Author Topic: My employers 403b contribution  (Read 7844 times)

needmyfi

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My employers 403b contribution
« on: March 19, 2015, 08:48:20 PM »
My employer just deposited our 403b contribution of 3.5% of our taxable income-not our gross income.  So the more we contribute to our own retirement-the less they contribute.Because of my own contributions to my retirement account, my benefit is reduced by several hundred dollars.

 WTF!  Most plans reward contributions or are at least neutral.

 Has anyone else encountered this and if so were you able to affect any change?

Miss Prim

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Re: My employers 403b contribution
« Reply #1 on: March 20, 2015, 03:58:09 AM »
What!  Do you have to put in a certain percent to get the 3.5%?  I have never heard of a company doing that!  Is it a small company?  I have a 403b with a hospital and we have to contribute at least 4% to get 2%.  But it is on gross, not net.  I would look into the legalities of what they are doing.  Sorry, can't help you more!

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I'm a red panda

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Re: My employers 403b contribution
« Reply #2 on: March 20, 2015, 07:19:14 AM »
I've never heard of anyone who deposits on taxable instead of gross income.

You probably need to run some simulations to decide if it is better for you to contribute elsewhere and get their contribution on a higher taxable income, or if it is worth it to not take as much of a match so that you can use the tax deferred account.

dunhamjr

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Re: My employers 403b contribution
« Reply #3 on: March 20, 2015, 09:21:29 AM »
i would talk to your hr/benefits people about this since that seems really odd to me.

slugline

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Re: My employers 403b contribution
« Reply #4 on: March 20, 2015, 09:39:00 AM »
Is this a suddenly-introduced change? Or has this plan always operated this way?

needmyfi

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Re: My employers 403b contribution
« Reply #5 on: March 20, 2015, 10:26:12 AM »
Thanks for the responses.  The company is a non profit with 100 plus employees.  I got a response from HR as follows:

 " I certainly understand and appreciate your concern.  Although a 401(k) or 403(b) match is based on the employee's contribution to their account, an employer contribution (which is given to all employees whether they contribute or not)  is always based on the taxable wages, not gross wages.  I have worked with many plans, and it has always been that way.  I am not sure if it is an IRS issue, or if it is just the way all plans are written.  Of course you must do the calculations and see what works best for your own financial situation.

As requested, I will stop your deductions effective with the check of April 3."



Can't find any info on this and I am embarrassed to say that I only noticed the discrepancy this year.  I contributed 29% last year and saw a reduction equal to 1% of my salary in my employer contribution.  Glad I caught it-I was contributing 50% for the last 3 months and would have had my employer contribution cut in half if I continued for the whole year.

Can't really muster any momentum among employees here-pretty much a paycheck to paycheck crowd who didn't even understand what I am talking about and frankly probably don't really need them to know my business anyway.  It just really strikes me as wrong.

RWD

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Re: My employers 403b contribution
« Reply #6 on: March 20, 2015, 11:07:02 AM »
That's messed up. It doesn't scale. In theory if your gross pay was low enough and your contributions high enough they could be contributing $0!

FrugalSpendthrift

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Re: My employers 403b contribution
« Reply #7 on: March 20, 2015, 11:36:36 AM »
I agree it doesn't make sense, because it could discourage people from contributing, but isn't the tax deduction more valuable than the match?

slugline

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Re: My employers 403b contribution
« Reply #8 on: March 20, 2015, 01:48:01 PM »
I agree it doesn't make sense, because it could discourage people from contributing, but isn't the tax deduction more valuable than the match?

^ I agree. While the policy in question is unfairly punitive to savers, this doesn't sound like a reason to stop contributing, unless you want to re-direct funds to another tax-advantaged account. Even the lowest marginal income tax bracket is 10%, right? It still looks advantageous to save in the 403B.

I'm thinking of it this way:
For each $1.00 you don't contribute, you get 90 cents of after-tax money in your hand (less if you're in higher bracket) plus 3.5 cents in a tax-deferred investment.
For each $1.00 you do choose to contribute, a full $1.00 goes to a tax-deferred investment.

Would I be wrong if I see the net effect as similar to a reduction in marginal income tax rate?

Miss Prim

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Re: My employers 403b contribution
« Reply #9 on: March 20, 2015, 04:06:59 PM »
I think that your HR person or whoever set this up is mistaken.  I have been googling around and everything I have read about an employer contribution is based on gross not net pay.  The fact that they said that they have worked with numerous plans and it has always been this way is mistaken on their part because most plans are based on gross pay.

Honestly, and I hope I don't insult too many HR people, but they all do NOT know what they are doing.  My daughter's company's HR person is woefully inadequate for her job and if someone had the guts to sue the company, they would get a substantial sum because they do not follow their own policies and she just fires people left and right for no reason.  She seems to have an inordinate amount of power in the company.  And this is an international company based in Austria with a North American office. 

I would contact the IRS because I do not think this is an IRS mandated policy.

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needmyfi

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Re: My employers 403b contribution
« Reply #10 on: March 20, 2015, 04:39:19 PM »
The tax advantage absolutely outweighs the loss of employer  contribution.  I am looking at maxing out my husbands 401k-he is eligible for make up contributions, and both our individual IRAS and then-even though it will probably continue to bug me a little- looking at what will likely be left over to save and contributing  to my 403b at a lower rate.

I agree with Miss Prim-I think that there is no way this can be an IRS policy and HR is likely in error.  However I have only had very limited contact with HR-once to email and ask why no 403b contribution had been made for almost 6 weeks and another time to ask if we were ever going to get the employer contribution  -we had been told about it in late December and it just hit our accounts 2 days ago. I have tried to rally some support at work but there are not even any remotely mustachian leanings in the bunch except for one young guy who just got hired.

I have considered emailing the CFO -absolutely need to get all facts straight before I jump rank.

bogart

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Re: My employers 403b contribution
« Reply #11 on: March 20, 2015, 08:44:58 PM »
I can tell you that my employer, a US university with a 403b that contributes regardless of what or whether employees contribute, contributes a flat amount based on gross.  I don't think there's anything prohibiting your employer from doing what they're doing, but it's certainly not universal.

johnny847

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Re: My employers 403b contribution
« Reply #12 on: March 20, 2015, 09:06:32 PM »
I agree with the others - this seems wrong. I even doubt the legality of such a contribution.

That's messed up. It doesn't scale. In theory if your gross pay was low enough and your contributions high enough they could be contributing $0!

Because of this implication, that would mean that they would be giving higher salaried people a much greater percentage match than those who make far less. I believe that would fail discrimination testing - I don't think it's legal to give people a different percent match. You either give them the same match or none at all.

rpr

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Re: My employers 403b contribution
« Reply #13 on: March 20, 2015, 09:26:15 PM »
Thanks for the responses.  The company is a non profit with 100 plus employees.  I got a response from HR as follows:

 " I certainly understand and appreciate your concern.  Although a 401(k) or 403(b) match is based on the employee's contribution to their account, an employer contribution (which is given to all employees whether they contribute or not)  is always based on the taxable wages, not gross wages.  I have worked with many plans, and it has always been that way.  I am not sure if it is an IRS issue, or if it is just the way all plans are written.  Of course you must do the calculations and see what works best for your own financial situation.

As requested, I will stop your deductions effective with the check of April 3."


Can't find any info on this and I am embarrassed to say that I only noticed the discrepancy this year.  I contributed 29% last year and saw a reduction equal to 1% of my salary in my employer contribution.  Glad I caught it-I was contributing 50% for the last 3 months and would have had my employer contribution cut in half if I continued for the whole year.

Can't really muster any momentum among employees here-pretty much a paycheck to paycheck crowd who didn't even understand what I am talking about and frankly probably don't really need them to know my business anyway.  It just really strikes me as wrong.

Ask for a copy of the official plan documents. Your HR department must have one. Or it may be on their website. Read it carefully. That is the only way you can be sure of what the official policies are.

Cathy

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Re: My employers 403b contribution
« Reply #14 on: March 20, 2015, 10:28:03 PM »
I agree with the others - this seems wrong. I even doubt the legality of such a contribution.

That's messed up. It doesn't scale. In theory if your gross pay was low enough and your contributions high enough they could be contributing $0!

Because of this implication, that would mean that they would be giving higher salaried people a much greater percentage match than those who make far less. I believe that would fail discrimination testing - I don't think it's legal to give people a different percent match. You either give them the same match or none at all.

I recently read all of the US statutes on retirement schemes. Suffice it to say that they are very complicated and contain many exceptions and exceptions to the exceptions. However, fully digesting all those statutes did give me a much more advanced understanding of these plans. For example, did you know that there's no such thing as a 401(k) plan? The plan is actually authorised by § 401(a), and § 401(k) just provides that a 401(a) plan can have certain characteristics and still remain a 401(a) plan.


As for this topic, the starting point is the statute authorising the plan in question, 26 USC § 403(b). The nondiscrimination requirement is initially found in 26 USC § 403(b)(1)(D), which provides that, except for a plan purchased by a church, the 403(b) plan must meet certain nondiscrimination requirements found in 26 USC § 403(b)(12). Note that churches (as defined in the statute) are exempt from the nondiscrimination requirements, so if the OP's employer is a church, he can stop reading here.

Assuming the employer is not a church, 26 USC § 403(b)(12) sets out the nondiscrimination requirements for the plan. This section contains another exemption in 26 USC § 403(b)(12)(C), which provides that a governmental plan maintained by a state or local government or political subdivision thereof or agency or instrumentality thereof, is exempt from almost all of the nondiscrimination requirements (including all requirements that might be relevant to this thread). So, if OP's plan is operated by such a governmental entity, OP can again stop reading.

If we cleared those possible exemptions, there is yet another exemption found in the "flush language" of 26 USC § 403(b)(12), which exempts from the nondiscrimination requirements an employee who is a participant in another form of retirement plan offered by the employer (including, say, a 401(k) plan). There are some other possible exemptions from the nondiscrimination requirements, including nonresident aliens with no income from sources within the US, people who normally work less than 20 hours per week, and certain students. If OP falls into any of these various exemption categories, none of the potentially relevant nondiscrimination requirements apply.

If OP managed to clear all those exceptions, then we get to the substantive nondiscrimination requirements described principally in 26 USC § 403(b)(12)(A)(i). This paragraph first exempts from the nondiscrimination requirements any contributions "made pursuant to a salary reduction agreement". The statute does not define the term "salary reduction agreement", but 26 CFR 1.403(b)-5(2) says that the nondiscrimination requirements do not apply to elective deferrals. So now we have narrowed down the possible application of the nondiscrimination rules to the employer contributions, and only if all of these other exemptions have been cleared.

As for the employer contributions to which the nondiscrimination requirements apply, they have to meet basically four separate tests.

The first test is found in 26 USC § 401(a)(4) (and 26 CFR 1.403(b)-5(1)(i)), which says that the "the contributions or benefits provided under the plan [cannot] discriminate in favor of highly compensated employees". However, that paragraph is subject to 26 USC § 401(a)(5)(B), which says that a plan is not discriminatory for the purpose of this test merely because contributions made by the employer "bear a uniform relationship to the compensation" within the meaning of 26 USC § 414(s). Finally, we get to the kicker, which is that 26 USC § 414(s)(2) says that for the purpose of the exception that contributions can be proportional to compensation without being discrimination, the employer does not need to consider the portion of salary which was deferred as part of compensation. In other words, the scheme described by the OP is not discrimination within the meaning of 26 USC § 401(a)(4). However, that is just the first test; I mentioned there were four.

The second test is found in 26 USC § 401(a)(17) (and 26 CFR 1.403(b)-5(1)(ii)), which provides that compensation taken into account by the plan cannot exceed $200,000 per employee, adjusted for inflation for each year after 2001. That test does not appear relevant to this thread.

The third test is found in 26 USC § 401(m) (and 26 CFR 1.403(b)-5(1)(iii)), which places an upper limit on the amount of employer contribution. Given that the complaint in this thread is with the employer not matching enough (rather than matching too much), this test is also irrelevant for our purposes. (Note that for 401(a) plans (and thus, 401(k) plans), this provision also limits the amount of employee contributions. However, this part of the test does not apply for 403(b) plans.)

The fourth and final test is found in 26 USC § 410(b) (and 26 CFR 1.403(b)-5(1)(iv)), which provides that the plan must meet one of three subtests. It only has to meet one, not all three. The three alternative subtests are the following:
  • "The plan benefits at least 70 percent of employees who are not highly compensated employees." [26 USC § 410(b)(1)(A)]; or
  • At least (x*0.7)% of non-highly-compensated employees benefit from the plan, where x is the percentage of highly compensated employees who benefit from the plan [26 USC § 410(b)(1)(B)]; or
  • Among other things, "the plan benefits such employees as qualify under a classification set up by the employer and found by the Secretary not to be discriminatory in favor of highly compensated employees" [26 USC § 410(b)(1)(C)].

So, if the plan already satisfies subtest (1) or (2) above -- and it might very well -- then it's game over, and the plan is legal. However, if the plan fails subtests (1) and (2), then subtest (3) appears the most hopeful ground for making an argument against the legality of the plan, as it's very vague. Under this third alternative subtest, you would merely have to argue that the scheme outlined in OP is a classification scheme that is discriminatory in favor of highly compensated employees. The term "highly compensated employee" is a technical term defined in 26 USC § 414(q).

Given the language "found by the Secretary" in the third alternative subtest, if your employer is intending to rely on this subtest, they may have already obtained a private letter ruling from the IRS that rules that the plan is not discriminatory. Pursuant to 26 USC § 6110, such written determinations are open for public inspection and the IRS publishes them on its website, but it often redacts company names and other identifying information so even if such a ruling exists, you may not be able to find it.
« Last Edit: March 21, 2015, 01:36:46 AM by Cathy »

rpr

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Re: My employers 403b contribution
« Reply #15 on: March 21, 2015, 01:00:08 AM »
Cathy -- very detailed reading of the legal verbiage.

But my plan provides a simpler and easier to read document that exactly lays out what the employer will contribute. It is in the first page of the plan and stands out on its own. This is the employer specific document that the OP needs to get their hands on.


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Elle 8

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Re: My employers 403b contribution
« Reply #16 on: March 21, 2015, 06:30:21 AM »
Thanks for the responses.  The company is a non profit with 100 plus employees.  I got a response from HR as follows:

 " I certainly understand and appreciate your concern.  Although a 401(k) or 403(b) match is based on the employee's contribution to their account, an employer contribution (which is given to all employees whether they contribute or not)  is always based on the taxable wages, not gross wages.  I have worked with many plans, and it has always been that way.  I am not sure if it is an IRS issue, or if it is just the way all plans are written.  Of course you must do the calculations and see what works best for your own financial situation.

As requested, I will stop your deductions effective with the check of April 3."


Well, Cathy already confirmed that this is legal, but in my experience it is not common.  Like the HR person who responded, I've also worked with these plans and I've never seen it based on taxable wages.  It should be spelled out in the plan document what is or is not included; for example, I've seen plans where bonuses are not included (usually, it's non-wage earnings that are excluded, for example, tuition reimbursement).

Like others have suggested, I would request a copy of the plan document.

needmyfi

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Re: My employers 403b contribution
« Reply #17 on: March 21, 2015, 02:19:06 PM »
All the great responses!  That's why I love this forum.  I was outraged when I heard this was the way this worked, and no one at work would even lift a head .  Thanks especially to Cathy.  If anyone has 403b plans and doesn't mind sharing the details of their plan in a pm I would be grateful.  Have a feeling that I will be swimming upstream tho.

Rural

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Re: My employers 403b contribution
« Reply #18 on: March 21, 2015, 03:20:30 PM »
403(b) and 457 with no match at all here.

Calvawt

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Re: My employers 403b contribution
« Reply #19 on: March 21, 2015, 04:44:14 PM »
I am the CFO for a large non-profit and our 403b match is based on gross wages.  I have never heard of one being based on taxable wages.

needmyfi

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Re: My employers 403b contribution
« Reply #20 on: March 21, 2015, 05:04:51 PM »
I am the CFO for a large non-profit and our 403b match is based on gross wages.  I have never heard of one being based on taxable wages.

Thanks vawt-do you have any suggestions for where I could turn to next?

randymarsh

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Re: My employers 403b contribution
« Reply #21 on: March 21, 2015, 05:45:01 PM »
Being based on taxable and not gross income makes no sense.

This would also reduce the contribution for employees who are paying more for health insurance (family plan vs. single).

needmyfi

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Re: My employers 403b contribution
« Reply #22 on: March 22, 2015, 08:16:54 AM »
May have found a smoking gun  Hope my attachment here works-this is from an irs site

Cathy

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Re: My employers 403b contribution
« Reply #23 on: March 22, 2015, 08:57:16 AM »
May have found a smoking gun  Hope my attachment here works-this is from an irs site

Unfortunately, you cannot rely on IRS publications as your source of information on tax law. As explained by the IRS (in IRM § 4.10.7.2.8), IRS publications are intended to explain the law in plain English, but they are not guaranteed to be correct, "should not be cited to sustain a position", and are nonbinding. IRS publications are not legal authority. Even if that publication supported your position, it would be of no legal effect.

In this case, I already described the actual law in my post above.

Even though the publication is irrelevant, I still looked at it to try to see what part you think might disagree with my post. I can see two parts that you might think support you. On page 3 of your PDF, the IRS gives a definition of "415 compensation". However, as I mentioned in my post, the definition of compensation that matters for our purposes is found in § 414(s). Subparagraph 2 of § 414(s) explicitly says that the employer may elect not to include pre-tax elective deferrals in compensation for this purpose. So that part of the publication does not assist you.

The second part of the publication that you might think helps you is later on page 3 of your PDF which appears to state that a particular regulation (26 CFR 1.414(s)-1(c)(4)) changes the definition of compensation for the purpose of § 414(s) to include elective deferrals. Unfortunately, we can know without looking at the regulation that either the publication is wrong about what the regulation says, or the regulation is void. The Treasury department does not have the authority to make a regulation that contradicts a statute, and if it purports to do so, the regulation would be void. However, in this case, the error lies in the publication, not the regulation.

A review of 26 CFR 1.414(s)-1(c)(4) reveals that what it actually says is that the employer may choose to include elective deferrals in compensation. It does not say the employer must include elective deferrals in compensation, and does not help you at all.

So, I would say good effort, but the IRS publication does not assist you. The law remains as described in my earlier post.
« Last Edit: March 22, 2015, 09:34:15 AM by Cathy »

needmyfi

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Re: My employers 403b contribution
« Reply #24 on: March 22, 2015, 09:35:27 AM »
Thanks Cathy-I'm neither an accountant or a lawyer.  The full  irs document seems to indicate that 414 compensation definitions relates only to calculating and determining discrimination and actually has some examples ie joe makes x in gross, joe defers y to his 403 b, joes employer contribution should be based on x, his 415 compensation.  Jill is a highly paid employee who makes x, Jill also receives tax deferred compensation in the form of y as part of her contract. For the purposes of calculating non discrimination Jill's 414 compensation is x, not x+ y.

According to publicaccess tax documents, 10% of our CEO's pay appears to be tax deferred-it is not specified whether or not this is a tax sheltered annuity or what. 

You may well be correct that they are doing something legal, however clearly not in the spirit of the law.  It would certainly be worth searching for an official determination.

Cathy

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Re: My employers 403b contribution
« Reply #25 on: March 22, 2015, 09:40:51 AM »
It does not matter what is contained in an IRS publication, even assuming you are interpreting it correctly. IRS publications are not legal authority. You don't need to take my word for this, because as I mentioned in my second post in this thread, the IRS itself explains this in the Internal Revenue Manual.

As for official documentation, I already provided statutory (or regulatory) references for everything I said. I didn't make them all links because it's tedious to create that many links, but if you put any statutory reference into Google, it will come up for you to read (copy the "26 USC" and the text after it). However, please note that the law is complicated and you can't just jump to § 414 or another definition and expect to understand how it relates to anything. To understand the full regime, you may want to re-read my first post in this thread, which explained in detail how the nondiscrimination requirements work.

I am not sure how you are determining the spirit of the law. The law is what I described in my posts. You might think something is unfair, but that doesn't make it illegal or contrary to the spirit of the law. There are many things in various laws that I believe are unfair, but my subjective opinion on their fairness has no legal effect (unless framed as some sort of constitutional argument).

I should also explain that if the employer's purported 403(b) plan does not meet the statutory requirements, the effect is that the plan is not actually a 403(b) plan. That means that all contributions into it would count as taxable income to you, including both the employer contributions and your elective deferrals (including all contributions to date since you started at the job). The law does not force the employer's plan to do anything in particular. It's just that if the plan fails to meet the statutory requirements, it's not a 403(b) plan and is not entitled to special tax treatment. So even if you successfully established that the plan is not a 403(b) plan, that might not have the effect you are hoping for.
« Last Edit: March 22, 2015, 10:12:49 AM by Cathy »

needmyfi

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Re: My employers 403b contribution
« Reply #26 on: March 22, 2015, 10:23:17 AM »
I should also explain that if the employer's purported 403(b) plan does not meet the statutory requirements, the effect is that the plan is not actually a 403(b) plan. That means that all contributions into it would count as taxable income to you, including both the employer contributions and your elective deferrals (including all contributions to date since you started at the job). The law does not force the employer's plan to do anything in particular. It's just that if the plan fails to meet the statutory requirements, it's not a 403(b) plan and is not entitled to special tax treatment. So even if you successfully established that the plan is not a 403(b) plan, that might not have the effect you are hoping for.
WOW- food for thought there!!  May just take the tactic that what they are doing may be legal, but absolutely not required.  Not sure how to proceed with THAT info.  Again-thanks so much. 

Cathy

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Re: My employers 403b contribution
« Reply #27 on: March 22, 2015, 10:42:16 AM »
The IRS appears to offer two programs ("Self-Correction Program" and "Voluntary Correction Program") that, subject to many conditions, allow employers to retroactively correct plans that turned out not to be 403(b) plans, so the employer might be able to take advantage of one of those if the plan turned out not to be a 403(b) plan. However, if the plan has been operating for more two years, it looks like the employer would not be eligible for self-correction.


That said, personally I would focus on the unfairness of the mechanism, because the plan is probably a 403(b) plan already as explained in my first post in the thread.
« Last Edit: March 22, 2015, 10:49:36 AM by Cathy »

BigRed

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Re: My employers 403b contribution
« Reply #28 on: March 23, 2015, 11:05:59 AM »
I work for a non-profit corporation, and we have a 403b (with very nice investment options, including anything Vanguard offers and more) as well as an automatic 4% contribution  .  That contribution is on gross pay.  We don't have the same investment options on those contributions, which are considered part of our pension plan, rather than the 403b plan, though I don't know what the legal ramifications of that distinction are.  We do still have some relatively low cost target date funds (SSgA at .17% ER) available, but the rest of the options come from a very limited list.  In any case, the Summary Plan Document lays out the same rules that 403b and 401k plans generally have with respect to distributions, including RMDs.

Summary: It's 4% and based on gross. 

 

Wow, a phone plan for fifteen bucks!