403(b) Outlook: Controlled Group Rules

October 09, 2008

403b Outlook Archive 403(b) Outlook Archive

What is the rule? For 501(c)(3) tax-exempt entities, the "employer" in a controlled group includes not only the organization whose employees participate in the 403(b) plan, but also any other tax-exempt organization(s) under "common control." Common control is based on 80 percent of the directors or trustees being either representatives of, or directly or indirectly controlled by, the same tax-exempt organization.

What has changed under the final regulations? The final regulations do not reflect a change in IRS thinking on this subject, but do for the first time formally require tax-exempt entities to apply the control group rules to their 403(b) plans, 401(a) qualified plans and eligible 457(b) plans, effective Jan. 1, 2009. For a 403(b) plan, these rules would be particularly relevant for purposes of the nondiscrimination requirements, but will also be relevant for purposes of the 15-year catch-up limit under 402(g). And for employers with qualified 401(a) plans, they will also apply for the Section 415 contribution limits and the Section 401(a)(9) minimum distributions rules.

Responsibilities for administrators: This new rule affects plans sponsored by tax-exempt employers that are part of a controlled group. Institutions that are members of a controlled group will need to revise their procedures for nondiscrimination testing and for determining compliance with contribution limits. These rules do not apply to governmental employers and churches. Until further guidance is issued, the controlled group rules in Notice 89-23 can continue to be used for purposes of determining the controlled group for public schools and churches.

What happens if you fail to comply? A nondiscrimination failure will result in plan disqualification, which means that all contracts of all employees in the plan would be taxable.

Effective date: Jan. 1, 2009.

Read more about nondiscrimination rules.

Next week’s issue: Plan Document Requirements

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