The DOL Advisory Opinion 2018-01 on the Retirement Clearinghouse shows the challenges presented by auto-portability in general, and specifically in the use of these types of IRA programs to accomplish it. The specific program, as described in the Advisory Opinion sets up a series of automated transfers of those “small amounts” forced out from retirement plans and into IRAs.  Ultimately, the program’s goal appears to be to prevent leakage of those small amounts by using fintech to facilitate those forced rollovers following the participant from employer to employer.

One of these steps in making the program work is the “automated” transfer from the “forced out” IRA into the new employer’s plan of the IRA owner, which the system found.

Here’s the difficulty, which is inherent to bulk IRA programs: IRAs are individually owned investment contracts, which are under the control of the former participant-even though they are set up by the former employer.  The program attempts to be able to make the transfer transfer to the new plan from the IRA through a “negative consent” notice and approval process. The participant will be notified of the transfer and, if they do not object, the funds will be transferred from the IRA to the new employer’s plan.

It appears from the Advisory Opinion that the program sponsor may have requested the DOL to rule that the negative consent would relieve the program’s sponsor from any fiduciary obligations related to that transfer. Even if it was not specifically requested, the DOL made it clear that negative consent will not suffice to relieve the program’s sponsor from the fiduciary obligations related to the decision to move the money from the IRA to the new plan. I don’t need to detail what fiduciary steps would then be required to make that happen.

This ruling on negative consent related to “plan” assets (which includes IRA monies) is actually a big deal, of which we should all take note when dealing with auto-portability.

Then there is that nasty problem of securities laws and other state laws which further complicates these types of efforts.  IRAs, unlike 401(k) plans, are NOT exempt from securities laws; nor are the investments held under the IRA (unless they are otherwise exempted securities, like certain bank deposits or fixed annuity contracts); nor is state law preempted. The question one always needs to consider when dealing with programs like this is how a fiduciary which is not appointed by the individual IRA holder has any legal authority to do ANYTHING with a registered security (or even any other investment) after it is set up by the original employer, as the investments are legally owned by the former participant. How can you effectively manage these arrangements?

It gets complicated.

My point is this: we are so accustomed to the exempted and preempted status of dealing with plan money, it is easy to overlook the fact that there is a whole range of other laws which come into play when dealing with IRA based auto-portability programs   It is, by the way,  similar to the sorts of problems we continue to have with 403(b) accounts  (which are also non-exempt securities), their related asset allocation models and related issues-a point on which I had previously blogged.

It’s worth repeating: It gets complicated.



The key to the DOL’s proposed MEP regulation is not so much the helpful and appropriate hemming in of the “commonality and control” requirements (those rules will apply only to group or association MEPs); nor is it that certain PEOs can generally be “employers” when acting indirectly on behalf of their clients in sponsoring a MEP; nor is it in the likewise helpful notion that participating employers are not co-sponsors (though they still retain certain fiduciary obligations with regard to the MEP); nor is it in the DOL’s new-found willingness to recognize important policy differences between MEWAs and a retirement plan MEP.

The key to the regulation is, instead, the DOL’s extensive request for comments. The mere fact that the reference to wanting comments appears on no less than 18 of the “pre-publication” pages is in itself telling.

For what is the Department asking comments? It has identified are two major, unresolved issues. The first is what should constitute a “corporate MEP.” We all are familiar with those arrangements, the most prominent being a single plan covering employers of what used to be a controlled or affiliated service group.

The second, however, is what seems to be the focus of the Departments attention: pooled employer plans, the classic MEP of unrelated employers which the Department declined to recognize in its seminal Advisory Opinion, 2012-04. The DOL has initially decided not to include this category of MEPs in the proposed safe harbor because it “implicates different policy concerns” than PEOs. And it is this upon which it appears to be seriously seeking comment.

The DOL is looking for insight on where you draw the line between a service provider purely serving its own narrow commercial interest (such as in the sale of DCIO products) and one which involves the service provider bearing some measure of the employer’s employment based legal obligations. According to the DOL, failing to draw this line correctly “would effectively read the definition’s employment-based limitation” out of the ERISA.

The DOL proposes drawing this line at the “substantial employment function.” Staff is clearly comfortable that PEOs which meet its criteria do perform a substantial employment function, even though still engaged in a pecuniary commercial enterprise.

This standard seems appropriate, and well founded in law-at least for “non-corporate” plans.

The question really to be answered whether a pooled service provider (lets call it the “PSP”) is performing a substantial employment function, as well, when sponsoring and controlling a retirement plan covering a client’s employees. The PSP, in doing so

  • performs most of the retirement plan obligations of a plan sponsor;
  • while being legally responsible for the employer’s formal 3(16) responsibilities and acting as the named fiduciary;
  • while performing the vast majority of the 3(21) administrative functions under the plan and maintaining the ERISA processes required under the plan;
  •  while having the authority to name other fiduciaries, including the 3(21) and 3(38) investment fiduciaries.

The satisfactory performance of these obligations requires the PSP to be integrally involved in the client employer’s employment practices. Think simply, for example, of the work that goes into hiring of the plan’s auditor and supporting all of the work and review necessary to completing the audit. The auditor’s management letter addresses the PSP activities.

These functions make the PSP much more like a PEO than a DCIO, and perhaps makes it even more closely aligned to the employer than the PEO. In fact, the Open MEP had its origins in the PEO industry, with the PSP willing to take on employer legal obligations that the PEOs were unwillingly to, themselves, bear.

DCIOs, on the other hand, draw strict limits on their liability, and strive to keep their involvement with their client employer’s employment relationships at a minimum (if extant at all). In contrast, an effective PSP needs a substantial and ongoing relationship with the employer in order to even adequately perform is function.

The DOL itself states in its proposed regulation that “access to an employment-based retirement plan is critical to the financial security of aging workers.” This makes it hard to argue that taking on the responsibility for employer-based retirement plans is not a substantial employment function.

One of the key  EBSA National Enforcement Projects (that is, a project driven by the national, not the regional, EBSA offices) is the “Plan Investment Conflicts Project.” You’ll hear DOL staff refer to it as the PIC project, and many of you have already run into it-maybe even without knowing it. It is the “next generation” of fiduciary compliance programs that the DOL has developed over the years, with this one building on those past programs which had looked at compensation conflicts, 408(b)(2)  compliance and 404(a)-5 disclosures.

What makes this program different? It appears to be using standard, plan level investigations to instigate reviews of selected practices of large financial service companies, as opposed to having to open large service provider investigations to get to the answers being sought.  To most plans, what their investment platform provider does in the operation of its plan is just a black box. What it takes to actually run these platforms in today’s market requires a high level of technical sophistication which is well beyond the ken of most plans to understand, much less review.

There is also a critical  dearth of public information out there which plan fiduciaries would need were they to do a significant review of those platforms. For example, did you realize that the Schedule C to the Form 5500 does NOT require the platform to disclose the amount of revenue sharing the provider receives from the plan investments? Schedule C merely requires that a formula be described,  and the typical fiduciary has little ability to generate an accurate number from that formula (the proposed Form 5500 revisions, now on hold, would have remedied that). Another example is the use of sub-transfer agent fees. The SEC Rule 30e-3, discussed in my last blog, also seeks to find more information on how mutual fund  sub transfer agent fees (including those generated off of ERISA plan investments)are being utilized, and to whose benefit. That information is not currently available to the fiduciary.

There has been some frustration in the past on DOL audits, where  the investigator would often feel the need to hold someone  responsible for something that was clearly under the control of the plan asset investment platform and not the plan itself. What seems to be happening now is that a practice of the investment provider which  is uncovered in a plan audit may be referred to the EBSA National Office, where its resources  are used to coordinate and assist in reviewing the practice of the platform-including between EBSA Regional Offices.

This Project is actually consistent with the growing notion that retirement plan investment platforms have become commodities, and sophisticated ones at that, for which the platform should bear greater  responsibilities instead of the sponsor. That notion has begun to take root, for example, with it showing  up in proposed MEP legislation.  However, re-balancing these responsibilities will not be an easy task and may eventually  require either statutory or regulatory change. But it does looks like the question is now being joined.

As a reminder that retirement plans do not exist in an ERISA “bubble,” the SEC proposed Rule 30e-3 3 this past June which will fundamentally rework the manner in which mutual fund prospectuses, proxy material and other fund reports are delivered to shareholders. This proposed rule, if made final, would permit electronic delivery of these reports to be made the default-much in the same way as currently being proposed for the electronic delivery for required ERISA notices.

Why should this matter to retirement plans? First, it is a reminder that 403(b) participants are considered shareholders for SEC purposes and are required to receive the paper delivery of fund reports unless they opt for electronic delivery. The passage of this rule would substantially simplify this “heavy lift” for many 403(b) plan vendors and custodians. Much has been made under the ERISA proposals of the burden arising from the paper delivery of ERISA notices- but this is hardly anything when compared to what is required under the fund reports delivery rules for 403(b) participants.

It will also impact 401(a) plans. One of the more difficult problems arising from the use of omnibus trading platforms by trust companies is the ability to delivery fund reports (including things like proxy materials) to the fiduciaries of these plans. You see, the plans using these platforms (and they ARE in common use) aren’t typically carried as the shareholders of record by the fund company’s transfer agent (the fund company’s transfer agent typically is responsible for keeping the list of shareholders to whom fund reports are to be delivered). The transfer agent usually passes on this responsibility to the omnibus platform, and the omnibus platform passes on this responsibility to the trust company or other fiduciary. For those of you familiar with complex, multiparty administrative processes, you can see how this system is susceptible to “breakage.” Thus, by the way, the need for the payment of those “sub transfer agent fees” that you often read about. I strongly suspect that the electronic delivery rules, if implemented, will help make the current system work more reliably.

The SEC’s Rule 30e-3 fact sheet can be found here.

Rule 30e-3 is not without its opponents. The paper industry (go figure) has filed a lawsuit already challenging the rule as “arbitrary and capricious.” But this lawsuit has also been joined by consumer groups which raise the same issues as are being raised in opposition to the ERISA electronic delivery rules: e-delivery imposes hardship on the most vulnerable populations, including the elderly, as well as those less affluent and rural communities without access to broadband internet, while opening the door to new phishing scams, online fraud and cybersecurity threats. There is also a claim that this electronically delivered material is difficult to read on mobile devices.

What is particularly striking is that this lawsuit may have an effect on the efforts to change the ERISA delivery rules. More and more it is clear that ERISA is not an island…..

Effective January 1 of this year was the right of participants to an extended period to rollover their defaulted loan amount, if the default arose following unemployment or the termination of a plan. The statute has a fundamental flaw: it confuses the rules related to the taxation of the loan with the distribution rules related to defaulted loans. The practical effect of this confusion is that it is virtually impossible to effectively use. Making it work requires the acceleration of the reduction of the plan’s retirement benefit, which runs counter to the fiduciary obligations under a loan program.

It may be helpful first to discuss how the defaulted loan rules actually work, and then to see how the statute doesn’t.

There are two types of distributions related to defaulted loans: “deemed” distributions and “actual” distributions. A “deemed” distribution occurs when there have been insufficient loan repayments made in the quarter, or through the “cure period” (the following quarter) to meet the amortization requirements. When this happens, the loan is a “deemed distribution,” and will be reported as taxable even if the participant’s account balance was never offset by that amount. The regulations specifically state that a “deemed” distribution will NOT be treated as an “actual” distribution.

An “actual” distribution of a loan default occurs “when, under the terms governing a plan loan, the accrued benefit of the participant or beneficiary is reduced (offset) in order to repay the loan (including the enforcement of the plan’s security interest in the accrued benefit). A distribution of a plan loan offset amount could occur in a variety of circumstances, such as where the terms governing the plan loan require that, in the event of the participant’s request for a distribution, a loan be repaid immediately or treated as in default.” (1.72(p) Q&A 13(a)(2)).

An “actual” distribution also generally can’t occur unless there has been a distributable event under a 401(k) or 403(b) plan, which can further complicate things. Particularly in the 403(b) space where non-payroll deduction loans are common, loan offsets may not occur for a number of years after the “deemed default.”

There is no uniform practice to offsetting account balances upon loan default. Often, they are not offset until the participant comes in for a distribution after terminating employment, or under some sort of periodic “sweep” performed by the recordkeeper. In any event, there is not typically an independent notice to the participant of the date of the offset.

There is also growing practice to preserve the account balance, and to avoid the offset of the account balance. As part of the fiduciary obligation to protect a retirement benefit, more employers are  permitting terminated employees to continue to make post-severance payments on their own.  According to the 2017 PLAN SPONSOR Defined Contribution Survey, 26.2% of DC plan sponsors that responded to the survey  said this feature has been or will be added to their plans, and an additional 5% are considering adding the feature in the future. These efforts requires employers to delay the actual offset following the default. Adding an insurance feature to protect the loans also requires a delay in the offset.

By the way, the rules do not require the offset upon default. In fact, the preamble to the DOL regs actually encourage delaying the offset in order to enable employers to find a different way to repay the loan. Offsets of a retirement benefit should be the last resort under the fiduciary rules, not the first.

Add to this the fact is participants really will not know whether there is an offset unless they know to look at their next quarterly statement -and know what to look for. There is no independent notice of the offset.

So, what does all of this mean? In reality, a substantial number of loan defaults will result in taxation under the “deemed” distribution rules, rather than the “actual” distribution rules, and can’t be rolled over until the offset actually occurs. Which means the rollover extension rules get applied in an odd sort of way,  ending up in some curious mismatches.

Let’s use an example. Assume a participant/borrower is laid off from employment in June 1, 2018; the loan defaults because the layoff resulted in no payroll deductions being made; the employee does not take advantage of the  post-separation repayment program offered by the employer; and the account balance is not immediately offset because of the necessity of delay caused by the post separation loan program. That loan becomes taxable as a deemed distribution at the end of the cure period, September 30. The participant could NOT roll over the amount of that loan because no offset has occurred. Assuming no offset has occurred by year end, the defaulted loan amount with penalties (if applicable) will be reported on the Form 1040.

Assume further that the participant, still unemployed by the plan sponsor,  takes a distribution on January 1, 2019, and the recordkeeper then offsets the account balance. Now what? The tax liability has fixed in the prior tax year. Though the participant has the right now to roll over that amount to an IRA by April 15, 2020 (or the extended due date),  this right is meaningless because the tax liability has already attached, and it would be an after-tax amount.

The new rule really doesn’t work well at all unless there is a massive movement to immediately offset retirement accounts-which has horrible public policy ramifications. Forcing increased leakage into the system to make the promise of an extended rollover period work seriously undermines the efforts underway to preserve these at-risk assets. Accelerating offsets is counter to the fiduciary’s obligation to preserve the retirement benefit under the plan.

Treasury and Labor both took significant steps in promoting lifetime income from defined contribution arrangements during Mark Iwry and Phylis Borzi’s tenures. The fiduciary rule at the DOL and staff reductions at the IRS seems to take their toll, as focus on this issue lessened dramatically-and then disappeared completely.

The recent uptick in publications from the private sector focusing on lifetime income is now a welcome surprise, complete with studies showing that participants are now wanting elements of guaranteed income ad part of their retirement arrangements. But lifetime income can be a daunting concept for the non-actuarial/non-insurance professional whose practice is focused on defined contribution arrangements. Where does one even start in trying to figure this out, and whether or not to include it your clients DC plans or IRAs?

I strongly recommended that the best place to start to get a fundamental understanding of how DC plans and IRAs can be used to provide lifetime income is to look at the IRS’s guidance on the Qualified Longevity Annuity Contracts, the QLAC.  The preamble to the proposed regulation provides clear (ok, ok,  admittedly highly technical, and mixed in with RMD stuff) guidance on how lifetime income is structured. Don’t be misled that it is structured as relief to the Required Minimum Distribution Rules. The TRUE value of the reg is NOT the RMD relief-the true value is that it describes how 401(k) plans can offer lifetime income.

That preamble should not be read alone. The IRS’s guidance in Revenue Ruling 2012-3 was actually designed to make the QLAC regs work, so you will need to read that as well. Though the Rev Ruling is about when annuitization occurs for purposes of spousal consent, it approves the notion that Lifetime Income in a 401(k) is an investment option, and not a benefit under the plan (thus not subject to 411(d)(6) and other sticky rules).

If you don’t want to look at the regs and rev ruling,  I had put together a basic primer on how the QLACs work (including use of 2012-3) in a paper,which is still current: First Steps to Modernizing DC Annuitization: QLACs and Revenue Ruling 2012-3. This may be useful in figuring out lifetime income. I can’t believe that six years has passed since its writing.

The DOL issues related to the purchase of an annuity (after all, in order to actually guarantee lifetime income, there has to be insurance. Only insurance companies, or the government, can legally provide this sort of promise) are still out there, mostly the “safest available annuity” issue, formal guidance is still on their annual guidance worklist.  They did give some relief in 2015 as well, will the release of FAB 2015-2. I discussed this on a blog of a few years back. If you need more information on Lifetime Income, click on the Lifetime Income Category in this site’s sidebar.

One of the continuing confusions in how 401(a) rules apply to 403(b) plan  involves the reporting rules related to the correction and reporting on the 5500 of one of the most common errors in any elective deferral plan: the late deposit of those deferrals into the plan.  Neither non-ERISA or ERISA 403(b) plans will ever file a Form 5330. Ever. Even when the VFCP program is being used to correct the late deposit.

Adding to the confusion is that the Form 5500 instructions do not differentiate between 403(b) plans and 401(a) plans. It simply states that  all “defined contribution” plans need to file the Form 5330 for late deposits, and pay the penalty tax.  So keep the following in mind:

  • Though late deferrals to an ERISA 403(b) plan do need to be reported under the Compliance portion of  the Form 5500 Schedule H or Schedule I, Form 5330 cannot be filed-in spite of the directions in the Form 5500  instructions. This is because the Tax Code’s prohibited transaction rules, Section 4975, do not apply to 403(b) plans-even if it is an ERISA 403(b) plan. Form 5330 only applies to plans to which 4975 applies.  Tell your auditor NOT to file the Form 5330, and that no 5330 penalty tax is due.
  • Late ERISA 403(b) deposits are, however, violations of ERISA’s prohibited transaction rules under ERISA Section 406.  This means that the DOL’s Voluntary Fiduciary Compliance Program (VFCP)  does apply to these deposits. But your analysis shouldn’t stop there. Note that, unlike the mandatory rule under Code Section 4975, the ERISA 5% penalty on the earnings on these late deposits under ERISA 502(i) is an administrative penalty that may be assessed by the DOL.  The statute only requires that you fix the late deposit (by paying the interest), as it still is, after all, an ERISA prohibited transaction. But there is no statutory requirement that you report it other than on the Form 5500 or mandatorily pay a penalty.
  • An important corollary is that the non-ERISA 403(b) plan is never subject to either the ERISA prohibited transaction rules or the 4975 tax. HOWEVER,  timely deposit is a condition of 403(b) status: the 403(b) regs mandate that the deposits of elective deferrals must be made “within a period that is not longer than is reasonable for the proper administration of the plan. For purposes of this requirement, the plan may provide for section 403(b) elective deferrals for a participant under the plan to be transferred to the annuity contract within a specified period after the date the amounts would otherwise have been paid to the participant. For example, the plan could provide for section 403(b) elective deferrals under the plan to be contributed within 15 business days following the month in which these amounts would otherwise have been paid to the participant.” So, if the deposits are made past the date identified in the plan or, if there is no date, beyond a reasonable period, you have a form and operation problem which needs to be corrected under EPCRS (probably SCP-but that is also a problem if the error is being repeated regularly).
  • Identifying those “late” deposits can be a challenge.  Some insurance companies, in particular, can be notorious about the time in which they take to actually allocate their  deposits to annuity contracts (this can a problem more so in the 401(k) market than 403(b)s, because the 401(k) contracts are typically not subject to the strict SEC rules on posting deposits which are imposed on “registered” 403(b) investments. But even mailing a check to a 403(b) vendor can cause delays that the auditor may improperly raise issues with).  The problem this delay causes on audit is that many auditors pick up the posting date of the contribution to the participant’s contract, and claim that the late posting represents a late deposit, and a prohibited transaction.  This is not the rule. The DOL has recognized this issue of there being time between the deposit and the date it is allocated. It provided and an important example in its preamble to its “deposit” rules under 2510.30-102 that:

Where, for example, an employer mails a check to the plan, the Department is of the view that the employer has segregated participant contributions from plan assets on the day the check is mailed to the plan, provided that the check clears the bank.

Remind your auditor that the test is the date that the money is irrevocably sent from the employer’s account (such as by check or wire), NOT the date the vendor allocates the deposit to the contract.


The Tax Cuts and Jobs Act’s participant loan changes (which delays the account offset on loan defaults related to unemployment or plan termination) triggers something we would all rather not look at:  the “uncomfortable” manner in which ERISA’s fiduciary rules apply to loans and their administration.

These changes should cause plan sponsors and recordkeepers to consider new choices about their handling of loan defaults, something they haven’t had to do in nearly 28 years. This matters because changing a plan’s loan rules is not a minor technical act. Loans are investments subject to the same ERISA prudence rules as any other plan investment, and changes to loan procedures impacts the investment.

There is a temptation to put the loan fiduciary issues to the side, justifying it with the widely misunderstood notion that there is little fiduciary responsibility related to loan accounts because plan loans are effectively a participant “loaning their own funds to themselves.” It worthy to note, however, that the Department of Labor directly disavowed this common misperception when responding to a comment making this sort of claim to its proposed loan regs in 1989: “there is no basis in the statute for departing from the position that participant loans should function as plan investments.” (See 54 FR 30520).

When you think about it, the legal analysis is startling:

  • A participant loan is a commercial transaction between the plan and the participant.
  • The DOL regs treat loan funds as an investment account under the plan.
  • As a plan investment, the loan fund is subject to the ERISA’s prudence standard. According to the DOL, “section 408(b)(1) recognizes that a program of participant loans, like other plan investments, must be prudently established and administered….”
  • The DOL has also separately stated that plan fiduciaries “must assess and monitor loan programs.”

Things get even more uncomfortable when you look at the fundamental “prudence” regs. They require “appropriate consideration to those facts the particular investment involves, including the role the investment or investment course of action plays in that portion of the plan’s investment portfolio with respect to which the fiduciary has investment duties.”  Then fiduciaries must “act accordingly” after giving the investment that “appropriate consideration.”

Meeting this standard is typically handled in the periodic investment review of a plan’s investment funds. But when is the last time you saw this review take into account the loan fund activity under the plan? I would guess rarely, if ever. But according to a leading Wharton study (“Borrowing from the Future: 401(k) Plan Loans and Loan Defaults”, Timothy (Jun) Lu, Olivia S. Mitchell, Stephen P. Utkus, and Jean A. Young,2014) approximately 10% of loan principal is lost to defaults annually. This is made all the more pointed by the fact that the loan fund is usually one of the larger investment funds under the plan. Loans are generally utilized by 20% of plan participants at any one time, with some 40% of plan participants taking out loans over a any given five year period.  A 3(21) adviser would be expected to subject any other plan investment of this magnitude (and performance!) to periodic fiduciary review.

What makes this all very uncomfortable is that loans are a necessary evil, in large part because of the common occurrence of default and the subsequent “leakage” offset of account balances upon job loss. But 401(k) or 403(b) plans would be unsuccessful without them. Participation and contribution rates exist at their current levels due in part to loan access under the plan. It then really becomes a balancing act between implementing the basic fiduciary requirements to preserve a retirement benefit and to protect the plan’s assets with making the plan attractive to participants. Or, as the DOL has put it, “The Department does not believe that the purpose of the (loan) exemption is to encourage borrowing from retirement plans but rather to permit it in circumstances that are not likely to either diminish the borrower’s retirement income or cause loss to the plan.”

This is not an easy balancing act to perform, and it’s deceiving to believe that it could be addressed by merely providing an account offset as a way to “protect” the plan upon a default. This ignores the seriousness of reducing a participant’s retirement benefit, particularly where the default follows involuntary unemployment-effectively making it a forced default and forfeiture beyond the participant’s control.

An uncomfortable task, for sure, but one that probably should be given serious consideration.

There is a little noticed change in the IRS’s recent update of Publication 571 (which is the IRS’s 403(b) technical guide). In a highlighted box on page 4 is the following, under how the limits on “annual additions”-otherwise known as the 415 limits- apply:

More than one 403(b) account. If you contributed to more than one 403(b) account, you must combine the contributions made to all 403(b) accounts maintained by your employer. If you participate in more than one 403(b) plan maintained by different employers, you don’t need to aggregate for annual addition limits.

This innocuous seeming statement is actually pretty outstanding, finalizing a quiet morphing over a generation of the way the IRS applies a regulation in a way we rarely see.  The change: the employee is effectively no longer considered the employer for 415/403(b) purposes, but the rules have not really changed. In Gemology, according to Evan Giller-who first put me on notice to this “gem” of a change in 571- this type of change would be considered a “pseudomorph.” Pseudomorph is the name given to a crystal (or other gem) where one mineral replaces the mineral which actually formed the crystal without actually changing the the form or shape of the crystal.

Okay, I admit to taking some literary license with the analogy, but it seems appropriate here.

1.415(f)-(1)(f) of the tax regulations reflects its history: “the participant, and not the participant’s employer who purchased the section 403(b) annuity contract, is deemed to maintain the annuity contract…” This technically means that the employee is the employer for 415 purposes, and that all contributions to all 403(b) contracts of an individual count against the 415 limit-regardless of which employer plan it came from. For those who were around back then, I seem to recall that this was also the way we would run the 403(b) Maximum Exclusion Allowance (the now extinct “MEA”).

With the demise of the MEA, and with the growing focus of the IRS on employer accountability, we saw a shift over the years to treating the 415 limit as an employer-based limit, not an individual limit. This actually makes a lot of sense, as this limit is virtually impossible to enforce if applied beyond an employer.

The 2007 403(b) regulations actually were a bit ambiguous on this point, as they never touched on that pesky 415 reg. It only mandated the aggregation of 403(b) contracts of the same employer (with the exception of other companies under the participant’s control).  There has always been this uncertainty since then, because if the employee was the employer (as per 415), it still was an individual limit. The question was whether we could now effectively read the new 403(b) reg together with the old 415 reg to apply the 415 limit on an employer by employer basis, rather than treating the employee as the employer. The language under 415 could actually be read that way, if looked at generously (I guess).

Publication 571 seems to have solved this for us. It appears that the transition is now complete. There is no 415 aggregation of contributions to 403(b) contracts from unrelated employers (except, of course, for that weird “control” rule).  A Pseudomorph….





There has been increasing interest in the market to put together Multiple Employer Plans for 403(b) plans, and with good reasons. Tax exempt entities are really well suited to the sorts of economies of scale that a MEP can bring, and they often organize well around common associations.

But a 403(b) MEP is really complicated when you get down to it because-like anything 403(b), it seems-of the devil that exists in the details.  For example, besides  having to deal with the DOL 2012 Advisory Opinion on all MEPs; and  the fact that the Tax Code Section governing 401(a) MEPS does not apply to 403(b) plans (which means you can never really have a 403(b) MEP for tax purposes); and that the ERISA Section governing all ERISA MEPs (including 403(b) MEPs) requires compliance with that Tax Code Section which doesn’t cover 403(b) MEPS; you still have to deal with the complications of dealing with those legacy contracts of the various participating employers in the MEP. Then there is the issue of dealing with those combination of ERISA and non-ERISA 403(b) plans commonly sponsored by a 403(b)participating employer. These require use of traditional state law agency rules to make them work.

Yes, this is all manageable if you can have a MEP in the first place. The point here is that there are a lot of moving pieces in a 403(b) MEP that you don’t have to deal with in a 401(a) MEP. Using the aggregation model (see, for example, Section 202 of the recently introduced Retirement Enhancement and Savings Act of 2018 (“RESA”) which describes this model well) instead of the MEP -which many school districts actually do and call them MEPS- is so often more attractive.

What makes it all the more challenging is that you are dealing with the DOL’s regulatory processes which are geared to MEPs, while also dealing (on the same arrangement) with IRS regulatory processes which deal with each participating employer in a MEP as a single employer plan. The impact on this really falls on the IRS. The Form 5500 epitomizes the problem.

It starts with Form 5500 Section 1 which requires that you identify the plan as a MEP or a single employer plan.  For ERISA purposes, the answer is MEP, and you must check the box. However, for Tax Code purposes, it is not a MEP-do you also check the single employer box?

What flows from that may cause the IRS heartburn. The financial statements are driven by ERISA’s rules and not the Code’s, though the IRS relies upon the DOL information when performing their own compliance activities. This means that such  information is  required to be reported on an aggregated MEP basis, not on a single employer basis. The only “single employer” data provided on the 5500 is each participating employer’s EIN, along with something called “percentage of contributions” for each of those employers. The compliance questions will also be answered on the consolidated MEP basis, not on the “single employer” basis, which may be of a concern to the IRS.

It’s also likely to become messy when the IRS is looking for an individual plan Form 5500 for the 403(b) plan under the EIN of the employer and with a plan number and doesn’t find one. This is exacerbated by the way a plan joins the MEP: it typically merges with the plan of the lead sponsor, but the merger is with a “plan” the IRS doesn’t recognize as a plan.

Let’s not forget about the Form 8955 SSA, either.  This is a tax form, and it is required of all 403(b) plans subject to ERISA’s vesting standards. It is not an ERISA form. With each participating employer under a 403(b) MEP being considered an individual plan, a separate 8955-SSA has to be signed and filed on behalf of each participating employer. The IRS will have difficulty tying this back to the MEP’s Form 5500.

I truly doubt that the IRS’s systems are up to all of this and other process issues I haven’t mentioned, especially given the IRS’s budgetary strain. Even the provisions in RESA which will permit Open MEPS® won’t address these issues. It is likely to exacerbate them. So be prepared to deal with some bizarre regulatory twists in dealing the IRS when working with a 403(b) MEP,  to manage through this lack of regulatory processes, or to seriously consider the aggregation model.