Plan sponsors which sponsor 403(b) plans sometimes struggle with whether the plan is subject to the requirements of ERISA. Some are; some are not! This article will help answer the question for many while additional IRS guidance may be needed to answer the very important question for others.
Special Note: This article does not address ERISA applicability for church plans, some of which have been dealing with litigation suggesting that ERISA will apply to the plans of certain health care facilities which sponsored plans are not actually adopted by the church itself. That topic will be covered in a separate article which we expect to post in October.
There is no doubt that 501(c)(3) plan sponsors with 403(b) plans which include employer contributions are sponsoring ERISA plans. We also know that 501(c)(3) plan sponsors with 403(b) plans consisting only of voluntary employee deferrals may be exempt from ERISA coverage. To be exempt from ERISA, the voluntary 403(b) plan must operate under Department of Labor (DOL) requirements that the plan sponsor’s involvement in the plan is limited. Under DOL regulation 2510.3-2, employers who have limited involvement in the voluntary plan, and who provide reasonable choices in investments may be able to avoid ERISA coverage for the plan.
In DOL Field Assistance Bulletin (FAB) 2007-02, the DOL made it clear that employers are permitted to follow IRS compliance rules, including the adoption of a plan document as required in the final 403(b) regulations, but must take care not to make discretionary decisions for the plan. For example, employers must not approve transactions in the plan such as loans and hardship withdrawals. A follow up FAB 2009-01 shed further light on what an employer can and cannot do to maintain the ERISA exemption. Employers are not permitted to contract with a third party administrator (TPA) to authorize transactions (because the TPA serves as an agent for the employer); however, could conceivably require that product providers either approve those transactions, or contract with a TPA to do so. However, an employer could contract with a firm to gather and aggregate data so that the product providers would have sufficient information to approve or disapprove such transactions (such as loans and hardship withdrawals).
FAB 2010-01 (issued in February 2010) provides that the 403(b) plan must offer a choice of more than one financial institution, unless the employer can successfully argue that the cost of multiple providers would cause the employer to stop contributions to the plan. Providing an open architecture platform with multiple investments is also an option. Another limited exception to the multiple providers requirement would require that the employer permitting salary reduction contributions only to a single provider would be required to permit in-plan exchanges to other providers.
ERISA 3(32) specifically exempts state and local governmental employers from the requirements of ERISA. Thus, public education employers which sponsor 403(b) plans are not required to meet the requirements of ERISA, even when making employer contributions to the plan.
But what is the status of charter schools?
The IRS is working on guidance to define a governmental plan under Internal Revenue Code Section 414(d). A notice of proposed rulemaking was published on Nov. 8, 2011, defining a governmental plan as a plan that must be established and maintained by a governmental entity for its employees and must not permit participation by any non-governmental employees. Because of over 2,000 comments requesting clarity for charter schools, the IRS issued interim guidance in the form of Notice 2015-07 which announces the positions the IRS is considering when the 414(c) regulations are finalized. In that interim guidance, the IRS made it clear that charter schools that may not meet the requirements to qualify as a governmental plan and will have until the effective date of the final regulations to make any changes necessary to meet those requirements. Among those requirements are:
1. The charter school is established and operated in accordance with a state statute (currently seen in 41 of the 50 states) authorizing the granting of charters to create independent public schools.
2. Participation in the state or local retirement system by the charter school’s employees is required or permitted.
3. The charter school’s governing board is controlled by a state, a political subdivision of a state, or an agency or instrumentality of the same.
Charters are often granted by the state board of education, or a separate state agency formed to grant charters and maintain oversight. In other instances we have seen charters granted by local school boards or community colleges, which would certainly meet the criteria indicated above.
We expect the first piece of the IRS guidance on the definition of a governmental plan in the form of proposed regulations, perhaps as early as 2017 since that project appears in the IRS business plan for the fiscal year ending June 30, 2017. Another round of comments will then be permitted before the final regulations being issued. The NTSA will alert the membership when that occurs.
Ellie Lowder, TGPC, Consultant, is a member of the NTSA Communication Committee.
Opinions expressed are those of the author, and do not necessarily reflect the views of NTSA or its members.