ERISA v. Non-ERISA 403(b)
Rev. 03/11/10; E-mail Alert 2010-4

In Field Assistance Bulletin (FAB) 2010-1, the DOL provides much needed additional guidance on properly excluding prior to 2009 assets from Form 5500s filed for ERISA 403(b) arrangements. In FAB 2010-1, the DOL also provides new guidance to clarify issues in the challenges a non-ERISA 403(b) plan has in remaining exempt from becoming an ERISA 403(b) arrangement. The “reasonable choice” of vendors and investments safe harbor for non-ERISA plan status found in ERISA Regulation 2510.3-2(f) has been clarified in this new guidance. Citations by Q&A number are provided throughout the article.  

ERISA v. Non-ERISA: New Guidance
A safe harbor arrangement — permitting the 403(b) plan to remain 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 may refuse to include such contracts if they would either be costly or if they would involve the employer in discretionary decision making. Q&A 14

The employer may not hire a TPA to make discretionary decisions and keep the non-ERISA status of the plan. However, discretionary determinations may be allocated to the annuity provider without the plan becoming an ERISA plan, and in fact, the annuity provider may in turn hire a TPA and the plan would remain safe harbored. The employer may limit the available providers it will have in the safe harbor arrangement to providers that are responsible for discretionary decisions. Q&A 15

Reasonable Choice
Must a “safe harbor arrangement” under 29 CFR 2510.3-2(f) offer participants a reasonable choice of both 403(b) providers and investment products?  — The DOL’s response is basically “Yes."

But an Exception Has Been Provided
Although the safe harbor generally requires that the arrangement offer a choice of more than one 403(b) investment provider and more than one investment choice, the DOL states that an employer may have just one investment provider to whom it will forward payroll salary reduction contributions, if participants are permitted to transfer or exchange their interest to the 403(b) account of another provider.

In the alternative, where the cost of having payroll deductions sent to more than one 403(b) investment provider causes a small employer to stop making its payroll system available to all such providers, then the employer may limit the payroll to one investment provider. The employer must be able to demonstrate these administrative burdens and costs to the DOL. Further, this exception is only available if the one investment provider 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.

In both of the above exceptions, employees must be provided with a disclosure of any limitations and costs associated with such transfers or exchanges before deciding to participate.

Cite: Q&A 16

Two further points clarified in FAB 2010-01

1. 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. Q&A 17
2. 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). Q&A 18

For more on the latest on 403(b) arrangements,
click here for information on our Practitioner seminar, or
click here for information on our Insights seminar.