The short answer is that having a plan document, allowing loans and having a loan policy, and monitoring contribution limits ordinarily do not by themselves cross out of the safe harbor, but the way that the employer implements them might.  The way to avoid these things is for the provider, and not the employer, to exercise any discretion, but each employer will have to look at its own plan to see if that is the case.

Also, selecting and monitoring investment providers might not cross the safe harbor.  However, if providers are restricted on any basis other than (1) a number and selection designed to afford employees a reasonable choice in light of all relevant circumstances, or (2) that the plan does not allow as an investment any annuity contract or custodial account that complies with the Code requirements the provider of which does not agree to the plan’s division of tax compliance responsibilities among the employer, provider and participant (such as by signing an information sharing agreement), then that might be a problem under the safe harbor.  It is not a “bright line” test.   At the same time, many employers may not want to make their plan too wide open to too many multiple investments or providers.

Ultimately, as the DoL itself says in the FAB, 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 – which certainly does not give much comfort, and in our view, has become harder.

In the past, we would also point out that the downside to being subject to ERISA is not necessarily that great.  SPD and fiduciary rules are generally not too difficult   to comply with, a written plan not necessarily a bad idea if you ever got sued over the terms of a plan, and preemption from state law downright advantageous (for example, to not be in state court if you got sued).  Filing a 5500 is also not terribly onerous.  That analysis has changed a bit now that, beginning in 2009 for large (generally, 100+ participant) plans, the 5500 will require an outside audit (something else a lot of plans should probably be focusing on now).

Recent DoL guidance, FAB 2007-2, expands on how the safe harbor applies after the final 403(b) regulations.  We think it both gives and takes away, but in some important areas, there may be some difficulty with complying with it.   

Here is generally what the FAB says:

• The DoL believes that the safe harbor allows an employer to:
• conduct administrative reviews of the program structure and operation for tax compliance defects;
• conduct discrimination testing and compliance with maximum contribution limitations;
• fashion and propose corrections;
• develop improvements to the plan's administrative processes that will obviate the recurrence of tax defects;
• obtain the cooperation of independent entities involved in the program needed to correct tax defects [Note that it does not expressly state that the employer can force a correction, though "obtaining the cooperation" of the provider to do the correction might achieve the same thing];
• seek to take advantage of the safe harbor by periodically reviewing the documents making up the plan for conflicting provisions and for compliance with the Code and the Treasury regulations; and
• keep records of its activities.

In addition, the FAB says that an employer, by adopting a written plan, does not automatically establish a Title I plan. Compiling the benefit terms of the contracts and the responsibilities of the employer, annuity providers and participants is a function similar to the information collection and compilation activities expressly permitted under the DoL's safe harbor.

The employer cannot, however, consistent with the safe harbor, have responsibility for, or make, discretionary determinations in administering the program. Examples of such discretionary determinations include:

• authorizing plan-to-plan transfers;
• processing distributions;
• satisfying applicable qualified joint and survivor annuity (QJSA) requirements;
• making determinations regarding hardship distributions;
• making determinations regarding qualified domestic relations orders (QDROs);
• making determinations regarding eligibility for or enforcement of loans; and
• negotiating with annuity providers or account custodians to change the terms of their products for other purposes, such as setting conditions for hardship withdrawals.

With respect to selecting investments, a tax-sheltered annuity program will not, in the DoL's view, become covered by Title I of ERISA merely because the written plan conforms to the new 403(b) regulations by limiting employees to exchanges of contract funds only among providers who have adopted the written plan, or transfers from the program of a former employer to that of the current employer. Under the safe harbor, the employer may limit funding media or products available to employees, or annuity providers who may approach the employee, to a number designed to afford employees a reasonable choice in light of all relevant circumstances.

The DoL points out that the Code-mandated restrictions on transfers of funds may require the employer to allow providers to offer a wider variety of products in order to afford employees a reasonable choice in light of all relevant circumstances for purposes of the safe harbor. The also state that, alternatively, an employer may limit the number of providers to which it will forward salary reduction contributions as long as employees may transfer all or a part of their funds to any provider whose annuity contract or custodial account complies with the Code requirements and who agrees to the plan's division of tax compliance responsibilities among the employer, provider and participant.

- David Powell, Groom Law Group

NOTE: T he answers provided in the Ask the Expert column are not intended to serve as and does not constitute legal advice as part of an attorney-client relationship.  Those asking questions are strongly advised to consult their own consultants, accountants, and legal advisors before regarding any specific questions they may have.