Tip of the Week: Do Negative Elections Cause a 403(b) Plan to Become Subject to ERISA?

Under the Pension Protection Act of 2006, employers were permitted to automatically enroll employees in a 403(b) salary reduction program under which each employee is deemed to have elected to make an elective deferral contribution into the plan. Because this type of program would cause the employer sponsoring the 403(b) plan to be more “involved” than is permitted under the “limited involvement” safe harbor exemption, this plan feature would probably cause a nongovernmental or non-church 403(b) plan to become subject to ERISA. This has become even more of an issue since the issuance of final regulations under 2510.3-2 that promote auto-enrollment plans through states subject to a list of requirements, where only if offered by a state are the programs not subject to ERISA.

Therefore, automatic contribution arrangements (also known as auto-enrollment or negative election provisions) in 403(b) plans should be considered only in situations where the employer has a statutory exemption from ERISA or is willing to maintain an ERISA plan.

In plans where a 501(c)(3) employer makes contributions to the 403(b) plan, the plan is already subject to ERISA, so adding an auto-enrollment feature will have no additional ERISA impact. In that instance, auto-enrollment should be considered as a means to increase employee participation in the plan.

It is important for governmental employers to review state law before implementing any auto-enrollment provisions to their plan, since most states do not permit governmental employers to withhold amounts from an employee’s paycheck without prior written consent.  Several states are trying to create exceptions to this restriction for employee contributions to retirement plans, but a thorough review of applicable laws should be performed before this feature is implemented. This may be a particular nuisance for public education employers that currently use the IRS model language to implement their 403(b) plan document, since the model language includes an auto-enrollment feature. Care must be taken to eliminate those portions of the model language from the employer’s plan document in states where automatic enrollment is not permitted or where it is not desired.

Editor’s Note: This is an occasional feature in the NTSA Advisor. It is drawn from The Source, a book that covers technical, compliance, administrative and marketing aspects of the 403(b) and 457(b) markets. More information about The Source is available here.