TIAA Seeks Parity Under Proposed Multiple Employer Plan Regs

September 30, 2019

Internal Revenue Service
CC:PA:LPD:PR (REG-121508-18)
1111 Constitution Avenue NW
Washington, DC 20224

Re: Proposed Regulations on Multiple Employer Plan Relief (REG-121508-18)

Dear Sir or Madam:

Teachers Insurance and Annuity Association of America (“TIAA”) appreciates the opportunity to respond to the Internal Revenue Service's (“IRS”) request for public comment on the above referenced proposal (“Proposal”).¹ The Proposal would provide an exception to the application of the "unified plan rule" for a defined contribution multiple employer plan (“MEP”) in the event of a failure by an employer participating in the MEP to satisfy a qualification requirement or to provide information needed to determine compliance with a qualification requirement. We support the Proposal and commend the IRS for addressing this important issue and for the thoughtfulness of its approach.

About TIAA

Founded in 1918, TIAA is the leading provider of retirement services, especially in the 403(b) market, for those in academic, research, medical, and cultural fields. Over our century-long history, TIAA's mission has always been to aid and strengthen the institutions, retirement plan participants, and retail customers we serve and to provide financial products that meet their needs. With our strong not-for-profit heritage, we remain committed to the mission we embarked on in 1918 of serving the financial needs of those who serve the greater good.

To carry out this mission, we have evolved to include a range of financial services, including asset management and banking services. TIAA manages $1.1 trillion in assets,² and our investment model and long-term approach aim to benefit the five million retirement plan participants we serve across more than 15,000 institutions.

TIAA is the leading provider of retirement plan products and services to the not-for-profit market, including to 403(b) plans. Accordingly, our comments will focus on how the Proposal will apply to the 403(b) market.

History of 403(b) regulation

Congress first enacted section 403(b) of the Internal Revenue Code (“IRC”) as part of the Technical Amendments Act of 1958, and for many years thereafter, it was left largely untouched. Historically, section 403(b) arrangements were not considered plans as we understand them today. Rather, section 403(b) arrangements were viewed as individual arrangements under which contributions to an annuity were made on behalf of employees by certain educational and non-profit employers. This has resulted in section 403(b) arrangements being inadvertently left out of many major retirement policymaking initiatives over the years.

The first, and for many decades only, comprehensive regulations interpreting section 403(b) arrangements were published in 1964³. While some amendments were made to the 403(b) regulations in the ensuing years, the first comprehensive reworking of the regulations did not occur until 2007, when Treasury finalized rules implementing changes to the existing 403(b) regulations. This included significant changes made by the Tax Reform Act of 1986, the Economic Growth and Tax Relief Reconciliation Act of 2001, and the Pension Protection Act of 2006.

We note all of this primarily to underscore how 403(b) regulations historically have been forgotten when Congress and regulatory agencies have undertaken major retirement policy changes.

MEPs and 403(b) plans

MEPs, as described in IRC section 413(c) and in the Proposal, grew in prominence after the 1974 passage of ERISA, which formalized the terminology and many of the rules that govern MEPs. However, when IRC section 413(c) was enacted in 1974 and section 413(c) regulations were finalized in 1979, there was no reference to 403(b) plans or 403(b) arrangements covering multiple employers (“403(b) MEPs”) because section 403(b) arrangements were not considered “plans” at that time.

Specifically, IRC section 413(c) explains the application of certain rules in the case of “a plan maintained by more than one employer.” It is generally accepted that IRC section 413(c) does not apply to section 403(b) plans because that section only references section 401(a) and 403(a) plans.

Similarly, section 413(c) regulations reference only section 401(a) and 403(a) plans. Under the unified plan rule in the regulations, tax qualification of a 401(a) or 403(a) MEP is determined with respect to all employers maintaining the plan. Failure of one employer maintaining the plan to satisfy an applicable requirement will result in disqualification of the entire plan.⁴ The unified plan rule is this rule that the Proposal will modify.

As previously stated, IRC section 413(c) and the regulations thereunder do not explain how the various MEP requirements should be administered in the case of a 403(b) MEP. This makes it difficult to understand how the unified plan rule, including the favorable relief under the Proposal, would apply to a 403(b) MEP (if at all). However, there is regulatory guidance outside of IRC section 413(c) on which a 403(b) MEP sponsor can rely in the case of a failure to satisfy the requirements of IRC section 403(b).⁵

In general, section 403(b) regulations provide that if a 403(b) contract includes any amount that fails to satisfy the requirements of IRC section 403(b), then all contracts issued to that individual by the employer lose favorable tax treatment.⁶ For example, an employer's failure to operate in accordance with the terms of a plan adversely affects all of the contracts issued by the employer to the employee or employees with respect to whom the operational failure occurred.

Section 403(b) regulations go on to state that an employer's failure does not adversely affect any other contract issued under the plan, with three exceptions:

Any of these foregoing failures would adversely affect all contracts issued under the section 403(b) plan.

Accordingly, section 403(b) regulations already include a rule that helps prevent the complete disqualification of a 403(b) MEP in the event of an operational error affecting only some of the contracts issued under the 403(b) plan, provided that the employer does not fail in one of the ways listed above. If the employer fails in one of those three ways, the failure would potentially disqualify the entire 403(b) MEP. For example, one participating employer violating a nondiscrimination rule such as the universal availability rule could jeopardize the tax favored status of the entire 403(b) MEP. This result is similar to the unified plan rule under IRC section 413(c) for a section 401(a) or 403(a) MEP.

While the Proposal would provide relief from the unified plan rule for section 401(a) and 403(a) MEPs, there remains uncertainty for a 403(b) MEP plan sponsor seeking relief under similar circumstances.

TIAA recommends that Treasury and the IRS consider cross-referencing the exception language into the 403(b) regulations to allow for the same exception for 403(b) MEPs.

To address this concern, we believe it would be well within the authority of the Treasury and the IRS to include in the section 403(b) regulations a cross reference to the new rules under IRC section 413(c). Section 403(b) regulations include a variety of rules regarding administration of section 403(b) plans that interpret the 403(b) plans in a workable way. For example, section 403(b) regulations cross-reference the 401(k) safe harbor hardship distribution rules in 26 CFR § 1.401(k)-1(d)(3) for purposes of defining and incorporating hardship distribution rules and restrictions.⁷

In this regard, it would be sufficient, in our view, to add the following sentence to 26 CFR § 1.403(b)-3(d)(1)(ii) cross-referencing the 413(c) regulations: “For purposes of this paragraph (d), a failure by one employer to satisfy the requirements of section 403(b) in a plan maintained by more than one employer shall not adversely affect contracts issued on behalf of employees as a result of one participating employer's failure, provided rules similar to Sec. 1.413(c)-2(g) are satisfied.”

If the IRS determines that including such a cross-reference would require a new proposal, or is otherwise not possible, there are other workable solutions. For example, a Revenue Ruling describing a spin-off and termination from a 403(b) MEP similar to the new regulations, or an amendment to the Revenue Procedure governing the Employee Plans Compliance Resolution System (EPCRS) providing for similar rules in the case of a 403(b) MEP, could provide sufficient support for the administrator of a 403(b) MEP to take the necessary actions to protect the 403(b) MEP in the case of an unresponsive participating employer.

Conclusion

TIAA appreciates the IRS's efforts to provide an exception to the application of the “unified plan rule” in the event of a failure by an employer participating in the MEP. We are hopeful that the IRS will use this opportunity to ensure that 403(b) MEPs are provided the same exception. We welcome the opportunity to engage further on any aspects of the foregoing.

Sincerely,

Ben Lewis
Senior Managing Director
TIAA