Matching contributions in 401(a) Plan linked to 403(b) Plan may result in Loss of ERISA Exemption

June 2012

On May 25, 2012, the Department of Labor issued Advisory Opinion 2012-02a. The opinion discusses 403(b) plans which are linked to a 401(a) plans where the employer bases the matching contributions into the 401(a) based on the employee’s salary deferrals into the 403(b).

Generally a 403(b) plan established by private sector tax-exempt organization is a pension plan covered by Title I of the Employee Retirement Income Security Act of 1974 (ERISA). Government and church plans are generally excluded from coverage under Title I of ERISA. Certain questions were raised regarding 403(b) plans funded entirely with employee salary deferrals. In response the DOL issued a “safe harbor” regulation at 29 C.F.R. 2510.3-2(f). The safe harbor regulation allowed plans that met the following four criteria to not be subject to Title I of ERISA. The four general conditions are: (1) participation of employees is completely voluntary, (2) 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) the involvement of the employer is limited to certain specific activities, and (4) the employer receives on 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.

If an organization bases the employer contributions to a 401(a) plan on the employee making salary reduction contributions to the 403(b), it is the DOL position that this is inconsistent with condition (3) limited employer involvement and conflicts with condition (1) that employee participation in the 403(b) plan be completely voluntary. This particular type of matching employer contributions to a qualified plan will constitute sufficient employer involvement with the 403(b) plan to disqualify reliance on the safe harbor provided in the regulations.

If you would like to discuss this matter further, please contact Drew Cheney or your BNN advisor at 1-800-244-7444.

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