Adding Roth a non ERISA 403b plan

[30Rock]

Can the employer amend the plan to add Roth if the 403b plan is structured as not subject to ERISA under the limited involvement safe harbor regulation 2510-3-2(f)? If Roth is not added, then any high earner over the FICA limit cannot do catch-ups. Due to this SECURE 2.0 requirement, I would think adding Roth could be permitted. Any thoughts?

[Peter Gulia]

If a charity prefers to do no more than make available voluntary-only purchases of individuals’ rights under § 403(b) contracts without “establishing” or “maintaining” a plan, each insurer or custodian that issues a § 403(b) annuity contract or § 403(b)(7) custodial-account agreement decides the contract’s provisions, including whether the contract offers or omits a Roth-contribution provision.

If an individual’s wage-reduction/deduction agreement’s instructions directs her elective deferrals to a § 403(b) contract that does not allow Roth contributions, the employer would treat a § 414(v)(7)-constrained employee’s election that seeks non-Roth elective deferrals beyond those that can be allowed without using an age-based catch-up as ineffective.

The employer would stop those contributions. The employer would report such an employee’s Federal income tax wages excluding only so much as was properly excluded without an attempted age-based catch-up that could not be a non-Roth contribution.

Remember, the U.S. Labor department’s interpretation about how an employer avoids “establishing” or “maintaining” a plan includes a concept of not unnecessarily restraining § 403(b) “contractors who may approach employees” to less than a “reasonable choice” after considering (at least) six factors, including “[t]he terms of the available arrangements[.]” 29 C.F.R. § 2510.3-2(f)(3)(vii)(D). A charity cannot worsen its “hands off” noninvolvement position by tolerating more choice.

So, if a § 403(b) insurer or custodian that would like to do business with the charity’s employees offers a contract that allows Roth contributions, the charity might add that vendor to what the charity allows for its employees’ voluntary choices.

In evaluating whether an ostensible nonplan really is an ERISA-governed plan, some might find that narrowing employees’ choices to only contracts that refuse Roth contributions results in an unreasonable choice (if at least one contractor allowing Roth contributions presented itself as seeking to fit the employer’s program and meet the program’s reasonable conditions).

Remember too that in forming the “written plan” Internal Revenue Code § 403(b) might require as a tax-qualification condition, an employer that prefers not to “establish” a plan as ERISA’s title I defines it does not set plan provisions. Rather, the charity collects, assembles, and re-expresses provisions that result from the recognized contracts of the recognized § 403(b) insurers and custodians together with Federal tax law.

If the “written plan” does not already so state, a charity might write that a Roth contribution is recognized only if the contract the participant chose allows the contribution and only to the extent the Internal Revenue Code does not preclude recognizing the contribution.

This is not advice to anyone.

[30Rock]

Great input Peter. The vendor is telling them they cannot add Roth it due to limited involvement rules (I am assuming now that the catch-up rules are complex and require monitoring the 402(g) limit so that catch-ups switch to Roth for the high earners who elect to make catch-ups under the new rules. I could argue that the vendor can assist with this conversion and it does not require employer involvement. Can they add another contract or annuity provider at another company, assuming this provider will allow Roth? Unless they can find a solution, they will forced to restate the plan to an ERISA plan document and start filing 5500's. Thank you!

[Peter Gulia]

Is the vendor saying that the vendor is unwilling to receive Roth contributions under that vendor’s contract?

Or is the vendor suggesting that the charitable-organization employer somehow must not or should not allow Roth contributions, even if there is available under the employer’s nonplan program a § 403(b) contract that allows Roth contributions?

If it’s the latter point, an employer might consider whether it could be unwise to rely on legal advice from a person that denies that it provides legal advice.

In theory, a charitable organization might design a “written plan” that allows Roth contributions and meets Internal Revenue Code § 403(b) and § 414(v)(7) and yet does not, within the meaning of ERISA’s title I as interpreted in 29 C.F.R. § 2510.3-2(f) and EBSA’s guidance, let the employer “establish” or “maintain” any plan provision. To do so, the charity would need top-notch lawyering and an unusually capable payroll manager. And the employer would resist becoming a party to any annuity contract or custodial-account agreement, and resist every contractor’s requests for instructions.

But before a charity considers such a course, the charity might reevaluate whether existing arrangements really do not establish a plan and do not maintain a plan.

Further, a charity might want its lawyer’s explanation that 29 C.F.R. § 2510.3-2(f), if ever it was “safe” to rely on, is no longer conclusive. Although a judge may consider the Labor department’s reasoning expressed in its 1975 interpretative rule, a judge must not defer to it. Rather, a Federal court must interpret a statute—ERISA § 3(2) and ERISA’s title I—according to the court’s best interpretation of Congress’s statute. And even if a court otherwise is persuaded by an interpretive rule, a court might not be persuaded about how that interpretation applies regarding facts and circumstances that the agency’s rulemaking might not have then contemplated.

A charity might want its lawyer’s advice about risks and opportunities, including perhaps some the organization might not yet have considered, or considered carefully. Or, considered in light of changed facts and circumstances.

30Rock, how confident are you that the charity’s existing written plan does not already allow Roth contributions to the extent a § 403(b) contract allows them?

This is not advice to anyone.