403(b) Programs Don’t Have to be ERISA Plans

A day after the Internal Revenue Service (IRS) released the final version of its 403(b) rules, the Department of Labor (DoL) said Tuesday that the plans can be set up so they are exempt from the Employee Retirement Income Security Act (ERISA).

In Field Assistance Bulletin 2007-02, DoL’s Employee Benefits Security Administration (EBSA) sets out a safe harbor allowing a 403(b) program funded only with employee contributions to not be treated as a pension plan “established or maintained” by the employer for purposes of Title I of ERISA.

To qualify for the safe harbor, EBSA said the plans have to show that:

  • participation of employees is completely voluntary,
  • all rights under the annuity contract or custodial account are enforceable solely by the employee or beneficiary of such employee, or by an authorized representative of such employee or beneficiary,
  • the involvement of the employer is limited to certain optional specified activities,
  • the employer receive no direct or indirect consideration or compensation in cash or otherwise other than reasonable reimbursement to cover expenses properly and actually incurred in performing the employer’s duties pursuant to the salary reduction agreements.
  • EBSA officials said in the document that if an employer, or a person acting in the interest of an employer, receives other consideration from an annuity contractor, the employer could be deemed to have “established or maintained” a plan and lose the safe harbor protections from ERISA.

According to an EBSA news release, the DoL guidance “confirms the department’s view that tax exempt employers can engage in a range of activities to facilitate the operation of a tax-sheltered annuity program under the new IRS regulations and still remain within the safe harbor’s criteria.”

Allowable Activities

EBSA said that the permitted plan sponsor activities not disqualifying the employer from the safe harbor include:

  • permitting annuity contractors—including agents or brokers who offer annuity contracts or make available custodial accounts—to publicize their products.
  • requesting information concerning proposed funding media, products, or annuity contractors, and compiling such information to facilitate review and analysis by the employees.
  • entering into salary reduction agreements and collecting annuity or custodial account considerations required by the agreements, remitting them to annuity contractors, and maintaining records of such collections.
  • holding one or more group annuity contracts in the employer’s name covering its employees and exercise rights as representative of its employees under the contract, at least with respect to amendments of the contract.
  • limiting funding media or products available to employees, or annuity contractors who may approach the employees, to a number and selection designed to afford employees a reasonable choice in light of all relevant circumstances.
  • EBSA officials cautioned against applying the safe harbor criteria too broadly. “We note, however, that the new § 403(b) regulations offer employers considerable flexibility in shaping the extent and nature of their involvement under a tax-sheltered annuity program,” EBSA wrote in the guidance document. “The question of whether any particular employer, in complying with the § 403(b) regulations, has established or maintained a plan covered under Title I of ERISA must be analyzed on a case-by-case basis applying the (safe harbor) criteria…”

Tuesday’s EBSA guidance document is available at http://www.dol.gov/ebsa/regs/fab2007-2.html