Court Dismisses 403(b) ERISA Claim Against Employer, But Not the Plan’s Adviser

The sponsor, a Texas counseling service, was protected by a safe harbor provision, but the adviser might not be so fortunate.


In December 2020, Robert Roton and Jacqueline Juarez filed a complaint in the U.S. District Court for the Northern District of Texas against their employer, Legacy Counseling Center, Inc.—a mental health center that provides counseling for people with HIV and treatment for substance addiction—and the plan’s manager, Peveto Financial Group, LLC. Both businesses are based in Texas.

The court filed a partial order on December 29, 2022, ruling on summary judgment motions from both defendants. District Judge Brantley Starr ruled that the plaintiffs have standing to bring the suit, but Legacy is exempt from the ERISA requirements in this case. Peveto, on the other hand, cannot be held liable for IRS corrective damages, yet can still be held liable for not permitting wider plan participation if they are found to be a fiduciary.

The 2020 suit alleged that Legacy sponsored a 403(b) plan managed by Peveto Financial but only permitted “high-level” employees to participate, denying the opportunity to “rank-and-file” employees. The suit alleged that this violated the “universal availability” rule found in Internal Revenue Code 403(b)(12)(A)(ii). The plaintiffs alleged that they have a right to participate in the plan, and this participation opportunity must be offered at least once per year to employees who work 20 or more hours per week.

According to the initial filing, Roton lost out on $231,500, and Juarez lost $58,347.17 in hypothetical contributions and IRS mandatory corrective earnings to offset opportunity cost from lost investment revenue.

Peveto had argued that the plaintiffs did not have standing because recovery of this kind can only be for a plan itself, not for individual participants. Starr rejected this argument and said that standard would only apply for a defined benefit plan, not a defined contribution plan, because DC plans are invested on an employees’ behalf at the employees’ risk.

Peveto also argued that IRS corrective payments are extra-contractual damages, and Starr agreed that these payments are an administrative correction done voluntarily to avoid IRS penalties, not a remedy guaranteed by law.

Legacy argued that it should be exempt from the ERISA violations alleged, and Starr agreed. An employer is exempt from ERISA requirements related to a 403(b) plan if it meets certain criteria, including: participation in the plan is voluntary; employer involvement the products available to participants; and the employer receives no compensation except that which is used to offset the costs associated with payroll deducting.

The court found that Legacy was indeed in a safe harbor, based on these criteria.

Peveto asserted it was not a plan fiduciary and merely provided investment advice, and was therefore also not liable under ERISA. In a motion for summary judgment, facts must be read in the light most favorable to the other party, in this case the plaintiffs. Starr found that there was a factual dispute, and one-on-one consultations with participants. Peveto also collected a fee every time a participant enrolled. Since these facts are contested, the case must continue for Peveto.

The two defendants, Peveto and Legacy, also did not agree on who administered the plan, which Starr’s ruling called a game of “high stakes hot potato.” Since Legacy is in a safe harbor, it would not necessarily matter if it was responsible for administration, but since Peveto is not, administrative responsibility could suggest it was, in fact, a fiduciary and therefore liable under ERISA.

Starr did not rule on Peveto’s fiduciary status, only ruling that there is a dispute to be adjudicated at a later point.

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