Motion to Dismiss Granted in Pending Lawsuit Regarding Governmental Plan Status

The U.S. District Court for the Middle District of North Carolina has dismissed the complaint against Atrium, a health care system in North Carolina, after the U.S. District Judge determined the retirement and health plans offered to Atrium employees were "governmental plans" that are exempt from the Employee Retirement Income Security Act of 1974 ("ERISA"). The full Opinion and Order is available here. For a review of the allegations in the Atrium lawsuit, see our e-alert available here.

It is important to note that the decision from the U.S. District Court for the Middle District of North Carolina is a decision from one district court and that the time for appeal has not expired. Additionally, the analysis in this case is very fact sensitive. Thus, caution should be exercised in extrapolating the ultimate conclusion to other factual scenarios, in other parts of the country. It may help to review the historical background of the determination regarding whether an entity may participate in a governmental plan.

Under Internal Revenue Code ("Code") Section 414(d), the term governmental plan means “a plan established and maintained for its employees by the Government of the United States, by the government for any state or political subdivision thereof, or by any agency or instrumentality of the foregoing . . . .” Thus, oftentimes, the question is whether: (1) is the entity a political subdivision or (2) is the entity an agency or instrumentality of a state or political subdivision?  
 
Definition of a “political subdivision”
 
Historically, in determining whether an entity is a political subdivision, many governmental plans have relied on the Supreme Court decision in NLRB v. Natural Gas Utility District of Hawkins County, Tennessee, 402 U.S. 600 (1971), where the Supreme Court interpreted the term “political subdivision” for purposes of the National Labor Relations Act. The Supreme Court in the Hawkins decision set forth a two prong test: is the entity (1) created directly by the state, so as to constitute departments or administrative arms of the government, or (2) administered by individuals who are responsible to public officials or to the general electorate. Hawkins, 402 U.S. at 604-05. In deciding whether the Hospital in Atrium was a political subdivision, the Court relied on the Hawkins test and concluded that both prongs were met (even though only satisfaction of one prong was necessary). 
 
Definition of an “agency or instrumentality”
 
With respect to the definition of agency or instrumentality, most plans have relied on Revenue Ruling 89-49, which contains five criteria for determining whether an entity may maintain a governmental plan. The factors in this analysis include:
 

• The degree of control exercised over the entity's every day operation.
• Source of funds.
• Selection of trustees or operating board.
• Specific legislation creating the entity.
• Whether the applicable governmental unit considers the employees to be the public unit's employees. 

ANPRM
 
The Internal Revenue Service ("IRS") and the Department of Treasury ("Treasury") on November 7, 2011, issued an Advance Notice of Proposed Rulemaking ("ANPRM") REG – 157714-06. The announced purpose of the ANPRM was to solicit comments on draft proposed regulations for determining if a retirement plan is a governmental plan under Internal Code Section 414(d). 
 
Based upon Code Section 414(d), the ANPRM contains five separate definitions for a governmental employer: (1) United States, (2) agency or instrumentality of the United States, (3) state, (4) state political subdivision, and (5) agency or instrumentality of the state or a state political subdivision. The fourth definition in the ANPRM covers political subdivisions:
  This two-pronged test is not a facts and circumstances test. It is a "check-the-box" test. It is important to note that the first prong of this two-pronged definition of political subdivision would not specifically include educational institutions unless they also had other "sovereign powers." Under the second prong, this definition would not cover an entity if the governing officers are appointed by local officials. It is notable that commentators on the ANPRM have questioned why the IRS and Treasury did not stay with the Hawkins test and have requested that the IRS and Treasury stay within the confines of Hawkins.
 
An entity that does not fit within the definition of a "political subdivision" could still offer or participate in a governmental plan if the entity can meet the criteria for an "agency or instrumentality," which is the fifth definition in the ANPRM. Under the ANPRM, there are five main factors and eight other factors to consider in the analysis, which are similar to the factors in Rev. Rul. 89-49 and 57-128. Unlike the test for a “political subdivision,” the criteria for an “agency or instrumentality” is a facts and circumstances test.  
 
Impact of Atrium decision
 
As noted above, the Atrium decision is a decision from a district court under very fact sensitive circumstances. Further, the time for appeal has not expired. Thus, caution should be given when applying the Atrium holding to other facts or circumstances. Importantly, at the time the IRS issued the ANPRM, the IRS was aware of the Hawkins decision and included a discussion on Hawkins in the ANPRM.  
 
Should you have questions about governmental plan status or the IRS' proposed rules concerning this status, please contact 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.