Prior to the technical correction measures in the Job Creation and Worker Assistance Act of 2002, it was necessary to count “non-vested” amounts as contributions in the year vested for purposes of the IRC §415(c) limit. Now, the non-vested contributions will be counted as contributions in the year they are made.
That change, along with the repeal of the exclusion allowance under EGTRRA, removes any conflict in determining contributions limits for 403(b) plans with a vesting schedule. Prior to 2002, vesting schedules in a 403(b) plan created the potential of excess contributions, because the vested amount, when added to the contributions made to the plan in that year, could result in exceeding the limitations for that year.
Also, under the final Section 403(b) regulations, 403(b) contracts and custodial accounts are required to include language as a condition of qualifying as a 403(b) funding vehicle that causes any unvested amounts held under the plan to be segregated and treated as 403(c) contributions.
Upon vesting, the amounts segregated can be moved back into the 403(b) portion of the contract and be treated as part of the 403(b) plan. This controversy stems from the statute and the final regulations (Treas. Reg. §1.403(b)-3(a)(2)), which indicate that the “rights of the employee under the annuity contract” (including custodial agreements) are nonforfeitable.
This has ensued in the interpretation that 403(b) plans cannot include nonvested amounts.
There is nothing to suggest that the DOL follows this rule. Accordingly, for ERISA purposes, it appears that any amounts contributed under a 403(b) plan must be considered at all times to be subject to the ERISA requirements, including the vesting and funding requirements. Through the submission process of the new 403(b) prototype/volume submitter plans, the IRS agreed to permit separate accounting language in lieu of the “separate account” wording that was previously required and the change was included in updated LRM language.
Editor’s Note: This is an occasional feature in the NTSA Advisor. It is drawn from The Source, a book that covers technical, compliance, administrative and marketing aspects of the 403(b) and 457(b) markets. More information about The Source is available here.
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