Independent Contractors in Governmental 457(b)

[BTG]

I recently came across an article (here) which suggested that including independent contractors in governmental 457(b) plans could cause those plans to lose their ERISA exemption.  The author contends that, while independent contractors are permitted to participate in 457 plans, the ERISA exemption applies to "governmental plans," which are defined in ERISA 3(32) as plans that cover employees.  (He acknowledges that plans that cover only independent contractors would be exempt in their own right because they don't cover any employees, but indicates that the governmental employer must maintain separate plans for employees and independent contractors in order for them both to be exempt from ERISA).

While I follow his logic, I can't say that I've seen any other support for (or even discussion of) this position.  Does anyone else agree or disagree with his position?

[Carol V. Calhoun]

We definitely encountered this years ago, when we asked the DOL for an opinion letter stating that a particular 457(b) plan was a governmental plan.  They made us exclude independent contractors from the plan before issuing the letter.  See https://benefitsattorney.com/authorities/advisory-opinion-94-02a/

Of course, these days, neither the DOL nor the IRS will issue guidance on whether a plan is a governmental plan.  But I would still keep plans for employees and independent contractors separate.

[ERISAAPPLE]

I've never heard of this.  This is fascinating.  So Carol, if you have two plans - one for employees only and one for ICs, then you have two non-ERISA plans, but if you put both in one plan, do you have an ERISA plan that violates the exclusive benefit rule?  

[Carol V. Calhoun]

57 minutes ago, ERISAAPPLE said:

I've never heard of this.  This is fascinating.  So Carol, if you have two plans - one for employees only and one for ICs, then you have two non-ERISA plans, but if you put both in one plan, do you have an ERISA plan that violates the exclusive benefit rule?  

Well, they wouldn't necessarily violate the exclusive benefit rule, but the plan would become subject to the ERISA rules that apply to nongovernmental plans--which would mean it would have to comply with things like the J&S rules.  I didn't claim it made sense, but that was the position the DOL was taking, based on the literal language of the statute.  As you can see in Advisory Opinion 94-02A, the DOL made us represent that there had never been any independent contractors in the plan before it would issue the opinion.

[BTG]

Carol, thank you very much for your response and the citation to your Advisory Opinion.  I'm not sure I understand the policy motivation for the DOL's position (aside from just blindly following the statutory language).  However, it appears that the safest course is indeed to maintain two separate plans.

ERISAAPPLE, the exclusive benefit issue is an interesting point, but I think you can get around that because ERISA's exclusive purpose rule in Section 404(a)(1)(A) refers to participants and their beneficiaries (versus the Code Section 401(a) language which refers to employees and their beneficiaries).  I can't say that I've ever noticed that distinction before.

[Peter Gulia]

There might also be a practical reason for not including nonemployee contractors under a State or local government employer’s § 457(b) plan.

 

Many of these plans restrict contributions (not considering rollovers and transfers) to wage-reduction elective contributions.  Many States’ laws governing these plans preclude an employer’s nonelective or matching contribution.

 

For many governmental payers, paying employees and paying nonemployee contractors are at least separate functions and sometimes separate departments.  In my experience, a typical accounts-payable operation has no software logic to process a contractor’s direction to reduce the amount otherwise payable to the contractor.  Nor is that operation set up to account for such reductions and remit a payment to a retirement plan’s recordkeeper.

[Luke Bailey]

As a point of clarification, isn't the issue not, at least directly, a prohibition against covering independent contractors, but rather a prohibition against having any NONGOVERNMENTAL participants? I don't know, I'm just asking. So a consultant or other typical IC is a sole proprietor and typically has no pretension to being anything other than a private for profit person/entity. Folks (and I don't know that there are any) who are clearly and solely performing governmental functions, e.g. directors, trustees, etc. of a governmental body, but who, maybe, are appropriately paid on a 1099-MISC, could be in a governmental 457(b), no?

[Carol V. Calhoun]

6 minutes ago, Luke Bailey said:

As a point of clarification, isn't the issue not, at least directly, a prohibition against covering independent contractors, but rather a prohibition against having any NONGOVERNMENTAL participants? I don't know, I'm just asking. So a consultant or other typical IC is a sole proprietor and typically has no pretension to being anything other than a private for profit person/entity. Folks (and I don't know that there are any) who are clearly and solely performing governmental functions, e.g. directors, trustees, etc. of a governmental body, but who, maybe, are appropriately paid on a 1099-MISC, could be in a governmental 457(b), no?

No, the relevant language is that ,

Quote

the term “governmental plan” means a plan established and maintained for its employees by the Government of the United States, by the government of any State or political subdivision thereof, or by any agency or instrumentality of any of the foregoing. [Emphasis added.]

What the DOL is saying is that a plan established and maintained for nonemployees does not fit within this definition, regardless of whether those nonemployees are fulfilling a governmental function.

[Luke Bailey]

On ‎11‎/‎27‎/‎2018 at 4:35 PM, Carol V. Calhoun said:

No, the relevant language is that ,

What the DOL is saying is that a plan established and maintained for nonemployees does not fit within this definition, regardless of whether those nonemployees are fulfilling a governmental function. 

Interesting, and thanks for clarifying, Carol. Of course, the DOL is reading "exclusively" into the statutory provision. If one took the same approach to private plans, plans with partners and employees would not be subject to ERISA, right? Also, at least arguably, the reference to 1.401-1(a)(2) in what would be 1.414(d)-1(k)(1)(I) (the "I" should be lower case, but I can't seem to make that happen) in the 414(d) ANPRM brings in 401(c)(1), which would get you a different result, I think.