Revisiting the 403(b) non-ERISA Safe Harbor

June 1, 2010 (PLANSPONSOR (b)lines) - Suppose you are the human resources director for a 501(c)(3) nonprofit organization that offers a 403(b) plan.  You have paid attention to the IRS 403(b) regulations, making sure that your plan reflects the new tax compliance rules, and since your 403(b) plan only accepts voluntary employee contributions, it falls within the Department of Labor (DoL)’s regulatory non-ERISA safe harbor.

That means everything should be set as far as plan operation goes, right?  Not necessarily.    

In light of recently issued DoL guidance – Field Assistance Bulletin 2010-01 – a 403(b) sponsor should now be taking another look at the plan’s operation under the non-ERISA safe harbor.  This new guidance provides additional explanation about the actions a 501(c)(3) organization can and cannot take with respect to its 403(b) plan to continue to satisfy the safe harbor.    


ERISA has two statutory exemptions for plan sponsors – governmental employers (including public schools) and church entities (provided they do not voluntarily and irrevocably elect to have the ERISA provisions apply to their plan).  If, however, a 403(b) sponsor does not fit into either of these statutory exceptions, there is one more option – a 501(c)(3) sponsor that is neither church- nor government-affiliated would need to satisfy the “limited employer involvement” criteria of the DOL non- ERISA safe harbor regulations.   

According to the regulations, an employer meets the “limited involvement” requirement when it does the following:

  • Permits vendors to publicize their products;
  • Requests and summarizes information regarding the available funds or products;
  • Collects salary reduction contributions and remits them to vendors;
  • Holds in the employer’s name one or more group annuity contracts covering its employees; and
  • Offers a reasonable number of investments under the plan.

In 2007, the DoL recognized the need to supplement its non-ERISA safe harbor regulations to reflect the new final IRS 403(b) regulations. The resulting DoL Field Assistance Bulletin 2007-02 explained that a 501(c)(3) organization seeking to maintain its 403(b) plan’s safe harbor status could not take on discretionary determinations, including authorization of disbursements under the 403(b) plan.      

However, questions soon arose once the IRS’ 403(b) regulations became effective in 2009.  Specifically, 501(c)(3) organizations which had previously not considered their 403(b) program to be an employer-sponsored plan had to navigate new waters, balancing 403(b) plan operation regulations outlined by the IRS with the existing DoL non-ERISA safe harbor requirement.  A grey area emerged regarding which activities under the IRS 403(b) regulations would be considered “discretionary” and cause a plan to fall outside the safe harbor.

New Guidance  

In the new Field Assistance Bulletin 2010-01, issued this past February in Q&A format, the DoL has attempted to clarify how to operate a 403(b) under the non-ERISA safe harbor.  According to the guidance, a 501(c)(3) organization operating under the safe harbor can offer optional plan design features such as  loans or hardship withdrawals, but only if the product vendor assumes responsibility for authorizing participant requests for these transactions.    

An employer looking to limit its role to administrative functions can do so by delegating its discretionary administrative duties to its product vendors, but not directly to a third party administrator (although the product vendor, in turn, could retain a third party administrator).   

In addition, the guidance notes that offering a “reasonable choice of investments” – which is a requirement for a safe harbor plan – generally means more than one product vendor and more than one investment product must be made available under the plan.    

However, even with this general rule, there are two exceptions that will enable a 403(b) plan to satisfy the safe harbor: 

  • Employee contributions can be remitted to just one vendor, provided that participants may move their account via contract exchange to another provider under that 403(b) plan; or   
  • Amounts under the 403(b) can be limited to a single vendor with a wide array of investment options, if , based on the facts and circumstances, the sponsor can show that the administrative costs and burdens of operating in a multiple vendor scenario would result in no longer offering a 403(b) plan altogether. Under this alternative, the employer would need to provide employees looking to participate in the 403(b) plan with advance notice describing “limitations on or costs or assessments associated with an employee’s ability to transfer or exchange contributions to another provider’s contract or account.”


In light of this latest DoL guidance, a 501(c)(3) organization’s benefits manager seeking to preserve the 403(b) plan’s non-ERISA status should, together with legal counsel:

  • Do the homework and take stock - How many vendors are currently available under the plan either to receive employee contributions or contract exchanges? 
  • Reassess current workflows - How are requests for disbursements currently handled?  Does the product vendor have plan administration functionality to approve participant requests for loans and withdrawals?  
  • Stay informed - DoL guidance issued to date does not address either transitional rules or the ability to retroactively make corrections for a 403(b) plan to preserve its non-ERISA status.  Industry groups are seeking additional clarification on these issues.

Understanding these changing dynamics of the 403(b) landscape can help a 501(c)(3) plan sponsor stay the course toward safe harbor.  

Linda Segal Blinn, JD, Vice President of Technical Services, ING   

Note: 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.