Ask the Experts November 15, 2011

(b)lines Ask the Experts – Can a Plan Move from ERISA to non-ERISA?

November 15, 2011 (PLANSPONSOR (b)lines) – “I work with a 501(c)(3) Tax-Exempt organization (non-church, non government) that made employer contributions to individual 403(b) annuity contracts with a single vendor several years ago.

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“Since then, a few employees make elective deferrals only, but no employer contributions are made. This employer wishes to convert this ERISA plan to a non-ERISA 403(b) in 2011. Can this be done?”

Michael A. Webb, Vice President, Retirement Services, Cammack LaRhette Consulting, answers:

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Unfortunately, once an ERISA plan has been established (which it was for this private tax exempt once employer contributions were made), it cannot be “de-ERISAfied”, or converted to a non-ERISA plan, even though employer contributions are no longer made to the plan. The fact that contributions were made to individual contracts as opposed to a group contract is irrelevant for purposes of the ERISA determination, though it will be important with respect to other administrative issues, such as the contracts that are required to be included in plan assets/participant count for 5500 reporting purposes (see Group vs. Individual – Understanding a Critical Distinction in 403(b) Contracts)

You could possibly cease contributions to this ERISA plan and establish a new non-ERISA elective deferral-only plan (assuming that the “limited involvement” criteria of ERISA Regulation §2510.3-2(f) are satisfied), but this would seem to accomplish little in the way of administrative simplification, since all ERISA requirements would need to be satisfied for the old plan until all assets were distributed.

Terminating the ERISA plan does not seem to make much sense either, if you wish to continue elective deferrals, since a new 403(b) could not be established within 12 months of the termination, and the alternative, a 401(k) plan, would also be subject to ERISA.

It should be noted that, if this were a non-electing church or governmental plan sponsor, the plan would not have been subject to ERISA in the first place, despite the presence of employer contributions.

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.