Jump to content

Recommended Posts

Seems to me that many non-ERISA plans require employer sign-offs for things like distributions and loans.

I read some articles that seem to suggest that the only way to have a non-ERISA plan is for an independent party to sign off on everything.  Is that how it works in the real world (I only work with ERISA plans so forgive my ingorance on this aspect).

Share this post


Link to post
Share on other sites

Yes, unless it's a governmental or church plan, we advise the employer to keep its hands off to the maximum amount consistent with meeting its legal obligations.  For example, it has to adopt a plan document, and determine what providers will be permitted to offer their products.  However, distributions and loans should be left up to the providers (although of course the plan document would govern when they would be available).

  • Like 2

Share this post


Link to post
Share on other sites

It is a potentially messy situation, and sometimes with no good answer. The non-governmental entity keeps its hands off to the greatest extent possible, yet some vendors require a sign-off before processing distributions, etc. - the employer is then left with the choice of having a needy employee being unable to get a hardship distribution, or to "cross the line" and make certain determinations or give approval. Rock - Employer - Hard Place.

  • Like 1

Share this post


Link to post
Share on other sites

I was talking to one of the vendors in this space and when I asked them about it, they were like "it happens all the time? I've been here 13 years and no one has ever asked me that before?"

Carol I certainly would not question the accuracy of your guidance!

And to clarify I am referring to non-governmental non-ERISA plans.

Share this post


Link to post
Share on other sites

To be clear, I'm not questioning it either - I fully agree. I'm just saying that in many real-life situations, it isn't that clean. What SHOULD happen and what DOES are often different.

  • Like 2

Share this post


Link to post
Share on other sites

My experience with voluntary benefits intended to be non-ERISA is pretty similar. The DoL has very restrictive rules on what makes a program non-ERISA, but I have never seen an enforcement initiative in this area.

Share this post


Link to post
Share on other sites

When I advised a charity that preferred not to be involved in claims decisions, we got each provider’s contract obligation that it will decide all claims without asking the employer for anything beyond furnishing factual information (not discretionary findings) the employer has and the provider reasonably needs.

 

For an IRC § 403(b) non-plan, the trick is to get each provider’s obligation before the employer permits the provider “to publicize [its]products to employees” and before accepting a wage-reduction agreement that would specify a contribution to the provider.  Likewise, the employer would avoid being a party to, or otherwise adopting or approving, an agreement, plan, or other writing that states, or without the employer’s assent could be amended to include, a contrary provision.

 

Such a constraint narrows the available investment and service providers.

 

If the employer had not obtained role-limiting provisions, a participant’s claim can result in the hard place Belgarath describes.

 

Many employers, unwittingly or reluctantly, do things that establish or maintain a plan.  And many businesspeople don’t understand that what an employer intended as a non-plan became a plan.

 

Enforcement is almost none until a participant’s surviving spouse discovers the spouse was not named as the participant’s beneficiary (and learns that, if the plan is ERISA-governed, the beneficiary designation might be invalid).  Even then, not everyone pursues it.

  • Like 2

Share this post


Link to post
Share on other sites
16 minutes ago, Peter Gulia said:

Enforcement is almost none until a participant’s surviving spouse discovers the spouse was not named as the participant’s beneficiary (and learns that, if the plan is ERISA-governed, the beneficiary designation might be invalid).  Even then, not everyone pursues it.

Interesting!

Share this post


Link to post
Share on other sites

If possible, I advise Non-ERISA plans for which I am doing the documents and our firm is doing whatever administration or consulting is involved, not to have Hardships or Loans unless they are using a vendor like TIAA where the vendor will assume the responsibility of resolving such questions with the Participant without the Plan Sponsor's participation.   It is my understanding the the Sponsor can answer factual questions (such as "Is this person an employee?" "What is the person's hire date?  Birth date?")  The prohibition relates to questions involving a judgment or fiduciary action  (Does this Participant have a Hardship?   Is this person creditworthy for a loan?)

I agree with Carol (good judgment on my part!!).    I also note that Non-ERISA plans are a slippery slope.  The IRS and DOL would prefer all 403(b)'s to be ERISA so no favors or leeway is given to plans purporting to not be subject to ERISA.  For an excellent discussion of this see Bob Toth's comments in "The Business of Benefits", January 30, 2014, "Trouble Ahead for the Non-ERISA 403(b) Plan."  In this article, he discusses a lawsuit the DOL filed against a plan sponsor for late deposits (these were really late...months not days).  The DOL maintained that the Plan Sponsor exercised discretion over the plan assets by late depositing them and that exercise of discretion made the plan ERISA.

Finally, most of the clients we advise in this space (and their advisors) believe that if the plan does not permit Employer contributions, that plan is Non-ERISA.  As everyone responding in this space knows, it is not in any way so simple.  We also work with many plans for which the day to day matters at the employer's work place are handled by a modestly paid person who is also doing a lot of other HR and related tasks.  These jobs also have higher turnover.  If a Plan has loans in it, and the vendor asks the Plan Sponsor for a signature, the person I just described may just sign off on paperwork without consulting us.

  • Like 1

Share this post


Link to post
Share on other sites
16 minutes ago, Patricia Neal Jensen said:

One other item:  It is not permissible for the Plan Sponsor of a Non-ERISA plan to hire a TPA to exercise the impermissible discretion.

Well the consensus seems to be that exercising discretion causes ERISA coverage, but it happens every day to not much consequence.  Rest assured if anyone seeks my counsel they'll get the by-the-book answer!

Share this post


Link to post
Share on other sites

A lot of the problem arises because the treatment of 403(b) plans as non-ERISA plans was based on an extremely old type of 403(b) arrangement.  As 403(b)s morphed into being something more like qualified plans, the DOL was faced with a situation in which it either had to impose unforeseen burdens on often struggling nonprofits that had done what seemed right at the time, or come up with a strained interpretation to save such plans.  In the years since the guidance was issued, the guidance has become even more obsolete, but the nonenforcement has meant that a lot of plans are just plain ignoring it.

I'm old enough to remember the early 403(b)s, having been around before the dawn of time.  They weren't really "plans" as we would think of them today.  Rather, what would happen is that an insurance agent would come through town and say to an employer, "Hey, you can give your employees a tax benefit that is not only cost-free to you, but actually provides you with a tax benefit.  Just allow your employees to buy these annuity contracts through payroll deduction.  Not only will your employees save on income and Social Security taxes, but you will save on the employer's share of Social Security taxes.  And we'll do all the work, while you just send us the money out of employees' paychecks."  Typically, these weren't even group annuity contracts, just an individual contract for each employee.

So in 1979, when the DOL adopted 29 C.F.R. § 2510.3-2(f), you already had a bunch of these contracts.  The employers had always thought of them sort of like an arrangement in which employees got a group discount on baseball tickets if the employer collected the money from them and paid it all at once.  If the DOL had suddenly declared these to be ERISA plans, there would have been a whole lot of questions about those existing contracts.  Suddenly imposing a slew of new requirements on employers which were often underfunded nonprofit organizations was seen as a huge burden, and the DOL wanted to avoid doing that.  So it came up with guidance to preserve the status quo as much as possible.

Of course, in the intervening years, 403(b)s have changed radically.  Employee deferrals no longer provide a Social Security tax advantage.  They have to have formal plan documents.  The contracts are more likely to be custodial accounts than annuities.  They are likely to be group contracts rather than individual.  Hardship distributions and loans have been added.  All in all, today's 403(b) plans look almost like 401(k) plans.  But meanwhile, the 1979 guidance remains in effect.  It is no wonder that it is hard to apply to today's plans, which look nothing like the arrangements to which it was originally intended to apply.

Share this post


Link to post
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now

×
×
  • Create New...