403(b) Q&A | Published in June 2017

403(b) Questions, Answered

When the plan year ends on a weekend; vesting schedules for employer contributions; why the new fiduciary rule covers IRAs not non-ERISA 403(b)s

By Contributing Writer | June 2017
Art by Alessandra De Cristofaro

What if the Last Day of the Plan Year Falls on a Weekend?

Q: We are a 501(c)(3) organization that encountered a year-end retirement plan issue. A few workers terminated employment at the end of the year, and their last day was December 30, 2016—the last business day of the year for our firm (the 31st was a Saturday, and our office was closed). Our 403(b) retirement plan has a last-day rule, wherein the document language is quite clear: You must be employed on the last day of the plan year (ours is the calendar year) to receive our annual employer contribution. However, the employees in question would most certainly have been at work had December 31 been a business day and not a day the office was closed. The plan document does not specifically address what happens in this situation. Should an employer contribution for the 2016 plan year be provided? Our 403(b) plan is subject to ERISA [Employee Retirement Income Security Act], if that is relevant.
A: There is no specific formal guidance on this issue, and even informal Internal Revenue Service (IRS) guidance is somewhat dated. Based on the comments by the IRS representative back at the 2005 ASPPA [American Society of Pension Professionals and Actuaries] Annual Conference, the answer depends on the employer’s determination of when the employment relationship has ended.
In the answer to question 42 in the compilation of questions to the IRS/Treasury from the 2004 Enrolled Actuaries Meeting, the IRS agreed that a participant’s day of retirement is his last day worked, but that last day is a facts and circumstances determination “based on the employer’s practice concerning the last day an individual is considered an employee.”
With regard to 403(b) plans specifically, the regulations regarding when an account is distributable take the same approach. Under Treasury Regulation Section 1.403(b)-6(h), an account is distributable upon a severance from employment, which is defined as occurring “on any date on which an employee ceases to be an employee of an eligible employer.”
An employer may use a “bright line” test—i.e., a clearly defined rule or standard—that says the last day of the plan year is exactly that, even if it falls on a holiday or weekend. This is the simplest approach for the employer but least favorable to participants. Here, in both the question above regarding employees terminating employment at the end of the year and one where an employee quits on Friday, December 30, the employer could conclude that none of the participants were employees on December 31 and exclude them from an employer contribution allocation for the plan year.
Any approach other than the bright-line test involves the interpretation of facts and circumstances to determine whether the individual would have worked on the last day of the plan year had that been a business day. Under this approach, an employer could conclude that individuals intending to terminate employment “at the end of the year” whose last day of work is December 30 would have worked on December 31 and treat them as employed on the plan year’s final day. At the same time, the employer could still conclude that the individual who quit on December 30 would not have worked on December 31 had it been a work day and not include him in the employer contribution allocation.
Whichever approach an employer decides to take, consistency is key because each decision sets a precedent. And, of course, it would be prudent to consult with counsel having specific experience with your retirement plan regarding such issues.
Maximum Permissible Vesting Schedule for Employer Contributions
Q: What is the current maximum permissible vesting schedule for employer contributions to a retirement plan? And is it the same for base—i.e., discretionary—and matching contributions?

A: The maximum permissible vesting schedules applicable to defined contribution (DC) retirement plans—e.g., a 401(k)/profit-sharing plan or 403(b) plan—have changed over the years. Generally, since January 1, 2002, the maximum vesting schedule applicable to matching contributions has been a three-year cliff vesting schedule—i.e., 100% vesting after three years of service—or a two- to six-year graded vesting schedule—i.e., 20% after two years plus 20% for each year of service thereafter.
Discretionary employer contributions remained subject to a maximum five-year cliff vesting schedule or two- to seven-year graded vesting schedule until the Pension Protection Act of 2006 (PPA) amended the vesting rules to apply the three-year cliff and two- to six-year graded maximum schedules to both types of employer contributions. However, an employer may choose to apply one vesting schedule to the match and a different vesting schedule to discretionary contributions. Of note, certain types of employer contributions—e.g., safe harbor matching contributions—must be 100% vested immediately when made to the plan.
Defined benefit (DB) plans have typically been permitted to have longer maximum vesting schedules, and, for several years now, those have been five-year for cliff vesting and three- to seven-year for graded vesting. But, notably, a defined benefit plan with a cash balance component must vest all accrued benefits, including both the cash balance account and the benefit accrued under a traditional defined benefit formula, after no more than three years of service.
Why the New Fiduciary Rule Applies to IRAs but Not Non-ERISA 403(b)s
Q: Why does the fiduciary rule apply to IRAs [individual retirement accounts]? Aren’t those exempt from ERISA [Employee Retirement Income Security Act] and thus any of ERISA’s fiduciary provisions? And what about the many 403(b) plans not subject to ERISA? If the fiduciary rule doesn’t apply to those plans, why would it apply to IRAs?

A: First of all, non-ERISA 403(b) plans are specifically exempted from the new fiduciary rule. According to Field Assistant Bulletin No. 2009-02, Internal Revenue Code (IRC) “Section 403(b) contracts and custodial accounts purchased or provided under a program that is either a ‘governmental plan’ under Section 3(32) of ERISA or a non-electing ‘church plan’ under Section 3(33) of ERISA are not subject to the final rule.”
Thus, any 403(b) plan that is not subject to ERISA is exempt from the final fiduciary rule. However, many 403(b) plans of private, tax-exempt employers are subject to ERISA and would thus fall under the final rule.
As for IRAs, you are correct that they are generally exempt from ERISA provisions. However, IRAs are subject to the tax code, and Section 4975 of the IRC addresses prohibited transactions between IRAs and “disqualified persons” including fiduciaries. The section then goes on to define a fiduciary to include any person designated as such under ERISA; this is how the DOL affirms that its definition of a fiduciary applies to Section 4975, as well.
In addition, the DOL has specific authority over Section 4975 through Reorganization Plan No. 4—an executive order issued in 1978. Of course, enforcement of these prohibited transaction rules under the tax code would be the responsibility of the Internal Revenue Service (IRS) and not the DOL.
It should be noted that 403(b) plans are specifically exempt from Section 4975, which partially explains the differing treatment of IRAs and non-ERISA 403(b) plans under the new fiduciary rule.

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. Stacey Bradford, an associate at Groom, also contributed. 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 with the subject line: Ask the Experts. Questions must be of a general nature and of interest to a majority of plan sponsors.