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403(b) Q&A | Published in October 2016

403(b) Questions, Answered

Excluding temporary employees from making deferrals; a non-ERISA plan audit; governmental 403(b)s; ERISA plans and their regulations

By PLANSPONSOR staff | October 2016
Art by Vincy Cheung

Excluding Temporary Employees From Making Deferrals
 

Q: I work with a 501(c)(3) tax-exempt that sponsors a 403(b) plan. The entity employs a large number of temporary workers, as it engages in substantial project-related work for which it receives specific funding.
 
The workers in question generally lose their jobs in six months when the project is finished, though of course they may work on other projects in the future. The work is full-time, so the “normally-works-less-than-20-hours-per-week” exemption from the universal availability requirement wouldn’t work—the vast majority of such employees are expected to work more than 1,000 hours. Is there any way to exclude these employees from the right to make elective deferrals to the 403(b)? These people are generally off-site, and it is thus difficult to communicate with them regarding their right to make elective deferrals to the plan.


A: Unfortunately, there is no specific exclusion for “temporary” employees from the right to make elective deferrals under the universal availability requirement for 403(b) plans. The employees whom the plan may exclude from this right are quite limited, falling into one of the following categories:

  • Employees who will contribute $200 or less annually;
  • Employees who participate in a 401(k) or 457(b) plan, or in another 403(b) plan;
  • Nonresident aliens with no U.S. source of income;
  • Employees who normally work fewer than 20 hours per week (note that hours must be tracked in order to administer this exclusion); and
  • Students performing services described in Internal Revenue Code (IRC) Section 3121(b)(10)—generally, those enrolled in a post-secondary educational institution performing services for that institution.
  • Your “temporary employees” do not appear to fit into any of these categories. Of course, they will likely not defer more than $200 in a year, so it is possible that the first exclusion could be used to indirectly exclude them. However, the $200 elective deferral minimum would need to be applied to all employees, not just the temporary ones in question, and the latter group would still need to be provided with an “effective opportunity” to defer more than $200 to the plan in a given year, meaning such employees must still be notified of their right to make elective deferrals to the plan.

 Is a Financial Audit a Good Idea for a Non-ERISA Plan?
 
Q: We realize, as a governmental 403(b) and 457(b) plan sponsor, that we’re not subject to the annual 5500 reporting requirement or the related annual audit requirement; however, our plans are quite large, and our recordkeeper opined that it might be a “good idea” for us to complete a plan audit. Do you agree?
 

A: In our experience, it is a relatively rare event that governmental plans volunteer to go through the same type of audit that large Employee Retirement Income Security Act (ERISA) plan sponsors must undertake for Form 5500 purposes. The reason is that there is a fairly significant amount of work and expense involved, though the expense is typically nominal relative to the size of a larger plan.
 
In the uncommon instances where we have seen governmental plan audits, it is usually with respect to the largest retirement plans of states, where either state law or the relevant state office—e.g., comptroller, treasury, etc.—may require that all such plans be subject to an audit.
 
But is an audit or compliance review a bad idea? Not necessarily! Because audited financials are not required for such plans, in some instances the recordkeeping may escape the same level of review present with ERISA plans. This is especially true for 403(b) plans, which typically lack trust-level accounting—because 403(b) assets are almost never held in trust—and where assets may be invested in a variety of individual annuity contracts/custodial account agreements.
 
If you have experienced some recordkeeping errors with your plans, it might be prudent to go through the plan audit or a separate compliance review process, to see what is discovered. Although no audit or compliance review will be guaranteed to find all issues the Internal Revenue Service (IRS) might raise, it might indeed uncover some compliance defects.
 
Can Governmental 403(b)s Elect to Be ERISA Plans?
 

Q: I realize governmental plan sponsors are exempt from Employee Retirement Income Security Act (ERISA) coverage. But can governmental plan sponsors voluntarily elect to be covered under ERISA?
 

A: There is often confusion in this area. Church plans may elect ERISA coverage, but the same is not true for governmental plans. Governmental plans are never, ever, ever subject to ERISA. This is even true if they elect to follow every single provision of the act, intentionally or unintentionally, as there is no way a governmental plan can “ERISA-fy” itself.
 
Of course, a governmental plan must still meet the definition for the type of plan it is, under the Internal Revenue Code (IRC) and ERISA, and, with the Internal Revenue Service (IRS) having published a draft of possible future proposed regulations on the governmental plan definition, there could be future changes that affect whether some entities meet the definition or not.
 
However, the inability of a governmental plan to elect ERISA coverage should not be confused with an inability to voluntarily follow ERISA provisions as if it were an ERISA plan. Most governmental plans, unless state law precludes it, are free to follow any or all provisions of ERISA. However, for some governmental entities, it may be more problematic to follow ERISA provisions than for others.
 
Are Governmental Plans Free From ERISA-Like Regulations?

 
Q: I was surprised to learn in a recent Ask the Experts column that governmental plans are always exempt from the rules of the Employee Retirement Income Security Act (ERISA).To me, ERISA is an important regulatory framework for corporate and other plan sponsors to follow that mandates they be prudent in administering their plans. Are governmental plans free from ERISA-like prudence requirements?
 
A: Just because governmental plans are not subject to ERISA does not mean they lack regulation that provides ERISA-like requirements. Governmental plans are subject to both the Internal Revenue Code (IRC) and applicable state laws. Given that ERISA was derived from the state law of trusts, many of those state laws have provisions that mirror—or, to come full circle, have adopted parts of—ERISA. In addition, some governmental plans have decided to follow at least some ERISA-like practices, as indicated in the January 2014 Ask the Experts column.
 

Contributors David Levine and David Powell, both principals with Groom Law Group, Chartered, and Michael Webb, vice president, retirement plan services, Cammack Retirement Group, field selected questions concerning 403(b) plans and regulations, for use in this article. This article is meant to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.
 
Do you have a 403(b) question? Send it to rmoore@strategic-i.com with the subject line: Ask the Experts. Questions must be of a general nature and of interest to a majority of plan sponsors.

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