Gardner & White “Combo” Plans

A Comparison To 401(k)

Gardner & White introduced the concept of linking matching contributions under a 401(a) money purchase plan to employee contributions under a 403(b) annuity 15 years before the development of 401(k) plans. After the 401(k) plan was introduced, 403(b)-eligible employers were at various times eligible, and then not eligible, to maintain 401(k) plans. Currently, all such employers can maintain either a 401(k) plan or a 403(b) program; therefore, it is important that an employer understand the major differences between these arrangements, as set forth in the chart below. While the 401(k) plan is more widely recognized, the COMBO arrangement allows certain employees to enjoy higher annual contributions due to the separate 415 limits for the 401(a) and 403(b) portions of the plan, and the special catch-up allowances for longer-service employees.

Note: 401(a), 403(b), 401(k), 501(c)(3), 402(g) and 415 refer to Sections of the Internal Revenue Code. / 401(a)/403(b) COMBO PLAN / 401(k) PLAN
Employers that may offer / ·  501(c)(3) tax-exempt entities
·  Public schools
·  Churches
·  Governmental entities with 501(c)(3) status / ·  All employers, regardless of tax status (except state and local governments, unless grandfathered in 1986).
Employee contributions / Elective deferrals (pre-tax salary reduction contributions). / Elective deferrals (pre-tax salary reduction contributions).
Employer contributions / Employer contributions to 401(a) qualified plan match elective deferrals to 403(b) program according to plan formula. / Employer contributions match elective deferrals according to plan formula.
Certainty of Contributions / 401(a) money purchase plan contributions are subject to minimum funding requirements and must be made annually. / 401(k) employer contributions must be part of a profit
sharing plan and can vary at the employer’s discretion
Employee contributions – Age and service restrictions. / Universal Availability Test applies with limited exclusions. / Employer may impose age and service restrictions on employee contributions.
Employer contributions – Age and service restrictions. / Employer may impose age and service restrictions. / Employer may impose age and service restrictions.
Nondiscrimination Testing. The Internal Revenue Code subjects 401(k) elective deferrals to rigorous testing under the “actual deferral percentage” test. So long as all employees are given the right to contribute, elective deferrals under 403(b) are not subject to testing. / Elective deferrals:
·  All employees must be permitted to defer with limited exclusions.
·  $200 minimum annual contribution may be established
Employer matching contributions:
·  Actual Contribution Percentage (ACP) test limits contributions to Highly Compensated Employees (HCEs) / Elective deferrals:
·  Actual Deferral Percentage (ADP) test establishes maximum amount HCEs may defer on a pre-tax basis
Employer matching contributions:
·  Actual Contribution Percentage (ACP) test limits contributions to Highly Compensated Employees (HCEs)
Top Heavy Testing. A top heavy plan must provide additional minimum benefits if 60% or more of accounts benefit “key employees.” / Elective deferrals not subject to Top Heavy test. / Elective deferrals aggregated with employer contributions to determine Top Heavy status.
IRS Determination Letter. A qualified plan assures its tax-favored status by applying to the IRS for a favorable determination letter. All 401(k) plans are qualified plans and should request such a letter from the IRS. The IRS charges a user fee for these requests. Since a 403(b) plan is not qualified, no such filing is required to obtain the tax advantages of 403(b). / Required to assure qualified status (401(a) plan portion only); 5 Year submission cycle for tailored plans.. / Required to assure tax qualified status; 5 year submission cycle for tailored plans.
Annual employee pre-tax contribution limitations. Non- aggregation of employer and employee contributions in reaching the 415 limit is a critical distinction in favor of the COMBO approach. / ·  402(g) limit (no more than $16,500 in 2009)
·  415 limit ($49,000 or 100% of pay, if less in 2009)
Employer and employee contributions are not aggregated for purposes of the 415 limit for most employees. / ·  402(g) limit (no more than $16,500 in 2009)
·  415 limit ($49,000 or 100% of pay, if less in 2009)
Employer and employee contributions are aggregated for purposes of the 415 limit.
Age 50 catch-up contributions. Individuals who attain age 50 during the tax year and are prohibited from making further elective deferrals can make an additional "catch-up" contributions to the 403(b) or 401(k) plan. Catch-ups are made in addition to the $16,500 limit on elective deferrals. Employers are not required to allow for catch-up contributions. / Yes, under the 403(b) program. / Yes.
“Special 15 Year catch-up” contributions. Participants in 403(b) plans who have completed 15 years of service may qualify to make pre-tax deferrals above the annual limit ($16,500 in 2009). There are no similar provisions for additional deferrals under a §401(k) plan. / Yes, for certain longer service employees. Must be utilized if eligible prior to using the age 50 catch-up contribution. / Not available.
Plan termination / Subject to certain conditions, 401(a) and 403(b) assets may be distributed upon Plan termination. / If Plan terminated, all assets may be distributed.

ERISA Considerations. ERISA (the Employee Retirement Income Security Act of 1974) imposes fiduciary duties and responsibilities on those administering plans. Qualified plans (including both 401(k) plans and COMBO plans) are subject to ERISA, unless the employer itself is exempt. What does it mean if a plan is subject to ERISA? Though a full discussion of the implications of ERISA is beyond the scope of this summary, it can be noted that ERISA requires:

·  a written plan document,

·  a summary plan description,

·  annual reporting (Form 5500) and for larger plans an independent audit, and

·  compliance with many fiduciary requirements related to the administration of hardship withdrawals, loans, and spousal benefits.

Choosing the correct retirement program to match employees’ pre-tax contributions requires an understanding of the options available. When deciding, keep the following information in mind:

·  The 401(a)/ 403(b) COMBO and the 401(k) plan have similar profiles – employee pre-tax contributions are matched by employer contributions.

·  Pre-tax deferrals under both arrangements are subject to the same statutory maximum, and both are subject to similar IRS qualification requirements.

·  While some employees are able to defer more on a pre-tax basis under the “special catch-up” provisions of 403(b), a 401(k) plan allows the employer to be more restrictive in terms of participation standards.

·  Pre-tax deferrals in a 401(k) plan are tested under the ADP test; 403(b) deferrals are not.

Gardner & White is dedicated to providing retirement planning solutions to employers and has extensive experience with helping employers establish and administer all types of retirement arrangements. Please contact your G&W representative for additional information to help you decide which plan is right for your organization.

© 2009 Gardner & White Corporation

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