Maintaining Non-ERISA Status for 403(b)s

February 1, 2011 ( – Many 403(b) sponsors that have maintained their plan under the Employee Retirement Income Security Act safe-harbor exclusion are now questioning whether this is even possible given the new rules requiring increased plan sponsor oversight.

Though the Department of Labor addressed the issue further in Field Assistance Bulletin 2010-01 (see EBSA Offers Form 5500 Guidance for 403(b) Plans), there are still questions about how the sponsor can conform to Internal Revenue Service regulations without exceeding the “no exercise of discretion” requirement of the ERISA safe-harbor, and at least one industry group has asked for transitional relief for plan sponsor that may have found themselves inadvertently subject to Title I of ERISA (see ASPPA Asks for Relief for Plans Falling out of ERISA Safe Harbor).  

In the 2010 National Tax Sheltered Annuity Association’s 403(b) Compliance Resolution Summit, workshop facilitators Christopher M. Guanciale, Esq., APM, PlanMember Financial Corporation, and Barbara Webb, PenServ Plan Services, Inc., offered recommended solutions to this dilemma.  

According to NTSAA’s Summit report, sponsors should first identify the parties involved and determine their role, including the sponsor; the third-party administrator, if used; product providers; and any consultants, accountants or attorneys for the sponsor. The report notes that the sponsor cannot hire the TPA to make discretionary decisions; however, it could contract with an entity to gather information at a single source so that product providers can make those discretionary decisions. The contract with the TPA should make it clear that discretionary decisions are being made by the product providers.   

Product providers must be willing to assume the liability associated with transaction approvals or alternatively, the product providers can contract with a TPA where the TPA provides data to the product providers and the TPA makes discretionary decisions.   

In a multiple vendor environment, the sponsor should provide a variety of investment choices to meet a variety of investment objectives and limit the product providers to those that can agree to comply with the compliance responsibilities, including the making of discretionary decisions. 

For the single vendor option, the report says, to be consistent with the FAB, it appears that the DoL, given all other facts and circumstances, will permit a single vendor portal without multiple investment choices, only if the multiple investment option is cost-prohibitive and would result in the employer’s termination of the plan to avoid those costs, and only if the employer offers employees the freedom to exchange their accounts to a different “exchange only” provider.   

According to the NTSAA report, if a sponsor detects potential discrepancies with the “safe harbor” status of a particular plan, it should consider hiring competent counsel to conduct an evaluation of all facts and circumstances and make a determination for employer of the appropriate next steps. 

If the evaluation of facts and circumstances lead to a determination that weighs heavily in favor of the plan being subject to ERISA, the sponsor should be consulted on how to embrace ERISA status; adopt an ERISA plan document; file Form 5500 going forward; get an ERISA bond; and follow all ERISA requirements. Also, the sponsor should consider use of the Department of Labor “failure to file the 5500 in the past” correction procedures.   

If, in the alternative, the facts and circumstances lead to a determination favoring “safe harbor” status has been maintained, the sponsor should follow the recommended steps to maintain the status.

The NTSAA Summit report is here.

Rebecca Moore