PLANSPONSOR - April/May 2021 - 12

UPFRONT
Nuances of Employer-Sponsored Plans
OVER THE YEARS, through regulation changes and plan design
mandates, the three predominant types of defined contribution
(DC) retirement plans-401(k), 403(b) and 457(b)-have been
growing increasingly similar, though a number of key distinctions
Allowable Exclusions
401(k)
All contributions
Employees may be excluded
but not an employee class
protected by law. Part-timers
working three consecutive
years, 500 hours each, must
be allowed to make elective
deferrals unless the plan is
collectively bargained.
For nongovernmental plans,
classifications must be reasonable
and nondiscriminatory,
must pass 410(b)
coverage testing, and must
not have the effect of circumventing
the maximum waiting
periods per IRS rules.
Distribution Restrictions
401(k)
Elective deferrals
Limited to death, disability, job
termination, financial hardship
or attainment of age 59.5.
Employer contributions
Limited to death, disability, job
termination, financial hardship,
or attainment of a fixed number
of years of service, age
59.5 or a stated age.
Employer may elect more
restrictive provisions than
described above.
remain. For sponsors able to select their plan, digging into the
differences may help clarify which plan type, or combination of
types, to offer. We examine the distinctions found among allowable
exclusions and distribution restrictions, below.
403(b)
457(b)
Elective deferrals
Under the universal availability rule, basically only
steeple churches/qualified church-controlled organizations
(QCCOs) may exclude any employees from
making elective deferrals.
Employer contributions
Employers may exclude some employees but not an
employee class protected by law. For plans subject to
the Employee Retirement Income Security Act (ERISA)
and non-QCCO religious organizations-e.g., faithbased
universities and hospitals-classification must
be reasonable and nondiscriminatory, must pass
410(b) coverage testing, and must in no way circumvent
the maximum waiting periods per IRS rules.
All contributions
Public entities may exclude
some employees. Private
tax-exempts may include
only select management
employees or highly
compensated employees
(HCEs) and must
exclude all
others.
403(b)
457(b)
Elective deferrals
None for annuity contract account balances as of
December 31, 1988, that were never invested in
mutual funds; for all else, limited to death, disability,
job termination, financial hardship or attainment of
age 59.5.
Employer contributions
None for annuity contracts issued before January 1,
2009, and never invested in mutual funds; all other
contracts limited to death, disability, job termination,
financial hardship, or attainment a fixed number of
years of service, age 59.5 or a stated age.
For employer contributions invested in mutual funds, distributions
are limited to death, disability, job termination
or attainment of age 59.5.
Employer may elect more restrictive provisions than
described above.
Source: CAPTRUST
12 PLANSPONSOR.COM April - May 2021
All contributions
Limited to death, job
termination, attainment of
age 59.5 through 70.5
for private tax-exempt
organizations-or unforeseen
emergency; balances of
$5,000 or less with no
contributions in the past two
years and no prior distribution
may also be distributed.
Employer may elect more
restrictive provisions than
described above.
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PLANSPONSOR - April/May 2021

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