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

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

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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