A b plan must be documented in a written defined contribution plan that satisfies certain regulatory requirements and be operated in compliance with the plan. Specifically, the written plan document must set forth all the material terms and conditions regarding the following:. The plan also may set forth certain optional features that are consistent with but not required under I.
These include:. As provided in the final regulations, the existence of a written plan facilitates the allocation of plan responsibilities among the employer, the issuer of the contract, and any other parties involved in implementing the plan.
Without such a central document for a comprehensive summary of responsibilities, there is a risk that many of the important responsibilities required under the statute and final regulations may not be allocated to any party. See Correcting b Plan Errors. The written plan document can consist of more than one document. That is, plans are permitted to incorporate other documents, such as annuity contracts and custodial agreements.
Consider advising a tax-exempt employer that wishes to maintain non-ERISA b plan status to exclude from its written plan document any provisions concerning hardship withdrawal distributions, loans, plan-to-plan transfers, and acceptance of rollovers.
These provisions may appear instead in the annuity contract, custodial account agreement, or other ancillary document prepared by the third party administering the relevant aspect of the arrangement. Under the safe harbor rules, the employer could presumably limit the funding media or products available to employees, or the annuity contractors who may approach employees, to ones that agreed to include and administer such provisions.
The IRS has provided model language for b plans designed to satisfy requirements under I. The section b nondiscrimination rules are designed to ensure that coverage under a b plan does not discriminate in favor of highly compensated employees.
Church-sponsored b plans are exempt from these rules. Their application to other plans depends on whether the plan is maintained by a government or a private employer:.
Plans of governments and private employers but not churches that permit elective deferrals under their b plans must make them available to all employees, subject to the exceptions for excludable employees noted below. Certain employee groups may be excluded on a universally basis from participation in a b plan without violating the universal availability rule:.
Universal availability rule compliance is an issue for many b plans. For example, a school often hires substitute teachers whose work schedule is unpredictable. The employer may initially not permit elective deferrals based on an expectation they will work less than 20 hours per week and will not exceed 1, hours for they year a permissible exception, as noted above.
However, if this is done, the employer needs to carefully track actual hours to ensure that a substitute that ceases to qualify for an exempt category is given the opportunity to participate. As an alternative, many employers simply permit all employees, regardless of hours worked, to make elective deferrals.
In the past, several b plans misapplied the part-time employee exclusion by extending it to employees for any plan years where an employee did not meet the hours threshold during the immediately prior year, even if they had been permitted to contribute to the plan previously. The IRS has offered limited relief for such plans to bring their plans into compliance under the b remedial amendment period if they timely amend the plan in accordance with the transition relief and operate the plan in a manner compliant with the once-in-always-in rule for exclusion years beginning on or after January 1, There is a notice component to the universal availability rule.
Employers must provide all eligible employees with an annual notice concerning the opportunity to make salary deferrals to a b plan offering elective deferrals. The notice must also advise employees how they can make or change the amount designated for salary deferral purposes. The plans of private employers, but not governments or churches, are subject to the same as the rules that apply to qualified plans under I.
Unlike the universal availability rule, these nondiscrimination requirements apply on a related-entity basis under the employer aggregation rules of I. On their face, I. However, regulations take the position that these rules apply to tax-exempt organizations as well other than churches and provide rules for determining controlled group status in the case of tax-exempt organizations. Benefits under a b plan are based on contributions made and earnings thereon.
The written plan document must specify the types of contributions allowed. In the case of a private employer, such contributions must satisfy certain nondiscrimination requirements, as discussed in the previous section. A b plan can permit any or all of the following types of contributions, but the plan must specify which types are permitted:. Each of these are described in the b Plan Contributions section below. A b plan may also provide for automatic enrollment.
Elective deferral limit. The normal annual limit on elective deferrals plus contributions under an eligible Roth contribution program to a b plan is determined under the I. Timing rules for the return of any excess deferral resulting from a failure to comply with the elective deferral limit are found in 26 C.
Catch-up contribution rules. There are two catch-up contribution opportunities for eligible employees to increase the elective deferral limit for a year:. Age 50 catch-up contribution. If permitted by the b plan, employees who are age 50 or over at the end of the calendar year can also make catch-up contributions up to the statutory catch-up limit under I. If an employee covered by a b plan is also covered by a k plan or a simplified employee pension or SIMPLE retirement account , the plans are combined in applying the annual limit on elective deferrals and the age catch-up limit.
A special rule for b plans under I. If permitted under the plan, this catch-up rule increases the annual limit otherwise applicable by the least of:. Special rules for determining years of service for this purpose are given in 26 C.
Several examples applying the catch-up rules are given in 26 C. See also I. When both catch-up opportunities are available because a qualifying individual is age 50 or older by year-end , the employee may utilize both, but regulations require the additional amounts to be applied first to the years-of-service catch-up and then to the age 50 catch-up. Due to its complexity and the subsequent introduction of the age catch-up rules, many employers have eliminated the years-of-service catch-up from their b plans.
The I. The annual additions limit that applies to qualified defined contribution plans also applies to the aggregate of all contributions to a b plan, other than rollover contributions and age catch-up contributions.
It is important to establish a separate account to hold excess contributions to prevent commingling with b plan-eligible contributions. Failure to do so could taint the tax-qualified status of the entire b plan. Special rule for former employee contributions. Thus, it is possible for nonelective employer contributions to a b plan to continue for up to five years in the case of a retired or terminated participant.
Special rule for Church employees. Aggregation of contributions under separate plans. Normally, an employee who participates in a b plan and a qualified defined contribution plan, simplified employee pension, defined benefit plan that provides for employee after-tax contributions, or individual medical benefit account that is part of a pension or annuity plan need not combine contributions made to the b plan with contributions to the other types of plans for purposes of the Section limit.
However, if a doctor employed by a tax-exempt hospital also has a qualified plan for his or her own private medical practice, the b plan of the hospital would have to be combined with the qualified plan of the private medical practice in applying the limit. Requirements imposed on qualified plans under 26 C. In theory, contributions under a b plan must be nonforfeitable.
As a practical matter, though, there is a workaround build into the regulations whereby forfeitable contributions are treated as not having been made to the b plan, but rather to a separate I. Forfeitable contributions are required to be kept in a separate bookkeeping account than nonforfeitable contributions. Then, as amounts become vested, and assuming all of the b plan conditions other than nonforfeitability are met for those contributions, those amounts are retroactively treated as having been made to the b plan for purposes of the maximum limits on contributions when they become nonforfeitable.
To avoid participants becoming immediately subject to taxation upon a termination of the plan, however, a b plan that allows for any type of forfeitable contribution should provide for automatic full vesting upon plan termination as would be mandatory for a traditional qualified plan.
Thus, such b plans can subject employer contributions to three-year cliff vesting or six-year graded vesting, as described in the example given above or more liberal vesting schedules.
If a participant or beneficiary in a b plan is entitled to a distribution from the plan, the plan must give the participant or beneficiary the option to have the amount directly transferred to another plan rather than being paid to the participant or beneficiary.
A b plan also called a tax-sheltered annuity or TSA plan is a retirement plan offered by public schools and certain c 3 tax-exempt organizations. These frequently asked questions and answers provide general information and should not be cited as authority. A b plan, also known as a tax-sheltered annuity plan, is a retirement plan for certain employees of public schools, employees of certain Code Section c 3 tax-exempt organizations and certain ministers.
A b plan allows employees to contribute some of their salary to the plan. The employer may also contribute to the plan for employees. Generally, public schools, Code Section c 3 tax-exempt organizations or churches can set up b plans. There are significant tax advantages for participants in a b , including pre-tax contributions to a b plan and earnings on these amounts are not taxed until they are distributed from the plan. However, a b plan is generally required to allow all eligible employees to participate in the plan as of their employment commencement date the universal availability rule.
Employees should check with their employer to determine how to enroll in the plan. A b plan must generally allow all employees to make elective deferrals to the plan.
Under the universal availability rule, if an employer permits one employee to defer salary by contributing it to a b plan, the employer must extend this offer to all employees of the organization. However, the following exception describes limited situations in which employees may be excluded:.
The maximum amount of elective deferrals an employee can contribute annually to a b is generally the lesser of:. The maximum combined amount both the employer and the employee can contribute annually to the plan is generally the lesser of:.
Employees meeting certain requirements and plan participants may be eligible to make additional contributions. However, no portion of these contributions can come from money otherwise payable to the former employee by the employer and must cease at the death of the former employee.
The b plan sponsor must send elective deferrals to the vendor within an administratively feasible period generally, within 15 business days following the month in which these amounts would have been paid to an employee. Only eligible rollover distributions can be transferred between a b plan and a qualified plan for example, a k plan or a plan.
Yes, a b plan may, but is not required to, allow loans. If permitted by the plan, employees may obtain a loan to the extent and in the manner allowed by the plan. A b plan may, but is not required to, allow hardship distributions. If permitted by the plan, participants may obtain a hardship distribution to the extent and in the manner allowed by the plan.
In addition to loans and hardship distributions, a b plan may allow employees to take money out of the plan when they:. Employees may also receive a qualified reservist distribution. For example, an employee can choose to have benefits paid in a lump sum. A b plan must be maintained under a written program which contains all the terms and conditions for eligibility, benefits, limitations, the form and timing of distributions and contracts available under the plan, and the party responsible for plan administration which satisfy Code Section b.
The written plan requirement does not mean that the plan must be contained in a single document. When a not-for-profit employer has a b and a a plan with employer contributions, the a plan is subject to the limits, but the b plan has a separate limit. Funds contributed to b plan generally do not reduce the limits for the a and vice versa. Certain employers have provided a matching contribution to a qualified a plan for employee salary reduction contributions to a b plan.
There was serious question as to whether a b plan could maintain the exemption from ERISA under circumstances where a contribution to a a plan was conditioned on those employees contributing to the b plan. The DOL has stated unequivocally that a matching employer contribution to a qualified plan will constitute sufficient employer involvement with the b plan to disqualify reliance on the safe harbor provided in the regulations.
Nor does compliance with the safe harbor preclude an employer from taking employee participation in the b plan including salary reduction contributions into account in ensuring that employer contributions to the other plan meet tax qualification requirements in the Code. Regina is one of our b area experts.
Regina also provides technical guidance and support with respect to regulatory and legislative issues impacting the b plan.
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