Providing Employer Contributions to Some Employees and Not Others

“Can 403(b) and 457(b) plans of public entities provide employer contributions to some employees and not to others?”

Stacey Bradford, Charles Filips, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, vice president, Retirement Plan Services, Cammack Retirement Group, answer:

The short answer is “Yes”, but keep in mind that 403(b) plans of private tax-exempt entities can ALSO do this to a certain extent. The difference is that, for private entities (excluding 3121(w) “steeple” churches/QCCOs), they can only exclude employees from employer contributions to the extent that they can pass nondiscrimination testing, so if they exclude too many nonhighly compensated employees (NHCEs) relative to highly compensated employees (HCEs), they will fail testing.

For the 2020 Plan year, NHCEs are defined as those who earned less than $125,000 in 2019 (the $125,000 figure is indexed each year). Conversely, HCEs are defined as those who earned $125,000 or more in 2019 (indexed). If no one at the entity earned at least $125,000 in 2019, then the nondiscrimination testing requirement does not apply to its 403(b) plan, so the plan can freely provide contributions to some employees and not to others. Also, 457(b) plans of private tax-exempt entities must be unfunded and are limited to covering select management or highly compensated employees; all other employees must be excluded from coverage.

Public plans are not subject to the nondiscrimination testing rules for employer contributions, and the requirement that a 457(b) plan only cover select management or highly compensated employees does not apply. Thus, a plan sponsor of a public plan can pick and choose the employees to whom it wishes to provide an employer contribution in its 403(b) and 457(b) plans, regardless of their compensation. Of course, the terms of the plan must permit it.

However, for 403(b) plans other than church and QCCO plans, ALL employees must generally be permitted to make elective deferrals to the plan (with limited exceptions), even if they are not eligible for employer contributions. This is the so-called “universal availability” rule.  Employers can exclude employees from the 457(b) plan entirely, though, for either or both of employer contributions and elective deferrals.

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.