Section 403(b) Plans (Portfolio 388)

Tax Management Portfolio, Section 403(b) Arrangements, No. 388-7th, examines the three varieties of §403(b) arrangements available under the I.R.C. (i.e., annuity contracts, custodial accounts, and church-maintained retirement income plans). To view this Portfolio, visit Bloomberg Tax for a free trial.

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Description

Tax Management Portfolio, Section 403(b) Arrangements, No. 388-7th, examines the three varieties of §403(b) arrangements available under the I.R.C. (i.e., annuity contracts, custodial accounts, and church-maintained retirement income plans).

Although often used as retirement plans for employees of public schools (including employees of state colleges and universities), hospitals, and other tax-exempt organizations, §403(b) arrangements may also be used by individual employees of these organizations as an advantageous means of saving for retirement on a tax-sheltered basis. Thus, in addition to focusing on the complex rules limiting the contributions that may be excluded, or deducted, from an eligible employee's gross income, the Portfolio identifies the employees who are eligible for §403(b) arrangements, discusses the different arrangements, the applicable tax and ERISA rules, including the distribution rules and tax incentives, and how errors can be corrected.

Related Tax Management Portfolios include 361 T.M., Reporting and Disclosure Under ERISA, 370 T.M., Distributions from Qualified Plans — Taxation and Qualification, 373 T.M., Employee Benefits for Tax-Exempt Organizations and 392 T.M., Withholding, Social Security and Unemployment Taxes on Compensation.

Authors

Jon C. Hughes, Esq.

Jon C. Hughes, B.A., University of Pittsburgh (1995); J.D., University of Pittsburgh School of Law (1998); LL.M. (Taxation), New York University School of Law (1999).

James Olson, Esq.

James Olson, B.S., Duquesne University (1978); M.S. (Taxation), Robert Morris University (1986); J.D., Duquesne University School of Law (1990).

Table of Contents

Detailed Analysis
I. Introduction
II. Eligibility for Section 403(b) Arrangements
A. Public Education Employees
B. Employees of Certain Tax-Exempt Organizations
1. Private Section 501(c)(3) Organizations
2. Public Institutions Other Than Public Schools
C. Organizations Ceasing to be Eligible Employers
D. Employee vs. Self-Employed Status
III. Funding Section 403(b) Arrangements
A. Annuity Contracts
1. Characteristics
2. Investments
3. Life Insurance
a. Characteristics
b. Taxation
B. Custodial Accounts
1. Characteristics
2. Investments
C. Retirement Income Accounts
1. Eligible Employers
2. Characteristics
D. Face-Amount Certificates
IV. Requirements for Section 403(b) Arrangements
A. Employer-Sponsored Plan
1. Nontransferable
2. Nonforfeitable
3. Nondiscrimination Rules
a. Coverage
b. Contributions
c. Matching Contributions
(1) Limits
(2) Excise Tax
d. Discrimination Rule Transition Relief
e. Special Rules for Veterans and Military Personnel
4. Coverage by ERISA
a. Eligibility Rules
(1) Minimum Age and Length of Service
(2) Maximum Age
b. Reporting and Disclosure Requirements
(1) Annual Return/Report
(2) Disclosure
(3) Penalties for Noncompliance
c. Fiduciary Standards
(1) Duties of Fiduciaries
(2) Prohibited Transactions
d. Funding Requirements
e. Vesting
f. Other Plan Requirements
(1) General
(2) Qualified Joint and Survivor Annuity
(3) Bonding
(4) Notice of Contribution Reduction
5. Sex Discrimination
B. Salary Reduction Arrangements
1. Definition of Elective Deferrals
a. Limitation on Amount
b. Transfer of Amounts to Insurance Companies or Custodians
2. Automatic Enrollment Safe Harbor Arrangements
3. Discrimination Rules
4. Coverage by ERISA
C. Written Plan Requirement
1. Section 403(b) Pre-Approved Plans
a. Section 403(b) Prototype Plan
(1) Prototype Plan Document
(2) Standardized and Nonstandardized Plans
b. Section 403(b) Volume Submitter Plans
c. Pre-Approved §403(b) Plan Provisions
d. Forms and User Fee
2. Opinion and Advisory Letters
a. Scope of Letter
b. Employer Reliance
c. Withdrawal or Abandonment
3. Remedial Amendment
D. Reporting and Disclosure
V. Tax Incentives
A. Exclusion of Contributions from Gross Income
1. Limitation on Salary Reductions
a. Primary Limitation
b. Catch-up Contribution
c. Special Election
(1) Increased Salary Reduction Limit
(2) Years of Service Multiplier
(3) Availability of Election
2. Amounts That Become Substantially Vested
3. Limitation on Annual Additions
a. Basic Limitation
(1) Formula
(2) Employee and Employer Contributions
(3) Compensation
(4) Limitation Year
b. Special Contribution Limitations for Church Employees
(1) Cumulative Increase
(2) Special Rule for Missionaries
c. Aggregation with Other Plans
(1) Controlled Groups of Employers
(2) Special Rules Relating to Church Plans
(3) Employers Controlled by Participant
(4) Limitation Year
4. Excise Tax on Excess Contributions
B. Tax-Free Accumulation
1. General Rule
2. Constructive Receipt
C. Deductible Employee Contributions
1. In General
2. Limitations
D. Deemed IRA Contributions
E. Designated Roth Contributions
F. Disability Insurance
G. Income Tax Credit for Elective Deferral Contributions
VI. Distributions
A. Portability
B. At Retirement
1. Form
2. Required Minimum Distributions
3. Taxation
4. Rollovers
a. Inter Plan Transfers
b. Intra Plan Transfers to Roth Accounts
C. Before Retirement
1. Introduction to Pre-Retirement Distributions
2. Premature Withdrawal Penalty
3. Withdrawals of Employee Contributions
4. Loans
5. Rollovers
6. Exchange or Transfer
7. Qualified Domestic Relations Orders
8. Hardship Distributions
9. Disaster Relief
D. After Death
1. Introduction to Distributions After Death of Participant
2. Income Tax
a. General
b. Life Insurance Proceeds
3. Federal Estate Tax
E. Upon Plan Termination
VII. Correction of Section 403(b) Arrangement Compliance Failures
A. Employee Plans Compliance Resolution System
B. Self-Correction Program
1. Types of Corrections
2. Distribution of Excess Contributions
3. Timing
C. Voluntary Correction Program
1. Availability
2. VCP Requirements
3. Employer Eligibility Failures
D. Audit CAP

Working Papers

Table of Worksheets
Worksheet 1 DOL Opinion 75-33, Exemption from ERISA for “Governmental Plans”
Worksheet 2 DOL Opinion 77-36, Affecting, or Engaging in, Commerce for Purposes of ERISA
Worksheet 3 DOL Opinion 79-90A, Levy for Unpaid Taxes on Benefits Due a Participant
Worksheet 4 DOL Opinion 80-19A, Hospital's Employee Benefit Programs are “Governmental Plans”
Worksheet 5 Section 403(b) Plan with Employer, Employee, and Matching Contributions
Worksheet 6 Summary Plan Description — Section 403(b) Plan with Employer, Employee, and Matching Contributions
Worksheet 7 Chart: Comparison of §403(b) and §401(k)
Worksheet 8 Internal Revenue Manual 4.72.13 — Employee Plans Technical Guidelines: 403(b) Plans