Use of Qualified 401(a) Governmental Plan Assets to Indemnify Gov’l Employees/Directors

[Kate Belyayeva]

Would it be a problem under any federal law (e.g., IRC 401(a)(2) Exclusive Benefit Rule, IRC 503 prohibited transaction rules…) for a qualified 401(a) governmental plan to add a provision to its plan (and 501(a) trust agreement) to provide for indemnification of the board members and employees who administer the plan against liability (except in the cases of willful or wanton conduct, gross negligence, and gross malfeasance), with such indemnification to be payable from its plan assets. Assume that there are no state law issues to consider (focus is on federal law). Of course, since it’s a governmental plan, it is exempt from ERISA. Any specific or general thoughts would be greatly appreciated. Thanks!

[Carol V. Calhoun]

I would indeed expect it to be a  401(a)(2)  problem.  It would mean that if the board members were just negligent (not grossly so), then any liability would end up being paid by the very plan that suffered from the negligence.

[EGB]

Hi Carol - Do you think a governmental 401(a) plan can pay for fiduciary liability insurance premiums from plan assets? I believe it could, but I wonder about whether the insurer would need to have recourse against a covered individual who breached a fiduciary duty (similar to ERISA 410, yet understanding that ERISA does not apply). Of course, if the insurer would need to have recourse, then the insurance is not much help to the person who breached (which is one of the primary reasons to have the insurance in the first place).