(b)lines Ask the Experts – Can States Sponsor 403(b)s and 401(k)s?

“But what about 403(b) and 401(k) plans? I see what appear to be state-sponsored 403(b) and 401(k) plans, but I thought that states were not permitted to sponsor such plans. Can the Experts please clarify?” 

Michael A. Webb, vice president, Cammack Retirement Group, and David Levine, with Groom Law Group, answer: 

Certainly! We agree that the 457(b) plan is by far the most common model that we see of plans sponsored for public-sector employees for elective deferrals. Some states have also moved to sponsoring defined contribution 401(a) plans as an alternative to the traditional defined benefit pension plan that many state retirement systems offer.

Though certain states sponsor 401(k) plans, they are less common. The reason for this is that the Tax Reform Act of 1986 (TRA 86) eliminated the adoption of new 401(k) plans by states. However, under Treas. Reg. 1.401(k)-1(e)(4)(ii), plans that were in existence prior to May 7, 1986, were “grandfathered,” meaning that such  plans could be maintained, and that new employees could be enrolled in such plans. A few states sponsor such “grandfathered” plans.

As for 403(b) plans, the situation is a bit more complex. As stated in a recent Ask the Experts column, a state may sponsor a 403(b) plan, but ONLY for its public school employees; other state employees are not eligible for a 403(b) plan. Though a state can sponsor a 403(b) plan directly for its public school employees, as a practical matter, when states are involved in the sponsorship of a 403(b) plan, it is typically through a state agency (also permitted to sponsor a 403(b) plan) that deals with education matters, such as a state board of regents or a state department of education.

Thank you for your question!

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.