403(b) Annuities from Employee Organization are not ERISA Plans

May 30, 2008 (PLANSPONSOR.com) - The U.S. District Court for the Western District of Washington has ruled that an employee organization legally cannot establish or maintain a 403(b) plan under the Employee Retirement Income Security Act (ERISA).

The court dismissed the case for lack of subject matter jurisdiction after determining that the NEA Valuebuilder §403(b) Annuities promoted to public school employees by the National Education Association (NEA) were not established or maintained by either the public school employers or the NEA and are therefore not “plans” under ERISA. The public school employers were deemed not to have established or maintained a plan because its involvement in purchasing and recordkeeping the annuities was minimal and ministerial, according to the opinion.

The court noted that the Department of Labor established regulations permitting employers (and in some cases, employee organizations) to engage in limited activities relating to providing information and access about available benefit plans, without being deemed to have “established or maintained” the plan, providing a safe harbor from being governed by ERISA.

However, the safe harbor regulation for pension benefit plans using tax sheltered annuities permits employers but not employee organizations to engage in limited promotional activity without being deemed to have “established or maintained” an ERISA pension benefit plan.

The court agreed with the defendants that the omission of any reference to “employee organizations” in the safe harbor regulation is a recognition of the fact that they cannot establish or maintain a §403(b) annuity plan. To support its argument, the court pointed out that the parallel safe harbor for employee welfare benefit plans does include employee organizations.

The case was brought by a class of teachers who, through salary reduction agreements, obtained §403(b) annuity contracts paid for by their public school district employers, sold by insurance companies, and endorsed and promoted by NEA (See  NEA Hit with 403(b) Revenue Sharing Lawsuit ).

The teachers claim that the insurance company defendants in the suit improperly paid, and the NEA defendants improperly received, millions of dollars in undisclosed “commissions” or “revenue sharing” in exchange for endorsing and encouraging teachers to select the NEA Valuebuilder §403(b) Annuities from among the menu of retirement investment options provided to them by their school district employers.

The case is Daniels-Hall v. National Education Ass’n, W.D. Wash., No. C 07-5339RBL.