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Risks of Non-ERISA 403(b) Plans

Posted by Paul D. Woodard | Aug 29, 2017

A 403(b) plan is named after the Internal Revenue Code (IRC) Section 403, which details the plan. Essentially, a 403(b) plan is a retirement plan that allows employees to make contributions on a pre-tax basis, similar to a 401(k) plan. 403(b) plans sponsored by governmental and public education employers are exempt from ERISA. 403(b) plans sponsored by religious organizations (churches, church-controlled organizations, 414(e) religious organizations) are also exempt from ERISA but may elect ERISA coverage.

There are a number of reasons why an employer would want to maintain a non-ERISA 403(b) plan. The benefits of ERISA exempt 403(b) plans include flexibility in structure, fewer reporting and disclosure requirements, and less strict fiduciary requirements. From an administrative prospective, a non-ERISA 403(b) plan does not have to provide the ERISA-mandated notices, like a Summary Plan Description (SPD), to all participants. In addition, non-ERISA plans may also be exempt from filing and auditing requirements and are generally not subject to the same fiduciary requirements as other qualified ERISA plans.

501(c)(3) organizations from the private sector who establish 403(b) plans may be exempt from ERISA if certain requirements are met. However, certain actions may place a 403(b) plan's non-ERISA status at risk of falling under ERISA regulations. Therefore, it is important to understand how to keep a non-ERISA 403(b) plan exempt from ERISA. In order to qualify as a non-ERISA 403(b) plan, the Department of Labor (DOL) has provided safe harbor guidance. This includes:

  • Employees' participation in a 403(b) plan is voluntary;
  • Enforcement rights under annuity contracts or custodial accounts are limited to employees or beneficiaries;
  • The employer cannot make contributions to the 403(b) plan;
  • The employer can only have limited involvement in administration of the plan; and
  • Employers cannot be compensated beyond reasonable expenses related to employer's duties under the contracts.

Pitfalls to Avoid:

There are some potential pitfalls that may subject an otherwise non-ERISA 403(b) plan to ERISA requirements. One of the primary risks involves an employer offering a retirement plan to employees. The employer's participation in the 403(b) must be limited to administrative tasks, such as handling contribution deposits, providing notice about vendors, and having vendors present their products to employees.

Employers cannot select the 403(b) plan vendor for the company. This includes selecting a third-party administrator (TPA) to administer a 403(b) plan. The employer is also prohibited from accepting compensation from plan vendors, beyond a reasonable amount limited to covering the employer's contractual duties.

An employee may also come to the employer with questions about their 403(b) plan, believing the employer is in charge of administering the plan. The employee may request a hardship loan from their retirement plan or have questions about how a Qualified Domestic Relations Order will apply to their plan. The employer should generally direct the employee to the plan provider on these points as the DOL has determined that the handling of these functions by employers will make the 403(b) plan subject to ERISA.

Over time, an employer may find themselves taking on a more hands-on role with their employees' 403(b) plan. This may come through wanting to provide for their employees or from believing that managing the plan is more efficient than relying on TPAs. Before deciding how to handle a Non-ERISA 403(b) plan for employees, employers should consider talking to their ERISA and benefits attorneys. It is also a good idea to regularly review how the plan is managed to ensure the employer has not strayed into ERISA-regulated territory.

If you have any further questions about qualified and nonqualified benefit plans for your company, Butterfield Schechter LLP is here to help. We are San Diego County's largest law firm focusing its law practice on employee benefits law. Contact our office today with any questions on how we can help you and your business succeed.

About the Author

Paul D. Woodard

Paul Woodard practices in the areas of Employee Benefits, Employee Stock Ownership Plans, Pension and Profit Sharing Plans, ERISA, ERISA Litigation, Business Law, Qualified Domestic Relations Orders (QDROs), and Estate Planning.


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