As the restatement process for 403(b) plans continues on, a familiar “vestige” of certain past practices of a major vendor continues to bubble its way to the top. That “vestige” is the 403(b) “Money Purchase Plan.”

It is a very common practice in the 403(b) market for an employer to specifically identify the percentage of compensation it will deposit as an employer contribution to their 403(b) plan: percentages as high as 8, 10 or 12% are not uncommon, especially in higher education. There had been a raging debate in the past as to whether or not this practice of identifying a specific percentage of compensation as the employer formula made the plan a “money purchase plan.” It has been typical for 401(a) plan sponsors to treat plans with set percentage of compensation as “Money Purchase Plans”, where the employer has not reserved the right to, instead, make it a discretionary profit-sharing contribution. But does this rule apply to 403(b) plans?

This is not an esoteric issue. If you truly believe that your 403(b) plan is a “money purchase plan” several things happen. What do you do if you want to merge this plan with another 403(b) “voluntary only” plan which many employers have maintained side by side with the money purchase plan? Can you merge them, and what are the recordkeeping requirements when you do? What rules will apply to this new plan? Most importantly, the joint and survivor and spousal consent rules would apply to money purchase ERISA 403(b) funds because the normal form of benefit under such plans is an annuity-which typically does not otherwise apply to the voluntary only plan with which it is merging. Even with no merger,  do the J&S rules carry on into the newly restated document?

It really had seemed like this issue has faded into obscurity, especially with most 403(b) prototype documents avoiding this issue all together. However, practitioners are now occasionally faced again with this issue as they restate their 403(b) docents to the new volume submitter/prototype documents. What do you do if the plan has been identified in the past as a money purchase plan, and the plan document follows the money purchase rules? And what if you run into an insistent vendor claiming that your plan is a money purchase plan?

I, personally, have always been of the thought there is no such animal as a 403(b)-money purchase plan. Code Section 401(a)27 requires that you specifically identify a plan as either a profit-sharing plan or a money purchase plan as a condition of qualification. However, 403(b) has no such rule, and there is no reference in 403(b) to 401(a) 27. There is no mention of it in the regs, and the only reference in the preamble to the 403(b) regs state that 403(b) plans are NOT subject to the money purchase distribution rules. Under ERISA 205, the J&S rules will apply if the Code’s minimum funding standard applies. But the Code’s minimum funding standards do not apply to 403(b) plans.

I suppose there is an argument that a 403(b) plan sponsor can opt into money purchase status, and thereby elect application of Code Section 412, but I’m not quite sure how you would do this. Nonetheless, there are still some who are insistent.

The practical answer is to pay attention to the J&S rules as contained in the underlying investment contract as you restate the document. Many of the contracts funding these plans require application of the J&S and consent rules as a matter of contract-not as a matter of law. Given that the 403(b) plan document incorporates the terms of the underlying contract as being plan terms, you will need to honor that rule-but only with regard to those investments.

This also means that you may want to consider being able to merge an old “money purchase” with that “voluntary only” plan, without having to carry over and track these J&S rules for the new plan’s assets other than for those transferred. Transferring those assets to a merged plan would not typically need participant (or spousal) consent, even in participant controlled contracts. But you likely will still need to follow the contract’s spousal consent and J&S rules on those transferred contracts-whatever they may be-but  only as a matter of contract, not as a matter of law.


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