A 403(b) plan is a retirement program for employees of public schools, certain tax-exempt organizations and certain ministers. Under a 403(b) plan, employers may purchase annuity contracts or establish custodial accounts invested only in mutual funds for the purpose of providing retirement income for their eligible employees. The annuity contracts and custodial accounts may be funded by employee salary deferrals, employer contributions or both.
Some of the tax qualification requirements that apply to other types of retirement plans, such as 401(k) plans, also apply to 403(b) plans, with several modifications. In addition, Title I of ERISA may apply to a 403(b) plan, depending on the identity of the employer and the level of the employer’s involvement.
A 403(b) plan sponsored by a governmental or church employer is exempt from ERISA coverage. Also, the Department of Labor (DOL) created a safe harbor from ERISA’s coverage requirements for 403(b) plans maintained by tax-exempt organizations when the employer has limited involvement with the plan.
ERISA TITLE I
Title I of ERISA sets minimum standards to ensure that employee benefit plans are established and maintained in a fair and financially sound manner. ERISA generally requires sponsors of employee benefit plans to comply with numerous requirements aimed at protecting the interests of the plan participants and beneficiaries. For example, under ERISA, sponsors of employee benefit plans must provide participants and beneficiaries with certain information regarding their plans, such as a summary plan description (SPD) and information regarding benefit claims.
In addition, under ERISA, those individuals who manage plans (and other fiduciaries) must meet strict standards of conduct. ERISA also contains detailed provisions for reporting to the government, including the annual Form 5500 filing requirement. Further, ERISA contains civil enforcement provisions meant to protect plan funds and ensure that eligible participants receive their benefits.
SAFE HARBOR REQUIREMENTS:
Under the DOL’s safe harbor, a 403(b) program that is funded solely through employees’ salary deferrals is not subject to ERISA if certain factors are present. These factors are:
- The employees’ participation is completely voluntary;
- All rights under the annuity contract or custodial account are enforceable solely by the employee (or the employee’s beneficiary);
- The employer’s involvement is limited to certain optional specified activities; and
- The employer does not receive any direct or indirect compensation or consideration in cash or otherwise, other than reasonable reimbursement to cover expenses properly and actually incurred in performing the employer’s duties under the salary reduction agreements.
Whether a tax-exempt employer with a 403(b) program falls within the DOL’s safe harbor must be analyzed on a case-by-case basis.
Limited Employer Involvement
The DOL’s safe harbor allows an employer to engage in a limited range of activities to facilitate the 403(b) program. Under the safe harbor, an employer may:
- Permit annuity contractors to publicize their products, request information regarding proposed funding media, products or annuity contractors and compile this information to facilitate the employees’ review and analysis;
- Enter into salary reduction agreements and collect annuity or custodial account considerations required by the agreements, remit them to annuity contractors and maintain records of the collections;
- Hold one or more group annuity contracts in the employer’s name covering its employees and exercise rights as its employees’ representative under the contract, at least with respect to contract amendments; and
- Limit the funding media or products available to employee, or annuity contractors who may approach employees, to a number and selection designed to afford employees a reasonable choice in light of all relevant circumstances.
However, the safe harbor does not allow an employer to have responsibility for, or make, discretionary determinations in administering the 403(b) program.
Effect of Final 403(b) Regulations
The final 403(b) regulations required 403(b) programs to comply with additional tax qualification requirements and be maintained pursuant to a written plan document. In Field Assistance Bulletin 2007-02, the DOL confirmed that it is possible for tax-exempt employers with 403(b) programs funded solely with salary deferrals to comply with the final regulations and remain within the safe harbor.
Tax Compliance Issues
According to the DOL, the ERISA safe harbor allows an employer to conduct administrative reviews of the 403(b) program’s structure and operation for tax compliance defects. These reviews may include discrimination testing and compliance with the maximum contribution limits. An employer may create and propose corrections, develop improvements to the plan’s administration to avoid tax compliance errors, obtain the cooperation of other entities involved with the 403(b) program in order to correct tax defects and maintain records of its activities.
The ERISA safe harbor for 403(b) programs also allows an employer to certify certain facts for the annuity provider, such as employee addresses, attendance records or compensation levels. An employer could also transmit another party’s certification of facts to the annuity provider, such as a doctor’s certification of an employee’s medical condition.
Written Plan Document Requirement
In addition, Field Assistance Bulletin 2007-02 provides that an employer, by adopting a written plan, does not automatically create an ERISA plan. The DOL stated that it expected that a written 403(b) plan that complies with the safe harbor would consist largely of the separate contracts and related documents supplied by the annuity providers and account trustees or custodians. An employer’s involvement and adoption of a single document to coordinate administration among different issuers, and address applicable tax requirements, such as the universal availability requirement, without reference to a particular contract or account, will not put a 403(b) plan outside of the safe harbor.
The documents governing the 403(b) program should identify the parties responsible for the plan’s administrative functions. The documents should clearly describe the employer’s limited role and allocate discretionary determinations to the annuity provider or participant or to a third party selected by the provider or participant.
Choice of 403(b) Providers
The DOL’s safe harbor for 403(b) programs allows an employer to limit the funding media or products available to employees, or annuity contractors who may approach employees, to a number and selection designed to afford employees a reasonable choice in light of all relevant circumstances.
As a general rule, to meet the terms of the safe harbor, a 403(b) program must offer a choice of more than one 403(b) contractor and more than one investment product. However, there are some exceptions to this general rule. In Field Assistance Bulletin 2010-01, the DOL recognized that the cost of permitting employees to make contributions through payroll deductions may be significantly affected by the number of 403(b) contractors to which the employer must remit contributions. Thus, the DOL provided that the safe harbor allows an employer to limit the number of 403(b) providers to which it will forward salary deferrals to one, provided employees are allowed to transfer or exchange their interest to a 403(b) account of another provider.
Also, in Field Assistance Bulletin 2007-02, the DOL confirmed that a 403(b) program will not become subject to ERISA merely because it conforms to the final regulations by limiting employees to exchanges of contract funds only among providers who have adopted the written plan, or transfers from the program of a former employer to that of a current employer.
In addition, there may be circumstances where an employer can demonstrate that increased administrative costs in offering a number of 403(b) contractors would be sufficient to cause the employer to stop making its payroll system available to collect and remit 403(b) contributions to any 403(b) contractor. In such cases, according to the DOL, limiting available contractors to one offering a wide variety of investment products could be seen as affording employees a reasonable choice in light of all relevant circumstances (for example, a single insurance company’s 403(b) compliant arrangement with access to a broad range of affiliated investment products or a single 403(b) compliant “open architecture” custodial account platform giving employees access to a broad range of unaffiliated mutual fund investment products).
If your group is in need of more information on retirement plans or compliance, take a moment to contact one of our benefit consultants.