University 403(b) Plans

[Guest cphcs]

A common design (particularly at private universities) is to have an ERISA plan that receives employer contributions and a non-ERISA deferral only plan. In light of the administrative obligations imposed by the final regulations, including the restrictions on contract transfers, does anyone have experience or comments on whether we will see more of the deferral only plans be treated as ERISA plans due to employer-imposed limitations on vendors and other employer involvement?

When a non-ERISA plan "converts" to ERISA status, presumably the sponsor would need to go to participants and inform them of the QJSA/QPSA consent requirements that now apply to distributions and beneficiary designations. Anyone have experience with a plan that was determined to be an ERISA plan due to changed circumstances, after many years of non-ERISA status?

Seems like another issue would be filing a 5500 for the first time and including a plan effective date that is many years earlier. Perhaps an explanatory cover letter with the filing would help prevent a DOL inquiry. Any thoughts?

[TLGeer]

The basic reason an employer might want two plans, rather than one, was to avoid having to deal with the application of the 403(b) limits to amounts becoming vested. The two-plan design is therefore obsolete.

Since that problem is gone, I don't see why the employer wouldn't just have ane plan, and make it the 403(b). There are, of course, transitional issues, but the employer can either freeze or terminate the qualified plan.

[Guest mjb]

The basic reason an employer might want two plans, rather than one, was to avoid having to deal with the application of the 403(b) limits to amounts becoming vested. The two-plan design is therefore obsolete.

Since that problem is gone, I don't see why the employer wouldn't just have ane plan, and make it the 403(b). There are, of course, transitional issues, but the employer can either freeze or terminate the qualified plan.

The two design plan is not obsolete because plans which only accept salary deferral funds are usually the plans that provide loans and in a non ERISA plan spousal consent is not required to obtain a loan. Also in Non ERISA plans the employee can take a lump sum distribution without out have to obtain spousal consent.

Also under federal labor law changes in employee benefit plans must be negotiated with the collective bargaining agent for any union members covered by the plan. Most employees are represented by a union.

[TLGeer]

Maybe "obsolete" was too strong a word. There continue to be technical advantages to having multiple plans, including the ones you mention. However, many employers will conclude that the additional costs outweigh the benefits, which are around the edges rather than at the core of plan design.

The existence of a collective bargaining agreement does not change the analysis. It simply means that changing plans requires more people to agree that the change is beneficial.

There is another, more dramatic, way to use a two-plan structure, which I didn't cover in the first response. This is to take advantage of the fact that the 415 limitation on the 403(b) is essentially personal, absent an employer controlled by the employee. This means that the 403(b) can have employer contributions that essentially double the ordinary limitations on employer contributions. Absent a governmental or 3121(w)(3) employer, the combined plans are going to have to be nondiscriminatory, which is why you don't see this very often. However, it is a niche planning concept, which I think of as an alternative or supplement to a 457(b).

Also, you can gimmick with the 403(b) and the qualified plan to make available a different investment array for some people. If you think of it as having the higher-tiered employees in a cross-tested plan in the 403(b) in addition to or instead of the 401(k), you can see how this can be used to increase contributions or simply to move the smaller group to a different investment regime.

Tom Geer