Does ERISA apply?

[Guest cphcs]

501©(3) employer (that is not otherwise excepted from ERISA coverage) provides for a 403(b) deferral-only plan and is "hands-off" in such a way that it should be eligible for the ERISA exception under DOL reg 2510.3-2(f). (I recognize there are many pitfalls with this, but assume the exception would apply here.)

In preparing its plan document, the employer wants to provide that loans and hardships are not allowed under the plan. The only motivation for this is to avoid having to take discretionary action that would trigger ERISA, as the vendor will not agree to administer hardships and do everything required to administer loans.

Does the employer's decision not to allow hardships/loans violate the ERISA exception, by virtue of the employer exercising some discretion in "plan design"? This would seem to be a bad result, as the employer is trying to avoid ERISA application, but I welcome any thoughts.

[jpod]

Plan design is not a function that would risk loss of the regulatory safe harbor.

[QDROphile]

The fourth paragraph under "Analysis" in Department of Labor Filed Assistance Bulletin No. 2007-02 says that employers may not make "determinations" with respect to hardship withdrawals or loans, among other things. That could mean simply administrative determinations under plan provisions that allow hardship withdrawals or loans, or it could be more prohibitive, given that most annuity contracts have provisions for hardship withdrawals and loans and the employer would be "interfering" with the contract and the administration of the contract. The sixth paragraph says that the DOL expects that an exempt arrangement would consist mainly of the TDA contracts provided by the annuity providers and the employer can adopt a plan document that "coordinates" administration among the different contract issuers. No mention that an employer can adopt a plan document that limits the terms of an annuity contract and still stay in the safe harbor of non-involvement. If the employer is completely risk averse, it should leave those elements of design and administration to the vendors, but make sure there are agreements with vendors for compliance, including coordination among the vendors.

Personally, I think the Field Assistance Bulletin is both disingenuous and a nightmare for interpretation. I think it really means that the DOL just wants to look the other way rather than get into a new realm of enforcement. Meanwhile it provided a great disservice to those of us concerned with compliance issues (and who therefore are ill-suited to work in the 403(b) arena).

[Guest cphcs]

Thanks for the comments.

Custodial account agreements (including individual agreements) will sometimes provide, for example, that hardships are available if allowed by the plan, thus forcing the employer to make some type of design decision.

I don't think this should trigger ERISA, but agree the DOL guidance is not clear.

[QDROphile]

Off the point, but what do think happened under those custodial agreements when there was no plan document adopted by the employer, and no further involvement by the employer in administrative documentation, which would have been the case for nongovernmental exempt arrangements? No plan document, therefore no hardship withdrawals?

[Peter Gulia]

An employer that prefers to stay "hands off" might include in its written 403(b) plan a clear statement that it will not decide anything beyond whether to accept or reject its employee's salary-reduction agreement.

This might accomplish a goal of avoiding any discretion concerning a loan or distribution while also declining to decide whether a loan or distribution is allowed.

This kind of written plan might also provide that the employer does not recognize a contract as one to which the employer will remit contributions unless the employer is satisfied that (1) nothing in the contract imposes, or purports to impose, any obligation on the employer; (2) the contract's provisions meet 403(b), and impose on the insurer or custodian obligations to administer those provisions.

Please understand that I don't advocate this idea, but merely describe it as plan provisions that might be possible.

[Guest TPADoug]

Peter is correct in that any provision to insulate the employer from taking discretionary action in a 501c3 ERISA exempt plan isn’t a bad choice. I can tell you that our model plan doc for a 501c3 limits damn near everything they could do to protect them from just that. (though it doesn’t go as far as limiting them to only accepting or rejecting SRA’s) and defaults to not allowing the plan to allow for hardships and loans. I’ve not heard of anyone having their exemption challenged because it was a discretionary decision to not allow for hardships and loans in a plan doc. Those options aren’t mandated by law and are just that, optional. And by virtue of not using the option to allow hardships or loans, should insulate them from action.

[Peter Gulia]

If your client says it prefers to make available a 403(b) plan that's somehow a non-plan for ERISA, consider the following not-too-hypothetical:

A participant dies in 2039. Just before her death, she had taken complete distributions of all of her 403(b) balances (about $600,000). Not too long after the death, the participant's surviving spouse files an ERISA lawsuit in Federal court. He alleges that what the employer pretended was a non-plan was really a plan established or maintained by the employer, and that this plan was and is governed by ERISA. He asserts that, in the absence of his consent, the plan should not have paid the participant any distribution other than as a qualified joint and survivior annuity.

The employer submits its motions to dismiss, saying that it never established a plan and never maintained a plan. The court finds that a complaint need do no more than allege facts that, if later proven, could support finding the complaint's claim for relief. The court decides that the litigants' disputes about whether a plan was established or was maintained is a fact issue of a kind that can't be decided on a motion to dismiss.

After losing the motions to dismiss, each defendant answers the complaint. Because the defendants' answers deny the existence of an ERISA-governed plan, the court decides that facts that a litigant could use to prove or disprove the establishment or maintenance of a plan are relevant and discoverable. The plaintiff demands all of the employer's writings (including e-mails) concerning the 403(b) plan for all time after 2008. Conversely, there isn't much discovery for the defendants to get from the participant's surviving spouse.

How confident can one be that the employer will win this lawsuit? And if the employer wins, wouldn't it really have a loss because its discovery expenses and lawyers' fees won't be recoverable from the losing plaintiff (and won't be reimbursed by the ERISA fiduciary liability insurance that the employer didn't buy)?