Back in 1998, my client, a small school district, permitted an insurance company to pitch its 403(b) product to employees, and a few signed up and began making elective deferrals. A handful of those employees continue to be employed, and continue to make the salary deferrals. However, the company has not asked for any additional meetings with employees since then, and no other vendors have approached the school to pitch their products. In other words, the only time 403(b) showed up on the school's radar was one day ten years ago.
The district would like to terminate the "plan," but I am concerned that because the school district did not proactively go out and seek vendors to provide annuities, it may be saddled with exhorbitant penalties or compliance expenses.
Any thoughts on an appropriate approach?
Full Version: Effective Opportunity Problem?
To what State does the public-schools district belong?
QUOTE (Fiduciary Guidance Counsel @ Dec 3 2008, 08:21 AM) 
To what State does the public-schools district belong?
Mississippi
If a 403(b) plan remains limited to one insurer and a handful of participants, it might be not too difficult to administer.
QUOTE (Fiduciary Guidance Counsel @ Dec 3 2008, 09:29 PM)
If a 403(b) plan remains limited to one insurer and a handful of participants, it might be not too difficult to administer.
My immediate concern is the "effective opportunity" issue. The district has been willing to permit vendors to sign up employees, but only one vendor, 10 years ago, bothered to try it. Thus, it doesn't appear that any employees who have been hired since that date have had ANY opportunity to enroll. In other words, a "good deed" by the district in 1998 may now have disasterous consequences.
Are you suggesting that there was no communication, at all, of the existence of the 403(b) Plan or the identity of the single vendor? If the name, etc. of the single vendor is known by post-1998 employees, couldn't they just contact that vendor about the possibility of beginning deferrals? Or, if there is general knowledge of the existence of the 403(b) Plan, couldn't any post-1998 employee have found their own vendor and asked the school district to permit deferrals through that vendor?
If there was no communication and no knowledge at all, that's one story. But if there was appropriate communication, then you can't pin on the district the failure of employees to take the initiative to defer (although no proactivity by the district or the sole vendor for 10 years may make this argument a bit of an uphill battle).
If there was no communication and no knowledge at all, that's one story. But if there was appropriate communication, then you can't pin on the district the failure of employees to take the initiative to defer (although no proactivity by the district or the sole vendor for 10 years may make this argument a bit of an uphill battle).
QUOTE (Sieve @ Dec 4 2008, 08:18 PM)
Are you suggesting that there was no communication, at all, of the existence of the 403(b) Plan or the identity of the single vendor? If the name, etc. of the single vendor is known by post-1998 employees, couldn't they just contact that vendor about the possibility of beginning deferrals? Or, if there is general knowledge of the existence of the 403(b) Plan, couldn't any post-1998 employee have found their own vendor and asked the school district to permit deferrals through that vendor?
If there was no communication and no knowledge at all, that's one story. But if there was appropriate communication, then you can't pin on the district the failure of employees to take the initiative to defer (although no proactivity by the district or the sole vendor for 10 years may make this argument a bit of an uphill battle).
If there was no communication and no knowledge at all, that's one story. But if there was appropriate communication, then you can't pin on the district the failure of employees to take the initiative to defer (although no proactivity by the district or the sole vendor for 10 years may make this argument a bit of an uphill battle).
No activity whatsoever following the 1998 vendor presentation, other than the continued salary deductions for those few employees that signed up in 1998. If there was any knowledge at all of the vendor by employees other than those who showed up for the 1998 presentation, it is purely coincidental. School officials had no comprehension that there was a "plan" in place, or that they had a responsibility to make elective deferrals available to all employees. I mean, suppose the school district called the vendor to set up another meeting with school employees and the vendor declined (not worth the time, no longer in that line of business, etc.) -- apparently the school would be required to locate other vendors.
The universal availability rules took effect in 1989.
House Committee Report on TRA '86 for IRC § 403, under the heading Elective Deferrals, there is explained that (emphasis added)—
Initial IRS guidance on the universal availability requirement was provided in Notice 89-23 (IRB 1989-8, February 21, 1989) (emphasis added):
An EE generally does not have an opportunity if he is not aware of it. Annual notice to all eligible employees is generally deemed sufficient by the Employee Plans Correction Units (EPCUs), at least EPCU closes its review if the ER explains that such notices are so provided. One of the questions on the EPCU compliance check questionnaires sent out with IRS Letter 1562-F re 403b universal availability asks: "5) Describe how the opportunity to make deferrals is communicated to employees to ensure that they are aware of their right to participate in the section 403(b) plan. If the method differes by groups of employees or if there are different hiring packages, explain that as well."
The EPCU follows up with Letter 1564-B (7-2007) when the responses from the ER suggest a possible failure of universal availability. EPCU gives the ER 240 days to correct by the ER making a 'lost opportunity cost" contribution for each EE equal to 1.5% of pay, or if less and calculated, 1/2 of the average of the deferral percentages by those that were in fact given the opportunity.
House Committee Report on TRA '86 for IRC § 403, under the heading Elective Deferrals, there is explained that (emphasis added)—
QUOTE
The bill provides a special coverage and nondiscrimination rule applicable to tax-sheltered annuity programs that permit elective deferrals. * * * Under the bill, a tax-sheltered annuity program that permits elective deferrals will be considered discriminatory with respect to those deferrals unless the opportunity to make elective deferrals is made available to all employees of the entity sponsoring the tax-sheltered annuity program.
Initial IRS guidance on the universal availability requirement was provided in Notice 89-23 (IRB 1989-8, February 21, 1989) (emphasis added):
QUOTE
If contributions to a 403(b) annuity plan may be made pursuant to a salary reduction agreement within the meaning of section 3121(a)(5)(D), the plan meets the nondiscrimination requirements applicable to such contributions only if each participant who elects to make salary reduction contributions may elect to reduce annually his or her salary by more than $200 and the opportunity to make such contributions is available to all employees on a basis that does not discriminate in favor of highly compensated employees.
An EE generally does not have an opportunity if he is not aware of it. Annual notice to all eligible employees is generally deemed sufficient by the Employee Plans Correction Units (EPCUs), at least EPCU closes its review if the ER explains that such notices are so provided. One of the questions on the EPCU compliance check questionnaires sent out with IRS Letter 1562-F re 403b universal availability asks: "5) Describe how the opportunity to make deferrals is communicated to employees to ensure that they are aware of their right to participate in the section 403(b) plan. If the method differes by groups of employees or if there are different hiring packages, explain that as well."
The EPCU follows up with Letter 1564-B (7-2007) when the responses from the ER suggest a possible failure of universal availability. EPCU gives the ER 240 days to correct by the ER making a 'lost opportunity cost" contribution for each EE equal to 1.5% of pay, or if less and calculated, 1/2 of the average of the deferral percentages by those that were in fact given the opportunity.
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