Voluntarily elect ERISA coverage?

[Guest elizrcook]

Hospital maintains defined contribution plan and a 457 plan. Both plans constitute governmental plans, as that term is defined in ERISA. We had advised client it was exempt from Title I of ERISA (except for trust requirement), etc. Consultant has now advised client that it should voluntarily ELECT to be covered by ERISA in order to obtain protection of 404©. Can a governmental plan "elect" to be covered by ERISA?

[mbozek]

NO. Section 4(b) of ERISA exempts all govt plans from regulation under ERISA unlike church plans which can elect to be covered by ERISA. I would be interested in the basis for the consultant's theory of electing coverage under ERISA. Check the 5500 instructons.

[david rigby]

Section 404 is part of ERISA Title 1. Section 4(b) states "...this title shall not apply... (1) ... a governmental plan..."

[Kirk Maldonado]

mbozek:

My guess is that the consultant is extrapolating from the ability of church plans to elect to be subject to ERISA. But that may be giving the consultant too much credit.

[Guest elizrcook]

Thank you for your responses. You confirmed both our gut reaction and the results of our research. The consultant claims that the State of Florida has adopted this approach (i.e., voluntarily "elected" to be covered by ERISA). He also claims that other governmental entities have adopted the approach, just that the State of Florida is the "biggest." Once I have determined the basis for his approach, I'll post it. This "innovative" idea was suggested by a relatively large consulting group, and other plan sponsors will inevitably receive similar proposals.

[mbozek]

FLA has not elected to be subject to ERISA. Why would a public hospital have 404© protection for a 457 plan when the employer provides a 403(b) plan to employees which is exempt from 404© of ERISA.

[david rigby]

Methinks this is mostly PR, possibly seeking ways to avoid people asking questions.

"Trust us."

[Kirk Maldonado]

I think that the effectiveness of a governmental plan electing to be subject to ERISA will be about as effective as the individuals that elect that they are no longer subject to income taxes.

[MGB]

Given that the actuary for Florida is here in my office and we were very involved with the conversion process to the DC choice, I can guarantee you that no such ERISA "election" occurred.

However, the structure of the new plan would probably (other than the notice requirements saying that it is trying to) satisfy 404©, if it were possible. Perhaps the "consultant" is confusing looking like it complies with electing to comply.

[Guest elizrcook]

Thanks MGB. I wish it were that simple. We have, in fact, designed the investment options to comply with Section 404© [i should say attempt to comply with Section 404©; I believe that few, if any, plans actually comply with the disclosure requirements] under the theory that compliance with ERISA fiduciary standards helps support argument that the fiduciaries have complied with the prudent investor standard under common law or state statute. Unfortunately, the consultant "has taken it further" and prepared a report that identifies all of the "deficiencies," most of which relate to technical compliance with ERISA (e.g., failure to have an ERISA bond).

[Guest wcasay]

Although this appears to have answered the original question, I have a related one. Pennsylvania has 3,000 governmental pension plans, of which 99% are very small. Many of the plans have been created through insurance companies using an ERISA prototype document, with amendments as needed to continue to comply. This practice begun years ago and continues today. Are you saying that they can not use an ERISA prototype?

[david rigby]

I think the statement is that ERISA does not cover the plan. That does not address the issue of what the plan document looks like.

[401 Chaos]

To follow on Pax's reply, I think the use of ERISA-based documents is allowed. The problem comes in that these prototype documents include various ERISA-required provision that are not applicable to governmental plans and probably leave out a fair bit of provisions that you would ideally want to include in a governmental plan document. The result is that the plan sponsor ends up with a jumbled and confusing plan document that could potentially limit their options in ways not necessary or intended.

[mbozek]

While ERISA will not apply to a governmental plan, a govt employer that adopts an IRS prototype plan will be subject to the IRS qualification provisons in form that apply to private employers under ERISA, e.g., vesting, non alienation, J & S, participation,etc. However, govt employers will be exempt from the operational provisions of IRC 401(a) such as nondiscriminaton. Other provisons such as top heavy rules will be irrevalent to a Govt employer. The question I have is whether the adoption agreement for the prototype plan has a check off box for a govt employer.

[Locust]

If the Plan of a governmental employer says that certain ERISA provisions will apply, won't they apply?

The problem arises when there is general language, such as the "trustees will be subject to the prudence standards of ERISA," or "assets will be diversified as required by ERISA." That sort of language arguably results in the application of ERISA fiduciary principles to a governmental plan.

Anyone working with a governmental plan should strip all references to ERISA and the nondiscrimination rules from the Plan. Otherwise employees covered by the Plan (and in my state, state employees are particularly litigious) will have a great argument when the Plan fails to meet ERISA and nondiscrimination standards.

[mbozek]

No. Most states have laws that govern how public pension assets are to be invested by fiducaries, e.g., 40% stock/ 60% bonds and prohibit certain types of investments which are permited under ERISA. Some states require the appointment of a registered investment advisor by the plan and limit fees and commissions in ways that would conflict with ERISA. Since state plans are not subject ERISA the state courts woull apply state law where the rules conflict. Unlike churches, state employers cannot elect to be subject to ERISA so it is doubtful that even where there is no conflict that a plan would be subject to the ERISA fiduciary provisions if state law does not permit the use of the fiduciary provisions of ERISA.

Since an employer who adopts a prototpype plan cannot make any changes to the terms which are not permitted under the adoption agreement, the ERISA language cannot be removed from the plan document without requiring submisson as an individual plan document. Also I would not be too concerned by leaving nondiscriminaton language in the plan because public employers have few employees who make over 90 k a year and secondly the (a)4 rules cannot be enforced by the IRS against a public er. There is no private right of action to enforce the a4 rules under the IRC.

[401 Chaos]

I do not do much governmental plan work so don't know the nature of the market but is it really such that governmental employers cannot find non-ERISA, governmental prototype plans out there rather than using private employer prototypes? Although the market for governmental plans is limited, it would seem there would still be enough employers to support a range of prototype providers at competetive prices. It just seems to me many of these questions (and potential future problems) could be avoided by using an appropriate prototype.

[mbozek]

Under IRS rules all prototype plans must contain ERISA requirements for qualified plans. Only available option is a volume submitter plan but few providers are willing to offer the product because there are few potential customers.

[401 Chaos]

Mbozek, Thanks for the additional information.

[KJohnson]

You may want to look at Michel v. United Healthcare of Louisiana, Inc., 2003 U.S. Dist. LEXIS 5366 (E.D. La. 2003) holding that an exempt governmental plan cannot "opt into" ERISA even if the plan document says that is covered by ERISA. (I haven't gone back and re-read it, but I recall that this was a removal case that got kicked back to state court because of no ERISA jurisdication).

However, 401 Chaos' post is well taken. I don't think that they would have an "ERISA" cause of action, but to the extent that you put prudence, non-discrimination etc. in your plan document, you are just begging for an action under this "contract" if you don't adhere to its provisions. Plus you will be in state court (Hello jury trial and a whole bunch of other potential nasties).

EBIA had a good write up on this when it came out, but the *$^@#$ are now charging to get into their archives so I can't post a link (I guess I can't really blame them for charging but it sure was nice to have that service free).

[mbozek]

In those states where there is a law regulating the fiduciary aspects of investment of public plan assets the adoption an ERISA standard of prudence under a local govt plan would be void under the doctrine of state preempton since local govts are instrumentalities of the state govt and cannot adopt plan provisions that are contrary to state legislation. Adoption of an ERISA standard by a state pension plan would require appropriate state legislation.

Incorporating the a4 rules in a plan adopted by a public employer will not effect plan operation because very few public employees in local govts make over 90k.

[KJohnson]

Is it conflict preemption or complete preemption? My guess is that if you have agreed in a contract to a prudence standard that is greater than required by state law you will be held to that standard. I woudln't view that as "contrary" to state law.

Also on (a)(4) again, I am not so sure. Which categories of employees are they covering. This is a hospital after all. Even for the City of San Francisco I think that there are over 400 job classificaitons where the pay scale is over $90K.

Finally, if you incorproate any ERISA reporting and disclosure obligations into you plan document, you would probably have a contractual obligation to follow those as well.

In short I don't think that you can just put language in your document and then just turn around and ignore it.

[Guest elizrcook]

I posted the initial query in this string. Our client adopted individually designed plans in 2000, not prototype plans. Admittedly we used our "form" 401(a) and 457 plan documents as the basic plan documents, but we eliminated specific references to ERISA, specific references to sections of the Code that are not applicable to governmental plans, and all "indirect" references to limitations established under ERISA and the Code (e.g., the trustee shall discharge his duties with the care, skill, prudence, ... like character and with like aims").

The consultant that made a pitch to our client last month recommended that the plan sponsor "elect" to be governed by ERISA in order to obtain 404© protection. We researched the issue (found Michel v. United Healthcare and a few other cases). We did not think a governmental plan could (or should) elect to be governed by ERISA. However, because the consultant "insisted" that the State of Florida and many other plan sponsors have voluntarily elected to be covered by ERISA, we initially wondered whether there was some trend or new approach that we had missed. Consequently, I posted the initial query. Given the responses to my initial post (and the fact that when pressed, the consultant has not been able to cite us to any authority or refer us to an attorney who takes the position that governmental plans should elect to be covered by ERISA, ). I'm confident that the consultant is simply off-base.