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.
This is Part II of a two-part series. Part I, “How Are Employers Using Employer 403(b) Contributions, is available here.
The requirements vary from state to state and district to district. However, there are some general
guidelines to follow. Public education employers may begin to make employer contributions
to the 403(b) elective program that is already in existence after taking the following steps:
- Check state and local law to be sure that employer contributions to 403(b) plans by governmental employers are permitted. In most states, there is no prohibition against employer contributions – however, in a few states there may be.
- Review collective bargaining agreements and any individually negotiated contracts to be sure there is no language prohibiting employer contributions. Agree to work with employee groups and bargaining units to make employer contributions part of the collective bargaining process where needed.
- Adopt an administrative policy for the 403(b) plan describing specifics of the employer contributions, while including general language in the employer’s 403(b) plan document that employer contributions are permitted at the discretion of the employer or in accordance with applicable employment agreements. There should always be a written policy that describes the details of the contributions. Most importantly, the policy should also state that employees may not individually choose between the employer contribution and another benefit. It should also indicate that employees have not been given a cash option to avoid the contribution being treated as an elective deferral.
- Decide whether or not there will be a vesting schedule for the employer contributions. Generally, most 403(b) plans do not have a vesting schedule for employer contributions, but some do. If a vesting schedule is used for the 403(b) plan, the employer contributions may need to be made to a separate account for each participant because many 403(b) providers do not have the capability to separately track employer contributions in the account that also contains the employee’s elective deferrals which must be 100 percent vested from the outset. Also, under the new regulations unvested amounts must be segregated and treated as a separate contract under IRC §403(c) until they are vested or the plan terminates.
- Monitor the contribution limits for the combination of employer contributions and elective deferrals. In 2002, EGTRRA’s repeal of the 403(b) exclusion allowance and increase in eligible limits makes this task much easier than it had been previously. Note that prior to the repeal of the exclusion allowance on Jan. 1, 2002, a vesting schedule for employer 403(b) contributions presented a problem because the amounts that vested were counted as contributions in the year of vesting (not when contributed) for purposes of the exclusion allowance calculation. With the repeal of the exclusion allowance, that problem has substantially decreased. However, it will be important to check with providers to determine whether vesting schedules can be accommodated. If it is difficult to offer the vesting schedule in the 403(b) arrangement because of the use of individual products, a group unallocated 403(b) contract or a 401(a) plan may be a workable alternative.