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New DOL Opinion States Certain 403(b) Plans No Longer Exempt from ERISA

Recently issued U.S. Department of Labor guidance indicates limitations on the use of an exemption from the Employee Retirement Income Security Act of 1974, as amended (ERISA), for certain 403(b) Plans.

In Advisory Opinion 2012-02A (the Opinion), the U.S. Department of Labor (DOL) stated not-for-profit organizations making matching contributions to employee accounts under a qualified plan (e.g., one that meets the qualification requirements of  Code Section 401(a)) based on elective deferrals made by the same employee to the organization’s Code Section 403(b) Plan cannot rely on an exemption from coverage under the Employee Retirement Income Security Act of 1974, as amended (ERISA), with respect to the 403(b) Plan (the Safe Harbor).  As a practical matter, because almost all 403(b) Plans seeking to remain exempt from ERISA rely on the Safe Harbor, a 403(b) Plan will no longer be exempt from ERISA if the employer maintains a somewhat common arrangement whereby employer contributions are made to another qualified plan but are contingent upon the amount contributed to the 403(b) Plan.  For example, maintaining a separate 401(a) Plan with employer profit sharing contributions will not affect reliance on the Safe Harbor.  However, maintaining a separate 401(a) Plan with matching contributions that match amounts contributed to the 403(b) Plan no longer will satisfy the Safe Harbor.

The Safe Harbor provides that a 403(b) Plan will not be subject to ERISA if, among other requirements, employee participation is completely voluntary and employer participation is limited to certain specified activities (such as remittance of pre-tax contributions to an annuity contract or custodial account, permitting vendors to publicize their 403(b) Plan products with employees, etc.).

In an effort to preserve the ERISA exemption with respect to a 403(b) Plan, some organizations created a separate 401(a) Plan to simply hold employer contributions made on an employee’s behalf (e.g., do not permit voluntary employee elective deferrals).  As such, employers treated the 401(a) Plan as subject to ERISA and the 403(b) Plan as exempt from ERISA.  According to the Opinion, an organization will not fail the Safe Harbor simply because it maintains a separate 401(a) Plan.  However, the Opinion stated if the employer contributions to the 401(a) Plan are conditioned on the employee making pre-tax contributions to the 403(b) Plan, then there is violation of the “completely voluntary” and “limited employer involvement” requirements of the Safe Harbor.  Consequently, although there are two separate plans, the DOL has indicated that reliance on participation in the 403(b) Plan to be eligible for contributions to the 401(a) Plan will cause the 403(b) Plan to be ineligible for the ERISA exemption through the Safe Harbor.  This means the 403(b) Plan will be subject to ERISA’s fiduciary duty, reporting and disclosure requirements.  Unfortunately, the Opinion does not provide guidance to organizations that have historically taken a contrary view to the Opinion. 

The following options are high-level ideas on potential alternatives available for organizations to consider for purposes of restructuring these types of arrangements.  Which option is best (or even available) for a given organization is completely dependent on that organization’s individual facts and circumstances. 

 

What to Do With 403(b) Plan

What to Do With 401(a) Plan

Result/Considerations

Option 1

Keep 403(b) and add the matching component to the 403(b) Plan

Freeze or terminate the 401(a)

  • No ADP testing (i.e., nondiscrimination testing of pre-tax deferrals) required for 403(b) Plan
  • With 403(b) arrangement, no current requirement to file for determination letter
  • Single audit (if 401(a) Plan is terminated)
  • Single Form 5500 filing (if 401(a) Plan is terminated)
  • Potentially more limited investment options with 403(b) Plan

Option 2

Freeze or terminate the 403(b)

Keep 401(a) and add an elective deferral (CODA) component, making it a 401(k) Plan

  • Required to now conduct ADP testing (i.e., nondiscrimination testing of pre-tax deferrals)
  • Requirement to file for determination letter (if using a prototype document, you may be able to avoid this)
  • Single audit (if 403(b) Plan is terminated)
  • Single Form 5500 filing (if 403(b) Plan is terminated)

Option 3

Do nothing

Do nothing

  • No ADP testing (i.e., nondiscrimination testing of pre-tax deferrals) required for 403(b) Plan
  • With 401(a) arrangement, current requirement to file for determination letter (if using a prototype document, you may be able to avoid this)
  • Two audits required (one for each plan)
  • Two Form 5500 filings required (one for each plan)
© 2020 McDermott Will & EmeryNational Law Review, Volume II, Number 180

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About this Author

Mary K. Samsa, Corporate Lawyer, Executive Compensation Attorney, McDermott Will Emery, Law firm
Partner

Mary K. Samsa is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Chicago office.

Mary has more than 15 years of experience and has represented a wide range of organizations including, but not limited to, Fortune 100 public companies, privately held companies, multinational organizations and not-for-profit hospital systems as well as educational institutions.  Mary’s primary practice focuses on executive compensation (for both taxable and tax-exempt entities) where she regularly advises on nonqualified deferred compensation...

312-984-2142
Todd A. Solomon apension 401k attroney  McDermott Will & Emery LLP, Chcago
Partner

Todd A. Solomon is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Chicago office.  Todd focuses his practice primarily on designing, amending, and administering pension plans, profit sharing plans, 401(k) plans, employee stock ownership plans, 403(b) plans, and nonqualified deferred compensation arrangements.  He also counsels privately and publicly held corporations and tax-exempt entities regarding fiduciary issues under ERISA, employee benefits issues involved in corporate transactions, executive compensation matters, and the implementation of benefit programs for domestic partners of employees. 

Todd has significant ERISA Title I experience and has counseled plan fiduciaries with respect to investment policies, private equity, hedge funds, and other alternative investments, prohibited transaction issues, investment management agreements and payment of expenses from plan assets.

He advises multinational clients on global employee benefits matters and compliance issues. Todd is a council member of the International Bar Association Global Employment Institute (GEI) and serves as editor of the GEI’s Annual Global Report on global legal issues impacting human resources.

Todd represents clients before the Internal Revenue Service on issues such as Employee Plans Compliance Resolution System (EPCRS) filings, Audit Closing Agreement Program (CAP) negotiations, benefit plan audits and applications for determination letters. He negotiates with the Department of Labor in connection with benefit plan audits and Voluntary Fiduciary Correction Program filings, and the Pension Benefit Guaranty Corporation in connection with 4062(e) events and plan terminations.

Todd chairs the Firm's Pro Bono and Community Service Committee. He received the 2008 McDermott Will & Emery award for Outstanding Achievement and Commitment to Pro Bono and Service to the Community. Additionally, he is a member of the McDermott's Diversity and Inclusion Committee and has been involved with evaluating the Firm's domestic partner benefits policies and working with businesses in Chicago in jointly advocating for lesbian, gay, bisexual and transgender (LGBT) rights in the workplace.

312-984-7513
Joseph K. Urwitz, Employee Benefits Lawyer, McDermott Will Emery Law Firm
Associate

Joseph K. Urwitz is an associate in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Boston office.  He focuses his practice on employee benefits, executive compensation and ERISA matters.  Joe’s experience includes ERISA fiduciary issues, benefits issues faced by non-profit entities, executive compensation and deferred compensation arrangements, equity award plan design, employment and severance arrangements, qualified plan work and employee benefits matters arising in mergers and acquisitions.

Joe received his J.D. from the University of Chicago Law School...

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