The Question Stands

Art by Dan Page

Can a retirement plan’s sponsor and adviser be held liable for not applying the universal availability rule—i.e., Section 403(b)(12)(A)(ii) of the Internal Revenue Code—to a non-Employee Retirement Income Security Act 403(b) plan?

The case that prompted this question, Robert Roton and Jacqueline Juarez v. Peveto Financial Group LLC and Legacy Counseling Center Inc., was dismissed with prejudice by agreement of the parties, “with prejudice” meaning the court has made its judgment and the plaintiffs may not refile their claim. Claims against the plan sponsor were dismissed by the court, though not initially against the adviser, which could potentially face a reckoning with the IRS.

The Case

Robert Roton and Jacqueline Juarez, two employees of Legacy Counseling Center Inc., a mental health and addiction counseling service with offices in seven counties in the Dallas area, alleged that they were unjustly excluded from participating in Legacy’s 403(b) defined contribution plan. They argued that their exclusion violated the universal availability requirement for 403(b) plans and claimed they lost $231,000 and $58,347, respectively, as a result.

The two sued Legacy, and the plan’s financial adviser, Peveto Financial Group. They alleged that they were never informed of the plan’s existence and should have been allowed to participate if they chose to. The 403(b) plan sponsored by Legacy is a non-ERISA plan.

The case raises important questions about the responsibilities of an employer that sponsors an ERISA-exempt 403(b) plan, as well as those of its adviser. First among those questions is: Must a plan adviser inform all eligible employees of a plan’s existence and make enrollment available to them? Unfortunately, this question remains unsettled since the parties decided to dismiss the case.

The plaintiffs alleged, in a complaint brought this past December, that the plan was offered only to higher-paid employees and that the “rank-and-file” were never permitted to participate or even told about the plan. They said this violated the IRC’s universal availability requirement. The UAR essentially means that otherwise qualified 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 U.S. District Judge Brantley Starr, presiding in the U.S. District Court for the Northern District of Texas, ruled on in December 2022.

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 a safe harbor, the plan could not be 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. Starr wrote, “Were Peveto a fiduciary, the universal availability 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 availability. 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.