For most people, retirement plans feel complicated. In fact, one survey shows that 63% of respondents admitted they don’t know how a retirement plan works.
And when you start talking about retirement plan rules, regulations, and federal laws, the confusion just multiplies.
Today, we’re going to talk about the federal law (called ERISA) that enforces standards for many retirement plans. And more specifically, how it applies to 403(b) plans.
Yes, this topic can feel complicated, but we’re going to break it down so that it’s easy to understand.
Let’s start with the basics.
What is a 403(b) retirement plan?
A 403(b) is a tax-deferred retirement plan for organizations with 501(c)(3) status. These non-profit organizations generally include (but are not limited to) charitable organizations, religious organizations, private foundations, and educational organizations.
Usually, employee contributions made to a 403(b) account are deducted pre-taxes, which lowers the amount you pay in taxes today. But when money is taken out in retirement, you will pay taxes on the withdrawals.
There’s another option — 403(b) Roth plans — that have been available since 2006. Here, employees will pay taxes on their contributions now, but can take their money out tax-free in retirement.
ERISA vs non-ERISA retirement plans: what’s the difference?
Now that you know what a 403(b) plan is, let’s talk about the federal standard the 403(b) may — or may not — fall under.
First, what is ERISA?
This is a federal law, put into effect by the Employee Retirement Income Security Act of 1974 (ERISA), intended to protect participants in retirement plans. It does this by creating rules for plan sponsors on funding, vesting, participation, benefits, reporting, and fiduciary responsibilities.
This means that if an employer fails to follow these rules, the ERISA law protects the employee.
Plans that fall under ERISA guidelines are required to:
- File form 5500
- Provide participants with information about the plan
- Send annual reporting
- Adhere to plan fiduciary responsibility
- Disclose plan fees
Again, ERISA was put in place to ensure that certain standards are followed.
But some plans don’t fall under ERISA requirements — also known as non-ERISA plans.
What does it mean when a plan is non-ERISA?
Simply put, these plans are not subject to the rules and regulations of ERISA guidelines. While both are subject to IRS regulations, only ERISA plans must follow DOL regulations as well.
Plans That Are Exempt from ERISA include:
- Individual retirement accounts (IRA)
- State managed retirement savings programs
- Government employee retirement plans
- Church plans
For more on ERISA and non-ERISA plans, check out our blog on ERISA and Non-ERISA Retirement Plans.
Now that you know what ERISA and Non-ERISA are, let’s get back to the original question.
Is a 403(b) ERISA or Non-ERISA?
There’s not a clear yes or no answer to this question. It just depends on the type of plan.
Government and public education 403(b) plans are exempt from ERISA.
403(b) plans sponsored by 501(c)(3) organizations (such as tax-exempt hospitals and charitable organizations) are generally subject to ERISA but may choose non-ERISA if they meet specific requirements. In other words, they do not automatically qualify to be non-ERISA.
Religious organization 403(b) plans (such as churches) are not subject to ERISA, but they have the option to choose ERISA coverage. Typically, church 403(b) plans do not elect to have their plans covered by ERISA because of the increased administrative burden.
To elect ERISA coverage, religious organizations must attach a statement to their Form 5500 filed for the plan year to which it applies.
What are the benefits of non-ERISA 403(b) plans?
Non-ERISA 403(b) plans do not require:
- Form 5500 filing
- Summary plan description distributions
- An annual audit over 100 participants
Plus, they have fewer reporting and disclosure requirements, and reduced regulatory risk.
But they are restricted in other ways, such as:
- Employer administrative involvement is limited
- Employers cannot make any discretionary decisions on the plan (and should direct participant questions to the plan provider)
- Participation must be voluntary, made by payroll deduction on a pre-tax basis
- The employee is allowed to defer as much compensation as the plan permits
Let’s go one step further and talk about ERISA guidelines and church retirement plans. This is a game-changer for churches.
Why a 403(b)(9) plan may be a better option for churches
Sure, churches can choose 403(b) plans, but an even better option may be the 403(b)(9) — a plan uniquely designed for church organizations.
403(b)(9) plans are always non-ERISA.
Plus, employers can decide the limitations of participation.
This is a big benefit for church plans.
For more on the benefits of 403(b)(9) plans for churches, check out our article on Why 403b9 plans are ideal for churches.
How Do you Know If Your Retirement Plan is Covered by ERISA?
If you’re unsure if your retirement falls under ERISA or non-ERISA coverage, check your Summary Plan Description or contact your plan provider.
At TruthPoint Financial, we serve churches, ministries, and non-profits. If you’re interested in knowing more about 403(b) or 403(b)(9) plans, we’d love to help.