New 403(b) Regulations Push Most Plans Under ERISA
Posted on Tue, Apr 13, 2010
The Department of Labor's new 403(b) regulations altered the requirements for plan documents, employee transfers, non-discrimination compliance and plan terminations. While the plan document requirements have garnered the most attention, a closer look at the regulations shows that the greatest change for small and midsize non-profit organizations is that most, if not all, 403(b) plans will now fall under the Employee Retirement Income Security Act (ERISA). In July, 2007, DOL issued a Field Assistance Bulletin on the new 403(b) regulations. A quick perusal of this FAB might lead one to question the above assertion, as the FAB lays out specific safe harbor requirements that, if followed, would exempt a plan from ERISA compliance. However, a close reading shows that compliance with these safe harbor regulations is impractical and nearly impossible. After laying out the ERISA safe harbor requirements, the FAB goes on to say "The employer could not, consistent with safe harbor, have responsibility for, or make, discretionary determinations in administering the program." Such discretionary determinations include:
- Authorizing plan to plan transfers
- Processing distributions
- Satisfying applicable qualified joint and survivor annuity requirements
- Determination of hardship withdrawals
- Processing Qualified Domestic Relations Orders (QDROs)
- Determining the eligibility and enforcement of loans
Any of the actions listed above, if completed by the employer, will force the plan to comply with ERISA. The only way to avoid taking on these actions yourself would be to hire a Third Party Administrator to handle these functions. However, no TPA could reasonably be expected to administer a properly compliant non-ERISA 403(b). Here's why. Every 403(b) plan is now required to maintain and adhere to a written plan document. To do so, a TPA must have access to comprehensive plan information in a timely manner. Non-ERISA 403(b) plan investment options are held in the name of the participant. In ERISA plans, the assets are owned by the plan, in trust, for the benefit of the employee. If the employee assets are held in various individual accounts in the employee's name, a TPA cannot be expected to aggregate all the plan information to assure the investments and contracts are compliant with the plan document. The various Tax Sheltered Annuity (TSA) and custodial account providers do not, in most cases, have the employer information; as a result, getting participant information back to an employer or TPA is unfeasible. The IRS realized this flaw and issued new guidance in November in an effort to remedy the issue. In a nutshell, this states that if the employer gives a "reasonable and good faith effort" to include the individual contracts as part of the employer's plan, the contracts will remain tax qualified. In addition, the guidance dictates that the issuer of these individual contracts make the same "reasonable and good faith effort" in providing the employer contract information. If it was realistic and possible to accomplish this information exchange, the IRS would just say do it, rather than ask the plans and contract issuers to make an "effort." The fact that this guidance was issued bolsters the assertion that trying to administer an employer plan with individual contracts is cumbersome, if not impossible. Clearly, this is meant to give plan sponsors some latitude on this issue, but why take the chance? The answer for 403(b) plans must then be to adhere to the ERISA laws, and in doing so transfer the assets of individual investors into plan-level ownership. This is how 401(k) plans function and it makes plan level administration and recordkeeping simple. It also gives better service and pricing to plan participants through economies of scale on their assets. Moving the assets to plan level ownership should satisfy the "reasonable and good faith effort" requirement in that the employer will contact all individual contract issuers to move the assets into plan ownership. Once this is the case and the assets fall under and adhere to the ERISA standards, there will no longer be a question as to their tax-qualified status under the new regulations. Moving 403(b) assets to a model that uses trustee ownership and follows ERISA has a number of advantages to the current structure. This structure has always provided automated recordkeeping, generally lower fees, improved service and more objective investment information. Now you can add one more benefit to this list, compliance with IRS and Department of Labor (DOL) regulations.