Hold Harmless Agreements

[Guest Jim Brennan]

Does anyone know which Mutual Fund companies will sign the Standardized HH agreements developed by ASBO & NTSAA?

[Guest CVCalhoun]

Our experience so far has been that whether a mutual fund company is willing to sign ANY hold harmless agreement depends a lot on the negotiating power of the party asking. With a big enough system, most mutual fund companies seem willing to sign almost anything to get the business; with a smaller one, it may be hard to find a company willing to make any accommodations.

[Guest kristi]

While most mutual funds will not sign the existing NTSAA/ASBO hold harmless agreements, most brokers that deal in the 403(B) market will sign. This strategy permits the school districts to keep the mutual funds as product providers so long as the funds are distributed through a broker dealer. I know of a fewfunds who have signed under the "right" motivation ando thers who are very close to signing. The no load funds are NOT signing under any circumstances.

[Guest SLS]

I'm new to the 403(B) field, and am looking for some background information. Why do school districts require a 403(B) provider to sign a hold harmless agreement? I have seen some particularly strict agreements, that require the provider to indemnify a school board even for claims resulting from the school board's negligence.

[Guest CVCalhoun]

The major reason that governmental entities work on having 403(B) providers sign "hold harmless" agreements is that the employer is liable if a purported 403(B) contract does not meet the requirements of 403(B). The reason is that the exclusion of payments into a 403(B) contract from "wages" for income tax withholding purposes does not apply if the contract does not meet the requirements of section 403(B). Although income taxes are commonly thought of as an employee obligation, an employer is legally liable under section 3403 of the Internal Revenue Code for all income tax withholding if it pays wages to an employee and does not withhold from such wages. And the IRS, in its 403(B) audits (e.g., under the college/university and hospital audit programs) is typically going after the employer, not the employees, for any income taxes owed, on the theory that it is up to the employer to make sure that the program meets all legal requirements. Thus, the "hold harmless" agreement is an attempt to ensure that if the employer is held liable for taxes due to a 403(B) provider's failure to comply with the 403(B) requirements, the employer will be indemnified by the 403(B) provider.

As to why a hold harmless agreement would attempt to seek indemnity even for the employer's negligence, the fact is that in most instances, employers are not very involved with their own 403(B) plans. They count on the 403(B) providers to take care of the administrative details. Thus, they do not want a 403(B) provider to try to defend against a negligence action by asserting that it was the employer's duty to take care of the problem.

[Note: This message was edited by CVCalhoun]

[Guest greymann]

Fund groups are not going to sign an agreement wherein they incur liability for the employer's negligence. Under this type of agreement, the fund group could be responsible for an embezzlement, or lost checks, etc. It simply blows my mind that some school districts (mostly in Texas and California) feel such an agreement is fair. I have had discussions with many such districts, and their (il)logic totally escapes me. I had one district officer tell me that we could afford the liability, so why should we care. Another (in Florida) was taking a kickback for the one approved annuity option, and therefore the agreement was so punitive that no other fund group ever applied for a slot. In short, some of the HHAs simply cannot be signed.