Business of Benefits

Business of Benefits

MEPS Aren’t What They Are Seem; Alternative More Efficient at Achieving Scale

Posted in Multiple Employer Plans, Uncategorized

The DOL caused a minor stir (minor, particularly when compared to the Fiduciary Rule reactions) when it  effectively gave the States a “pass” on the rules which otherwise prohibit unrelated employers from joining a single multiple employer plan. Interpretive Bulletin 2509.2015-02, allows States to set up these platforms without worrying about the “commonality” imposed by DOL’s rules (for a discussion on commonality take a look in the archives at my prior MEP blogs). A state sponsored MEP meets the commonality requirement because, according to the DOL, the “state has a unique representational interest in the health and welfare of its citizens that connects it to the in-state employers that choose to participate in the state MEP and their employees, such that the state should be considered to act indirectly in the interest of the participating employers.”

What drove this decision was the desire to support the States in their efforts at expanding retirement plan coverage, where such efforts have generally been encountering difficulty in a deadlocked Congress. MEP platforms  provide “scale” to small employers, giving them access to investments and expertise that small plans typically cannot get on their own. So, the wider use of MEPs should serve to increase retirement plan coverage, especially where it is mandated by a State.

Causing the stir was that the Interpretive Bulletin effectively reserves the ability to offer  these widely available MEPs to the states:  privately offered MEPs cannot avail themselves of the States’ “unique representative interest” in order to meet the commonality rule. This have given further impetus to the bi-partisan efforts in Congress change the DOL rules to permit the private market to offer these MEP platforms.

It seems, however, that the MEPs patina of “retirement plan nirvana” may really be rust in disguise, and all of these legislative efforts may not really be necessary to improve coverage-and the hoopla about State MEPs may not mean much at all. As much as I believe in the value of MEPs for related organizations, if you look closely at the details, achieving scale for unrelated employers through MEPs comes at an unnecessary price. First and foremost, they are hard to do (and I seriously wonder if any State will have the ability to properly run one, even when relying on outside vendors). The recordkeeping is difficult; employers can be surprised by the way vesting rules apply; care has to be taken in the allocation of authority;  it is tough and risky to disgorge bad acting players; and there are still a number of unresolved issues in their administration and in the manner fiduciary rules apply.  Though EPCRS grants significant relief in correcting errors, the MEP sponsor still needs to price for it having to pay for the errors of the participating members. In short, MEPS carry inherent risk for the MEP organizer and the participating employer.

A more effective alternative at providing scale than the MEP platform, and one which really is made possible by technology, is what the DOL describes in its MEP IB  as the “Prototype Approach,” versions of which are apparently being considered by several states.

The chosen platform’s ultimate goal is efficient scale to expand coverage, not blind commitment to the MEP platform itself. It is possible under the “Prototype Approach” to mimic all but one “scale” element of the MEP.  We can, and do, create a package that combines all of the MEP elements of common plan documents, service agreement, fiduciary allocation, and  investment platforms into a  standardized program for unrelated employers which provides scale like a MEP. It provides those small plans the buying power and access to expertise which are at the heart of MEPs, doing so without that platform’s inherent difficulties.  For example, each plan is still legally a single plan, where the underwriters (nor the other plans in the pool) bears the risk of disqualification; and the dealing with a difficult participating employer is straightforward.

The sole disadvantage is the filing of a 5500 for each plan,  and an audit for each of the large plans.  With a simple regulatory change to the Form 5500 rules which would permit a single joint filing not unlike a Group Insurance Arrangement, a change which is well within the authority of the DOL under  29 CFR 2520.104-23(a)(2), “Prototype Plans”  would, in all respects, be a better tool for achieving scale and expanding coverage than MEPs. And unlike MEPs for unrelated employers-which can effectively only be offered by the States after the IB (mentioned above)-the private market can offer these platforms.

Best of all, this change to enhance the Prototype platform would not require complex legislation change, or a whole new scheme of interpretive regulation which would inevitably be required bound to follow. It would alsoprovide enhanced regulatory oversight in a way that cannot be provided over MEPs.



DOL and Lifetime Income

Posted in Lifetime Income

Even with all of the interest in the Fiduciary Rule, the DOL is still paying attention to lifetime income-so much so that the Qualified Longevity Annuity Contract (the “QLAC”, established by the IRS) was granted broad relief under the Rule. This relief is so favorable that one of the claims being brought in the 5 different lawsuits against the DOL related to the Rule is that non-QLAC annuities should be getting the same treatment.

So, retirement security through DC lifetime income is still an issue that is front and center. Evan Giller and I spoke before the ERISA Advisory Council last year on steps the DOL could take to facilitate DC Lifetime Income, and we “translated” those remarks into an academic article in the  Journal of Retirement.  Click on that link to see what we think might work.  The publisher is allowing access though July 15, so read it and print it out now. It may be helpful.

403(b) and the Fiduciary Rule

Posted in 403(b), Fiduciary Issues
Vintage magnifying glass  on old letter background

As in all things 403(b), it seems, retirement rules of generally applicability take unusual twists when applied to 403(b)plans. This really all is still connected to the fact that the 403(b) lineage goes back to several generations of retirees,where they served as highly successful individual retirement arrangements. Today, we still have much to learn from the details of those pre-2007 plans (that is, prior to the fundamental changes brought in by the unnecessarily expansive 403(b) IRS regulations issued that year).

The DOL’s fiduciary rule is not saved from that same  problem. A close look reveals  interesting twists in the manner in which the rule affects  (or doesn’t at all!)  403(b) plans, which simply do not apply to other participant directed defined contribution plans. Two really are the most obvious:

Non-ERISA 403(b) plans.

Arguably, the plan participants most exposed to inappropriate product placement are those in public school plans.  Yet, these participants  are  excluded from much of the fiduciary rule’s protections, except where an adviser makes the recommendation to rollover those funds to an IRA. This is the same for state university 403(b) plans, as well as non-ERISA 403(b) plans for private tax exempt orgs-including “non-electing” church 403(b) plans (churches can elect to be covered by ERISA). Why? Because these plans  are not subject to ERISA, and 403(b) plans are excluded from Code Section 4975 (which is the prohibited transaction section under the Tax Code which makes the DOL rules apply to non-ERISA IRAs). This non-application really does have the potential to have a number of ancillary effects on those products, which constitute a significant percentage of the marketplace. I would also think it would serve as further incentive for the DOL to limit the application of the 403(b) “safe harbor” rules which are otherwise used to prevent ERISA’s application to certain 403(b) plans.

Individually controlled 403(b) contracts.

More complicated is establishing the manner in which the Fiduciary Rule and its related Best Interest Contract Exemption apply to the significant chunks of the 403(b) marketplace where the individual, not the plan, controls the plan investments, and where the participant is much more like an IRA investor.  One needs to closely detail the manner in which the terms of “ERISA Investors,”  “Retail Fiduciaries” and “Retirement Investors” apply, where the plan fiduciaries do not control the individual account investments. For example, financial service companies and advisors have relief when dealing Retirement Investors, but how does this really apply when the decision making authority is the 403(b) participant?

There are large numbers of “legacy” contracts, where there is no employer effectively involved in the 403(b) contract at all, though they are still technically part of the plan under ERISA.  Think of those contracts excluded by the plans under Rev Proc 2007-71 (and from reporting under the 5500 by the DOL). They are still technically covered by the Fiduciary Rule, and the BIC, but the employer has no relationship with the vendor (and often not even with  the participant).  Add to this the issue of distributed contracts, where the employer no longer has any involvement in the 403(b) contract, and the annuity contract is no longer being part of the ERISA plan.  Many of these type of contracts still generate compensation to those who advise on them.

One impact this is surely to have is to encourage employers to no longer permit contributions to these legacy contracts without substantial relationships with the vendor. As we work through to a better understanding, my guess there will be a number of interesting side effects on this market brought by these new rules.



Tax Code Will Permit Merger of 403(b) and 401(a) Church Plans

Posted in 403(b)
Muckross Abbey

Much has happened since we’ve last posted a blog-upon some of which we could hopefully lend some helpful comments. The press of year end business (a problem which we are delighted to have!) and spending precious family time around the holidays made it difficult to get to those things thoughtfully. We look forward to working through that “issues stack” over the next few months.

Yes, we have had the DOL issue guidance on state MEPS, and on state mandated IRAs; there has been a notable SEC No-Act on 403(b) plans; there has been continued church plan litigation; and even a few 457(b) issues. 2015 really did have a notable fourth quarter.

It is, however, an extraordinary and fundamental changes introduced to church 403(b) plans by the PATH Act is worth first noting: the Tax Code will now permit the merger of 401(a) and 403(b) plans of churches; and the “transfer” of assets between the two types of plans will be permitted.

403(b)/401(a) mergers has been an ongoing issue in the tax-exempt marketplace: consultants and advisors trying to clear up the often messy retirement plan structures of their not-for profit clients continue to be stymied by the inability to merge these two types of plans. Not only could these plans not be merged, but there is no way to do a “plan to plan transfer” between them. The only way to accomplish any sort of “transfer” was for there to be a distribution from one of the plans which could be “rolled” into the other. One preferred method is to terminate the 401(a) plan with a default “deemed” rollover election (yes, this is permitted by 1.401(a)(31), Q7) into the 403(b) plan.

The PATH Act will eventually change all of that for church Plans. “Under rules prescribed by the Secretary,” church 403(b) and 401(a) plans (of the same church) will be able to either merge or transfer assets between them, effectively using the same “merger and transfer” rules currently in place for 401(a) plans. The good news is that this rule uses the the broad definition of “church” under 414(e)(3), which includes “steeple” churches and organizations associated with or controlled by churches-which will include such organizations as hospitals and universities.  (see our church plan blog for a description of the types of churches).

Don’t go racing to merge your church plans yet, however. We will need to wait for the IRS to issue guidance before that can be done.  But the door will  be open at some point.

One of the questions that the IRS will need to answer in guidance is how the Rev Proc 2007-71 applies. That revenue procedure permitted employers to exclude from its plan certain pre-2005 contracts (and, under certain circumstance, certain pre-2009 contracts), so it will be important to see if the IRS excludes those old contracts for merger purposes. Note also that there will be some serious complications under ERISA for those “electing church plans,” which have elected to be covered by ERISA. What really makes the new rules work so well is that the typical 414(e)(3) church will not be governed by ERISA, which will make the merger/transfer much simpler.

The PATH Act also introduced a few more changes to church 403(b) plans. It preempted state payroll laws which may otherwise prevent a church from auto-enrolling participants in a 403(b) plans (the existing auto-enroll rules did not cover church 403(b) plans); there is a controlled group/aggregation rule clarification; collective trust guidance; and grandfathered 403(b) DB guidance. Click here for a copy of  the  PATH Act Church Rules .

On a personal note, Conni took the picture above, of the 600 year old Muckross Abbey in Killarney National Park in Ireland. We were surprised when we happened upon some very old gravestones there of part of my Irish half’s family (I’m also half Hungarian).

MEP and the Common Paymaster: A Siren’s Call

Posted in Multiple Employer Plans
Siren's Call

There’s a continual siren’s call in the marketplace, enticing many to believe that the DOL’s seminal MEP Advisory Opinion, 2012-04 has limited applicability to arrangements like a PEO sponsored MEP. Like the siren’s call, such statements by these promoters are alluring, but potentially dangerous.

In that Advisory Opinion, the DOL made it clear that the Opinion would apply to MEPs the limited definition of what constitutes an “employer” that the DOL had historically applied to MEWAs (which are “multiple employer welfare arrangements,” which had been the source of long standing abuses).  2012-04 stands for the proposition that employers participating in a MEP must have a both a common employment bond between them, and that those employers must directly or indirectly control the MEP. There seem to be a number of arrangements which will have that bond, such as industry associations that were not formed for benefits purposes; franchise arrangements; commonly owned companies that don’t quite constitute a controlled group; and industry focused employment arrangements in a limited geographical area.

But the siren’s song’s lyrics are that the AO left open the question of whether or not a MEP is available under a PEO without these sorts of bonds, even claiming that making a PEO’s MEP available on an a la carte basis (the so-called “ASO” business) is permissible. The most recent version of that “song” which demonstrates the lengths to which parts of the market will go involves common paymaster services.  Employers, the siren says, that each hire the same company to serve as its payroll agent each then form a DOL-compliant common employment bond with the others of that payroll agent’s customers.

This is a pretty absurd argument. It would be similar to an attorney claiming that clients which each appoint the lawyer as agent to deal with the IRS on retirement plan matters  under a Power of Attorney have a common employment bond.

MEPs are very valuable tools for the right circumstances, and there can be some PEOs which do fit within the DOL’s guidelines.  There remains a possibility for legislative relief as well. Even better, though, is that there are non-MEP aggregation arrangements which can be a valuable alternative to MEPs.  It is risky behavior, however, to attempt to manufacture an employment bond that doesn’t really exist-especially when there are viable alternatives.

I will be speaking at ASPPA’s Annual Meeting next week at the Gaylord in National Harbor.  Adam Pozek and I will doing a presentation on Taking Over a MEP on Tuesday at 4:15; I will be manning the Speaker’s Corner at 6:15 on Sunday; and facilitating a PEO session at 10 on Tuesday and a “when you should offer a MEP” at 2:30 on Tuesday. Come by and say hi!


Website Privacy Policies and the Federal Trade Commission’s Authority over Retirement Plans

Posted in Cybersecurity, Fiduciary Issues, General Comment, Plan Administration

As if there aren’t all ready far too many acronyms in our business with which to deal, a recent third circuit court case on website privacy policies and cyber security tells us we may yet have another.

Remembering that ERISA does NOT preempt the application of other federal law (like the SEC, Anti-Money Laundering, and the Patriot Act rules-just to name a few), which we continue to learn to integrate into our practices, we now may find ourselves needing to deal with the Federal Trade Commissions standards as well.

The issue arises from something as innocuous as the website privacy policies which are so commonplace on retirement plan vendor websites (you know, those things know one ever reads or pays attention to). Well, it appears to matter to the Federal Tead Commission.

Cybersecurity and data privacy issues are a growing concern for retirement plans and their vendors. There has been much written about these issues recently, and we have always felt that there really is an ERISA  fiduciary standard that applies to the handling of a plan’s data.

Well, it looks like the federal courts now will recognize the FTC’s authority to govern such matters as well.  Here’s how it works:

  • The Federal Trade Commission Act prohibits “unfair or deceptive acts or practices in or affecting commerce,” under 15 U.S. Code § 45.
  • An unfair trade practice is one which “causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits to consumers or to competition.”
  • The FTC has taken the position that cybersecurity practices fall within its jurisdiction under this clause.

This all came to head in the case of FTC-v.-Wyndham-Worldwide, where the FTC brought suit against Wyndham for its misleading data privacy policy, and its faled data privacy practices. These failed practices lead to serious data breaches. In the court’s ruling , they found that Wyndham “unreasonably and unnecessarily” exposed consumer’s electronic data to unauthorized data and theft, while misrepresenting their security practices in its privacy policy.

There is quite a “list of horribles” in which Wyndham engaged, including its failing to

  • adopt “adequate information security policies and procedures;”
  • use “readily available security measures”—such as firewalls—to limit access between Wyndham’s other corporate networks; and
  • employ “reasonable measures to detect and prevent unauthorized access” to its computer network.

What should we take from all of this, on the retirement plan side? Consider knowing what’s in your privacy policy;  do what you say you are doing in the policy; and consider adopting reasonable cybersecurity practices.


Employee Asset Protection and State Auto-IRA Programs

Posted in Auto-IRA, Complex Prohibited Transactions

State based auto-IRA programs continue to pick up steam, and may soon become prominent features of the retirement security landscape. Granted, there are a number of legal and logistical issues which need to be resolved before they can be fully implemented, but things are moving quickly.

So it is timely to discuss participant protections under these programs. A successful program must necessarily incorporate ways to protect employee deposits. The holding of employee deposits are not much of a concern, as employee deposits will be held in IRAs protected by highly regulated, commercial custody companies-as in any IRA program.  The real challenge will be the protection of employees’ payroll based deposits in getting to the IRA.  Any payroll based deposit program is subject to the vagaries of an employer’s cash flow, and this will be a particularly acute problem in the small employer marketplace (which just happens to be the target market of the state auto-IRA efforts).

States, however, resist the application of ERISA (and its attendant protections) to their auto-IRA arrangements. It is generally believed in the States that the burdens imposed by full fledged ERISA regulation would make auto-IRA virtually impossible to implement, and would be their death knell.  The DOL has pledged its support in finding a workable solution to this problem, and it has a proposed reg pending at OMB.

Does this mean that auto-IRA participants then would be left unprotected if ERISA doesn’t apply? Actually, I think not. There is a variety of state law criminal and civil causes of actions which can be taken against bad acting employers who don’t make timely deposit of auto-IRA. But, almost surprisingly, there is the possibility that the DOL and the IRS still may have jurisdiction over these deposits under (of all things) the Tax Code’s prohibited transaction rules-even if ERISA does not apply.

This is how it may work:  IRAs are subject to the prohibited transaction rules under Code Section 4975.  This shouldn’t concern an employer who timely deposits auto-IRA contributions to the custodian. At some point, however, it may be possible that an employer who delays making the IRA deposit might be will be actually be deemed to be holding an IRA asset- under the same rules that an employer holding onto 401(k) deposits for too long will be deemed to be impermissably holding onto plan assets. Why? because the DOL has jurisdiction over the prohibited transaction rules (even those under Tax Code Section 4975), and there really doesn’t appear to be any basis for a  legal distinction under its rules between holding on to 401(k) deposits for too long and holding on to IRA deposits for too long.

If the the employer is still holding on to IRA payroll deduction at the time it becomes an IRA asset,  the employer then would become become a custodian of the IRA asset.  This, in turn, makes the employer a “disqualified person” under 4975, and makes it liable for the prohibited transaction taxes for using those late deposits for its own purposes.

Yes, this is strange territory, and there will be those who will reasonably disagree with whether or not the PT rules should apply in this manner. But it is also a reasonable position, and one which lends an important element of ERISA-like protection without some of the unnecessary burdens.


A 403(b) Collective Trust? A Note of Caution…..

Posted in 403(b), B/D-IA Issues

Collective trusts have seemingly become all the rage in plan  investment circles, and for some  very good reasons. Bonnie Treichel (of her and Jason Robert’s Retirement Law Group) will discuss the “ins and outs” of dealing with collective trusts in a guest blog to be posted shortly.

But what of a 403(b) plan purchasing collective trust interests? Surely, the CIT advantages can be made available to these plans, especially since the IRS specifically approved the commingling of 401(a) assets and 403(b) assets in something called 81-100 trusts under Rev Ruling 2011-01! (“81-100 Trusts” refers to the Revenue Ruling 81-100 which recognized the tax exempt status of a collective trust which holds the assets of unrelated 401(a)-and now (since 2011-1) 403(b) plans).

Well, as seems to be with all things 403(b), there’s trouble in the details. Two issues need to be addressed  with a 403(b) plan’s purchase of the collective trust interests of the sort that are typically sold to 401(k) plans.

Code Section 403(b) only permits investments in mutual funds and annuity contracts.* The CIT interests purchased by 401(a) plans, however, are “unitized.” This means that the commingled value of all the assets in the trust are valued every night, like a mutual fund, and each unit given a net asset value. But the problem is that the typical CIT is NOT a mutual fund registered under the Investment Company Act of 1940, and the interest which is being purchased is therefore not a mutual fund share (note that there are exceptions: some CITs WILL actually be registered under the 40 Act, but these are not trusts in which 401(k) typically invest).  It is therefore unlikely that the Code would permit its purchase under a non-403(b)(9) arrangement.

To get around this problem, you could try to design a CIT in such a way to “look through” the CIT to the underlying mutual fund in order to qualify under 403(b).  This, however, would require share accounting of the investments of the CIT. Legal niceties aside, this would be virtually impossible to do from the practical standpoint given the manner in which CITs operate (for example, they typically hold a percentage of their assets in cash, which then screws up share accounting).

But even if you could do share accounting and overcome the legal and logistical challenges to making this work for the Tax Code’s 403(b) rules , there is a serious securities law problem.  403(b) investments do not qualify for the exemptions from registration under the Investment Company Act of 1940 or the Securities Act of 1933, while 401(a) plans do enjoy that exemption.  The collective trust with 403(b) funds would likely have to be registered under the ’40 Act as a mutual fund or, at least, the CIT shares registered as securities under the ’33 Act. Unless the plan sponsor otherwise has security law exemptions (think government and certain church plans), this then would be a non-starter.The 81-100 trust for 403(b) plans of organizations without a security law exemption will, it would seem, have limited usefulness.

What does this all mean? It means that if you have a 403(b) plan which is investing in collective trusts, you probably need to sit down and talk with your lawyers or compliance staff. It will be very interesting to see how many of the 403(b) prototypes which the IRS is currently reviewing will specifically authorize collective trusts without a thought to these issues…..

*Note that 403(b) does have an exception: 403(b)(9)  permits church retirement income accounts to invest in vehicles other than annuity contracts and mutual funds.



Any discussion on any tax issue addressed in this blog (including any attachments or links) is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code or promoting, marketing or recommending to another person any transaction or tax-related position addressed therein. Further, nothing contained herein is intended to provide legal advice, including advice on Securities Laws, nor to create an attorney client relationship with any party.

DOL Provides Key ERISA Guidance on QLAC/DC Lifetime Income

Posted in Fiduciary Issues, Lifetime Income

Sláinte! to Mr. Hauser and Company at the DOL. OK, admittedly I’m still recovering from our recent trip to Ireland where, yes, I attempted to drive on their country “roads.” “Sláinte is one of the Gaelic terms for Cheers! And, yes, that is a pint from the Blind Piper in County Kerry.

SlainteThe DOL just published its first serious guidance on supporting lifetime income with the publication of FAB 2015-2, guidance which is very necessary for the success of the Qualified Longevity Annuity Contracts, as well as DC lifetime income income.

The FAB is an initial, but substantial, step in addressing one of the most pressing of the ERISA issues related to providing lifetime income from defined contribution plans: concerns by employers and their advisors regarding the potential of a substantial “tail” of liability related to buying an annuity. Who wants to purchase an annuity if some 30 years after the purchase of an annuity, an insurer becomes insolvent while the annuity is in its payout stage, after which the fiduciary can be held liable for that long ago decision?

Addressing this “fiduciary anxiety,” the DOL helpfully described the manner in which ERISA’s six-year statue of limitations serves to restrict the “window of liability” related to those purchases.

The DOL also discussed the manner in which it views that the ongoing obligation to monitor a chosen annuity vendor will apply. The fiduciary will need to periodically review the chosen insurer, but will not need to do so before the purchase of each annuity. The obligation to review ceases should annuities no longer be able to be purchased under the plan or, with regard to any particular carrier, that carrier’s annuities cease to be  an option under the plan.

It is also very helpful that the distribution of the annuity was recognized as a distribution option under the plan.

Through two simple examples using the QLAC type of annuity upon which the Treasury has issued guidance, the DOL stated that:

“Thus, for example, if the plaintiff bases his or her claim on the imprudent selection of an annuity contract to distribute benefits to a specific participant, the claim would have to be brought within six years of the date on which plan assets were expended to purchase the contract.”

This helps forms the basis upon which much more work can now be done. Next up will be guidance on a safe harbor, for the steps the fiduciary should take in choosing an annuity carrier. This is a project upon which the DOL is currently working. The FAB gave an important clue regarding the DOL’s approach to that ‘work-in-progress,” which is likely to help shape that safe harbor:

“Consistent with this statutory language, the prudence of a fiduciary decision is evaluated with respect to the information available at the time the decision was made – and not based on facts that come to light only with the benefit of hindsight. The conditions of the Safe Harbor Rule embody this general principle of fiduciary prudence. A fiduciary’s selection and monitoring of an annuity provider is judged based on the information available at the time of the selection, and at each periodic review, and not in light of subsequent events.”

This will be a critical element of the safe harbor, demonstrating that what is required is prudence, not prescience, as I had noted in a previous blog.

Evan Giller and I testified before the ERISA Advisory Council this past May, where we suggested the DOL work to ease fiduciary anxiety with this sort of guidance. We also suggested in the Testimony the factors which a safe harbor should require-noting that the burden to provide the information should be on the insurers in a competitive circumstance. Let the insurers’ poke at the accuracy of their competitors’ data; and let the fiduciary rely upon that.

You may find our written Testimony with its specifics related to what should be sought by the fiduciary helpful.

As with the Treasury’s guidance in Rev Rule 2012-3, this will help form the fundamental basis for making lifetime income work.

Fiduciary Liability for 403(b) Non-ERISA Plans?

Posted in 403(b), Fiduciary Issues

A number of us have been arguing about the extent of fiduciary liability for non-ERISA 403(b) plan sponsors for years now. This was caused by the 2007 changes to the 403(b) tax regulations, which  significantly increased employer responsibility for the maintenance of 403(b) plans. This greater level of employer involvement lead to our ongoing discussions on the sort of liability could these plans cause for the non-ERISA plan sponsor. Of particular concern to me was that of school districts which sponsored 403(b) plans. Those districts had typically viewed themselves as having minimal, if any, exposure to the operation of a 403(b) plan. This was in large part because of the lack of exposure to ERISA and its fiduciary obligations.

What school districts had never paid close attention to was their potential liability under non-ERISA, state law based legal claims, such as breach of contract, negligence, and other similar duties. ERISA, by the way, would preempt the assertion of these claims if they related to the operation of an ERISA plans, but public schools have no such protection.

Though these discussions (yes, Richard!) had always taken the nature of a nerdish argument between lawyers who really needed to get a life, a Wisconsin court has shown us that this could be a matter of very real concern to public schools.


The Wisconsin Court of Appeals has recently decided a matter in what appears to be one of the first reported appeals court cases involving school district liability under state law related to a wrongfully administered 403(b) plan. The case was technically one under which the issue was whether the federal tax code preempted a claim for participant tax losses related to errors in 403(b) plan administration.

What the Court found was that an action alleging a failure to exercise ordinary care in the administration of a 403(b) plan…, if proven, may entitle the Retirees to relief in state court.  Scary. Now it seems all so very real.

The facts won’t be unfamiliar to many school districts. In negotiating a layoff of teachers during the recession, the school district agreed to continue to make post severance contribution to the laid-off employees for 10 years following their termination of employment. The problem is that 403(b) only permits such post-severance payments for 5 years.

The IRS audited the school district’s plan,  found the error, and entered into a settlement agreement with the district under which the district agreed to pay $60,000 to the federal government.  The IRS agreed to treat the first five and one-half years of the plan’s payments as compliant with 403(b). The district then sought reimbursement from those former employees for amounts that it claimed it had paid to the IRS for the “employee share” of FICA taxes.

Those former employees didn’t take it laying down. They  filed a lawsuit against the district and its 403(b) third party administrator, claiming breach of fiduciary duty under Wisconsin law (not ERISA), breach of contract, misrepresentation, a federal civil rights violation, negligence, and unjust enrichment on the part of the district and breach of fiduciary duty, misrepresentation, and negligence on the part of the TPA.

The trail court first found against the former employees, finding that this was merely a “tax situation,” under which the former employees should make claims for tax refunds against the IRS.

The Court of Appeals disagreed, in no uncertain terms. The Court found, instead, that the suit could proceed if the former employees could prove they were erroneously promised that they could avoid FICA taxes and defer income taxes by use of a ten- year payment period in the 403(b) plan that the District was charged with administering (and the TPA was responsible for structuring). The Court agreed with the former employees, that the case is “essentially no different than an action against an accountant who commits malpractice and whose client, as a result, incurs additional tax obligations and costs that the client would not have incurred had the accountant not been negligent in the performance of his or her duties.”

The Court went on to find that the school district could be held liable for the tax exposure if it failed to use the degree of care, skill, and judgment that reasonably prudent administrators would exercise under like or similar circumstances.

This finding may well be the first step in establishing an “ERISA fiduciary-like” cause of action against school districts and plan administrators in the improper handling of non-ERISA 403(b) plans.

The case is Ann Cattau v. National Insurance Services of Wisconsin, Midamerica Administrative & Retirement Solutions, Neenah Joint School District, and Community Insurance Corporation; Appeal No. 2014AP1357, State of Wisconsin.