ERISA vs. Non-ERISA 403(b) Plans: A Primer

If you’re looking to expand your practice into the 403(b) plan market, be sure to evaluate a prospect's ERISA status.

403(b) Plan Sponsors

Only certain employer entity types can sponsor a 403(b) plan. Eligible employers are:

• Tax-exempt entities (e.g., 501(c)(3) tax-exempt organizations, charitable or community service organizations)
  • Usually ERISA covered; may qualify for non-ERISA coverage
• Certain governmental entities (i.e., a state, including a political subdivision of a state, or any agency or instrumentality of a state for its public school employees*)
  • Always non-ERISA covered
• Certain religious organizations
  • Usually non-ERISA covered

The entity type determines if the plan is subject to or can avoid ERISA requirements.

ERISA and Retirement Plans

The Employee Retirement Income Security Act of 1974 is a federal law that protects participation in private retirement plans. ERISA defines several federal requirements for:

• Funding
• Vesting
• Participation
• Accrual of benefits
• Reporting and disclosures
• Accountability of plan fiduciaries

Most employer-sponsored retirement plans are subject to ERISA requirements. However, some 403(b) plans can be established outside the ERISA umbrella.

ERISA or Non-ERISA

According to the Government Accountability Office, ERISA 403(b) plans are often the main plan offered by employers. Non-ERISA plans are generally supplemental to another retirement savings plan offered by an employer. A 403(b) plan that is an ERISA plan is subject to meeting Title I requirements of ERISA, which includes:

• Form 5500 filing
• Summary plan description
• Summary annual report
• Prohibited transaction rules
• ERISA bonding
• Retirement Equity Act
• Fee disclosures
• Fiduciary responsibilities
• Nondiscrimination requirements

With an ERISA plan, the employer is more hands-on. They choose investment options, set the timing of employee contributions, and may provide an employer match or other employer non-elective contributions.

ERISA 403(b) Plans vs. ERISA 401(k) Plans

It’s important to know the similarities and differences between ERISA 403(b) and 401(k) plans. Here's a quick primer:

Non-ERISA plans are generally supplemental to another retirement savings plan offered by an employer. Maintaining non-ERISA status comes with a unique set of challenges. In a non-ERISA plan sponsored by a tax-exempt entity, the Department of Labor requires the employer’s involvement to be very limited. Failure to adhere to the following DOL requirements may subject a non-ERISA 403(b) plan to ERISA requirements:

• The plan can only permit employee salary deferrals.
• The employee chooses the investments and controls the withdrawal of funds.
• The employer cannot provide administrative support to the plan and cannot select the third-party service provider for the plan.
• The employer cannot make any discretionary decisions, such as implementing automatic enrollment or determining distribution eligibility.

There are some advantages to non-ERISA plans:

• No need to provide annual investment and financial information.
• No need to file Form 5500 and related schedules.
• No annual audit for plans that cover more than 100 participants.
• Not subject to ERISA fiduciary standards regarding exclusive benefits, prudent care and diversification. It's still subject to state law and other standards.
• Non-ERISA plans generally don't have to follow Department of Labor regulations. Plans still need to follow established Internal Revenue Service regulations.

For more information on working with 403(b) plans, contact your retirement plan consultant at The Standard.