“We are contemplating establishing an ERISA 403(b) plan with employer contributions. How would this effect the status of our non-ERISA plan if a) we continued to permit individuals the right to make elective deferrals to the non-ERISA plan or b) we froze contributions to the non-ERISA plan? And finally, how could participants move money between the plans, if at all?”
Michael A. Webb, Vice President, Retirement Plan Services, Cammack LaRhette Consulting, answers:
This question is not uncommon, as the Experts have witnessed a gradual migration among 501(c)(3) plan sponsors from elective deferral-only plans excluded from ERISA coverage under DOL regulation 29 C.F.R. 2510.3-2(f) to ERISA 403(b) plans with employer contributions. Though you should work closely with counsel well versed in 403(b) plan issues to address your specific situation, on its face the establishment of a new ERISA 403(b) plan does not cause the prior non-ERISA plan to be subject to ERISA coverage, whether participants are permitted to continue elective deferrals to the non-ERISA plan or not.
However, if the new plan causes any provision of the exclusion under DOL regulation 29 C.F.R. 2510.3-2(f) to be violated (for example, if elective deferrals to the non-ERISA 403(b) are matched in the ERISA plan) then yes, the prior plan would become subject to ERISA. Special attention should be paid to the issue of whether vendors were limited in the non-ERISA arrangement to one or a few providers using the position under Q&A-16 of FAB 2010-01 that offering additional vendors “would be sufficient to cause the employer to stop making its payroll system available to collect and remit payroll deduction contributions to any 403(b) contractor” since establishing a new ERISA plan with a whole new infrastructure and series of payroll slots would undermine that argument.As a practical matter, though a plan sponsor can maintain both an ERISA 403(b) and non-ERISA 403(b) plan, it may be administratively difficult to do so, since two separate sets of rules for each plan must be administered and communicated to participants. Thus, some plan sponsors have simply opted to no longer take advantage of the ERISA exemption for their existing non-ERISA plan, add employer contributions to that plan, and operate one ERISA 403(b) plan going forward.
However, this approach may not be possible if any of the existing plan vendors do not have the recordkeeping infrastructure in place to provide the plan level financial reporting and other services necessary to support an ERISA plan. Thus, the existing plan vendors should be consulted before any such action is contemplated.
Finally, though terminating the non-ERISA 403(b) and establishing the ERISA 403(b) in its place is technically an option, it is often not a practical one, for a variety of reasons (see “Ask the Experts: Replacing a Non-ERISA with an ERISA Plan”).
As for your final question, since money would be moved from one 403(b) plan to another, a plan-to-plan transfer would be the mechanism for such movement of assets by participants, as opposed to a rollover or contract exchange. For more details on the differences between rollovers, contract exchanges, and plan-to-plan transfers, see “Ask the Experts: Rollovers, Exchanges, and Plan-to-Plan Transfers.”
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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.