As we continue to dig into the weeds in the 403(b) world, particularly through this difficult audit season, we continue to find more and more of those "unintended consequences" of the application of the 403(b) rules.
The latest in this line lies the manner in which the regs apply the universal eligibility rule to the collectively bargained group. Attempting to comply with this rule could cause an an employer to engage in an unfair labor practice where a recalcitrant union is involved.
You see, unlike the 401(a) rules which allow for the exclusion of collectively bargained groups from many of the key testing rules, 403(b) itself does not. IRS Notice 89-23 was written to address one of the key impacts of that problem, and had permitted employers to exclude employees from the universal eligibility rule whose retirement plans were subject to collective bargaining.
The new 403(b) regulations, however, generally revoked 89-23 and that exclusion, and required 403(b) plan sponsors to cover collectively bargained employees as part of the universal eligibility rule. The reg writers recognized some of the transition problems this would cause, and permitted the exclusion through:
"the later of (i) the first day of the first taxable year that begins after December 31, 2008, or (ii) the earlier of (I) the date that such agreement terminates (determined without regard to any extension thereof after July 26, 2007) or (II) July 26, 2010."
The reg, however, ignored a reality in union relations with companies: those relations are often not very smooth. What happens if the union has not agreed to a 403(b) plan? This can (and does!) happen for a number of reasons. These include things like poor employer/union relations; it could be seen an interfering with an important priority of the union or the employer; and questions could arise over control over or design of the program; and the like. An employer, I’ve been told by a number of labor lawyers, has no right to unilaterally impose a 403(b) program on a unionized group even where it is already being offered to the non-unionized workforce.
So July 26, 2010 has now come and gone, which means that employees covered by a collectively bargained agreement who are employed by an employer who sponsors a 403(b) plan now must be covered by the plan-even if the union has not agreed to this arrangement.This really leaves the employer with limited options, particularly if the union relations are sour: seek to impose the plan on the union, though it may result in an unfair labor practice charge; or terminate the existing plan covering non-unionized employees. Neither of these options are very attractive.
I would hope that the IRS, an audit, would recognize this problem where there has been an impasse in negotiating these plans.
403(b)plans have a very long history and were well ingrained into a host of different state and federal laws which have over time accommodated those programs. We will likely continue to have to work with the fallout from the failure to recognize those long-established "accommodate practices" for a number of years to come. I really think that the takeaway is that, when crafting rules to address specific compliance concerns, care be taken to draft rules to address those concerns, rather imposing rules in a new and broad brush.