Agenda Workshop #36

10/17/2016

1

Agenda – Workshop #36

• Different Types of Plans available to Nonprofit Employers

• 403(b) Plans

• ERISA 403(b) or Non-ERISA 403(b) or Keeping the Non-ERISA status of Nonprofit Plan

• Comparison/Contrast ERISA 403(b) to 401(k)

• Comparison/Contrast 457(b) to 457(f)

• Controlled Groups, Other Issues, Plan Designs

10/17/2016

2

Non-Profit Organizations –Plan Options and Opportunities

Speakers:

Bill Grossman

McKay Hochman Consulting, DST Systems Inc.

Sue Diehl

President, PenServ Plan Services, Inc.

What is a Tax-Exempt Organization?

• Section 501(c) of the IRC contains 29 different nonprofit organizations

For example:

• 501(c)(6) includes Business leagues, chambers of commerce, real-estate boards, boards of trade, or professional football leagues.

• 501(c)(3) includes certain hospitals, educational organizations, etc.

10/17/2016

3

What Types of Plans can they Establish?

• 401(k)

• Profit-sharing/Money Purchase – 401(a)

• 403(b) –Only for 501(c)(3) Organizations

• 457(b)

• 457(f)

• SEPs

• SIMPLE-IRAs

• MEPs – Multiple Employer Plans

501(c)(3) Organizations are Unique!• Only tax-exempt that can establish a 403(b) Plan.

• 501(c)(3) are –“Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise provided in subsection (h)), and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.”

10/17/2016

4

A word about Charter Schools…

• Also unique in that they typically have “dual taxuality”

• They are both a governmental entity and a tax-exempt organization under 501(c)(3)

• State law will determine how they are treated for State law purposes and what plans they may adopt


• For Example in Pennsylvania

–Charter Schools are treated as a governmental employer

– Employers are required to either cover them under the State Retirement System or cover them with a comparable 403(b) plan.

10/17/2016

5


In Michigan

• if there is a management company that is used the plan is typically set up as a Multiple Employer Plan

• Plan typically adopted by the Plan Sponsor (management org) and the Charter schools participate in that plan.

403(b) Plans

10/17/2016

6

Types of 403(b) plans• 403(b)(1) - Annuity Contracts

– investments through Insurance Annuities

• 403(b)(7) - Custodial Accounts– investments through mutual funds

• 403(b)(9) - Church Plans (RICAs)– investments limited in Plan agreement– not necessarily limited to annuities and mutual funds– Trustee(s) may be Church official(s)– Retirement distributions available for housing allowance– 6% penalty for excesses does not apply

• Previously referred to as ‘Wrap’ 403(b)(1)/(b)(7) Document

• combined annuity/mutual fund investments in a single document

• Today this is merely a 403(b) Plan (no longer needs reference to (b)(1) or (b)(7)

403(b) Plan Documents• Beginning in tax year 2009, IRS regulations required a “plan” to be

established by the employer. The definition is the same as applies under the Qualified Plan rules.

• See ERISA 403(b) vs. NonERISA 403(b) later.• See 401(k) vs. 403(b) later.

• RICAs must be maintained pursuant to a Plan as well. The plan document must state the intent to constitute a retirement income account.

• A RICA that is treated as a annuity contract is NOT a custodial account even if the investments are solely in mutual funds. This allows for the more liberal distribution rules under a RICA.

10/17/2016

7

4 types of Qualified Employers403(b) Programs may be offered by:

1. Tax exempt organizations under §501(c)(3) IRC

"organized and operated exclusively for religious, charitable, scientific, public safety testing, literary, educational purposes to encourage national or international amateur sport competition, or for the prevention of cruelty to children or animals.“

Examples – hospitals, nonprofits, Universities/Colleges

4 types of Qualified Employers2. Public Educational Institutions

Includes primary, secondary, preparatory, or high schools, colleges and universities, and federal state and other public supported schools.

Examples – public schools, charter schools treated as public schools, State Colleges/Universities

3. Self-Employed Ministers (must have a 403(b)(9))!

10/17/2016

8

4 types of Qualified Employers4.Church/Church Related Organizations - “With”

and “Without” a Steeple

With a Steeple – A church, place of worship

Without a Steeple:

• QCCO (Qualified Church Controlled Org)

• For example, a Church School

• Non QCCO (Non-Qualified Church Controlled Org) For example, a Nursing Home run by the Church. More than 25% of income comes from non church resources.

403(b) Plan Required Provisions• A plan must describe all material terms and conditions regarding:

1. Eligibility, 2. Contributions and benefits, 3. Applicable limitations, 4. Timing and form of benefit distributions, 5. Including distribution events, hardship withdrawals, loans, etc.6. Available investment arrangements7. Amendment procedure

• Plan provisions must satisfy1. Universal availability2. 401(m) test3. 401(a)(17) limit for contributions other than deferrals4. All applicable limits, e.g. 4155. Vesting, if applicable

10/17/2016

9

403(b) Plan Required Provisions• Incorporation of Investment Contracts

• Plan must incorporate the terms of the investment arrangements by reference.

• Plan must provide that its terms govern over any inconsistent terms of the investment contracts.

• A Plan must contain an Appendix that:• Identifies the parties responsible for various administrative

functions.

• Lists all investment vendors offered.

• Includes sufficient information to identify the approved investment arrangements.

403(b) Plan Optional Features• Plan may include optional features:

– Employer contributions– Roth contributions– Hardship withdrawals– Loans– Acceptance of rollovers– In service withdrawals– “Exchanges” to 403(b) products approved within

the plan (for contributions or just exchanges)– Plan to plan transfers (in or out)

10/17/2016

10

Compliance• Exchange Agreements

• Post-Employment Employer Contributions

• Universal Availability for Elective Deferrals

• Financial Hardship Distributions

• Frozen and Terminated Plans

• Timely Contribution Remittance/Deposit

• Catch-up Ordering Rule

• Information Sharing Agreements

Other Unique Features• Post-employment Employer contributions

• Universal Availability– Does not apply to steeple churches or QCCOs

• ERISA VS NonERISA

• Adding a Top Hat 457 Plan– 457(b)

– 457(f)

10/17/2016

11

Post-employment Employer Contributions

Non-elective employer contributions to retirees’

accounts after death are limited to lesser of:

– Monthly compensation to be determined based on 1/12 of final contract salary times number of months elapsed in the year of death

– Total contributions that would have been made on retiree’s behalf if s/he had survived to end of 5-year period

– 415 limit for relevant year (final 12 months of compensation before severance)

Non-ERISA 403(b) Coverage and Nondiscrimination

Nondiscrimination Rule For Elective Deferrals –

“Universal availability” All employees must have an “effective opportunity” to defer.

Permitted exclusions:• Those who normally work less than 20 hrs/wk• Those who are nonresident aliens• Student providing services (usually to a school) described in 3121(b)(1)• Eligible to participate by salary reduction in other deferral plans sponsored

by the employer, i.e. 403(b) 457(b), or 401(k)• Who do not wish to contribute at least $200 per year to a 403(b) account.

§403(b)(12)(A)(ii)

• Violation of the universal availability rule results in plan failure • Correction under EPCRS

10/17/2016

12

Universal Availability

• Requires “meaningful” written notice to employees of eligibility to participate at least annually

• Employees must have “reasonable opportunity” to make deferral elections

• IRS will want to see UA notices that are sent to employees and the method by which they are provided

• Some Employers use multiple avenues to provide these notices

Universal Availability– Effectively requires schools to count actual hours of

service for all employees if they want to exclude employees with fewer than 20 hrs/week (or less than1000 hours per year)

– Most TPAs encourage employers not to exclude any employees, especially if they can’t/don’t count hours.

– Failing Universal Availability can cause plan disqualification!

– New Annual 415 notice for years after pre-approved plans approval

10/17/2016

13

402(g) LimitTaxpayer limit for 2016 $18,000

• 401(k)

• 403(b)

• SARSEP

• SIMPLE-IRA (limit = $12,500)

Limited on calendar year basis.

457(b) not subject to 402(g) limit

401(k) v. 403(b) The major differences between 403(b) and 401(k) plans are:

1. Universal Availability - Eligibility rule applies to 403(b) elective deferrals whereas the ADP test applies to elective deferrals under a 401(k).

– Immediate eligibility to defer.

– Limited exclusions to Universal Availability

2. Types of Employers

– 403(b)s limited to: Public Educational Organizations, 501(c)(3) Organizations and Churches

– 401(k)s available to: all employers except state/local governments.

3. Investments

– 403(b)s (Other than church 403(b)(9) plans) can only be invested in annuities or mutual funds;

– 401(k)s allows for all types unless a prohibited transaction.

4. ERISA v. Non-ERISA

– 401(k)s subject to ERISA

– 403(b)s

• Governmental and Churches not subject to ERISA (unless church elects ERISA)

• 501(c)(3) Entities may be exempt from ERISA if meet the requirements

10/17/2016

14

403(b) Catch up Rules• One “Catch-up” limit for all 403(b), 401(k),

SARSEP ($6,000) & SIMPLE-IRAs ($3,000)

• Separate “Catch-up” for 457(b) governmental

• No Age 50 “Catch-up” permitted for tax exempt 457(b)

• Both Age 50 “Catch-up” and 15-year rule available in the same year for 403(b)s. Catch-ups first treated as the 15-year catch-up and then age 50 catch-ups

403(b) allowable distributions –But Check the plan!

Provision Elective Def ER-Annuity ER- Custodial

Attainment of 59 1/2

Severance from employment

Death

Disability under 72(m)(7) Unless contract has diff definition

Disability other than 72(m)(7)

Plan Termination If groupcustodial agreements

If group custodial agreements

Financial Hardship

Attainment of stated age

Stated event or # of yrs.

10/17/2016

15

403(b) Allowable Distributions

29

Hardship (must follow 401(k) rules)- Hardship distributions may only include

principal amount of elective deferrals, not including earnings thereon.

IMPORTANT TO RECEIVE THIS INFORMATION WITH TRANSFERS/EXCHANGES/TAKEOVERS!

- Exception for pre-1989 monies, excluding earnings.

- Employer must have written hardship policy or custodial agreement/annuity has language

ERISA 403(b) or Non-ERISA 403(b)

or Keeping the Non-ERISA status of Nonprofit Plan

10/17/2016

16

What is an ERISA Plan?

• An ERISA Plan is generally a retirement plan that benefits employees.

• Therefore owner-only plans are not subject to ERISA standards.

• Generally all qualified plans, SEPs and SIMPLE-IRAs that cover common-law employees (other than the spouse) are ERISA Plans

• 403(b) Plans of tax-exempt entities are ERISA plans but may be considered Non-ERISA if certain conditions are met

Non-ERISA 403(b)

NEVER SUBJECT TO ERISA

GOVERNMENTAL EMPLOYERS, INCLUDING:

– PUBLIC SCHOOLS

– STATE COLLEGES/UNIVERSITIES

CHURCHES (WITH AND WITHOUT A STEEPLE!)

– CAN ELECT TO BE COVERED BY ERISA

– WITHOUT STEEPLE INCLUDES QCCOs AND NON-QCCOs

10/17/2016

17

Non-ERISA 403(b)TAX-EXEMPT EMPLOYERS UNDER 501(c)(3) CAN GENERALLY REMAIN NON-ERISA IF:

• Elective Deferrals Only (No employer contributions)

• NO employer involvement, except investments and vendor selection Cannot assist in calculating available loans, hardship distributions, etc. Employers push all responsibilities on vendors

• Must have reasonable choice of investments, unless choice is offered through open architecture, one vender is generally not acceptable.

What Does Being Subject to ERISA Mean?

If Non-ERISA Plan Becomes Subject to ERISA, then These Rules Apply

Spousal Rights: Beneficiary, QJSA, etc.

Eligibility and Participation

ERISA Fiduciary Standards and Liability

ERISA Selection and Monitoring

ERISA Bonding Requirements

Prohibited Transaction

Protection from Creditors

Protection of Employee Benefits, Rights and Features

If Non-ERISA Plan Becomes Subject to ERISA, then These Rules Apply

Disclosure Requirements:• SPS, SMM, SAR• Benefit Statements• 404(a)(5); 408(b)(2)• QDIA, Blackout Notice, etc.

Form 5500 Reporting• Large Plan Audit

Penalties for Non-Compliance with ERISA Requirements, such as, NotHaving Provided Disclosures

10/17/2016

18

How does a 501(c)(3) Maintain NonERISAStatus?

In order for 501(c)(3) Organizations to be considered Non-ERISA, the Department of Labor has provided safe harbor criteria listing what employers may and may not engage in as part of the day-to-day administration of the Plan.

Non-ERISA 403(b) Guidance • ERISA Regulation 2510.3-2(f)

– Limited Employer Involvement

• FAB 2007-02 – Employer may adopt a written document and other

clarifications of what employer may and may not do

• FAB 2010-01– Employer must have more than one vendor

– Exceptions to more than one vendor

– Additional issues of what employer may and may not do

• Advisory Opinion 2012-02A– Non-ERISA status lost if 403(b) deferrals receive a 401(k) match

10/17/2016

19

ERISA Regulation 2510.3-2(f)Limited Employer Involvement

• “Limited involvement” exemption available if All of the following conditions are satisfied:

• Participation is completely voluntary for employees• Employee can enforce contract• Employer gets no direct or indirect benefit other than reasonable

expenses actually incurred• Employer’s involvement is limited to:

A. Allowing product providers to publicize their products to employeesB. Requesting information about the productsC. Summarizing or compiling information provided for employeesD. Collecting or remitting employee contributions E. Maintaining records, e.g. holding group contracts in employer’s nameF. Selecting annuity contractors, limiting to a reasonable number selected

to offer “reasonable” choice

ERISA Exemption Safe Harbor Clarifications under FAB 2007-2

• What employer actions are permitted under FAB 2007-2 and the 403(b) still be in the Non-ERISA 403(b) safe harbor?

• Establish a written plan• Review operation of plan for discrimination, limits and tax issues• Correct failures; EPCRS: Rev. Proc. 2013-12, 2015-27 and 28• Transmit to vendor information employer knows, i.e. address,

service, compensation; doctor’s certificate e.g. for hardship • Terminate the 403(b) plan• Limit the funding media or products available to employees, or the

annuity providers who may approach employees to a number designed to afford employees a “reasonable choice”

• Identify in the plan the parties that are responsible for administrative functions, including those related to tax compliance

10/17/2016

20

FAB 2007-02: Employer MAY NOT

• Employer may NOT negotiate with annuity/custodian providers to change product terms, i.e. conditions for hardship withdrawals

• Employer may NOT be responsible for, or make discretionary determinations. For example:

• Authorizing plan-to-plan transfers

• Processing distributions

• Satisfying the QJSA requirements

• Determining a hardship

• Determine eligibility for, or enforcement of, loans

• QDRO determinations

• Automatic Enrollment

FAB 2010-1 ERISA Exemption from Safe Harbor

• Under FAB 2010-1, the Employer MAY:

– Limit available providers to those who assume responsibility for discretionary decisions

– Include optional features such as participant loans in 403(b) plan, but only if handled by the investment provider.

– Could refuse to include contracts if they are either too costly,or if they would involve ER in discretionary decision making

– Discontinue the use of a vendor who is not complying with Section 403(b)/final 403(b) Regulations and still be a non-ERISA plan

10/17/2016

21


• The Employer may NOT:

– Limit investments to one provider.

– Permits “reasonable choice” for cost considerations where for example multiple investments are available under a broker-dealer or an “open architecture program.”


• The Employer may NOT:

– Unilaterally move from one provider to another. • If an employer does this, the plan will be an ERISA 403(b)

– Hire a TPA to make discretionary decisions without losing

the ERISA exemption.

• However, the employer may assign discretionary determinations to the annuity provider, who may in turn hire a TPA without the plan losing safe harbor status.

10/17/2016

22

How does a 501(c)(3) Maintain nonERISA Status?

The Employer may: • hold one or more group annuity contracts in the

employer’s name covering its employees and exercise rights as representative of its employees under the contract, at least with respect to amendments of the contract

ERISA 403(b) vs. NonERISA 403(b)Provision ERISA Plan NonERISA Plan

Deposit of Elective Deferrals Required to be made into the Plan

as soon as the employer can

reasonably segregate the assets

from their general assets but no

later than the 15th day of the month

after the month the amounts were

deducted from pay.

7-day safe harbor rule applies to ERs

with less than 100 participants

As soon as administratively feasible. (No

15 day rule applies, however State law

will apply and may have a quicker deposit

rule – NJ is 3 days!)

Annuity Distributions for Spouse Requires that the Employee’s

spouse receive an annuity

distribution or opt out.

QJSA and QPSA rules apply

Not required.

10/17/2016

23

ERISA 403(b) vs. NonERISA 403(b)Provision ERISA Plan NonERISA Plan

Employer Responsibilities in Administration Employer is responsible as “Plan

Administrator” of the Plan to make

any administrative decisions with

respect to the Plan’s operations.

Employer may not make any

administrative decisions regarding the day

to day operations of the Plan. If the

Employer does the Plan will automatically

be subject to ERISA.

Many Practitioners have stated that they

believe that it will be impossible for an

Employer not to fall into the trap of

answering a question that will make them

subject to ERISA.

Protection from all Creditors ERISA protects all assets from all

creditors (except the IRS).

No federal protection from creditors.

State law would apply.

Department of Labor (DOL) Disclosures Mandates –

SPDs, SMMs, SAR

Benefit statements;

Fee Disclosures;

DOL does not have jurisdiction over

NonERISA 403(b) Plans, so that no DOL

disclosures are required.

Comparison/Contrast ERISA 403(b) to 401(k)

10/17/2016

24

ERISA 403(b) vs. ERISA 401(k)FEATURES OF… ERISA 403(b) Plan ERISA 401(k) Plan

Which Types of Businesses may

Establish Educational organizations and nonprofit

organizations under 501(c)(3)IRC, and

certain church organizations.

Sole Proprietor, Partnership, S-Corporation, C-Corporation; and all nonprofit organizations (including 501(c)(3)). Govts also grandfathered – 1986

Appropriate For Individuals and

Businesses That Have Earnings

Which...

Generally ERISA protects all assets from

all creditors (except the IRS).

Generally ERISA protects all assets

from all creditors (except the IRS).

Continued Existence of Plan Permanency must be intended Permanency must be intended

Annual Contribution Not Required Not Required

Maximum Annual Deduction Up to 100% of each participant’s

compensation not to exceed $53,000.

Employers do not receive “deduction”

Up to 25% of total covered

compensation


What is Compensation? If you are an employee, compensation is

generally your salary reported to you on your

Form W-2. If you are a self-employed minister

your compensation is your "earned income"

If you are an employee, compensation is generally your salary reported to you on your Form W-2. If you are a self-employed minister your compensation is your "earned income"

Eligibility/Participation All employees except nonresident aliens;

employees who work less than 20 hours per

week; professors on sabbaticals; certain

students;.

All employees who are age 21 and

have completed 1 year of service

must be able to elect to defer (For

employer contributions, 2 years, if

100% immediate vesting.)

Nonresident aliens and union

employees covered under collective

bargaining agreements

Vesting (Employer) Under most plans the following choices are available for employer contributions:Full and immediate vesting.100% vesting after 1, 2, or 3 years of service.6 year graded vesting schedule

Same

Vesting (Employee

Deferrals)

100% immediate 100% immediate

10/17/2016

25


Emergency withdrawals Permitted for hardships only, if provision is

adopted

Same

Taxation of Distributions Generally as ordinary income Potential favorable tax treatment

for 10 year averaging, capital gains,

NUA

Contribution Deadline Due date for employer’s federal income tax

return, including extensions

Note: Tax exempts file Form 990, which is due

the 15th day of the 5th month after tax year

end (also referred to as “report year”). For

§415 purposes contributions must be made by

the 15th day of the 6th month after tax year

end.

Due date for employer’s federal

income tax return, including

extensions


Safe Harbor Nonelective Not permitted Yes – 3% of compensation

Safe Harbor Match Yes - $1 for $1 Match up to 3% of comp plus

2% on the next 2% of comp. No ACP testing

Same

Form 5500 Required Required

Funding Deferrals by Employees max - $18,000 (2016) or $21,500 for long term employees.

Age 50 Catch-up -$6,000

Employer Matching permitted

Employer Discretionary Contribution permitted.

Deferrals by Employees max -$18,000 (2016)

Age 50 Catch-up -$6,000

Employer Matching permitted

Employer Discretionary Contribution permitted.

10/17/2016

26


Top Heavy Rules Do not apply Applies

Permitted Disparity Available Same

Nondiscrimination Tests Deferrals – Universal AvailabilityMatching – ACPNonelective – 401(a)(4)

Deferrals – ADP

Matching – ACPNonelective – 401(a)(4)

Annuity Provisions Applies Applies

RMDs Generally 4/1 of year following later of 70 1/2

or retirement. Special rule for pre-1987

account

Generally 4/1 of year following later

of 70 1/2 or retirement for non 5%

owners. For 5% owners, generally

4/1 of year following attainment of

age 70 ½.

Why would an Employer adopt a 401(k) in lieu of a 403(b) Plan?

• Lack of understanding

• Eligibility of 1 or 2 years would reduce eligible employees and may not subject the Plan to an audit

• Employer should compare Universal Availability rule to the ADP test to see which one may work better.

10/17/2016

27

Comparison/Contrast Tax exempt 457(b) to 457(f)

457(b) vs. 457(f)FEATURES OF… Tax-Exempt 457(b) Gov./Tax-exempt 457(f)

Participation Select/Top Hat Group Select/Top Hat Group

Contribution Limit $18,000 for 2015 No Limit

Types of Permitted

Deferrals

Pre-Tax only, No Roth deferrals N/A

Age 50 Catch-up Not applicable Not applicable

Special 3-year catch-up Up to 2 X the normal deferral limit Not applicable

Responsibility for

Withholding

Tax-exempt Entity Employer

Rollovers to other Plans No No

Transfers Yes. To another tax-exempt 457(b) No

Transfer to State Plan to

purchase service credits

No No

10/17/2016

28

457(b) vs. 457(f)FEATURES OF… Tax-Exempt 457(b) Tax-exempt 457(f)

Distributable Events Based on document and employee elections Generally lump sum or over 5 years; based on document

Loans Permitted No No

RMD Rules Yes. Later of 4/1 after 70 ½ or retirement Not applicable

Vesting Permitted for Employer Contributions Not applicable

FICA Tax Yes. Applies later of: when services are

performed or when no longer substantial risk

of forfeiture

Yes. Applies later of: when services

are performed or when no longer

substantial risk of forfeiture

FUTA Tax Yes, except 501(c)(3) Organizations Yes, except 501(c)(3) Orgs

Reporting Contributions N/A N/A

Reporting Distributions Form W-2, except decedents Form W-2, except decedents

Form 5500 One-Time “Top-Hat” Declaration” 120 days

after establishment

One-Time “Top-Hat” Declaration”

120 days after establishment

457(b) vs. 457(f)FEATURES OF… Tax-Exempt 457(b) Tax-exempt 457(f)

Curing Excess Deferrals Similar to 401(k) N/A

Curing other Excesses Waiting for EPCRS update Waiting for EPCRS update

Investments Depends on document; “hypothetical” investment direction

Depends on document; “hypothetical” investment direction

Deemed IRAs Not permitted Not permitted

Savers tax credit available No No

10% premature tax No No

QDRO rules Applies No

Subject to 15 day Plan

asset rule

No No

Trust required Not permitted unless a Rabbi or secular trust

is established

Not permitted unless a Rabbi or

secular trust is established

10/17/2016

29

Controlled GroupsOther IssuesPlan Design

Special Control Group Rules for 501(c)(3) Orgs

• New rules applied beginning for years after 12/31/08 with respect to “controlled groups of businesses”

• If there is commonality in directors, trustees, or individuals on boards of directors in multiple organizations, such organizations may need to be treated as one employer.

10/17/2016

30

Special Testing Rules for 403(b) plans

For controlled groups, where 2 plans are maintained:

• 410(b) Coverage and 401(a)(4) tests are combined

• ADP is separate for any 401(k)

• Universal Availability is separate for any 403(b)

• ACP is separate

Late contributions to 403(b) Plans

• 403(b) plans are not subject to the excise tax under 4975

• They ‘may be’ subject to a 5% excise tax under ERISA section 502(i)

• Form 5330 cannot be used to pay the 5% tax

• Most employers will deposit the late contributions along with the earnings and then file under the DOL’s VFCP to pay the 5% excise tax

10/17/2016

31

PTO Contributions

Revenue Rulings 2009-31 and 2009-32 permitted deposits of unused sick and vacation leave to only 401(k) Plans.

Many 403(b) plans are written to offer this option

IRS indicated that this may be added for 403(b) and 457 plans, but as of this date has not had official guidance! Although IRS permitting in pre-approved plans.

Now lets look at Plan Design

Non-Profit Employers (501(c)(3))

403(b)

457(b)

457(f)

401(a) Profit-Sharing, Money Purchase

401(k)

SEP/SIMPLE-IRA (but not with Model 5305-SEP)

10/17/2016

32

Church Plan DesignChurches 403(b) 401(a) 401(k) Careful – not always advantageous! SEP (not with Model 5305-SEP) SIMPLE-IRA

Might include: Churches with a steeple; QCCOs or nonQCCOs. Nonelecting Churches default to pre-ERISA rules.

Not subject to ERISA unless they elect, but nonQCCOs will be subject to testing

Miscellaneous Adjunct Professors –

• Challenging endeavor for years

• Affects all retirement plans not just 403(b) plans

• Can affect eligibility and vesting

• A “part-time” professor hired on a contractual basis

• Cannot exclude by class

• Violation of Universal Availability Rule

• Affordable Care Act and ACA regulations and preamble– Counting hours can be any ‘reasonable’ method

– May not be added to Plan Document

– Accepted by IRS auditors

10/17/2016

33

Miscellaneous

One reasonable method that is acceptable under IRS audit is – an employer would credit hours as follows:

• 2.25 hours per week for each hour of teaching or classroom time

PLUS

• 1 hour of service per week for each additional hour of service outside the classroom performing required duties (e.g., office hours, department meetings).

Special Employee/Employer Contributions

FICA Replacement Plans 7.5 % required between Employer and Employee

Depends on Government Employer’s State, type of Employee, etc.

I.e., “Part time” individuals in PA can participate in a FICA replacement Plan

PTO Contributions

Mandatory Employee Contribution vs. Auto Enrollment

Mandatory Employee Contribution – Treated as a Non Elective Employer Contribution

Is Subject to FICA tax

10/17/2016

34

Special Employee/Employer Contributions

FICA Replacement Plans 7.5 % required between Employer and Employee

Depends on Government Employer’s State, type of Employee, etc.

I.e., “Part time” individuals in PA can participate in a FICA replacement Plan

PTO Contributions

Mandatory Employee Contribution vs. Auto Enrollment

Mandatory Employee Contribution – Treated as a Non Elective Employer Contribution

Is Subject to FICA tax

Structure of Multiple Plans (2016)

Now let’s look at a few plan designs to maximum benefits.

John, age 40 is the CEO of a private school and earns $75,000. He anticipates retiring in 20 years. His contract also requires the Employer to contribute to a 457(f) for John in the amount of $15,000 per year.

403(b) Defers the maximum $18,000* 457(b) Defers the maximum $18,000*457(f) Employer Contribution $15,000ESTIMATED TOTAL FOR YEAR 2016 $48,000

* These amounts reduce the annual compensation

10/17/2016

35

Structure of Multiple Plans (2016)Jane, age 60 is the CEO of a non-profit and earns $100,000. She is retiring next year (2017) and will be receiving a post-employment amount of $10,000 in 2017. Her contract also has required the Employer to contribute to a 457(f) for Jane in the amount of $20,000 per year since 2012.

403(b) Defers the maximum $24,000

403(b) Employer Contribution $10,000 (added in 2017)

457(b) Defers the maximum $24,000

457(f) Employer Contributes $20,000

ESTIMATED TOTAL FOR YEAR $78,000

Structure of Multiple Plans (2016)

Why are we layering these types of plans?

Remember that one plan – 403(b) or 401(a) cannot accept more than $53,000 (for 2016).

By establishing multiple plans the employees can maximize their contributions and not run afoul of the limitations.

By law, 401(a) plans and 403(b) plans are not aggregated when looking at the $53,000 cap.

10/17/2016

36

Questions

Copyright 2016 PenServ Plan Services, Inc. 71