IRS ruling enhances participation in secs. 403(b) and 457(b) plans.

• Author: Weinberger, Mark
• Position: Government employee retirement plans

The Service has approved automatic deferrals of a fixed percentage of employees' salaries to Sec. 403(b) annuity plans offered by exempt organizations, public schools and colleges, and to Sec. 457(b) eligible deferred compensation plans of state and local governments and exempt organizations. The new policy is intended to encourage increased participation levels in retirement plans and to boost savings levels. In view of the ease of implementing the automatic deferral approach and its positive impact, employers should find this new approach highly attractive.

In Rev. Rul. 2000-35, the IRS approved an arrangement for a Sec. 403(b) annuity plan similar to the one approved for qualified plans in Rev. Rul. 2000-8. The plan was amended to add an automatic compensation reduction of 4% for each employee. Employees could elect to receive cash or contribute a different percentage to the plan. For a newly hired employee, an election not to make contributions or to contribute a different percentage was effective for the first pay period, if filed when the employee was hired. An election not to make reduction contributions or to contribute a different percentage could be made at any time.

In Rev. Rul. 2000-33, the Service approved an amendment to a Sec. 457(b) eligible deferred compensation plan. Under the amendment, 2% of the employee's compensation was automatically contributed to the employee's account, if a newly hired or current employee had not affirmatively elected either to receive cash compensation or have less than 2% of compensation deferred under the plan. This provision satisfied the Sec. 457(b)(4) requirement that an agreement providing for deferral during a calendar month had to be entered into before the beginning of such month.

If a new employee filed an election to receive cash in lieu of making deferrals and the election was filed within a reasonable period ending before the beginning of the first month after the individual...