Interesting question came across my desk from one of our advisors . . .

His client, a Non-Profit with only 2 employees (Exec Director & P/T Assistant), established a Non-ERISA 403(b) 2 years ago, nearly to the day. Only the Exec participates in this and is eligible for benefits.

Our advisor told the Non-Profit to gross up Exec's salary so that Exec could make the full deferral. Instead, the Non-Profit did not gross up the exec, and made all contributions employer contributions.

My questions is, what is the best way to fix, or is it even a problem?

Would restating the plan as something besides a Non-ERISA 403(b) (like 401(k) Profit Sharing) prevent damage to the Exec and/or Non-Profit?

Any advice on this would be great as this is a tough one.

Thanks,

James CFP

The best advice is to tell the client to hire a lawyer who specializes in employee benefits law to fix the problem and next time don't be so penny wise and pound foolish.

Probably the course of action is:
1) Employer contributions to the executive's account in the 403(b) program are subject to coverage testing under IRC 403(b)(12).
2) If the part-time employee ever earned 1000 hours during an eligibility computation period, then the coverage testing fails.
3) Treas. Reg. 1.401(a)(4)-11(g) corrective amendment deadline is too late.
4) EPCRS needs to be examined. Sounds to me like a significant failure but your client might still be eligible for self-correction under the two-year rule.
5) 403(b) plan probably isn't a non-ERISA arrangement. Back Form 5500s are owed, fiduciaries need to review whether the investments are prudent, etc.
6) ERISA requires a plan document but there's not a firm deadline on that, so preparing one ASAP now probably isn't a compliance problem.

I might have missed something, but if so see my first paragraph.

Why don't you just file an amended W-2 for the employee to reflect the intention ? It sounds to me like a ministerial mistake which you could rectify.

Also, prepare an appropriate resolution showing the intent at the time to give the employee increased wages and to contribute it to the annuity per his request.

Good luck.

James;

What course of action did you follow?