Subscribers Login  

Final regulations were issued under §403(b) on July 26, 2007 (the “403(b) Regulations”).¹ While the regulations address significant changes applicable to 403(b) plans, such as imposing broad written plan and operational compliance requirements on all 403(b) arrangements and imposing a set of controlled group rules, one change that seems to have been lost in all of the hoopla concerns the inability to exclude collective bargaining employees (“CB Employees”) from the right to make elective deferrals (i.e., pre-tax contributions) under a §403(b) plan. This change creates significant labor relations issues that could get overlooked by non-governmental tax-exempt employers in the course of complying with the 403(b) Regulations.

The Universal Availability Requirement

The 403(b) Regulations repeal a nondiscrimination safe harbor which was made available under Notice 89-23 to provide temporary relief with respect to the imposition of the qualified retirement plan nondiscrimination rules on all employer contributions (other than elective deferrals) and after tax contributions to 403(b) plans. As a result of such repeal, 403(b) plans will now be fully subject to minimum coverage testing under §410(b) and employer contributions to them will be subject to testing under §401(a)(4), or in the case of employer matching contributions, §401(m). In addition, the 403(b) Regulations eliminate a special transitional exception regarding CB Employees with respect to the 403(b) elective deferral nondiscrimination rule--known as the universal availability rule. Basically, in order to satisfy the universal availability rule, a plan that offers the opportunity to make elective deferrals must extend that opportunity to all employees of the employer. Significantly, the only employees who may be excluded for purposes of the universal availability rule are part-time employees who work less than 20 hours a week, non-resident aliens, students exempt from FICA taxes and certain employees eligible to participate in another 403(b) plan, a governmental §457 plan or a §401(k) plan. Thus, under the 403(b) Regulations, CB Employees may no longer be excluded for purposes of determining whether the 403(b) plan satisfies the universal availability rule.² The universal availability requirement is generally effective with respect to collectively bargained plans between January 1, 2009 and July 26, 2010³

Impact of the NLRA

A tax-exempt employer who is a party to a collective bargaining agreement generally cannot simply amend its §403(b) plan to cover the employees covered by such agreement without running afoul of the provisions of the National Labor Relations Act (NLRA)⁴ This is because retirement benefits are a mandatory subject of bargaining between the employer and the union. Thus, an employer who desires to amend its 403(b) plan to include CB Employees or to change the terms and conditions under which such employees are covered under such plan must discuss such amendments with the union, absent any provision in the collective bargaining agreement that permits such a unilateral change.⁵ An employer who fails to engage in such bargaining may be deemed to have engaged in an unfair labor practice under the NLRA which could result in the issuance of a cease and desist order by the National Labor Relations Board, which is the governmental agency charged with enforcing the NLRA.⁶ This puts the employer in the seemingly untenable position of having to reopen contract negotiations to discuss the §403(b) regulatory changes or to unilaterally amend the 403(b) plan to comply with requirements of applicable law and risk committing an unfair labor practice.

While it would seem ludicrous that the employer could be charged with committing an unfair labor practice for amending its 403(b) plan to comply with applicable law, there is no exception to bargaining under the NLRA for changes in the terms and conditions of employment that are mandated by law. Thus, employers who sponsor 403(b) plans and who have CB Employees will need to review the terms of the applicable bargaining agreements to determine if such employees may be covered by the plan without the need for bargaining with the union. If not, the employer will need to commence negotiations with the union on this issue. A primary concern of most employers who will be forced to enter into such negotiations is that the union will seek to broaden the scope of bargaining beyond the §403(b) plan participation issue.

During the bargaining process, an employer is obligated to maintain the status quo, meaning in the case of a 403(b) plan the employer must continue to administer the plan based on its current terms. An exception to this rule applies once an impasse has been reached (i.e., negotiations have reached the point where neither party is willing to make additional compromises on an issue in order to resolve the issue) that permits the employer to unilaterally impose its last offer at the negotiating table on the issues for which a legal impasse has been reached. Thus, for example, if the employer offered to include the CB Employees in its 403(b) plan and provide them with the same employer matching contribution as it provides non-bargaining employees, but the union refused such offer in hopes that the employer would instead adopt a §401(k) plan for the CB Employees, the employer could amend the 403(b) plan to cover the CB Employees without running afoul of the NLRA. Thus, from a 403(b) plan qualification perspective where an exception to bargaining with the union does not apply, it is in the employer's best interest to raise the issue of 403(b) plan participation with the union so that if the union will not agree to including the CB Employees in the 403(b) plan, the employer can proceed with making the necessary plan changes to comply with the 403(b) Regulations.

Action Steps

Employers should review their 403(b) plans and applicable collective bargaining agreements to determine what changes will be necessary to comply with the 403(b) Regulations, if bargaining over these changes will be required with the union and the applicable regulatory effective date. If bargaining with the union will be necessary then the employer will need to determine the scope of such negotiations (i.e., will the issues be limited to the 403(b) plan) and develop a time table for such negotiations that will enable the employer to timely comply with the 403(b) Regulations.

For more information, in the Tax Management Portfolios, see Finston and D'Alessandro, 351 T.M., Plan Qualification -- Pension and Profit-Sharing Plans, and in Tax Practice Series, see ¶5520, Plan Qualification Requirements, and ¶5560, Specialized Retirement Plans.