E as in ERISA

Even a very good questionnaire will not provide you with everything that you need in order to make those determinations (unless you ask for a lot of attachments with organization charts and additional info about voting rights, familial relationships, etc.). Review and analysis of those attachments could become a project in itself. Unless you are charging for that determination, I would put the onus on the client. I would ask the client whether it has made a determination of what companies are in its controlled group or under common control or in an ASG. I would also ask for information about what other plans are sponsored by members of the group. (The client's application for determination should include answers to those questions. You could ask for an update to the information filed in the application).

In order for the merger to be effective as of that date, both the plan and the trust documents should be properly amended to reflect the merger. If the trustee of Plan Y legally has control of the former Plan X assets as of the effective date, it may not matter where the contributions are sent. (But you need to confirm with legal counsel that this will work. Sometimes a new institutional trustee will be wary about what responsibility it has for assets that are not in its custody. It will not want deposits to go to the old trustee's custody). But why do they want to do this anyway? If they continue to make deposits, won't they be interfering with the recordkeepers ability to finalize the records for Plan X and therefore won't they be further delaying the transfer process?

Regulations Section 1.401(a)(4)-4(e)(3)(iii)(G) provides that the following are benefits, rights and features subject to general nondiscrimination requirements: "The right to each rate of allocation of matching contributions described in Sec. 1.401(m)-1(f)(12) (determining the rate using the amount of matching, elective, and after-tax employee contributions determined after any corrections under Secs. 1.401(k)-1(f)(1)(i), 1.401(m)-1(e)(1)(i), and 1.401(m)-2©, but also treating different rates as existing if they are based on definitions of compensation or other requirements or formulas that are not substantially the same)." The references are to the matching contributions determined after correction for excess contributions under the ADP test and excess aggregate contributions under the ACP (and the last was for the multiple use test). Section 402(g) excess deferrals are not mentioned there. Which section makes 402(g) excess deferrals subject to nondiscrimination requirements?

I didn't think that refunds of excess deferrals created a discriminatory rate of match under the BRF regulations under 401(a)(4).

Go to the EEOC or legal counsel.

If the plan had been a huge success with employees, then the employer would generally not terminate it even if it was an administrative burden. So there probably are other "business reasons" like lack of interest by employees that you could cite in addition to the administrative burden.

You have to be careful with catchups and the impact on the ADP test. If the plan imposes a limit on HCEs, then the HCEs over 50 might all be able to make catchups without impacting any other HCEs contributions. Catchups that are a result of an employer provided limit are not considered in the ADP test. However, if the plan does not specifically limit the HCEs, then lower paid HCEs who contribute an extra $1,000 over the "suggested" HCE percentage might actually impact the ADP test. The extra $1,000 might end up getting distributed from a higher paid HCEs account as an excess contribution, due to the dollar leveling method.

I hadn't noticed before. But now that you point it out, I think that this is more than a simple typo at the end of Q&A 20 (a)(2) From the examples, I think that they are trying to exempt two situations from both the five year/level amortization rules and the maximum loan amount rules of refinancings: (1) A refinancing where the replaced loan is amortized over the permissible term of the replaced loan and the additional amount is amortized over a new 5-year term starting at the date of refinancing ($2907 for 16 and $406 for 4), and (2) A refinancing where both the replaced loan and the additional amount are amortized over the permissible term of the replaced loan ($2990 for 16). However, that is not what the preamble or Q&A 20 says. The preamble first indicates that you can use either of those methods to satisfy 72(p)(2)(B) and © (the five year and level amortization rules). But then it says if any portion of the loan extends beyond the permissible term of the replaced loan, then you must add the prior loan and replacement loans together (for the 72(p)(2)(A) maximum loan amount). (I'm reading "refinancing loan" to be the entire amount of the replacement loan -- both replaced loan and additional amount -- based on the statement "to the extent the refinancing loan exceeds the prior loan amount"). I read paragraph (a)(1) of Q&A 20 to say that you can apply (B) and © (the 5 year and level amortization rules) separately to the replaced loan and the additional loan amount, but that you apply (A) (the maximum loan amount) collectively to the replaced loan and the replacement loan. As you both indicate, paragraph (a)(2) seems to be internally inconsistent....However, I could read so that the two exceptions are: (1) A refinancing where the replaced loan is amortized over the permissible term of the replaced loan and the additional amount is amortized over a new 5-year term starting at the date of refinancing BUT ONLY IF the total of the replaced loan and the replacement loan is less than the maximum loan amount, and (2) A refinancing where both the replaced loan and the additional amount are amortized over the permissible term of the replaced loan. (Similar to what the preamble says). (And when I look back at the 2000 proposed regulations now, the same issues surface...) Are there really different exceptions for the (A) maximum amount limits and the (B)/© 5 year/level amortization rules....so that you don't have to add the replaced loan and the replacement loan together if you stay within the five year term, but you do have to add them together if go beyond the five years for even a small additional amount? That is not what the examples say!

And even then, we only use them on loans that are created on or after that date.

The terms used for administration of the plan on a payroll by payroll basis may sometimes be different than the terms used for testing at the end of the year. The definition of compensation or earnings that is used when the employee completes the election form is not necessarily the same as the definition of "Compensation" in the plan. You may be okay provided you have not technically violated the terms of the plan or the code when it comes to total allocations and testing for the year. For example, I think that the IRS has informally indicated that deferrals do not need to be stopped when the participant's salary has reached the 401(a)(17) limit for the year.

You can also try: http://www.benefitslink.com/taxregs/rmd2002final.pdf

I don't think that we are going to come to agreement on this. I think that the prudence requirements apply when the fiduciaries effect the decision to eliminate all participants' rights to direct their accounts into a broad array of investments. I don't think that it's a question of whether to apply due diligence -- only how much. And it's not only a question of whether or not to eliminate the options -- but also what time period should be involved, etc. In today's market in a plan that has a variety of investments that have incurred various percentages of losses, fiduciaries might deem it prudent to allow participants a window of one or three or six or twelve months to research how they would like to re-invest the proceeds and to dispose of the former investments. I understand that fiduciary responsibilities are observed at the plan level -- as they apply to all participants generally and not particular participants. The fiduciaries will be looking at the issues from an overall plan perspective. But although only one participant is balking, it may be that many participants were invested in risky investments that have suffered large losses. Or it may be that the participant has an exceptionally large balance (e.g., that he rolled a lot of money into the plan to take advantage of a brokerage window). The fact that one participant has balked only means that at least one participant will be very unhappy with this decision and may pursue litigation.

It's not clear, but I thought he worked for Company A ("less than 500 hours") and terminated there.

I would think that the employer would want to consider the fiduciaries' responsibilities and allow them to perform any necessary due diligence before executing those amendments (especially since many times the employer and/or its officers and its employees have fiduciary responsibilities). I can't tell you whether it's prudent to eliminate these investments or not -- prudence is a process not a conclusion.

I thought that in a stock sale, service is generally counted. In an asset sale, service is only counted if the successor employer maintains the plan.

You need to understand the form of the company transaction and plan transaction, and what the documents say.

So, for the sake of the person originally posting the question, would anyone disagree with the statement: Even if the plan sponsor amends the plan to eliminate the investment options, any fiduciaries should observe prudence and diligence standards before following the terms of the plan document and disposing of the investments? (Or is this just another unreliable post on this message board by someone who doesn't understand fiduciary liability?)

Ironically, today’s Benefits Buzz has a link to an article by Fred Reisch in Plan Sponsor re-iterating that “ERISA Section 404(a)(1)(D) requires that fiduciaries override the terms of a plan document if it would be imprudent to follow them.”

I recognize the DOL's brief in Enron stretches the law in many way. But the DOL's comments are still worth considering in this context. They indicate that "settlor" protection may not always be claimed in matters involving plan investments: "Defendants assert...that Plaintiffs do not challenge their discretionary acts as fiduciaries, but rather, challenge the design of the plans themselves and the acts of the plan settlers who wrote the plans' provisions. As discussed below, Defendants' argument is without merit. The investment and management of plan assets is inherently a fiduciary activity subject to ERISA's fiduciary duties. See ERISA § 3(21), 29 U.S.C. § 1102(21), (defining a fiduciary as a person who exercises any authority or control respecting management or disposition of plan assets). Moreover, in most instances, the plans did not require the Defendants to engage in the challenged conduct. Even where the plans arguably mandated Defendants' actions, ERISA § 404(a)(1)(D), 29 U.S.C. 1104(a)(1)(D), FORBIDS FIDUCIARIES FROM FOLLOWING THE PLAN DOCUMENTS IF DOING SO WOULD BE BE IMPRUDENT OR OTHERWISE VIOLATE ERISA." (emphasis supplied). Accordingly, even if the sponsor amends the plan, any fiduciaries should observe the fiduciary requirements such as prudence/due diligence before effecting any plan provisions involving investments or investment management. I'm not saying a fiduciary will lose if they don't, just that it might be a lot easier to win...

Doesn't "prudence" mean exercise of "due diligence"?

I think that I understand vicarious liability. What one does to protect oneself against vicarious liability is perform "due diligence." I think that the bottom line is that employer's should have processes in place for decisions that potentially involve any fiduciary liability: E.g., conduct a meeting to discuss the issue, get advice from experts (investment, legal, etc., as applicable), perform any necessary research, analyze information obtained, weigh the alternatives, and then make a decision. The amount of time spent depends on the risk. The amount of due diligence performed in this case may depend on whether the participant has $5,000 or $1,000,000 in his account. I would note that if the risky investment increases after the employer in value after it was eliminated, then the employee could sue the fiduciary for curtailing it. In either case, whether the employee wins or loses depends in part on what "due diligence" the employer performed in making the decision.

Q&A 6 of the 72(p) regulations clarifies that the loan doesn't have to be secured by the residence. I'd look more into whether you qualify under (I). I'd look at Regs. Sec. 1.163-8T and 1.163-10T.

I don't think that Lockheed v. Spink answers every question about plan amendments. I think that the focus in that case is on the benefit structure. I'm not aware that the conclusion in that case has been applied in one involving investment decisions. In fact, one might argue that Lockheed could be used to support the proposition that this is an fiduciary function -- I believe it notes that management of plan assets is a fiduciary function. (Nothing to hang one's hat on, but worth noting) When it comes to matter such as choosing the trustee and the investment manager and identifying the investments, I don't think a sponsor can absolve itself of all fiduciary liability simply by naming them in the document and claiming it was a "settlor" function. (Although I totally agree that one should do the most one can to get them characterized as "settlor" in order to preserve that argument). Assuming the fiduciary rules apply, if investments are risky and happen to be valued very low right now, then it may not be "prudent" to force them to be sold right now -- it may be better to protect against large losses by allowing the participant to ride them out for some period of time. An employer is not required to oblige a single participant, but it is hindered by the fact that its predecessor allowed such investments in the first place and now it must consider what is the most prudent path for eliminating them from the plan. When a plan is switching between investment advisors and funds, call me crazy but I would actually recommend that the employer give consideration to keeping all old and new investments open for at least some period of time. I'm not saying that it actually has to decide to do that, only that prudence requires that it give equal consideration to that alternative and have a good reason for not doing so (e.g., that "mapping" is adequate to prevent large losses).

I agree that the goal is to have certain actions characterized as "settlor" as opposed to "fiduciary," if possible. And therefore it is advisable to take action at the appropriate corporate level (e.g., the board) and in the appropriate format (e.g., the plan document) in order to be able to argue that the activity is a "settlor" one. Legal counsel should be consulted to assist in taking the proper action. There are many lawsuits over investments. The question of where to draw the line between "settlor" and "fiduciary" has not been answered definitively -- it seems to be one of the biggest concerns of the day. (And management of plan assets is a typical fiduciary function.) So I think that fiduciary-type due diligence should also be performed even if the "settlor" amends the plan to eliminate investment options.

I didn't think that these arrangements were common (where employers forced employees into a health plan when they couldn't prove they had other coverage). I don't think it will affect many. It was technically incorrect for an employer to treat these premiums as pretax when there was no choice between cash and the health insurance. So employers would have been forced to treat those who are making the choice (because they have other coverage) different than those who are not making the choice (because they don't have other coverage). As you note, any employer that did have this type of plan would probably have overlooked the difference and would have erroneously treated these as 125 dollars, which would have created qualifications issues for their plan (because testing compensation would have been wrong). This ruling simply allows the monies to be treated as pre-tax without risking disqualification. Employees do not have to be disadvantaged by this ruling -- because 415©(3) compensation does not have to be used for allocation purposes. The "deemed 125 contributions" can be added back for purposes of the definition of compensation used for allocations. The recent Rev. Proc. allows extends the period for making this amendment.