Defining Boundaries for Roth Conversions
Q: I am a participant in a 403(b) plan. I wanted to convert my 403(b) balance to a Roth account, but my benefits person informed me that, as I did not qualify for a distribution under the plan, I could not complete a Roth conversion. Is this true?
A: This is an example of a question where the answer may have changed because there was a change in the law.
For some time, in-plan Roth conversions were impermissible unless the participant was eligible for a distribution under the terms of the plan—which is often not before age 59.5 or normal retirement age—but that rule was changed by the American Taxpayer Relief Act of 2012 effective for conversions of vested amounts after that year.
However, it is still impossible to do such an in-plan Roth conversion if the plan document does not permit them, or if ongoing Roth contributions are impermissible.
Deferring Time for Unused Vacation/Sick Time
Q:I have a retiring employee who is eligible to receive a significant cash payout of unused sick/vacation time shortly after she retires.
I realize that she may defer such compensation into our 403(b) plan subject to the 415 limit rules regarding unused sick/vacation pay, and the plan terms do allow it. But she will be unable to defer the full amount without exceeding the 402(g) limit. We have a 457(b) plan for which she is eligible as well; could she defer the remainder into that plan, even though the payout will be made following termination of employment?
A: Due to the nature of 457(b) plans, which are deferred compensation rather than retirement plans, one would expect that post-retirement deferrals would not be possible. However, the same rules regarding deferrals of unused sick/vacation pay that apply to 403(b)/401(k) plans apply to 457(b) plans as well, as the 457 regulations utilize the compensation definition under 415.
Thus, provided certain conditions are met, any payout of unused sick or vacation time may be deferred to the 457(b) plan, up to the elective deferral limit for that plan—$18,000 as of this year ($24,000 in governmental plans for participants aged 50 or older as of this coming December 31). Those conditions are that: a) the employee would have been able to utilize the sick/vacation leave if employment had continued, and b) the money is paid to the employee no later than the later of 2.5 months following employment termination and the end of the limitation year—typically the calendar year—in which the termination of employment occurs. Thus, in your particular case, the employee in question should be able to defer compensation for unused sick/vacation time into your 457(b) plan.
Keep in mind that the proposed 457(f) regulations that the Treasury Department issued last June include a facts and circumstances definition of what constitutes bona fide sick leave and vacation pay, as opposed to disguised deferred compensation.
Eligibility After Move From Union to Nonunion Employee
Q:We sponsor an Employee Retirement Income Security Act (ERISA) 403(b) plan that excludes employees covered by collective bargaining agreements from the right to receive employer contributions, though they are permitted to make elective deferrals to the plan.
Recently, a union employee who has worked for us full-time for 10 years transferred to a nonunion position, which is eligible to receive employer contributions in the 403(b) plan. However, we have a waiting period of one year in order to receive employer contributions, and employer contributions are not fully vested until after the completion of three years of service. Does my formerly union employee need to wait a year to receive employer contributions and three years to become fully vested? Or is he immediately eligible/vested because he has already completed 10 years of service, albeit as a union employee?
A: Proper crediting of service can often be an area of confusion for plan sponsors, and your question is a prime example of the complexity of such rules.
There are types of service that can indeed be excluded under the Internal Revenue Code (IRC) for eligibility and/or vesting purposes—Section 411(a)(4), which excludes service prior to age 18 among other exclusions for vesting purposes, comes to mind. However, service while working in a classification that is ineligible for the plan is not a type of service that can be excluded—at least for participation and vesting. Thus, in your example, an employee with 10 years of service as a union employee would be immediately eligible to receive employer contributions when he becomes a nonunion eligible employee and would be immediately vested in such contributions as well.
Why Would a Church Plan Elect ERISA Coverage?
Q:I am an adviser who works with church plans and am thus familiar with the term “nonelecting” church plan, meaning one not electing Employee Retirement Income Security Act (ERISA) coverage. I do not understand why a church would want to elect ERISA coverage.
A: It is a rare event that a church plan sponsor would intentionally elect to be covered under ERISA. The reason for this is ERISA entails many administrative burdens, including filing Form 5500 annual reports, distributing a myriad of participant disclosures, and the like.
In addition, for church defined benefit (DB) plans, Pension Benefit Guaranty Corporation (PBGC) premium payments would be required if an ERISA election was made, though the payments go toward providing an insured benefit to participants were the church plan to become insolvent.
We have seen a few church plan sponsors that have had historic financial issues elect ERISA coverage for their defined benefit plan so their employees would be somewhat protected in the event of insolvency. However, this is truly unusual.
Still, many church plan sponsors have been under the mistaken impression that they inadvertently elected ERISA coverage by taking such actions as adopting a plan document with ERISA language or filing Form 5500s. The only way the regulations indicate that a church plan may elect to be covered under ERISA is for the sponsor to attach a written statement either to the Form 5500 filed for the first plan year for which the election is effective or to a written request for a determination letter relating to qualification of the plan.
Contributors David Levine and David Powell, both principals with Groom Law Group, Chartered, and Michael Webb, vice president, retirement plan services, Cammack Retirement Group, field selected questions concerning 403(b) plans and regulations, for use in this article. This article is meant to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.
Do you have a 403(b) question? Send it to firstname.lastname@example.org with the subject line: Ask the Experts. Questions must be of a general nature and of interest to a majority of plan sponsors.