Peter Gulia

While I’ve advised regarding a VEBA, I haven’t faced a situation of the kind you describe. In other situations, I’ve seen reasoning that a trustee may act through an agent. But a good agent segregates her principal’s assets from her personal assets. Before using the workaround, the VEBA trustees might consider how they would prove: that the employer/agent could not use the VEBA trust’s money for anything beyond the VEBA’s purpose; or that there were prudent controls for the trustees to detect the employer/agent’s bad act, and fidelity-bond insurance or other ready means to recover what’s stolen or misused. Might it be quicker for the VEBA trustees to select a bank with the needed wire-transfer services? Or to select a TPA that accepts the trustees’ check?

BenefitsLink mavens, please help me fill-in a gap in my experience. In collecting information to sort which workers are or were a 5%-owner or a 1%-owner (whether to find highly-compensated employees, key employees, those who must get a minimum distribution while still working, or something else), does a third-party administrator: rely exclusively on the employer/customer’s information on a questionnaire or spreadsheet? check information for logical consistency with the employer/organization’s tax return? ask the employer/organization’s accountant to specify the ownership percentages? do something else?

C.B. Zeller brings us an important point. If not everything about the loan is participant-directed, a fiduciary must consider prudence. If a provision not to allow prepayment is only in a procedure that is not a governing document, a fiduciary must do what is prudent. And if the no-prepayment provision is in the plan’s governing documents, ERISA § 404(a)(1)(D) might call a fiduciary to consider whether, in the particular circumstances, obeying the documents is imprudent.

If the plan’s governing document, summary plan description, 404a-5/404c-1 information, and loan agreement were carefully written (and the administrator has evidence that the disclosures were delivered), a claim that a fiduciary breached its responsibility by allowing a participant loan that was an imprudent investment might be negated by the fiduciary’s ERISA § 404(c) defense that the loan, including the lack of a right to prepay, resulted from the participant’s investment direction and exercise of control. If a loan was a non-exempt prohibited transaction, the plan’s equitable relief might include that the borrower disgorges the ill-gotten proceeds (with any profits made from using the proceeds) and restores the plan to no less than the result the plan would have obtained by keeping the loaned amount and prudently or properly investing the amount. But it’s unclear whether the participant loan Belgarath inquires about was or would be a prohibited transaction. Although 29 C.F.R. § 2550.408b-1 might preclude some participant loan terms that are less favorable to the plan than terms that would obtained “by persons in the business of lending money”, I don’t read the rule to preclude terms that might be more favorable than terms a commercial lender would get. https://ecfr.federalregister.gov/current/title-29/subtitle-B/chapter-XXV/subchapter-F/part-2550/section-2550.408b-1 And unless the plan itself is in the business of banking (or the plan is not the lender), ERISA ought to preempt States’ laws.

On your two questions: 1. The paraphrase and quotation are from the rule cited, 29 C.F.R. § 2550.408b-2, which interprets ERISA § 408(b)(2). The hyperlink points to the government’s Electronic Code of Federal Regulations rendering of that rule. 2. The focus is on whether the fiduciary that engages a service provider makes a fully independent decision. Even if neither the service provider nor its owner-operator is the engaging plan’s fiduciary, one might consider whether a desire to please the owner-operator, perhaps because she is company B’s minority shareholder, could tempt a decision-maker to use less than her best judgment for the retirement plan’s exclusive purpose. These are sensitive questions, and each party to the would-be service agreement should want its own lawyer’s advice.

Under the Labor department’s view (since 1975), the § 408(b)(2) exemption applies only to a § 406(a) prohibited transaction, and not to a § 406(b) self-dealing prohibited transaction. As a part of that view, a fiduciary must not cause a plan to pay or provide—even indirectly, but involving plan assets—compensation “to a person in which such fiduciary has an interest which may affect the exercise of such fiduciary's best judgment as a fiduciary[.]” 29 C.F.R. § 2550.408b-2(e)(1) https://ecfr.federalregister.gov/current/title-29/subtitle-B/chapter-XXV/subchapter-F/part-2550/section-2550.408b-2 “A person in which a fiduciary has an interest which may affect the exercise of such fiduciary’s best judgment as a fiduciary includes, for example, a person who is a party in interest by reason of a relationship to such fiduciary described in [ERISA] section 3(14)(E), (F), (G), (H), or (I).” 29 C.F.R. § 2550.408b-2(e)(1) (emphasis added). But the concept is not limited to those relationships. So, one might ask this question: Does the plan’s fiduciary or its decision-maker desire to please company B’s minority shareholder, A? If so, could that desire tempt one to use less than her best judgment for the retirement plan’s exclusive purpose?

I didn't express any view, or even mode of reasoning. Rather, my post was about pointing to a rule. It is not the only source of law on the questions raised.

If an employer/administrator sent a communication about coronavirus special provisions, such a communication ought to have explained the limited duration of those provisions. Even if it did, are you or your clients doing a follow-up communication to remind people that the special provisions no longer apply? Or is it good enough that the earlier communication explained the limited duration?

Ilene, I suspect almost every retirement-plans practitioner or service provider who regularly talks with small-business employers shares your thoughts.

In the IRS Notice extending some relief through June 30, 2021, the Treasury department invites comments on whether to make a permanent change. https://www.irs.gov/pub/irs-drop/n-21-03.pdf

To evaluate a range of potential answers to the questions raised above, one might read carefully the Labor department’s rule. 29 C.F.R. § 2510.3-55 Definition of employer—Association Retirement Plans and other multiple employer pension benefit plans. https://ecfr.federalregister.gov/current/title-29/subtitle-B/chapter-XXV/subchapter-B/part-2510/section-2510.3-55

The reference is to § 280 under subtitle B “COVID-related Tax Relief Act of 2020”, which is under title II “Assistance to Individuals, Families, and Businesses”, which is under Division N “Additional Coronavirus Response and Relief”. In the linked-to enrolled bill, that § 280 is on page 801.

In the Consolidated Appropriations Act, 2021 (enacted December 27, 2020), § 280 amends CARES Act § 2202(a)(6)(B) to treat a money-purchase plan as not failing to meet an Internal Revenue Code of 1986 § 401(a) distribution rule because the plan provides a coronavirus-related distribution, even if it is an “inservice withdrawal”. That change “shall apply as if included in the enactment of section 2202 of the CARES Act.” https://www.govinfo.gov/content/pkg/BILLS-116hr133enr/pdf/BILLS-116hr133enr.pdf

QDROphile, Bill Presson, Pam Shoup, thank you for contributing your good thinking. QDROphile, I like your logic path and reasoning. To it, I’ll add this bit of law: For an employer to offer the convenience of payroll-deduction IRA contributions without establishing or maintaining a plan, it can be burdensome to send money to many IRA providers. But it’s a risk to limit employees’ choice of IRA providers. See 29 C.F.R. § 2510.3-2(d)(1)(iii). Interpretive Bulletin 99-1 tries to give some succor to limiting employees’ choice of payroll-contribution payees, perhaps even to as few as one. But the Bulletin is not a rule or regulation. That means a court need not defer to it. Falling in with a State-run IRA program lets an employer limit its payee to just one. Yet, an employer’s risk of fiduciary liability might be slight. A court held that an employer that does no more than obey California’s law for its CalSavers program, including its implied-election provision, does not establish or maintain a plan. Howard Jarvis Taxpayers Ass’n v. Cal. Secure Choice Retirement Savings Program, 443 F. Supp. 3d 1152 (E.D. Cal. Mar. 10, 2020), appeal filed, No. 20-15591 (Apr. 3, 2020). The appeals court might reverse that decision. Or an employer not in the Ninth Circuit might face a court’s decision that a State-run IRA program is an ERISA-governed plan. But even with such a finding, a mere participating employer doesn’t face liability unless a court further finds (i) that the employer is a fiduciary for some particular function, (ii) the employer breached its fiduciary responsibility in performing that function; and (iii) that breach resulted in harm to the plaintiff’s IRA. That conclusion follows from applying ERISA § 409’s statement of a fiduciary’s personal liability and ERISA § 3(21)’s definition, which makes a person a fiduciary only to the extent of its discretionary decision-making. A court might not make the employer liable for an IRA’s investment result caused by using the IRA custodian and investment funds the State selected, which the individual affirmed by not opting out of payroll contributions and not periodically transferring amounts to another IRA. Bill Presson and Pam Shoup, my thought exercise is about what, if anything, one might suggest to an employer that does not become a client. And if an employer not ready to administer a retirement plan is subject to a State’s play-or-pay excise tax, falling in with a State’s program might avoid the tax while taking on a relatively lighter work burden and narrower risk. A State-facilitated IRA might be a starter kit for those we haven’t yet persuaded.

Yesterday, the President signed the appropriations bill.

QDROphile, thank you for giving me your time to think about this. And thank you for asking smart follow-up questions to describe further my imaginary employer. The charge of 100 basis points is distinct from, and in addition to, a fund’s expenses. But the expense ratios of the funds in the State-run program range from 2½ basis points [0.025%] for a bond fund to nine basis points [0.09%] for target-year funds. The employer would not analyze anything about investment alternatives, because it would delegate those decisions to a § 3(38) investment manager. A plan sponsored by the employer would not qualify for collective trust fund units or for mutual funds’ institutional-class shares. The workers have four-year college degrees, but are service workers, not knowledge workers. The employer’s preference is to allow (passively) retirement savings, but providing employees the convenience of payroll deduction.

Consider this not-entirely-imaginary work setting: The employer has no retirement plan, and no payroll practice for retirement contributions. The employer wants to allow its employees to save for retirement, but will provide no nonelective or matching contribution. None of the employees, including the deemed-employee business owner, wants to save (and none can afford to save) more than an amount within the IRA contribution limit. The business owner is the only worker who would be treated as a highly-compensated employee. This small-business employer and its startup plan would have no purchasing power in negotiating fees for a retirement plan’s investments or services. So, assume a recordkeeper’s and other service providers’ rack rates. The employer is unwilling to pay any of the plan’s expenses; everything must be charged to participants’ accounts. The employer will not consider an employer-sponsored retirement plan unless the employer can arrange the maximum delegation of fiduciary responsibilities—a pooled-employer plan or, for a single-employer plan, using a § 3(16) administrator, a § 3(38) investment manager (to select the plan’s investment alternatives), and a trustee, with all those services paid from participants’ accounts. All employees live and work in a State that offers a State-run payroll-deduction program for IRA contributions. The program allows Roth and non-Roth contributions. The State’s arrangements cap the expenses of the State-run IRA program at 100 basis points (expressed yearly) of accounts’ assets. This employer asks for your unbiased advice about whether it should arrange a 401(k) plan, or join the State-run IRA program. Which do you advise, and what reasoning do you explain to support your advice?

The President vetoed the defense-authorization bill, which means Congress will continue at least for the override votes. If the appropriations bill is presented on December 24, the tenth day is January 5. If the President neither approves nor objects, this could call the 116th Congress to continue through at least January 6 if they want to prevent a pocket veto.

Several possibilities turn on, or relate to, when the appropriations bill becomes presented. If the appropriations bill does not become law before the most recent anti-deficiency resolution expires Monday December 28, a government shutdown could result (if Congress has not enacted another extension, which might be impractical without the President’s cooperation). Both bodies of Congress are ready for votes next week if the President vetoes the defense authorization bill or the appropriations bill (or both). Yet, if the President neither approves nor objects on the appropriations bill, he might use the Constitution’s ten days to pocket-veto the bill if the 116th Congress adjourns. Further, the political theater around these and other actions might affect the scheduling of Congress’s anticipated January 6, 2021 joint session to count votes cast by the Electoral College and certify that result.

President Trump has not signed H.R. 133, and made remarks that call into question whether he will sign. The bill passed both bodies of Congress with votes more than the two-thirds that would be needed to override a President’s veto. House: 327–85, 359-53; Senate 92-6. Yet, Members might vote differently in a different political context. If the President neither approves the bill nor returns it with his objections “within ten Days (Sundays excepted) after it shall have been presented to him, the [bill] shall be a Law, in like Manner as if he had signed it, unless the Congress by their Adjournment prevent its Return, in which Case it shall not be a Law.”

In 1985 and 1986, I worked in lobbying on what became the 1986 Act. After enactment, even skimming the enrolled bill to find the retirement plans’ provisions I’d explain in my book, I glanced over many provisions that stated narrow conditions to avoid using a name. Some were mentioned in 1987’s Showdown at Gucci Gulch. https://www.penguinrandomhouse.com/books/118994/showdown-at-gucci-gulch-by-jeffrey-birnbaum/ And a 1988 article about the practice won a Pulitzer Prize. Donald L. Bartlett & James B. Steele, How the Influential Win Billions in Special Tax Breaks, Philadelphia Inquirer, Apr. 10, 1988. That article counted “at least 650 exemptions—preferences, really, for the rich and powerful—through the legislation, most written in cryptic legal and tax jargon that conceals the identity of the beneficiaries.”

Yesterday evening, Roll Call reports this is about the St. Louis Carpenters’ Pension Plan. https://www.rollcall.com/2020/12/21/midwestern-carpenters-would-get-relief-in-year-end-tax-package/

Common sense; I did not base anything on a specific statute, agency rule, or other agency interpretation. My explanation about an investment adjustment is grounded on treatises describing courts’ decisions applying the common law of equity or chancery relief. If one needs citations, a lawyer might look to the American Law Institute’s Restatements. Also, the U.S. Labor department has described, but not in an agency rule, a similar framework for the equity concept of restoration to correct a prohibited transaction. You’re right to tell the employer to lawyer-up.

If the employer restores to each Health Savings Account the money not paid over to the HSA custodian (with an investment adjustment), might a 2019 W-2 become correct? Each investment adjustment should be the greater of (i) the investment returns the HSA would have obtained by promptly investing the missing amounts and (ii) the investment return the employer obtained using the money the employer wrongfully had or the interest value of that money, whichever is greater.

Yes, I selectively quoted the text (but attached the whole text), and selectively described the soon-to-be statute’s effect. I mentioned 2020 because I remembered a BenefitsLink discussion in which austin3515 described a plan administrator’s decision, long before 2020 ends, to treat a situation as a partial termination. A situation that otherwise might be a partial termination could happen in 2021 and might be relieved by this legislation. Yet, the ratio’s or fraction’s numerator refers to those covered on March 31, 2021.