403(b) Loans and Hardship Withdrawals

Q: I am servicing a 403(b) plan sponsored by a small 501(c)(3), which consists of elective deferrals only, intended to be exempt from ERISA. The product provider recently asked the plan sponsor to begin approving loans and hardship withdrawals. What impact would that action have on the ERISA exemption?

A: If the plan sponsor approved loans and hardship withdrawals, the "limited involvement" requirement for the ERISA exemption likely would be exceeded, thus subjecting the 403(b) plan to ERISA.