Non-ERISA 403(b) plans must walk a fine line to avoid losing the ERISA exemption
Last month’s Supreme Court decision, Advocate Health Care Network v. Stapleton, upholding ERISA exemption for church-affiliated pension plans was a reminder that not all benefit plans are subject to ERISA. Indeed, non-profit employers who sponsor 403(b) plans can choose to be exempt from ERISA. But they have to tread carefully.
Why take this path?
Very simply, a non-ERISA 403(b) plan would not be subject to Title I of ERISA which among other provisions mandates certain reporting and disclosure requirements and imposes fiduciary responsibilities for those who have discretion over plan management and assets.
Thus, a 403(b) plan if a non-ERISA plan:
Would not file Form 5500 and related schedules including the audit requirement if over 100 or more participants;
Need not distribute a Summary Plan Description to participants; and
Would be exempt from ERISA’s strict fiduciary requirements.
How does a 403(b) plan become non-ERISA?
The Department of Labor (“DOL”) has, however, provided guidance or safe harbors in two publications, Field Assistance Bulletin 2009-02 and Field Assistance Bulletin 2010-01summarized as follows:
Employees must participate in the 403(b) on a voluntary basis.
Only the employee or beneficiary can enforce rights under the annuity contract or custodial account.
The employer makes no contribution.
The employer receives no compensation except for a reasonable amount to cover expenses related to employer’s duties under the contracts.
The employer has only minimal involvement with the administration of the plan, e.g., limited to depositing employee contributions, allowing vendors to explain their products, and providing investment choices.
How could a non-ERISA 403(b) plan subject itself to ERISA?
Sometimes discretion inadvertently or unknowingly finds itself in the plan such as an employer determining eligibility, processing hardship distributions and loans, and determining whether a domestic relations order is a Qualified Domestic Relations Order. That also includes hiring a Third Party Administrator like our firm.
That means, of course, the 403(b) plan could be subject to ERISA’s Title I requirements with all the time and expense to make the DOL’s required corrections – a topic way beyond this blog post.
Here are some points to keep in mind:
First, plan sponsors should seek advice from an experienced ERISA attorney that the 403(b) plan meets the DOL safe harbors – and get it in writing.
Second, plan sponsors should also review the plan annually to make sure that discretion hadn’t become part of the plan. If it has, then go back to the first point.
Finally, a 403(b) plan may be able to escape ERISA, but two other compliance obligations never go away: 1) the Internal Revenue Code, and 2) fiduciary responsibilities under state law – a topic for another time.