Case study: 403(b) Compliance assistance and plan design consulting for a healthcare institution

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By Suzanne D. Smith, Paul R. Bonsee | 21 September 2015

The challenge

A large healthcare institution maintained a 403(b) ERISA plan for approximately 5,000 participants using both a large mutual fund company and an insurance company as record-keepers. A well-known accounting firm had been acting as the plan auditor for a number of years. The plan provided for an employer non-elective (profit sharing) contribution that was a very complex formula, which was integrated with Social Security and, at the same time, a longevity formula. The longevity contribution was tiered based on years of service beginning in year three. Part-time workers, re-hires, employees of affiliates, and employee physicians further complicated the allocation of the employer contribution. For some time, both the human resources department and the board of directors of the institution had been aware that errors were being made in the employer contributions made to participant accounts. The institution’s record keepers and auditor were either unable or unwilling to provide assistance. Two plan corrections had already been filed in recent years with the IRS. Adding to the employer’s concern was the fear that it might be forced to require that participants return monies that were mistakenly paid into their accounts, which would certainly affect morale and possibly bring about legal issues. Milliman was retained to:

  • Identify and correct errors made in the allocation of employer contributions to participant accounts
  • Provide plan compliance assistance and communicate with the IRS regarding corrective measures
  • Consult in the redesign of the plan to simplify administration going forward.

The Milliman solution

Milliman began by requesting plan contribution and eligibility data going back nearly 50 years. Dates of hire, dates of termination, dates of re-hire, hours worked, and job classification information contained in Excel files from the employer’s payroll system were received, organized, and scrubbed. Fortunately, the institution had good records on file in electronic format to aid in this process. The information was analyzed by the service team, which then:

  • Determined the correct plan entry date for 5,000+ employees who had worked for the employer on and off over the previous 30+ years in various eligible and ineligible capacities
  • Calculated years of service based on date of hire and anniversary dates
  • Re-calculated the employer non-elective contribution for 2009-2014, including non-discrimination testing for each year
  • Presented the correction options for overpayments and underpayments and assisted with the IRS correction filing
  • Recommended plan design changes, including a safe harbor compensation definition, a consistent definition of years of service for all plan purposes, and an annual allocation of the employer non-elective contribution rather than allocations made on a payroll basis.

Finally, Milliman determined, based on recent IRS pronouncements, that the employer would not be compelled by the correction program to require a return of any funds allocated in error. The board was greatly relieved to receive this information.

The outcome

The employer is currently reviewing the recommended plan design changes with the help of its outside legal counsel. It is also considering partnering with Milliman for ongoing third party administrative services to maintain participant hours and years of service records, employee eligibility records, calculation of employer contributions, compliance testing, annual 5500 forms filing, and maintenance of plan documents.