Peter Gulia

Elective deferrals under a § 457(b) plan with a matching contribution under a § 401(a) plan is a common design (if the governmental employer has sufficient authority under State law). I have never seen it done as money-purchase plan. Governmental Plans Answer Book suggests (at Q 6:26) that stating a plan as a money-purchase plan might impose a tax-law funding requirement to the extent needed for the plan’s benefit to be sufficiently determinable under 26 C.F.R. § 1.401-1(b). But a governmental plan stated as a profit-sharing plan (with no § 401(k) arrangement) has no Internal Revenue Code funding requirement. I’m unaware of a good reason for a governmental employer to self-impose any more funding requirement than State law commands. Under Internal Revenue Code § 401(m)(4)(A)(ii), a matching contribution includes one made to any defined-contribution plan on account of an elective deferral, which under IRC § 401(m)(4)(B) “means any employer contribution described in section 402(g)(3).”

Consider these interpretive rules: “[T]he plan administrator of an employee benefit plan subject to the provisions of part 1 [of subtitle B] of title I shall furnish a copy of the summary plan description . . . to each participant covered under the plan (as defined in § 2510.3-3(d))[.]” 29 C.F.R. § 2520.104b-2(a) https://www.ecfr.gov/current/title-29/subtitle-B/chapter-XXV/subchapter-C/part-2520/section-2520.104b-2 “An individual becomes a participant covered under an employee pension plan” no later than “[t]he date designated by the plan as the date on which the individual has satisfied the plan’s age and service requirements for participation[.]” 29 C.F.R. § 2510.3-3(d)(1)(ii)(A)(2) https://www.ecfr.gov/current/title-29/subtitle-B/chapter-XXV/subchapter-B/part-2510/section-2510.3-3#p-2510.3-3(d) If a statute is ambiguous, a court defers to the agency’s notice-and-comment rule if the rule’s interpretation is permissible. Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (June 25, 1984).

If your firm is owed an amount for work you completed, consider whether you want to submit your claim. Not submitting a claim promptly might time-bar it. If the employer/sponsor is or was a business organization, there might be persons beyond the decedent with some authority to act for the business organization. And the decedent’s executor, administrator, or other personal representative might have some authority to administer or wind up the business. Further, consider whether you do or don’t want to be available if a personal representative wants to engage you to prepare the outstanding information returns.

For everyone who graciously contributed to this discussion: After another conversation with me today, the JD student will refocus the paper’s topic to how a plaintiff’s attorney should recognize employee-benefits secondary effects of the lost employment or lower wages, and in settlement negotiations should seek more value to compensate the harmed worker for could-have-been retirement contributions and growth that an award of back pay alone might not completely restore. We thank you for your good help.

Even if ERISA and the plan’s governing documents do not otherwise preclude an adjustment of mistaken allocations, read (or suggest that your client’s lawyer read) the annuity contracts and custodial-account agreements. The employer/administrator might have no right and no power to unravel amounts credited under those contracts.

Consider (politely) reminding an independent qualified public account of the audit’s purpose. An audit might include some audit procedures designed to test whether the plan was administered according to the plan’s governing documents. An audit might include some audit procedures designed to evaluate whether the plan’s financial statements need a reserve for income taxes because the plan (i) did not meet the conditions for tax-qualified treatment, and (ii) had a net of taxable income after counting deductions, including those for distributions and for other proper expenses. Even if no reserve for income taxes is needed, an audit might include some audit procedures designed to evaluate whether the plan’s financial statements need a disclosure that the plan does not get tax-qualified treatment. But an ERISA § 103 audit is not a compliance-assurance engagement. The purpose is to report a finding about whether the plan’s financial statements are fairly stated. Even if a too-low interest rate might have made a participant loan a distribution, that might not always tax-disqualify the plan. Or if it does, the plan’s financial statements could disclose that the plan does not (or might not) get tax-qualified treatment. Doing so might help make the plan’s financial statements fairly stated. Even if a too-low interest rate might have made a participant loan a non-exempt prohibited transaction, a plan’s financial statements could report or note related-party and prohibited transactions. Doing so might help make the plan’s financial statements fairly stated. And considering that a too-low interest rate for some participant loans likely would not preclude a “clean” report that the plan’s financial statements are fairly stated, an auditor might consider some tolerance if the fiduciary furnishes a plausible explanation about how the fiduciary set the loan interest rate within the ERISA and Internal Revenue Code rules.

And at least some of the legal thinking seems to be from Jewell Lim Esposito, a respected employee-benefits lawyer.

Redcloud, just for background, the attachment is one page from my coursebook; it cites the leading cases for the settlor doctrine. Absent a court’s order, an employee-benefit plan’s administrator (or other fiduciary) administers the plan according to the plan’s governing documents. A written plan has primacy. Exceptions or variations are (i) ignoring a document’s provision to the extent that it is contrary to ERISA’s title I or title IV; (ii) ignoring or interpreting a provision to the extent that it is contrary to other Federal law; and (iii) interpreting a plan to include a provision ERISA’s title I or title IV commands. A written plan often states or suggests answers to questions such as: · whether back pay counts in compensation, as measured for one or more purposes; · whether the plan counts hours of service (or other measure of service) attributable to one or more periods for which back pay was awarded; and · how such a measure of service relates to measures for eligibility service, accrual service, and vesting service. A fiduciary’s duty to a retirement plan could include a duty to collect from an employer a contribution owing to the plan. A fiduciary’s duty to an uninsured (“self-funded”) health plan could include a duty to obtain an employer’s payment of a benefit the plan provides. ERISA Fiduciary Responsibility settlor doctrine.pdf

With no endorsement and no evaluation, here’s what that company says about its service. https://www.leadingretirement.com/solutions/cannabis-401k-plan

But the plan's administrator would keep in its records the employer's written announcements, right?

Redcloud (if you’re still reading this), Luke Bailey’s points are well taken. Our first conversation mentioned the legal distinction between an employer’s business decision-making and a plan administrator’s fiduciary responsibility, and a case that involved the distinction. (And we discussed another case that led to a big shift on how plans’ sponsor specify an essential provision of an employee-benefit plan.) I doubt your course on employment discrimination has even mentioned ERISA’s distinction between “settlor” and fiduciary decisions. We could cover it when we look at your draft of your outline. Thinking about how the terms of a negotiated settlement in an employment-discrimination case could affect obligations to or under not only retirement but also health and other employee-benefit plans might be an aspect of the employer’s and the plaintiffs’ negotiating positions. And once there is a judgment or settlement, some aspects of implementing it might come into a plan administrator’s fiduciary functions. Let’s check-in when you’re ready.

Luke Bailey, thank you for an intriguing idea. For a few service providers, I’ve designed non-discretionary claims-processing regimes—not only for hardship and unforeseeable-emergency claims, but also for other kinds. For some kinds, a sensitive issue is specifying which conditions result in a kick-out to a discretionary reader. In developing the method for deciding a hardship claim using what the IRS calls a “summary of information on source documents”, the IRS could have set an upper limit (for example, requiring a plan’s administrator to collect and consider source documents for a claim that would pay more than $nnn,nnn) but did not. See Internal Revenue Manual 4.72.2. Before presenting the memo at 2017’s TEGE conference, the IRS people had worked on this for at least 12 months. They knew recordkeepers would make system changes grounded on the memo. And they knew that for many plans tax law’s constraint is the only constraint. For a hardship claim (if it does not require a spouse’s consent) under a typical individual-account retirement plan, no person has a direct economic stake in denying a claim. The key restraint is a fear of losing the plan’s tax treatment. If a plan’s claims procedure is within what the IRS’s employees are instructed not to challenge, there might be little or no reason to seek discretionary decision-making. (I have seen administrators specify, or recordkeepers use, heightened identity controls for a claim that exceeds an amount threshold.) My first post in this discussion described a way an administrator might decide against an unusual claim. Some might want discretion to deny a claim. And some, lacking an automated regime of the kind I described in my second post, might be stuck with discretion. But an employer/administrator might consider whether it likes discretion (perhaps to help protect all or some participants from themselves), or whether it prefers not taking on any more discretion than is needed to obey public law and the plan’s governing documents.

Here’s a follow-up question to sate our curiosity: Imagine a plan’s employer/administrator instructed its service provider to decide hardship claims, without discretion, using a procedure designed to apply the regulation’s deemed needs and permitted assumptions. The procedure also uses the Internal Revenue Manual’s method for processing claims using only the claimant’s written representations (without collecting supporting documentation). All this is completely computerized. The service provider has done a perfect job of implementing everything the regulation and the IRS method call for. The claimant checks all the right boxes, and completes every “I certify” statement. (Nothing in the plan’s records has information that, even if fully used, could reveal any lack of truthfulness in the claimant’s claim.) Would the claim described above get routine processing through the system?

Bill Presson, thank you for the vote of confidence. CuseFan and ESOP Guy, thank you for contributing ideas I can use to help guide the student. Moments after Redcloud’s post, we had a productive conversation about a still-in-development research topic. Redcloud’s first imagination might include some mistaken assumptions, and the hypo or research question might change a few times before Redcloud’s professor approves an outline. Consider also that different pension professionals might work with quite different sizes. An employee-benefits lawyer’s work often focuses on situations that involve tens or hundreds of thousands of participants. Or, as in most of my experience, with systemic processes used for millions of participants.

An important part of the lobbying and legislative “deal” that moved the legislation that became ERISA was big businesses’ desire to get national preemption of State laws. See, for example, State v. Monsanto Co., 517 S.W.2d 129 (Mo. Sup. Ct. Dec. 16, 1974) (Before ERISA, Monsanto’s provision of health and welfare benefits was insurance subject to State regulation.) Also, a preceding Federal law, the Welfare and Pension Plans Disclosure Act of 1958, had already treated those different kinds of plans together. For more information, see James A. Wooten, The Employee Retirement Income Security Act of 1974: A Political History (2004).

For Temple University’s law school, I teach (now going on 11 years) a specialized course on ERISA Fiduciary Responsibility. I teach it, and my summer-semester course on Professional Conduct in Tax Practice, as writing courses. Beyond my courses, I’ve served as consulting or reviewing faculty on papers for others’ courses or for independent-writing projects. I have experience with help a student choose and refine a topic, and plan how to research it. If doing so doesn’t interfere with anyone in your school’s faculty, I’d be glad to converse with you to help you discern whether your idea would research and write effectively to fulfill your course’s or project’s purpose. Also, I can tell you about (at least) two big cases you likely would want to consider in your research.

Without commenting on Paychex’s or any service provider’s particular fee: Many ERISA practitioners believe a reasonable exit-processing fee an independent fiduciary approved as a part of a reasonable service agreement with no more than reasonable compensation that meets all conditions of ERISA § 408(b)(2) is an exempt prohibited transaction. I have no more than a surface awareness of antitrust or competition law. Perhaps a lawyer in that field might see a bundling, tying, or price-discrimination arrangement, and (if there is) might consider whether Paychex has enough market power for the arrangement to be anti-competitive.

While I don’t conclude any particular answer, here’s a bit of framework for thinking about the questions. The point of a deemed need is that an administrator follows it without evaluating whether the claimant truly needs what the claim asks for, to the extent that it is within the deemed need. 26 C.F.R. § 1.401(k)-1(d)(3)(ii)(B)(2) ends with the phrase “(excluding mortgage payments)”. And a plan’s governing document might include some text meant to follow this. An administrator might interpret the plan’s provision to allow no more than the amount the claimant would pay to buy the residence had he financed with a mortgage the portion of the purchase price that typical principal-residence purchasers usually so finance. (This is only one of several possible interpretations.) A plan might allow a gross-up for “any amounts necessary to pay any federal, state, or local income taxes or penalties reasonably anticipated to result from the distribution”. An administrator must explain its denial (or partial denial) of a claim. Consider including a written explanation of the administrator’s interpretation. The textual analysis might include analyses of the whole texts—that is, of the whole rule, and of the whole statute the rule interprets and implements. The administrator might follow carefully its claims procedure. If the claimant complains, afford the claimant an opportunity to present any further facts that might support his claim. If a complaint is about the interpretation, invite the claimant to present his legal argument. If the plan grants discretionary authority, courts defer to a fiduciary’s interpretation unless it is so obviously wrong that the decision could not have resulted from any reasoning.

If the questioning physician wants advice, he might consult Asrar Ahmed, the author of ERISA and Sharia Law and Can Sharia and ERISA Coexist?. He is an EBSA Senior Investigator and presumably would not provide advice on a question of U.S. law that could come before the Labor department. But perhaps he might on his own time provide his advice on a question of religious law, which the Labor department would not consider. One can find him on LinkedIn.

Luke Bailey gives us good practical guidance. In my experience, too many employers and administrators unwisely reach out to decide or do something before there is a claim to respond to. (So far, Kansas401k avoided that trap.) And too many neglect opportunities to channel “concerns” into the plan’s claims procedure. Following a careful claims procedure gets predictably stronger results. Luke Bailey suggests one way an administrator might help protect the administrator’s decision-making. (Showing an estate-planning or family lawyer how to turn her client’s wish into something the plan can deal with often is effective.) Another way, perhaps depending on the ambiguous facts and circumstances, might be to inform the “concerned” telephoner that anyone can submit a written claim. (It even could be a claim that recognizes the surviving spouse is the beneficiary, but asserts that she ought not to be the payee and that the plan ought to delay payment for a reasonable time so a conservator can be appointed.) Following the administrator’s claims procedure, including forming written explanations for each denied claim, makes it much easier to defend the administrator’s decision. That’s so even for situations in which people are embarrassed, defensive, or hostile. And it can avoid unnecessary expenses. Why burden participants’ accounts with an expense for attorneys’ fees to show a court the plan’s primacy if that unpleasant exercise could have been avoided? My observation is more than anecdotal. It’s grounded on my experience as counsel to a big recordkeeper (with many thousands of plans and millions of participants), advising a work unit that handled big volumes of death claims. We used business-process measurements to discover ways to make claims-handling more effective, and to manage our and plans’ expenses. Sometimes, there is a healthy balance between asserting or defending a plan’s primacy and avoiding unnecessarily deciding a claim in ways that might offend others’ sensibilities. Also, giving interested persons a way to be heard strengthens the decision-making. Even unlearned judges can understand the idea of deference to a process. If the “concerned” telephoner was invited to, but didn’t, use a procedure to slow down payment to the potential conservatee, a judge looking into the situation might have more empathy for an administrator’s decision to pay the named beneficiary absent any reason not to.

C.B. Zeller, thank you for your help in the earlier conversation, and for reminding us about it. (BTG, my posts in the earlier conversation and above, taken together, explain how 408b-2 and 404a-5 disclosure rules need not be an impediment.) It seems many big recordkeepers lack a business interest in facilitating payments to unaffiliated investment advisers, until enough plan sponsors demand that service and have the bargaining power to motivate the recordkeeper to build it.

Even if a plan’s administrator in its discretion finds that a beneficiary is an incapacitated person, many plans’ governing documents grant the administrator permission to pay a conservator or other fiduciary for the incapacitated person, but do not command that means of payment. However, a careful administrator might prefer a means of payment likelier to show a satisfaction of the plan’s obligation to pay the benefit.

Here’s the ERISA rule that recognizes using a distinct summary plan description for each class of participants and beneficiaries. https://www.ecfr.gov/current/title-29/subtitle-B/chapter-XXV/subchapter-C/part-2520/subpart-B/section-2520.102-4

For an ERISA-governed individual-account retirement plan that provides participant-directed investment, such a plan’s fiduciary could allow directing participants to select, individually, one’s investment adviser, and to direct payment of a reasonable investment-advisory fee with a charge against the directing participant’s individual account. A fiduciary allowing such an arrangement might (i) restrict it to registered investment advisers; (ii) restrict it to advisers that commit to the allowing fiduciary’s terms, including assurances about delivering initial and updated ERISA § 408(b)(2) disclosures to the allowing fiduciary; (iii) require a directing participant to certify that she received all disclosures required under investment-adviser law and ERISA § 408(b)(2); (iv) set a maximum on the investment adviser’s fee a participant may direct, and (v) require that the fee be charged in a format and on an interval the fiduciary finds efficient for the plan’s administration with the recordkeeper’s services. I’m unaware of an ERISA Advisory Opinion that speaks to the question BTG asked. But there are tax-law rulings that support paying an investment adviser engaged by an individual, rather than by an employer plan’s fiduciary. In Letter Ruling 93-16-042 (January 27, 1993), the IRS assured a participant that quarter-yearly payments of her investment adviser’s fee would not tax-disqualify her § 403(b) contract, would not be distributions, and thus would have no tax consequences. The IRS treated the investment adviser’s fee as analogous to a trustee’s fee incurred by a § 401(a) plan. Under the investment-advisory agreement and § 403(b) contract presented in the ruling request, each individual participant would engage the investment adviser, and instruct her § 403(b) contract issuer to pay the investment adviser’s fee and count those payments as charges against the § 403(b) contract’s account balance. (For a § 403(b) arrangement, an annuity contract or custodial account fills the function of what otherwise would be a retirement plan’s trust.) The IRS’s analysis did not depend on any express or implied approval by a plan’s fiduciary. There could not have been such a condition because the ruling requestor’s § 403(b) contract was not (and never had been) held under any employer’s plan. Further, the ruling specifies the participant, the investment adviser, and the § 403(b) contract issuer as the parties to the arrangement. The ruling mentions no fiduciary other than the participant’s investment adviser. The IRS’s reasoning, which the ruling itself describes as a “well established” general principle, applies widely for all kinds of eligible retirement plans and without regard to the investments held under the plan.

Before a court appoints a fiduciary, a threat of Labor’s enforcement might persuade an employer to administer its plan. In those circumstances, an owner/employer/administrator might see sense in reasonable corrections. And those circumstances might give a third-party administrator some bargaining power to negotiate reasonable fees (including payment in advance) and protective terms before the TPA accepts an engagement. Before revealing information to a participant, one might consider whether the information was disclosed with an expectation or presumption of confidentiality or privacy and, if so, whether professional-conduct rules, a voluntary association’s rules, or one’s personal ethics preclude revealing the information. But those questions might not arise because a participant might already know enough information to support her complaint.