Code Section 402(g)(7) seems to have a gift for certain 403(b) plan sponsors (that is, for “qualified organizations, being educational organizations, hospitals, home health service agencies, health and welfare service agencies, churches, or convention or association of churches): the annual elective deferral limit for participants in these plans with “15 years of service” with the qualified organization can be as much as $3,000 greater than the existing limit for everyone else, up to a lifetime maximum of $15,000.

When you are restating your 403(b) plan documents, and you come across this election, your first impression may well be “why not? What a great benefit for the more senior employees!”

You should, however, pause at that moment, and consider the details of what it takes to be able to support providing this benefit. It’s not what it seems to be, and it truly has become an “attractive nuisance.”

An attractive nuisance is a term used in personal injury law to describe a dangerous circumstance on one’s property–such as a deep pool or pond–which will be attractive to children. If the property owner has not taken precautions to prevent children from accessing that “nuisance ” that owner may be liable for any harm done to that child who then jumps in that pond and is hurt.

The 402(g)(7) “long service catchup” is of that character. At the very least, it’s a terrible trap for the unwary. It is a benefit which is virtually unsupportable except for those employers with sophisticated payroll systems which have also been programmed over an extended period of time to calculate and store the data needed to provide this benefit.

The devil, as in all else 403(b), is in the details:

  • 402(g)(7)(D) requires that the definition of “years of service” which is to be used in calculating the 15 year catchup is the “meaning given to such term by section 403(b).”
  • 403(b)(4) provides  the definition of years of service for 403(b) plans. It only has a passing similarity to the “years of service” used for vesting and participation under sections 410 or 411, or even under ERISA Title 1. One must count:
    • one year for each full year during which the individual was a full-time employee of the organization purchasing the annuity for him, AND
    • each fraction of a year for each full year during which such individual was a part-time employee of such organization and for each part of a year during which such individual was a full-time or part-time employee of such organization.
  • 1.403(b)–4(e) provides the special rules for computing the fractional “work periods” to be used in computing the 15 year catch-up (they are extensive, some 1435 words).
  • 1.403(b-2(b)(11) then provides the special rules for determining the participant’s “includible compensation,” which must be used to determine the 415 limitation on those long service contributions, which is different than the general compensation rules used elsewhere in the plan for all other purposes.

Why does this all matter? Because no employer that I’ve ever encountered actually collects and properly calculates both partial years of service and includible compensation for those periods, nor has the ability to do so (though I’ve little doubt there may be a handful of employers which do)-and I suspect the IRS has also found a lack of documentary support for these calculations in its reviews. And, yes, if you’ve adopted this rule, the Service will ask for this data on audit if you have elected the benefit.

Which is why you should pause before checking that box adopting the 15 year catch-up. If you do not have the data to establish the eligibility for the benefit, you will then suffer a CAP penalty on audit.

Our advice always is to be not misled: the long service catch-up can only be best described as an attractive nuisance. Just don’t do it.

I would also like to send a shout out to the Treasury and IRS’ staff who participated in the 2019 ABA Joint Fall Tax Meeting this past week. I do this not to curry favor, in the same way I do not seek to demean in my  technical critiques of their work over time. I left the meetings with the impression that we do need  pause to recognize the  work they do from time to time. It is complex and demanding, and they are incredibly good at it.  Balancing  competing (and very serious) policy and statutory concerns while drafting language which must also prove to be useful to sponsors, participants and vendors is no mean feat. They represent “good government” in an era where it seems that the notion of  public service is too often trampled upon. A tip of the hat to you all.




Minutiae. Thats what I try to explain those who continue to claim that 403(b) plans are “just another form of 401(k) plan;”  and is just what the drafters of the 2007 403(b) regulations did not wholly grasp when they tried to fundamentally reshape 403(b) plans to try to make them “just like” 401(k) plans. Its the small rule differences which make 403(b) plans so difficult to understand and handle on systems which are geared to administer 401(k) plans. It is those small differences upon which we really rely in trying to figure out solutions to the inevitable problems which arise when you actually try to run these plans.

The definition of “student” is just such a case in point. “Student ” status means nothing in the 401(k) world, but it is one of the few classes of employees  which can be excused by employers from the universal availability rule  of 403(b) plans. Student employees do not have to be given the opportunity its to make elective deferrals into the 403(b)-and given the often transient nature of student employment at colleges and university, this is a welcome exclusion.

But it is not everything it appears to be, and the details of this rule are often overlooked by  school plan administrators who are responsible for completing the plan documents. Code Section 403(b)(12((ii) limits the exclusion  to those “performing services described in section 3121(b)(10)” . This is the Student FICA Exemption, where any compensation earned by these employees is not considered “wages” for FICA purposes. These are effectively student employees earring compensation related to their field of study, but there is an extensive list of requirements which the IRS well describes. Effectively, for 403(b) purposes, you can exclude from deferrals those same students whose compensation is also excluded from the social security rules. There is  the added caveat that your exclusion of these students is subject to section 410(b)(4), which requires uniform treatment of that class-you can’t let some in and some not.  And finally, this is not an exclusion from from the non-discrimination rules for employer contributions, especially if your definition of compensation is W-2, not 3121….

Those organizations which do take advantage of the Student FICA Exclusion are often well versed in its use, but that knowledge may or may not spill over into those responsible for making plan document choices under the 403(b) plan. It is too easy sometimes to simply choose that exclusion without recognizing the details of that exclusion-especially when the employer is also choosing to exclude “students” (and not necessarily just those with the FICA exemption) from receiving any employer contributions, and may want to exclude all student employees from making elective deferrals.

The practical impact of this limited student employee exception is that employers do need to track most student employee hours, and need to keep them under the 1000 hour/work l less than 20 hours per week requirements if you wish to exclude them from the plan. And then you need to remember to apply the once in always in for these non-excludable student employees-which often comes into play when student s are pressed into service for either major projects or for overtime during summer employment. You also need to remember to elect separate treatment for FICA Exempt student employees than non-FICA Exempt student employees when completing the adoption agreement for the 2020 required 403(b) plan restatement.

Watch the Western Pension Benefits and Benefits Council webinar page for an upcoming presentation by Evan Giller and I, which will be sometime in the week  October 21(I think!) focusing just on this sort of significant minutiae.

Chris Carosa, Chief Contributing Editor of the Fiduciary News, consistently publishes valuable information related to implementation of the fiduciary’s obligations. Chris’s articles are insightful,  bringing a fresh angle to the often intractable fiduciary issues we or our clients daily face. However, I found that his August 27 article entitled “Did Business Roundtable Just Break a Fiduciary Oath?” deserves a response-especially since I was already in the midst of writing a blog on the Business Roundtable’s press release.

The Business Roundtable issued a press release  on August 19 signed by the CEOs of the largest companies in the U.S. outlining a “Statement on the Purpose of a Corporation .” In it, the CEOs outline a ” modern standard for corporate responsibility” or, as Jamie Dimon, CEO of JP Morgan Chase and the Chair of the Business Roundtable stated, “Major employers are investing in their workers and communities because they know it is the only way to be successful over the long term.”

So just why is it both Chris and I undertake to address this issue on retirement plan related sites?

Simply put, Chris passionately feels that these CEOs are abdicating their fiduciary responsibilities to their shareholders by investing corporate assets on the basis of “social responsibility.” In addition to the question of similar fiduciary standards which may apply to the ERISA context, he also raises the question whether it creates problems for investment advisers to recommend investing in these companies.

This really does fall squarely into the ESG discussions which have been raging recently, with the current administration being concerned about retirement plan fiduciaries engaging in shareholder activism based on “social responsibility.”

My take is much different than Chris. I not only believe that the Business Roundtable has it right, but it is a position that properly frames the issues for the ERISA  investment fiduciary: prudent  assessment of an investment must take into account a broader view than the narrow financial analysis of the books and records of the company, or of current market pricing. Particularly for ERISA fiduciaries, the investment standard is long-term, to provide retirement income. Any valid, long-term  analysis has to be able to take into account the social, political, market  and scientific trends which will inevitably affect the investment’s value. There is a point at which “social responsibility” and good business have a strong comity of interests, and the Business Roundtable recognizes that. My favorite example of this is the 2010 interpretive guidance related to climate change published by the SEC with the following statement:

This interpretive release is intended to remind companies of their obligations under existing federal securities laws and regulations to consider climate change and its consequences as they prepare disclosure documents to be filed with us and provided to investors.

It is not only appropriate, but necessary, to understand that the plan’s investments do not operate in a vacuum, that they often will be internalizing the costs of the “non-business” markets in which they must operate.

The DOL, on the other hand, has taken an extraordinarily narrow view on an investment’s value and the lack of import of “social issues” on investment decisions at least since 1989.That year, the DOL took it upon itself, without the request of any party, to issue a warning letter (the now infamous “Polaroid Letter”) to the fiduciaries of the Polaroid Plan.  Polaroid was engaged in a proxy fight  over the takeover of the company. The Polaroid ESOP held a substantial percentage of the company, shares of which were largely allocated to the accounts of union members. The plan also provided for pass through voting rights to those participants. Participants voted overwhelming against the take-over, and against the tendering of the Plan’s shares. The DOL sternly reminded the fiduciaries that they could not honor the voting results of the participants if their vote resulted in an imprudent action.

The Polaroid matter is now known for the litigation which followed, of course, and for the issue of whether or not and under what circumstances should a plan document’s terms be disregarded. At the time, however, it was a much different issue that was contentious: the DOL made it clear that the impact on workers and communities of a hostile takeover of a company cannot be considered in making the fiduciary decision of valuing an offer on the investments. The fiduciaries must only look to the financial statements at the time of the deal, and extraneous facts cannot be considered.

I was in-house ERISA counsel at Kellogg company at the time, in Battle Creek, Michigan, and knew first hand of the economic issues of a Fortune 100 company in a small town in a rural region of Michigan. I also had a front row seat shortly thereafter at Lincoln Financial Group in Fort Wayne, Indiana, where I provided ERISA support in their corporate transactions. The success of these companies were closely tied to that of the workers and of the surrounding communities. Indeed, that was the time period of the brutal corporate takeovers engineered by firms the  likes of KKR (remember Kohlberg Kravis Roberts & Co.?) which would rely upon their own version of economic analysis, and then dismantle companies, sell off their pieces, often send them deep into debt, ultimately destroying those companies-and the communities in which they operated-for the benefit of a small number insiders. Though I’ve not done a review of the business  literature related to that period, I have little doubt that the destruction wrought by those firms on the “investments” they purchased will be demonstrably not in the long term best interests of these companies and those which invested in them.

This really does have current applicability in the current discussions on economically targeted investments, the so-called “ESG” rules.  Of course, making investment decisions based solely on social or political notions without regard to the “economics” is clearly imprudent. However, it is also prudent to include non-traditional factors in any “economic” analysis, including the value of those investments and their viability related to the communities (and the impact on its workforce)  and markets in which they operate.


It has now been a dozen years since the IRS issued Revenue Procedure 2007-71, which was written in response to the logistical difficulties which arose from the mammoth changes imposed by the 2007 changes to the 403(b) regulation. That regulation imposed substantially new responsibilities on 403(b) plan sponsors, including the employer’s need to track and be held accountable for all 403(b) contracts which had ever been issued under that 403(b) plan. Considering that some of these plans have been around since 1919 or so; that many of these plans have permitted a large number of vendors to peddle their individual contracts to their employees; and given that many of the vendors never had any legal relationship with the employers themselves; these regs created a very serious problem.

This problem was exacerbated by the DOL, which revoked its long-standing Form 5500 exemption for 403(b) plans following the new IRS regs. That exemption had  permitted ERISA 403(b) plans to merely file what was in effect a “registration statement” (as required by the Tax Code), and did not require an IQPA audit for those plans with 100 or more participants.

So then there were two pretty serious problems. The first was a basic compliance problem:  dealing with potentially generations of 403(b) legacy vendors with whom employers had no connection. The second was the Form 5500: how was a financial statement supposed to be put together when the employer never had a clue as to whether some of the contracts even existed, and then all of those past contracts would be counted toward the 100 participant level for audit purposes.

Rev Proc 2007-71 offered a great deal of relief, to which the DOL also (partially) acquiesced-though employers and professionals often seem to have forgotten about it today. Any contract issued before 2005 and to which no contributions were received after December 31, 2004, could be completely ignored for 403(b) compliance purposes. Any contract issued between December 31, 2004 and before January 1, 2009 could also be excluded by for tax compliance purposes, as long as no contributions were received into that contract after December 31, 2008, and the employer made a good faith effort to establish a connection with that vendor.

The DOL agreed to apply that same rule to its Form 5500, including agreeing to exclude those now “exempted” contracts from the participant count for the IQPA audit purposes. The exception: the DOL has stated that those contracts are still subject to ERISA; the exemption only extends to the ERISA reporting requirements. This differs from the IRS approach, which exempts those contracts for all 403(b) tax compliance purposes.

The value of this  Rev Proc endures; and is particularly helpful when plans restate their 403(b) plan docs and need to do things like name their vendors;  have Information Sharing Agreements; and try to make plan redesign decisions.

I encourage all those who have forgotten about this Rev Proc to pull it out: it may solve many of your plan problems.

The question for the IRS now, as one 403(b) expert raised with me, is whether there really is any value in maintaining the different treatment  between the pre-2005 legacy contracts and the 2005-2009 legacy contracts, and whether those 2005-2009 contracts should also enjoy that same broad exemption without any requirement to prove the “good faith effort” of over a decade ago.  No funds have gone into these contracts for well past any Tax or ERISA statute of imitation (except, of course for outright fraud), and there may not even be any sponsor staff around anymore which could attest to what “good faith efforts” were undertaken. It would simplify tax administration, and permit plans to no longer waste any time in dealing with these legacy vendors which have no impact on the plan today.



If you talk to anyone who is working on pension legislation, they all will tell you that the provisions of RESA and the SECURE Act are as sure a thing as there is in DC; that their passage is not a matter of “if” but it’s just a matter of “when.” MEPs and “Group” arrangements (which permits unrelated employers on the same platform to file a consolidated 5500)  are critical pieces of that legislation. It is pretty clear that that these will soon become a standard part of our regulatory framework.

However, as I have mentioned in previous blogs, MEPs are hard to do, and Group arrangements have their own detailed challenges which will need to be addressed by service providers. Achieving scale in the small plan marketplace takes a healthy and specialized skill set.

It’s not just going to be challenging for benefit professionals: the IRS the DOL are also going to have a number of challenges in regulating them (see, as just one example, my blog on the IRS 403(b) MEP issues).  The promise of the advantages of scale offered by these new arrangements may be valuable, but  it involves the regulators translating rules, procedures, investigations and audits generally applicable on an individual plan into some sort of combined plan basis as a normal part of its activities.  I suspect this will call for a number of new regulatory protocols.

Which explains in large part  the DOL’s new Field assistance Bulletin, 2019-01. MEP sponsors have been required since the 2014 plan year to report certain information on all of their participating plans on the MEP’s Form 5500.This includes

  • the name of each participating employer,
  • each participating employer’s EIN; and
  • a good faith estimate of each participating employer’s percentage of total contributions to the MEP for the year.

Employers with account balances in the plan would have to be listed even if they had no contributions for the year. The attachment to the Form 5500 has to be labelled “Multiple Employer Plan Participating Employer Information.”

The DOL now reports that it surveyed 386 MEPs for the 2016 plan year and found that 101 of them were “non-compliant” with the MEP reporting requirements. Typical violations included replacing employer names with abbreviations or numbers (such as “Client 1”);  reporting only the last 4 digits of the EIN;  providing no information, stating instead that “information to be provided upon request;” or  incorrectly identifying the PEO as the only participating employer.

The new FAB is designed to address these reporting issues, and the relief is generous one: anyone failing to properly report in prior years will have a pass, as long as they properly report the MEP data on the 2018 Form 5500. Given that the deadline is now upon us, the DOL will grant a special extension of time to file a MEP’s 5500 until October 15, 2019- without the filling of a Form 5558. If a plan has already incorrectly filed for the 2018 plan year, it may file an amended return by October 15. There is a catch: this relief is dependent upon the MEP sponsor providing the missing data from past years at the DOL’s request.

The most telling stories about this FAB are that (1) it establishes the data  groundwork that both the DOL and the IRS need to determine what requirements will need to be imposed when RESA and SECURE (or their successors) eventually pass; and (2) for those who argued that this data is somehow an unwarranted imposition of an administrative burden on MEP operations need to be prepared, I think, for a substantial new set of regulations over time designed so that the agencies have sufficient information to fulfill their mandate.

MEPs and Group arrangements are not “solving” for regulatory exposure. They are “solving” for fiduciary and administrative expertise, which is typically unavailable to small sponsors, along with manageable audit costs and well priced (and availability of ) investments.




The regulatory scheme governing the registration and sales of securities and the regulatory scheme governing retirement plan investments have historically developed separately from each other. The SEC and the U.S. Department of Labor’s Employee Benefits Security Administration (the “EBSA”) had worked independently of each other for decades, with their regulatory paths only occasionally crossing. Indeed, not only had there been little coordination between the SEC and EBSA, there had always been a bit of regulatory animosity between the two agencies.

The compliance marketplace has likewise developed separately, as the typical securities compliance staffs in financial services organizations have minimal relationship with the ERISA compliance staffs. The word “compliance” actually has greatly different meanings for the two different kinds of staffs.

It seems like ancient history now, but in 2008 the DOL and SEC began to address this with a formal Memorandum of Understanding Concerning Cooperation Between the U.S. Securities and Exchange Commission and the U.S. Department of Labor” (the “MOU).   This MOU resulted in the regional offices of the EBSA establishing regular and continuing relationships with their associated regional SEC Office on matters which “would be of interest to the other regulator in fulfilling their respective regulatory responsibilities”- occurring where either organization found themselves dealing with bad acting retirement plan advisers and broker-dealers.

The MOU covered several activities:

  • Regular Meetings
  • Points of Contact
  • Training
  • DOL Access to Non-Public SEC Examination Information
  • SEC and DOL Access to Non-Public SEC and DOL Enforcement Information.

I  encourage you to read the entire MOU. It really is pretty extensive. The processes implemented over 10 years ago are still very much working in at least a number of EBSA offices, with regularly scheduled meetings and the establishment of long term relationship between the personnel in both agencies.

The MOU could not, however,  address the substantial differences in the rules governing how either agency has dealt with retirement plan advice and product sales. Though they each sought to protect investors and plan participants, their activities continue to be disjointed by their very nature. Corporate compliance staffs, likewise, have generally continued to  reflect this disjointedness.

It is worth now considering, however,  the impact of this MOU on fiduciary enforcement with the publication of the SEC’s new Reg IB on fiduciary duties and the suggestions from EBSA that a a new fiduciary rule will be closely related to that of the SEC.

What will happen where you have two broadly empowered federal agencies working from what may be the same playbook (or at least very similar ones), where you already have a well established, coordinated cross-enforcement structure in place? It would seem that the potential is there for a substantial impact.


The Department of Treasury has fulfilled its portion of the directive under Executive Order (the “EO”)13847 by issuing its proposed regulation giving relief to under the “one bad apple” rule.

That EO had two MEP directives: the DOL was directed to propose regs which we permit unrelated employers to adopt MEPs (which it has done); and the Treasury was directed to issue rules which would prevent the disqualification of a Multiple Employer Plan under Code Section 413(c) should a single member of the MEP act in a way which would otherwise disqualify the plan. This is commonly referred to as the “one bad apple” rule, which has been cited as one reason small employers would not join a MEP-and thereby miss out on the advantages of scale. The IRS now refers to this as the “unified plan” rule.

Why the “unified plan” problem even occurs is because of the nature of the Tax Code’s MEP rules: each employer participating in a MEP is required to comply with the vast majority of the 401(a) rules as if they were in a stand-alone plan. However, if one participating employer in the MEP  is out of compliance, all of the employers risk the penalty of disqualification.

Sounds pretty draconian doesn’t it? Maybe not, because this rule has had a minimal practical effect. A senior Treasury official and I once were ruminating on this, and we both agreed that neither of us had ever seen a complete MEP disqualified because of it. Think about: when is the last time you’ve seen any plan disqualified?

The real issue with “bad apples” is the manner in which EPCRS applies. So, self-corrections (SCP) work well for most MEP issues, and the IRS’s newly proposed reg relief won’t impact that. The IRS has already covered MEPs for VCP, with the VCP sanction (which is the filing fee) being limited to that computed on the size of the “bad apple” employer, not on the entire plan. Even then, however, with the IRS’s substantial reduction in VCP filing fees for larger plans, VCP is a very affordable option even without relying on the EPCRS MEP relief.

This leaves CAP, which seems to where the rubber hits the road. The floor for sanctions under CAP for the MEP will, according to EPCRS, be the filing fee under VCP (though the IRS is now seeking a multiple of that fee as a CAP minimum). The real MEP problem is in the calculation of the “Maximum Payment Amount,” which includes the taxes which would be paid on all of the MEP assets, and the tax deductions of all the employers in the MEP.

But even the impact of this is limited by the  instructions under EPCRS for the CAP penalty. Part VI, Section 14 of EPCRS states that the ultimate sanction is a negotiated amount:

“If a failure (other than a failure corrected through SCP or VCP) is identified on audit, the Plan Sponsor may correct the failure and pay a sanction. The sanction imposed will bear a reasonable relationship to the nature, extent, and severity of the failure, taking into account the extent to which correction occurred before audit.”

EPCRS then lists a number of factors which come into play, which significantly argue for a penalty based solely on the impact of the “bad actor.”

The IRS has also treated MEPs well over time, and we  should not ignore the informal history of the broken MEP. The idea of being able to disgorge a bad actor from a MEP to preserve the MEP was the informal position of the IRS for years, as repeatedly explained by Dick Wickersham. Once Wickersham retired, so did this position.

My point in all of this? Yes, the proposed reg is welcome, of course, as a purely technical and structural matter. But the relief may be mostly illusory. The “bad apple” problem has always sounded worse than it is and may have been able to be  fixed by a simple adjustment to the Maximum penalty Amount rules under EPCRS, and to the rules as to who should be responsible for that penalty. The IRS may want to consider this change in any event, particularly where spin-offs don’t occur for any number of practical reasons.

The proposed reg is far from the panacea that the promoters may have you believe it is. This is most apparent in the proposed protocols for spinning off a bad actor. The most difficult logistical and legal challenges facing MEPs (OK, other than the DOL’s rules on “employers”) are in the forced spin-off of a recalcitrant participating employer. The IRS proposal only really addresses small part of what actually happens under these circumstances-all of  which will eventually need to be addressed. This may take a significant regulatory effort, especially if RESA/SECURE become law.

As the restatement process for 403(b) plans continues on, a familiar “vestige” of certain past practices of a major vendor continues to bubble its way to the top. That “vestige” is the 403(b) “Money Purchase Plan.”

It is a very common practice in the 403(b) market for an employer to specifically identify the percentage of compensation it will deposit as an employer contribution to their 403(b) plan: percentages as high as 8, 10 or 12% are not uncommon, especially in higher education. There had been a raging debate in the past as to whether or not this practice of identifying a specific percentage of compensation as the employer formula made the plan a “money purchase plan.” It has been typical for 401(a) plan sponsors to treat plans with set percentage of compensation as “Money Purchase Plans”, where the employer has not reserved the right to, instead, make it a discretionary profit-sharing contribution. But does this rule apply to 403(b) plans?

This is not an esoteric issue. If you truly believe that your 403(b) plan is a “money purchase plan” several things happen. What do you do if you want to merge this plan with another 403(b) “voluntary only” plan which many employers have maintained side by side with the money purchase plan? Can you merge them, and what are the recordkeeping requirements when you do? What rules will apply to this new plan? Most importantly, the joint and survivor and spousal consent rules would apply to money purchase ERISA 403(b) funds because the normal form of benefit under such plans is an annuity-which typically does not otherwise apply to the voluntary only plan with which it is merging. Even with no merger,  do the J&S rules carry on into the newly restated document?

It really had seemed like this issue has faded into obscurity, especially with most 403(b) prototype documents avoiding this issue all together. However, practitioners are now occasionally faced again with this issue as they restate their 403(b) docents to the new volume submitter/prototype documents. What do you do if the plan has been identified in the past as a money purchase plan, and the plan document follows the money purchase rules? And what if you run into an insistent vendor claiming that your plan is a money purchase plan?

I, personally, have always been of the thought there is no such animal as a 403(b)-money purchase plan. Code Section 401(a)27 requires that you specifically identify a plan as either a profit-sharing plan or a money purchase plan as a condition of qualification. However, 403(b) has no such rule, and there is no reference in 403(b) to 401(a) 27. There is no mention of it in the regs, and the only reference in the preamble to the 403(b) regs state that 403(b) plans are NOT subject to the money purchase distribution rules. Under ERISA 205, the J&S rules will apply if the Code’s minimum funding standard applies. But the Code’s minimum funding standards do not apply to 403(b) plans.

I suppose there is an argument that a 403(b) plan sponsor can opt into money purchase status, and thereby elect application of Code Section 412, but I’m not quite sure how you would do this. Nonetheless, there are still some who are insistent.

The practical answer is to pay attention to the J&S rules as contained in the underlying investment contract as you restate the document. Many of the contracts funding these plans require application of the J&S and consent rules as a matter of contract-not as a matter of law. Given that the 403(b) plan document incorporates the terms of the underlying contract as being plan terms, you will need to honor that rule-but only with regard to those investments.

This also means that you may want to consider being able to merge an old “money purchase” with that “voluntary only” plan, without having to carry over and track these J&S rules for the new plan’s assets other than for those transferred. Transferring those assets to a merged plan would not typically need participant (or spousal) consent, even in participant controlled contracts. But you likely will still need to follow the contract’s spousal consent and J&S rules on those transferred contracts-whatever they may be-but  only as a matter of contract, not as a matter of law.


Any discussion on any tax issue addressed in this blog (including any attachments or links) is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code or promoting, marketing or recommending to another person any transaction or tax-related position addressed therein. Further, nothing contained herein is intended to provide legal advice, nor to create an attorney client relationship with any party.

The Portman-Cardin Bill, the Retirement Security and Savings Act – 2019 introduces sweeping changes to 403(b) plans by expanding their investment universe. These changes, however, also required modification to the Securities Laws otherwise applicable to 403(b) plans in order for them to work. A few critical issues have gone unanswered in the legislation, and there are a number of transition issues which we will have to be addressed.

Technically, the Act expands 403(b) custodial account investments, permitting them to hold interests in 81-100 group trusts as well as mutual funds. (An 81-100 trust is a reference to Rev Ruling 81-100 which, as later expanded, permits the common investment of 403(b) funds and 401(a) funds in the same investment trust vehicle. It can include collective trusts). This change only works, as a practical matter, if the 81-100 trust is subject to the same securities law rules as 401(a) plans. Securities laws have always exempted 81-100 group trust interests issued in connection with 401(a) plans from registration. But that exemption has never applied to trust interest issued in connection to 403(b) plans. This has meant that any collective trust (such as those providing stable value funds or ETFs) would have to go through the expensive and burdensome process of registering (and maintaining itself) as an investment company subject to the Investment Company Act of 1940, the Securities Act of 1933 and the Securities Exchange Act of 1934.

The method the Portman Cardin drafters  chose to make this work is to introduce fundamental changes to the securities laws as they apply to 403(b) plan-across the board- effectively making all of the security law exemptions which have been available in the past to 401(a) plans also available to 403(b) plans.The practical effect? Should the legislation pass, 403(b) plans which (i) are governed by ERISA; (ii) if not an ERISA plan, the employer sponsoring the plan agrees to serve as a fiduciary with respect to the investments made available to plan participants; (iii) or is a governmental plan will be treated like 401(a) plats for Securities Law purposes. On a simple level, this means that the following investments would now be made available under 403(b) plans, where they have not been available in the past:

  • non-insurance stable value funds (these are largely funded by 81-100 collective trusts;
  • ETFs, which are also largely funded by 81-100 collective trusts;
  • non-registered separate accounts under group annuity contracts-of the sort typically purchased by 401(k) plans; and
  • because the 81-100 trusts are not required to own mutual funds, equity-based CITs will now be available as investments.

It also solves the “cash” problem 403(b) plans have always had. There has never been a simple way to handle stray cash in a 403(b) plan before this.

Simple seeming measures which are narrowly focused (here, it’s clear that collective trust interests have been the focus), often have unintended consequences when you take a broader view. A few things are conspicuously absent from the statute:

Who is the shareholder?  Exemption from registration is one thing. However, these newly authorized non-registered investments are still securities, still subject to a number of securities laws (for example, certain anti-fraud provisions). It has been a long-standing position of the SEC that the 403(b) individual participant is the shareholder who is protected by securities laws, even under group custodial accounts and group annuities. This is unlike 401(a) plans, where the SEC has traditionally viewed the plan fiduciary as the shareholder. This has forced prospectus, evergreen and proxy delivery to the individual 403(b) participant itself. Failure to comply with this rule is expensive: participants not receiving these disclosures are entitled to a 12-month put on their investments.

Portman Cardin needs to address this. If not, even under the new rules which do not require registration, the collective trustee (or the insure of the non-registered annuity) may still owe substantial legal duties to the individual participants under securities laws. Besides not addressing a long-standing securities law issue for 403(b) plans,  this could conceivably cause  a reluctance to engage in this new 81-100 business if this issue is not addressed.

Unitization under 403(b). The IRS has never answered the question as to whether or not you can pool permitted investments within the 403(b) plan and unitize that pool. For example, if you were to create an asset allocation model within the plan using the plan’s mutual funds and collective trusts, and created a daily value on that model, the new law pretty much makes it clear that that the pool will not have to be registered as an investment company (under current law, it has to be registerred unless you meet Rule 3a-4-and this another story). But it is nowhere clear that this unitization would pass muster under 403(b), as the unit of the pool would not be an 81-100 pool, it would not be a mutual fund and it would not be an interest in an insurance company separate account. Portman Cardin can simply address this.

Distributed annuities. The variety of law changes under RESA, SECURE and Portman Cardin put into play a number of rules would promote the distribution of annuities to provide lifetime income-including, for example, the authorization of the variable annuity QLAC. This used to be simple under 403(b)s, as they would all be registered. But what happens when you purchase a non-registered variable annuity within the plan, and then distribute it? Does it have to be registered? It does get complicated for the plan. Portman Cardin forces the issue, as we will have to address  this same problem in the 401(a) space.

Finally, there are a whole host of transition issues (well beyond the simple matter of collective trust registration) which really need to be vetted-and which typically are vetted through the regulation process. This will include answering intriguing questions related to how this would operate in state university and K-12 403(b) plans, which may have no fiduciary; won’t be subject to ERISA; but are governmental plans exempt from both ERISA and securities law registration. What investment information will participants now be required to be given?

Something which directs the SEC, IRS and DOL to draft regulations which address these issues would be helpful, as there certainly will be  a number of significant ones which arise- and the SEC seems to have been much more reluctant to issue regulatory guidance than the DOL and Treasury have in the past.



For all the noisy support being generated for the changes to Multiple Employer Plan arrangements in RESA and SECURE, little notice is being given to the provisions which are likely to have a much more meaningful impact on the ability for smaller plans to obtain the advantages of scale: the rules permitting the “Combined Annual Report for Groups of Plans.”

These rules are based upon old DOL regulations called “Group Insurance Arrangements (or “GIAs) for welfare plans under 29 CFR 2520.104-21, which permit unrelated employers on the same insurance platform to file a single Form 5500.  Under the proposed statutory language, retirement plans participating in a group arrangement could rely upon a single annual report filed by the common Plan Administrator, subject to requirements similar to that required of the GIA under 2520.103-2. This includes a single audit report by a single IQPA selected by the Plan Administrator.

Why is this going to be more impactful than MEPs?

Well, MEPs are hard to do. They are odd arrangements, subject to their own terms and conditions. In addition to the cross counting of years of service between participating employers, they require a centralized authority under the control of the members. It is also quite a task to remove an uncooperative MEP member.

Fintech provides us an out from all of this. Advances in technology really do permit us to aggregate plans on combined platforms in ways which replicate MEPs-without the arrangement actually being a MEP. Aggregating plans enable you to avoid all of those  problems that the MEP language in RESA and SECURE is awkwardly trying to address; and you avoid the logistical problems inherent in MEP operations.  You can aggregate plan documents, service agreements, investment platforms, investment advice all in a well priced package providing those advantages of scale which so often elude small plans.

The one thing that fintech CAN’T fix, however, is that each of the plans in the arrangement must currently file their own Form 5500s.  The RESA and SECURE language fixes this by allowing these arrangements to file a combined 5500. I suspect that this arrangement will be more welcome in the TPA community than a MEP. The central fiduciary under these arrangements is actually the Plan Administrator, not a lead sponsor, and the arrangement (except for the common Plan Administrator) already mirrors many of the existing  business practices of TPAs.

Here’s the proposed statutory language from SECURE, which is similarly found in Section 202 of RESA. It is striking in its simplicity, especially when compared to the MEP provisions:


(a) IN GENERAL.—The Secretary of the Treasury and the Secretary of Labor shall, in cooperation, modify the returns required under section 6058 of the Internal  Revenue Code of 1986 and the reports required by section 104 of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1024) so that all members of a group of plans described in subsection (c) may file a single aggregated annual return or report satisfying the requirements of both such sections.

(b) ADMINISTRATIVE REQUIREMENTS.—In developing the consolidated return or report under subsection (a), the Secretary of the Treasury and the Secretary of Labor may require such return or report to include any information regarding each plan in the group as such Secretaries determine is necessary or appropriate for the enforcement and administration of the Internal Revenue Code of 1986 and the Employee Retirement Income Security Act of 1974.

(c) PLANS DESCRIBED.—A group of plans is described in this subsection if all plans in the group—

(1) are individual account plans or defined contribution plans (as defined in section 3(34) of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1002(34)) or in              section 414(i) of the Internal Revenue Code of 1986);
(2) have-

(A) the same trustee (as described in section 403(a) of such Act (29 U.S.C. 1103(a)));

(B) the same one or more named fiduciaries (as described in section 402(a) of such Act (29 U.S.C. 1102(a)));

(C) the same administrator (as defined in section 3(16)(A) of such Act (29 U.S.C. 1002(16)(A))) and plan administrator (as defined in section 414(g) of the Internal Revenue Code of 1986); and

(D) plan years beginning on the same date; and

(3) provide the same investments or investment options to participants and beneficiaries.

A plan not subject to title I of the Employee Retirement Income Security Act of 1974 shall be treated as meeting the requirements of paragraph (2) as part of a group of plans if the same person that performs each of the functions described in such paragraph, as applicable, for all other plans in such group performs each of such functions for such plan.