Non-ERISA 403(b) for non-governmental 501(c)(3) tax-exempt

Ignoring the fact that some of these ostensibly non-ERISA deferral only plans don't really qualify as non-ERISA...

Let's assume they qualify. Mandatory auto-enrollment in 2025 shouldn't apply, correct? 

Internal Revenue Code § 414A(a) states a condition on whether an arrangement for elective-deferral or salary-reduction contributions gets § 401(k) or § 403(b) Federal income tax treatment.

http://uscode.house.gov/view.xhtml?req=(title:26 section:414A edition:prelim) OR (granuleid:USC-prelim-title26-section414A)&f=treesort&edition=prelim&num=0&jumpTo=true

Internal Revenue Code § 414A(c)(3) excuses governmental plans and church plans.

But it does not excuse a payroll practice that is not a plan described in ERISA § 3 because the arrangement is neither established nor maintained by an employer (or a labor union).

Consider that § 414A’s references to “any annuity contract purchased under a plan” use that term-of-art phrase for its Internal Revenue Code § 403(b) meaning, which treats an employer’s payroll practice and limited role as a convener regarding § 403(b) annuity contracts and custodial accounts as a “plan” in applying § 403(b) and related Internal Revenue Code provisions. See 26 C.F.R. § 1.403(b)-3 https://www.ecfr.gov/current/title-26/section-1.403(b)-3
 

Further, § 414A(a) generally applies, with the § 414A(c) exceptions, to a § 403(b)(16) safe-harbor-deferral-only plan. See I.R.C. § 403(b)(16) and Notice 2024-2 at A-6 https://www.irs.gov/pub/irs-drop/n-24-02.pdf. At least that’s the IRS’s reading.

Are you helping a nongovernmental charitable organization that had no 403(b) before December 29, 2022?
 

Hi Peter - thank you for the information. No, I'm not helping anyone, nor have I had an inquiry on this question - just anticipating the possibility with 403(b) restatements starting next year. I could see this question possibly coming up. 

Happy Holidays to you!

An employer that otherwise might assume it neither established nor maintains a plan within ERISA’s meaning might consider, with its lawyers’ advice, whether to document that the plan is ERISA-governed (and file Form 5500 reports).

Without ERISA § 514(e) supersedure of States’ laws, applying an automatic-contribution arrangement’s implied assent to take a wage-reduction contribution from a worker’s pay could be contrary to many States’ wage-payment laws, and could be a crime under some States’ laws.

That’s in addition to the many other reasons for recognizing that ERISA might govern a plan.

There may be more current info from the IRS, but the last I looked at this, there was some controversy concerning a requirement to add auto enrollment to a Safe Harbor Non-ERISA plan (as opposed to a Non-Electing Church plan which is by law, not ERISA and, also, clearly exempt from the SECURE 2.0 Auto Enrollment procedures and rules) .  The initial assumption was that there was no exception for a Safe Harbor Non-ERISA plan but those of us who work in this area pointed out that the auto enroll provisions could cause the sponsor to assert a level of control which could make the plan ERISA.  A recent ASC broadcast reiterated this concern.  There may be, further, some state law considerations:  A Non-ERISA plan is subject to state law and there are states which still have auto enrollment prohibitions.  Except for any Non-Electing Church plans which you may have, I would set aside these Safe Harbor Non-ERISA plans and keep looking for more clarity on this point as the Cycle 2 403(b) pre-approved documents come out and become available for use.

Patricia Neal Jensen’s explanations and observations are consistent with my notes above.

Federal income tax law (but not ERISA’s title I) might permit a plan sponsor some delay to document provisions implemented during a remedial-amendment period.

But if an employer—for a 403(b) not established before December 29, 2022 (and not otherwise excepted)—will begin an automatic-contribution arrangement as soon as January 2025:

Shouldn’t the employer already have considered its lawyers’ advice about whether the employer establishes or maintains an ERISA-governed plan?

Shouldn’t the employer have decided its plan’s default contribution percentage?

Shouldn’t the employer have decided when and to whom to send the opt-out notice?

Shouldn’t the employer have written the text of the opt-out notice?

Congress wrote the statute Congress wrote. Congress decided not to change ERISA § 3’s definition of an employee-benefit plan which, if not a governmental plan or a church plan, is ERISA-governed.

The Internal Revenue Service lacks authority to interpret whether ERISA’s title I governs a plan.

Any interpretation the US Labor department might make does not control what Federal courts decide, and does not control what a State’s courts or executive agencies decide.

All those points observed, a service provider need not take on an unfair burden.

The plan is subject to the automatic enrollment requirement. Selecting the auto deferral %s and selecting a QDIA could cause the plan to be subject to ERISA. It's possible the DOL could issue guidance (which is unlikely to be before 2025) that the employer isn't subject to ERISA if certain conditions are met. That would then be a problem for employers in states that don't allow auto enrollment.  

There are two safe options. Stop deferrals before 2025 or implement automatic enrollment and assume the plan is subject to ERISA. We don't have guidance on who must be covered by the feature, so if an employer wants to suspend deferrals, it might be able to wait until the first new participant enters the plan after 2024.

I'm curious if anyone else has other reasonably safe options. 

On 12/23/2024 at 4:54 PM, Patricia Neal Jensen said:

The initial assumption was that there was no exception for a Safe Harbor Non-ERISA plan but those of us who work in this area pointed out that the auto enroll provisions could cause the sponsor to assert a level of control which could make the plan ERISA. 

This was precisely the issue that concerned me. Seems like an employer is between a rock and a hard place. 

On 12/24/2024 at 3:12 PM, G8Rs said:

I'm curious if anyone else has other reasonably safe options. 

Retire and let someone else worry about it?😁