:: How To Identify An Exempt Governmental Plan

In providing a general approach to identifying a self-funded ERISA plan, a consideration of plans exempt from ERISA coverage is naturally required. As governmental plans constitute one of the important exemptions from ERISA coverage, this article will address in more detail the prerequisites for exempt governmental plans.

The Statutory Basis For Exemption of Governmental Plans

ERISA defines a governmental plan as follows: The term “governmental plan” means a 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. The term “governmental plan” also includes any plan to which the Railroad Retirement Act of 1935, or 1937 [45 U.S.C.A. § 231 et seq.] applies, and which is financed by contributions required under that Act and any plan of an international organization which is exempt from taxation under the provisions of the International Organizations Immunities Act [22 U.S.C.A. § 288 et seq.]. 29 U.S.C. § 1002(32)

Why Are Governmental Plans Exempt From ERISA?

Before undertaking a discussion of the parameters associated with the exemption, it may be of some interest to note the reason for the exemption in the first place. The purpose of the exemption has been described as follows:

Congress created ERISA “to curb abuses which were rampant in the private pension system.” Roy v. Teachers Ins. and Annuity Ass’n, 878 F.2d 47, 49 (2d Cir.1989) (citing H.R.Rep. No. 533, 93d Cong., 2d Sess., reprinted in 1974 U.S.Code Cong. & Admin.News 4639) (emphasis original). Although applying ERISA to public pension plans was considered, Congress was reluctant to interfere with the administration of public retirement plans due to the resulting federalism implications. H.R.Rep. No. 533, 1974 U.S.Code Cong. & Ad.News at 4647

Hightower v. Texas Hosp. Ass’n, 65 F.3d 443 (5th Cir. 1995).

A Second Circuit Court of Appeals case notes several specific reasons for the exemption:

First, it was generally believed that public plans were more generous than private plans with respect to their vesting provisions. H.R.Rep. No. 533, 1974 U.S.Code Cong. & Ad. News at 4667. Second, it was believed that “the ability of the governmental entities to fulfill their obligations to employees through their taxing powers” was an adequate substitute for both minimum funding standards and plan termination insurance. S.Rep. No. 383, 93d Cong ., 2d Sess., reprinted in, 1974 U.S.Code Cong. & Ad. News 4890, 4965; H.R.Rep. No. 807, 93d Cong., 2d Sess., reprinted in, 1974 U.S.Code Cong. & Ad. News 4670, 4756-57. Finally, there was concern that imposition of the minimum funding and other standards “would entail unacceptable cost implications to governmental entities.” H.R.Rep. No. 807, 1974 U.S.Code Cong. & Ad. News at 4830. See also H.R.Rep. No. 533, 1974 U.S.Code Cong. & Ad. News at 4668.

Rose v. Long Island Railroad Pension Plan, 828 F.2d 910 (2d Cir.1987), cert. denied, 485 U.S. 936, 108 S.Ct. 1112, 99 L.Ed.2d 273 (1988)

As to the principles of federalism noted above, the Second Circuit in Rose quoted the following legislative history:

There are literally thousands of public employee retirement systems operated by towns, counties, authorities and cities in addition to the state and Federal plans. Eligibility, vesting, and funding provisions are at least as diverse as those in the private sector with the added uniqueness added by the legislative process. For this reason the Committee is convinced that additional data and study is necessary before any attempt is made to address the issues of vesting and funding with respect to public plans.H.R.Rep. No. 533, 1974 U.S.Code Cong. & Ad. News at 4647. See also Feinstein v. Lewis, 477 F.Supp. 1256, 1261 (S.D.N.Y.1979) (purpose of ERISA governmental exemption was to “refrain from interfering with the manner in which state and local governments operate employee benefit systems”), aff’d, 622 F.2d 573 (2d Cir.1980).

Factors That Should Not Be Relied Upon

First, as has been noted in a previous article, governmental plans are not required to file Form 5500’s. Nonetheless, one cannot rely upon the absence of filing history as determinative. Some entities file that should not, and other fail to file that should. Second, State statutes and regulations may suggest a plan has governmental status, but inasmuch as ERISA coverage is a federal statute, the scope of the exemption must be determined by federal law. A recent case, McMurtry v. Aetna Life Ins. Co., 2006 WL 2640627 W.D.Okla. (September 13, 2006), provides a good example of this issue. Though the hospital entity in that case was deemed subject to the protections of the Oklahoma Governmental Tort Claims Act, the district court emphasized that that previous finding had no bearing on the ERISA exemption question.

Defining the Governmental Plan: A Framework For Analysis

McMurtry v. Aetna Life Ins. Co., provides an excellent collection of authorities on the exemption and applies the analysis in one of the more typical and challenging contexts – the operation of a regional hospital authority. As noted by the Court in Crosby v. Hosp. Auth., 93 F.3d 1515, 1524 (1996), courts have had difficulty defining the exact nature of hospital authorities. As public purpose authorities, hospital authorities “are unique entities, lying somewhere between a local, general-purpose governing body (such as a city or county) and a corporation.” Thus, the analysis in McMurtry supplies a valuable assessment of the scope of the exemption in the context of a complex organizational framework. The facts were as follows:

1. In 1969, a public trust, Norman Regional Hospital Authority (Authority), took control of the Norman Regional Hospital which was original established by the City in 1946.

2. In 1970, the City of Norman leased the hospital to the Authority.

3. The Authority has also purchased additional land on which additional buildings were built so that a portion of NRH was owned by the City of Norman and leased to the Authority and a portion was owned by the Authority.

4. The City of Norman is the sole beneficiary of the trust. The Trustees of the Authority are appointed by the Mayor of the City of Norman with the approval of the City Council.

The issue before the Court was alleged breach of contract and bad faith which, were the plan an ERISA plan, would be preempted. The district court relied heavily on Seventh Circuit in Shannon v. Shannon, 965 F.2d 542, 547-48 (7th Cir.1992):

The Court finds the test utilized by the Seventh Circuit provides the most appropriate means to resolve the matter. That test relies upon a methodology developed “to determine if a particular entity is a governmental subdivision, agency or instrumentality under the NLRA and the LMRA” Shannon v. Shannon, 965 F.2d 542, 547-48 (7th Cir.1992). The test comprises two prongs, only one of which need be satisfied. The entity is a political subdivision if it is “ either (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.” Id. at 548, quoting NLRB v. Natural Gas Utility District of Hawkins County, Tennessee, 402 U.S. 600, 604-05 (1971). In applying this test, the courts examine the manner in which the entity was formed, to whom it reports, who has the ultimate control of the entity, how the entity’s employees are paid and whether they are entitled to the protections afforded other governmental employees.

The Court then undertook a factor by factor analysis drawn from the caselaw bearing on the issue. The factors are as follows:

Factor #1: Pedigree of A Governmental Entity- Was the entity created by a public entity? In the McMurtry case, the City created the NRH, so this factor weighed in favor of the exemption.

Factor #2: Public Accountability – To what extent is the management and control of the entity subject to review by public officials? In McMurtry, the Trustees of the managing entity, the Authority, were appointed by the City, and could be removed by the public officials, thus providing “indicia of being a governmental entity”.

Factor #3: The Power of Eminent Domain – The Authority lacked the power of eminent domain which the court noted was important in NLRB v. Natural Gas Utility District of Hawkins County, Tennessee, 402 U.S. 600, 604-05 (1971). (the gas utility district was delegated such authority :”This delegation includes the power of eminent domain, which the District may exercise even against other governmental entities.”)

Factor #4: Records Open To The Public – Are the entity’s records open to the public? Also important in Natural Gas Utility as factor, this was not the case with the Authority.

Factor #5: Employees Covered by Civil Service Protections – Are the entity’s employees subject to civil service protections? The McMurtry court stated: “The employees are not covered by civil service protections, are not hired by the City and are not subject to the same pay scale as City employees. In this regard, NRH is similar to the Truman Medical Center which was found to be a private entity.” citing, Truman Medical Center, Inc., v. NLRB, 641 F.2d 570 (8th Cir.1981)

Factor #6: Separateness of Employees and Their Payroll – May the employee plan participants look to a public source in the event of a shortfall in benefit funding? The Court noted that: “The separateness of the employees and their payroll was an important fact in Brock v. Chicago Zoological Society, 820 F.2d 909, 913 (7th Cir.1987), where the court found the entity to be private.” This factor militated against a finding of governmental status in McMurtry.

Factor #7: Source of Funding – Is public money used to fund the benefits under the plan? On this point, the Court stated: Here, the plan is privately funded, as the premiums for the plan are paid with funding which comes solely from funds earned by NRH. There is no evidence public money is used to fund or support the plan.

Ultimately, the Court determined that the plan would not constitute a governmental plan, stating:

The private nature of the plan in question combined with the fact that employees of NRH are treated more akin to employees of a private entity than a governmental one outweighs the public ownership of the facilities and public accountability of the Trustees. Thus, the Court finds that the plan at issue was not established or maintained for the benefit of employees of a political subdivision, agency, or instrumentality of the State of Oklahoma. Consequently, the plan is not exempted from ERISA by the governmental plan exception.

Not All Factors Are Created Equal

The list of factors set forth above may convey a sense of parity that is not intended. The McMurtry court placed great emphasis on the status of the employees and the source of funding for their benefits. In evaluating these factors, the court observed that:

The Court notes that the fact the plan is not funded with public money and that the employees are more akin to private employees than public are sufficient facts in the Second, Fifth, and D.C. Circuits to preclude application of the “governmental plan” exception. See Roy v. Teachers Ins. & Annuity Ass’n, 878 F.2d 47, 50 (2d Cir.1989); Hightower v. Texas Hosp. Ass’n, 65 F.3d 443, 448 (5th Cir.1995); and Alley v. Resolution Trust Corp., 984 F.2d 1201, 1206 (D.C.Cir.1993).

Once A Governmental, Always A Governmental?

What is the proper result when a plan originally established as a governmental undergoes a change in plan sponsorship? This issue has arisen and received different answers. In a noteworthy case, the Fifth Circuit has held that the plan can lose its governmental status:

The Second Circuit has explained that Congress’ goals in enacting ERISA, coupled with federalism concerns, require that “when a pension plan has been established by a governmental entity for its employees and the governmental entity’s status as employer has not changed, the plan must be exempt from ERISA as a governmental plan.” Roy, 878 F.2d at 50 (emphasis added). It follows that, in order to protect employees of publicly operated pension plans, once a governmental entity relinquishes responsibility for providing a retirement plan to a private entity, that private entity operates or maintains the existing pension plan, or any newly created pension plan, subject to the provisions of ERISA. Hightower v. Texas Hosp. Ass’n, 65 F.3d 443 (5th Cir. 1995)

Note: For further information, the Department of Labor Advisory Opinions offer conclusions on a variety of fact patterns. For example, see ERISA Advisory Opinion 2005-07A, ERISA Advisory Opinion 2004-01A and ERISA Advisory Opinion 2002-11A.

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