On the Subject of Being a Non-ERISA 403(b)
Rev. 08/26/10; E-mail Alert 2010-13

Since the final 403(b) regulations in July of 2007, there have been questions about how a non-ERISA 403(b) arrangement may maintain the status of being exempt from ERISA. This article addresses that issue. A 403(b) arrangement sponsored by a 501(c)(3) entity must adhere to specific rules in order to be exempt from being exempt from ERISA. If an employer or the 403(b) arrangement fails to adhere to the safe harbor exemption from being an ERISA plan, the 403(b) will be subject to ERISA, from then forward. Failure to recognize that the plan has becone subject to ERISA is serious, in that the employer may be subject to substantial penalties for failure to satisfy ERISA reporting, disclosure and other requirements. ERISA requirements such as the fiduciary rules and responsibilities, spousal consent rules, and disclosure rules such as the Summary Plan Description, will apply for each year that the 403(b) was no longer exempt from ERISA.  

501(c)(3) Entities
A plan sponsored by a section 501(c)(3) organization is subject to ERISA unless it meets the safe harbor exemption. The exemption does not include employer contributions. Therefore, if an employer makes a match or a nonelective contribution, the 403(b) is an ERISA plan. The employer also must maintain proper distance from making discretionary decisions such as determining hardships or QDROs or approving loans. The employer’s role should be administrative only. Further, there can be no mandatory contributions. Participation of the employee must be voluntary and the rights must be solely enforceable by the participant. Also, the employer may receive no or reasonable compensation for the arrangement. There are other rules that are outside the exemption that we will address. Section 501(c)(3) organizations who sponsor plans that do not intend to be covered under ERISA must exercise care that the plan sponsor’s actions do not cause the plan to be lose its exemption from ERISA coverage.  The original rules for this exemption are found in DOL 29 CFR 2510.3-2(f).

Regulation 2510.3-2(f)
The Department of Labor (DOL) provides plans sponsored by §501(c)(3) organizations with a safe harbor from ERISA under 29 CFR 2510.3-2(f).  This exemption indicates that the 403(b) plan must be funded with only salary reduction contributions.  The regulation follows and it limits involvement by the employer and requires all of the following items to be satisfied:  

          “1.  Participation must be voluntary

2.  All rights under the annuity contract or custodial account are enforceable solely
     by the employee, by a beneficiary of such employee, or by any authorized
     Representative of such employee or beneficiary

3.  The sole involvement of the employer is limited to any of the following:

a.   Permitting funding agents to publicize their products to employees.
b.   Requesting information concerning proposed funding media, products or annuity contractors.
c.   Summarizing or otherwise compiling information provided by proposed funding media in order to facilitate review and analysis by employees.
d.   Entering into salary savings agreements with employees, withholding compensation under the terms of such agreements, remitting amounts withheld to applicable funding agents and maintaining administrative records with respect to such withholding.
e.   Holding in the employer’s name one or more group annuity contracts covering its employees.
f.    Limiting the funding media or products available to employees and/or limiting the contractors who may approach employees to a number which is designed to afford employees a reasonable choice in light of all relevant circumstances. Such circumstances include:


i.     the number of employees affected,
ii.      the number of contractors who have indicated interest in approaching employees,
iii.      the variety of available funding products,
iv.      the terms of the available arrangements,
v.      the administrative burdens and costs to the employer, and
vi.      the possible interference with employees’ performance as a result of the direct solicitation by sales agents.

g. The employer receives no direct or indirect consideration or compensation for administrative services provided under the program, other than reasonable reimbursement for expenses incurred by the employer in providing such services.

ADDITIONAL GUIDANCE
Regulation 29 CFR 2510.3-2(f) is still in effect. Also of note for clarifying the exemption are two advisory opinions issued after the safe harbor exemption regulations.

Advisory Opinion 94-30A
The DOL ruled a plan would be subject to ERISA if an employer became involved in certifying disability or hardship criteria for determining eligibility for an in-service withdrawal in a 403(b) plan.

Advisory Opinion 2001-03A
The DOL ruled that when an insurance company converts from a mutual life insurance company to a stock life insurance company, voting on the proposed plan of demutualization and selecting an allocation method for distributing the demutualization proceeds among the employees covered under the group contract would not cause a 403(b) plan to lose exemption from ERISA.

POST FINAL 403(b) REGULATION GUIDANCE
It was not until the sweeping changes in employer responsibility from the IRS's final 403(b) regulations of 2007 — such as to adopting and maintain a written plan document — that the issue of maintaining non-ERISA status required the DOL to issue substantial new guidance on maintaining non-ERISA status.

FIELD ASSISTANCE BULLETIN (FAB) 2007-2
On July 26, 2007, the DOL published final §403(b) regulations, which required employers who sponsor 403(b) plans to adopt a written plan document, including a list of vendors. The FAB states that the safe harbor from ERISA found in regulation 2510.3-2(f) remains operative. Since the Revenue Ruling 90-24 transfers were also eliminated by the final regulations, the employer — in choosing the vendors for the plan — is also involved in deciding whether to permit transfers among former and current vendors, and in making sure the vendors and the employer have the information necessary to administer the plan and report the 1099-Rs properly. Thus, the employer has become involved with information sharing agreements (ISAs) with the vendors. The ISAs provide greater compliance.

In order to maintain the safe harbor exemption in light of all this new employer involvement, the DOL published FAB 2007-2 simultaneous with the IRS's issuance of the final 403(b) regulations, in order to address what the employer is permitted to do under the 403(b) final regulations and still meet the exemption from being an ERISA plan . 

Under FAB 2007-2, employers may perform the following  and remain in the exempt-from-ERISA safe harbor:

• Employer development and adoption of a single document to:
• Coordinate administration among different issuers and
• Address tax matters that apply, such as universal availability, without reference to a particular contract,
• Compliance with the final 403(b) regulations will not necessarily cause a 403(b) to become covered by ERISA
• The DOL subsumes employer activities designed to ensure the 403(b) program continues to be tax compliant, for example, the employer may:
• Fashion and propose corrections under EPCRS
• Develop improvements that will obviate defects
• Obtain cooperation of outside entities involved in the program needed to correct defects, and
• Keep records of activities
• The employer may:
• Conduct administrative reviews of program structure and operation for tax compliance defects, such as:
• Nondiscrimination testing,
• Testing maximum contribution limitations
• Certify to an annuity provider a statement of facts within the employer’s knowledge as employer:
• Employee addresses
• Attendance records, or
• Compensation levels
• Transmit to an annuity provider another party’s certification as to the other facts, such as a doctor’s certification of the employee’s physical condition
• The employer’s written plan may limit exchanges of contract funds among providers who have adopted the written plan, or transfers from the program of a former employer to a current employer.
• The employer may decide to terminate the 403(b) plan.
• If an employer decides to discontinue performing ministerial and administrative functions required under the 403(b) regulations, the employer’s decision to terminate the plan will not make it an ERISA plan.
• The employer may limit the funding media or products available to employees or the annuity providers who may approach employees to a number designed to afford employees a “reasonable choice” in light of all relevant circumstances without the plan becoming subject to ERISA.

Safe Harbor DOL Regulations Regarding “Reasonable Choice”

The employer may limit:

• the funding media or
• products available to employees, or
• the annuity contractors who may approach employees,
• to a number and selection which is designed to afford employees a reasonable choice in light of all relevant circumstances.

Relevant circumstances may include, but would not necessarily be limited to, the following types of factors:

• The number of employees affected,
• The number of contractors who have indicated interest in approaching employees,
• The variety of available products,
• The terms of the available arrangements,
• The administrative burdens and costs to the employer, and
• The possible interference with employee performance resulting from direct solicitation by contractors.

Under FAB 2007-2 employer discretionary determinations that would be outside the safe harbor ERISA exemption include:

• Authorizing plan-to-plan transfers
• Processing distributions
• Satisfying qualified joint and survivor annuity requirements
• Making hardship determinations
• Making QDRO determinations
• Determining eligibility for or enforcement of loans
• Adding an automatic enrollment feature to the plan
• Negotiating with annuity providers or accounts custodians to change the terms of their products for other purposes, such as, setting conditions for hardship withdrawals.

FIELD ASSISTANCE BULLETIN (FAB) 2010-1
FAB 2010-1 clarifies the “reasonable choice” of vendors and investments section of regulation 2510.3-2(f). The regulation requires that an arrangement offer a choice of more than one 403(b) investment contractor and more than one investment choice. In FAB 2010-1, the DOL reiterates this and then provides for two limited exceptions. The first permits an employer to forward payroll salary reduction contributions to only one investment contractor, provided participants are permitted to immediately transfer or exchange their interest to the 403(b) account of another provider.  In both this and the next case, employees must be provided with a disclosure of any limitations and costs associated with such transfers or exchanges before deciding to participate.

An alternate exception is available. In the case where the cost of having payroll deductions sent to more than one 403(b) contractor causes a small employer to stop making its payroll system available to vendors, then the employer may limit the payroll to one vendor. The employer must be able to demonstrate these administrative burdens and costs to the DOL. Further, this exception is only available if the one contractor is offering a wide variety of investment products such as a single insurance company with access to a broad range of affiliated investment products or a single 403(b) compliant “open architecture” custodial account providing employees access to a broad range of unaffiliated mutual fund products will be permitted.

Further ERISA v non-ERISA points clarified in FAB 2010-01:

• An employer may discontinue a vendor who is not complying with Code Section 403(b) and the final 403(b) Regulations and still be a non-ERISA plan
• An employer in a non-ERISA plan may not unilaterally move from one provider to another. If an employer does this, the plan will become an ERISA 403(b).
• A safe harbor arrangement — permitting the 403(b) plan to remain a safe harbored from being an ERISA plan — may be maintained if optional features such as participant loans are available in the 403(b) plan, but are handled by the investment provider. The employer could refuse to include such contracts if they would either be costly or if they would involve the employer in discretionary decision making.
• An employer who hires a TPA to make discretionary decisions will make the non-ERISA plan into an ERISA plan. Discretionary determinations may be allocated to the annuity provider, who may, in turn, hire a TPA and the plan would remain safe harbored. Nonetheless, the employer may not hire a TPA to make discretionary decisions and keep the non-ERISA status of the plan.  The employer may limit the available providers it will have in the safe harbor arrangement to providers that are responsible for discretionary decisions.

CONCLUSION
Over the past several years the IRS has increased its focus on 403(b) compliance, focusing on universal availability, hardships and participant loans. With the changes in the final 403(b) regulations and the employer becoming involved now with a written plan document, more compliance, information sharing agreements, the number of vendors; the ability to maintain the status of being an exempt from ERISA 403(b) seems to be more arduous then ever.

Note that an employer may not maintain a 403(b) that is a non-ERISA 403(b) and a 403(b) that is subject to ERISA. In such a circumstance, both would be subject to ERISA.

This article together with the linked guidance provide an extensive overview of the rules for the determination of whether the plan is exempt from ERISA under the DOL's safe harbor regulation and subsequent guidance.

For more 403(b) information

Click here for information on Newkirk's Client and Prospect Booklet on 403(b) Arrangements entitled: 403(b) Tax Sheltered Arrangements: Your Questions, Our Answers

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