Additional Deferral Opportunities When 403(b) Isn’t Allowed

“We are a county hospital that is NOT dual status (i.e., we are NOT a 501(c)(3) charitable organization) and thus cannot sponsor a 403(b) plan. We sponsor a 401(a) and a 457(b) plan, but our 401(a) does not allow pre-tax deferrals. Some of our physicians have come to us seeking additional deferral opportunities, since they can only defer to the 457(b) plan. Is there anything that our physicians (or any other employee) might be able to do to save more for retirement?”

Charles Filips, Kimberly Boberg, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, answer:

There are some possibilities for additional contributions, though they may not be pretax/Roth elective deferrals. The first thing you should investigate is whether your state or local government sponsors a 401(k) plan. States and local governments are no longer permitted to create 401(k) plans and have not been able to do so since May 6, 1986. However, state/local governments that had plans at that time are “grandfathered” and can permit new participants to join the plan. Most of these state/local governments will allow your employees to participate, as long as you are paying into the state retirement system for those employees. However, you will need to check the plan(s) for employee eligibility, as it may vary.

If your state/local 401(k) is not an option, there are no other potential options for qualified pre-tax/Roth elective deferrals as far as the Experts are aware. However, there are two options for additional physician contributions to your 401(a) plan. First, as we discussed in a prior Ask the Experts column, mandatory pretax “pick-up” contributions under 414(h) may be made to your 401(a) plan. However, such contributions are not subject to employee discretion, meaning that they cannot be changed or discontinued by the employee. Thus, these “pick-up” contributions are not nearly as flexible as pre-tax elective deferrals to a 401(k) plan would be for your employees. And, of course, your plan will need to specifically allow for this provision.

In addition, if your 401(a) plan allows for after-tax contributions, your physicians, if eligible for the 401(a) plan, may make such contributions to that plan up to the lesser of 100% of pay or the 415 limit less any other contributions (e.g., employer contributions) to that plan. The 415 annual contribution limit is $61,000 in 2022. These contributions are completely voluntary but cannot be pre-tax or Roth; they must be after-tax.

These arrangements generally cover the options that would be available to such physicians. You may hear of other plan types that you may sponsor, such as a 415(m) plan or a 457(f) plan, but these are supplemental plans that are much less likely to address the specific needs of your physicians to make additional contributions for retirement plan purposes and should likely only be explored after all the options above have been exhausted.

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.

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