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Sunday, July 29, 2012

School district not liable for losses suffered by employees participating in its Tax Deferred Annuity Plan


School district not liable for losses suffered by employees participating in its Tax Deferred Annuity Plan
Elmira Teachers' Assn. v Elmira City School Dist., 53 AD3d 757

The Elmira City School District offered its employees an opportunity to participate in a Tax Deferred Annuity Plan pursuant to Section 403(b) of the Internal Revenue Code. The District designated Horizon Benefits Administration, Inc. to act as the third-party administrator of the District's plan. Employees electing to participate in the program, which was voluntary, entered into a salary reduction agreement (SRA) with the District authorizing moneys to transferred to a custodial bank where the funds were then distributed to various vendors of investment products selected by the participants.

In addition to serving as the Plan’s administrator, Horizon offered an “investment option” known as ChoicesUnlimited to participants that gave them access to various mutual funds.

As the result of an investigation by the Ohio Attorney General, Horizon's assets were frozen and the company was eventually liquidated. District employees who had elected to participate in Horizon's ChoicesUnlimited investment account lost money while those electing other investment vehicles processed by Horizon did not suffer any similar loss.

The Teachers’ Association and four teachers that had lost money then sued the District for “breach of contract and breach of the implied covenant of good faith and fair dealing, breach of fiduciary duty, negligent retention, negligent supervision and negligent misrepresentation.”

The School District moved to have the lawsuit dismissed, contending that the “hold harmless provision” in the SRA controlled. The “hold harmless” provision relied upon by the District provided that "[t]he Employee agrees that the Employer shall have no liability whatsoever for any loss suffered by the Employee with regard to his [or her] selection of an insurance company or mutual fund, or the solvency of, operation of, or benefits provided by said insurance company or mutual fund company".*

The Appellate Division agreed with the District, noting that the “hold harmless” provision was clear and unambiguous, and clearly intended to encompass a situation where the plan participants who lost money did so because they selected a particular investment option offered by Horizon in its capacity as a vendor of investment products rather than some other investment vehicle.

The court found it significant that “there is no evidence that the plan participants who selected alternative investment options and deposited their money in funds offered by other vendors suffered losses as a result of Horizon's liquidation even though it was the overall plan administrator.” Accordingly, the Appellate Division concluded that “the hold harmless provision is applicable and precludes [the Teachers’ Association] from asserting causes of action against [District] arising from Horizon's ultimate liquidation.

* See, also, Meirowitz v Bayport-Bluepoint Union Free School Dist., 57 AD3d 858, in which the Appellate Division that a “save harmless clause” barred employees and retirees from recouping Tax Deferred Plan investment losses from the school district.

Comment: Education Law Article 8-c, Special Annuity, addresses tax deferred annuity programs available to certain employees of the State and political subdivisions of the State. Section 299.2, in pertinent part, provides: Neither the state, or a political subdivision thereof, nor an employer shall be a party to any annuity contract purchased or custodial account established in whole or in part with payments pursuant to said agreement, and no retirement, death or other benefit shall be payable by the state, or political subdivision thereof, or by an employer under such agreement or such annuity contract or custodial account.

The Elmira Teachers’ Association decision is posted on the Internet at:

The Meirowitz decision is posted on the Internet at:

Handbooks focusing on State and Municipal Public Personnel Law continue to be available for purchase via the links provided below:

The Discipline Book at http://thedisciplinebook.blogspot.com/

A Reasonable Penalty Under The Circumstances at http://nypplarchives.blogspot.com

The Disability Benefits E-book: at http://section207.blogspot.com/

Layoff, Preferred Lists at http://nylayoff.blogspot.com/

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