Under what condition can a 403(b) plan be exempt from ERISA?

A 403(b) plan can be exempt from the Employee Retirement Income Security Act (ERISA) under the condition that only elective deferrals are used as the contribution source. This means that if the contributions consist solely of employee salary deferrals, the plan is treated differently under ERISA regulations.

The rationale for this exemption is that plans solely funded by employee contributions do not have the same level of employer involvement and liability compared to those with employer contributions. When an employer does not contribute to the plan, it reduces the regulatory burden associated with the management of the plan, allowing it to be less complex and maintaining a level of simplicity for the employees involved.

In contrast, if employer contributions were made or if involvement were considered extensive and mandatory, the plan would likely be subject to ERISA, which imposes certain fiduciary duties and reporting requirements. Similarly, mandatory participation and other conditions do not facilitate an ERISA exemption either, as they can introduce employer control and responsibility that ERISA aims to regulate. Thus, the characteristic of only utilizing elective deferrals is what provides the basis for the exemption from ERISA.