Governmental plans are Exempt from PBGC coverage

Governmental plans are exempt from PBGC coverage under the ERISA. Opinion letter 96-3 gives guidelines from the ERISA section (4021)(b)(2) for determining if an organization is a government employer.

The PBGC letter relays that that there are 5 general factors in determination, “(i) whether the plan or plan sponsor is controlled by a government entity, (ii) whether officers or members of the plan represent, or are selected by, a government entity, (iii) whether the plan or the plan sponsor is funded by a governmental entity, (iv) whether the plan’s participants are considered to be government employees, (v) whether the plan sponsor is treated under state or federal law as a governmental entity, (vi) whether there are any private interests involved, and (vii) whether a governmental entity has the powers and interests of an owner.”

In section 4021(b)(2) the ERISA states, “There is no definitive statutory or regulatory definition of the term ‘governmental instrumentality.'” This lack of a concrete boundary causes confusion for organizations in regard to governmental exemptions.

In opinion letter 96-2, a California case is in discussion. The conflict pertains to the company’s directors, who are not public agencies, but who affiliate the organization as a governmental one.

The PBGC recognizes that the state of California possesses substantial authority over the company and that the state has final veto-power over any potential changes in the company. Because the state of California has so much power in the structure of the company, the PBGC grants the company the title of a governmental entity. The organization is exempt from coverage.

In opinion letter 98-2, a corporation running a city transit system is in discussion. The corporation argues that they are in contract with the city and therefore the corporation is a government instrumentality, which makes them exempt from coverage.

Although the corporation runs the “public enterprise” that the city owns, the contract between the city and the corporation does not hold the city liable to the plan or active plan participants for unfunded benefits. This lack of accountability on the city’s behalf directly puts the weight of the plan on the corporation’s shoulders.      The contract also implies that the corporation is in charge of compensation, discipline and day-to-day functions. Due to the corporation’s heavy hand in their own affairs, the PBGC does not recognize the corporation as being a governmental entity and therefore are not exempt.