Can a non-ERISA 403(b) still exist?

[Guest bobolink]

With the plan documentation requirement and 5500 reporting and audit rules kicking in for 2009 plan years, is it still possible to argue that sponsor involvement is limited enough for the plan to be exempt from ERISA?

Further, do any real benefits remain that flow from satisfying the exemption?

What should a sponsor consider when trying to determine whether or not to go for the exemption?

I'm off to study FAB 2010-01 and 2007-02 and would appreciate anyone's thoughts.

[Guest Tom:]

Bobo:

The DOL clearly thinks that a voluntary 403(b) maintained by a non-governmental non-church employer can avoid ERISA. However, it appears to be getting more and more difficult to avoid ERISA. Therefore, it may not be practical, or even prudent, to maintain such a plan as not covered by ERISA. Some of the primary advantages of not being subject to ERISA are avoiding annual 5500 reporting, complying with QJSA requirements, meeting minimum age and service rules for employer contributions and administering less restrictive loan requirements for small participant accounts. However, an employer can easily and inadvertently cause its plan to become subject to ERISA by making a discretionary determination (e.g., approving or disapproving a participant loan or hardship withdrawal) or by limiting investment options (e.g., designating an exclusive annuity vendor or selecting 403(b)(7) mutual funds). Therefore, any decision to administer a 403(b) plan as not subject to ERISA must be carefully weighed against the risk and liability associated with administering a plan as not subject to ERISA when it actually is subject to ERISA. An example of such a risk is a plan failing to obtain spousal consents for lump-sum distributions when such consent may be required under ERISA. It seems likely that most non-governmental non-church employers will eventually choose to administer their 403(b) plans as covered by ERISA.

[Guest Matthew Gouaux]

As you'll see when you review FAB 2007-02, the DOL's position is that having a written plan document does not necessarily increase employer involvement to such a degree that the employer is unable to satisfy the applicable "safe harbor" (cited in the FAB). The benefits of not being subject to ERISA include not having to file Form 5500 (or obtain an audit) or comply with ERISA's reporting and disclosure requirements. This can be a significant benefit, particularly for smaller plans. However, because there is always a risk that an employer will become too involved for the plan to be exempt from ERISA, employers with non-ERISA plans should understand and attempt to continually satisfy the requirements of the safe harbor. If a plan accidentally becomes subject to ERISA and the employer fails to file Form 5500 or otherwise comply with ERISA (because the employer believes the plan is exempt from ERISA), there is a risk of civil liability. Employers that weigh these risks against the cost of ERISA compliance may find that it makes more sense for the plan to be subject to ERISA.

[John Feldt ERPA CPC QPA]

A fair number of deferral-only plans that cover 120+ participants will benefit by being non-ERISA plans since they avoid the expensive accountant's opinion required by the Form 5500.

For example, if the opinion (audit) is $9,000 divided by 125 participants, that's a cost of over $70 per person, more if it's charged only to those with balances in the plan.