(b)lines Ask the Experts – Testing the Limits

Michael A. Webb, Vice President, Retirement Services, Cammack LaRhette Consulting, answers:    

No formal nondiscrimination tests are required for your plan, since there is no such testing related to 403(b) elective deferrals. However, you would need to verify on audit that your plan satisfied the Universal Availability requirement of Section 403(b)(12) of the Internal Revenue Code (IRC), which requires that the right to make elective deferrals to your plan be made “effectively available” to all employees, with limited exceptions (see Ask the Experts – Universal Availability and Immediate Deferral) This means that you would need to provide proof that you provided notice of that right to employees at least annually; if your voluntary participation rate is particularly low, this might also be a sign that the benefit was not made effectively available to employees.   

In addition, you should perform testing to ensure that employees do not exceed their contribution limits under the plan, which for a plan that consists exclusively of elective deferrals, would essentially mean compliance with the IRC 402(g) elective deferral limit ($16,500 in 2011). Though administration of this limit seems simple, it can be complicated if your plan permits the increase of this limit via the 15-year catch-up election under 402(g)(7), especially in conjunction with the age-50 catch-up election under 414(v).   

If you add employer contributions to your plan, there are several other tests that must be performed – we can save that topic for a future edition of Ask the Experts!  

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.