The New 403(b) Plan Documents and ERISA

Written by: Bob Toth

As we sit down and attempt to craft our new 403(b) plan documents to meet the January 1 deadline, that dreaded  question of whether or not any particular 403(b) plan is subject to ERISA’s Title I reach really comes home to roost.

It is a big stakes issue. A Title I 403(b) program is not only required to file a full Form 5500 in 2009 (complete with expensive audited financials, for the larger plans), but it will also be subject to that whole range of recently promulgated ERISA rules which apply to 401(k) plans: investment advice, the participant fee disclosures rules and the service provider rules, as well as the old standards including ERISA’s prohibited transaction and fiduciary rules. Toss in the plan asset “deposit rules” and the PPA statement rules, along with other ERISA minutia and you begin to get a flavor of what it means to be covered by Title I.

It has never really been an easy issue to deal with. For 501(c)(3) organizations (that is, most “private” tax-exempt organizations) and for those few church organizations which could be covered by ERISA, the DOL issued a “safe harbor” at 29 CFR 2510.3-2(f) which gave us some guidance. The key has always been to avoid enough employer involvement so that the 403(b) plan could not be seen as being “sponsored” by the employer. As long as it could be seen as an employee controlled, private arrangement, ERISA would not apply. We had gotten use to the balancing act.

These new 403(b) plan requirements, however, change that "balance." The regs are all about holding the employer accountable for a proper 403(b) plan. For example, where 403(b) vendors used to be able to rely upon employee representations for compliance, they no longer can do so. The employer must now be involved in the compliance process. Does this now mean that the IRS regs will cause plans to be covered by ERISA?

The IRS was concerned enough about the issue to seek guidance from the DOL. The DOL then issued Field Assistance Bulletin 2007-02,which provided some comfort, but causes pause to plan document drafters.  The DOL said in that FAB merely that conducting administrative reviews of the program structure and operation for tax compliance defects, including conducting discrimination testing,  limiting contributions, developing improvements to the plan's administrative processes that will obviate the recurrence of tax defects and obtaining the cooperation of independent entities involved in the program needed to correct tax defects, will not trigger ERISA coverage.

The DOL also said, though, that the it would be “inconsistent” with the safe harbor for the employer to “have responsibility for, or make, discretionary determinations in administering the program. Examples of such discretionary determinations are authorizing plan-to-plan transfers, processing distributions, satisfying applicable qualified joint and survivor annuity requirements, and making determinations regarding hardship distributions, qualified domestic relations orders (QDROs), and eligibility for or enforcement of loans.”

So a word of caution to plan drafters, employers and service providers: inadvertently putting “standard” 401(a) language (which assumes a plan administrator’s control over a plan) into a 403(b) document or a service provider agreement can be an expensive proposition. Doing it improperly can cause ERISA liability.

But it really raises the question as to whether or not a 501(c)(3) organization can now ever avoid ERISA status for its 403(b) plan, because of the new regs.

DOL Advises on Advice

By Nick Curabba

Readers of this blog have no doubt noticed the Department of Labor's latest pieces of regulatory guidance on investment advice (proposed regulations and a proposed class exemption).  The guidance was issued pursuant to a provision in the Pension Protection Act of 2006 (PPA), and bears a resemblance to (although is not as comprehensive as) legislation for which the financial services industry had advocated for at least six years that permits plan services providers to also provide investment advice directly to participants without running afoul of ERISA's prohibited transaction rules.

So far the DOL is winning praise from most parties for both the process used in developing the new guidance, and the substance of the proposed rules.  On process: the Department went out of its way to solicit public comment prior to even issuing proposed rules. Some of that was no doubt due to the statutory requirements to gather information about the feasibility of computer investment models, but the Department expanded that directive to other aspects of the regulations as well.  This kind of collaborative and open process should be a model for future regulatory initiatives, we believe. On substance: with the exception of an overly aggressive (and wholly unrealistic) proposed effective date, because of the open process, there is little in the proposed guidance that came as a great surprise.

That is not to say the guidance is fully without unexpected twists.  One interesting side note is in DOL's report to Congress (also required by the Pension Protection Act) which contains the Department's conclusion on the feasibility of using a computer model advice arrangement to provide advice to owners of individual retirement accounts (IRAs). Had the DOL found that no such model was feasible (because, for example, no model existed that could take account of the entire universe of investment options available to IRA investors), the Department was directed to issue a class exemption permitting investment advice arrangements for IRAs under alternative circumstances.

During the legislative run-up to the PPA, many of us lobbying for this provision believed that the DOL would find no such computer model existed, and therefore we anticipated a class exemption.  The Department departed from the expected route here. They appear to have side-stepped the need to issue a class exemption for IRAs by interpreting the PPA provision narrowly.  Rather than reading the PPA's direction as requiring the DOL to determine if a computer model could take account of all available investment options, the Department saw its role as merely determining if there exists a computer model that can take account of all the assets classes that would make up a prudently diversified portfolio.  It's an interesting (if not overly crimped) analysis and results in a somewhat expeditious availability of prohibited transaction relief to IRA issuers.