DOL Opinion: Certain 403(b) Plans No Longer Exempt from ERISA



Department of Labor limits an exemption from the Employee Retirement Income Security Act

By McDermott, Will & Emery, LLP Jun 21, 2012
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In Advisory Opinion 2012-02A, released on May 25, 2012, the U.S. Department of Labor (DOL) stated that not-for-profit organizations making matching contributions to employee accounts under a qualified plan—one that meets the qualification requirements of Internal Revenue Code section 401(a)—based on elective deferrals made by the same employee to the organization’s section 403(b) retirement savings plan cannot rely on a "safe harbor" exemption from the Employee Retirement Income Security Act (ERISA) with respect to the 403(b) plan.

As a practical matter, because almost all 403(b) plans seeking to remain exempt from ERISA rely on the safe harbor, a 403(b) plan will no longer be exempt from ERISA if the employer maintains a somewhat common arrangement whereby employer contributions are made to another qualified plan but are contingent on the amount contributed to the 403(b) plan. For example, maintaining a separate 401(a) plan with employer profit-sharing contributions will not affect reliance on the safe harbor. However, maintaining a separate 401(a) plan with matching contributions that match amounts contributed to the 403(b) plan no longer will satisfy the safe harbor.

The safe harbor provides that a 403(b) plan will not be subject to ERISA if, among other requirements, employee participation is completely voluntary and employer participation is limited to certain specified activities (such as remittance of pretax contributions to an annuity contract or custodial account, permitting vendors to publicize their 403(b) plan products with employees, etc.).

In an effort to preserve the ERISA exemption with respect to a 403(b) plan, some organizations created a separate 401(a) plan to simply hold employer contributions made on an employee’s behalf and not permitting voluntary employee elective deferrals. As such, employers treated the 401(a) plan as subject to ERISA and the 403(b) plan as exempt from ERISA.

According to Advisory Opinion 2012-02A, an organization will not fail the safe harbor simply because it maintains a separate 401(a) plan. However, the opinion stated if the employer contributions to the 401(a) plan are conditioned on the employee making pretax contributions to the 403(b) plan, then there is violation of the “completely voluntary” and “limited employer involvement” requirements of the safe harbor.

Consequently, although there are two separate plans, the DOL has indicated that reliance on participation in the 403(b) plan to be eligible for contributions to the 401(a) plan will cause the 403(b) plan to be ineligible for the ERISA exemption through the safe harbor. This means the 403(b) plan will be subject to ERISA’s fiduciary duty, reporting and disclosure requirements.

Unfortunately, the opinion does not provide guidance to organizations that have historically taken a contrary view to the opinion. The following options are high-level ideas on potential alternatives available for organizations to consider for purposes of restructuring these types of arrangements. Which option is best (or even available) for a given organization is completely dependent on that organization’s individual facts and circumstances:

What to Do with 403(b) Plan

What to Do with 401(a) Plan

Result/Considerations

Option 1

Keep 403(b) and add the matching component to the 403(b) plan

Freeze or terminate the 401(a)

No ADP testing (i.e., nondiscrimination testing of pretax deferrals) required for 403(b) plan.

With 403(b) arrangement, no current requirement to file for determination letter.

Single audit (if 401(a) plan is terminated).

Single Form 5500 filing (if 401(a) plan is terminated).

Potentially more limited investment options with 403(b) plan.

Option 2

Freeze or terminate the 403(b)

Keep 401(a) and add an elective deferral (CODA) component, making it a 401(k) plan

Required to now conduct ADP testing (i.e., nondiscrimination testing of pretax deferrals).

Requirement to file for determination letter (if using a prototype document, you may be able to avoid this).

Single audit (if 403(b) plan is terminated).

Single Form 5500 filing (if 403(b) plan is terminated).

Option 3

Do nothing

Do nothing

No ADP testing (i.e., nondiscrimination testing of pretax deferrals) required for 403(b) plan.

With 401(a) arrangement, current requirement to file for determination letter (if using a prototype document, you may be able to avoid this).

Two audits required (one for each plan).

Two Form 5500 filings required (one for each plan).

Numbering more than 1,000 lawyersMcDermott Will & Emery LLP is an international law firm with a diversified business practice.

© 2012 McDermott Will & Emery LLP. All Rights Reserved. Reposted with permission.

This article should not be construed as legal advice.

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