* Except,of course for governmental 403(b) plans and non electing churches……
It is difficult to maintain the non-ERISA status of a 403(b) arrangement. Those who wish to do so really have to work at it, with the irony being that “working at it” just may be what triggers ERISA status for those plans. In essence, one must “work at” “not working at it.” Don’t worry, this makes sense to those who engage in these efforts.
The ability to maintain the non-ERISA status of a 501(c)3 – 403(b) plan seems to have dimmed considerably late last year when the DOL took an interesting position in a lawsuit it filed last year against a 403(b) plan administrator. The administrator regularly delayed depositing elective deferrals into a non-ERISA 403(b) plan for 3 or 4 months- a time period for which we would all agree is pretty egregious. What makes the case so striking (besides the fact that it is an enforcement effort by the DOL against a 403(b) plan, of which we have seen few) is that the DOL appears to condition the plan’s ERISA status on the “discretion” exercised by the plan administrator in failing to make timely deposits.
For some background, the non-ERISA status of a 403(b) plan is premised on employer “noninvolvement” in the plan. The challenge for these plans is that the IRS expanded employer responsibility for 403(b) arrangements in its 2007 regulations, making it tougher for an employer to exercise the authority needed to otherwise keep a 403(b) plan in tax compliance without also stepping over the line which would trigger ERISA status of a plan. The DOL issued a “safe harbor” regulation in 1974, 2510.3-2(f), under which it granted 403(b) “elective deferral only” plans an exemption from ERISA as long as certain conditions were met. These conditions were based on the principal of non-employer involvement in the arrangement. With the 2007 IRS regs causing more employer involvement, the DOL issued guidance in FABs 2007-2 and 2010-1 under which it further clarified how the safe harbor would now apply.
The DOL generally takes a jaded view of claimed non-ERISA status for these plans, asserting that most any discretionary control over a plan’s assets or administration would nullify the exemption. So, for example, discrete acts such as authorizing plan-to-plan transfers; approving the processing of distributions; approving hardship distributions, QDROs, and eligibility for or enforcement of loans are all seen as discretionary acts which are “inconsistent” with the use of the safe harbor. An employer taking on any of these responsibilities will generally be triggering ERISA status for the plan.
The lawsuit seems to be adding a new twist to the determination of ERISA status. What the lawsuit looks to be asserting is that a non-ERISA plan which otherwise complies with the DOL “safe harbor” guidance may become an ERISA plan if the employer mishandles employee contributions. This is because an employer which does not deposit elective deferrals into the plan “within a period that is not longer than is reasonable for the proper administration of the plan” (as required by the tax regulations), or within the period required by the plan document, can be viewed as excercising discretion that triggers ERISA status.
There are substantial implications to this. It is the rare tax-exempt employer which always deposits, without fail, employee contributions in the 3-4 day window now being required by the DOL. Though I have little doubt that the occasional failure is unlikely to provide a sound basis for claiming that the employer is exercising discretion over plan assets, and trigger ERISA status, there is some tipping point at which this will occur. So, for example, a pattern of late deposits (even not of the 3-4 month variety described in the lawsuit) might do it. Should the DOL continue with this approach, it may well incredibly limit the use of the ERISA “safe harbor” for a significant percentage of plans.
We described the lawsuit (including its name and citation) in an article for our latest quarterly newsletter we wrote for our “403(b)/457(b) Technical Requirements Handbook.” The Handbook is really an unusual and useful tool. Its written and organized as a “how to” book, instead of the typical technical manual which merely defines terms. Its focus is on the practical application of the 403(b) and 457 rules; a guide designed to be used by those who want hands on guidance to compliance with both the tax and ERISA rules. Most unusual of all, it comes with a both a quarterly newsletter discussing timely compliance issues and a quarterly update to the manual itself, making sure your resource is current.
We encourage you to try a free 14-day trial of the Handbook. We think you’ll like it.