Does Erroneously Filing Form 5500 Void Non-ERISA Status?

“I work for a third-party administrator (TPA) firm that has a new private tax-exempt client which started a 403(b) plan last year intending it to be not governed by the Employee Retirement Income Security Act (non-ERISA).

“All of the requirements for the Department of Labor (DOL) safe harbor were met as far as we can determine but, before they hired us, they erroneously filed a Form 5500. Is the mistaken filing enough to void the Non-ERISA status? What should be done concerning the erroneously filed 5500?”


Stacey Bradford, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, vice president, Retirement Plan Services, Cammack Retirement Group, answer:


Interesting question! As we do in many situations, the Experts turn to the regulations in this regard for guidance; specifically, the DOL’s safe harbor regulation at 29 C.F.R. § 2510.3-2(f) as follows:


(f)Tax sheltered annuities. For the purpose of title I of the Act and this chapter, a program for the purchase of an annuity contract or the establishment of a custodial account described in section 403(b) of the Internal Revenue Code of 1954 (the Code), pursuant to salary reduction agreements or agreements to forego an increase in salary, which meets the requirements of 26 CFR 1.403(b)-1(b)(3) shall not be “established or maintained by an employer” as that phrase is used in the definition of the terms “employee pension benefit plan” and “pension plan” if

(1) Participation is completely voluntary for employees;

(2) All rights under the annuity contract or custodial account are enforceable solely by the employee, by a beneficiary of such employee, or by any authorized representative of such employee or beneficiary;

(3) The sole involvement of the employer, other than pursuant to paragraph (f)(2) of this section, is limited to any of the following:

(i) Permitting annuity contractors (which term shall include any agent or broker who offers annuity contracts or who makes available custodial accounts within the meaning of section 403(b)(7) of the Code) to publicize their products to employees,
(ii) Requesting information concerning proposed funding media, products or annuity contractors;
(iii) Summarizing or otherwise compiling the information provided with respect to the proposed funding media or products which are made available, or the annuity contractors whose services are provided, in order to facilitate review and analysis by the employees;
(iv) Collecting annuity or custodial account considerations as required by salary reduction agreements or by agreements to forego salary increases, remitting such considerations to annuity contractors and maintaining records of such considerations;
(v) Holding in the employer’s name one or more group annuity contracts covering its employees;
(vi) Before February 7, 1978, to have limited the funding media or products available to employees, or the annuity contractors who could approach employees, to those which, in the judgment of the employer, afforded employees appropriate investment opportunities; or
(vii) After February 6, 1978, limiting the funding media or products available to employees, or the annuity contractors who may approach employees, to a number and selection which is designed to afford employees a reasonable choice in light of all relevant circumstances. Relevant circumstances may include, but would not necessarily be limited to, the following types of factors:
(A) The number of employees affected,
(B) The number of contractors who have indicated interest in approaching employees,
(C) The variety of available products,
(D) The terms of the available arrangements,
(E) The administrative burdens and costs to the employer, and
(F) The possible interference with employee performance resulting from direct solicitation by contractors; and

(4) The employer receives no direct or indirect consideration or compensation in cash or otherwise other than reasonable compensation to cover expenses properly and actually incurred by such employer in the performance of the employer’s duties pursuant to the salary reduction agreements or agreements to forego salary increases described in this paragraph (f) of this section.

As you can see, the regulation is silent on Form 5500s in general, and the issue of whether an inadvertent 5500 filing would cause such a plan to be subject to ERISA in particular. In addition, subsequent guidance, in the form of DOL Field Assistance Bulletins (FABs) 2007-02 and 2010-01, also do not shed any light on the issue. Thus, though we know from other guidance that neither a church or governmental plan can inadvertently elect ERISA coverage by erroneously filing a 5500, we do NOT know if a private 501(c)(3) tax-exempt could elect ERISA coverage by filing a 5500 in error.


The issue is further complicated by the fact that though the 5500 issue is not addressed in current guidance, there are actions that a plan sponsor could undertake in connection with a 5500 filing (e.g. in the process of obtaining an independent accountant’s opinion, if one is required) that would clearly cause the plan to violate the DOL safe harbor and thus become subject to ERISA. Thus, the Experts strongly recommend that the entity in question contact benefits counsel with specific expertise in such matters to determine the scope of the actions that would lead to a  potential ERISA coverage issue, as well as possible resolution.


Hiring a TPA and the ERISA safe harbor


And finally, since your firm is a TPA, you may be interested in this excerpt from the aforementioned FAB 2010-01, which states that the mere hiring of a TPA by a 403(b) plan sponsor may cause that plan to violate the DOL safe harbor and thus become subject to ERISA coverage if discretionary determinations are made by the TPA.

Q15: Would an employer exceed the ERISA coverage safe harbor limitations on employer involvement in 29 CFR 2510.3-2(f) if the employer hires a third-party administrator (TPA) to make discretionary decisions?

Yes. The employer’s selection of a TPA would be inconsistent with the safe harbor in 29 CFR 2510.3-2(f). The Department’s FAB 2007-02 addressed the safe harbor conditions for tax-sheltered annuity arrangements to fall outside of ERISA Title I coverage, and specifically noted that the documents governing the arrangement could identify parties other than the employer as “responsible for administrative functions, including those related to tax compliance.” As FAB 2007-02 further noted, the documents should correctly describe the employer’s limited role and allocate discretionary determinations to the annuity provider or other responsible third party selected by a person other than the employer. Moreover, an employer may limit the available providers it will make available in its safe harbor arrangement to those where the 403(b) contracts or accounts or other governing documents prepared by the provider state that the provider or another appropriate third party is responsible for discretionary decisions related to loans and hardship distributions.

Thus, TPAs are limited as to how they can assist potential 403(b) private tax-exempt plan sponsor clients who wish to avoid ERISA coverage under the DOL safe-harbor.

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.



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