Compliance July 25, 2007

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).
Reported by

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:

Want the latest retirement plan adviser news and insights? Sign up for PLANADVISER newsletters.

  • 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

Compliance July 25, 2007

Final 403(b) Regulations Released

Experts say that the finalized 403(b) rules, released on Monday by the Internal Revenue Service (IRS), represent a potential opportunity for plan advisers.
Reported by

Not only will advisers have to help clients ensure compliance generally, they will have to provide specific guidance on whether clients with an older model 403(b) plan with little plan sponsor involvement and multiple vendors should follow a continuing industry trend in which more 403(b) plans are transforming themselves into more of a 401(k)-type program.

“You need to contact every client because they all will have to take a look at their plan and see if it fits with these regulations,” said Aaron Friedman, National Practice Leader for Non-Profit Consulting for The Principal, in an interview with PLANADVISER.com. “If nothing else, this is certainly an opportunity for a client touch. There’s some work to be done and some opportunity there for relationship building.”

For more stories like this, sign up for the PLANADVISERdash daily newsletter.

Added Bruce Corcoran, Senior Vice President, National Markets, Education at AIG VALIC: “They (the new regulations) are a known quantity and will allow (advisers) to work with plan sponsors to design the plan of the future.”

Effective Dates

Although the proposed version of the regulations was set to kick in with the 2008 plan year, the final regulations are generally not effective until the 2009 plan year and church plans will have until their 2010 plan year, for example. “I think there were some favorable effective dates there,” concluded Richard Turner, Vice President and Deputy General Counsel, AIG VALIC.

90-24 Transactions

In another closely watched facet of the long-awaited regulations, tax officials ultimately decided against banning so-called “90-24 exchanges” in which participants move their money from one annuity contract to another.

The tax officials explained that they had suggested the restrictions because of their experience in keeping track of such asset movement under the old rules. “IRS audits and related investigations have revealed that employers encounter substantial difficulty in demonstrating compliance with hardship withdrawal and loan rules,” the IRS document stated. “These problems are particularly acute when an individual’s benefits are held by numerous carriers.’

To have those transfers be considered an investment change within the same plan, the IRS said the contract to which the assets are being moved must include distribution restrictions that are not less stringent that those imposed on the contract being exchanged.

Also, the IRS said, the employer and the issuer of the second contract have to work out an agreement under which the employer and the issuer will periodically give each other information about the participant’s employment status. Also to be exchanged is information about issues such as whether a severance from employment has occurred for purposes of distribution restrictions and whether the hardship rules in the regulations are satisfied, the IRS said.

“You have to have someone in the middle making sure all the plan requirements are being met,’ said Friedman, noting that the regulations put an additional burden on plan sponsors. “We’re not displeased with the outcome, but having 90-24 transfers is going to be more difficult to do.’

Plan Documents

While sticking with their original proposal to require 403(b) plans to have plan documents similar to those already required in other parts of the retirement savings world, tax officials agreed to allow plans to have a number of documents to serve collectively as the “plan document.” However, the IRS made it clear that the multiple documents have to explicitly designate plan roles and responsibilities – and that those documents cannot work at cross purposes with each other.

“The existence of a written plan facilitates the allocation of plan responsibilities among the employer, the issue of the contract, and any other parties involved in implementing the plan,’ the tax officials wrote. “Without such a central document for a comprehensive summary of responsibilities, there is a risk that many of the important responsibilities required under the statute and final regulations may not be allocated to any party.’

Concluded The Principal’s Friedman: “It’s up to the plan sponsor that there are no contradictions. Someone needs to understand that there has to be compliance. There are rules and someone has to be responsible for them.’

The final regulations are available at http://www.plansponsor.com/pdfs/403bfinalregs.pdf.

«

Close