Williams Mullen: Matching Contribution Feature Subjects 403(b) Plan to ERISA

BY: CATHERINE M. MARRIOTT & NONA K. MASSENGILL

Tax-exempt entities that sponsor IRC Section 403(b) plans typically operate their plans to avoid the application of ERISA.  ERISA will not apply if the plan can satisfy a safe harbor exemption.  Central to the safe harbor is limited employer involvement and the voluntary nature of employee contributions to the plan.  In a recent Advisory Opinion (2012-02A, May 25, 2012), the Department of Labor (DOL) addressed whether a matching contribution feature could satisfy the safe harbor exemption.

Safe Harbor.  Safe harbor 403(b) plans are funded solely through salary reduction agreements or agreements to forego a salary increase.  Contributions are used to fund the purchase of annuity contracts or custodial accounts.  Around this basic structure, the following conditions must be present for the plan to satisfy the safe harbor.  First, participation is completely voluntary.  Second, all rights under the annuity contract or custodial account are enforceable solely by the employee or his beneficiary or representative.  Third, employer involvement is limited to specified activities, such remittance of contributions to the 403(b) provider; recordkeeping; and limiting products available to employees to ensure a reasonable choice of investments.  Fourth, the employer may receive no direct or indirect consideration, other than reasonable reimbursement to cover actual expenses incurred in carrying out the salary reduction agreements.  

The Advisory Opinion.   Advisory Opinion 2012-02A involved a matching contribution that implicated two of the safe harbor conditions.  In their request, several tax-exempt employers sought an opinion on a 403(b) plan structure that involved a non-403(b) plan matching contribution.  The tax-exempts each maintained both a 403(b) plan and a separate money purchase pension plan.  Each employer made a matching contribution into the money purchase plan "based on" the employee's salary deferrals to the 403(b) plan.

The DOL advised that conditioning employer contributions to a separate pension plan on an employee's making salary reduction contributions to a 403(b) plan is inconsistent with the limited employer involvement standard set by the safe harbor regulations and the requirement that employee participation be "completely voluntary."  The DOL noted that an employer may take 403(b) plan participation into account in ensuring that contributions to its other pension plans satisfy tax qualification requirements without running afoul of the safe harbor.

Employer Impact.  Although the DOL specifically permits a number of employer activities in implementing an exempt 403(b) arrangement, the Advisory Opinion is an example of a design-based link between plans that must be avoided if the employer's goal is to satisfy the 403(b) plan safe harbor.  Consequences for an employer whose 403(b) plan is subject to ERISA include the requirement to file annual reports for the plan on Form 5500 and to prepare and provide summary plan descriptions for the plan.  If you have questions on the application of the Advisory Opinion to your plan, or if you would like assistance in understanding and satisfying your ERISA obligations, please contact any of the attorneys in Williams Mullen's employee benefits group.

For more information about this topic, please contact the author or any member of the Williams Mullen Employee Benefits & Executive CompensationTeam.


Please note:
This newsletter contains general, condensed summaries of actual legal matters, statutes and opinions for information purposes. It is not meant to be and should not be construed as legal advice. Readers with particular needs on specific issues should retain the services of competent counsel. For more information, please contact us

© 2012 WILLIAMS MULLEN ALL RIGHTS RESERVED

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