4041 / What nondiscrimination requirements apply to a tax sheltered annuity plan that provides for contributions other than by salary reduction?

According to the final regulations, under IRC Section 403(b)(12)(A)(i), employer contributions and employee after-tax contributions must satisfy all of the following nondiscrimination requirements in the same manner as a qualified plan under IRC Section 401(a):

(1)  Section 401(a)(4), relating to nondiscrimination in contributions and benefits, taking Section 401(a)(5) into account

(2)  Section 401(a)(17), limiting the amount of compensation that can be taken into account

(3)  Section 401(m), relating to matching and after-tax employee contributions

(4)  Section 410(b), relating to minimum coverage¹

Section 401(a)(26), although listed in IRC Section 403(b)(12)(A)(i), no longer applies to defined contribution plans.

The final regulations do not adopt the good faith reasonableness standard of Notice 89-23 for purposes of satisfying the nondiscrimination requirements of IRC Section 403(b)(12)(A)(i).² The Notice 89-23 standard continues to apply to state and local public schools and certain church entities for determining whether the controlled group rules apply.³ See Q 3842 through Q 3867 for the actual requirements of IRC Section 401(a)(4), IRC Section 401(a)(5), IRC Section 401(a)(17), IRC Section 401(m), and IRC Section 410(b).

Governmental plans. A governmental plan is one established by the United States government, the government of any state or political subdivision, or any agency or instrumentality of any of them.⁴ The minimum participation and coverage and nondiscrimination requirements
described in IRC Section 403(b)(12)(A)(i), other than IRC Section 401(a)(17), do not apply to state and local governmental plans. In particular, the requirements of IRC Sections 401(a)(4), 401(a)(5), 401(m), and 410(b) do not apply to such plans.⁵ Sponsors of governmental 403(b) plans must comply with regulations under IRC Section 401(a)(17).⁶

501(c)(3) tax-exempt organizations. Regulations under IRC Sections 401(a)(4), 401(a)(5), and 410(b) generally are effective for plans maintained by tax-exempt organizations. Tax-exempt sponsors of 403(b) plans must comply with regulations under Section 401(a)(17).

All employees of a group of employers that are members of a controlled group of corporations or all employees of trades or businesses that are under common control will be treated as employed by a single employer for purposes of the minimum participation, coverage, and nondiscrimination rules ( Q 8964).⁷ Under the final regulations, common control exists between an exempt organization and another organization if at least 80 percent of the directors or trustees of one organization either are representatives of, or are directly or indirectly controlled by, the other organization. A trustee or director is treated as a representative of another exempt organization if he or she also is a trustee, director, agent, or employee of the other exempt organization. A trustee or director is controlled by another organization if the other organization has the general power to remove the trustee or director and designate a new trustee or director. Whether a person has the power to remove or designate a trustee or director is based on facts and circumstances.⁸