Non-ERISA vs. ERISA & Form 5500

[JADSecurities]

Hi All -

I recently saw 403(b) Plan documents stating that that it is a non-ERISA Plan. I am looking for some clarification related as to whether it is in fact a non-ERISA 403(b) Plan. (The documents were from 12/2008.) The documents state:

WITHDRAWAL RESTRICTIONS: Except in the case of hardship, disability & distributions [from a separate account under a TSA for rollover contribution...] no distribution will be made to a Participant under any TSA maintained under the Plan until the Participant has attained age 59 & 1/2 or had severance of employment with Employer ... whichever is earlier.

HARDSHIP WITHDRAWALS: As part of its certification, each Provider must agree that it will not approve any hardship withdrawal unless the participant has provided the Provider with specific information to support the existence of an immediate & heavy financial need that qualifies for hardship withdrawal and the amount necessary to meet the financial need. In the absence of information to the contrary, the provider may rely on a Participant's representation that the immediate & heavy financial need may not be reasonably satisfied from other sources. However, the Provider must promptly notify the Employer (or designated representative) of any hardship withdrawal by a Participant. The Employer will notify the Provider if the Employer has information inconsistent with the Participant's hardship request, and the Provider must agree to take corrective action if so notified. A Participant will not allowed to make salary reduction contributions during a 6-month period commencing no later than 30 days after the date such Participant receives a hardship withdrawal under a TSA.

DISABILITY: As part of its certification, each Provider must agree that it will not make any distribution to a Participant by reason of disability unless the Provider has received satisfactory evidence that the Participant has become disabled within the meaning of Code section....

While it appears that the language in the documents is statutory in nature, I want to be certain that the Plan document(s) are not violating the rule that "all rights under the contracts & custodial accounts are enforceable only by the participant" as is required for non-ERISA PLans.

What do you think?

Also, if you think the Plan is non-ERISA, do you believe that no Form 5500 needs to be filed, even if the total PLan assets exceed $250,000 (over $500,000) w/ 15 paticipants?

Your comments are appreciated.

JD

[Carol V. Calhoun]

Requiring compliance with the statutory requirements relating to withdrawals/distributions will not cause the rule that "all rights under the contracts & custodial accounts are enforceable only by the participant" to be violated. Otherwise, no plan could comply with both the 403(b) requirements and the non-ERISA plan requirements.

The bigger issue would be whether anything in the contract would cause more than limited employer involvement. There are two ways you get to be a non-ERISA 403(b) plan:

1. The employer is governmental, or a nonelecting church, or
2. The plan meets the requirements of 29 CFR § 2510.3-2(f).

If the plan meets either of these requirements, it is not subject to ERISA, and thus need not file a Form 5500.

If the plan is a governmental or nonelecting church plan, you don't need to worry about 29 CFR § 2510.3-2(f). Otherwise, you need to make very sure that the employer does not do anything more than is permitted by 29 CFR § 2510.3-2(f). For example, if the employer were determining the availability of hardship withdrawals, you could have an issue under 29 CFR § 2510.3-2(f). For that very reason, non-ERISA 403(b) plans typically require the provider to comply with the legal requirements in order to be allowed to sell contracts under the plan. Given the fact that "limit[ing] funding media or products available to employees, or annuity contractors that may approach the employees, to a number and selection designed to afford employees a reasonable choice in light of all relevant circumstances" is permissible under 29 CFR § 2510.3-2(f), limiting providers to ones that agree to comply with the law seems the safest course.

[QDROphile]

No plan can comply with the 403(b) requirements and the "non-ERISA" requirements. One may take comfort that the DOL will not go after a plan that carefully threads the needle of the embarrassing DOL guidance.

[Carol V. Calhoun]

No plan can comply with the 403(b) requirements and the "non-ERISA" requirements. One may take comfort that the DOL will not go after a plan that carefully threads the needle of the embarrassing DOL guidance.

DOL interprets its own regulation to say that you can comply with both. Field Assistance Bulletin No. 2007-02. But you're right that employers are really having to thread the needle here.

A big part of the problem is that 403(b)s didn't really develop as employer plans. When they started, it was basically annuity issuers (not custodial accounts at all) going around to employers and saying, "We can offer your employees something that is not only at at no cost to you, but produces an employment tax benefit to you (back before 3121(v)), if you just agree to handle deducting the money from paychecks and sending it to us." The employer signed on to this, without ever contemplating whether there were other companies doing the same thing that might produce better returns for employees.

Given this history, I don't think the DOL has a lot of interest in trying to suddenly force all of these plans into fiduciary compliance. So they are twisting themselves in knots trying to find a way to preserve the exemption.

[QDROphile]

I agree that the DOL was self serving and disingenuous and does not want to expand its enforcement over small nonprofit employers.

[Patricia Neal Jensen]

It is sort of a statement of the obvious to say I agree with Carol, but I do!   I do not put hardship withdrawals or loans or disability into Non-ERISA documents for fear of putting the sponsor in a compromised situation with a vendor which does not know how these rules work.

Non-ERISA plan are not required to file 5500's, regardless of asset size.