Understanding Employee Contributions to 403(b) Plans
by Stephen W. Forbes, J.D., LL.M.
403(b) plans have many practices regarding employee contributions. Some types of contributions may be elective deferrals for one purpose but not for others.
Most 403(b) plans provide employees with salary reduction agreements with which the employees can choose to have funds withheld from compensation and contributed to the 403(b) plan. They closely resemble 401(k) elective deferrals. In fact, the final regulations require that 403(b) elective deferrals follow many of the requirements of the 401(k) regulations.
Under those regulations, a 403(b) plan which allows any elective deferrals must provide all eligible employees with an effective opportunity to defer or to change a deferral election, at least annually. Facts and circumstances determine whether a participant has an effective opportunity to defer, including the adequacy of notice of the availability of the election, the period of time during which an election may be made, and any other conditions on elections.
403(b) elective deferrals can be pretax or Roth. The deferrals are subject to the universal availability requirements (except in a church plan), the 402(g) limit, and special distribution restrictions. Plans can permit employees to make additional elective deferrals as catch-up contributions.
There are two other types of 403(b) employee contributions which are elective deferrals for purposes of FICA taxes.
A few plans provide employees with an irrevocable one-time election, prior to entering the plan, to have a certain amount withheld and contributed to the plan. For example, before entering a plan, an employee may elect to contribute $500 per paycheck. The employee cannot change such an election so long as the employee remains employed by the plan sponsor.
Some 403(b) plans provide for mandatory contributions. In this situation, making the contribution is a condition of employment. Such a condition may arise from a statute or contract, or may simply be the employer’s policy.
Both of these types of contributions reduce the employee’s wages for tax purposes. The FICA rules count these contributions as wages. However, neither type of contribution is an elective deferral for purposes of a 403(b) plan under Treas. Reg. §31.3121(a)(5)-2, which the Treasury finalized in November 2007. Accordingly, these contributions are nonelective employer contributions as far as the plan is concerned. Except for church plans and governmental plans, these contributions are subject to nondiscrimination testing under Code §401(a)(4). They are not subject to the universal availability rule (and cannot be used to satisfy that rule) or the 402(g) limit. Unlike conventional elective deferrals, these contributions are not included in gross compensation for purposes of 415 or other Code provisions which reference the 415 definition of compensation.
For more information about 403(b) Plans consider:
403(b) Prototype Plan. SunGard offers a 403(b) prototype-formatted document to assist employers in complying with the new written plan requirement. The 403(b) Prototype includes a basic plan document and two alternative adoption agreements: deferral only and employer contributions and deferrals. For additional information about this plan, call 800-326-7235, Ext. 1100.
To comply with the final regulations, you will need to become educated on the topic, acquire a written plan document, determine how to administer the plan, and process the correct government forms.