Employee benefit plans fall into two broad categories: welfare plans and pension plans. The pension plans are then split into defined contribution plans and defined benefit plans. Under a defined contribution plan, participant’s benefits are limited by his or her contributions into the plan and accumulated earnings. A defined benefit plan defines the benefits through the plan design. For example, a defined benefit plan will typically define the pension benefit based on compensation over some period of years with the employer and a percentage which will vary with length of service with the employer. For now, we will focus on the defined contribution plan, specifically on 403(b) plans which are sponsored by a litany of organizations such as hospitals, churches, charitable organizations, governmental organizations and public schools.
403(b) plans are governed by ERISA in generally the same way as most other defined contribution retirement plans. There are, however, key differences in the rules for 403(b) plans and it is important to keep them in mind.
Formation and Documentation
Like all other ERISA plans, 403(b) plans must be in writing. A key difference between a 401(k) plan and a 403(b) plan is that a 403(b) plan is not limited to a single document. All of the documentation taken together covers the rules governing the operation of the plan and the management of plan assets. A 403(b) plan can have multiple providers.
403(b) plans do not have specific eligibility standards; rather they must be universally available. This is to say that nearly every employee of the organization has the right to participate in the plan and must be notified of that right. There may be exceptions in the cases of students or employees who work under 20 hours a week, however, the general rule is universal availability.
A third key difference is that 403(b) plans only have to adhere to the Actual Contribution Percentage (ACP) test. The ACP test compares the match rate (matching contributions received divided an employee’s compensation) of non-highly compensated employees against the match rate of highly compensated employees. To contrast, a plan such as a 401(k) must adhere to the ACP test as well as the Average Deferral Percentage (ADP) test. Compensation is defined within the 403(b) plan, but is limited by the IRS to $265,000 in both 2015 and 2016 as a measure of determining benefits.
As different as they may seem, 403(b) plans and their administrators are subject to many of the same requirements that other defined contribution retirement plans must adhere to. The plan administrators of 403(b) plans are subject to titles I and II of ERISA which state that the administrators must operate the plan for the benefit of participants and their beneficiaries, otherwise known as fiduciary duty. While the plan administrator has fiduciary duty, he or she may contract with a third party to handle the plans operations. It is important to remember that this does not transfer the fiduciary duty of the plan administrator to the third party performing the functions assigned to it. 403(b) plans are subject to the Pension Protection Act of 2006 and are required to obtain a certification of funded status no later than October 1st. Finally, 403(b) plans are required to be audited if they meet the definition of a large plan, generally defined as a plan with more than 100 participants at the beginning of the plan year.
To aid our clients in ensuring that they meet the requirements for operating their retirement plans, we offer our clients a plan administrator checklist that contains ERISA and DOL requirements. Please contact your RINA representative if you would like a copy of the administrator checklist.