It is not often that one gets to hearken back to the very basic law governing 401(a) plans in addressing an issue, but one of the key questions related to the funding of “ERISA Accounts” provides just such an opportunity. One of the most fascinating of the issues related to these accounts (and there are a number of them coming out of the woodwork as their popularity grows, as well as a number of thoughtful papers being written on these accounts) is the question of how long can the funds can remain in the ERISA Account before needing to be allocated to participant accounts.
We know that the IRS has taken a clear position on the timing of the “spend down” of a forfeiture account, and that funds in the forfeiture account must generally be allocated within the plan year that forfeiture is made (this rule, by the way, would not apply to 403(b) plans). But this is based on 401(a)(8) and the required treatment of forfeitures of contributions under 1.401-7(a)- and the ERISA Account deposit is not a forfeiture. We also know that the DOL has, at least on one occasion, deferred to the prudence standard (see, for example, FAB 2006-1) in managing these accounts.
We do know that a plan document needs to contain language outlining the management of the ERISA Account (and that the Account should be accounted for separately from the forfeiture account), unless the fiduciary is otherwise able to establish procedures under its general fiduciary authority. But what should be the standard under the Code that the plan should adopt?
I think the answer goes back to the “exempt purpose” rules which govern tax-exempt organizations. If I recall my research as a first year associate in Detroit with the good Rasul Raheem, Dr. Willard Holt, Richard Smart and Roland Bessette, under the tutelage of the fine Stan Kirk, the trust of a 401(a) plan is, after all, an exempt organization under 501(a), and the assets of a tax exempt organization are to be used in the fulfillment of the organization’s exempt purpose. The exempt purpose of a 401(a) trust is, of course, to provide a pension or profit sharing benefit exclusively for employees or their beneficiaries. So, hanging on to the funds in this ERISA Account for too long and not using them for providing this benefit or supporting the operation of the plan would be a failure to use the assets of the "exempt organization" in furtherance of the trust’s exempt purpose. This, ultimately, really leaves you with that “reasonable” period that the DOL suggests to be the standard.
This may also mean that there may not be a standard for a non-ERISA 403(b) plans (as they are neither not subject to 401(a) or the fiduciary standards of ERISA). Any effort to impose a standard would have to be related somehow to the failure to purchase an annuity for an employee. But that may not even matter, for the tax exempt organization would not be otherwise taxed on that amount anyway, and it is not an event which would disqualify the plan.
With 403(b) plans in mind, by the way, make sure the 403(b) ERISA Account is invested in mutual funds or in an annuity account, not just to some holding account at a financial institution. See my blog on “The Trouble With 403(b) Cash.”
I knew that research I first did years ago when trying to figure out how a pension fund worked would eventually turn out to be useful sometime…….
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