Application 408(b)(2) to 403(b) Plans

Under ERISA Section 408(b)(2), certain covered service providers are required to furnish specified information to plan administrators so that they may comply with their disclosure obligations in the participant-level disclosure regulation. The Department of Labor (“DOL”) issued Field Assistance Bulletin (FAB) #2012-02 on May 7, 2012, and under Q-2, the DOL affirms the application of this regulation to IRS section 403(b) plans that are ERISA-covered plans. http://www.dol.gov/ebsa/regs/fab2012-2.html):

According to the FAB, all 403(b) plans must comply with Section 408(b)(2) (75 FR 64921); however, the DOL will not take enforcement action against any plan administrator who has reasonably determined that it would be impracticable or impossible to obtain the information necessary to meet the disclosure requirements under paragraph (d) of the regulation with respect to any designated investment alternative that is an annuity contract or custodial account described in IRS section 403(b) if:

  1. The contract or account was issued to a current or former employee before January 1, 2009;
  2. The employer ceased to have any obligation to make contributions (including employee salary reduction contributions), and in fact ceased making contributions to the contract or account for periods before January 1, 2009;
  3. All of the rights and benefits under the contract or account are legally enforceable against the insurer or custodian by the individual owner of the contract or account without any involvement by the employer; and
  4. The individual owner is fully vested in the contract or account.

Generally, the regulation does not apply to tax-sheltered annuities that are not ERISA-covered plans. Under 29 CFR 2510.3-2 tax sheltered annuities’ statuses as employee benefit plans and pension plansare defined.

“For the purpose of title I of the Act and this chapter, a program for the purchase of an annuity contract or the establishment of a custodial account described in section 403(b) of the Internal Revenue Code of 1954 (the Code), pursuant to salary reduction agreements or agreements to forego an increase in salary, which meets the requirements of 26 CFR 1.403(b)1(b)(3) shall not be established or maintained by an employer as that phrase is used in the definition of the terms employee pension benefit plan and pension plan if:

  1. Participation is completely voluntary for employees;
  2. All rights under the annuity contract or custodial account are enforceable solely by the employee, by a beneficiary of such employee, or by any authorized representative of such employee or beneficiary;
  3. The sole involvement of the employer, other than pursuant to paragraph (f)(2) of this section, is limited to any of the following:
    1. Permitting annuity contractors (which term shall include any agent or broker who offers annuity contracts or who makes available custodial accounts within the meaning of section 403(b)7(of the Code) to publicize their products to employees,
    2. Requesting information concerning proposed funding media, products orannuity contractors;
    3. Summarizing or otherwise compiling the information provided with respect to the proposed funding media or products which are made available, or the annuity contractors whose services are provided, in order to facilitate review and analysis by the employees;
    4. Collecting annuity or custodial account considerationsas required by salary reduction agreements or by agreements to forego salary increases, remitting such considerations to annuity contractors and maintaining records of such considerations;
    5. Holding in the employer’s name one or more group annuity contracts covering its employees;
    6. Before February 7, 1978, to have limited the funding media or products available to employees, or the annuity contractors who could approach employees, to those which, in the judgment of the employer, afforded employees appropriate investment opportunities; or
    7. After February 6, 1978, limiting the funding media or products available to employees, or the annuity contractors who may approach employees to a number and selection which is designed to afford employees a reasonable choice in light of all relevant circumstances.

Relevant circumstances may include, but would not necessarily be limited to, the following types of factors:

  1. The number of employees affected,
  2. The number of contractors who have indicated interest in approaching employees,
  3. The variety of available products,
  4. The terms of the available arrangements,
  5. The administrative burdens and costs to the employer, and
  6. The possible interference with employee performance resulting from direct solicitation by contractors
  7. The employer receives no direct or indirect consideration or compensation in cash or otherwise other than reasonable compensation to cover expenses properly and actually incurred by such employer in the performance of the employer’s duties pursuant to the salary reduction agreements or agreements to forego salary increases described in this paragraph (f) of this section.”

This document is provided for informational purposes only and should not be consider as delivering legal advice. Please seek competent legal counsel regarding the subject matter before taking any actions.
©2012 Chao & Company, Ltd. All rights reserved.


  1. (d) Reasonable compensation.Section 408(b)(2) of the Act and § 2550.408b-2(a)(3) permit a plan to pay a party in interest reasonable compensation for the provision of office space or services described in section 408(b)(2). Section 2550.408c-2 of these regulations contains provisions relating to what constitutes reasonable compensation for the provision of services.