PLANADVISER - Summer 2023 - 39

employees (see the sidebar) working
over 20 hours a week must be permitted
to make elective deferrals to the 403(b)
plan sponsored by their employer. Roton
and Juarez alleged that both Legacy and
Peveto were plan fiduciaries.
Each defendant filed a motion to
dismiss, which Judge Brantley Starr for
the U.S. District Court for the Northern
District of Texas ruled on, in December.
The court ruled in favor of Legacy's
motion to dismiss, saying the company's
403(b) is a non-ERISA plan, and,
therefore,
the sponsor cannot be an
ERISA fiduciary.
The judge also said Legacy's was
a safe harbor plan because participation
in it was voluntary, the company
received no payment beyond what was
necessary to administer the plan, rights
are enforceable solely by the employee,
and the sponsor's involvement was
limited to restricting the investment
products available to participants.
Since Legacy was ruled to be within
the plan could not be
a safe harbor,
sued under ERISA. Legacy was formally
dismissed as a defendant in March, while the case against
Peveto was allowed to continue, until being dismissed
completely in April.
The Discussion
Peveto's motion to dismiss was rejected because there were
still important factual disputes at that time. The plaintiffs
alleged that Peveto collected a fee for sign-ups and, more
importantly, provided one-on-one consultations with participants
and gave investment recommendations-an action
that could have made it a fiduciary, according to the court.
Additionally, the plaintiffs alleged that Peveto never
informed them of the existence of the plan and their
right under the UAR to participate in it. Judge Starr wrote,
" Were Peveto a fiduciary, the universal applicability rule
would have obligated it to promulgate the Plan to Legacy
employees, whether by written publication or some other
means. " In light of this, the court declined to dismiss the
case as it concerned Peveto.
On April 20, both Peveto and the plaintiffs agreed to
dismissal with prejudice and to settle their own attorney's
fees and legal costs. The case was formally terminated the
same day without a final ruling on the merits.
Ary Rosenbaum, managing partner at The Rosenbaum
Law Firm, says the 403(b) world is different from the 401(k)
because some 403(b)s are exempt from ERISA and others are
not. A plan can be exempt if it is maintained by a government
institution, a church or certain nonprofits, Rosenbaum says.
Perhaps the main appeal, he adds, of a 403(b), from
an employee's point of view is the universal applicability.
Perhaps the main downside, though, is that non-ERISA
plans lack ERISA's strong protections. 403(b)s are " still the
wild, wild West when it comes to fees and abuse, " observes
Rosenbaum, and " nobody wants to talk about it. "
According to ERISA attorney David Kaleda, a principal in
Groom Law Group, " If the 403(b) plan is not subject to ERISA
by reason of the safe harbor, then the non-ERISA status
should extend to all parties. " In other words, if the sponsor
is excused because of a safe harbor, then the adviser for the
same plan should be too.
Michael Kreps, a principal in, and chair of retirement
services at, Groom Law Group, says the court's decision to
dismiss the plan sponsor from the case and not the adviser
was " an odd decision that appears to misunderstand the
law. ERISA either applies or it doesn't. "
Kreps notes that the UAR, while not an ERISA rule, is
required of all 403(b)s, regardless of safe harbor status; the
rule does not, however, have a right of private action. That
is, an individual or private entity may not sue a plan for
violating this rule. If the plan is indeed violating the UAR,
this would be an enforcement matter for the IRS.
Upon an IRS audit, if the adviser were found to have
given bad advice to the plan by ignoring the UAR then
perhaps that individual could be found liable through that
route, but this is different from qualifying as an ERISA
fiduciary, Kreps explains.
In summary, he says, this is a potential issue for the IRS
to investigate, but an adviser may not be sued under ERISA
in his capacity as an adviser for a non-ERISA plan.
-Paul Mulholland
How Universal Is the Requirement?
According to the IRS, a 403(b) plan must satisfy the universal applicability
requirement with respect to elective deferrals: " If any employee
of the employer maintaining the 403(b) plan may participate, then
all of the employer's employees must be given the opportunity to
participate. "
The IRS website notes some exceptions. Employees who work fewer
than 20 hours a week, student employees, nonresident aliens, and
employees who are eligible to contribute to a 401(k) or 457(b) plan
from the same employer may be excluded.
If any student employee or employee working fewer than 20 hours a
week is eligible to participate in the 403(b), then all employees in those
categories must be made eligible. An employee may not be disqualified
for another general criterion, such as working part time.
Since the UAR is part of the Internal Revenue Code, it applies to 403(b)
plans governed by the Employee Retirement Income Security Act, as
well as to those that are not. This means, per the IRS, it should apply to
the Legacy Counseling Center plan advised by Peveto. -PM
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