Recently issued U.S. Department of Labor guidance indicates limitations on the use of an exemption from the Employee Retirement Income Security Act of 1974, as amended (ERISA), for certain 403(b) Plans.
In Advisory Opinion 2012-02A (the Opinion), the U.S. Department of Labor (DOL) stated not-for-profit organizations making matching contributions to employee accounts under a qualified plan (e.g., one that meets the qualification requirements of Code Section 401(a)) based on elective deferrals made by the same employee to the organization’s Code Section 403(b) Plan cannot rely on an exemption from coverage under the Employee Retirement Income Security Act of 1974, as amended (ERISA), with respect to the 403(b) Plan (the Safe Harbor). As a practical matter, because almost all 403(b) Plans seeking to remain exempt from ERISA rely on the Safe Harbor, a 403(b) Plan will no longer be exempt from ERISA if the employer maintains a somewhat common arrangement whereby employer contributions are made to another qualified plan but are contingent upon the amount contributed to the 403(b) Plan. For example, maintaining a separate 401(a) Plan with employer profit sharing contributions will not affect reliance on the Safe Harbor. However, maintaining a separate 401(a) Plan with matching contributions that match amounts contributed to the 403(b) Plan no longer will satisfy the Safe Harbor.
The Safe Harbor provides that a 403(b) Plan will not be subject to ERISA if, among other requirements, employee participation is completely voluntary and employer participation is limited to certain specified activities (such as remittance of pre-tax contributions to an annuity contract or custodial account, permitting vendors to publicize their 403(b) Plan products with employees, etc.).
In an effort to preserve the ERISA exemption with respect to a 403(b) Plan, some organizations created a separate 401(a) Plan to simply hold employer contributions made on an employee’s behalf (e.g., do not permit voluntary employee elective deferrals). As such, employers treated the 401(a) Plan as subject to ERISA and the 403(b) Plan as exempt from ERISA. According to the Opinion, an organization will not fail the Safe Harbor simply because it maintains a separate 401(a) Plan. However, the Opinion stated if the employer contributions to the 401(a) Plan are conditioned on the employee making pre-tax contributions to the 403(b) Plan, then there is violation of the “completely voluntary” and “limited employer involvement” requirements of the Safe Harbor. Consequently, although there are two separate plans, the DOL has indicated that reliance on participation in the 403(b) Plan to be eligible for contributions to the 401(a) Plan will cause the 403(b) Plan to be ineligible for the ERISA exemption through the Safe Harbor. This means the 403(b) Plan will be subject to ERISA’s fiduciary duty, reporting and disclosure requirements. Unfortunately, the Opinion does not provide guidance to organizations that have historically taken a contrary view to the Opinion.
The following options are high-level ideas on potential alternatives available for organizations to consider for purposes of restructuring these types of arrangements. Which option is best (or even available) for a given organization is completely dependent on that organization’s individual facts and circumstances.
Click here to view table.