403(b) Plan Design: Creating Opportunities for Participants

Now that most 403(b) plan sponsors are required to have a written plan document in place, they can create opportunities for employees to build retirement savings by their choices in provisions of the plan document, Architect said. In addition to pre-tax and post-tax deferrals and age 50 “catch up” deferrals allowed for most retirement plans, 403(b) plans can provide for “catch up” deferrals for employees who have completed 15 years of service or more.       

Architect also pointed out that 403(b) plans can provide that employees after severance can still defer regular pay, vacation pay, and sick pay. Individuals would have until the later of the plan’s limitation year or 2 ½ months to defer from these checks paid to them after severance, subject to deferral limits.      

In addition, Architect said Congress passed a law allowing employers to contribute up to the maximum legal limits for employees up to five years after severance. Architect noted that this five-year provision is generally seen in employment contracts with K-12 superintendents and university presidents, provosts, coaches, or department heads. He warned that in the non-public 403(b) market, employer contributions are subject to ACP discrimination testing, so sponsors must consider if it is economically feasible to include the five-year provision in their plans.      

Finally, Architect said special pay plans set up only when individuals leave are approved in 403(b)s.      

Architect reminded plan sponsors that under universal availability rules, employers must proactively make employees aware of their opportunity to participate in the 403(b) plan. He also warned that plan sponsors should make sure their plan in form does not violate universal availability rules. Only employees who work less than 20 hours per week and leased or contracted employees can be excluded from participation, and according to Architect, many plans will have a problem because they say only full-time employees can participate and define full-time employees as those who work more than 2,000 hours in a year.      

In addition, Architect warned that plan design choices could affect those plans previously complying with the ERISA safe harbor for exemption. Architect said the mere existence of a plan document does not trigger ERISA, but certain choices requiring employer involvement could. He suggested sponsors look to Department of Labor Field Assistance Bulletin 2007-2 for guidance.      

The IRS has announced that it expects to launch a prototype plan document program for 403(b)s in 2010. Architect said sponsors do not need to adopt a pre-approved plan, but they will be able to go back and clear up any document defects by adopting one of the prototypes.