A nonprofit organization may elect not to be covered under the Employee Retirement Income Security Act (ERISA) if certain requirements are met. Electing non-ERISA status used to be a popular method to limit the complexity involved with sponsoring a qualified plan. With the issuance of new regulations governing these plans in 2009, qualifying for non-ERISA status has become more difficult and there are now compelling reasons for sponsors of such plans to convert to ERISA status.
ERISA Exemption
A salary-deferral-only plan that is not covered by ERISA is exempt from the Form 5500 and audit requirements, along with nondiscrimination testing and fiduciary concerns. In 1979, the Department of Labor (DOL) established a safe harbor for private tax-exempt organizations to be exempt from ERISA Title I coverage (an automatic exemption is granted governmental and non-electing church plans). The safe harbor requires the plans meet all four of the following requirements to qualify for the exemption:
- Plan participation must be voluntary.
- All rights under the annuity contracts or custodial accounts must be enforceable not by the employer but rather by the employee or beneficiary.
- The employer’s involvement is limited to certain specified activities; and
- The employer receives no direct or indirect compensation for maintaining the plan other than being reimbursed for reasonable expenses.
Generally, an employer can facilitate plan operation, such as entering into salary reduction agreements, allowing access to investment providers and determining the number of “reasonable“ investment choices without violating the third requirement.
With the advent of the new regulations, 403(b) plans became subject to many of the same regulations applicable to 401(k) plans. Recent regulations, such as participant fee disclosure and changes in the investment landscape, have made it difficult for employers to limit their involvement and made their ERISA status uncertain at best. Plans that also match contributions or offer employer funding through another plan will find it especially difficult to maintain ERISA exemption. In 2012, the DOL issued two advisory opinions denying the ERISA exemption for plans that made employer contributions.
Advantages of ERISA coverage
There are advantages to both plan sponsors and participants to allowing a 403(b) plan to be covered under ERISA. These include:
- Creditor protection for participants.
- Compliance with regulatory system – no worries about potential penalties.
- Reliance on established rules and procedures for plan documents and operation.
- Availability of IRS correction programs.
- Fiduciary liability protection for compliant plans.
- Employer involvement allowed in necessary plan functions.
Transition to ERISA Coverage
To subject a previously exempt plan to ERISA, a plan sponsors should engage a retirement plan professional to understand their expanded roles and responsibilities. The plan document will have to be brought into compliance with all current laws, a Form 5500 will need to be filed, and a large plan will have an audit requirement. Plan fiduciaries will need to establish procedures for oversight and management of accounts. The transition period also affords an opportunity to review the overall retirement plan design, which may include consolidating a stand-alone 403(b) plan into other plans sponsored by the employer.
It is becoming increasingly difficult to qualify for exemption from ERISA status. Plan sponsors who find themselves in this uncertain situation should consider the benefits of electing to be covered under ERISA and enhancing the retirement benefits they are offering to their employees.
For more information or questions about non ERISA 403(b) plans, please contact Richard Green at rgreen@windes.com or toll free at 844.4WINDES (844.494.6337).