Maintaining Non-ERISA 403(b) Status

Certain 403(b) plan types will never be considered governed by the Employee Retirement Income Security Act (ERISA)—public K-12, college and university schools, charter schools treated as public schools under state law, and church plans for which the sponsor has not elected to be governed by ERISA. However, other 403(b) plan types must adhere to certain rules to qualify for the ERISA exemption.

Barbara J. Webb, director of technical services at the Horsham, Pennsylvania-based PenServ Plan Services, Inc., told attendees of the National Tax-deferred Savings Association’s (NTSA) 2014 403(b) Summit, the Department of Labor (DOL) defines non-ERISA plans as those that only include employee elective deferral contributions, not employer contributions, and for which the employer has no involvement except for the selection of vendors/investments. Non-ERISA 403(b) plan sponsors cannot assist in calculating available loans, hardship distributions, or in any other administrative duties under the plan, she said. This makes maintaining non-ERISA status difficult as the IRS regulations require 403(b) plans to adhere to statutory limits.

In order for 501(c)(3) nonprofit organizations to be considered non-ERISA, the DOL has provided safe harbor criteria listing what employers may and may not engage in as part of the day-to-day administration of the plan. Webb reminded Summit attendees what the criteria are.

The plan sponsor may:

• Engage in a range of activities to facilitate the operation of the program;
• Permit investment providers—including agents or brokers who offer annuity contracts/custodial accounts—to publicize their products;
• Request information concerning proposed funding media, products, or annuity contractors;
• Compile investment information to facilitate review and analysis by the employees;
• Enter into salary reduction agreements and collect annuity or custodial account considerations required by the agreements, remit them to the providers, and maintain records of such collections;
• Hold one or more group annuity contracts in the employer’s name covering its employees and exercise rights as representative of its employees under the contract, at least with respect to amendments of the contract;
• Limit funding media or products available to employees, or annuity contractors that may approach the employees, to a number and selection designed to afford employees a reasonable choice in light of all relevant circumstances;
• Certify to an annuity provider a statement of facts within the employer's knowledge as employer, such as employee addresses, attendance records or compensation levels;
• Transmit to the investment provider another party's certification as to other facts, such as a doctor's certification of the employee's physical condition;
• Identify in the plan the parties that are responsible for administrative functions, including those related to tax compliance. The plan should correctly describe the employer’s limited role and allocate discretionary determinations to the vendors/investment provider(s);
• Discontinue a provider due to non-compliance with 403(b) regulations or inclusion of optional features; and
• Refuse vendors whose operational practices force an employer to make discretionary decisions.

The plan sponsor may not:

• Permit any type of employer contributions under the plan;
• Have responsibility for, or make, discretionary determinations in administering any part of the 403(b) plan/program or hire a third-party administrator (TPA) to do the same;
• Make discretionary decisions including authorizing plan-to-plan transfers; processing distributions, including hardship distributions; determining whether a domestic relations order (QDRO) is qualified; and determining eligibility for and enforcement of loans; and
• Limit investments to one provider (Field Assistance Bulletin (FAB) 2010-01 permits “reasonable choice” for cost considerations where, for example, multiple investments are available under a broker/dealer or an “open architecture” program).