In U.S. Department of Labor (DOL) advisory opinion 2012-02A, the DOL ruled that basing matching contributions to an Employee Retirement Income Security Act of 1974 (ERISA) covered money purchase plan upon employees’ salary deferrals to a 403(b) plan prevented the 403(b) plan from qualifying for the exemption from ERISA under 29 C.F.R. § 2510.3-2(f). The ruling affects tax-exempt organizations with “linked” 403(b) arrangements.
With certain exceptions, ERISA generally applies to any pension plan “established or maintained” by an employer. A 403(b) arrangement is not treated as a pension plan “established or maintained” by an employer provided the safe harbor conditions in 29 C.F.R. § 2510.3-2(f) are met. Specifically:
- The arrangement must be funded solely through salary reduction agreements or agreements to forego an increase in salary.
- Participation by employees must be completely voluntary.
- All rights under the 403(b) arrangement must be enforceable solely by the employee, an employee’s beneficiary, or an employee’s (or beneficiary’s) authorized representative.
- The employer’s involvement is limited to certain specified activities.
- The employer receives no direct or indirect compensation other than reasonable compensation to cover expenses incurred by the employer in performing its duties under a salary reduction agreement or agreement to forego salary increases.
By basing matching contributions to the money purchase plan on salary deferrals to a 403(b) plan, the DOL ruled that the safe harbor requirements that participation by employees in the 403(b) arrangement be completely voluntary and that employer involvement be extremely limited were not met. As a result, the 403(b) arrangements were deemed to be ERISA plans, subjecting them to ERISA’s reporting and fiduciary regimes.