There is a long legal history in California of school districts paying for compliance type services, it started back in 1974 with an AG Opinion (all are below). This opinion (see section 5. Service charges) refers to what was originally Ed Code Section 13009 and is now Ed Code Section 44041, it stated:
"The governing board of each school district when drawing an order for the salary payment due to employees of the district shall, without charge, reduce the order by the amount....."
The key term here is "without charge," the AG found that this term "reflects a distinct legislative determination that school districts must themselves bear the administrative costs of providing tax-sheltered annuities to their employees"
All of this came to a head again in 2002-03 when another TPA decided that they would begin charging vendors for their compliance services, this led to a big fight that eventually was once again resolved by an AG Opinion, issued by Bill Lockyer and Gregory Gonot on February 18th, 2004, No. 03-1005 (below). The question posed was:
"In light of a school district's broad authority to conduct its programs and activities, may a school district assess a fee upon providers of deferred compensation plans to cover its costs of administering the plans for district employees?"
The conclusion was the same as the 1974 opinion:
"Even though a school district has broad authority to conduct its programs and activities, it may not assess a fee upon providers of deferred compensation plans to cover its costs of administering the plans for district employees"
Thus it was once again established the vendors could not be charged. This would not be the end though.
When the IRS issued new proposed 403(b) regulations in 2004 it was clear that the school districts and public employers where going to have to spend more money on compliance as the compliance duties would be much heftier than in the past where they mostly collected money and remitted it. This led to Assembly Bill No. 2462 that was passed in 2006 that did several things:
Created new disclosure laws for all Third Party Administrators (most of which are not following them)
Allowed CalSTRS to create a Third Party Administrator
Changed Ed Code 44041 to allow employers to pass the cost of compliance onto the employee
A few things are important to understand in this legislation (which is also below)
Ed Code Section 24953 (g) reads as follows:
"The cost of providing administrative or compliance services pursuant to this section shall be deemed to be a cost incurred by the employer and subject to subdivision (b) of Section 44041 or subdivision (b) of 87040"
So what does 44041 say?
Ed Code 44041(b) was changed to read:
"For purposes of a deferred compensation plan authorized by Section 403(b) or 457 of the Internal Revenue Code or an annuity
program authorized by Section 403(b) of the Internal Revenue Code that is offered by the school district which provides for investments in corporate stocks, bonds, securities, mutual funds, or annuities, except as prohibited by the California Constitution, the governing board of each school district when drawing an order for the salary payment due to an employee of the district shall, with or without charge, reduce the order by the amount which it has been requested in a revocable written authorization by the employee to deduct for participating in a deferred compensation plan or annuity program offered by the school district. The governing board shall determine the cost of performing the requested deduction and may collect that cost from the organization, entity, or employee requesting or authorizing the deduction. For purposes of this subdivision, the governing board of a school district is entitled to include in the amounts reducing the order the costs of any compliance or administrative services that are required to perform the requested deduction in compliance with federal or state law, and may collect these costs from the participating employee, the employee's participant account, or the organization or entity authorizing the deduction."
The key phrase changed was from "without charge" to "with or without charge." This changed allowed employers to charge employees for compliance (assuming they could work it out with Labor). However, the law says even more, in to places it states the following:
"The governing board shall determine the cost of performing the requested deduction and may collect that cost from the organization, entity, or employee requesting or authorizing the deduction."
"For purposes of this subdivision, the governing board of a school district is entitled to include in the amounts reducing the order the costs of any compliance or administrative services that are required to perform the requested deduction in compliance with federal or state law, and may collect these costs from the participating employee, the employee's participant account, or the organization or entity authorizing the deduction."
Many TPA's are jumping on this language to claim that something regarding charging vendors (whom are not listed) is now allowed by law. They are claiming that the terms "organization or entity" refer to vendors or deferred compensation providers. While it is not entirely clear why these extra words were added, it is important to read the entire sentence. Again, the sentence reads "....may collect these costs from the participating employee, the employee's participant account, or the organization or entity authorizing the deduction."
So, the employee can pay via their paycheck or via their 403(b) account, however it does not say that the vendor can pay, the sentence ends with "entity authorizing the deduction." Who is the only entity that can authorize a payroll deduction? The employee. A vendor cannot authorize a payroll deduction, in fact the employer cannot even authorize a salary deduction unless it is first authorized by the employee (which is why there is no Auto Enrollment in California). Regardless of the language saying "organization or entity" there is no other entity that may authorize a deduction other than the employee. That is it, this bill didn't expand the law to allow employers to charge vendors. If it did, it would have specifically mentioned them, it doesn't.
But wait, there is more, yet another AG Opinion, this one (which I refer to as the FBC Opinion) was issued by AG Ed Brown and Deputy AG Taylor Carey on August 25th, 2008, No. 06-408 (below). This opinion asks about preferred providers and whether school employees can receive commission (they cannot) from 403(b) vendors. But it also states the following:
"With respect to 403(b) plans in particular, the Education Code provides that a school district, as an employer, may offer 403(b) plans to, and collect the costs of regulatory compliance and administrative services from, it participating employees"
In section 2. Compensation for Promotion, it states:
"Before Assembly Bill 2462 was passed, school districts were not allowed to charge employees for the administrative costs and other expenses associated with processing 403(b) plans. In recognition of sharply increasing administrative burdens on school districts that offer 403(b) plans, AB 2462 gave school districts the authority to recover the costs associated with 403(b) transactions."
It goes on to cite Ed Code Section 44041(b).
In my professional opinion (I am not a lawyer) the law has not changed around whether a vendor can be charged for compliance services relating to a 403(b) plan. AB 2462 did not change this, nor did the most recent AG Opinion.
So the question must be asked...why are TPA's in California telling school districts that they can pass their fees onto the vendors and citing state law and AG Opinions that do not support doing any such thing?
Perhaps they think the districts won't check out what they are saying or perhaps the TPA's don't understand what they are reading.
If I'm wrong on this, great, but somebody needs to show me the progression and prove to me that I'm wrong.
At least two TPA's are currently charging vendors or plan on charging vendors in California, how are they getting away with it?
I believe they are doing it with a wink and a nod. They are saying to the vendors "You must pay us, but we are not charging YOU, we are charging the employees account (which is legal), but if you can't arrange for the debit from their account, you can pay the fee on behalf of the participant." The TPA then excludes vendors who cannot arrange or won't pay the costs.
There you have it, the full history and examination of how the 403(b) compliance is paid for in California, along with all the documentation.....review and decide for yourself.
Original 1974 AG Opinion
AG Opinion 06-408 (the FBC Opinion)
200403-1005 Lockyer AG Opinion