Compliance April 15, 2008

(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?
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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.)

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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

Administration April 14, 2008

WI Money Managers Restructure POB Issue

April 14, 2008 (PLANSPONSOR.com) - State of Wisconsin money managers have restructured nearly $1billion in pension obligation bonds (POB) into a lower interest rate arrangement.
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A news report on Madison.com said the move was driven by an interest-rate spike due to the recent market turmoil over the subprime mortgage crisis.

Frank Hoadley, capital finance director for the state, told the newspaper that state money managers broke their $948 million in pension bonds into nine pieces and converted seven of the pieces into a lower rate posture as of April 1. “Two are still outstanding and in auction-rate mode. We are continuing to watch the market and look for opportunity to convert on the most advantageous terms we can find,” Hoadley contended.

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The news report said the $948 worth of bonds were originally sold in December 2003 to fund 50% of the state’s $1.8-billion pension shortfall.

Hoadley told the newspaper that, prior to the restructuring and as a result of the market turmoil, one piece of the bond issue had been reset to a 15% rate for 28 days while the piece originally priced at a variable rate averaged 9%. Before the rate spike, rates were originally in the 4% area. After the restructuring, Hoadley told the newspaper, the bond issue is now at 5% and 6%.

Meanwhile, in Alaska, Governor Sarah Palin is expected to sign a measure granting authority for the state to issue up to $5 billion in pension obligation bonds (POB) (See Alaska to Issue up to $5B in POBs under New Pension Funding Plan ).

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