Common / Potential Plan Violations

403(b) plans must be maintained in accordance with plan provisions. This means you are responsible for ensuring that your plan documents accurately reflect how your plan operates and that your plan complies with IRS requirements.

This information is generally applicable to public school employers. Information specific to non-ERISA 501(c)(3) non-profit and ERISA plans will be available shortly. If you have questions about compliance and your non-ERISA 501(c)(3) or ERISA plan, contact AXA Equitable at (800) 628-6673 or EV.Collections@axa-equitable.com.

General Plan Administration

Employee Eligibility and Contributions

Loans, Withdrawals, and Distributions  

General Plan Administration

• No written plan—The written plan must cover all of the plan’s terms and conditions, including eligibility, benefits, contributions, approved investment providers, withdrawals, loans, rollovers, transfers, and distributions. The terms of the plan must also be followed.  We can provide a written plan document  if AXA Equitable is an approved provider in your plan. Find out how to obtain a written plan document from AXA Equitable.  
• Permitting exchanges between investment providers that are neither approved providers for the plan nor providers with whom the plan has information sharing agreements—Effective September 25, 2007, all 403(b) exchanges are limited to either your plan’s approved investment providers or investment providers that agree to share information for plan compliance purposes. AXA Equitable can provide you with a sample information sharing/hold harmless agreement. 
• Ineligible investment options—An employer that remits 403(b) contributions to a bank suspense account rather than to qualified investment providers would be using an improper investment option. A mutual fund without a custodial arrangement (as required under the regulations) is an improper investment option, as is an annuity without the required 403(b) regulatory language. A violation can also occur if new endorsements are not being given out to all annuity contract holders. In these cases, the IRS would likely disqualify all of the affected 403(b) accounts and may or may not require you to pay all under-withheld federal income taxes for those disqualified accounts

Employee Eligibility and Contributions

• Eligible employees have not been given the opportunity to participate in your plan—Because the exclusion of substitute teachers is a common violation, it is important to permit substitute teachers to participate if they choose to do so. To avoid the problem of payroll periods when the substitute may not have generated enough salary to support a flat dollar contribution, you can permit these types of employees to make contributions based only on a percentage of compensation. Under the final 403(b) regulations, all full-time and part-time common-law employees are eligible to participate; however, you can exclude employees who fall into the following classifications:
  • Employees who are nonresident aliens;
  • Employees who are eligible to participate in another salary deferral plan you sponsor, such as another 403(b) plan, or a 401(k) or 457(b) plan;
  • Employees who elect to contribute less than $200 per year;
  • Employees who normally work less than 20 hours per week and either are not expected to work 1,000 hours or more in their year of hire, or worked less than 1,000 hours in the prior year (This requires that records be kept on hours worked); and
  • Students who perform services for a university as described in IRC 3121(b)10.

Individuals who are not eligible to participate under any circumstances include leased employees, independent contractors, and elected officials (except where the elected official’s job requires a background in education to qualify for the position, e.g., State Superintendent of Public Education).

An ineligible employee makes 15-year catch-up contributions.

The plan has a service or minimum age requirement before employees can start contributing—The universal availability requirement prohibits such restrictions on employee contributions. Only employer contributions may be subject to a service or minimum age requirement.

Loans, Withdrawals, and Distributions

• Loans have not been administered in accordance with plan regulations—Common loan violations include: failure to make required payments when due, which results in the default of the entire loan; granting of a new loan when there is an outstanding defaulted loan unless the new loan is being repaid through payroll deductions; poor documentation; and loans from multiple plan investment providers or other plans of the employer that in the aggregate exceed the allowable loan limits. 
• Pre-age-59½ plan hardship withdrawals have been made by individuals who do not meet the “qualifying event” requirements—Common hardship withdrawal violations involve inadequate documentation proving that the distribution is the result of a financial hardship, or hardship distributions from multiple plan investment providers that in the aggregate exceed the amount needed to relieve the hardship. If the safe-harbor method is used to determine hardship, violations can also occur if employees take hardship withdrawals and you do not suspend those employees’ voluntary contributions to all of your 403(b), 401(k), and 457(b) plans for six months.
• IRS required minimum distributions have not been made to eligible individuals—Distributions to participants in your plan must begin by the later of: the April 1st after the participant reaches age 70½, or following the year after the participant is no longer employed by you.  The law requires that the participant pay a 50% federal penalty tax on the required distribution if it is not made in a timely manner.  
• Income taxes on distributions have not been properly reported—Incorrect distribution codes used on 1099 forms can result in the improper tax treatment of distributions and/or a failure to report the 10% early withdrawal federal penalty tax.

GE44470 (3/09)