ERISA Coverage

[joel]

Is there a possible scenario where a voluntary salary reduction only 403(b) arrangement can come under ERISA?

[Guest mjb]

No- ERISA 4(b)(1) &3(32).

[Guest mike webb]

For public schools, it is not possible even if employer contributions exist.

[TLGeer]

Exemption 1-Governmental plans. ERISA 3(32). Easy enough for school districts. Must be established or maintained "for its employees." There is law on this, and it is possible to set up a "public school" that is not governmental. It is also possible to cover non-employees.

Exemption 2-Non-Plan. DOL Regs. 2510.3-2(f). Salary reduction amounts only. Has other hoops to jump through. Mostly about being reasonable in limiting investments.

After final regs come out, there is going to be significant employer compliance whatever the result.

And don't forget that church schools can be exemot as such.

I now have a book available, here at BenefitsLink, on 457, which provides coverage of the governmental plans issue. Part of 457 planning is ducking the ERISA funding rules, by being governmental or church or by being for a select group. Don't want to be too obnoxious about it, but people buying it would make me happy. One on 403(b) should be out at final regs plus 45 days.

[Guest mjb]

Exemption 1-Governmental plans. ERISA 3(32). Easy enough for school districts. Must be established or maintained "for its employees." There is law on this, and it is possible to set up a "public school" that is not governmental. It is also possible to cover non-employees.

I thought under RR 66-274 and the proposed regs only employees of the school district who is the employer are eligible to participate in a 403b plan. Independent contrators are excluded as well as certain elected or appointed officials of a state educational system that oversees public schools.

[Peter Gulia]

Before we too quickly conclude that ERISA never governs any 403(b) arrangement for public-schools employees, we should allow for at least the possibility that there could be facts that might show that an employee organization (such as a labor union) "established" OR "maintained" a plan or program that provides retirement income to employees. A variety of arguments might be made concerning whether a plan or program maintained by an employee organization could be or can't be something different than a plan (if any) that's established or maintained by a government or by an employer of the employees. See ERISA 3(2)(A), 4(b)(1), 29 U.S.C. 1002(2)(A), 1003(b)(1); compare 29 C.F.R. 2510.3-2(d)&(f).

[Guest Getearl]

Before we too quickly conclude that ERISA never governs any 403(b) arrangement for public-schools employees, we should allow for at least the possibility that there could be facts that might show that an employee organization (such as a labor union) "established" OR "maintained" a plan or program that provides retirement income to employees. A variety of arguments might be made concerning whether a plan or program maintained by an employee organization could be or can't be something different than a plan (if any) that's established or maintained by a government or by an employer of the employees. See ERISA 3(2)(A), 4(b)(1), 29 U.S.C. 1002(2)(A), 1003(b)(1); compare 29 C.F.R. 2510.3-2(d)&(f).

To the Lawyer -- "an employee organization (such as a labor union) " are not eligible for 403(b)s. I believe that labor organizations are found under section 501© 6. Therefore any public school sponsoring a 403(b) would be non-ERISA because it is a gov't unit. So there is no possibility that 403(b) could be maintained by a employee organization because it is not eligible to maintain one. So the other let them conclude (and quickly) that ERISA never governs any 403(b) arrangement for public school employees.

[Peter Gulia]

Getearl, you describe what many might consider a common-sense view – that a way, sometimes a good way, to construe or interpret a statute’s word that’s not specially defined by the statute is to consider the meaning or use of the word in a related context. And I empathize with a sense that many of the practitioners who use these bulletin boards prefer “tidy” answers, hoping that the law is clearly stated.

But let’s recall that joel’s originating question asked: “Is there a possible scenario where a voluntary salary reduction only 403(b) arrangement can come under ERISA?”.

Internal Revenue Code § 403(b) governs only whether contributions to a contract will or won’t be excluded from gross income for Federal income tax purposes. While § 403(b)(1)(A) restrains which kind of employer can pay over a § 403(b) contribution, this text doesn’t by itself preclude the possibility that a person other than the employer might “establish” or “maintain” a “plan or program” as non-tax ERISA uses those words. And the text of ERISA expressly recognizes the possibility that a plan can be “established” or “maintained” by a person other than an employer that contributes to the plan.

Whatever one thinks about the merits of the possible interpretations and arguments (and I advocate none of them), we should be mindful of the possibility that some set of facts could result in an ERISA-governed plan, or at least that a court might so find.

[joel]

Is there a possible scenario where a voluntary salary reduction only 403(b) arrangement can come under ERISA?

Here is an actual Complaint: 403bwise.com/pdf/dan_hall_vs_nea pdf

Joel

[Guest mjb]

Joel: the link doesnt work. How about describing the basis of the complaint. There is a difference under ERISA between a public employees union acting in its capacity as an bargaining agent for the members of the union and the public employee union acting as the employer of persons who work for the union

[joel]

Joel: the link doesnt work. How about describing the basis of the complaint. There is a difference under ERISA between a public employees union acting in its capacity as an bargaining agent for the members of the union and the public employee union acting as the employer of persons who work for the union

mjb: I just emailed Dan Otter at 403bwise with a request to post the Complaint. Generally here it is.

NEA as the largest teacher union in the nation endorses for its membership a 403b variable annuity called Value Builder underwritten by Security Benefit Life. The NEA receives a fee paid by Security Benefit for this endorsement. This product is sold by a commission salesforce so it is subtantially more expensive to the teacher/investor compared to a no-load product which the NEA could have chosen as its endorsed product. But it did not choose the no-load route because no-load firms do not sign endorsement agreeements for a fee. Recognizing this they remained hellbent in using the 403b provision of the IRC as a revenue enhancemet for the Union and have for a fee endorsed the Value Builder product since 1991. So some of the fees paid by the NEA investor in the Value Builder Variable Annuity saw its way to the NEA bank account in Washington DC. Q.: Under ERISA is this a breach of fiduciary duties on the part of NEA to its membership? Does ERISA require the NEA to inform its membership that other 403b products are available to its membership. In essence do ERISA fiduciary rules apply to this endorsement agreement?

In my view ERISA does not apply because governmental plans are specifically exempt from ERISA. This is not a Plan that covers NEA EMPLOYEES which is clearly an ERISA Plan. Notwithstanding the NEA endorsement/involvement it still remains a salary reduction agreeement between a public employee ie teacher and his public entity employer/school district. The employer is simple bound to forward the salary reduction to Security Benefit for investment pursuant to the directions of the individual.

[joel]

mjb: To read the Complaint log onto benefitslink.com. At the home page click: Daniels-Hall Vs. NEA.

Joel

[Belgarath]

The following was from yesterday's Benefits Link newsletter. The emphasis is mine. Obviously I have no idea if the claim will be successful (I'm dubious that this will be judged to fall under ERISA) but I thought it interesting in light of this thread.

School workers sue union over retirement plan

By GENE JOHNSON

AP LEGAL AFFAIRS WRITER

SEATTLE -- Two school workers have sued the National Education Association, accusing the union of betraying its members by accepting millions of dollars in kickbacks for promoting a high-fee retirement plan.

The lawsuit, filed in U.S. District Court in Tacoma last week, seeks class-action status on behalf of at least 57,000 other teachers and school personnel who invested with the Valuebuilder plan offered by Security Benefit Life Insurance Co., of Topeka, Kan., and Nationwide Life Insurance Co., of Columbus, Ohio. In all, the union's members invested more than $1 billion since 1991, according to the complaint.

The fees and expenses charged by Nationwide and Security Benefit as part of the so-called 403(b) plan were far higher than those charged by comparable and better-performing plans available on the market, but the NEA and its for-profit subsidiary, the NEA Member Benefits Corp., accepted payments from the companies to endorse those retirement plans, the lawsuit said. The payments created a conflict of interest and cost NEA members tens of millions of dollars in lost retirement savings, in violation of the Employee Retirement Income Security Act, it said.

Furthermore, in Valuebuilder's menu of investment offerings, Security Benefit and Nationwide only included funds that had paid to be listed, the lawsuit claimed.

Union leaders "should be endorsing plans because they're good plans, not because they're paid money to endorse those plans," one of the plaintiffs' attorneys, Derek W. Loeser of Seattle, said Tuesday.

The types of plans at issue here are typically exempt from ERISA, but Loeser argued that in this case, the union endorsed the plans, requiring it to comply with the law's requirements for acting in employees' best interests.

The NEA directed a call for comment to Lisa Sotir, general counsel of NEA Member Benefits, who called Loeser's analysis of the law a "dramatic expansion" of previous court interpretations. She said lawyers are still reviewing the lawsuit. She said the payments are used to pay for costs associated with the Valuebuilder program, including oversight, customer surveys and compliance with Securities and Exchange Commission regulations.

"We don't use the funds in any way other than to benefit our members," she said.

Loeser said that when a union endorses a pension benefit plan, its members can reasonably assume the union has done due diligence to ensure that the endorsed plan is the best for its members. It isn't clear exactly how much the NEA was paid for endorsing the plan, or how much the union members lost, but that is expected to be revealed during discovery, Loeser said.

The lawsuit was reported in the Los Angeles Times on Tuesday, and the complaint quoted extensively from a Times article discussing the payments NEA received to endorse the plan.

According to the complaint, Nationwide was the exclusive plan provider to NEA from 1991-2000, when it sold the Valuebuilder program, with $860 million in assets, to Security Benefit for $72 million. A Security Benefit spokeswoman declined to comment, and Nationwide spokeswoman Carah Brody said the company had not seen the lawsuit and could not comment.

The lawsuit was brought by Jerre Daniels-Hall, a school psychologist from Port Orchard, Wash., and David Hamblen, a teacher from Diamond Springs, Calif. It seeks the disgorgement of any kickbacks paid to the NEA and excessive fees paid to Security Benefit and Nationwide, as well as damages for any investment losses suffered by the union's members.

In April, Loeser's law firm, Keller Rohrback, filed a similar lawsuit against New York State United Teachers Member Benefits Trust.

[joel]

mjb: Have you made the connection to the Complaint?

[Guest mjb]

Paragraph 37 of the complaint alleges that the union and its affiliate are employee organizations engaged in commerce or an activity affecting commerce as those terms are defined in ERISA.

Section 4(a)(2) of ERISA states that ERISA applies to any employee benefit plan established or maintained by an employee organization representing employees engaged in commerce or any industry or activity affecting commerce.

Section 3(11) of ERISA defines commerce as trade, traffic, commerce, transportation or commuication between any state and any place outside thereof.

Section 3(12) defines industry or activity affecting commerce to mean any activity, business, or industry in commerce or in which a labor dispute would hinder or obstruct commerce or the free flow of commerce and includes any industry or activity "affecting commerce" as that term is defined within the meaning of the labor mangement relations act of 1947 or the Railway labor act.

In order for an employee organization to maintain a plan subject to ERISA under 4(a)(2), the employees represented by the organization have to be engaged in commerce between any state and any place outside that state as required by 3(11). Since both of the named plaintiffs are employees of a public school district located in a single state how are they (not the union that represents them) engaged in interstate commerce by virtue of their duties as public school teachers? Is it because their students will move to another state at a later date or because they use books and other materials that have been transported from another state?

Several years ago the US Supreme Court invalidated several federal laws that created federal crimes under the interstate commerce clause (e.g., pssession of a gun within 1000 feet of a school) because the basis for the interstate nature of the act (i.e., that guns were manufactured from parts made in different states) was too tenuious to be interstate commerce. In the courts opinion if these kind of laws were valid then there would be no limit to regulation by the federal govt and therfore no need for state regulation (see 10th Amendment).