By Jenny Kiffmeyer, J.D – The Retirement Learning Center

Dual-Status Hospitals and Retirement Plans

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with an advisor in Colorado is representative of a common inquiry regarding governmental and tax-exempt entities. The advisor asked, “One of my plan sponsor clients is a hospital that has dual status as a tax-exempt entity and a governmental entity. Could the dual-status hospital have both a 403(b) plan and a 457(b) plan?”

Highlights of Discussion

Dual-status entities could include governmental hospital organizations that have received a determination letter from the IRS stating it is exempt from taxes under IRC Sec. 501(c)(3) and that it also qualifies as an affiliate of a government unit as described in Rev. Proc. 95-48.

Yes, a governmental entity that also satisfies the requirements of IRC Sec. 501(c)(3) (i.e., a dual-status entity) may maintain both a 403(b) plan and a 457(b) plan. This was affirmed in the preamble to the proposed 403(b) regulations (see page 67078 of REG–155608–02).

Under sections 457(b)(6) and 457(g), an entity that is both an instrumentality of a State and a section 501(c)(3) organization can have an eligible plan under section 457(b) only if it is funded. However, under section 403(b)(1)(A)(i) and (ii), an entity that is both an instrumentality of a State and a section 501(c)(3) organization could cover any of its employees, regardless of whether they are performing services for a public school.

That means, any employee that is eligible to participate in both the 403(b) plan and the 457(b) plan would have two separate deferral limits and, potentially, would be able to essentially “double up” on elective deferral contributions (See PLR-145997-08). The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), effective after December 31, 2001, no longer imposes any requirement to reduce the maximum amount that may be deferred for an individual under section 457(b) by any amount contributed for such individual to a different type of retirement savings plan such as a section 403(b) plan.

A word of caution:  It is important for a dual-status hospital to make sure it satisfies the requirements of IRC Sec. 501(r)(1) as well as  Revenue Ruling 69-545. In recent years, the IRS has revoked a hospital’s tax-exempt status under IRC Sec. 501(c) for failing to comply with IRC Sec. 501(r)(1) (PLR 201829017). For more information see Charitable Hospitals – General Requirements for Tax-Exemption Under Section 501(c)(3).

Conclusion

It is possible for a governmental entity that also satisfies the requirements of IRC Sec. 501(c)(3) (i.e., a dual-status entity) to maintain both a 403(b) plan and a 457(b) plan.