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Governmental Plan Status is Key Issue in Pending Lawsuit Governmental Plan Status is Key Issue in Pending Lawsuit

Governmental Plan Status is Key Issue in Pending Lawsuit

Atrium Health Lawsuit

Atrium, a health care system in North Carolina, is facing a class action lawsuit alleging multiple violations of the Employee Retirement Income Security Act of 1974 ("ERISA"). The full Complaint is available here.

 Atrium currently claims its employee retirement plans are governmental plans and, therefore, are exempt from ERISA. The Complaint asserts that ERISA should apply to Atrium's plans, because the plans do not meet the definition of governmental plan found in ERISA. The Complaint further claims multiple instances of the plans falling short of ERISA's requirements, including ERISA's funding and vesting requirements.

The Complaint identifies the following reasons why Atrium's plans do not meet the governmental plan definition:

  • Atrium's board is not publicly nominated or elected;
  • Atrium's board is not controlled by a state, political subdivision, or any other governmental entity;
  • No state, political subdivision, or any other governmental entity has the powers and interests of an owner with respect to Atrium;
  • Atrium's employees are not treated as employees of any state, political subdivision, or any other government entity;
  • Atrium receives no funding from the state or any political subdivision; and
  • Atrium does not possess the sovereign powers of a state, political subdivision, or any other governmental entity.

Additionally, the Complaint asserts that, unlike a governmental entity, Atrium employs lobbyists, operates a Political Action Committee, has contributed to various political campaigns, manages religiously-affiliated hospitals, operates in three states, and is currently being sued by the United States and state of North Carolina (for unrelated matters).

Governmental Plan Status

ERISA defines a governmental plan as any "plan established or maintained for its employees by the Government of the United States, by the government of any State or political subdivision thereof, or by any agency or instrumentality of any of the foregoing." ERISA § 3(32). Importantly, the Internal Revenue Code ("Code") definition of a governmental plan has a key distinction, including "any plan established and maintained for its employees by the Government of the United States, by the government of any State or political subdivision thereof, or by any agency or instrumentality of any of the foregoing." Code § 414(d) (emphasis added). Atrium has not yet filed a response to the Complaint or clarified its position on how its plans meet one or both of the definitions. 

There are a number of special provisions and/or exemptions that are applicable solely to governmental plans, such as exemption from Title I and Title IV (requiring Pension Benefit Guaranty Corporation premium payments) of ERISA. See ERISA §§ 3(32), 4021(b)(2). Further, the Code provides specific exceptions to state and local government plans and employers which allow for increased flexibility. Notable examples of the special provisions for governmental plans of state and local employers include:

  • Employers may "pick up" employee contributions through salary reduction or direct payment so they are pre-tax when made;
  • Favorable grandfathering and transitional rules apply to significant parts of Internal Revenue Service guidance;
  • Special benefit limits under Code § 415 apply that are more favorable than those that apply to private-sector plans;
  • Certain service purchase opportunities may be used that apply only to governmental plans;
  • Plans are exempt from many costly and cumbersome nondiscrimination testing requirements; and
  • Plans are exempt from ERISA's funding requirements.

As there are no final Treasury Regulations interpreting Code § 414(d), the interpretation of this Code section has been based upon court cases and upon the Internal Revenue Service's ("IRS") Revenue Ruling 89-49 (as well as some earlier rulings) and guidance from various Private Letter Rulings ("PLRs")

ANPRM Reg. – 157714-06

While there have not yet been final Treasury Regulations interpreting Code § 414(d), in November 2011, the IRS announced its intention to issue regulations defining the term "governmental plan" under Code § 414(d). The 2011 Advance Notice of Proposed Rulemaking provides definitions for key terms found in Code § 414(d), including: (1) "established and maintained"; (2) "United States"; (3) "agency or instrumentality of the United States"; (4) "state"; (5) "political subdivision of a state"; and (6) "agency or instrumentality of a state or political subdivision of a state." The rule also outlines a six-factor test to be used to determine whether a plan is a "governmental plan." As noted in one of our earlier e-alerts, available here, there has not been direct action following the end of the comment period in 2012; however, it continues to be listed on the IRS' Unified Agenda.

Looking Ahead

With the strong correlation between the factors in the Treasury Department's AMPRM and the reasoning in the Complaint against Atrium why Atrium's plans are not governmental plans, if the Proposed Regulations are issued during the pendency of the lawsuit, the lawsuit may provide interpretation of the regulations (or analysis of the proposed rules). Regardless, the lawsuit proves a stark reminder for the importance of governmental plan status—the Complaint alleges that, once ERISA is applied, Atrium's plans present funding and fiduciary failures/violations and provide insufficient information to participants. We will continue to monitor the progress of this lawsuit and update on any further developments regarding the proposed rules.

Should you have questions about governmental plan status or the IRS' proposed rules concerning this status, please contact Amy Dygert, Audra Ferguson-Allen, Robert Gauss, Lisa Harrison, Lindsay Knowles, Tara Sciscoe, Chris Sears, or the Ice Miller LLP Employee Benefits attorney with whom you most closely work.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.
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