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.