What’s a non-ERISA 403b?

The ERISA act is a federal law that protects retirement savings from misuse and abuse by fiduciaries. It defines the federal requirements that retirement plans must follow regarding funding, plan participation, vesting as well as reporting and disclosures. However, certain retirement plans are not subject to ERISA.

Non-ERISA 403(b) plans refer to the 403(b) plans that are not subject to the ERISA Act, and hence do not need to follow the requirements of the act. Typically, 403(b) plans sponsored by governmental and public school employers are exempt from ERISA, while 403(b) plans sponsored by churches, mosques, and other religious organisations are exempt from ERISA but may elect ERISA coverage.

What is ERISA?

The ERISA Act is a federal law that was enacted in 1974 to set a minimum standard for retirement plans and health plans in the private sector. It regulates fiduciaries like plan sponsors and plan administrators to ensure they remain compliant with their fiduciary duties.

The federal law applies to employer-sponsored plans like 401(k), 403(b), and pension plans, which must comply with the minimum federal standards. It establishes the minimum standards that all companies with ERISA-compliant retirement plans must obey. ERISA protects the covered employees and the employer.

What is a non-ERISA 403(b)?

Most private employer-sponsored retirement plans like 401(k) and 403(b) are subject to the ERISA act. However, not all 403(b) plans are subject to the ERISA act.

403(b) plans exempted from the ERISA act are referred to as Non-ERISA 403(b) plans. These plans do not have the same value of protection as ERISA plans, but they must conform to the requirements established by the Internal Revenue Service (IRS).

403(b) Plans Exempted from ERISA

If your employer-sponsored 403(b) retirement plan falls into any of these categories, it may be exempt from the ERISA provisions.

Plans sponsored by the government

The first category of non-ERISA retirement plans is government-sponsored 403(b) plans. In this case, the term 'government' includes local, city, state government, and federal government.

Plan sponsored by religious organisations

Church 403(b) plans also fall under non-ERISA plans. It includes plans sponsored by churches, mosques, and other religious organisations. However, even with the exemption, some religious organisations may elect ERISA coverage.

A religious organisation can choose to submit to ERISA coverage by attaching a statement to Form 5500 that they first filed in the first plan year, confirming that they are subject to ERISA. However, electing to have the plan covered by ERISA attracts increased administrative responsibilities.

Plans established by 501(c)(3) organisations

If you have a private sector 403(b) plan established by a 501(c)(3) organization, it may be exempt from ERISA if it meets certain requirements. This means that these plans do not automatically qualify to be non-ERISA plans.

Safe Harbor Rules for Non-ERISA 403(b) plans

The Department of Labor establishes safe harbor regulations for non-ERISA plans. Based on these rules, a private sector 403(b) plan will not be subject to Title I of ERISA if they meet certain requirements. These requirements include:

Voluntary participation

Employee participation in the 403(b) plan must be completely voluntary for all participants.

Employee enforceability

All rights under the plan are enforceable by an employer, beneficiary, or authorized representative of the employee.

Restricted employer involvement

The involvement of the employer is limited to specific activities related to the administration of elective deferral agreements. The employer may not process distributions, review QDRO requests, authorize plan transfers, or approve 403(b) loan requests.

No employer compensation

The employer must not receive direct or indirect compensation in cash or other forms for maintaining the plan. However, the employer may receive reasonable compensation to cover expenses incurred in operating the plan.

Employer contribution

The employer cannot make contributions to the participant’s 403(b) accounts.

Advantages of Non-ERISA Plan

Exemption from filing and audit requirements

A non-ERISA plan is not required to file Form 5500 and other schedules. Also, if the plan has at least 100 or more participants, it does not require an annual audit.

Few disclosure requirements

A non-ERISA 403(b) plan does not need to comply with ERISA-mandated documents. This means that the plan sponsor does not need to provide a Summary Plan Description (SDP) and annual investment information to plan participants.

Less strict fiduciary requirements

A non-ERISA plan has less strict fiduciary requirements compared to ERISA plans. This means a non-ERISA plan is not subject to fiduciary standards like prudent care, exclusive benefits, and diversification. However, it must comply with state laws and IRS requirements.

Risks of Non-ERISA Plan

Certain actions can make a non-ERISA 403(b) plan subject to ERISA standards. These actions include:

An employer offering a 403(b) plan to employees

If a non-ERISA qualified employer starts offering a 403(b) plan, it should be limited to administrative tasks like collecting contributions and providing notices to 403(b) vendors. If the employer becomes actively involved in operating the plan, it may be subject to ERISA provisions.

Employer selecting a 403(b) plan provider

The employer is restricted from selecting the vendor for the 403(b) plan, including a third-party administrator. Also, the employer cannot receive compensation in cash or other forms from the vendor beyond a reasonable amount to cover its contractual responsibilities in the plan.

Administrative activities

The employer is restricted to certain operational activities in the non-ERISA plan. If the employer accepts employee requests for hardship distributions, plan loans, and plan-to-plan transfers, it could subject the plan to ERISA requirements. The employer should direct such requests to the 403(b) plan provider since handling such tasks may be deemed active involvement in retirement plan operations.