Non-ERISA 403(b)s an Endangered Species

“Yes, non-ERISA still exists, the safe harbor is still available, but organizations will have to work at it,” Robert J. Toth Jr., from the Law Office of Robert J. Toth Jr. in Fort Wayne, Indiana, tells PLANADVISER. However, Toth contends the Department of Labor (DOL) really doesn’t like non-Employee Retirement Income Security Act (ERISA) plans because in its view, they lessen participant protections.

The DOL issued a “safe harbor” regulation in 1974 under which it granted 403(b) “elective-deferral only” plans an exemption from ERISA as long as certain conditions were met. These conditions were based on the principal of limited-involvement by the plan sponsor in the arrangement.

The DOL has made its view of what it means by non-involvement clearer via a couple of actions in the past two years. In Advisory Opinion 2012-02A (see “b(lines) Ask the Experts: No Safe harbor if 401(a) Match Tied to 403(b)”), the DOL is quite clear that matching contributions to a 401(a) plan that are based on 403(b) elective deferrals violate the "limited involvement" of an employer required to maintain the exemption from ERISA.

In addition, the DOL in November 2013 filed a lawsuit against a provider of mental health and drug treatment services seeking to restore employee retirement plan contributions that were not remitted to the plan’s trust or not remitted in a timely manner (see “Restoration of Funds Sought for Health Clinic Employees”). “What makes the case so striking (besides the fact that it is an enforcement effort by the DOL against a 403(b) plan, of which we have seen few) is that the DOL appears to condition the plan’s ERISA status on the ‘discretion’ exercised by the plan administrator in failing to make timely deposits,” Toth wrote in a blog post.

The Internal Revenue Service (IRS) regulations passed in 2007 made it even harder for 403(b) plan sponsors to maintain limited involvement, requiring much more oversight of plan limits, transactions and design. “Monitoring isn’t a problem, the DOL says monitoring [plan limits] will not trigger ERISA status,” Toth says. “It’s other things that are tricky.”

For example, he tells PLANADVISER, if a divorced participant’s spouse presents a domestic relations order (DRO) to a non-ERISA 403(b) plan, the plan sponsor cannot make the determination that the DRO is a qualified domestic relations order (QDRO), or it will trigger ERISA status. He adds that plan vendors were previously agreeable to making that determination, but not so now, because the new regulations say the sponsor is responsible for making sure plans maintain their tax qualified status, and vendors do not want liability for something that is the responsibility of plan sponsors. 

In addition, Toth says non-ERISA plans cannot offer loans and hardship withdrawals now because the regulations require them to sign off on loan and hardship requests. This reduces the value of offering a non-ERISA plan to employees.

“It’s not a bad thing to be covered by ERISA,” Toth states. He believes all non-ERISA plans should consider migrating to ERISA coverage. He points out that ERISA will preempt the application of state laws—contract, tort and negligence, for example—to which non-ERISA plans are subject. 

“If you have a non-ERISA 403(b) plan, instead of having the DOL challenge you on it, take a look to see if it is worth it to maintain that status,” he concludes.