Evan and I spoke at the ALI-ABA’s Advance Law of Pensions this past week in San Francisco, probably the leading seminar for experienced employee benefit lawyers in the country. Our topic was "Getting Over The Hump," a 403(b) guide for the non-403(b) practitioner. We’re checking with ALI-ABA for permission to publish our paper and PowerPoint here.
One of the most difficult questions we received from the audience had to do with the counting of former employees for purposes of the 2009 Form 5500 (those "Lost Souls of 403(b)"), which 403(b) plans will need to file in toto for the first time. Follow this link to the DOL’s 2009 Form 5500 regs.
The question went something like this (with editorial license taken): a private tax-exempt employer has maintained a 403(b) plan for 25 years, under which 75 employees are currently eligible to participate (remember, here, the universal eligibility rules will really goose this number). The employer also has had, over its 25 years of maintaining the plan, 100 former employees who had left its employ owning individual 403(b) contracts (either custodial accounts or annuity contracts). The employer has never tracked these contracts, and now needs to know whether or not to include these former employees in their counts for the Form 5500.
This is a huge question, because the answer will determine whether or not an expensive audit will be needed for the plan year: if contracts for those "lost souls" need to be included, the participant count will cross the audit threshold of (generally) 100 participants; if the plan doesn’t need to count them, the audit will not need to be done. Its an important issue even for those for whom the threshold will not be crossed, as the totals will still be needed for inclusion in the shortened Form 5500 schedules, and the Form itself.
Regrettably, there are a whole host of other Title 1 questions which are also implicated.
One would hope that we could look to the IRS’s Rev. Proc. 2007-71 for guidance, to glean some sort of sensible ERISA answer which would be consistent with the Code: perhaps if you don’t need to track the participant’s contract or account for tax compliance purposes, you wouldn’t need to include it in plan counts for ERISA purposes. This, though, has its odd results: the inactive contracts issued prior to 2005 would all be excluded, and inclusion of those in the 2005-2009 "transition" period would depend upon whether they were for active or former employees and whether a good faith effort has failed. Given the difficulties and ambiguities surrounding the implementation of 2007-71, this Rev. Proc. will not provide a testable, objective standard which would pass an auditor’s scrutiny.
A clearer answer is likely to be found in using the DOL’s traditional analysis of what constitutes a "plan asset" for its regulatory purposes. The DOL has consistently ruled in the past that "in situations outside of the scope of the plan assets-investments regulation, the assets of a plan are to be identified on the basis of ordinary notions of property rights," Advisory opinion 92-22A. See also 2005-08A, and 2003-05A.
So, it would seem that you would need to look to the terms of the annuity contracts and custodial accounts of these former employees and make a determination if the particular contract fell within the "ordinary notions" concept. To me, this is particularly attractive because it uses an existing "structure" to address the tough issues for employers like the one in my example, who may have no idea if any particular contract even exists any more. It also may provide a method by which to sanely determine whether an individual annuity contract, a certificate under a group annuity contract, an individual custodial contract or an interest in a group custodial arrangement should be covered: that is, look at their terms and the legal rights they convey, not merely at the "type" of arrangement it is.
There is no doubt a bit of tweaking will need to be done to make this work in the 403(b) context-including developing protections to avoid excluding active contracts, and how to deal with plan terminations. But the DOL has addressed odd issues before, noting in footnote 2 to Advisory Opinion 94-31A that they can be informed by their ability to further develop the "common law" of ERISA when dealing with the definition of "plan assets."
Important participant rights can be protected in the same manner as under terminal funding annuities or under plan distributed annuities (about which we have blogged). It would be also helpful if whatever the DOL comes up with was recognized by the IRS as representing the same "pool of lost souls" against which the tax compliance rules would apply.