Plan sponsor taken off 403(b) lawsuit, advisor isn’t so lucky

A plan sponsor was spared from a 403(b) lawsuit, but the advisor is still on the hook.

Two plaintiffs filed a complaint in Texas federal court against their employer, Legacy Counseling Center, Inc. the plan’s manager, Peveto Financial Group, LLC. The court recently ruled that the plaintiffs have standing to bring the suit, but Legacy is exempt from ERISA in this case. Peveto, won’t be held liable for IRS corrective damages, yet could still be on the hook for not permitting wider plan participation if they are found to be a fiduciary.

The lawsuit claims that Legacy sponsored a 403(b) plan managed by Peveto Financial.  The plan only allowed “high-level” employees to participate, but not “rank-and-file” employees. That violated the “universal applicability” rule found in Internal Revenue Code 403(b)(12)(A)(ii) since the plaintiffs worked 20 or more hours per week.

Legacy argued that it was exempt from ERISA since the plan wasn’t covered under ERISA. 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 in 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 financial advisor claimed it wasn’t a plan fiduciary and merely provided investment advice, and was therefore also not liable under ERISA. The judge found that there was a factual dispute, because of one-on-one consultations with participants and Peveto also collected a fee every time a participant enrolled.

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