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August 7, 2007

403(b) Plans: ERISA Exemption?

One of the questions that has been nagging tax-exempt organizations is how to preserve a plan’s exemption from ERISA. Generally, not-for profit organizations sponsoring 403(b) plans are subject to ERISA, unless the plan is fully funded with employee money, and as long as certain other conditions are met. With the issuance of the new 403(b) regulations, a question has arisen about how an employer can make an employee-funded plan available that would be exempt from ERISA? The day after the final 403(b) regulations were issued, the DOL’s Employee Benefits Security Administration came out with Field Assistance Bulletin (FAB) 2007-02 to give direction on this question.

In summary, this guidance provides that a plan, funded fully with employee dollars, can retain exemption from ERISA, as long as the following conditions are met:

  1. The plan is completely voluntary;

  2. All rights under the contract or custodial agreement are enforceable by the employee, the employee’s beneficiary, or his/her authorized representative;

  3. The employer involvement is limited to certain specified activities, as more fully described below;

  4. The employer receives no direct or indirect compensation or consideration, other than reimbursement for reasonable expenses incurred in performing duties relating to salary reduction administration.

According the FAB, examples of activities that the employer can do without violating the safe harbor are:

  • Allow providers, including insurance agents and brokers, to publicize their products to employees.

  • Compile, for employees, information from various providers.

  • Accomplish the salary reduction function, including withholding employee money and paying it over to providers.

  • Hold annuities or other contracts in the employer’s own name, and exercise certain rights, such as amendment rights on behalf of employees.

  • Limit the number and variety of products to a selection designed in which to allow reasonable choice.

Generally, church plans and government plans are exempt from ERISA; therefore, these matters are not of concern.

 

The information contained in this Benefit Beat is not intended to be legal, accounting, or other professional advice, nor are these comments directed to specific situations.

As required by U.S. Treasury rules, we inform you that, unless expressly stated otherwise, any U.S. federal tax advice contained in this Benefit Beat is not intended or written to be used, and cannot be used, by any person for the purpose of avoiding any penalties that may be imposed by the Internal Revenue Service.

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