Types Of Plans Affected By The New 403(b) Regulations
Are all 403(b) plans affected by the final regulations?
For the most part, the final regulations, like the ones that they replaced, apply to most 403(b) plans. For most 403(b) plans, the primary impact of the final regulations is that they are required to put their plans in writing.
How do we know if our 403(b) plan is subject to ERISA?
If you are a governmental plan, your 403(b) plan is not subject to ERISA regardless of the types of contributions made to the plan. A TDA plan sponsored by a private, tax-exempt employer may also be exempt from ERISA, but only if it satisfies Department of Labor (DOL) safe harbor requirements and the employer does not make any discretionary determinations either in form or in operation. If your TDA plan permits hardship distributions, you’re probably going to want to have one of the vendors do the determinations for you, to avoid making your plan subject to ERISA.
What are the DOL safe harbor requirements for a TDA plan to be exempt from ERISA?
According to Field Assistance Bulletin 2007-02 (FAB), issued by the Department of Labor immediately following the release of the final 403(b) regulations, and further clarified by DOL FAB 2010-01, TDA plans can still be exempt from ERISA even though they must now satisfy written plan requirements, if the following conditions are met:
- Participation of employees in the plan is completely voluntary.
- All rights under the annuity contract or custodial account are enforceable solely by the employee or beneficiary of such employee.
- Involvement of the employer is limited to certain optional specified activities.
- The employer receives no direct or indirect consideration or compensation, other than reimbursement of expenses.
Subsequent guidance on this issue, in FAB 2010-01, indicated that:
- Subject to some exceptions, the plan sponsor must offer a reasonable choice of both 403(b) vendors and investment products
- An employer may not have the right to unilaterally move funds from one 403(b) investment to another 403(b) investment.
- The employer may make optional plan features available, such as loans and hardships, as long as the vendor is responsible for any discretionary determinations.
- An employer sponsoring a safe harbor arrangement may not hire a TPA to make discretionary decisions under the plan as the hiring of a TPA is a discretionary decision. However, the 403(b) plan documents can allocate discretionary determinations to the annuity provider or other responsible third party selected by a person other than the employer.
- An employer may limit the safe harbor arrangement only to vendors whose products and services comply with the section 403(b) requirements without making the safe harbor arrangement subject to ERISA.
According to the FABs, compliance with these safe harbor requirements will be determined on a case-by-case basis. In administering a TDA plan, however, the employer cannot make (or have responsibility for) discretionary determinations (such as determining hardship distributions) and still retain the plan’s non-ERISA status. An employer can, however, continue to perform ministerial tasks such as monitoring contribution limits and can limit the funding vehicles to a reasonable choice without jeopardizing the plan’s non-ERISA status.
Is it still worthwhile to keep my TDA plan exempt from ERISA if I have met plan document requirements anyway?
Non-ERISA 403(b) plans do not currently have to file Form 5500 each year. Since ERISA 403(b) plans are subject to all of the filing and auditing requirements that currently apply only to qualified plans, this exemption is an important advantage. Sponsors and administrators of a non-ERISA 403(b) plan are not subject to ERISA’s fiduciary requirements. And it is ERISA that requires a participant’s spouse to receive a 50% share of the participant’s account unless they sign a spousal waiver.
On the other hand, it is easy to unintentionally become subject to ERISA by becoming too involved in administering the plan. And if the DOL determines that your plan was actually subject to ERISA in prior years and you did not file a Form 5500 or meet other ERISA requirements in those years, you may be subject to penalties and perhaps claims from spouses of participants who benefit in a form other than a joint and survivor annuity.