12/09/2008

INTRODUCTION

We are aware that many nonprofits (that are not churches or governments) wish to sponsor 403(b) plans that are not subject to ERISA. In general, most plan sponsors wish to maintain a plan outside of ERISA to avoid 5500 reporting and audits (if the plan has over 100 participants) which are required if the plan is subject to ERISA.

We are deeply concerned about the level of understanding of just what it takes to keep a 403(b) plan out of ERISA. We have attempted to answer questions on this topic as they come up but we are concerned that our assistance may at times be taken out of context. Because of this concern, we have decided to attempt to clarify this topic with a full explanation of the requirements for nonprofits (that are not sponsored by churches or governments) wishing to sponsor 403(b) plans that are not subject to ERISA.

Please note the information in this technical update is not intended for plans that are sponsored by churches (as defined in ERISA 3(33)) or governments (as defined in ERISA 3(32), including public school plans). Church plans and governmental plans are exempt from ERISA by statute. They may set up any permissible 403(b) arrangement (with or without employer contributions, for example) and the plans will not be subject to ERISA (unless the church specifically opts for ERISA coverage under Code section 410(d)).

After summarizing the requirements for nonprofit plans that will not be subject to ERISA, we will provide our recommendations to plan sponsors considering this route. We will also address a frequently asked question regarding assignment of the plan administrator in our limited scope document. In our view, it is very difficult (and has always been difficult) for nonprofits to sponsor a 403(b) plan that is not to subject to ERISA. We therefore recommend that plan sponsors and their advisors proceed with caution. In many instances, it may be advisable to make the plan subject to ERISA in order to avoid penalties and the burden of filing 5500s for multiple years.

BACKGROUND

A nonprofit that wants its 403(b) plan to be exempt from ERISA must follow several restrictions on what it can do with its 403(b) plan. The most well-known of these restrictions is that the employer may not make non-elective contributions to the plan. There are, however, many more restrictions placed on the employer under the Department of Labor's (DOL) safe harbor rule.

The safe harbor regulation

The general rule is that employee benefit plans that are "established or maintained" by an employer are subject to ERISA (governments and churches are exempt from this general rule). The DOL issued a safe harbor rule for nonprofits that wished to have 403(b) plans that are not subject to ERISA in 1979 under 29 CFR 2510.3-2(f). This regulation explained that in order for a 403(b) plan employer to avoid "establishing and maintaining a 403(b), the following requirements must be met:
  • participation must be "completely voluntary" for employees;
  • rights under the plan are enforceable solely by employees;
  • the employer must not receive compensation/consideration for offering plans;
  • employer involvement must be limited to the following:
  • permitting vendors to publicize products to employees, summarizing/compiling info re vendors avail,
  • collecting salary reductions and remitting to vendors,
  • holding group annuity contracts in the employer's name, and
  • limiting vendors available to employees (to a number and selection designed to afford employees a reasonable choice in light of all relevant circumstances, factors are listed in the regulation).
You can find 29 CFR 2510.3-2(f) here: DOL Regulation.

2007 Field Assistance Bulletin

When the 403(b) final regulations were issued in 2007, several new requirements were placed on 403(b) plan sponsors. Chief among these new requirements was a written plan for most sponsors. These requirements raised doubts about the continuing ability of nonprofits to maintain a non-ERISA 403(b) plan (for example, how can a plan avoid being "established" if it is written and adopted by the employer?). The DOL issued FAB 2007-02 to further clarify what is and is not allowed under the safe harbor in light of the new regulations. Under the FAB 2007-02, the DOL clarified that employers can do the following and still meet the safe harbor:
  • perform duties as necessary to ensure tax compliance (nondiscrimination testing, max contribution limits);
  • adopt a 403(b) plan (which the DOL expects "would consist largely of the separate contracts and related documents supplied by the annuity providers and account trustees or custodians");
  • perform information collection and compilation duties; and
  • terminate a plan.
However, employers may not "have responsibility for, or make, discretionary determinations in administering the program." This includes (as examples):
  • authorizing plan-to-plan transfers,
  • processing distributions,
  • satisfying applicable joint and survivor annuity requirements,
  • making determinations regarding hardship distributions,
  • making determinations regarding QDROs, and
  • determining eligibility for or enforcing loans.
In addition, employers may not negotiate with vendors "to change the terms of their products... such as setting conditions for hardship withdrawals."

Also notable, the FAB expanded on its guidance to employers wishing to limit vendors under the plan. Because the new contract exchange rules under the final 403(b) regulations (at section 1.403(b)-10(b)) newly restrict participant's ability to move 403(b) investments, the FAB noted that nonprofits "may" be required to "offer a wider variety of products in order to afford employees a reasonable choice in light of all relevant circumstances for purposes of the safe harbor." (Participant's previously had significant freedom to move to 403(b) investments without notifying their employers under Revenue Ruling 90-24.)

You can find FAB 2007-02 here: FAB 2007-2. You can find the final 403(b) regulations here: Final Regs.

RECOMMENDATIONS

Ensuring a nonprofit 403(b) plan does not become subject to ERISA is not necessarily a simple task. The DOL has not provided a bright line rule for nonprofits to follow (i.e., no given number of vendors under the plan will meet the safe harbor, a complete list of discretionary determinations is not provided under the safe harbor, etc.). Therefore, just as the DOL will evaluate each plan "on a case-by-case basis", nonprofits should consult with a qualified advisor (who fully understands the safe harbor requirements) and discuss the totality of the circumstances under the plan to decide whether the plan was subject to ERISA in the past and whether it can and should continue to remain outside ERISA.

Beyond this periodic evaluation, the plan sponsor must be diligent in ensuring it does not make discretionary determinations or perform other actions in its day-to-day operations that could cause the plan to become subject to ERISA. A simple example includes ensuring that if a plan vendor forwards a loan application or a hardship withdrawal request to the plan sponsor so that they can "sign off" on the request, the sponsor knows to explain to the vendor that they are prohibited from approving loans or hardships.

If it is discovered that the plan sponsor has been engaging in actions that make the plan subject to ERISA, delinquent 5500 forms should be filed and 5500 forms will be required for future years until the plan is terminated. In addition, the written plan should be on a "full scope" document on the ftwilliam.com system. It is our understanding that a plan that was once covered by ERISA cannot become "un-ERISA" by any other action short of terminating the plan.

If the advisor and plan sponsor aren't sure whether the plan is covered by ERISA, we suggest making the plan subject to ERISA. The risks of continuing with a plan as if it is non-ERISA when there is a risk that the DOL will consider it an ERISA plan are greater and more burdensome than dealing with an ERISA plan. If the plan attempts to proceed as non-ERISA and the DOL determines that the plan is subject to ERISA, DOL will penalize for failure to file 5500s, 5500s may need to be filed for as many as dozens of years. In the alternative, 5500s can be filed on an annual basis when the information is more readily available.

Finally, we understand that part of the concern over ERISA coverage is the uncertainty concerning what assets must be included in the upcoming full 5500 filing. Unfortunately, the DOL has not provided detailed guidance on this subject. A recent DOL Notice eliminates the limited 5500 reporting option for 403(b) plans effective for the 2009 plan year. (See http://www.dol.gov/ebsa/regs/fedreg/notices/20071116.pdf - the "Discussion of the Public Comments" section suggests transitional relief may be considered by DOL but is certainly not promised). It is certainly possible that we will not know the full requirements for 403(b) 5500 filings until the 2009 5500 filing instructions are released (which are expected in late 2009).

Plan Administrator designation in the limited scope document

Because the plan administrator is assigned a number of discretionary duties in the limited scope 403(b) document, we will not allow nonprofits to select the plan sponsor as the plan administrator of the plan. Typically, the plan administrator should be the vendor(s) approved under the plan. The vendor may appoint another party, such as a TPA, to provide these services (the TPA should not be appointed by the Plan Sponsor). (Note that the FAB suggests it is proper to allocate discretionary determinations to participants but we do not believe this is possible under the final regulations; see section 1.403(b)-3(b)(ii).)

Unfortunately, we have heard that many 403(b) vendors are refusing to assist plan sponsors with the discretionary determinations under the plan - even when they historically did assist with these duties. In these circumstances, the employer is faced with either finding new vendors that will assist with discretionary determinations or going forward with an ERISA plan.

CONCLUSION

Although the DOL has clarified that a nonprofit can maintain a non-ERISA 403(b) plan while still meeting the new requirements under the final 403(b) regulations, it may be more difficult to do so in the post final regulations 403(b) environment. We expect that after going through the process to create a written plan, plan sponsors should be newly aware of their duties and the tax risks of maintaining a 403(b) plan. The newly enlightened sponsor may want more control over the plan in the form of limited vendors and limiting in-service withdrawals (thereby making the plan subject to ERISA). In addition, market forces seem to be effectively forcing some nonprofit 403(b) plans into ERISA coverage since at least some vendors appear unwilling to perform discretionary determinations under the plan.

If you have any questions please feel free to contact us at support@ftwilliam.com or call 800.596.0714.

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