At the National Tax-deferred Savings Association (NTSA) 2014 403(b) Summit, M. Kristi Cook, an attorney with her own practice in Horsham, Pennsylvania, and Ellie Lowder of TSA Consulting and Training Services in Tucson, Arizona, shared insights they’ve gained into compliance requirements for 403(b) plans.

Universal Availability

The Universal Availability rule for 403(b) plans requires that participants are offered a “meaningful opportunity” to participate in the plan, but what exactly does this mean? Lowder said that during an NTSA webcast in August 2013, Dan Gardner, Internal Revenue Service (IRS) senior staff specialist indicated “year-round activity is required.” Lowder explained that this means employees should not only be given plan information in an enrollment kit, but through websites and meetings throughout the year. All information provided to employees should include examples and illustrations. “So, the IRS expects year-round and diverse activities to satisfy its idea of meaningful opportunity,” she said.

She added that IRS examiners are trained to check plans’ participation rates, and low rates may trigger audits. “It will trigger IRS interest in how meaningful and effective is the opportunity to participate.”

Plan Document Provisions

The IRS has established a pre-approved plan document program for 403(b)s and is currently accepting submissions for pre-approved documents. The same day it announced the program, it issued a listing of required modifications (LRM) for 403(b) plans, noting provisions that must be included in plan documents. However, some of the language in the LRM raised questions. For example, Lowder noted, the LRM defined severance of employment by a K-12 public school system employee on a statewide retirement system basis. Up to now, 403(b)s have been treating severance of employment as when an employee leaves a school district within a state, regardless of whether he or she joined another district within the same state, she said. However, according to the LRM, if an individual leaves one district and joins another in the same state, there has been no severance, because the IRS considers the state the same employer.

This makes a huge difference in terms of administration, Lowder said. Which plan rules do you follow? What if school district A has a plan document and so does school district B, but school district A’s plan allows for loans while school district B’s plan doesn’t, and the employee who moved to school district B has a loan? Lowder said some law firms and third-party administrators (TPAs) are advising clients to follow the LRM language, but hopefully, the IRS will clarify it soon. According to Lowder, in a phone forum, an IRS staff member indicated the IRS has considered comments about the severance of employment language and other language in the LRM and will be issuing guidance about the changes shortly.

Rollovers

Cook noted that the Financial Industry Regulatory Authority (FINRA) set out new standards for rollovers from employer plans to individual retirement accounts (IRAs) in Regulatory Notice 13-45. “FINRA claims these are not new standards; they are old standards people seem to have forgotten,” she noted.

The notice reminds financial advisers and broker/dealers that they must include in their “advice” to employees all the options employees have for dealing with their retirement plan accounts upon severance of employment—leave the assets in the plan, roll over to another plan, roll over to an IRA, take a taxable distribution. Advice to roll plan assets into an IRA must consider all these options and whether the rollover is the “suitable” choice for the employee. For example, Cook explained, the financial representative must consider all the investment options available under the plan compared to investment options with the IRA and prove that it is in the employee’s best interest to not keep his or her money in the plan.

For plan advisers and broker/dealers, Cook provided a checklist for documenting their recommendations:

• Type of plan and distribution restrictions;
• Age considerations – options for employees between 55 and 59 1/2, whether they are older than 70 1/2 and still working, timing issues with divorce transactions;
• Any unique investment options available under employer’s plan;
• Fees and expenses - including transaction costs;
• Level of personal advice available;
• Tax issues; and
• Creditor protections.

ERISA Exemption

Cook noted that maintaining non-Employee Retirement Income Security Act (ERISA) status has become harder under IRS regulations, but the Department of Labor (DOL) has issued guidance listing specific activities plan sponsors may or may not do and still maintain non-ERISA status (see “Maintaining Non-ERISA 403(b) Status”).

The DOL says 403(b) plan sponsors cannot hire a TPA to do what they are not allowed to do on their own, but Cook said plan sponsors may be able to use a “data aggregator” or “information coordinator,” which shares information and coordinates transactions for vendors and the plan sponsor, but does not approve or authorize transactions. She noted that some vendors will not work within this framework because they will still require signatures on forms.

Church Plans

Cook addressed the recent court decisions affecting certain 403(b) plan sponsor’s “church plan” status. Currently there are six lawsuits questioning organizations’ “church plan” status. Two courts have rejected legal and regulatory precedent allowing a church-affiliated organization to establish a “church plan,” and have ruled only a church may establish a “church plan.” However, there is now a split in the courts as, in May, a federal district judge in Michigan held a plan need not be established by a church in order to qualify as a church plan (see “Defendants in One Church Plan Case Get a Victory”).

Auto Enrollment

Cook and Lowder finished up their session at the summit by noting automatic enrollment is becoming more popular with ERISA plans, including ERISA 403(b)s. But, is it permissible for non-ERISA 403(b)s, especially public sector plans? According to Cook, some states are asking whether they can auto enroll employee into a defined contribution retirement plan in lieu of offering a defined benefit pension plan. Lowder warned that state law may prohibit it; in almost all states, the law prohibits the taking of employees’ money without express written authorization (see “Public Plans Slower to Adopt Automatic Enrollment”). Cook said some states are arguing that if automatic enrollment into a new defined contribution plan is collectively bargained with a union, that can be deemed as consent.