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:

  1. The arrangement must be funded solely through salary reduction agreements or agreements to forego an increase in salary.
  2. Participation by employees must be completely voluntary.
  3. 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.
  4. The employer’s involvement is limited to certain specified activities.
  5. 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.