Peter Gulia

If you “really cannot abide” what you observed as a lawyer’s violation of our professional-conduct rules, you may—after getting your client’s informed consent—report the misconduct to whichever court (or its disciplinary authority) regulates the misbehaving lawyer. Beyond others, here’s an important caution: Rule 8.3 “does not require” (and does not, by itself, permit) revealing rule 1.6 confidential information. Rule 8.3(c) subordinates a duty to report misconduct to a duty to preserve a client’s confidences. See, for example, In re Ethics Advisory Panel Opinion No. 92-1, 627 A.2d 317 (R.I. 1993) (if a lawyer learns of another lawyer’s misconduct while the observing lawyer represents her client, the duty of confidentiality prohibits reporting the other lawyer’s misconduct without the observing lawyer’s client’s consent, even if the observing lawyer learned of the misconduct from other lawyer’s admission rather than from the observing lawyer’s client). Confidential information is broader than privileged communications. It covers (at least) “information relating to the representation of a client[.]” Rule 1.6(a). Rule 8.3’s comment 2 exhorts the observing lawyer to “encourage a client to consent to disclosure where [investigation of the misbehaving lawyer] would not substantially prejudice the client’s interests.” But the consent must be informed consent. It requires that one “communicate[] adequate information and explanation about the material risks of[,] and reasonably available alternatives to[,] the proposed course of conduct.” Rule 1.0(e). The quotations and paraphrases above are from the American Bar Association’s Model Rules. You would check the rules that govern you.

ratherbereading, to return to your query about what advisors or service providers recommend or suggest to a plan’s sponsor/administrator, there is a divergence of opinions about whether it’s wise to use what the IRS calls the summary-substantiation method described in the Internal Revenue Manual. A search in these BenefitsLink forums will turn up a few discussions that air different views.

EBECatty and John Feldt gave you the answers. If you also want primary sources, some rules for points mentioned above are: 26 C.F.R. § 1.457-2(b) (definition for “annual deferrals”). 26 C.F.R. § 1.457-2(i) (definition for “nonelective employer contribution”, defining it as all deferrals other than an elective deferral, and specially defining it to include what under IRC § 401(k)-(m) would be classified as a matching contribution). https://ecfr.federalregister.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFRf2be51fac065c2d/section-1.457-2 26 C.F.R. § 1.457-4 (describing an agreement as a condition for a deferral “by salary reduction”). https://ecfr.federalregister.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFRf2be51fac065c2d/section-1.457-4 Employers, advisors, and service providers practically think of amounts set aside for retirement, older age, or severance-from-employment as contributions. Yet, it’s deliberate that these tax-law rules use (even for nonelectives) the word deferral, rather than contribution. For a non-governmental employer’s plan, all “amounts deferred” are an unsecured obligation to pay wages at some later time. 26 C.F.R. § 1.457-8(b) (“In order to be an eligible plan of a tax-exempt entity, the plan must be unfunded and plan assets must not be set aside for participants or their beneficiaries.”). https://ecfr.federalregister.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFRf2be51fac065c2d/section-1.457-8

For § 4975, it is never the employee-benefit plan or its trust that owes the excise tax. Under Internal Revenue Code of 1986 § 4975(a), the excise tax “shall be paid by any disqualified person who participates in the prohibited transaction (other than a fiduciary acting only as such).” For § 4975, the instructions say “file Form 5330 by the last day of the 7th month after the end of the tax year of the employer or other person who must file this return.” See table 1 on page 2. https://www.irs.gov/pub/irs-pdf/i5330.pdf Under “Who Must File”, it is “[a] disqualified person liable for the tax under section 4975 for participating in a prohibited transaction (other than a fiduciary acting only as such)[.]” In your situation, ground Form 5330 on the employer's tax year.

Following Revenue Ruling 2014-9, 2014-17 Internal Revenue Bulletin 975 (April 21, 2014), it’s feasible to “reasonably conclude that a potential rollover contribution is a valid rollover contribution” without looking to an IRS letter. https://www.irs.gov/irb/2014-17_IRB#RR-2014-9 And the IRS’s website explanation includes this: “It’s not necessary to obtain a letter from the distributing plan when its qualified status can be checked using the online Department of Labor filing search.” https://www.irs.gov/retirement-plans/verifying-rollover-contributions-to-plans For most § 401(a)-(k) and § 403(b) plans, one looks to Form 5500 data. If the paying plan’s most recent Form 5500 shows any characteristics code that begins with “1” or “2” and does not show code 3C, treat the paying plan as an eligible retirement plan. If an investment or service provider uses a database repackaged from Form 5500 reports, this look-up can be automated. You described a situation about an IRA, which one imagines might not be ERISA-governed. For an employment-based retirement plan, it’s feasible for a service provider to use such a method with no discretion; instead, a plan’s administrator would instruct its service provider to follow a written procedure the plan administrator approves. I don’t know which of the investment and service providers uses such a method. A custodian for a truly individual IRA should be willing to accept good-enough evidence that a rollover contribution is from an eligible retirement plan; if it’s not, the error harms no one but the IRA holder.

A list of sponsors of IRS-preapproved documents is public information and available at the IRS’s website. For example: https://www.irs.gov/pub/irs-tege/ppa_listdc3.pdf. An opinion letter is on an IRS form. I’m curious: If a plan deciding whether to accept a proposed rollover contribution receives a document sponsor’s IRS opinion letter as some evidence that a user’s plan would be a tax-qualified plan, what do they ask for as evidence that the distribution-paying plan’s sponsor adopted the IRS-preapproved document?

EBECatty, consider giving the Treasury department the benefit of your observations. When a rulemaking’s comment period has closed, the agency is not mandated to consider a late-filed comment but nothing precludes considering it, at least for the agency’s internal thinking. In my experience, Treasury lawyers consider even a late-filed comment when it has intelligent and useful observations, as your letter would have.

The Schedule A form uses the word “paid” 31 times. It has one mention of “accrual”, only for counting retention charges on an experience-based contract. And nothing in the Schedule A portion of the Form 5500 Instructions uses the word “accrual” (except to describe a benefit-responsive contract held by an individual-account retirement plan). Not mentioning a choice of accounting methods for Schedule A might have been a considered choice. For example, the Schedule C instructions say: “Either the cash or accrual basis may be used for the recognition of transactions reported on the Schedule C as long as you use one method consistently.”

EBECatty, RatherBeGolfing, and Kevin C, thank you for the further information. For those documents that don’t invite an adoption agreement’s fill-in, only the most determined and careful readers will see a base plan document’s choice of law, fewer will try to negotiate a different provision, and yet fewer will have the bargaining power to get a change. Often, the choice of State law will be practically irrelevant, even for a non-ERISA plan. But when this provision matters, it’s likely to be uncovered after it’s too late for an effective change.

EBECatty, thank you for the information about Relius and Ascensus. Does anyone know what’s in the ftwilliam documents? How about big recordkeepers—Empower, Principal, Voya, Hancock, Transamerica?

In reviewing an IRS-preapproved document, I saw this: “To the extent such laws are not preempted by federal law, the terms and conditions of this Plan will be governed by the laws of the state in which the Pre-approved Document Provider is located[.]” This choice sometimes might matter because the document can be used to state a non-ERISA plan. The document defines “Pre-approved Document Provider” not as the documents’ publisher but rather a retirement-services provider (a licensee of the documents). Is this choice-of-law provision now common?

Even if your client might consider someone else’s advice that an annual report and information return might not be required, your client might consider filing a Form 5500 return desirable because the IRS counts a plan trust’s Federal income tax statute of limitations from that filing. IRS Announcement 2007-63, 2007-30 Internal Revenue Bulletin (July 23, 2007). https://www.irs.gov/irb/2007-30_IRB#ANN-2007-63 When the plan’s administrator files its Form 5500 for 2020, three years later (and, often, practically sooner) 2020 will roll out of the years the IRS would examine. Although an employer might feel there is little risk that the IRS would find an operational defect for 2020, why would an employer/administrator leave open any possibility of being put to the burden of responding to IRS information requests (if it is inexpensive to file the 2020 Form 5500)?

Internal Revenue Code of 1986 (26 U.S.C.) § 6652 (h) Failure to give notice to recipients of certain pension, etc., distributions In the case of each failure to provide notice as required by section 3405(e)(10)(B), at the time prescribed therefor, unless it is shown that such failure is due to reasonable cause and not to willful neglect, there shall be paid, on notice and demand of the Secretary and in the same manner as tax, by the person failing to provide such notice, an amount equal to $100 for each such failure, but the total amount imposed on such person for all such failures during any calendar year shall not exceed $50,000. amended by SECURE § 403(c). (i) Failure to give written explanation to recipients of certain qualifying rollover distributions In the case of each failure to provide a written explanation as required by section 402(f), at the time prescribed therefor, unless it is shown that such failure is due to reasonable cause and not to willful neglect, there shall be paid, on notice and demand of the Secretary and in the same manner as tax, by the person failing to provide such written explanation, an amount equal to $100 for each such failure, but the total amount imposed on such person for all such failures during any calendar year shall not exceed $50,000.

Bird, thank you for your useful observation. Adding nothing, a typical notice already is too long and too difficult for any but the most capable and determined reader. If that assumption is right, which distributees would we harm by editing the notice? Many administrators (often by falling-in with a recordkeeper’s service) furnish a § 402(f) notice for every distribution. Some do so to lessen risks about failing to furnish a notice when it was required. Some do it because the notice is furnished (perhaps as a part of a claim form) before anyone has received a claimant’s claim, and so before one knows whether the to-be-requested distribution will be eligible or not. Also, one distribution might have within it a portion that is rollover-eligible and a portion that isn’t. If a notice is furnished to a distributee who gets a distribution or a portion that is not rollover-eligible, might it help (or at least not harm) a reader to get a little more information?

What do BenefitsLink people think about using the IRS’s safe-harbor texts and writing a little more so one notice covers differing possibilities or portions? For example: If this distribution or a portion of it is an eligible rollover distribution, . . . . If this distribution or a portion of it is not an eligible rollover distribution, . . . . Like? Dislike? Aside from whether you like or dislike this method, do you think it minimally complies with Internal Revenue Code § 402(f)?

For the query discussed above (including David Olive’s illustration), there are many ways a court, an arbitrator, an executive agency’s official, or a plan’s administrator (or its lawyer) might interpret ERISA’s §§ 102-105, § 404(a)(1), and related provisions. As far as I know, there is no EBSA guidance that interprets the statute or a rule to discern whether a plan’s administrator must or should not describe an expired provision. And I’m unaware of a consensus among employee-benefits lawyers. (I suspect many have not been asked any question about this.) If asked the question, it’s for each advisor to render her advice, considering the inquiring client’s interests and facts.

The exemption has no change after October 12, 1979. I’ve considered the exemption only once. (And it was longer ago than your experience.) I explained that the exemption does not relieve a plan’s fiduciary from its responsibility to act loyally and prudently for the exclusive purpose of providing the plan’s benefits. A fiduciary must get the best deal the plan could obtain. The insurance agency decided that its fiduciary responsibility required it to negotiate the life insurance contract to zero the commission with the insurer lowering the premiums for the contract’s death benefits and increasing the cash values. An actuary reported to us that the insurer’s profit margin on the negotiated contract was equal to its margin on the commission-loaded contract.

A support for Belgarath’s top-notch explanation is: Rev. Rul. 84-18, 1984-1 C.B. 88 [1984-6 Internal Revenue Bulletin 5]. See also News Release IR-84-6 (Jan. 13, 1984). The IRS held an individual may deduct an IRA contribution made after the tax return was filed but by the return’s due date. In the “law and analysis” for that ruling, the IRS observed: “Although the holding of Rev. Rul. 66-144 is limited to an accrual basis taxpayer, section 1013(c)(2) of [ERISA] extended the grace period of [Internal Revenue Code] section 404(a)(6) to cash basis taxpayers.”

Let’s ask a related question: Assume a nonlawyer TPA. The IRS-preapproved document is from one of the big document vendors. With no suggestion from the TPA, its client—the plan’s sponsor—wrote the variation of the default-beneficiary provision. The TPA considers that provision unwise. But the TPA believes a prudent plan administrator could interpret the provision as not granting discretion and not tax-disqualifying the plan. What duty or responsibility (if any) does such a TPA have to tell her client that the provision might be unwise?

The Labor department’s website has a listing of prohibited-transaction exemptions, organized by EXPRO, class, and individual exemptions. Under class exemptions, the website shows the history of an exemption, with Federal Register citations for each proposal, adoption, and amendment or clarification. (For example, the display on the Qualified Professional Asset Manager exemption includes eight citations.) Under “Insurance Agents In-house”, the display shows citations for the proposal and adoption (both in 1979) of PTE 79-60, and nothing further. https://www.dol.gov/agencies/ebsa/laws-and-regulations/rules-and-regulations/exemptions/class Here’s the government’s posting of the portion of 44 Fed. Reg. 59018 (Oct. 12, 1979): https://s3.amazonaws.com/archives.federalregister.gov/issue_slice/1979/10/12/59015-59020.pdf#page=4 If it’s hard to read, better images are available from HeinOnline and other publishers.

What Luke Bailey says. And consider whether it makes sense for an employer/administrator to try to anticipate many situations in which an employee might lack enough pay for all the things one might do with it, develop the employer’s hierarchy, and set it as an interpretation and plan-administration procedure for all the employee-benefit plans.

Last May’s 29 C.F.R. § 2520.104b-31 (Alternative method for disclosure through electronic media—Notice-and-access) is available only for retirement plans. The Labor department reserved on health and other welfare-benefit plans. See paragraph (c). https://ecfr.federalregister.gov/current/title-29/subtitle-B/chapter-XXV/subchapter-C/part-2520/section-2520.104b-31 A welfare plan may deliver electronic disclosures as provided under a participant’s or beneficiary’s affirmative consent. 29 C.F.R. § 2520.104b-1 https://ecfr.federalregister.gov/current/title-29/subtitle-B/chapter-XXV/subchapter-C/part-2520/section-2520.104b-1

pmacduff alludes to a further inquiry: How many of these decisions are made, practically, by an employer falling-in with the way its payroll-services provider offers services?

Yes, it's frustrating; but until the IRS says something, what other advice could one render?

I don’t recall the earlier discussion you mention. But is this plausible: At least some BenefitsLink users work in business organizations with policies designed to keep people out of communications about prices for products or services if the communications might be troublesome under antitrust or competition laws. Even if some of those policies and outlooks might be more cautious than necessary, some of our neighbors follow those cautions.