There are three key employer groups which utilize 403(b) plans: K-12; colleges and universities; and non-profit healthcare systems. Of the three, its is healthcare that seems to be most impacted by the new aggregation rules introduced with the 2007 403(b) regulations.
Not-for-profit hospital systems are typically corporations organized under the non-profit corporation rules of the states in which they are domiciled. There is an important feature of these incorporation rules at which the 403(b) changes were aimed: these nonprofit healthcare organizations typically have no stock. Instead of stock ownership, the corporations are generally organized around "membership," or like concepts.
The practical effect of this lack of stock ownership is is that the controlled group rules under Code Sections 414(b),(c),(m) and (o) and 1563 would often not apply (Notice 89-23 only being a safe harbor), meaning the discrimination and coverage rules under 403(b)(12)(A)(i) for 403(b) employer contributions were often tested on an organization by organization (as opposed to controlled group) basis.
Treasury changed this all with the introduction of 1.414(c)-5. In effect, an "80%" control test was introduced, with certain permissive aggregation rules permitted, and with church controlled orgs being able to permissively disaggregate under certain circumstances.
More than in any other 403(b) plan sponsor community, those in the healthcare system have undergone tremendous consolidation activity over the past 15 years, with hospitals (and other sorts of related entities) seeking to survive and be successful through acquisition and merger. This activity has often resulted in healthcare systems owning quite an assortment of separate nonprofit and for-profit organizations-with the related odd collection of legacy 403(b) and 401(k) plans.
This merger activity, when combined with the new aggregation rules, has resulted in a very difficult hangover for a number of unsuspecting healthcare systems. First, the traditional rules governing discrimination and coverage apply in ways they didn’t prior to 2009, and many of these legacy programs have never been tested under the new aggregation rules (its that inertia thing). Secondly, there are very specific rules which apply to coverage testing when you have 403(b) plans and 401(k) plans within these new controlled groups, the application of which may make it difficult (and sometimes impossible) to maintain both kinds of plans-particularly when its a 501(c)(3) maintaining a 401(k) plan.
Even those orgs which have taken the lead in moving to consolidate platforms in order to deal with the new 403(b) regs are finding themselves now in some difficulty, where there is a dawning on just how the new aggregation rules apply.
Of all the 403(b) hangovers we have experienced in the past few years, my guess is that this is the most unanticipated of them.
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