Very Serious Business: Sense and Nonsense under Section 403(b) of the Internal Revenue Code of 1986

By Pratt, David A. | Albany Law Review, Summer 1996 | Go to article overview

Very Serious Business: Sense and Nonsense under Section 403(b) of the Internal Revenue Code of 1986


Pratt, David A., Albany Law Review


I. INTRODUCTION II. DEVELOPMENT OF SECTION 403(b) III. WHAT IS A 403(b) ARRANGEMENT? IV. WHICH EMPLOYERS MAY SPONSOR A 403(b)

ARRANGEMENT?

A. In General

B. Eligible Employers

C. Ineligible Employers

D. Suggested Changes V. WHO MAY PARTICIPATE IN A 403(b) ARRANGEMENT? VI. FUNDING VEHICLES VII. SALARY REDUCTION CONTRIBUTIONS VIII. LIMITATIONS ON CONTRIBUTIONS TO A 403(b)

ARRANGEMENT

A. Dollar Limit on Elective Salary Reduction

Contributions

1. General Rule

2. Higher Limit for Certain Employees

3. Coordination with Other Plans

4. Excess Deferrals

B. Limitations Under Section 415

1. General Rule

2. Special Elections

a. The A Election

b. The B Election

3. Special Section 415 Rules for 403(b)

Arrangements

4. Effect of Excess Contributions

C. The Exclusion Allowance

1. General Rule

2. Includible Compensation

3. Years of Service

4. The "C Election"

5. Other Rules

D. Vesting

E. Excise Tax

F: Conclusion and Comments IX. TAX TREATMENT OF 403(b) ARRANGEMENT

PARTICIPANTS X. ROLLOVERS AND TRANSFERS XI. DISTRIBUTION REQUIREMENTS

A. Minimum Distribution Rules

B. Restrictions on Distributions

1. Salary Reduction Contributions

2. Custodial Accounts

3. Plan Termination

4. Exceptions XII. NONDISCRIMINATION REQUIREMENTS

A. Salary Reduction Contributions

1. General Rule

2. Employees Who May Be Disregarded

3. Results of Noncompliance

B. Other Employer Contributions XIII. COMPLIANCE WITH SECTIONS 410(b), 401(a)(26)

AND 401(a)(4)

A. In General

B. The Safe Harbors Under Notice 89-23

1. The Maximum Disparity Safe Harbor

2. The Lesser Disparity Safe Harbor

3. The No Disparity Safe Harbor

C. Definition of Employer

D. Excludable Employees

E. Compensation

F. The Plan Year

G. The Testing Method XIV. APPLICABILITY OF ERISA

A. In General

B. Consequences of ERISA Coverage XV. CONCLUSION

I. INTRODUCTION

Until 1958, employees of certain tax-exempt organizations could defer all or part of their income from the organization through the use of a tax-sheltered annuity arrangement.(1) In 1958, Congress added section 403(b) to the Internal Revenue Code (IRC),(2) restricting the amount of compensation that could be deferred for tax-purposes.(3) Under the legislation, an employee's deferral for tax-purposes was limited to the "exclusion allowance," a calculation based on the employee's compensation and length of service with the employer.(4) From these modest beginnings, section 403(b) has become an integral part of the benefit packages of eligible employers.(5)

A 403(b) arrangement has, until recently, been easier to design and administer than a plan which is qualified under section 401(a). In addition, since the Tax Reform Act of 1986 (TRA 1986) prohibits the adoption of new 401(k) plans by governmental and tax-exempt employers,(6) a 403(b) arrangement is clearly the best vehicle available to employees of tax-exempt employers who wish to make tax-deductible salary deferrals into a retirement plan. The only alternative, an eligible deferred compensation plan under section 457,(7) is clearly less satisfactory, as (1) the employee simply becomes a general creditor of the employer with respect to amounts deferred, and income thereon,(8) and (2) in order to comply with both the requirements of section 457 and the requirements of the Employee Retirement Income Security Act of 1974 (ERISA),(9) as amended, a private tax-exempt employer must generally limit participation in its section 457 plan to a select group of management or highly compensated employees. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • A full archive of books and articles related to this one
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Very Serious Business: Sense and Nonsense under Section 403(b) of the Internal Revenue Code of 1986
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

    Already a member? Log in now.