(b)lines Ask the Experts – Employer Contribution Calculation When Moving from Union to Non-Union 403(b)

“I work with an employer that sponsors two 403(b) plans; a nonunion plan and a plan for collectively bargained employees. An employee met the eligibility for the employer contribution to the union plan years ago. However, she moved from union status to non-union status in 2018. The non-union plan provides for an employer contribution, and service in the union plan is credited toward eligibility for the nonunion plan so she was immediately eligible for the employer contribution in the nonunion plan. The definition of compensation in the non-union plan is all compensation earned during the year, even when the employee is not eligible. Do I include the compensation when the participant was eligible for the union plan or exclude the compensation earned during the time he was with the union plan?”

Stacey Bradford, Kimberly Boberg, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, vice president, Retirement Plan Services, Cammack Retirement Group, answer:

This is an excellent question as it demonstrates that plan language that is written for one purpose can have unintended consequences! The Experts have seen this situation too many times to count, which is why it is so important to draft plan language carefully and work closely with counsel well-versed in such issues to make certain that situations don’t arise such as the one you describe.

In this particular situation, the Experts suspect that the intent of the plan language was to ease administration (it is much easier to track full-year compensation than partial-year compensation for each employee). However, the unintended consequence surfaces when someone switches from union to nonunion status and the plan language does not address that particular scenario. Since there is no regulation that states that compensation for a given year cannot be eligible compensation for more than one plan sponsored by the same employer, the plan document language governs.

Thus, assuming that retirement plan counsel concurs that the language states that compensation earned while a union member is not specifically excluded from the nonunion plan (and it is always important to confirm such matters with counsel), the employee in question would receive an employer contribution to the nonunion plan for all compensation earned in 2018, and, depending upon the language in the union plan, would be entitled to an employer contribution to the union plan for 2018 as well, based on the portion of the same 2018 compensation that was earned while eligible for the union plan. Presumably, this “double contribution” on some of the same compensation was not the intended consequence for the plan sponsor; and the plan sponsor may wish to work with counsel going forward so that compensation earned while a union member is excluded from the nonunion plan, and vice versa.

One caveat to this analysis; since these are two 403(b) plans, it should be noted that a single 415 limit applies to both, so in no event can the total amount of employer contributions and elective deferrals (excluding age-50 catch-up contributions, but including deferrals pursuant to the 15-year catch-up provision) to both 403(b) plans combined exceed the lesser of $55,000 or 100% of compensation.

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.