The Department of Labor has issued Field Assistance Bulletin (FAB) 2010-01 clarifying the extent to which pre-2009 contracts no longer receiving employer contributions under a tax-sheltered annuity Section 403(b) arrangement may be omitted from ERISA plan reporting, and when Section 403(b) arrangements are exempt from ERISA under the Department’s “safe harbor” regulation. The results are some “do” and “do not” rules for tax-exempt employers who want to minimize or claim exemption from ERISA reporting. [Field Assistance Bulletin 2010-01].
Background. The Department of Labor has long maintained a “safe harbor” regulation (29 C.F.R. § 2510.3-2(f)) for employee-paid arrangements to which the employer does not contribute, and employer involvement is limited mainly to collecting and remitting employee payroll deductions. Tax regulations for Section 403(b) arrangements that were issued in 2007 and became effective in 2009 imposed significant document and administrative requirements for Section 403(b) arrangements. In 2007, the Department issued FAB 2007-02 to delineate the scope of the safe harbor regulation in light of employer responsibilities under the tax regulations.
In 2009, the Department followed up with FAB 2009-02, which addressed ERISA audit and reporting requirements for Section 403(b) arrangements that were ERISA plans. Notably, FAB 2009-02 gave transitional relief allowing pre-2009 contracts no longer receiving employer contributions to be excluded from the ERISA plan for audit and reporting purposes.
The new FAB 2010-01 gives additional guidance on both subjects. Its 18 questions and answers merit close study by tax-exempt organizations whose Section 403(b) arrangements are subject to ERISA, or who continue to rely on the safe harbor regulation to avoid ERISA. (Section 403(b) arrangements of public schools can continue to be exempt from ERISA as governmental plans.)
Annual Reporting Key to the transitional relief of last year’s FAB 2009-02 is the ability to disregard, for ERISA purposes, pre-2009 contracts to which no further employer contributions are being made. FAB 2010-1 reiterates the rule that qualifying pre-2009 contracts are not considered plan assets, and makes the following further points, first about things that do and do not take otherwise qualifying pre-2009 contracts out of the transitional relief:
- Such contracts will continue to qualify for the transitional relief even if the employer continues to provide information to the provider (such as whether an employee has terminated employment), but not if the employer must make or consent to discretionary decisions (such as whether an employee has a hardship permitting premature withdrawal, or qualifies for a loan).
- A contribution made in 2009 but solely for the 2008 year will not be treated as a 2009 contribution taking the contract out of the transitional relief.
- Loan repayments are considered contributions, so contracts where the employer deducts loan repayments from payroll and forwards them to the provider will not qualify for the transitional relief. But contracts will continue to qualify for transitional relief if the employee makes loan repayments directly to the provider.
- Otherwise qualifying pre-2009 contracts will lose that status if exchanged for a new contract in an exchange requiring the employer’s consent.
As to the scope of the transitional relief, FAB 2010-01 points out that:
- The rules for excluding pre-2009 contacts apply not just for 2009, but for ERISA reporting in all future years.
- For ERISA reporting purposes, an employer may exclude fewer than all of the qualifying pre-2009 contracts, including fewer than all the contracts that it knows about.
- Employees (or former employees) whose only participation is through a qualifying pre-2009 contract may be disregarded in determining the number of participants in the plan. (This in turn may determine whether the plan remains a small (under 100-participant, or in some circumstances under 120-participant) plan exempt from the financial audit and expanded financial disclosure requirements.)
- Qualifying pre-2009 contracts and their assets may be excluded from all schedules and from comparative financial statements.
- A financial audit report will not be rejected for being “qualified,” “adverse” or “disclaimed” if the sole reason for that limitation is that qualifying pre-2009 contracts were not covered by the audit.
- The financial audit may consider whether excluded contracts really do qualify for the transitional relief, and any questions about their status should be resolved as part of the audit.
The transitional relief of FAB 2009-02 applies to employers making a “good faith” effort to transition for the 2009 plan year. FAB 2010-01 states that “good faith” depends on all the facts and circumstances, but notes that:
- Employers and plan administrators must document their efforts to properly to account for and report on contracts and custodial accounts.
- Employers and plan administrators must implement internal controls to keep and maintain (as required by ERISA record retention requirements) records on a going-forward basis.
Scope of the Safe Harbor Staying within the safe harbor requires (among other things) that the employer have no discretionary responsibilities in connection with the arrangement and that employees have a “reasonable choice” of both 403(b) providers and investment products. FAB 2007-02 explained how administrative responsibilities required by the tax regulations could be allocated between the employer and the insurance company or other provider of the annuity contracts so as to preserve the safe harbor for the employer.
The most noteworthy aspect of FAB 2010-01 here is its discussion of how arrangements where the employer limits access for employee Section 403(b) deferrals to only one (or a very few) contract providers may still qualify under the safe harbor as giving a “reasonable choice” to employees. While stressing that access to multiple providers remains the general rule, FAB 2010-01 indicates that:
- An employer may select only one provider if employees are allowed to transfer or exchange (in accordance with tax regulations) their interests to a 403(b) account of another provider.
- Limitation to one provider might also be acceptable if the employer can demonstrate that the administrative burdens and costs of making payroll deductions available for employee elective deferrals to multiple providers would otherwise cause the employer to drop the 403(b) program altogether and if the one selected provider offers a sufficiently broad range of affiliated or unaffiliated investment products.
- An employer may, consistently with the safe harbor, discontinue a provider that does not comply with Internal Revenue Code requirements.
FAB 2010-01 also addresses the limitations on employer discretion under the safe harbor:
- Loans and other discretionary features may be allowed under a safe harbor arrangement as long as the provider, rather than the employer, is responsible for any discretionary determinations.
- An employer may limit its 403(b) providers to those whose service contracts state that the provider will make those discretionary determinations.
- An employer may not have discretionary authority to exchange or move employee funds from one provider to another.
- An employer can not avoid discretionary responsibilities and thereby stay within the safe harbor by contracting with a third-party-administrator (TPA) to make discretionary decisions.
- However, if the TPA making discretionary decisions is selected by an independent third party (or the provider), the safe harbor may remain available.
Employers should bear in mind that while the FAB is binding on the Department of Labor auditors in the field -- that is what Field Assistance Bulletins are for -- the Department of Labor positions taken in FAB 2010-01 may not necessarily be given deference by a court in a lawsuit brought by a participant claiming the safe harbor does not apply. The safe harbor should therefore still be entered with some caution.
Employers relying on the safe harbor must review FAB 2010-01 to ensure they remain within the Department’s interpretations of it. For other employers, the clarifications provided by FAB 2010-01 will be helpful as they make the transition to the full ERISA reporting regime for Section 403(b) arrangements.