After making my way through the newly-proposed and voluminous (100+ pages) 403(b) regulations (mentioned here in this previous post), one of the items that stands out overall is the plan document requirement. Proposed regulation section 1.403(b)-3(b)(3) provides:
A contract does not satisfy paragraph (a) of this section unless it is maintained pursuant to a plan. For this purpose, a plan is a written defined contribution plan, which, in both form and operation, satisfies the requirements of this section and sections 1.403(b)-4 through 1.403(b)-10. For purposes of this section and sections 4.1403(b)-4 through 1.403(b)-10, the plan must contain all the material terms and conditions for eligibility, benefits, applicable limitations, the contracts available under the plan, and the time and form under which benefits distributions would be made. . .How will this new requirement impact whether or not a 403(b) plan ends up falling under the purview of ERISA? Although the IRS states in the regulations that having a plan document would not necessarily lead to the application of ERISA, it is expected that the DOL will provide guidance on this issue. Here is what the regulations have to say on the plan document requirement and the application of ERISA:
The Treasury Department and the IRS have consulted with the Department of Labor concerning the interaction between Title I of the Employee Retirement Income Security Act of 1974 (ERISA) and section 403(b) of the Code. The Department of Labor has advised the Treasury Department and the IRS that Title I of ERISA generally applies to "any plan, fund, or program . . . established or maintained by an employer or by an employee organization, or by both, to the extent that . . . such plan, fund, or program . . .provides retirement income to employees, or . . . results in a deferral of income by employees for periods extending to the termination of covered employment or beyond." ERISA, section 3(2)(A). However, governmental plans and church plans are generally excluded from coverage under Title I of ERISA. See ERISA, section 4(b)(1) and (2). Therefore, section 403(b) contracts purchased or provided under a program that is either a "governmental plan" under section 3(32) of ERISA or a "church plan" under section 3(33) of ERISA are not generally covered under Title I. However, section 403(b) of the Code is also available with respect to contracts purchased or provided by employers for employees of a section 501(c)(3) organization, and many programs for the purchase of section 403(b) contracts offered by such employers are covered under Title I of ERISA as part of an "employee pension benefit plan" within the meaning of section 3(2)(A) of ERISA. The Department of Labor has promulgated a regulation, 29 CFR 2510.3-2(f), describing circumstances under which an employer's program for the purchase of section 403(b) contracts for its employees, which is not otherwise excluded from coverage under Title I, will not be considered to constitute the establishment or maintenance of an "employee pension benefit plan" under Title I of ERISA.These proposed regulations are generally limited to the requirements imposed under section 403(b). In this regard, the proposed regulations require that a section 403(b) program be maintained pursuant to a plan, which for this purpose is defined as a written defined contribution plan which, in both form and operation, satisfies the regulatory requirements of section 403(b) and contains all the material terms and conditions for benefits under the plan. The Department of Labor has advised the Treasury Department and the IRS that, although it does not appear that the proposed regulations would mandate the establishment or maintenance of an employee pension benefit plan in order to satisfy its requirements, it leaves open the possibility that an employer may undertake responsibilities that would constitute establishing and maintaining an ERISA-covered plan. The Department of Labor has further advised the Treasury Department and the IRS that whether the manner in which any particular employer decides to satisfy particular responsibilities under these proposed regulations will cause the employer to be considered to have established or to maintain a plan that is covered under Title I of ERISA must be analyzed on a case-by-case basis, applying the criteria set forth in 29 CFR 2510.3-2(f), including the employer's involvement as contemplated by the plan documents and in operation.
To the extent that these proposed regulations may raise questions for employers concerning the scope and application of the regulation at 29 CFR 2510.3 -2(f), the Treasury Department and the IRS are requesting comments.
McDermott Will & Emery also comments on the issue in their article on the new regulations here. (From Benefitslink.com.)The article makes the point that the plan document requirement may impact "whether the plan document will effectively supersede and control the main contractual document between the employer and the 403(b) vendor (such as a 403(b) group annuity contract issued by an insurer)."
By the way, in the recent "Extra Special Edition of the Employee Plans News" published by the IRS, Carol Gold, Director of EP, indicates that the IRS is not yet ready to begin implementation of a 403(b) determination letter program until the 403(b) regulations are finalized. She notes, however, that the proposed regulations do indeed "move the '403(b) plan' closer to the concept of a 'qualified plan' and leaves the door open for the development of such a program for 403(b) plans in the near future. Here is most of what she had to say:
This week, proposed regulations under section 403(b) were published in the Federal Register. These regulations take the important step of requiring a 403(b) contract to be maintained pursuant to a plan in order for amounts contributed by employers for the purchase of annuity contracts to be excluded from the gross income of employees. For purposes of the regulation, a plan is a written defined contribution plan which must satisfy the applicable requirements of the regulation both in form and operation. Furthermore, the proposed regulation provides rules by which 403(b) plans may be terminated.Clearly, the proposed regulations move the “403(b) plan” closer to the concept of a “qualified plan”. However, we anticipate it will be a while yet before the regulations are finalized. Nevertheless, we recognize that if 403(b) annuity contracts are treated as ”plans” under the regulations when finalized, there will be more of an impetus to create a program to review plans and plan amendments, and possibly to issue determination letters on those plans or amendments.
We would welcome the opportunity to work with the public on considering such a program. At this point, however, we feel it would be premature to actively develop such a program prior to the finalization of the regulation. Therefore, I would suggest that we continue to exchange ideas about what a program could look like while agreeing that substantive change will have to wait a little longer.
Private retirement plans established under the provisions of ERISA now hold a large part of the population's personal assets. Untold numbers of participants in these plans have found and will find themselves seeking the protection of the bankruptcy courts. Prior to the 1992 U.S. Supreme Court case of Pattersen v. Shumate, the law was in a state of disarray and the courts were split over whether or not the anti-alienation provisions of ERISA protected these assets from bankruptcy. Shumate seemed to lay to rest some of the confusion surrounding the interplay between the bankruptcy laws and ERISA, holding that participants could exclude their interests in "ERISA qualified plans" from the bankruptcy estate in a bankruptcy proceeding.
However, with bankruptcies on the rise and ERISA plans becoming many times the only source of assets, creditors and bankruptcy trustees have become more determined in pursuing these assets. One such pursuit ended in a very unhappy result for participants in the recent case of Rhiel v. Adams in which the Sixth Circuit Court of Appeals reached a surprising conclusion in the 403(b) arena, throwing the state of the law in disarray once again at least with respect to 403(b) plans.
In the Adams case, the court held that a husband and wife's interests in 403(b) plans were included in the bankruptcy estate and not exempt under section 542(c)(2) of the Bankruptcy Code. Section 541(a) of the Bankruptcy Code provides that the bankruptcy estate is comprised of all legal and equitable interests of the debtor(s) while section 542(c)(2) then provides an exclusion from the estate as follows:
A restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable nonbankruptcy law is enforceable in a case under this title. 11 U.S.C. § 542(c)(2).The lower federal district court had held that the 403(b) plans were 'ERISA-qualified' as contemplated by the Supreme Court in Pattersen v. Shumate. As such, they were not the property of the bankruptcy estate, and were not subject to administration by the bankruptcy Trustee. However, on appeal, the Sixth Circuit reversed the lower court and remanded the case for further proceedings based upon the fact that the husband and wife had not shown that the section 542(c)(2) "in a trust" language had been satisfied. According to the Sixth Circuit, the interest of the debtor had to have been held "in a trust" in order for section 542(c)(2) to apply, meaning that the 403(b) annuities did not satisfy this trust requirement and that the annuities were not exempt from the bankruptcy estate.
The court in reaching its conclusion seems to almost ignore the U.S. Supreme Court case of Pattersen v. Shumate. The U.S. Supreme Court in Shumate had held that the § 541(c)(2) language--"applicable nonbankruptcy law"--included ERISA and that the anti-alienation provision contained in the ERISA qualified plan at issue in the Shumate case (a pension plan) satisfied the literal terms of § 541(c)(2). The court in Shumate held further that the sections of ERISA and the Internal Revenue Code requiring a plan to provide that benefits may not be assigned or alienated clearly imposed a "restriction on the transfer" of a debtor's "beneficial interest" within § 541(c)(2)'s meaning, and that the terms of the plan provision in question complied with those requirements.
Although the Shumate case did not involve a 403(b) plan, but rather a pension plan, there is language in the Shumate case (which the dissent in the Adams case emphasizes) which could have been used to support a result that the 403(b) interests should not have been included in the estate as follows:
The natural reading of the provision [e.g. § 541(c)(2)] entitles a debtor to exclude from property of the estate any interest in a plan or trust that contains a transfer restriction enforceable under any relevant nonbankruptcy law.As the dissent states, the Sixth Circuit could have reached a different result by relying on this language in Shumate--"any interest in a plan or trust"--as well as on the reasoning espoused by the Supreme Court in Shumate, i.e. that of (1) ensuring that the treatment of pension benefits not "vary based on the beneficiary's bankruptcy status"; (2) giving "full and appropriate effect to ERISA's goal of protecting pension benefits" and (3) ensuring that the "important policy underlying ERISA: uniform national treatment of pension benefits" be preserved.
In my opinion, the following arguments of Sixth Circuit Judge Jennie D. Latta's dissent are highly persuasive:
(1) Judge Latta notes the Sixth Circuit's own language in which it stated that it would not "rely on the literal language of the statute where such reliance would lead to absurd results or an interpretation which is inconsistent with the intent of Congress." As Judge Latta aptly states, "[t]he majority’s reading is inconsistent with the clear intent of Congress that ERISA-qualified pension plans not be subject to creditor claims."
(2) "Outside of bankruptcy, no creditor of the Adams would be able to reach the debtors’ beneficial interests in their pension plans to satisfy claims, and this is true not because these interests are exempt from execution pursuant to state law, but because they are exempt from execution pursuant to federal law. See Guidry v. Sheet Metal Workers Nat. Pension Fund, 493 U.S. 365, 110 S. Ct. 680 (1990)(permitting no equitable exception to ERISA’s anti-alienation provision). The filing of a bankruptcy case should not change this result."
(3) "The narrow reading of § 541(c)(2) advanced by the majority of the Panel nullifies the anti-alienation provision of ERISA for non-trust, qualified pension plans. The majority advances no policy argument in favor of this reading. Were we called upon simply to construe § 541(c)(2), without the benefit of the Supreme Court’s opinions in Guidry and Shumate, then a narrow, “plain-meaning” reading would be appropriate, but I believe that we must go beyond § 541(c)(2) and include within our discussion the plain meaning of ERISA’s anti-alienation requirement. When this is done, it is clear that ERISA-qualified pension plans, whether held in trust or not held in trust, are excluded from the bankruptcy estate."