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Non-ERISA Plan issues


Guest brp
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Suppose a gov't hospital or public university sponsors a Non-ERISA 403(B) plan. The plan has several investment vendors such as TIAA/CREF, VALIC, ING, etc. to which employees may choose as custodian of their individiual account. Since, the employer has no written plan document or SPD, is it the responsibility of each custodian to determine employee eligibility, hardship distribution rules, loan provisions, etc. Also, should each custodian provide the employer an annual evaluation of the plan assets, number of participants and so on.

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You made quite a leap! Just because a plan is not specifically subject to the ERISA reporting and disclosure requirements doesn't mean that they will choose to have "no written plan document or SPD". It simply means that the plan document and employee's summary are not required to comport to the ERISA requirements.

Duties do not arise only under ERISA. All exemption from ERISA requirements does is imply the application of state laws. In fact the reason for the ERISA exemption for governmental plans is the separation of powers clause in the Constitution.

Almost all state laws, including the common law, impose duties on fiduciaries, including the employer. While those duties may vary with respect to investments, I have a hard time believing that an employer-fiduciary could discharge its duty under state law without written documents. The administrators have the duty to determine eligbility, distributions, loans, etc. Any funding provider, by holding the assets of such a plan, is also a fiduciary. As such, before they accept the assets they need to know that someone is administering the plan. If they are contracted to provide administrative services as well as investments, that should be consistent with the plan documents and the contract between themselves and the public employer.

They should then fulfill all of their duties under the plan document and the contracts to which they are party.

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Thanks for the clarrification, Vebaguru. Ok, the employer has contracted with each company to provide administration and investments. Does each company have a seperate plan document or does the employer have one plan document that each company should administer by?

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Typically with 403(B) plans each vendor has its own plan and adoption/execution materials for the employer to sign. That is why most school districts limit the number of approved vendors, because it is a lot of stuff to hand out to employees.

Remember that 403(B) plans are funded through employee contributions. Eligibility is generally anyone on the payroll. So the plan documents are quite simple.

Remember that IRS did a 403(B) audit project 3 years ago. They said that of 30 plans they audited, none were in compliance. They even considered creating a determination letter procedure so that a higher level of compliance could be obtained.

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Since there is no requirement that there be a plan document, you will find that very few public school employers have a plan document. The exemption from ERISA, and the fact that Code does not require a written document will generally mean there isn't one. The custodial accounts and the annuity contracts are required to contain specific language, and the employer should always ascertain that the options being offered to employees do conform to those requirements.

In the case of employer contributions (which are of growing interest post-EGTRRA in public schools), employers generally draft an administrative policy describing the nature of the employer contributions, rather than use a plan document.

The IRS comments (in the Examination Guidelines, I, A,(6) "Unlike qualified plans, 403(B) plans are not subject to the requirements of a definite written program (although Title I requires a written plan document for certain 403(B) plans). Accordingly, there is no Title II requirement that a 403(B) plan oeprate in accordance with its terms. However, certain Code requirements must be reflected in the underlying annuity contracts or custodial account agreements."

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Public schools do not use plan documents because the district does not want the risk associated with being a plan sponsor. It is not unusual for 403(B) plan participants to be victimized by a vendors agent who fails to remit the employees' contributions to the 403(B) provider. There is no reason for the district to be involved in such a mess. The district's position is that it is merely a conduit for the contributions from the employee to the vendor or vendor's agent in accordance with an agreement between the two parties.

mjb

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Guest Pete Swisher

There is a misperception among 3b sponsors that being "non-ERISA" means less liability, but the requirements under state law (as mentioned above) are nearly as strict as under ERISA from a fiduciary standpoint, and are in fact the source of ERISA fiduciary standards. Check out UPIA (Uniform Prudent Investors Act), Restatement of Trust (Third), Uniform Trust Code, and the new practice standards for fiduciaries put out by the Foundation for Fiduciary Studies--they all say virtually the same things as ERISA says about fiduciary responsibility. As consultants to 3b sponsors we can steer them toward helping them meet their obligations as fiduciaries, and Step One should be eliminating the ludicrous practice of naming forty insurance companies (or six) as vendors. My local school district has forty, and the participants usually pay about 2.5% in annuity fees when the plan sponsor could instead use its combined purchasing power and get that number below 1%. Breach of duty? Yes, in my opinion.

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The laws that you cite are model legislation proposed by various committees but need to be enacted by a state legislature. Also it is questionable that such legislation would apply to a school district or other govt entity (absent specific legislation) which acts only as a conduit for employee contributions to various providers. Even under ERISA an employer is not a fiduciary for the employees choice of provider merely because it permits employees to make salary reduction contributions from a reasonable choice of funds. The school districts believe that there is little risk of being sued because of charges by the funds because it is not making the decision to invest but there would be a fiduciary risk if the school district chose funds which would have poor investment performance. Also if there are 40 providers some of them must be lost cost such as TIAA/CREF or Vanguard which have no load, low cost funds.

mjb

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mobozek,

If the employer is receiving salary reduction agreements from employees, withholding pre-taxed 403(B) contributions according to those salary reduction agreements, and then submitting the contributions directly to the home office of the vendor; wouldn't that classify the employer as a plan sponsor.

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Because the er is only acting as a conduit for remitting the employees' contribution to the vendor. The employer has not established a plan or is holding the assets in trust since the ee has complete control over the funds. See Dol reg 2510.3-2(f) (TSA) and 3.2(d) (IRA).

mjb

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The "model" legislation is intended as a standardization of duties and remedies among the states. Some are currently stricter while other are more lax.

Similarly, some states hide behind governmental immunities (like my state of Utah) statutes while others don't (like California). Practice and statutes vary widely.

It seems to me that what may be prudent practice in Alabama may be imprudent in Alaska. Practitioners who advise employers in this area, including the insurance companies and mutual funds who offer products for sale, need to be fully familiar with the laws of their jurisdiction.

Finally, governmental immunities aren't always enough. A few years ago a local governent adopted and maintained a flex (125) plan for several hundred firefighters. When one of the firefighters was audited personally it was discovered that the flex plan was not being operated in conformance with IRC section 125. This led to audits of all firefighters under the CBA, and taxation of all salary reduction contributions to the 125 plan, including income taxes, penalties and interest. Pursuant to the CBA the members of the union filed a grievance. The city ended up paying despite governmental immunities.

It seems to me that districts that permit salary reduction arrangements without verification of compliance with applicable laws and regulations are taking a similar risk. They might as well do it right and in writing rather than trying to hide under the slippery rock of governmental immunity.

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I think there is a difference between the liability of the employer in remitting contributions to a vendor under a salary reduction plan and the employer's responsibility for tax reporting. An employer who permits salary reduction under a 403(B) plan still has to make sure that the employees do not exceed the 403(B)/402(g) limits because excess amounts are subject to income and FICA taxation. Maintaining multiple vendors requires that the employer have adequate controls to monitor the limits including loans even if the employer has no responsibilitay for the investments. If state law imposes fiduciary duty on employers who allow employees to make salary reduction contributions to an outside vendor as a plan sponsor then the employers will discontinue such programs because there is no reason for them to assume fiduciary risk merely to allow employees to reduce their salary on a voluntary basis.

mjb

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Guest Pete Swisher

Mbozek,

It's always risky to joust with a moderator and I eagerly await the excoriating response, but...I know the model acts were just model acts, but in point of fact they have been enacted with various changes by a large number of states. They seemed a reasonable reference, especially in this national forum. And are you saying that a non-ERISA 3b plan sponsor with discretion over choice of vendors is not a fiduciary with respect to the actual choices? Always? It seems to me that there is a strong case that these sponsors do in fact meet the definition of fiduciary (not always, perhaps, but often) on these plans and are therefore bound by their states' fiduciary laws with respect to vendor selection. Example: a hospital I know of has a lousy current provider (single provider only)--sub-par investments across the board. Their (incompetent) GP attorney told them they have no fiduciary risk because they're a non-ERISA 3b. If this plan moved to, say, six lousy vendors plus six good vendors for a total of 12, are they then not at risk for their choice of the six lousy ones? If you know of regulations/state laws or other precedents that make clear that these sponsors are not fiduciaries under state law, I'd like to know about them.

Thanks.

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I am not aware of any state laws on this issue other than state labor laws that relate to remitting employee contributions to a carrier or provider. It would be very difficult to construct a theory of liability against the employer if the employee has control over the investment choice and the employer is not recieving any payment from the provider because the employee has complete control over the decision to invest and the employer is not a fiduciary with regard to the employee's decision to make an investment. Imposing fiduciary liability on the employer because the funds permform poorly would result in the elimination of this option since there is no reason for the er to maintain a benefit program which will create liability risk or require monitoring of performance. There once was a federal case, Otto v. VALIC, which discussed the exemption of state 403(B) plans from ERISA but I think the decision has been erased from the official reports because the court revoked its opinion.

mjb

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Guest Pete Swisher

I can't argue that the risk of litigation is small--it's a remote risk even on ERISA cases, though 2002 was a banner year. But I disagree that exposing 3b sponsors to fiduciary risk will "eliminate" this option since sponsors would then have "no reason" to offer such plans. If that logic were correct, there would be no qualified plans at all because every ERISA plan sponsor offers a plan despite having explicit risk under ERISA--the risk alone is obviously not a dealbreaker. Nonprofits are not so different from for-profits in this regard.

And I think I'll stick to my guns--non-ERISA 3b plan sponsors can be, and often are, fiduciaries with respect to their selection, monitoring, and replacement of service providers. Moreover, they have every reason to go ahead and behave as if they are fiduciaries--what do they have to lose by doing it "right"? I accept that courts might disagree--but I propose they are equally likely to agree.

Another point I believe favors the fiduciary approach is the argument that ERISA, while not applicable to non-ERISA 3b's, is nonetheless a source of insight on how the courts will look at fiduciary duty in a retirement plan under trust/prudent investor law (since trust law is the source of ERISA). We have oodles of court cases and guidance on retirement plans thanks to ERISA, and while a different statute(s) cover 3b's the overall principles are highly similar.

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  • 1 month later...
Guest STLGiant

While the model is just that, many states like MO haven't adopted this. My understanding is that in MO the only way to file suit on a fiduciary claim is when a state vehicle is involved in a vehicular homicide. Yet, there are more than a few 403b Gatekeepers running around scaring the bejesus out of school superintendents about becomming a fiduciary on their 403b arrangement.

Perhaps it might be time for somebody to post which specific states have adopted some type of investment fiduciary model and whether or not entities that are not subject to fiduciary standards outlined in Title I of ERISA are in fact subject to some state law version of what would be generalized as investment fiduciary standards similar to what is outlined in Title I.

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