State Sponsored 403(b) Plans: A Closer Look

The news has been flooded with articles lately regarding the attempts of several states to sponsor 401(k) plans and obtain an exemption from ERISA for doing so. But do you know that some states currently sponsor 403(b) plans? In this article, we will take a closer look at such often-overlooked plans and their impacts on the advisor community.

Background

Treas. Reg. §1.403(b)-2 permits four types of entities/individuals to sponsor 403(b) plans:
 

• 501(c)(3) tax-exempt organizations;

• public education organizations (Internal Revenue Code (IRC) Section 170(b)(1)(A)(ii));

• ministers (defined by IRC Section 414(e)(5)(A)); and

• a state, including a political subdivision of a state, or any agency or instrumentality of a state for its public school employees (IRC Section 170(b)(1)(A)(ii)). (An Indian tribal government is treated as a state (IRC Section 7871(a)(6)(B)).

It is the final type of organization that we will focus on for this article.
 

States, or political subdivisions (e.g., a state board of regents) can and do sponsor 403(b) plans. However, they can ONLY sponsor a 403(b) plan for public school employees. Thus, other state employees, such as state/county/municipal healthcare employees, may NOT participate in 403(b) plan sponsored by the state. However, if a state/county/municipal hospital qualifies as a 501(c)(3) organization, it may sponsor its own 403(b) plan. When some of these 403(b) plans were first established in many states, the states erroneously thought that ALL public employees could participate, but they quickly learned that this was not the case and amended their plans accordingly.

Since public schools also can participate in a 403(b) plan that is sponsored by the school district, there is an interesting dichotomy under which public school employees can be eligible for two types of 403(b) plans:

1. a plan sponsored by the school district; and
2. a plan sponsored by the state/political subdivision.

Note that this is the case for K-14 as well as higher education employees. Of course, the school district may simply choose to participate in the state plan, as opposed to sponsoring its own plan. Some state-sponsored plans are quite popular; others have few, if any, employees enrolled in them.

State 403(b) Plan Sponsorship

Sixteen states, either directly or through a political subdivision, sponsor 403(b) plans for public school employees as follows (Note: this list is based on the author’s research of publicly available information; if you are aware of other state 403(b) plans, or believe that any state plans are inaccurately described herein please feel free to contact the NTSA so that we may update this information):

1. Arizona — this plan, sponsored by the Arizona State Retirement System and known as the Arizona State Retirement System Supplemental Salary Deferral Plan, is limited to K-14 employees (no higher ed). In addition, school districts must elect to participate in the plan in order for employees of those school districts to participate. There is a single provider for the plan.

2. Connecticut — this plan, sponsored by the state and known as the State of Connecticut 403(b) Program, is offered to both K-14 and higher ed employees (the plan document indicates that the 403(b) is also offered to state hospital employees as well, which appears to be inconsistent with the Code, but the underlying state statute clearly limits participation to employees eligible to participate in a 403(b) plan). There is a single provider for this plan.

3. Delaware — this plan, sponsored by the state and known as the State of Delaware 403(b) TSA Plan, is limited to K-14 employees and certain higher education institutions which are listed on their website. There are 13 providers offered under this plan, though one of the providers furnishes enrollment services for all vendors.

4. Hawaii — this plan, sponsored by the state Department of Education (DOE) and known as the State of Hawaii Department of Education 403(b) Plan, is open to all K-14 employees, and other employees of the DOE. There are 33 providers offered under this plan, though a TPA is utilized as well. The University of Hawaii utilizes a similar plan with the same TPA, though there are 34 providers under that plan.

5. Idaho — this plan, sponsored by the state Board of Education and known as the Idaho State Board of Education Tax Deferred 403(b) Plan is open to all employees of the Board of Education (which appears to include all K-14 employees, though this is not entirely clear) as well as higher ed employees. There are 5 providers offered under this plan.

6. Iowa — this plan, sponsored by the state Department of Administrative Services and known as the Retirement Investors Club 403(b) Plan, is limited to K-14 employees (no higher ed). In addition, school districts must elect to participate in the plan in order for employees of those school districts to participate. There are four providers for this plan.

7. Kansas — though there is no state-sponsored plan for K-12 employees, the Kansas Board of Regents sponsors the Kansas Board of Regents Voluntary Retirement Plan for higher ed employees (including community college employees). There are six providers in this plan, and a TPA is utilized as well. http://www.kansasregents.org/about/regents_retirement_plans/voluntary_re...

8. Maryland — this plan, sponsored by the state and known as the Maryland Teachers and State Employees Supplemental Retirement Plan (MSRP) 403(b) Tax-Deferred Annuity Plan is offered to both K-14 and higher ed employees. There is a single provider for this plan.

9. Massachusetts — though there is no state-sponsored plan for K-12 employees, the Massachusetts Department of Higher Education sponsors the Commonwealth of Massachusetts Tax Deferred Savings Plan for higher ed employees (including community college employees). There are six providers in this plan.

10. Montana — though there is no state-sponsored plan for K-12 employees, the Montana University System Board of Regents sponsors the Montana University System 403(b) Plan for higher ed employees (including community college employees). There are four providers in this plan.

11. Nevada — though there is no state-sponsored plan for K-12 employees, the Board of Regents of the Nevada System of Higher Education sponsors The Nevada System of Higher Education Supplemental 403(b) Plan for higher ed employees (including community college employees). There is a single provider for this plan.

12. New Jersey — this plan, sponsored by the state and known as the Supplemental Annuity Collective Trust (SACT) Tax-Sheltered Plan, is open to both K-14 and higher ed employees; however, employees must participate in state retirement system in order to be eligible. Unusually, the plan is self-administered, with investments directed by the state.

13. North Carolina — this plan, sponsored by the state, is known as the North Carolina Public School Teachers’ and Professional Educators' Investment Plan. Though the plan document provisions indicated that any K-14 and higher ed employee is eligible, the plan appears to only be marketed to K-12 school districts. In addition, school districts must elect to participate in the plan (either as a standalone plan or alongside their existing 403(b) plan) in order for employees of those school districts to participate. There is a single provider for this plan.

14. Oklahoma — this plan, sponsored by the Oklahoma Teachers Retirement System and known as the Oklahoma Teacher Retirement System 403(b) Plan (click on the Active Clients tab to locate the link to the plan website), is limited to K-12 employees (no community colleges or higher ed). In addition, school districts must elect to participate in the plan in order for employees of those school districts to participate. There is a single provider for this plan.

15. Vermont— this plan, sponsored by the Vermont State Teachers’ Retirement Board and known as the Vermont State Teachers' Retirement Board 403(b) Plan, is limited to K-12 employees (no community college or higher ed). There is a single provider for this plan.

16. Washington — this state is a bit unusual in that there is a state-sponsored plan ONLY for community and technical colleges, and NOT for K-12 or higher ed, This plan is sponsored by the Washington State Board for Community and Technical Colleges and is known as the State Board Voluntary Investment Program. There is a single provider for this plan.

In addition, although the following state does not sponsor a 403(b) plan directly, it does offer a recordkeeping platform that school districts can select as a provider for their own 403(b) retirement plans:

California — through the California State Teachers Retirement System (CALSTRS), school districts can choose Pension2, in which CALSTRS selects and monitors the investment options. There is a single provider for this plan.
Note, however, that school districts cannot choose Pension2 exclusively, since California law prohibits school districts from limiting the number of 403(b) providers.

Note that higher education institutions in California are not subject to this law, and may limit their 403(b) providers. CALSTRS offers TPA services through its 403bComply program.

The following 33 states (and the District of Columbia) do not provide any 403(b) offerings. However, many states offer a 457(b) plan for elective deferrals; some offer a grandfathered 401(k) plan as well.

Alabama*
Alaska
Arkansas
Colorado
Florida*
Georgia
Illinois*
Indiana
Kentucky
Louisiana
Maine
Michigan
Minnesota*
Mississippi
Missouri
Nebraska
New Hampshire
New Mexico
New York
North Dakota
Ohio
Oregon
Pennsylvania*
Rhode Island
South Carolina
South Dakota
Tennessee
Texas
Utah
Virginia
West Virginia
Wisconsin
Wyoming
District of Columbia

*In these states, third-party entities, such as education associations or unions, provide endorsed 403(b) offerings, but these offering are not sponsored by the state or a political subdivision of the state.

Conclusion

Since one-third of states offer some sort of sponsored 403(b) solution, it is becoming nearly as important to acquire knowledge regarding these plans as it is with state 457(b) plans.

Practice Pointer: the state system 403(b) plans can vary greatly, from those that utilize single recordkeeper, to those that utilize many providers. Some state plans may closely resemble plans that are offered by school districts in that state; others may not resemble such plans at all. It is important for the knowledgeable advisor to understand how these plans interact, or, in many cases, compete with each other.

Michael Webb, TPGC, CEBS, is the NTSA Education Committee Co-Chair and a Vice President at Cammack Retirement.

Cammack Retirement is an independent retirement plan consulting firm specializing in non-profit industries. Offering tailored, actionable solutions, to help clients achieve the greatest return on their employee investment,

Cammack Retirement delivers end-to-end solutions for complex retirement plan challenges.

Please note that this article is for general informational purposes only, is not intended to be taken as legal advice or a recommended course of action in any given situation. Readers should consult their own legal advisor before taking any actions suggested in this article.

Opinions expressed are those of the author, and do not necessarily reflect the views of NTSA, or its members.