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Group Recommends Changes in Elective Deferral Aspect of Proposed Retirement Annuity Regs

JAN. 25, 2006

Group Recommends Changes in Elective Deferral Aspect of Proposed Retirement Annuity Regs

DATED JAN. 25, 2006
DOCUMENT ATTRIBUTES
  • Authors
    Easterbrook, William W.
  • Institutional Authors
    Adventist Healthcare Retirement Plans
  • Cross-Reference
    For REG-155608-02, see Doc 2004-21932 [PDF] or 2004 TNT 221-

    8 2004 TNT 221-8: IRS Proposed Regulations.
  • Code Sections
  • Subject Area/Tax Topics
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 2006-3101
  • Tax Analysts Electronic Citation
    2006 TNT 33-37

 

January 25, 2006

 

 

CC:PA:LPD:PR (REG-155608-02). Room 5203

 

Internal Revenue Service

 

POB 7604, Ben Franklin Station

 

Washington DC 20044

 

 

Re: November 16, 2004 Proposed Section 403(b) Regulations

 

 

Dear Sir or Madam:

Following are comments from the Adventist HealthCare Retirement Plan ("AHRP") regarding the proposed Section 403(b) regulations that were published on November 16, 2004 (the "Proposed Regulations"). While the formal comment period for the Proposed Regulations has expired, AHRP hopes that the Internal Revenue Service will take these comments into account as they prepare final regulations. AHRP's comments relate to the order in which catch-up elective deferrals count toward the limits in Sections 402(g)(7) and 414(v).

Background

AHRP is a tax exempt organization created to administer the Adventist HealthCare Retirement Plan -- TSA Plan (the "Plan"). The Plan is a Section 403(b) plan to which participants make pretax salary reduction contributions. There are no other types of contributions to the Plan. Employees of various hospitals and other healthcare organizations participate in the Plan. All of the participating employers are tax-exempt organizations under Section 501(c)(3). All of the participating employers are associated with the Seventh Day Adventist Church (the "Church"). In 1994, a private letter ruling was issued to AHRP concluding that the Plan is a church plan, within the meaning of Section 414(e). Other organizations associated with the Church (e.g., hospitals sponsoring other retirement plans, educational institutions, church bookstores) allow employees and ministers to make elective deferrals to various Section 403(b) arrangements.

A number of Plan participants are eligible for the special catch-up elective deferrals permitted under Section 402(g)(7) ("402(g)(7) Catch-Up Contributions") because the Plan's participating employers are "qualified organizations" within the meaning of Section 402(g)(7)(B). The Plan's participating employers are qualified organizations because they are associated with the Church. In many cases, the participating employers also are "qualified organizations" because they are hospitals. To determine whether a participant is eligible to make 402(g)(7) Catch-Up Contributions, AHRP must determine the participant's "years of service" under Sections 402(g)(7)(D) and 403(b)(4). To determine whether the participant is eligible to make 402(g)(7) Catch-Up Contributions, the special rule in Section 1.403(b)-4(c)(3)(ii)(A)(4) of the Proposed Regulations requires the Plan to determine the participant's years of service with all organizations related to the Church. If the participant does not have 15 years of service with one or more of the employers participating in the Plan, then the Plan must investigate whether a participant has years of service with other organizations associated with the Church.

A number of the organizations associated with the Church operate autonomously with respect to day-to-day employment matters. As a result, neither the Plan's participating employers nor AHRP routinely exchange employment data, such as years of service, with these other Church-associated organizations (e.g., church book stores). In addition, to apply the provisions of Section 402(g)(7)(A)(iii) and Section 1.403(b)-4(c)(3)(i)(B)-(6) of the Proposed Regulations, the Plan must determine the amount of the elective deferrals contributed by other Church-related employers to other Section 403(b) arrangements. As a result, if the Plan must determine a participant's eligibility for 402(g)(7) Catch-Up Contributions and the participant has fewer than fifteen years of service with the employers participating in the Plan, then the Plan must undertake an ad hoc investigation of the participant's employment history with all Church-associated organizations, along with inquiries as to elective deferrals contributed on behalf of the participant by these Church-related organizations to other Section 403(b) arrangements.

A number of Plan participants are eligible to make additional elective deferrals under the provisions of Section 414(v) ("414(v) Catch-Up Contributions"). Determining eligibility for 414(v) Catch-Up Contributions only requires knowledge of the participant's age, which is readily available to the Plan's participating employers.

Participants who are eligible to make both 402(g)(7) Catch-Up Contributions and 414(v) Catch-Up Contributions shall be referred to as "Dual Eligible Participants." A number of Dual Eligible Participants make catch-up contributions that do not exceed the amount permitted under Section 414(v). Fewer Dual Eligible Participants make catch-up contributions in excess of the amount permitted under Section 414(v). Except for the rule in Section 1.403(b)-4(c)(3)(iv) of the Proposed Regulations (the "Ordering Rule"), the Plan would only need to conduct the ad hoc investigations required to determine a participant's eligibility for 402(g)(7) Catch-Up Contributions where the Participant wishes, in a particular year, to contribute catch-up elective deferrals in excess of the amount permitted for that year under Section 414(v).

AHRP's Concerns

AHRP's concerns relate to the Ordering Rule, which determines the order in which catch-up elective deferrals are credited against the limits that apply to 402(g)(7) Catch-Up Contributions and the 414(v) Catch-Up Contributions respectively. For Dual Eligible Participants, the Ordering Rule takes the position that catch-up contributions first are credited against the limit for 402(g)(7) Catch-Up Contributions, then against the limit for 414(v) Catch-Up Contributions. AHRP does not believe that the Ordering Rule reflects Congress' intent, when it enacted Section 414(v), that participants be able to take full advantage of the catch-up contribution opportunities permitted under Sections 402(g)(7) and 414(v). As a result, AHRP believes that the Ordering Rule unduly restricts participants' rights to make the maximum available catch-up contributions and create an undue administrative burden.

The Ordering Rule Unduly Restricts the Section 402(g) Catch-Up Contributions Available to a Dual Eligible Participant

For a Dual Eligible Participant, the Ordering Rule prematurely exhausts the participant's opportunity to make 402(g)(7) Catch-Up Contributions. For example, suppose that a Dual Eligible Participant contributes $3,000 as a catch-up contribution for each of five consecutive years. Under the Ordering Rule, the Dual Eligible Participant will have exhausted his or her opportunity to make 402(g)(7) Catch-Up Contributions, even though the catch-up contributions made were less than the amount permitted for 414(v) Catch-Up Contributions. AHRP believes that Congress intended that a Dual Eligible Participant would be eligible to take full advantage of the opportunity to make 402(g)(7) Catch-Up Contributions, both annually and cumulatively over the employee's lifetime.

Annual Contribution Limit

Section 1.403(b)-4(c)(2)(ii) of the Proposed Regulations properly reflects Congress' intent, expressed both in the text of Section 414(v) and in the legislative history, that a Dual Eligible Participant may make catch-up elective deferrals for a year equal to the sum of the amounts permitted for that year under Sections 402(g)(7) and 414(v).

Lifetime Contribution Limit

However, the Ordering Rule undermines Congress' intent that Dual Eligible Participants have the opportunity, over their lifetimes, to take advantage of the maximum catch-up contributions permitted under both Sections 402(g)(7) and 414(v). The limit in Section 402(g)(7) has an annual component, as expressed in Section 402(g)(7)(A)(i) and Section 1.403(b)-4(c)(3)(i)(A) (but, as further limited by Section 402(g)(7)(A)(ii)-(iii) and Section 1.403(b)-4(c)(3)(i)(B)-(C). In addition, the Section 402(g)(7) limit has a lifetime component, because Section 402(g)(7)(A)(ii)-(iii) and Section 1.402(b)- 4(c)(i)(B)-(C) limit the total catch-up contributions that a participant may make over his or her lifetime to the lesser of $15,000 or the amount described in Section 402(g)(7)(A)(iii). In contrast, the limit in Section 414(v) has only an annual component. For a Dual Eligible Participant, the lifetime component of the Section 402(g)(7) limit is prematurely exhausted because all catch-up contributions, up to the limit available for that year under Section 402(g)(7), are counted against the lifetime component of the Section 402(g)(7) limit. For the reasons noted below, AHRP believes that Congress' intent would be better realized by reversing the Ordering Rule and counting catch-up elective deferrals against the limit in Section 402(g)(7) only to the extent that the participant's catch-up contributions for a year would exceed the amount permitted for that year under the Section 414(v).

Congress' Intent

AHRP understands that some attorneys involved in the drafting of the Proposed Regulations believe that the Ordering Rule is mandated by provisions in Section 414(v). AHRP believes that Section 414(v) may be read to support the revision to the Ordering Rule requested above.

AHRP believes that Congress intended that Section 414(v) would permit older participants to help prepare for retirement by allowing them to make contributions over and above those available under other Code provisions. Interpreting Section 414(v) in a manner that deprives participants of the opportunity to take full advantage of the lifetime component of the Section 402(g)(7) limit frustrates this intent.

The text of Section 414(v) may be construed in a manner that is consistent with AHRP's suggested revision of the Ordering Rule. Under Section 414(v)(1), a participant may make 414(v) Catch-Up Contributions only if he or she is an "eligible participant." Under Section 414(v)(5)(B), an "eligible participant" means a participant "with respect to whom no other elective deferrals may . . . be made to the plan for the plan (or other applicable) year by reason of the application of any limitation or other restriction described in paragraph 3." Section 414(v)(3)(A)(i) references "any otherwise applicable limitation contained in section 401(a)(30), . . . [or] 403(b)." By means of Section 403(b)(1)(E), a 403(b) plan funded by means of salary reduction agreements (such as AHRP) must meet the requirements of Section 401(a)(30).

Section 401(a)(30) requires that a plan provide that elective deferrals for a calendar year "may not exceed the amount of the limitation in effect under section 402(g)(1)(A) for taxable years beginning in such calendar year." Section 402(g)(1) expresses the general limit on elective deferrals (e.g., $15,000 in 2006). Section 402(g)(7) provides that the limitation in Section 402(g)(1) shall be increased for a qualified employee of a qualified organization. AHRP believes that Congress intended Section 414(v)(5)(B) to require that an "eligible participant" be a participant who has exhausted the elective deferrals available under Section 402(g)(1), without taking into account the additional amounts that may be contributed on account of Section 402(g)(7). The Conference Committee Report makes no explicit reference to a participant being required to make the maximum available 402(g)(7) Catch-Up Contributions before becoming eligible to make 414(v) Catch-Up Contributions. Section 402(g)(7) serves the same purpose as Section 414(v) of allowing participants an opportunity, later in their careers, to make additional elective deferrals to ensure adequate retirement income. In light of this purpose, the requirement that an "eligible participant" have exhausted the elective deferrals available under Section 402(g)(1) could reasonably be understood not to incorporate the additional deferrals available on account of Section 402(g)(7). On this interpretation, eligible participants could take full advantage of the lifetime component of the limit on 402(g)(7) Catch-Up Contributions.

Administrative Burdens Created By the Ordering Rule

The Ordering Rule forces the Plan to determine whether any participant eligible to make 414(v) Catch-Up Contributions also is eligible to make 402(g)(7) Catch-Up Contributions so that the Plan can determine whether a catch-up contribution is credited against the lifetime component of the Section 402(g)(7) contribution limit. The Plan must determine whether the participant is eligible to make 402(g)(7) Catch-Up Contributions, even if the catch-up contribution elected would be allowed under Section 414(v), because the participant may later make catch-up contributions that would only be permitted if Section 402(g)(7) applies. Because many participants never contribute amounts in excess of the amount allowed under Section 414(v), the Plan will be forced to conduct burdensome investigations to determine service with and contributions made by other Church-associated organizations, even in situations in which that information will never be necessary to determine the limit on the participant's catch-up contributions. Crediting catch-up contributions first against the Section 414(v) limit would reduce the unnecessary administrative burden of collecting service and contribution data from all Church-associated organizations.

Conclusion

Accordingly, AHRP respectfully requests that final regulations reverse the Ordering Rule in Section 1.403(b)-4(c)(3)(iv) of the Proposed Regulations and provide that catch-up contributions for a year first count against the limit in Section 414(v) and only count against the limit in Section 402(g)(7) to the extent that they exceed the amount permitted under Section 414(v). This revision to the Ordering Rule will better reflect Congress' intent by allowing Dual Eligible Participants to make the full catch-up contributions intended by Congress and will avoid administrative burdens created for church plans. (A technical correction to pertinent provisions of the Internal Revenue Code would be helpful to confirm the suggested interpretation.) Please contact me if you need further information.

Sincerely

 

 

William W. Easterbrook

 

President, AHRP

 

Washington, District of Columbia

 

CC:

 

Ms. R. Lisa Mojiri-Azad, Office of Division Counsel/Associate Chief

 

Counsel, Tax Exempt and Government Entities, Internal Revenue Service

 

 

Mr. John Tolleris, Office of Division Counsel/Associate Chief

 

Counsel, Tax Exempt and Government Entities, Internal Revenue Service

 

 

Mr. Robert Architect, Senior Tax Law Specialist, Employee Plans

 

Division, Tax Exempt and Government Entities, Internal Revenue

 

Service
DOCUMENT ATTRIBUTES
  • Authors
    Easterbrook, William W.
  • Institutional Authors
    Adventist Healthcare Retirement Plans
  • Cross-Reference
    For REG-155608-02, see Doc 2004-21932 [PDF] or 2004 TNT 221-

    8 2004 TNT 221-8: IRS Proposed Regulations.
  • Code Sections
  • Subject Area/Tax Topics
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 2006-3101
  • Tax Analysts Electronic Citation
    2006 TNT 33-37
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