Mandatory Auto Enrollment under S2.0 and ERISA Exemption

If a new 403b is subject to mandatory auto enrollment, can that plan still qualify as ERISA exempt?  I know the question has been asked -- has it been answered?

I’m unaware of any court decision that sets a precedent on your question.

The Treasury department’s proposed rule to interpret Internal Revenue Code § 414A proposes no guidance. Even if it did, no court would defer to an executive agency’s interpretation. Further, an interpretation of ERISA § 3 is beyond Treasury’s authority.

To discern whether something is an ERISA-governed plan, one looks to whether that something is “established” or “maintained” by an employer. ERISA § 3(1)–(3), 29 U.S.C. § 1002(1)–(3).

Even with a “completely voluntary” salary-reduction arrangement (with no nudge), some lawyers suggest it is not feasible to administer contracts according to the conditions for the Federal income tax treatment of Internal Revenue Code § 403(b) without involving the employer in a way that results in a plan established or maintained by the employer within ERISA’s meaning.

Even if a court might be persuaded that 29 C.F.R. § 2510.3-2(f) is a correct interpretation of the statute, could an employer decide and administer an automatic-contribution arrangement’s provisions but still meet the interpretation’s “completely voluntary” and “hands off” conditions?

There is more than one way to meet Internal Revenue Code § 414A(a)(2)’s tax-qualification condition. Who decides whether a first year’s default deferral is 3%, 4%, 5%, 6%, 7%, 8%, 9%, or 10% of compensation? Does that decision “establish” a plan? Who decides which investment is the arrangement’s qualified default investment alternative? Is it possible to select a QDIA without making a discretionary interpretation of the Labor’s 404c-5 rule referred to in I.R.C. § 414A(b)(4)? Whatever are these and other provisions, who puts them in writing? Does that act “establish” a plan?

How does an employer administer § 414A(b)(3)(A)(ii)’s auto-increase without “maintaining” a plan? How does an employer decide the content of, and decide how to deliver, the many required notices without administering or “maintaining” the plan?

I’m aware of a strand that points in another direction. A court decision held that an employer that does no more than obey California’s law for its CalSavers IRA program, including its implied-election provision, does not establish or maintain a plan. California public law sets the provisions. “CalSavers is not an ERISA plan because it is established and maintained by the State, not employers[.]” Howard Jarvis Taxpayers Ass’n v. California Secure Choice Ret. Sav. Program, 997 F.3d 848 (9th Cir. May 6, 2021). (A Ninth Circuit opinion is a precedent only for Federal district courts in Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, and Washington.) Lawyers and courts might distinguish a nongovernmental employer’s § 403(b) plan because there are some automatic-contribution provisions that cannot be set and administered by looking only to annuity contracts and custodial accounts, rather than an employer’s decisions.

An employer might prefer to presume that an automatic-contribution arrangement is an ERISA-governed plan. Without ERISA supersedure generally and § 514(e)’s preemption of States’ wage-payment laws, some States’ laws require an affirmative written instruction to deduct an amount from a worker’s pay. And under some States’ laws, a violation of a wage-payment law can be not merely a civil violation but also a crime. Also, an arrangement’s default deferral that is invalid under State law might call into question whether the arrangement meets I.R.C. § 414A’s tax-qualification condition.

This is not advice to anyone.

I agree with everything Peter noted above.  Non-ERISA 403(b) plans are not "favored" in the law:  A mistake in "administering" such a plan may cause the plan to not only be ERISA in the current year but also in years past resulting in failure to file 5500 penalties, etc.

Below is a little "cheat Sheet" I show to entities considering starting a Non-ERISA 403(b):

The listed activities are considered non-ministerial and therefore not permitted under the safe harbor for a Non-ERISA 403(b) Plan in accordance with DOL FABs 2007-02 and 2010-01: 

1. Authorizing plan-to-plan transfers

2. Processing or authorizing distributions 

3. Satisfying applicable qualified joint and survivor annuity requirements

4.Making hardship determinations

5. Selecting optional plan features

6. Determining and qualifying domestic relations orders

7. Determining loan eligibility and enforcement

8. Negotiating with annuity providers to change the terms of their products or other purposes, e.g, setting conditions for hardship withdrawals

9.Selecting a TPA to perform such administrative functions on behalf of the plan.

Patricia Neal Jensen, JD, 403(b) SME FuturePlan   

Patricia.Jensen@FuturePlan.com 

I honestly can't tell if you guys are answering the direct question I posed, which is does mandatory auto enrollment automatically make an otherwise ERISA exempt plan subject to ERISA?  You have provided a lot of great information but I just don't think you have answered that question directly (at least not that I saw).  So Peter for example, you definitely asked my quetion more eloquently and thoroughly than I did, but I don't think you suggested an answer?

If a charitable organization’s § 403(b) plan is not a governmental plan or a church plan, I would not (without getting more facts) suggest the organization attempt to treat a plan that includes a § 414A automatic-contribution arrangement as a non-ERISA plan.

That’s because I think a court could decide that an organization “established” a plan by deciding essential terms of an automatic-contribution arrangement, or “maintained” a plan by administering an automatic-contribution arrangement’s provisions.

austin3515, many of my notes in BenefitsLink discussions avoid stating a conclusion. That’s for more than a few reasons, including:

A warning that what I write here is not advice might be ineffective.

Even if I expect that a regular BenefitsLink neighbor would not assert any kind of reliance, I still worry about what other readers might perceive.

My malpractice insurer suggests cautions about what a lawyer puts in social media.

I want my insurance applications to be truthful.

I likely haven’t done complete research. It’s work to check all courts’ decisions.

Even if I’m completely confident about a point of law, I don’t want something I’ve written to be quoted against my client, even incorrectly. (I’ve had that sad experience with litigation.)

I am counsel to law firms other than mine, and avoid publicly expressing a view that might call into question a firm’s advice to their client.

I am a coauthor in multi-author books, and avoid publicly expressing a view that might differ with, or embarrass, a coauthor.

Likewise, I avoid anything that might embarrass or otherwise burden a publisher I work with. That includes topics and points on which I’m not the publisher’s author or editor.

I try to help smart practitioners who can do their own reasoning. But I don’t want to give a too-easy answer to someone who doesn’t think for oneself.

And many questions of employee-benefits law don’t have a settled answer.

Law is a prediction of what a court would decide; we often don’t know.

None of this is advice to anyone.

There is no answer.

One concern is whether the auto enrollment feature is too much employer involvement. You could argue there isn't employer involvement because it's required by law. It would have been nice if the law (unlike prior bills) didn't leave any discretion in designing the auto enrollment feature. But there is some discretion in setting the default % and escalation. Is that too much involvement? 

A bigger concern is that the plan must have a QDIA. If the plan isn't subject to ERISA, then there is no fiduciary standard in selecting the investment. 

The DOL is aware of the issue. No telling if we'll get guidance. Unless they provide some sort of QDIA safe harbor (possible but unlikely), I suspect they will say the plan is subject to ERISA. They prefer that participants be protected by ERISA. 

Consider also whether a § 403(b) plan that includes a § 414A automatic-contribution arrangement must provide a QJSA/QPSA regime or alternate ERISA § 205 rights for a participant’s spouse.