Client Alerts

Employer Non-Elective Contributions to 457 and 403(b) Plans under Minnesota Law: The Legal Analysis

Employer Non-Elective Contributions to 457 and 403(b) Plans under Minnesota Law: The Legal Analysis

When dealing with employer sponsored Section 403(b) and Section 457 deferred compensation plans, a public sector employer subject to Minn. Stat. Section 356.24 needs to be aware of both the Internal Revenue Code (“Code”) requirements and the state law requirements under Minnesota Statutes Section 356.24.  In general, the Code requirements permit more than what Minnesota Statutes Section 356.24 permits.  This is particularly important because Minnesota Statutes Section 356.24 was amended in the 2020 legislative session.  One of the amendments impacts benefits strategies that have been in place for years.

Minnesota Statutes Section 356.24 Overview
Minnesota Statutes Section 356.24 provides the statutory authority for a public sector employer to use public funds to provide additional deferred compensation to employees.  It consists of a general rule and a specific list of exceptions to the general rule.

General Rule.  Minnesota Statutes Section 356.24, subdivision 1, provides in part:
“It is unlawful for a school district or other governmental subdivision or state agency . . . to contribute public funds to a supplemental pension or deferred compensation plan . . . other than:”

Exceptions.  Minnesota Statutes Section 356.24, subdivision 1, then lists fourteen exceptions to the general rule.  If a situation does not fall into one of the listed exceptions, the general rule controls.  Consequently, it is imperative that an employer contribute public funds only to a listed program.

In the past, parts (5) and (11) were the two listed exceptions by which public sector employers contributed public funds to Section 403(b) and Section 457 deferred compensation plans.  Part (5) allowed the employer to contribute public funds as a match; part (11) allowed the employer to contribute public funds as a non-elective employer contribution (e.g., mandatory contribution) of accumulated sick, vacation, and severance.  The problem with the old part (11) was that it had language requiring the recipient program to be “wholly and solely” funded by this type of contribution.  That meant the contributions could not be put into the existing 403(b) and/or 457 accounts that accepted deferrals by the employee and the employer match.  Contributions under part (11) had to be separately contributed into a separate account or separate plan.  It was cumbersome, sometimes difficult to implement, and triggered a second set of account charges.

This is the backdrop against which the 2020 amendments must be viewed.

REMINDER:  This alert addresses only one of the amendments to Minnesota Statutes Section 356.24 – the deletion of part (11).

Old Part (11)
This provision was an exception to the rule stated in subdivision 1 that contributing public funds was “unlawful unless” made into one of the enumerated programs.  Old part (11) provided the means for the employer to impose a mandatory contribution (also called an employer non-elective contribution[1]) accumulated sick, vacation, and severance.  This type of contribution is a contribution of public funds and, therefore, requires this exception.

Old part (11) has been used for years in stacking strategies, collectively bargained agreements, personnel policies and employment contracts to accomplish additional deferred compensation beyond what is allowed by voluntary salary deferral and employer match.  Examples include:

  1. Annual contributions of sick and vacation with respect to hours above a threshold.
  2. One-time contributions of sick, vacation, and/or severance upon termination of employment where specifically described and mandatory (e.g., dollar amount, number of hours, etc.).
  3. Stacking where contributions go – first to the Section 403(b) up to the maximum permitted, second to the Section 457 up to the maximum permitted, and the remainder to a retiree only HRA (including MSRS HCSP).

Because these contributions were mandatory contributions (e.g., employer non-elective contributions), they were not counted against the Section 402(g) deferral limit under the Code[2] and they were not subject to the match requirements under old Minnesota Statutes Section 356.24, subd. 1 (5).  And with respect to the Section 403(b) plan, this employer non-elective contribution was not subject to FICA withholding.[3]  As public funds, a non-elective employer contribution – public funds — to a Section 403(b) and/or 457 plan required a listed exception under Minn. Stat. Section 356.24, subd. 1.  By deleting part (11), non-elective employer contributions are no longer allowed. 

New Subd. 3
The 2020 amendment removes the details of deferred compensation plans from the exception listed in part (5).  The details are now described in the new subd. 3.  Deferred compensation plans are still defined as including Section 403(b) and 457 plans made available through the employer.  The employer match – which is public funds — must still be made on a dollar for dollar match and is limited to one half of the Section 402(g) limit.

New subd. 3 does not address nonelective employer contributions.  It only addresses employee deferrals and the employer match on the employee deferrals.  New subd. 3(g) clarifies that a plan may be designed to allow salary deferral (voluntary deduction from what would otherwise be received as taxable compensation) from sick, vacation, and severance into the Section 403(b) and/or Section 457 plans.  It is not required; it is permissive.  The plan would need to include these sources as eligible compensation for purposes of salary deferral.  Any salary deferral described in new subd. 3 is still subject to the Section 402(g) limit for Section 403(b) plans.[4]

New subd. 3(f) provides that “public funds are contributed to the plan only in an amount that matches . . .”(emphasis added).  This means the only public funds that can be contributed into Section 403(b) and Section 457 plans are the match.  This language in new subd. 3(f) precludes non-elective employer contributions.

Impact
Taken together, deleting old part (11) and new subd. 3(f), Minnesota Statutes Section 356.24 no longer allows employer non-elective contributions.

If old part (11) is not put back into Minnesota Statutes Section 356.24 to authorize employer non-elective contributions and new subd. 3(f) is not adjusted to accommodate non-elective deferrals, deferred compensation options available to employers and employees are significantly reduced.

Salary Deferral Maximum Match maximum Other contributions
403(b) Plan Salary deferral maximum Section 402(g) 1/2 Section 402(g) NONE
457 Plan Salary deferral unlimited 1/2 Section 402(g)* NONE

*For school employee participating in both, only get the match under one plan.

Under the amended Minnesota Statutes Section 356.24, an employee continues to enjoy the maximum salary deferral ability allowed under the Code.  And, the employer continues to be able to match up to ½ of the Section 402(g) limit.  However, there is no authority for the employer to make non-elective contributions.  The only contribution of public funds permitted under Minnesota Statutes Section 356.24 that accommodated non-elective contributions to a deferred compensation plan was part (11).   And the new subd. 3 makes it clear the only contribution of public funds available is in the form of the dollar for dollar match.  There no longer is authority for the contribution of public funds through mandatory conversion of sick, vacation, and severance. 

Recommended Action
Efforts are being made to get Minnesota Statutes Section 356.24 amended to address these issues and again allow non-elective employer contributions.  This could be accomplished by:

  1. Adding old part (11) back to the list of exceptions with the removal of the problematic phrase “wholly and solely”; and
  2. Adjusting new subd. 3(f) to distinguish between the maximum match (and its terms and conditions) and non-elective employer contributions.  This could be done by adding to the start of new subd. 3(f)  “Other than non-elective employer contributions allowed under another provision of 356.24, . . . .”

If these changes are not achieved, the employer has a lot of work to do.  Employers will need to review personnel policies, collective bargaining agreements, and employment contracts to identify situations built upon old part (11) and evaluate how to address them.  This includes programs in place and upon which employees have relied in making retirement decisions.

The amendment eliminating employer non-elective contributions was passed in 2020.  This raises significant issues regarding how to handle programs where the trigger for benefits occurred in 2021 or occurs in 2022 and the benefits are based upon a program built under old part (11).  Benefits based on programs built under old part (11) that are part of collective bargaining and employment contracts are also problematic because there is no effective date language that delays the amendment’s impact until the first contract beginning on or after the adoption of the amendment that eliminates employer non-elective contributions.  And on a going forward basis, non-elective employer contributions cannot be part of the deferred compensation portion of employee compensation packages.

Please contact us if you have any questions and/or would like assistance with implementing any of the forgoing action items.

[1] Section 1.401(k)-6 provides that “ [n]on-elective contributions means employer contributions (other than matching contributions) with respect to which the employee may not elect to have the contributions paid to the employee in cash or other benefits instead of being contributed to the plan.”  Emphasis added.

[2] Section 1.401(k)-1(a)(2) provides in part   “cash or deferred arrangement is an arrangement under which an eligible employee may make a cash or deferred election with respect to contributions . . ..”

[3] Because the 457 plan makes no distinction regarding employee and employer contributions, the non-elective employer contribution to the 457 plan was subject to FICA.

[4] The Section 402(g) limit is the Code limit on salary deferrals.  The Code does not impose a Section 402(g) on deferral contributions to a Section 457 plan.

 

[February 10, 2022]