Opinions June 1, 2010

Revisiting the 403(b) non-ERISA Safe Harbor

June 1, 2010 (PLANSPONSOR (b)lines) - Suppose you are the human resources director for a 501(c)(3) nonprofit organization that offers a 403(b) plan.  You have paid attention to the IRS 403(b) regulations, making sure that your plan reflects the new tax compliance rules, and since your 403(b) plan only accepts voluntary employee contributions, it falls within the Department of Labor (DoL)’s regulatory non-ERISA safe harbor.
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That means everything should be set as far as plan operation goes, right?  Not necessarily.    

In light of recently issued DoL guidance – Field Assistance Bulletin 2010-01 – a 403(b) sponsor should now be taking another look at the plan’s operation under the non-ERISA safe harbor.  This new guidance provides additional explanation about the actions a 501(c)(3) organization can and cannot take with respect to its 403(b) plan to continue to satisfy the safe harbor.    

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Background  

ERISA has two statutory exemptions for plan sponsors – governmental employers (including public schools) and church entities (provided they do not voluntarily and irrevocably elect to have the ERISA provisions apply to their plan).  If, however, a 403(b) sponsor does not fit into either of these statutory exceptions, there is one more option – a 501(c)(3) sponsor that is neither church- nor government-affiliated would need to satisfy the “limited employer involvement” criteria of the DOL non- ERISA safe harbor regulations.   

According to the regulations, an employer meets the “limited involvement” requirement when it does the following:

  • Permits vendors to publicize their products;
  • Requests and summarizes information regarding the available funds or products;
  • Collects salary reduction contributions and remits them to vendors;
  • Holds in the employer’s name one or more group annuity contracts covering its employees; and
  • Offers a reasonable number of investments under the plan.

In 2007, the DoL recognized the need to supplement its non-ERISA safe harbor regulations to reflect the new final IRS 403(b) regulations. The resulting DoL Field Assistance Bulletin 2007-02 explained that a 501(c)(3) organization seeking to maintain its 403(b) plan’s safe harbor status could not take on discretionary determinations, including authorization of disbursements under the 403(b) plan.      

However, questions soon arose once the IRS’ 403(b) regulations became effective in 2009.  Specifically, 501(c)(3) organizations which had previously not considered their 403(b) program to be an employer-sponsored plan had to navigate new waters, balancing 403(b) plan operation regulations outlined by the IRS with the existing DoL non-ERISA safe harbor requirement.  A grey area emerged regarding which activities under the IRS 403(b) regulations would be considered “discretionary” and cause a plan to fall outside the safe harbor.

New Guidance  

In the new Field Assistance Bulletin 2010-01, issued this past February in Q&A format, the DoL has attempted to clarify how to operate a 403(b) under the non-ERISA safe harbor.  According to the guidance, a 501(c)(3) organization operating under the safe harbor can offer optional plan design features such as  loans or hardship withdrawals, but only if the product vendor assumes responsibility for authorizing participant requests for these transactions.    

An employer looking to limit its role to administrative functions can do so by delegating its discretionary administrative duties to its product vendors, but not directly to a third party administrator (although the product vendor, in turn, could retain a third party administrator).   

In addition, the guidance notes that offering a “reasonable choice of investments” – which is a requirement for a safe harbor plan – generally means more than one product vendor and more than one investment product must be made available under the plan.    

However, even with this general rule, there are two exceptions that will enable a 403(b) plan to satisfy the safe harbor: 

  • Employee contributions can be remitted to just one vendor, provided that participants may move their account via contract exchange to another provider under that 403(b) plan; or   
  • Amounts under the 403(b) can be limited to a single vendor with a wide array of investment options, if , based on the facts and circumstances, the sponsor can show that the administrative costs and burdens of operating in a multiple vendor scenario would result in no longer offering a 403(b) plan altogether. Under this alternative, the employer would need to provide employees looking to participate in the 403(b) plan with advance notice describing “limitations on or costs or assessments associated with an employee’s ability to transfer or exchange contributions to another provider’s contract or account.”

  

In light of this latest DoL guidance, a 501(c)(3) organization’s benefits manager seeking to preserve the 403(b) plan’s non-ERISA status should, together with legal counsel:

  • Do the homework and take stock - How many vendors are currently available under the plan either to receive employee contributions or contract exchanges? 
  • Reassess current workflows - How are requests for disbursements currently handled?  Does the product vendor have plan administration functionality to approve participant requests for loans and withdrawals?  
  • Stay informed - DoL guidance issued to date does not address either transitional rules or the ability to retroactively make corrections for a 403(b) plan to preserve its non-ERISA status.  Industry groups are seeking additional clarification on these issues.

Understanding these changing dynamics of the 403(b) landscape can help a 501(c)(3) plan sponsor stay the course toward safe harbor.  

Linda Segal Blinn, JD, Vice President of Technical Services, ING   

Note: This material was created to provide accurate information on the subjects covered.  It is not intended to provide specific legal, tax or other professional advice.
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Compliance May 28, 2010

House Passes Fee Disclosure and Pension Funding Relief Bill

May 28, 2010 (PLANSPONSOR.com) - The U.S. House of Representatives passed a bill Friday that provides for defined contribution plan fee disclosure and temporarily eases pension funding requirements.
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The American Jobs and Closing Tax Loopholes Act (H.R. 4213) was considered by the House this week, after passing the Senate (see “Fee Disclosure Rides Along with Pension Relief“).

Fee Disclosure

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The bill passed by the House amends the Internal Revenue Code and the Employee Retirement Income Security Act of 1974 (ERISA) to increase the disclosures provided to administrators and participants of defined contribution plans, incorporating provisions that are based on the 401(k) Fair Disclosure and Pension Security Act.

Plan Administrator Disclosures

Service providers must provide a written statement to the plan administrator describing the services to be provided and the total annual revenue to be collected by the service provider in connection with the plan (disclosed in dollar amounts or as a formula) before entering into a contract with a plan administrator (and additionally for each year subsequent to the initial contract year). (Service providers with contracts less than $5,000 in the aggregate are exempt from these disclosure provisions.)

The revenue must be allocated among three categories:

  • administration and recordkeeping services,
  • investment management, and
  • other services.

The bill directs the Secretary of Labor to develop safe harbors and other guidance on the allocation of revenue among the categories.

Plan Participant Disclosures

The plan administrator must provide an employee prior to his eligibility with a notice describing the plan, key characteristics of each investment option in the plan, and a plan fee comparison chart.

To participants, administrators must provide a quarterly benefit statement that includes information on each investment option in which the employee is invested (small plans may provide the benefits statement on an annual rather than quarterly basis).

Pension Relief

Touted as a job saving provision, the bill also provides for funding relief for both single and multiemployer pension plans, allowing more time for employers to make up those losses their pension plans suffered when the stock market plummeted in the fall of 2008. This aspect of the bill is estimated to raise $1.987 billion over 10 years.

A provision in the bill would permit single employer defined benefit plan sponsors to elect an extended nine year amortization period (instead of the current seven year allowance for a funding shortfall) with interest only being paid in the first two years. Plan sponsors can elect relief for up to two plan years during the four-plan-year period from 2008 to 2011.Under the provision, the plan’s funding obligation for a plan year is increased if the sponsoring employer makes excessive employee or shareholder payments.

The bill also provides for funding relief for plans that are subject to the prior law funding rules (i.e., plans not yet subject to the requirements of the Pension Protection Act of 2006) and allows the sponsors to calculate its minimum required contribution without regard to the deficit reduction contribution rules for up to two plan years. This is done by offering an alternative election under which a plan may instead amortize funding liability under a 15-year payment schedule for one plan year. The provision generally allows plan sponsors to elect relief for plan years beginning during the three-plan-year period from 2009 to 2011.

The bill extends through 2011 the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA) relief that permitted a plan to use its pre-financial crisis funded percentage in applying the accrual restriction rule for the first plan year beginning after September 30, 2008, thereby allowing single employer defined benefit plans to use their funded percentage for the last plan year ending before September 30, 2009.

The bill also:

  • Allows an employer to use its credit balances for the period of 2009 to 2011 if the plan was at least 80% funded prior to the financial crisis
  • Modifies the Pension Benefit Guaranty Corporation (PBGC) reporting requirement by requiring additional reporting if aggregate unfunded vested benefits of plans maintained by the sponsor exceed $75 million
  • Permits qualified airline employees to rollover bankruptcy settlement amounts to a traditional IRA (present law permits rollover of such settlements to a Roth IRA), and to recharacterize a prior contribution of a settlement amount to a Roth IRA as a contribution to a traditional IRA

Multiemployer Provisions

 The bill permits multiemployer pension plans to elect to use a 30-year amortization period for certain losses incurred in either or both of the first two plan years ending on or after June 30, 2008, instead of over the 15-year period mandated under present law. (The 30-year amortization extension is not available unless the plan is projected not to have a decrease in its funded percentage in 15 years.)

However, if a plan elects the extended amortization periods, benefit increases are restricted for a two-year period, unless the plan actuary certifies that increases are fully paid for by additional contributions by the plan sponsor and certain funding levels are projected to be met. The maximum smoothing period for determining plan asset values is also increased from five years to 10 years for the either or both of the first two plan years ending on or after June 30, 2008.

Also, for those underfunded multiemployer pension plans that elected WRERA relief, the bill provides up to an additional 2 year extension, bringing the WRERA relief to a five-year extension over the 10-year (or 15-year for a seriously endangered plan) period.

As it relates to multiemployer pensions plans, the bill also:

  • Modifies certain amortization extensions under prior law, allowing certain plans to treat the return on plan assets for plan years that contain any of the period from June 30, 2008 to October 31, 2008 as the interest rate used for charges and credits to the plan’s funding standard account.  
  • Permits plan trustees to elect to use as the default schedule the contribution schedule that has been approved by the bargaining parties and that covers at least 75% of the employees actively participating in the plan. 
  • Provides transition rules with respect to certifications of a plan’s funded status for plans whose certifications are due after the date of enactment and for certain plans whose most recent certification does not take into account an election to take funding relief with respect to a plan year that begins on or after October 1, 2009

“We’ve seen some significant improvements in the national economy, but many employers are still struggling to recover,” Congressman Earl Pomeroy (D-North Dakota) said in a statement issued after the passage of the bill. “Even here in North Dakota, the Wall Street excesses have hurt pension plans and are pinching a lot of good companies. This legislation will give them some relief so they can focus on creating jobs and getting our economy back on track.”

The legislative text of H.R. 4213 (including amendments to the Senate amendment to H.R. 4213)is located here http://waysandmeans.house.gov/media/pdf/111/HWC_711_xml.pdf

The CBO's Budgetary Effects Table of H.R. 4213 is here http://waysandmeans.house.gov/media/pdf/111/HR4213_Budgetary_Effects.pdf

Because there were amendments made to the bill, it will now have to be reconsidered in the Senate.

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