School District 403(b)

[Guest Astro]

Anybody know if any state laws require a minimum number of vendors be offered in a 403(b) plan for school districts? Or, is there any reason why a single vendor would pose a problem under some state laws?

[Guest mjb]

Anybody know if any state laws require a minimum number of vendors be offered in a 403(b) plan for school districts? Or, is there any reason why a single vendor would pose a problem under some state laws?

Some states such as Cal and Tex require that SDs accept virtually all 403b vendors. Some states leave it up to the SD. You need to check state law.

[Peter Gulia]

Ohio is another example of a State that requires a public-schools employer to allow any provider:

If the governing board of a public institution of higher education or the board of education of a school district procures a tax-sheltered annuity for an employee, pursuant to section 9.90 of the Revised Code, that meets the requirements of section 403(b) of the Internal Revenue Code of 1954, 26 U.S.C. 403(b), the employee has the right to designate the li-censed agent, broker, or company through whom the board shall arrange for the placement or purchase of the tax-sheltered annuity. In any case in which the employee has designated such an agent, broker, or company, the board shall comply with the designation, provided that the board may impose either or both of the following as conditions to complying with any such designations:

(A) The designee must execute a reasonable agreement protecting the institution or district from any liability attendant to procuring the annuity;

(B) The designee must be designated by a number of employees equal to at least one per cent of the board's full-time employees or at least five employees, whichever is greater, except that the board may not require that the agent, broker, or company be designated by more than fifty employees.

Ohio Revised Code 9.91.

Clause (A) has not yet been interpreted by a court decision.

As mjb suggests, it's important to be careful about following State laws. Among other reasons, a "purchase" that's outside the State's enabling statute likely is void.

[joel]

Ohio is another example of a State that requires a public-schools employer to allow any provider:

If the governing board of a public institution of higher education or the board of education of a school district procures a tax-sheltered annuity for an employee, pursuant to section 9.90 of the Revised Code, that meets the requirements of section 403(b) of the Internal Revenue Code of 1954, 26 U.S.C. 403(b), the employee has the right to designate the li-censed agent, broker, or company through whom the board shall arrange for the placement or purchase of the tax-sheltered annuity. In any case in which the employee has designated such an agent, broker, or company, the board shall comply with the designation, provided that the board may impose either or both of the following as conditions to complying with any such designations:

(A) The designee must execute a reasonable agreement protecting the institution or district from any liability attendant to procuring the annuity;

(B) The designee must be designated by a number of employees equal to at least one per cent of the board's full-time employees or at least five employees, whichever is greater, except that the board may not require that the agent, broker, or company be designated by more than fifty employees.

Ohio Revised Code 9.91.

Clause (A) has not yet been interpreted by a court decision.

As mjb suggests, it's important to be careful about following State laws. Among other reasons, a "purchase" that's outside the State's enabling statute likely is void.

These state laws were passed prior to the issuance of the new 403(b) regs. Based on these regs if an employer is of the opinion that a single vendor approach is the way to go does that leave the employer wide open to litigation by an employee who feels the state law was violated?

Joel

[J Simmons]

Yes, until the state law is changed, the participants could likely sue over an employer going a single vendor or limited number of vendors in violation of state law. This would be so with the public school employers that are exempt from ERISA and thus state laws clearly apply to their 403b offerings. For 501©(3) employers, ERISA applies but might not preempt these state laws.

The new 403b tax regs do not require a single-vendor approach, and thus both the new 403b regs and the state laws can be accommodated by a 403b plan. The fact that the state laws were enacted before the new 403b regs were issued does not invalidate the state laws.

[TLGeer]

Yes, until the state law is changed, the participants could likely sue over an employer going a single vendor or limited number of vendors in violation of state law. This would be so with the public school employers that are exempt from ERISA and thus state laws clearly apply to their 403b offerings. For 501©(3) employers, ERISA applies but might not preempt these state laws.

The new 403b tax regs do not require a single-vendor approach, and thus both the new 403b regs and the state laws can be accommodated by a 403b plan. The fact that the state laws were enacted before the new 403b regs were issued does not invalidate the state laws.

However, the "reasonable agreement protecting the institution or district from any liability attendant to procuring the annuity" language could be read to encompass a 403(b) information sharing agreement. It's intended to allow hold harmless agreements, but it doesn't limit itself to hold harmless agreements and including an ISA withion its terms would be consistent with the obvious statutory intent.

[J Simmons]

Tom,

Are you suggesting that if an employer in a state that requires an open-vendor environment can avoid that by entering into an info sharing agreement with hold-harmless language with one or just a few vendors, and find cover for that from the 403b regs?

As I understand the 403b regs, they require info sharing agreements between the employer and the vendor. If another vendor came along and was willing to sign the employer's info sharing agreement on the terms entered with the 'sole' vendor, would that state law be inapplicable?

Or is your suggestion that vendors would generally be so adverse to signing hold-harmless language burdening the vendor in favor of the employer that no other vendor would, as a practical matter, be willing to sign and give such a hold-harmless?