In Search of the Elusive Non-ERISA 403(b)

Adam C. Pozek | 02/21/10

Crikey!  We’ve just discovered the rare non-ERISA 403(b) plan meandering along, oblivious to such details as filing Form 5500 or worrying about fiduciary responsibility.  Wait…could it be this harmless creature only offers investments from a single vendor?  Danger! Danger! Danger!

Last week, EBSA published Field Assistance Bulletin 2010-01 to provide additional guidance to those trying to figure out how to cope with life under the new 403(b) regulations.

Of potentially more interest, however, is what has NOT changed…the determination of ERISA coverage.  Generally speaking, there are three broad categories of 403(b) plans not subject to ERISA.

  •       Governmental plans such as public schools enjoy a statutory exemption from ERISA.
  •       Church plans are also exempt by statute unless they make a formal election to be covered.
  •       Plans in which the employer has only very limited involvement in the ongoing operation, administration, etc. of the plan are also exempt.

It is this third category - addressed in DOL Reg 29 CFR 2510.3-2(f) - that is most misunderstood.  What, exactly, does it mean for the employer to have limited involvement?

For starters, there can be no employer matching or non-elective contributions to the plan.  Not only will such contributions trigger ERISA coverage, they will also require the plan to satisfy nondiscrimination testing (ACP test for employer match and 410(b)/401(a)(4) tests for NEC).

A second factor is the number of investment vendors and options within each vendor platform available to participants.  According to Q&A 16 in FAB 2010-01, “To meet the terms of the safe harbor, the arrangement generally must offer a choice of more than one 403(b) contractor and more than one investment product.” [emphasis added]  This is the one I have seen bite many unsuspecting non-profits, and it is not new.  Not only are single-vendor plans subject to ERISA now, they always have been.

The most obvious consequence is that Forms 5500 should have been filed for each year since plan inception.  Fortunately, this can be easily remedied using the DOL’s Delinquent Filer Voluntary Correction Program.  There is also a matter of required notices such as the Summary Plan Description.  ERISA-covered plans that do not satisfy timing requirements to distribute the SPD can be penalized up to $100 per participant per day.

What may be less obvious but exceedingly more risky is the issue of fiduciary responsibility.  Many of these arrangements were setup and left to their own devices without a trace of any prudent processes to analyze fees or select/monitor investment options.  A recent GAO report confirms that 403(b) plans generally pay higher fees their for-profit counterparts.

If the FAB is any indication, non-ERISA 403(b) plans may be headed for the endangered species list.  For those realizing they must deal with ERISA and all of its ramifications, much time and attention are needed to determine how to appropriately, yet cost-effectively address past neglect while creating a habitat for these beasts to flourish in the future.

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Topics: 403(b), Department of Labor, ERISA, Fiduciary Responsibility, DWC

The views expressed in this blog are those of the authors and do not necessarily represent the views of any other person or organization. All content is provided for informational purposes only and is not intended to be tax or legal advice.