When a 403(b) Plan’s Exclusive Relationship with One Vendor Really Isn’t
To simplify plan administration, certain sponsors are proposing to reduce the number of vendors under their 403(b) plan to a single provider.
But timing is everything, as 403(b) sponsors are learning. And unless they are paying close attention to the IRS guidance, a sponsor’s intentions may unknowingly be undermined. In other words, a 403(b) plan sponsor that enters into an exclusive arrangement with one vendor after 2008 may not truly have an “exclusive” relationship.
To better understand, a timeline is in order. According to IRS transitional guidance in Revenue Procedure 2007-71, any vendor that was “deselected” by an employer prior to January 1, 2009, the general effective date of the 403(b) regulations, need not be “part of the written plan” if the employer made a reasonable, good faith effort to reach out to a former vendor to coordinate information for participant requests for loans, hardships and other distributions. Alternatively, this requirement can be satisfied so long as the former vendor made a reasonable, good faith effort to contact the employer and exchange necessary information before processing participant disbursement requests under that investment product. So, a 403(b) plan that winnowed the number of vendors down to a single provider before 2009 could be considered to have only a single vendor “under the plan” and could be successful in streamlining plan administration.
But that’s not the case for situations where a vendor becomes an unapproved 403(b) provider on or after January 1, 2009. In fact, a sponsor that deselects a vendor from receiving ongoing contributions under the plan after the effective date of the regulations will nevertheless need to treat that provider as still being “under the plan.” Pursuant to the final 403(b) regulations, these vendors are required to enter into an information sharing agreement with the employer (if one does not already exist) to share information to process a participant request for a loan, hardship or other distribution.
That means even if a vendor is no longer authorized under the 403(b) plan to receive an additional dollar as a contribution or contract exchange, that deselected vendor will continue to be a part of the 403(b) plan as long as participants maintain accounts with that provider. Since reducing the vendor line-up after 2008 does not remove the regulatory burden of information sharing, a 403(b) sponsor will quickly find that an exclusive funding arrangement with a single vendor does not automatically result in plan administration made simple. On the contrary, providers deselected in 2009 or later are technically “legacy vendors” under the plan for information sharing purposes – and the 403(b) plan will, at some level, always be operating in a multiple vendor environment.
Operating under the DoL Safe Harbor
Reducing the number of vendors may also have implications for non-governmental/non-church 501(c)(3) organizations which intend to operate their 403(b) plans under the Department of Labor (DoL) non-ERISA regulatory safe harbor. For example, while a 501(c)(3) plan sponsor intending to remain within the non-ERISA safe harbor may limit funding media or products available to employees, that sponsor must nevertheless afford employees a “reasonable choice” in light of all relevant circumstances.
The DoL has indicated that giving participants reasonable choice could include remitting contributions to a single vendor; but the agency also states that employees must have the ability to transfer all or a part of their account to any vendor that meets the 403(b) requirements and agrees to the plan’s division of tax compliance responsibilities among the employer, provider and participant. Practically speaking, this does not make for easy administration for those 403(b) sponsors seeking to remain within the non-ERISA safe harbor.
Given this gray area, the DoL has noted that employers with non-ERISA safe harbor 403(b) plans are seeking additional clarification about this “reasonable choice of investments rule.” Expect to see guidance released soon that may shed some additional light on this topic.
In the meantime, be aware that consolidating vendors down to a single plan provider is not a cure-all for 403(b) plan administration. A sponsor will need to keep in mind the importance – and obligation – of sharing information with legacy, deselected vendors on an ongoing basis long before there is any opportunity for an IRS audit of the 403(b) plan.
- 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.)