(b)lines Ask the Expert – ERISA Exemption

April 15, 2008 ((b)lines) - An adviser has some charter school clients that have been utilizing the DoL safe harbor in Labor Reg. § 2510.3-2(f) regarding being considered an Employee Retirement Income Security Act (ERISA)-governed plan. The adviser asks: One 501(c)(3) non-profit charter school has teachers that are employed by the charter school, but also eligible for the state pension plan and retirement system. This group believes that they should be considered as a public school, and therefore exempt from ERISA, when they establish their 403(b) plan. Should it?

Is the plan of a charter school a governmental plan or not?  Because if it is, that charter school does not need to worry about the DoL regulation safe harbor.  It is out of ERISA, period.  And if the school is separately incorporated and approved by the IRS as a 501(c)(3) corporation as well as sufficiently controlled by a governmental entity, it can have a 403(b) plan which will be a governmental 403(b) plan similar to a traditional public school.  Whether that control is sufficient to meet the test to be a governmental plan depends heavily on the facts and circumstances.  You will find a number of private letter rulings going in different directions depending on individual facts. 

If you really want to know, you may have to seek your own legal opinion (which, remember, is not binding on the IRS or DoL), or, preferably, your own IRS private letter ruling or DoL advisory opinion.  Advisers to state pension systems are often called on to review the participation by charter schools in their plans carefully, and you may find that the system has its own legal opinion on the question.  Though you may also find that the state pension system is relying not on the charter school being governmental, but on the DoL’s rule that a governmental plan can allow a de minimis number of non-governmental employees to participate. (A rule which, along with the governmental plan definition in general, is currently under review by the IRS, DoL and PBGC.)

If after that analysis, the charter school’s plans cannot qualify as governmental plans, then the DoL safe harbor becomes relevant.  We’ve long been concerned, though, that many employers think the safe harbor is broader than it really is.  And we’ve questioned whether it is really worth trying to qualify for, given how easy it may be to fall out of it and the consequences of doing so without realizing it for a long time.

David Powell, Groom Law Group