Helping 501(c)(3) Organizations Design a Winning Plan

Segal Blinn noted that non-profits that meet the requirements for status as a 501(c)(3) organization may offer either a 401(k) or 403(b) or both. Initial considerations when determining what plan(s) to sponsor include that 403(b)s are more limited than 401(k)s in the type of investment options it can use and 401(k) plans can impose a minimum age and service requirement for eligibility, while 403(b)s are subject to the universal availability rule, with few exceptions for who can be excluded from the plan.

However, Segal Blinn pointed out that universal availability could be a good thing as it takes the place of the ADP test 401(k)s are required to administer each year. Answering an attendee’s question, Segal Blinn clarified that while a 403(b) cannot have a minimum age and service requirement for eligibility to participate in the plan, it may have requirements for eligibility to receive an employer contribution.

Additionally, plan sponsors should note that 401(k)s are subject to top heavy testing, while 403(b)s are not, and a 403(b) is only subject to 410(b) minimum coverage, 401(a)(4) general nondiscrimination, and ACP testing if it is subject to ERISA or if the organization is a nonqualified church-controlled organization.

Some special rules could make 403(b)s an attractive plan option, according to Segal Blinn. First, 403(b)s are allowed to offer participants with 15 years of service to contribute catch up contributions up to $3,000 per year up to a $15,000 lifetime total. This is in addition to the age 50 catch up contribution allowed by the IRS. Secondly, 403(b)s have special distribution rules allowing employer contribution amounts in annuity contracts prior to 2009 and deferral amounts prior to 12/31/88 to be distributed without a distributable event occurring.

However, plan sponsors should remember that if a plan includes multiple vendors, the 403(b) regulations require information sharing among vendors to make sure the plan abides by all contribution, loan, and distribution limits.

ERISA Considerations

A 403(b) plan could also have the advantage of not being governed by the Employee Retirement Income Security Act (ERISA). Segal Blinn noted that governmental employers and churches have statutory exemption from ERISA, and churches can voluntarily make an irrevocable election to be subject to ERISA. In addition, the IRS has provided a safe harbor for 403(b)s, whereby plans would not be subject to ERISA, with certain conditions, but Segal Blinn noted that it is getting harder to satisfy the safe harbor requirements.

To qualify for safe harbor, basically a plan must provide a reasonable choice of investments and the sponsor must have limited involvement in plan, only performing ministerial functions and not involved in the day-to-day plan administration. With the new IRS regulations requiring much more employer oversight, only performing ministerial functions is getting tricky.

Segal Blinn pointed out that IRS Field Assistance Bulletins 2007-02 and 2010-01 say plans can still fall under the safe harbor, but it is a facts and circumstances determination for each plan and the IRS is looking at permissible vs. discretionary functions. As examples, Segal Blinn said certifying hardship distributions is a discretionary function and a sponsor providing its own plan administration could also fall under discretionary functions.

Providing an employer contribution to the plan is considered a discretionary function and would make a plan subject to ERISA. Segal Blinn pointed out that for sponsors of a deferral-only 403(b) with a 401(k) that provides a match, the Department of Labor has said they must be combined and both plans are considered ERISA-governed.

Answering an attendee's question, Segal Blinn said the availability of loans or hardships in the plan does not kick in ERISA status, as long as the sponsor is not making determinations on permission.

ERISA subjects a plan to fiduciary status; requirements for bonding of those handling financial transactions, certain vesting schedules, and spousal consent rules; and disclosure requirements, including Form 5500 reporting, Summary Plan Descriptions, and Summary Annual Reports.

To (b) or not To (b)

In sum, Segal Blinn says a 403(b) plan will meet a 501(c)(3) organizations design needs if the organization wants its highly compensated employees to be able to defer the full IRS limit (since no ADP testing is required), if it wants all participants to have the advantage of special catch contribution and distribution rules, and if there is the potential for non-ERISA status which excludes the plan sponsor from being considered a fiduciary by the IRS and certain plan design and disclosure requirements.

The Webcast is available here.