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Date: July 24, 2007
Memorandum For: |
Virginia C. Smith, Director of Enforcement Regional Directors |
From: |
Robert J. Doyle Director of Regulations and Interpretations |
Subject: |
ERISA Coverage Of IRC § 403(b)
Tax-Sheltered Annuity Programs |
Issue: How do the Department of the Treasury/Internal
Revenue Service regulations governing Internal Revenue Code § 403(b)
tax-sheltered annuity programs affect the status of such programs under
the Department of Labor's safe harbor regulation at 29 C.F.R. §
2510.3-2(f)?
A tax-sheltered annuity (TSA) program under section 403(b) of the
Internal Revenue Code (Code), also known as a “403(b) plan,” is a
retirement plan for employees of public schools, employees of certain
tax-exempt organizations, and certain ministers. Under a 403(b) plan,
employers may purchase for their eligible employees annuity contracts or
establish custodial accounts invested only in mutual funds for the purpose
of providing retirement income. Annuity contracts must be purchased from a
state licensed insurance company, and the custodial accounts must be held
by a custodian bank or IRS approved non-bank trustee/custodian. The
annuity contracts and custodial accounts may be funded by employee salary
deferrals, employer contributions, or both. Although not subject to the
qualification requirements of section 401 of the Code, some of the
requirements that apply to qualified plans also apply, with modifications,
to 403(b) plans.
These TSA programs, if established or maintained by an employer engaged
in commerce or in any industry or activity affecting commerce, generally
are “pension plans” within the meaning of section 3(2) of ERISA and
covered by Title I pursuant to section 4(a) of ERISA.(1) The terms “establish”
or “maintain” are not defined in ERISA, and uncertainty as to the
application of ERISA to TSA programs funded entirely with employee
contributions prompted the Department of Labor in 1979 to issue a “safe
harbor” regulation at 29 C.F.R. § 2510.3-2(f).
The safe harbor at § 2510.3-2(f) states that a program for the
purchase of annuity contracts or custodial accounts in accordance with
provisions set forth in section 403(b) of the Code and funded solely
through salary reduction agreements or agreements to forego an increase in
salary, are not “established or maintained” by an employer under
section 3(2) of the Act, and, therefore, are not employee pension benefit
plans subject to Title I, provided that certain factors are present. These
factors are: (1) that participation of employees is completely voluntary,
(2) that all rights under the annuity contract or custodial account are
enforceable solely by the employee or beneficiary of such employee, or by
an authorized representative of such employee or beneficiary, (3) that the
involvement of the employer is limited to certain optional specified
activities, and (4) that the employer receive no direct or indirect
consideration or compensation in cash or otherwise other than reasonable
reimbursement to cover expenses properly and actually incurred in
performing the employer's duties pursuant to the salary reduction
agreements. In this latter regard, if an employer, or a person acting in
the interest of an employer, receives, for example, other consideration
from an annuity contractor, the employer could be deemed to have “established
or maintained” a plan.
The safe harbor allows the employer to engage in a range of activities
to facilitate the operation of the program. The employer may permit
annuity contractors—including agents or brokers who offer annuity
contracts or make available custodial accounts—to publicize their
products, may request information concerning proposed funding media,
products, or annuity contractors, and may compile such information to
facilitate review and analysis by the employees. The employer may enter
into salary reduction agreements and collect annuity or custodial account
considerations required by the agreements, remit them to annuity
contractors, and maintain records of such collections. The employer may
hold one or more group annuity contracts in the employer’s name covering
its employees and exercise rights as representative of its employees under
the contract, at least with respect to amendments of the contract. The
employer may also limit funding media or products available to employees,
or annuity contractors who may approach the employees, to a number and
selection designed to afford employees a reasonable choice in light of all
relevant circumstances.(2)
The Department of the Treasury/Internal Revenue Service has issued
final regulations at 26 C.F.R. 1.403(b)-0 et seq. (July 2007) reflecting
legislative changes made to § 403(b) since the existing regulations were
adopted in 1964. The § 403(b) regulations also incorporate interpretive
positions that the Department of the Treasury/Internal Revenue Service
have taken in other guidance on § 403(b). This Bulletin is intended to
provide guidance to EBSA’s national and regional offices concerning the
extent to which compliance with the updated regulations would cause
employers to exceed the limitations on employer involvement permitted
under the Department of Labor’s safe harbor for tax-sheltered annuity
programs at 29 C.F.R. § 2510.3-2(f).
The new § 403(b) regulations have not led the Department of Labor to
change its view on the principles that apply in determining whether any
given TSA program is covered by Title I of ERISA. Even though the
differences between the tax rules for TSA programs and those governing
other ERISA-covered pension plans may have diminished, the Department's
safe harbor regulation at 29 C.F.R. § 2510.3-2(f) remains operative. The
new § 403(b) regulations allow significant flexibility regarding the
employer's functions in the structure and operation of the arrangement.
Thus, compliance with the new § 403(b) regulations will not necessarily
cause a TSA program to become covered by Title I of ERISA.
The Department has acknowledged that employers have an interest
separate from acting as their employees’ authorized representatives in
ensuring that the annuity contracts and custodial accounts in TSA programs
are tax compliant. The Code’s qualification requirements impose
obligations directly on employers in connection with the employees’
annuity contracts and custodial accounts. If individual contracts or
accounts fail to satisfy the tax qualification requirements, even if due
to actions or errors of an employee or annuity contractor, the employer
can be liable to the IRS for potentially substantial penalty taxes,
correction fees, and employment taxes on employee salary deferrals.
Accordingly, in the Department’s view, the safe harbor at section
2510.3-2(f) subsumes certain employer activities designed to ensure that a
TSA program continues to be tax compliant under section 403(b) of the
Code.
The Department of Labor has issued advisory opinions and other guidance
on whether specific employer functions are compatible with the safe
harbor. The Department believes that the safe harbor allows an employer to
conduct administrative reviews of the program structure and operation for
tax compliance defects. Such reviews may include discrimination testing
and compliance with maximum contribution limitations under the Treasury
regulations. As noted in previous guidance issued by the Department, the
employer may also fashion and propose corrections; develop improvements to
the plan's administrative processes that will obviate the recurrence of
tax defects; obtain the cooperation of independent entities involved in
the program needed to correct tax defects; and keep records of its
activities.(3)
A program could fit within the section 2510.3-2(f) safe harbor and
include terms that require employers to certify to an annuity provider a
state of facts within the employer's knowledge as employer, such as
employee addresses, attendance records or compensation levels. The
employer may also transmit to the annuity provider another party's
certification as to other facts, such as a doctor's certification of the
employee's physical condition. The employer could not, however, consistent
with the safe harbor, have responsibility for, or make, discretionary
determinations in administering the program. Examples of such
discretionary determinations are authorizing plan-to-plan transfers,
processing distributions, satisfying applicable qualified joint and
survivor annuity requirements, and making determinations regarding
hardship distributions, qualified domestic relations orders (QDROs), and
eligibility for or enforcement of loans.(4)
An important requirement in the Treasury regulations is that a TSA
program must be maintained pursuant to a “written defined contribution
plan” that satisfies the Code’s regulatory requirements and contains
all the material terms and conditions for benefits under the plan. An
employer, by adopting such a written plan, does not automatically
establish a Title I plan. Compiling the benefit terms of the contracts and
the responsibilities of the employer, annuity providers and participants
is a function similar to the information collection and compilation
activities expressly permitted under the Department’s TSA safe harbor.
Indeed, the preamble to the final Treasury regulations makes clear that
the “plan” required to satisfy the Code does not have to be a single
document, but may incorporate by reference other documents, including
insurance policies and custodial account agreements and other documents
governing the contracts and accounts prepared by the annuity providers. 26
C.F.R. § 1.403(b)-3(b)(3).
The Department of Labor expects that the written plan for a TSA program
that complies with the safe harbor would consist largely of the separate
contracts and related documents supplied by the annuity providers and
account trustees or custodians. An employer’s development and adoption
of a single document to coordinate administration among different issuers,
and to address tax matters that apply, such as the universal availability
requirement in Code section 403(b)(12)(A)(ii), without reference to a
particular contract or account, would not put the TSA program out of
compliance with the safe harbor.
Because the Treasury regulations allow a plan to allocate
responsibility for performing administrative functions to persons other
than the employer, the relevant documents should identify the parties that
are responsible for administrative functions, including those related to
tax compliance. The documents should correctly describe the employer’s
limited role and allocate discretionary determinations to the annuity
provider or participant or other third party selected by the provider or
participant.
In addition, an employer seeking to take advantage of the safe harbor
may periodically review the documents making up the plan for conflicting
provisions and for compliance with the Code and the Treasury regulations.
Negotiating with annuity providers or account custodians to change the
terms of their products for other purposes, such as setting conditions for
hardship withdrawals, would be a form of employer involvement outside the
safe harbor.
A tax-sheltered annuity program will not, in the Department’s view,
become covered by Title I of ERISA merely because the written plan
conforms to the new § 403(b) regulations by limiting employees to
exchanges of contract funds only among providers who have adopted the
written plan, or transfers from the program of a former employer to that
of the current employer. Under the safe harbor, the employer may limit
funding media or products available to employees, or annuity providers who
may approach the employee, to a number designed to afford employees a
reasonable choice in light of all relevant circumstances. The
Code-mandated restrictions on transfers of funds may, however, require the
employer to allow providers to offer a wider variety of products in order
to afford employees a reasonable choice in light of all relevant
circumstances for purposes of the safe harbor. Alternately, an employer
may limit the number of providers to which it will forward salary
reduction contributions as long as employees may transfer all or a part of
their funds to any provider whose annuity contract or custodial account
complies with the Code requirements and who agrees to the plan's division
of tax compliance responsibilities among the employer, provider and
participant.
Finally, in the event an employer decides that it does not want to
continue to perform the ministerial and administrative functions required
under the § 403(b) regulations, the Department does not believe that the
employer's determination to terminate a TSA program in compliance with the
Treasury regulations will cause a program not otherwise covered by Title I
of ERISA to become covered.
The Department is of the view that tax-exempt employers will be able to
comply with the requirements in the new § 403(b) regulations and remain
within the Department’s safe harbor for TSA programs funded solely by
salary deferrals. We note, however, that the new § 403(b) regulations
offer employers considerable flexibility in shaping the extent and nature
of their involvement under a tax-sheltered annuity program. The question
of whether any particular employer, in complying with the § 403(b)
regulations, has established or maintained a plan covered under Title I of
ERISA must be analyzed on a case-by-case basis applying the criteria set
forth in 29 C.F.R. § 2510.3-2(f) and section 3(2) of ERISA.
Questions concerning the information contained in this Bulletin may be
directed to the Division of Coverage, Reporting and Disclosure, Office of
Regulations and Interpretations, 202.693.8523.
-
Under ERISA § 4(b) (1) and (2), “governmental
plans” and “church plans” generally are excluded from coverage
under Title I of ERISA. Therefore, § 403(b) contracts and custodial
accounts purchased or provided under a program that is either a “governmental
plan” under § 3(32) of ERISA or a non-electing “church plan”
under § 3(33) of ERISA are not subject to Title I.
-
The regulation at 29 C.F.R. §
2510.3-2(f) provides a “safe harbor” for TSA programs that conform
to its provisions. The safe harbor does not preclude the possibility
that programs that do not fully conform with the regulation may
nevertheless not be “established or maintained” by an employer for
purposes of Title I of ERISA.
-
See DOL Information Letter to
Siegel Benefit Consultants (Feb. 27, 1996).
-
See Advisory Opinion Nos.
94-30A, 83-23A, and 80-11A.
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