TIAA-CREF Plan Documents – Cat Fishing?

Posted by Christopher J. Ciminera

Recent articles brought to my attention the phrase “cat fishing” which means wishful thinking or realizing that something is not what you originally thought. Cat fishing reminded me of wishful thinking that has affected some private schools who sponsor a 403(b) plan under the TIAA-CREF plan document. Some of these organizations have been operating under the assumption that the plan document allows the exclusion of employees who work less than 20 hours a week from the plan’s deferral feature, when that is not the case.

A little history on 403(b) plan rules may help one to understand the situation I will be pointing out. 403(b) plans must follow a universal availability rule. This rule requires that if one person is offered an opportunity to defer, then all other employees should also be able to defer. Although this would suggest that all employees must be given a chance to defer, the 403(b) Regulations offer specific exclusions to this rule. These exclusions include part-time employees working less than 20 hours, those employees whose contributions would be $200 or less annually, and certain student workers, to name a few.  However, the plan document must allow the universal availability exclusions permitted by the Regulations, and the TIAA-CREF document does not.

Operationally, some schools that have part-time employees, such as substitute teachers, coaches, and summer teachers who work less than 20 hours per week, have assumed that they can exclude them from the plan’s deferral feature because the Regulations allow such an exclusion. However, such wishful thinking has proven to be cat fishing. TIAA-CREF does not follow the model IRS plan document and does not include an exclusion option from the deferral feature for employees who work less than 20 hours per week.

The exclusions from the deferral opportunity allowed by the TIAA-CREF plan documents include only employees who are:

  1. Eligible to participate in a Code Section 401(k) plan maintained by the employer in which employees may make elective deferrals,
  2. Eligible to participate in another Code Section 403(b) plan maintained by the employer in which employees may make elective deferrals,
  3. Non-resident aliens (within the meaning of Code Section 7701(b)(1)(B)) who received no earned income (within the meaning of Code Section 911(D)(2)) from the employer or which constitutes income from sources within the United States (within the meaning of Code Section 861(a)(3)),
  4. Students performing services described in Code Section 3121(b)(10) (generally, this refers to students who are enrolled and regularly attending classes offered by the employer where the employer is a school, college or university).

An “Other” exclusion line is not available on the adoption agreement to add another excluded category. Therein lies the problem. To exclude employees who work less than 20 hours per week, plan sponsors must amend the plan to do so.

For small plans that don’t require an audit, the discrepancy between the plan operations and the plan provisions could go unnoticed until there is an IRS or DOL audit.

To correct this specific error, the plan sponsor should contact a knowledgeable ERISA attorney to add an amendment to the plan document, prospectively, to exclude employees who normally work less than 20 hours per week.

To correct the incorrect exclusion of participants in previous years, the plan sponsor should consider preparing a submission to the IRS Voluntary Correction Program, including the following corrections:

  1. Identify all employees who were operationally excluded, but should have been given a chance to contribute a deferral;
  2. Once these employees are identified, the plan sponsor should compute or have a knowledgeable third party compute the missed deferral opportunity. Since the plan sponsor may never know what these participants would have deferred, the Employee Plan Compliance Resolution System (EPCRS) instructions for this defect allow an employer to calculate the missed deferral as the greater of (a) 3% or (b) the maximum deferral percentage eligible for match.
  3. Additionally, for those employees who would have been eligible for a match (based on the years of service in the plan document being met) the missed match opportunity should be computed.
  4. Lastly, missed earnings on the missed deferrals and employer contributions should be computed by using the DOL’s Lost Earnings calculator.
  5. The employer must fund the correction from its own funds.

The moral of the story is that just because you believe a person or plan document should allow certain features you would like in your plan, it doesn’t always mean that it does. That is why it is important to understand the plan document, what it says, and what it means before actually administering the plan in your own way.