Peter Gulia

For a loan to a participant to meet an exemption from prohibited-transaction consequences (under both ERISA’s title I and Internal Revenue Code § 4975), the loan must “earn a reasonable rate of interest[.]” 29 C.F.R. § 2550.408b-1(a)(1)(iv). Further, the rule states: “A loan will be considered to bear a reasonable rate of interest if such loan provides the plan with a return commensurate with the interest rates charged by persons in the business of lending money for loans which would be made under similar circumstances.” 29 C.F.R. § 2550.408b-1(a)(1)(iv). The rule includes three examples of facts and circumstances that do not result in a reasonable interest rate. Some fiduciaries adopt a procedure for setting a loan interest rate based on a “prime” interest rate, with an increase of zero, 100, or 200 basis points. This might be based on an IRS employee’s remarks that burden no one, not even the IRS. Without reopening that discussion, here’s my question: Has anyone seen the Employee Benefits Security Administration or the Internal Revenue Service pursue enforcement for a too-low loan interest rate? If so, what was the agency’s explanation about why the rate was too low?

If you’re hoping for comments about strengths and weaknesses in challenging the former employer’s decisions, BenefitsLink people might want to know whether the former employer is a government (for example, a public-schools district), a church or church-controlled, or a charitable organization that is neither governmental nor church-controlled. And recognizing some possibility that State law might matter, in which State does the former employer have its principal office? (That question is a proxy measure that might help uncover a law or choice about which State’s law might govern the former employer’s retirement plan.)

The current § 415 rules do not predate § 403(b)(7) accounts. Rather, the confusing text results from some legal drafters’ style or usage, often unfortunate, that assumes a reader’s awareness (sometimes with no signal) of all terms that have been specially defined. For agency rules to implement and interpret IRC § 415, the April 7, 2007 rules replaced the January 7, 1981 rules. https://www.govinfo.gov/content/pkg/FR-2007-04-05/pdf/E7-5750.pdf Congress enacted § 403(b)(7) on September 2, 1974, effective as of January 1, 1974. At least the 2007 revisors might have considered it unnecessary it to state explicitly that § 1.415(j)-1(e)’s reference to “a section 403(b) annuity contract” includes all the individual’s § 403(b) contracts. Internal Revenue Code § 403(b)(5) states: “If for any taxable year of the employee this subsection applies to 2 or more annuity contracts purchased by the employer, such contracts shall be treated as one contract.” And § 403(b)(7)(A) begins: “For purposes of this title, amounts paid by an employer described in paragraph (1)(A) to a custodial account which satisfies the requirements of section 401(f)(2) shall be treated as amounts contributed by him [the employer] for an annuity contract[.]” Likewise, the agency rules include this: “Section 403(b) and § 1.403(b)-3(a) only apply to amounts held in an annuity contract (as defined in § 1.403(b)-2), including a custodial account that is treated as an annuity contract under paragraph (d) of this section, or a retirement income account that is treated as an annuity contract under § 1.403(b)-9.” 26 C.F.R. § 1.403(b)-8(a). Some Treasury department lawyers worked on the § 415 rules (published April 7, 2007) and the § 403(b) rules (published July 26, 2007) around the same time. https://www.govinfo.gov/content/pkg/FR-2007-07-26/pdf/07-3649.pdf About the statement to be attached to the individual’s tax return, I don’t advise anyone; but a lawyer or certified public account might evaluate this: My limitation year for § 403(b) contracts is each year ended with August. A change must comply with 26 C.F.R. § 1.415(j)-1(d).

With no observation about what relevant law might provide: If the plan’s administrator considers furnishing a notice to less than all participants and other directing persons: Before the change date, is the to-be-replaced fund available to participants who have not yet invested in it, including those who do not yet use anything with the vendor that uses the to-be-replaced fund? After the change date, is the new fund available to participants who do not yet use anything with the vendor that uses the to-be-replaced fund?

Luke Bailey and BobbyV, thank you for your further observations.

An employer might elect, “subject to such terms and conditions as the Secretary may prescribe”, “to maintain the simplified employee pension on the basis of the employer’s taxable year.” Internal Revenue Code of 1986 (26 U.S.C.) § 408(k)(7)(C)(ii).

C.B. Zeller and Bird, thank you for your observations. Any others?

Imagine an individual-account (defined-contribution) retirement plan that does not provide participant-directed investment. Imagine the participants range from 18-year-olds to workers in their 90s. If you were the plan’s trustee or investment manager with complete authority and responsibility to decide the plan’s investment policy, what would you do? Would you decide an asset allocation grounded on some average of the participants’ ages? Is there another method you might use to balance the potentially differing interests of younger and older participants? Is there some other way—without changing the plan’s provisions—to manage this fiduciary challenge?

What RatherBeGolfing said. (RBG, thank you for explaining a point I didn’t describe.) Also, a judge’s finding that a complaint alleges enough facts to support a claim on which the court could grant relief does not tell a reader that every alleged fact is relevant; rather, it finds only that the complaint includes allegations needed to support the claim the judge finds is sufficiently asserted. The most Judge Sorokin observes about how the plan’s omission of participant-directed investment relates to the asserted fiduciary breach is that participants’ potentially differing interests might have been something the fiduciaries ought to have considered in deciding investments for the one portfolio that commonly affected all participants’ accounts. And that observation is not needed to support the finding that the complaint asserted a fiduciary breach.

QDROphile opens our eyes to some points this discussion had not considered. It’s better that an ERISA-governed plan’s QDRO procedure does not unnecessarily call for a “hold” ERISA doesn’t require. (I’ve held that view since 1984.) Changing a procedure a divorcing spouse expected or, worse, might have relied on is troublesome. Among other ways, it could result in lawyering or litigation expense. And it risks that a court might render an incorrect decision. (Some of the nonsense PWBA/EBSA published heightens those risks.) Even if I’m right about how a Federal court should apply the statute (and should ignore unpersuasive subregulatory interpretations and other courts’ incorrectly reasoned decisions), it’s smart to consider that judges don’t always get everything right. For the situation BG5150 describes, changing an unfortunate QDRO procedure, despite risks, would be about affording a terminated plan’s administrator a choice to act so a “hold” anticipating a domestic-relations order doesn’t delay a distribution that completes a plan’s termination. A risk that someone challenges a change in a QDRO procedure might be moderate because, as QDROphile describes, would-be plaintiffs make choices about whether to challenge a plan administrator’s act or decision. I don’t know the facts and circumstances of the plan BG5150 describes, and shouldn’t guess which is the worse set of expenses and risks.

I don't know why the software crosses out a normal text.

I look to ERISA § 402 because it presumes an employee-benefit plan was expressed in writing, and that a written plan “provide a procedure for amending [the] plan[.]” ERISA § 402(b)(3). If a QDRO procedure is stated in the plan’s governing document, one would follow whatever that document calls for to make a proper amendment. If a QDRO procedure is stated by a distinct document, one might see to it that an amendment of the QDRO-procedure document is made by the person that was, following ERISA § 402, properly granted authority to make or amend a document of that kind, and, if that person is an artificial person, by a human with authority to act for the artificial person. Except for a participant’s interest in something that ERISA or a plan’s governing document makes non-forfeitable or accrued and not to be cut back, I don’t see anything in ERISA that precludes a change because a non-participant has an expectation.

For a plan not ERISA-governed, I might consider a State’s statutory and common law of contracts. (For a governmental plan, I’d consider interpretations of the U.S. and State constitutions.) But with limited exceptions that don’t relate to a plan’s terms, ERISA preempts a State law that “relates to” an ERISA-governed employee-benefit plan. ERISA § 514. I look to ERISA § 402 because it presumes an employee-benefit plan was expressed in writing, and that a written plan “provide a procedure for amending [the] plan[.]” ERISA § 402(b)(3). If a QDRO procedure is stated in the plan’s governing document, one would follow whatever that document calls for to make a proper amendment. If a QDRO procedure is stated by a distinct document, one might see to it that an amendment of the QDRO-procedure document is made by the person that was, following ERISA § 402, properly granted authority to make or amend a document of that kind, and, if that person is an artificial person, by a human with authority to act for the artificial person. Except for a participant’s interest in something that ERISA or a plan’s governing document makes non-forfeitable or accrued and not to be cut back, I don’t see anything in ERISA that precludes a change because a non-participant has an expectation.

For a plan not ERISA-governed, I might consider a State’s statutory and common law of contracts. (For a governmental plan, I’d consider interpretations of the U.S. and State constitutions.) But with limited exceptions that don’t relate to a plan’s terms, ERISA preempts a State law that “relates to” an ERISA-governed employee-benefit plan. ERISA § 514. I look to ERISA § 402 because it presumes an employee-benefit plan was expressed in writing, and that a written plan “provide a procedure for amending [the] plan[.]” ERISA § 402(b)(3). If a QDRO procedure is stated in the plan’s governing document, one would follow whatever that document calls for to make a proper amendment. If a QDRO procedure is stated by a distinct document, one might see to it that an amendment of the QDRO-procedure document is made by the person that was, following ERISA § 402, properly granted authority to make or amend a document of that kind, and, if that person is an artificial person, by a human with authority to act for the artificial person. Except for a participant’s interest in something that ERISA or a plan’s governing document makes non-forfeitable or accrued and not to be cut back, I don’t see anything in ERISA that precludes a change because a non-participant has an expectation.

Assuming an otherwise valid amendment of the QDRO procedure, I doubt that ERISA § 402 provides a non-participant, even less one who is not yet a proposed alternate payee, a vested right in the administrator not changing its procedure.

No, I’m not holding back the information. I’ve never had a client who wanted to arrange the insurance. In the 1980s, I heard about a Bermuda insurer that offered this insurance. But I don’t remember the insurer’s name, if I ever knew it. Professional and business publications I’ve seen describe the idea, but don’t name insurers.

If a QDRO procedure calls for a “hold” sooner than ERISA § 206(d)(3)(H) otherwise would require it, does anything preclude amending the procedure so it calls for no more than ERISA § 206(d)(3)(G)-(H) requires?

The complaint describes the essential problem by eliding a description about the absence of a provision for participant-directed investment with the assertion that the investment fiduciaries did not consider how interests differ among the participants. (I suspect this might have been Nichols Kaster’s strategy choice.) Neither of the complaint’s counts asserts a claim asserting that an individual-account plan’s omission of a provision for participant-directed investment is, by itself, or even as applied under the alleged facts, contrary to ERISA’s title I. Likewise, the complaint’s prayer for relief does not seek reformation of the plan. Judge Sorokin’s order reacts to the complaint presented and how the litigants briefed the motion about whether the complaint states a claim on which the court could grant relief. That a plan’s governing document omits a provision for participant-directed investment is not itself a fiduciary’s breach because deciding the plan’s provisions is a creation or “settlor” decision, which a plan’s sponsor (rather than an administrator, trustee, or other fiduciary) may make without ERISA fiduciary responsibility. Rather, a plan’s governing document (ignoring any provision ERISA’s title I precludes, and supplying any unwritten provision ERISA’s title I requires) is a part of the starting point from which a fiduciary works. A fiduciary with investment responsibility must exercise its responsibility considering all relevant facts and circumstances. Those facts could include that the plan’s participants and their beneficiaries have a wide range of ages and economic interests. A fiduciary must prudently, and impartially, balance differing interests. I can imagine a case in which the difficulties of balancing differing interests might overwhelm an analysis of how to invest the plan’s assets. It might be so difficult that a fiduciary might consider whether it is impossible or impractical to obey both the governing document and ERISA § 404(a)(1)(B). But the court in DeMoulas Super Markets did not reach a question of that kind. One may read the order as logically consistent with an assumption that an absence of a provision for participant-directed investment was not invalid (or that a question had not been presented) and, following that assumption, a finding that the complaint alleged enough facts that a fact-finder could find a fiduciary breached a duty to invest prudently the plan’s one investment pool. We don’t know what Judge Sorokin (or another judge) would decide if the alleged facts were about a mainstream asset allocation and nothing suggesting the fiduciary failed to consider the differing interests of younger and older participants. Please don’t read the above explanations as expressing any view about whether an individual-account retirement plan should provide or omit participant-directed investment for any portion of such a plan’s assets.

DefComp, you are unlikely to find this with a public Internet search. Consider asking your lawyer who advises you about the non-qualified deferred compensation, your certified public accountant, and your registered investment adviser for an introduction to an insurance broker who knows how to place this insurance.

The court found: “Plaintiff is not alleging that Defendants breached their duty of prudence by failing to provide Plan participants with a menu of investment options[.]” Rather, the plaintiffs asserted that the plan’s fiduciaries imprudently invested the plan’s one portfolio. Toomey v. DeMoulas Super Markets, Inc., Civil No. 19-11633-LTS [document no. 32] (D. Mass. Apr. 16, 2020) (order on defendants’ motion to dismiss). The court found the facts alleged included these: “Between 2013 and 2017, the Plan had approximately 11,000 to 13,000 participants with a wide range of retirement needs and objectives. During that time, the Plan had between $580 million and $756 million in assets. . . . . The Plan’s Investment Policy Statement (IPS) called for 70% of the Plan’s assets to be allocated into domestic fixed income options, and 30% into equities.” “[E]ven taking the investment strategy chosen by the Plan as the benchmark, it was imprudently executed in several ways. For example, . . . Defendants often failed to meet their own equity allocation targets, in some years devoting as much as 86% to fixed income options, with the remainder (14%) to equities. [E]ven among fixed income investments, the defendants failed to undertake appropriate efforts to generate meaningful returns. In 2013, for example, Defendants invested 58% of the Plan’s total assets—$336 million—in cash and money market accounts earning .01% interest or less. In 2014, Defendants increased the Plan’s investment in cash (or cash equivalents) to over $400 million, or 66% of the Plan’s assets, in accounts earning .05% interest or less. Defendants also left millions of dollars—$27 million in 2016—in bank accounts that returned 0% interest. [T]o the extent Defendants invested in bond funds, they failed to procure the lowest-cost share class of those funds even though, as a large institutional investor, they had the leverage to do so.” Toomey v DeMoulas Super Markets Inc.pdf Toomey v DeMoulas Super Markets Inc complaint.pdf

For the issues one imagines are in play, engage Ilene Ferenczy to advise you. https://ferenczylaw.com/article-defined-benefit-plans-determining-professional-status-of-plan-sponsors-for-pbgc-coverage/

I worked, as counsel to another law firm, on a situation about H-2A employees. But I never saw any advice about employment law or immigration law. The other firm looked to me first, and the facts left no escape from Internal Revenue Code § 410(b). (Testing was a non-starter.)

If an employer has H-2A employees, the employer likely uses a law firm at least to help on getting approvals, and advise about conditions, for those guest workers. If whether it is feasible to exclude from a retirement plan the H-2A employees turns on law beyond ERISA and the Internal Revenue Code, it might make sense to put such an other-law question to the lawyers who handle the H-2A matters.

As I skim the rest of the QTA rule, it seems to preclude a wind-up administration if the QTA-eligible custodian knows it holds less than substantially all of the plan’s assets (other than contributions owed to the plan) and is unwilling to serve as QTA for the whole plan.

In the third paragraph, I did not write the underlining, did not fail to write the ellipsis at the beginning of the quotation, and did not italicize the quotation, or my observation about it.