The sponsor may retain day-to-day administration of the 403(b) plan or delegate that responsibility to a third party administrator (TPA), but either way, it’s important to take a step back on a regular basis to determine whether a 403(b) plan’s administration is making the grade.
First and foremost, a sponsor should determine whether it has sufficient resources to take on 403(b) plan administration in-house. That means not only having employees who, on top of their current job responsibilities, can assume the added task of plan administration, but also ensuring that those employees have a strong understanding of the IRS’ 403(b) rules.
The IRS indicated at a recent industry conference that they will be stepping up audit activity of 403(b) plans. That means an employer may want to consider whether it is appropriate to have its employees become 403(b) experts through on-the-job training. If an employer does not have employees who can become well-versed in the rules and take on 403(b) plan administration, they may want to consider hiring a TPA to administer the plan.
Additional considerations arise if the sponsor is a 501(c)(3) organization that is neither church- nor government-affiliated and wants its 403(b) plan to operate under the Department of Labor (DoL)’s non-ERISA safe harbor. DoL Field Assistance Bulletin 2007-02, which was issued shortly after the IRS released its final 403(b) regulations, indicates that a 501(c)(3) plan sponsor intending to remain within the non-ERISA safe harbor must limit its activities with respect to the 403(b) plan to only those that are ministerial and nondiscretionary.
Specifically, the Field Assistance Bulletin notes that an employer is not permitted to perform plan administration functions for its 403(b) plan that require discretionary determinations, including authorization of disbursements under the 403(b) plan. If a non-governmental/non-church 501(c)(3) organization wants its 403(b) plan to continue to meet the DOL non-ERISA safe harbor, then it has no choice but to delegate plan administration to a third party consistent with the guidance set forth in the Field Assistance Bulletin.
If a 403(b) sponsor does decide that a TPA will be providing the plan’s administrative services, the employer should assess each candidate's abilities and skills to ensure they meet the plan’s needs.
Sponsors should ask:
- What is the TPA’s experience with 403(b) plan administration? - All 403(b) plans are not created equal. The rules for 403(b) plan administration may vary, depending on whether the sponsor is a public school or a 501(c)(3) organization. Even within these categories, a TPA may need to be familiar with special 403(b) plan rules applicable to churches and church-affiliated entities. The TPA’s services also need to reflect whether the 403(b) plan is subject to ERISA – remember that public schools have a statutory exemption from ERISA; churches do too, unless they make a voluntary irrevocable election to have ERISA apply.
- Does the TPA keep up-to-date on 403(b) regulatory developments? - Change is constant. An employer should determine whether a TPA is able to meet plan needs, both in terms of expertise and infrastructure, in a continually evolving regulatory environment. That means the TPA should be able to both monitor legislative and regulatory developments impacting 403(b) plans as well as implement those changes in a timely fashion. A TPA’s ability to meet new IRS rules will help keep a 403(b) plan operating smoothly with minimal disruption to the sponsor or its participants.
- Does the TPA operate in accordance with industry standards? - The SPARK Institute has developed 403(b) Best Practices Common Data Elements to facilitate compliance with IRS information sharing rules for loans, hardships, and other distributions from a 403(b) plan. Information on entities (including TPAs) who meet the SPARK common data elements criteria can be found at http://www.sparkinstitute.org/403b-data-elements.php.
- What is the scope of the TPA’s services? - If an employer hires a TPA, the IRS will require that the responsibilities delegated to the TPA be part of the 403(b) written plan. Therefore, it is important that a sponsor understands the extent of services a TPA will be providing. For example, if a 403(b) plan offers hardship withdrawals, will the TPA review the documentation to determine if a participant’s hardship request can be approved? Alternatively, will the TPA delegate that review and approval function to the product vendor? Some TPAs provide plan document services while others do not, so clearly establishing the roles among all parties will keep a 403(b) plan operating smoothly and help minimize the likelihood of oversights if the IRS performs an audit.
Plan sponsors should continue to give their 403(b) plans a periodic check-up and resolve any discrepancies that may develop. In the end, a little oversight and attention goes a long way in helping keep the 403(b) plan compliant so it can pass the test of a potential IRS audit.
Linda Segal Blinn, JD, Vice President of Technical Services, ING U.S. Retirement Services
(This material was created to provide accurate information on the subjects covered. It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation. These materials are not intended to be used to avoid tax penalties, and were prepared to support the promotion or marketing of the matters addressed in this document. The taxpayer should seek advice from an independent tax advisor.)