Business of Benefits : Employee Benefits Lawyer & Attorney : Law Office of Robert J. Toth, Jr. : 403(b) Plans, Annuity & Insurance Law : Business of Benefits Blog

There are three key employer groups which utilize 403(b) plans: K-12; colleges and universities; and non-profit healthcare systems.  Of the three, its is healthcare that seems to be most impacted by the new aggregation rules introduced with the 2007 403(b) regulations.

Not-for-profit hospital systems are typically corporations organized under the non-profit corporation rules of the states in which they are domiciled. There is an important feature of these incorporation rules at which the 403(b) changes were aimed: these nonprofit healthcare organizations typically have no stock. Instead of stock ownership, the corporations are generally organized around "membership," or like concepts.

The practical effect of this lack of stock ownership is is that the controlled group rules under Code Sections 414(b),(c),(m) and (o) and 1563 would often not apply (Notice 89-23 only being a safe harbor), meaning the discrimination and coverage rules under 403(b)(12)(A)(i) for 403(b) employer contributions were often tested on an organization by organization (as opposed to controlled group) basis.

Treasury changed this all with the introduction of 1.414(c)-5. In effect, an "80%" control test was introduced, with certain permissive aggregation rules permitted, and with church controlled orgs being able to permissively disaggregate under certain circumstances. 

More than in any other 403(b) plan sponsor community, those in the healthcare system have undergone tremendous consolidation activity over the past 15 years, with hospitals (and other sorts of related entities) seeking to survive and be successful through acquisition and merger.  This activity has often resulted in healthcare systems owning quite an assortment of separate nonprofit and for-profit organizations-with the related odd collection of legacy 403(b) and 401(k) plans.

This merger activity, when combined with the new aggregation rules, has resulted in a very difficult hangover for a number of unsuspecting healthcare systems. First, the traditional rules governing discrimination and coverage apply in ways they didn't prior to 2009, and many of these legacy programs have never been tested under the new aggregation rules (its that inertia thing). Secondly, there are very specific rules which apply to coverage testing when you have 403(b)  plans and 401(k) plans within these new controlled groups, the application of which may make it difficult (and sometimes impossible) to maintain both kinds of plans-particularly when its a 501(c)(3) maintaining a 401(k) plan.

Even those orgs which have taken the lead in moving to consolidate platforms in order to deal with the new 403(b) regs are finding themselves now in some difficulty, where there is a dawning on just how the new aggregation rules apply.  

Of all the 403(b) hangovers we have experienced in the past few years, my guess is that this is the most unanticipated of them.

 __________________

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By now it should be apparent the Department of Labor (“DOL”) has opened a proverbial can of worms by proposing to expand the category of service providers who will be subject to ERISA’s fiduciary standard. Not only has the proposal been met with a tidal wave of negative comments from industry insiders, but Members of Congress from both parties have also weighed in with their objections.

While it may come as a surprise that an attorney who works with retirement plan professionals would support the DOL’s attempt to expand the fiduciary standard, I actually agree with the assertion that a change in the law is needed. As in-house counsel for a broker-dealer that supported the nation’s largest network of independent retirement plan professionals, I pushed hard to require our registered representatives to adopt the principles that form the basis for the proposed rule. Specifically, I encouraged our registered representatives to consider moving their practice to a fee-based advisory platform and affirm their fiduciary status. For those unwilling to make the switch, I pushed to require client agreements that affirmatively stated the representative was not intending to act in a fiduciary capacity. Like the DOL, I have my share of battle scars from the effort.

However, while I agree with the DOL’s goal, I cannot support its methodology for bringing about this change. Specifically, I believe the proposed rule (as currently drafted) violates the constitutional separation of powers by permitting an executive branch agency to rewrite existing law rather than interpreting the law as it is currently written.

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 A few weeks ago, I blogged on the important role that the Securities Compliance Officer may play in 408(b)(2) compliance. I touched on some of the securities rules which apply to retirement plans outside of the executive compensation context. Attached is a more htorough explanation of those rules, which can hopefully be useful as we attempt to wend our way through this changng regualtory landscape.  The article I wrote for the "Practical Compliance and Risk Management for the Securities Industry" March-April issue, entitled "Securties Rules for Retirement Plans."  Excuse the bad picture........

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T his has become my "annual Mother's Day" posting, which hopefully helps describe the importance of what we do:

ERISA wonks such as ourselves tend to get lost in the press of details which seem to flow non-stop from our regulators and legislators in D.C.  It is sometimes helpful to step back and see the personal impact of the things we do.

A few years back, a good friend of mine who ran the retirement plan operations of a large insurance company asked me to speak about ERISA to a meeting of his administrative processing staff. At the time, they were still struggling with some of the more difficult administrative processes related to the QJSA and QPSA rules. Here's what I told them:

My father died at Ford's Rouge Plant in 1970, after 20 years with the company. Back then, the normal form of benefit under a defined benefit plan was a single life annuity, covering the life of only the employee.  There was no such thing yet as a qualified joint and survivor annuity or a qualified pre-retirement survivor's annuity.  This meant that my father's pension died with him. My mother was the typical stay-at-home mother of the period who was depending on that pension benefit for the future, but was left with nothing. With my father's wages topping at $13,000 annually and five kids at home, there was also little chance to accumulate savings.

The Retirement Equity Act of 1984 (a copy of which I still keep in my office) was designed to change all of that. By implementing the requirement of a spousal survivor annuity, a whole class of non-working spouses received protection which was desperately needed.  So in that speech to my friend's administrative staff, I asked them to take a broader view-if just for a moment- of the important task they were being asked to implement. It was valuable social policy with real, human effect which they were responsible for pulling off, and they should take a measure of pride in the work they were doing.

Things have evolved much over the years, and some of those same rules which provided such valuable protection have become the matter of great policy discussions centering on whether they are appropriately designed, and whether they can be modified in a way to accommodate new benefits like guaranteed lifetime income from defined contribution plans. But the point is that Congress sometimes gets it right, and there is very valuable social benefit often hidden in the day to day  "grunge" of administering what often seems to be silly rules.

Mom, by the way, is still alive and doing well.

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