Compliance Responsibility

[Guest lkazden]

We offer a 403(B)(1) plan through TIAA-CREF. When a participant wants to take a distribution they do everything through TIAA-CREF. The only thing we, as the plan administrator, do is provide a termination date.

My question is, under a 403(B), who is responsible to ensure that the distribution restrictions and requirements are satisfied? For example, if TIAA-CREF, did not get the proper paperwork for the distribution, lets say the spousal waiver, would the liability come back to us? Or, because the participants have individual contracts with TIAA-CREF is this TIAA-CREF's responsibility?

I appreciate any input that you could give.

[E as in ERISA]

My understanding is that, although the employer technically has limited if any responsibility for a 403(B) arrangement in which its only involvement is payroll deduction, the IRS expects the employer to monitor the arrangement. It can "enforce" this expectation by auditing all your employees' individual tax returns if the employer disclaims all responsibility.

[Guest Brent Rowell]

I am not an attorney and am not aware of any cases.

I think TIAA-CREF is doing their best to assist you in carrying out YOUR responsability.

[mbozek]

You should relly check this out with T/C pension administration but my understanding of the procedures for 403(B) plans subject to ERISA is that the employer is required to get all of the necessary distribution forms and spousal consents from the employees and then forward the information to T/C so that the distribution is paid- The Employer is still liable for making sure that the documentation is properly completed and notarized before it is returned to T/C because the employer is the plan sponsor under ERISA. T/C processes the information and pays the benefits.

[E as in ERISA]

I don't think that there are any cases on this. The IRS is conducting examinations of many 403(B) arrangements, including many in cases where the employer is not considered the sponsor of the plan. The IRS could be limited in its ability to obtain corrective action at the employer level in those cases (e.g., it may be primarily a payroll tax issue). However, the employers help take corrective action, because the alternative is that the IRS will go to each employee and treat the monies as taxable.

It is my understanding that TIAA/CREF is very helpful to employers and has a lot of tools to help them keep the arrangements in compliance.

[mbozek]

Katherine: I dont understand how payroll tax could apply to distributions from a 403(B) plan. Lump sum benefits paid by an insurer are subject to 20% withholding and periodic payments are subject to 10% voluntary withholding which is the responsbility of the payor, e.g., T/C. The employer has no liability for income tax withholding on distributions. The employer liability that I referred to is to insure that the distributions meets all of the ERISA requirements, e. g., it is permitted under terms of the plan, spousal consents, notice of rollover distribution, etc. An employer can be liable if it allows payment to be made without spousal consent. Also the ability of the IRS to tax amounts deferred under a 403(B) plan is limited to disqualifying deferrals for a particular year in which a violation occurred, such a failure to conform to nondiscrimination requirements, since a 403(B) plan is an annuity under IRC 72 and not a qualified plan.

[E as in ERISA]

I was responding to Brent Rowell, who indicated he wasn't aware of any cases on this. I was trying to indicate the IRS' practice, which may not be documented anywhere.

My point is that the employer should only have limited responsibility with respect to certain 403(B) arrangements that are not ERISA plans (if the employer is merely facilitating the salary reduction, then its responsibility should be limited to correctly withholding taxes). But the IRS seems to have an expectation that the employer is monitoring a variety of other operational aspects (potentially including distributions). So no matter what kind of 403(B) arrangement I had, I would want to take some care to make sure that the service provider is doing a good job.

That said, my understanding is that T/C does a good job.

[mbozek]

Employers have very limited liability for distributions under 403(B) plans (whether subject to ERISA or not) under the IRC because the employer is not payor of the annuity benefits. In an individual annuity contract owned by the employee there is no employer responsibility to require that the employee commence benefits since the annuity contract is owned by the employee and the employer has no control over benefit commencement at 70 1/2. In other types of 403(B) plans where a group annuity is used, the penalty for not commencing benefits is the 50% excise tax but there is no penalty or disqualifiction of the plan if employees do not commence minimum distributions because a 403(B) annuity is not a qualified plan. The employer obligations under a 403(B) under the IRC are limited to tax penalities for excess contributions, loan limits and violations of the nondiscrimination rules for 403(B) plans.

[Guest lkazden]

So, you are saying that there is limited liability under the IRC, but there would be liability under ERISA if the proper paperwork was not obtained (for example, the spousal waiver)?

[mbozek]

Yes. In a 403(B) subject to ERISA the employer is responsible for making sure that all of the required forms are filed and properly executed by the participant and spouse. For example if a spousal consent was not properly obtained, the employer would be liable for paying the spousal benefit, not the payor of the annuity. The payor is performing a minestrial function in paying benefits under ERISA but is responsible for collecting witholding tax.