Nonprofit Organizations Take Note
by Karen W. Kuehlhorn, CPA
As printed in the Traverse City Business News, July 2008
Final regulations for 403(b) plans (commonly referred to as tax-deferred annuities) issued July 2007 are effective for tax years after 2008. The new regulations affect all 403(b) plans including those set up for public school employees and churches. This article addresses only 403(b) plans set up by non profit organizations under 501(c)(3).
Written plan requirement - The plan is required to be in writing and must satisfy nine conditions in order for contributions to be excluded from current taxable income. Among these nine conditions are:
- Nondiscrimination requirements –
- Universal availability of elective deferrals
- Nondiscrimination rules for employer contributions, if provided
- Compliance with required minimum distribution rules
- Allow direct rollovers
- Comply with statutory limits of elective deferrals and annual additions
The plan must also identify the annuity contracts and/or custodial accounts available under the plan. A provider being listed and selling to employees must cooperate in sharing of information.
Universal availability – A plan may not impose a minimum age or service condition for eligibility to defer. Except for the exceptions listed below, if anyone can defer, everyone must be able to defer. The plan may exclude from eligibility to defer –
- Employees who normally work less than 20 hours per week
- Student employees
- Nonresident aliens
- Employees who are eligible to defer under a 401(k), 457, or another 403(b) plan of the employer
A plan may require $200 minimum annual deferrals. All employees must have an annual opportunity to make a deferral election – they must be given notice including the time to make the election and other conditions.
Nondiscrimination rules - A plan may impose minimum age and service requirements to qualify for employer contributions. A 403(b) plan must comply with nondiscrimination rules required of qualified 401(k) profit sharing plans; however, 403(b) plans are not subject to the actual deferral percentage (ADP) nondiscrimination test.
Plans Subject to Title I of ERISA – A 403(b) plan of a 501(c)(3) organization is exempt from Title I of ERISA only if there are no employer contributions and no employer involvement beyond collecting and remitting employee deferrals to respective annuity or custodial account providers.
A 403(b) plan that is subject to Title I of ERISA must file an annual Form 5500 and provide a summary annual report to its participants, and provide a summary plan description (SPD). The plan is also subject to more strict deposit requirements for employee deferrals.
Beginning with 2009 plan years, 403(b) plans that are subject to Title I must attach a schedule of financial information to Form 5500. Large plans – generally, those with 100 or more participants at the beginning of a plan year – will be required to attach audited financial statements to its Form 5500.
Employers with 403 (b) plans permitting only employee deferrals may be able to structure the plan so that custodians/vendors are responsible for decisions regarding distributions, loans, etc. The employer would merely share information from various providers and avoid Title I of ERISA.
The concept of vendors sharing information with the employer is a new one for vendors of annuity and custodial accounts. In order to report the financial information required for Form 5500, it will be imperative for employers to receive comprehensive annual information on the accounts of participants. Employers should be interested to know the format of the information vendors plan to report as well as the frequency and timing of reports.
Employers should be meeting with vendors and an accountant, attorney or other consultant with specialize knowledge of pension and 403(b) plans to address ERISA compliance issues and to have an adequate written plan document in place before 2009.
Karen Kuehlhorn, CPA, is the pension plan consultant for Dennis, Gartland & Niergarth in Traverse City.