Many sponsors of 403(b) plans have adopted pre-approved volume submitter plan documents in the last few years. If you are a 403(b) plan sponsor using such a document you need to be aware that in addition to all the familiar notices that you regularly distribute to your participants, there is an additional annual notice requirement that is not as well known. This is the notice that discloses the rules governing participants in 403(b) plans who control another employer maintaining a retirement plan.
What are the Controlled Employer Rules that Apply to Contributions to Contracts in 403(b) Plans?
IRC section 415 provides that contributions to a 403(b) plan cannot exceed a maximum limit set each year by the IRS. Generally, for purposes determining the 415 limit for an annuity contract or custodial account in a 403(b) plan, the participants, not the employer, are deemed to maintain the 403(b) contracts issued to them. This is different from the way section 415 works under qualified defined contribution plans such as 401(a) and 401(k) plans, where the employer is considered as maintaining the plan.
However,there is an important exception to this rule. If a participant in a 403(b) plan owns or controls another employer that maintains a 401(a) or 401(k) plan, the IRC treats the 403(b) contract as if it is maintained by both the controlled employer and by the participant. That means that in applying the IRC section 415 limits to the 403(b) contract, the participant must aggregate the contributions made to the 403(b) plan with all other contributions the participant receives under any 401(a) or 401(k) plan maintained by the controlled employer.
For example, assume a doctor is employed by a hospital and is a participant in the hospital’s 403(b) plan. The doctor also maintains a private practice that she controls. Any contributions to a qualified plan of the private practice must be aggregated with contributions to the 403(b) contract to determine whether the 415 limit under the contract has been met.
When Does a Participant Control Another Employer for this Purpose?
A participant controls a partnership or corporation if he or she has a more than 50% ownership interest in that entity.
What are the Notice Requirements Under the Controlled Employer Rules?
Under the terms of the pre-approved volume submitter document, the plan administrator must provide a written or electronic notice to participants that explains the controlled employer rules. The notice informs participants that it is their responsibility to notify the plan administrator of information necessary to meet the requirements of the controlled employer rules, and that the failure to provide that information could result in adverse tax consequences to the participant. In particular, if the participant does not provide this information it could affect the tax qualification of his or her 403(b) contract.
When Must the Notice be Provided to Participants?
This notice must be provided once each calendar year, so in most cases it will be delivered before the end of the year. The first year that the notice is required is the later of the year in which an employee becomes a participant,or the first plan year which begins after the Employer adopts the volume submitter document. Plan administrators should check with their document providers to see if they are providing this notice on your behalf. Note that this notice requirement only applies to 403(b) plans that have adopted a pre-approved volume submitter document, but it is a good practice for all 403(b) plan administrators to inform participants of this rule.
© Boutwell Fay LLP 2020, All Rights Reserved. This handout is for information purposes only and may constitute attorney advertising. It should not be construed as legal advice and does not create an attorney-client relationship. If you have questions or would like our advice with respect to any of this information, please contact us. The information contained in this article is effective as of September 2020.