The Frequently Neglected 403(B) Plan - Errors May Be Costly

Date: October 30, 2017

Originally published in Association TRENDS magazine.

We previously discussed the differences between deferred compensation plans for tax-exempt employers, in particular; the tax attributes of Internal Revenue code Section 457(b) and 457(f) plans. (Mind Your B's and F's: A Primer on Deferred Compensation Plans for Tax Exempts, Association Trends, May/June 2015). However; participation in 457(b) and 457(f) programs is limited to a "select group of management or other highly compensated employees" and those arrangements generally serve as a supplement to the retirement programs available for all employees.

Until 1996, most tax exempt employers were limited to offering tax deferred annuity programs governed by Code Section 403(b) as the retirement plan for all employees.  Beginning in 1996, the more popular 401(k) plan was available for adoption by tax exempt organizations.  However, due to employee familiarity with the existing programs and investment options, many employers hesitated to convert to 401(k) plans and many 403(b) plans are still operational.  However, these plans traditionally have not received the same level of support from the recordkeepers and institutions that hold the contributed funds, particularly if the programs allow only for employee contributions.  

Association executives are frequently the named fiduciaries of 403(b) plans or are deemed to be fiduciaries due to their status as officers.  Accordingly, ensuring that the programs operate correctly should be on executives' radar screens.  Following are frequent issues that arise with respect to plan operations and questions you should be asking:

  1. Do you have a plan document?  Surprisingly, many 403(b) plans continue to operate with no formal plan document.  Lack of a plan document jeopardizes the tax qualification of the plan and renders enforcement of the provisions difficult, if not impossible.
  2. Are all employees eligible to make deferrals on their date of hire?  While an hours requirement and a waiting period may apply for employer contributions, the “universal availability” rule for 403(b) plans requires that all employees be eligible to make deferrals immediately following their hire, with limited exceptions.  Any exceptions must be spelled out in the plan document – see Item 1. above.
  3. Do you transmit employees' deferrals to the accounts in a timely manner?  A good rule of thumb is to transmit the deferrals as frequently as withholding taxes are transmitted.  
  4. If your plan allows loans, are the loan limits followed?  This rule may be difficult to administer if participants have multiple accounts with different vendors and is one of many issues that supports a recommendation to consolidate to one vendor.
  5. Are the investments made available to employees monitored regularly with the assistance of an investment professional?  Monitoring entails reviewing internal costs and investment return – the subject of frequent class litigation.  

This list is by no means complete, but is intended to alert executives to the common issues we encounter, usually after the issues become problems.