COVERAGE TEST
RELIEF FOR TAX-EXEMPT
ORGANIZATION
401(K) AND (M) PLANS
Prepared by: Debra L. Mackey, Esq.
The Internal Revenue Service in
March of 2004 issued proposed regulations that permit certain employees of a
501(c)(3) tax-exempt organization to be excluded when
testing a 401(k) or (m) plan for coverage under Section 410(b). The proposed regulations are effective for
plan years beginning after
Under the proposed regulation, the employees of a 501(c)(3) tax-exempt organization who are eligible to make salary reduction contributions under a 403(b) plan may be treated as excludable employees under a related 401(k) or (m) plan if (1) no employee of the tax-exempt organization is eligible to participate in the 401(k) or (m) plan, and (2) at least 95% of the employees who are not employees of the tax-exempt organization are eligible to participate in the 401(k) or (m) plan.
Before the enactment of the Small Business Job Protection Act of 1996, employees of tax-exempt organizations were not permitted to participate in a 401(k) or (m) plan. Regulations stated that such employees, precluded from participating in the 401(k) or (m) plan, were excludable employees for purposes of testing a related 401(k) or (m) plan for minimum coverage. The SBJPA changed the law, allowing 501(c)(3) tax-exempt organizations to offer 401(k) or (m) plans to their employees. As a result, those employees could no longer be excluded from coverage testing based on the existing regulation.
The proposed regulation essentially puts employees of tax-exempt organizations in the same position they were in prior to the SBJPA law change with respect to 401(k) and (m) coverage testing. The proposed regulation offers no additional relief to those employers who, in response to the SBJPA change, made participation in a 401(k) or (m) plan available to employees who were already participating in a 403(b) plan as a means to ensure that the 401(k) or (m) plans of related companies could pass coverage. Such employers may decide to eliminate “dual eligibility” by again excluding the employees of the tax-exempt organization from participation in a related 401(k) or 401(m) plan.
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