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Must a plan’s administrator reevaluate the employer’s decision about who is or isn’t an employee?


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I’m hoping BenefitsLink “heavy hitters” will help me think through an issue intensified by the new market for 3(16) administrators.

 

An employer (also its retirement plan’s administrator) engaged a 3(16) provider for some plan-administration responsibilities, including deciding claims for a distribution.

 

A participant submitted a claim for a retirement distribution grounded on her severance-from-employment.  The employer signed a statement, on the claim form, to confirm that this participant is severed from employment.  (For this hypo, assume no other condition could entitle the participant to a distribution.  Also, assume the plan has no provision for a participant loan.)

 

Through other services, the 3(16) provider has actual knowledge that the participant continues to perform (personally) services for the employer, and knows the employer classifies the worker as a “1099” contractor.  The 3(16) provider believes the employer’s classification is wrong, and was not made in good faith.

 

To meet its ERISA fiduciary responsibilities, must the 3(16) provider reevaluate or question the employer’s classification of the participant as a nonemployee?

 

If so, how much “poking” must the claims administrator do?

 

 

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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What does the service agreement say as to the service provider's responsibilities?

Right or wrong, the employer has made the decision that this is no longer an employee, which has created a severance from employment.  The service provider should caution the employer about the possible ramifications if there is a determination that a severance of employment did not actually take place, and should recommend that the employer seek a legal opinion.

Beyond that, I don't think the service provider owes a duty to investigate the employer-employee relationship.

 

 

 

 

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It seems to me that if they are true 3(16), and at least if they have a concern, they have a fiduciary duty to study further and try to come to the correct conclusion vis a vis the administration of the plan.

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2 hours ago, jpod said:

It seems to me that if they are true 3(16), and at least if they have a concern, they have a fiduciary duty to study further and try to come to the correct conclusion vis a vis the administration of the plan.

Wow this can raise all kinds of secondary issues quickly if correct. 

So if the plan admin decides this person is still an employee and refuses to pay them it seems like in order to be consistent they would have to count the hours worked for vesting. This person might be elig for a contribution (which the sponsor might not want to fund- what happens if it is a SH plan and the sponsor doesn't send the funds??)

 

If jpod is correct the words going through my head is stay out of the 3(16) business. 

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I wouldn't go as far as saying 'stay out of the 3(16) business)'.  This fact pattern can tie back to the Microsoft case.  Plans have been "Microsoft-Proofed" to do the following: Basically, you're excluding the employee because you 'labeled' them an Independent Contractor.  Should a subsequent determination conclude they are (in fact) a common-law employee, then they are still excluded by class, but that class is not a safe harbor exclusion from the non-discrimination testing.  So, if you rerun the test and continue to pass, the misclassification becomes a non-issue.

This case is slightly different since it's not dealing specifically with plan participation, but the ability to take a distribution under plan terms.  I don't think "Microsoft Proofing" helps there.  But, you're only corrective action may be a distribution to someone who's not eligible for one.  I don't think the notion of having to fund additional contributions will be as much of an issue.  At the end of the day, continue to RTFD :-)

Good Luck!

CPC, QPA, QKA, TGPC, ERPA

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Thanks for the good help.

 

A decision that the participant is not severed-from-employment would not lead to logical-consistency problems.

 

Long before the recent change, the participant completed enough years of vesting service to be fully vested.

 

The plan has anti-Microsoft language strong enough to exclude a worker the employer classifies as a nonemployee even if a final court order decides the worker is an employee for every other purpose.

 

Coverage and nondiscrimination testing are unaffected because for 2017 and the next few years the employer will not make a nonelective contribution.  (The plan has no § 401(k) arrangement, and no other provision for participant contributions.)

 

So if the issue is whether the participant has a severance-from-employment to entitle her to a retirement distribution, how much inquiry or evaluation should the claims administrator do?

 

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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Your opinion as a lawyer is worth more than my opinion as a non-lawyer, but I would say there is not a duty beyond asking the question of the employer - ask for confirmation that this person is in fact a bona fide independent contractor, and not an "employee." If the employer so certifies, then move on and don't worry about it. I caveat this statement to the extent that the service agreement specifically says or indicates otherwise - but I frankly doubt that it would address this question.

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I thought about the Microsoft case and I think you people might be blowing by the differences too fact. 

If I recall the case BOTH the sponsor and PA took the position the person was an IC.  A court disagreed and made the plan cover them.  So people started writing plans saying if a person IS TREATED AS AN IC and later ruled to not be an IC they are still excluded.

But if the PA refuses to make a distribution it is because the PA is refusing to treat the person as an IC. 

So how can the PA say this person was never an IC for distribution purposes but a misclassified IC for contribution purposes?  There is no after the fact change in classification like in the court case. 

I am willing to be convinced but at this point that seems like a material fact people are ignoring.  The never was a mistaken misclassifications by the PA as an IC so it can't be changed after the fact. 

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Well, you guys know the legal details better than I, but....

  • The "3(16) provider" is not the employer and does not have responsibility for employment decisions.
  • When the provider asks the ER (as suggested by Belgarath) "please confirm that this person is not an employee", that unequivocally puts the burden of proof on the ER.

If the provider knows the ER is lying (thru whatever source of information), the next logical step is to resign.  Or have I misread what's really going on?

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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Having received your gifts, I feel I ought to share my thinking.

 

What the claims administrator must do in deciding whether the participant has or lacks a severance-from-employment turns on how the plan and the ERISA § 405(c) delegations and allocations set responsibility for that decision.

 

If the responsibility to decide whether a participant has or lacks a severance-from-employment is allocated to the claims administrator, it should decide that question using the claim, the employer’s statement, and any other information the claims administrator knows.  It also should seek further information if a prudent fiduciary would do so.  A decision-maker might rely on the employer’s certificate of one or more facts, but not on the conclusion to be drawn from the facts.

 

If the responsibility to decide whether a participant has or lacks a severance-from-employment is allocated to the employer/administrator, the claims administrator need not question such a decision unless it knows that its co-fiduciary’s act or failure to act breaches that fiduciary’s responsibility.  ERISA § 405(a)(3) has not been litigated often enough to make clear exactly how much knowledge sets up a § 405(a)(3) responsibility.  Even concerning a decision that was presumably wrong, a judge might require a claimant to prove (with evidence beyond circumstantial evidence) that the co-fiduciary knew that another fiduciary had breached its duty.

 

For example, in Newton v. Van Otterloo, 756 F. Supp. 1121, 1132-1133, 13 Employee Benefits Cases (BNA) 1532, 1544 (N.D. Ind. 1991), the court found that a directed trustee acted correctly in following a direction to abstain from voting the retirement plan’s shares in the employer’s business.  The plan’s trust held a clear supermajority of the shares, and so could decide the matters voted on.  Deciding not to vote allowed the only other significant shareholder, the corporation’s chief executive officer, to decide the matters to be voted on, including his reelection as a director.  The court found that the decision to abstain breached the directing fiduciaries’ duties.  The court found that the decision to abstain would not have been a breach had the directing fiduciaries obtained independent advice.  The court found that the directed trustee was not charged with knowledge that the directing fiduciaries had not obtained independent advice.  While I don’t suggest that anyone rely on that court’s reasoning, it illustrates some judges’ reluctance to apply ERISA § 405(a)(3).

 

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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