 Comments
Regarding the Application of Regulations Under Code Section 401(m)
to 403(b) Plans and Other Issues Relating to Matching Contributions
Under 403(b) Plans
June 24, 2002
Carol Gold,
Director
TE/GE Employee Plans Division
Internal Revenue Service
1111 Constitution Avenue, NW
Washington, DC 20224
Re:
Comments Regarding the Application of Regulations Under Code Section
401(m) to 403(b) Plans and Other Issues Relating to Matching Contributions
Under 403(b) Plans
Dear Ms. Gold:
The American
Society of Pension Actuaries ("ASPPA") offers the following comments
to the Internal Revenue Service on the application of the regulations
under Internal Revenue Code ("Code") Section 401(m) to 403(b) plans
and other issues relating to matching contributions under 403(b)
plans.
ASPPA is a national
organization of approximately 5,000 members who provide actuarial,
administration, consulting, legal and other professional services
for qualified plans and other retirement plans, including 403(b)
plans. The comments in this letter are submitted with the request
that the Service clarify, expand or modify existing guidance to
address the points raised in this letter affecting matching contributions
under 403(b) plans.
Find
out whether the employer aggregates plans to pass coverage under
§§403(b)(12) and 410(b). Ask which test the employer uses to pass
coverage, ratio percentage or average benefits.
Consider whether
employer contributions satisfy the safe harbors. If not, see if
there is another basis on which employer contributions satisfy good
faith/reasonable interpretation.
See whether
matching contributions satisfy the ACP test.
Thus, the 403(b)
examination guidelines imply that if a 403(b) plan meets the safe
harbors under Notice 89-23 for employer contributions other than
matching contributions, and the matching contributions satisfy the
ACP test, the plan then would be deemed to satisfy 403(b)(12)(A)(i)
pursuant to Notice 89-23, regardless of whether the plan satisfies
the other nondiscrimination requirements referenced in 403(b)(12)(A)(i).
ASPPA requests that the Service confirm, through the issuance of
regulations or other guidance, that this interpretation is correct.
B.
Good Faith Interpretation
Part II of Notice
89-23 states that the Service will deem a 403(b) plan to be in compliance
with Code Section 403(b)(12) if the employer operates the plan in
accordance with a reasonable good faith interpretation of Section
403(b). Part II further states that in the case of employer and
employee contributions other than salary reduction contributions,
a 403(b) plan must satisfy the nondiscrimination requirements of
Code Sections 401(a)(4), (5), (17) and (26), 401(m) and 410(b) in
the same manner as if the plan were described in Code Section 401(a).
Regardless of
whether a 403(b) plan relies on the 403(b)(12)(A)(i) safe harbor
under Part IV of Notice 89-23 or uses a reasonable good faith interpretation
to satisfy the nondiscrimination requirements under Part II, matching
contributions must pass the ACP test under Code Section 401(m).
ASPPA believes that, because the ACP test was structured to correspond
to the ADP test applicable to 401(k) plans, and because the compliance
requirements applicable to elective deferrals under a 403(b) plan
differ from those applicable to elective deferrals under a 401(k)
plan, a 403(b) plan should be permitted to satisfy Part II by relying
on a reasonable good faith interpretation of Section 401(m) that
may not require satisfaction of the ACP test. ASPPA requests that
the Service issue guidance accordingly.
II.
Service-Based Matching Formulas
Many 403(b)
plans provide for a service-based matching contribution formula,
i.e., a formula under which the matching contribution rate
increases as the length of a participant's service with the employer
increases.
It appears that
under Part IV of Notice 89-23, a 403(b) plan, which is relying on
the safe harbor to satisfy Code Section 403(b)(12)(A)(i) does not
need to satisfy any of the requirements under Code Section 401(a)(4)
or the regulations thereunder. Consequently, it appears that a service-based
matching contribution formula should come within that safe-harbor
if it satisfies the ACP test, regardless of whether it also satisfies
Code Section 401(a)(4) and the regulations thereunder. ASPPA requests
the Service to confirm that the foregoing is a correct interpretation
of Part IV.
If a service-based
matching contribution formula which satisfies the ACP test must
also satisfy Code Section 401(a)(4) and the regulations thereunder,
the following points should be considered.
A.
Treasury Regulations Section 1.401(a)(4) - 4(e)(3)(i) states that
different rights or features exist if a right or feature is not
available on substantially the same terms as another right or feature.
Treasury Regulations Section 1.401(a)(4)-4(e)(3)(G) states that
the right to each rate of matching contributions is a separate right
or feature.
Treasury
Regulations Section 1.401(m)-1(a)(2) states that the "right to each
level of matching contributions, are benefits, right or features
. . . and each level must therefore generally be available to a
group of employees that satisfies Section 410(b)." ASPPA interprets
this to mean that the contribution rate group will satisfy Code
Section 410(b) if the group comprises a reasonable classification
group and each rate group must benefit enough non-highly compensated
employees to pass certain numerical tests. Reasonable classifications
generally include specified job categories, nature of compensation
(i.e., salaried or hourly), geographic location, and similar
bona fide business criteria. ASPPA believes that a "service classification"
would be considered reasonable. Although Treasury Regulations Section
1.410 (b)-4(c)(3)(ii) provides some guidance under "factual determinations,"
ASPPA requests that the Service clarify, through the issuance of
new regulations or other guidance, that a service classification
is a reasonable classification.
B. It would
therefore appear that a service-based matching contribution formula
that fails applicable coverage tests as a benefit or feature may
satisfy Code Section 403(b)(12)(A)(i) through reliance on a reasonable
good faith interpretation standard. We understand that according
to a Service field directive, during the good faith compliance period,
only optional forms of benefits would be tested under the 401(a)(4)
regulations and rights and features are therefore subject to good
faith standards.
[1] We request that the Service issue an updated field
directive or other guidance, which confirms that this inference
is correct.
III. Reliance
on 401(k) Regulations.
The regulations
under Code Section 401(m) parallel the regulations under Code Section
401(k). For that reason, ASPPA requests that the Service confirm
through formal guidance that 403(b) elective deferrals are to be
treated the same as 401(k) elective deferrals for interpreting and
applying 401(m) regulations to 403(b) plans. For example, the concept
of qualified nonelective contributions ("QNECs") is a part of the
401(k) regulations. QNECs should be expressly permitted to be made
to 403(b) plans to correct ACP failures or other eligible correction
failures under VCT, and other correction procedures.
The Service's
examination guidelines relating to hardship distributions of 403(b)
elective deferrals direct that "to determine an employee's eligibility
for a hardship distribution, consult rules applicable to hardship
distributions under § 401(k)." Therefore, it appears that 403(b)
elective deferrals are treated the same as 401(k) elective deferrals
to the extent that they are subject to the same or similar statutory
requirements. Guidance is needed which expressly states that this
is the case.
IV.
Operational Difficulties Caused by the Nature of 403(b) Plans
Because 403(b)
plans often have little employer involvement or control, it is difficult,
as a practical matter, for matching contributions, which exceed
the amounts permitted under the ACP test to be removed from participant
accounts.
Completing the
refund of excess aggregate contributions within 2½ months after
the plan year end is difficult because many 403(b) vendors will
not permit the employer to access information concerning the accounts
of participants in 403(b) plans, and frequently will not honor employer
requests for transactions, such as refunds, without specific written
participant permission. This practice makes it difficult for excess
aggregate contributions to be refunded in a timely matter. Consequently,
the imposition of a 10% excise tax on the employer, who will have
little, if any, control of the distribution, for failure to distribute
excess aggregate contributions within 2½ months of the end of the
taxable year is inequitable.
A compressed
time period within which the employer must determine the earnings
on excess aggregate contributions in accounts controlled by the
participant (and not by a trustee or custodian) makes compliance
difficult, if it is the employer's responsibility to report the
excesses in Forms 1099-R.
In light of
these operational difficulties, ASPPA requests that the Service consider
the following as a practical approach to correcting ACP failures
under 403(b) plans: Require the employer to give notice to the affected
participant, but to allow the correction process to be the responsibility
of the participant and/or the vendor.
These comments
have been prepared by the Tax-Exempt & Governmental Plans Committee
of ASPPA's Government Affairs Committee and principally authored
by Theresa Lensander. We appreciate the opportunity to provide these
comments, and are available to discuss them with you further.
Sincerely,
Amiram
J. Givon, Esq., APM, Co-Chair
Tax-Exempt & Gov't Plans Subcommittee |
Brian
H. Graff, Esq., CPA
Executive Director |
David
A. Pratt, Esq., APM, Co-Chair
Tax-Exempt & Gov't Plans Committee |
Bruce
L. Ashton, Esq., APM, Co-Chair
Government Affairs Committee |
Jeffrey
C. Chang, Esq., APM
Administration Relations Committee Chair |
R.
Bradford Huss, Esq., APM, Co-Chair
Government Affairs Committee |
cc:
Robert J. Architect
Rosamond Ferber
Joyce
Kahn
Mark O'Donnell
Richard J. Wickersham
|
