In testimony to the IRS Advisory Council on Employee Welfare and Pension Benefit Plans, Kristi Cook, JD, on behalf of the American Society of Pension Professionals and Actuaries (ASPPA) and the National Tax-Sheltered Accounts Association (NTSAA) these practices will inadvertently cause some plans to potentially be subject to Title I coverage, and for many, on a retroactive basis. If ERISA does apply, then many well meaning 501(c)(3) organizations may find themselves subject to substantial penalties and fines for failing to comply with their Title I reporting and disclosure obligations.
Cook identified three crucial changes made by the new IRS 403(b) regulations (and related guidance) that have exacerbated this problem.
First, there was a change to the rules regarding discretionary administrative decisions. Historically, providers of 403(b) investments have assumed responsibility for making administrative decisions that require “discretion.” This was principally due to an IRS ruling which permitted participant representations to be the basis for making such decisions. The new regulations from the IRS, in most cases, no longer allow plan administration to be based simply on the employee’s representation(s).
A second change emanating from IRS guidance that has caused problems relates to the requirement that a 403(b) arrangement be evidenced by written documentation containing the salient features of the plan as it could assign to a third party responsibility with regard to discretionary determinations. The IRS has proposed model 403(b) plan language to comply with its new regulations. The language includes a “Memorandum of Understanding,” which details the allocation of responsibilities for administering the plan (including discretionary determinations) among the employer, the investment provider and, if applicable, third party administrators. This language provides that the memorandum is specifically incorporated, by reference, into the plan. Although not clear, it would appear that this “Memorandum of Understanding” would be part of “the documents governing the arrangement” as contemplated by Field Assistance Bulletin (FAB) 2010-01. This is a significant concern because under the proposed language, it is possible to draft a “non-ERISA” document for a 501(c)(3) organization and attach a “Memorandum of Understanding” that assigns to a third party responsibility with regard to discretionary determinations.
Cook says if the “Memorandum of Understanding” is not considered part of “the documents governing the arrangement,” transitional relief will be absolutely necessary. In addition, relief is needed for employers who entered into independent agreements with third party administrators in the good faith belief that doing so was consistent with the safe harbor by removing the employer from the discretionary determination process.
According to Cook, a third concern under the new IRS rules is the requirement that a compliant plan document be adopted in a relatively short time frame because it is unclear what compliance steps they can take without losing the Title I exemption. The IRS mandate was established with insufficient time for 403(b) plan document expertise to truly develop within the marketplace. This resulted in plans being drafted and adopted without proper consideration of the plan provisions which impact qualification for the safe harbor exemption. This is particularly true for 501(c)(3) organizations which often don’t have the funds to pay for competent outside counsel that understands the nuances of the “limited involvement” safe harbor exemption. In many cases, these organizations rely on advice provided by well intentioned volunteers associated with their cause which often turns out to have been incorrect, Cook contends.
ASPPA and NTSAA have recommended that the Department of Labor (DoL) provide transitional relief for 501(c)(3) organizations offering employee 403(b) savings arrangements which may be subject to ERISA coverage as a result of the clarifications provided in recent guidance (see ASPPA Asks for Relief for Plans Falling out of ERISA Safe Harbor).
ASPPA and NTSAA recommend that employers who have become subject to ERISA be permitted to stay within the “limited involvement” safe harbor exemption by taking remedial action. Alternatively, affected employers who are willing to forgo the safe harbor exemption, should be permitted to retroactively correct any reporting, disclosure or other ERISA violation without penalty if all actions are completed within the “correction period.”The groups say the relief for affected employers should be conditioned upon remedial action being taken during a “correction period” of 12-18 months following the announcement of relief. The remedial actions should require the employer to cease any further actions beyond those permitted under DoL Regulation §2510.3-2(f) and subsequent guidance as clarified by FAB 2010-01. The employer must also make a good faith effort to reform service contracts and 403(b) documentation so that any responsibility for discretionary determinations will be identified and allocated to parties.