Peter Gulia

Consider checking your client’s agreement with the custodian and each other service provider. Many retirement-services providers include in an agreement a customer’s warranties about its plan’s documents. Many agreements include a customer’s promise not to change any document that governs the plan except with the service provider’s written assent. Some agreements presume documents furnished by the provider are acceptable to the provider, and impose obligations about “outside” documents. While these service provisions often might not affect a plan sponsor’s ability to amend its plan, these provisions might affect a service provider’s obligations.

There are different ways for an executive to get some protection against her employer’s insolvency. While some use non-insurance arrangements, some use contracts with an insurance company or other insurance underwriter. The Internal Revenue Service has recognized some carefully arranged purchases of insurance against an employer’s inability or failure to pay an obligation as not funding a deferred compensation plan’s promise. For example, IRS Ltr. Ruls. 9344038 (Aug. 2, 1993), 8406012 (Nov. 5, 1983). Among the described facts, the participant paid for the insurance. Also, the participant negotiated the insurance, and did so without involving the employer. A letter ruling is not precedent. IRC (26 U.S.C.) § 6110(k)(3). Each taxpayer should get her lawyer’s advice. Because this insurance is an obligee’s personal protection against her employer’s inability or failure to pay deferred compensation, it is not a “plan” (or the employer’s) investment; rather, it is a participant’s personal insurance against one or more risks about her employer’s ability or willingness to meet its deferred compensation obligation. An insurer will underwrite this risk only if the insurer receives detailed financial information about the employer or obligor, and considers the information reliable. An underwriter might look (at least) for CPA-audited financial statements and minimum revenue and capital positions of the obligor. StockShield’s “Deferred Compensation Protection Trust” http://stockshield.com/our-products/deferred-compensation-protection-trust/ is a different idea. I’ve never evaluated it.

And don’t forget to revise the summary plan description. The plan identification number is an element of the required contents of a summary plan description. 29 C.F.R. § 2520.102-3(c).

Many governmental retirement plans have no provision for following a domestic-relations order. That Mississippi PERS has no responsibility to pay the non-participant might not preclude a court’s order that a retiree pay the non-participant. For one example, see https://courts.ms.gov/Images/Opinions/CO96560.pdf The non-participant might want advice from a lawyer knowledgeable in Mississippi domestic-relations law and courts’ procedures, including chancery practice.

A plan’s administrator might read carefully the governing documents’ provisions about a distribution to a beneficiary who is not yet an adult. Typical provisions permit paying a minor’s conservator or guardian, including a natural guardian (a parent). But a provision of that kind does not necessarily command paying such a fiduciary. Or if it does, there might be little or no constraint on a plan amendment. Also, a plan’s administrator might read carefully the governing documents’ provisions to check whether the plan’s termination undoes provisions that otherwise might have required a distributee’s consent to a distribution. If—after exhausting loyal, obedient, and prudent efforts to get the beneficiary’s choice about whether the beneficiary prefers money or a rollover—the beneficiary has not specified his or her choice, a plan’s administrator might obey the plan’s provisions (including recent amendments). What does the plan provide for a situation in which an adult beneficiary, after due notice, fails to specify the beneficiary’s choice between money and a rollover? Does anything in the plan’s governing document vary that provision regarding a minor beneficiary?

The lawyer you want is Jewell Lim Esposito. She is an experienced employee-benefits lawyer who also has a focus on cannabis, hemp, and CBD businesses. https://www.fisherbroyles.com/people/jewell-lim-esposito

If the plan’s governing documents allocated investment responsibilities to participants or they had a right to direct investment, might the plan’s administrator have breached an ERISA § 404(a) responsibility if the administrator did not meet the disclosure requirements of 29 C.F.R. § 2550.404a-5 for 2012 and later years. Even if the liability exposure to the one employee is both slight and remote, an employer/administrator might consider getting its lawyer’s advice about opportunities to reform, or at least amend, the document to state a plan that is not participant-directed (if that was, or is, the true intent).

29 C.F.R. § 2510.3-2(f) is not the only way to show that an employer didn’t establish or maintain a plan. Yet, courts’ decisions about arrangements for payroll-deduction pay-overs to buy voluntary insurance at least consider, and mostly apply, the somewhat similar rule—29 C.F.R. § 2510.3-1(j). While I have deep experience (from 1984 through 2005) about § 403(b) arrangements intended as a non-plan, all that experience was before the Treasury department interpreted IRC § 403(b) to require a written plan. Although I’ve advised charities (from 2006 through as recently as a week ago) about how to avoid involvement in claims decisions, none of those charities attempted to avoid establishing a plan. For many situations in which an employer believes it has a non-plan, the bigger risk exposure is that a participant’s surviving spouse discovers the spouse was not named as the participant’s beneficiary and learns that, if the plan is ERISA-governed (or a court so decides), the beneficiary designation might be invalid.

I am unaware of any published court decision that is on point for your question. Skillful lawyers could argue a wide range of possible interpretations. If your client is the employer and it prefers a non-plan, it might want its lawyer’s advice about: how strongly or weakly evidence beyond the document shows that the document’s provision was not the employer’s intent and is not employees’ reasonable expectation; whether the document may be equitably reformed to get rid of the scrivener’s error and state only provisions the employer intended.

If: the purpose and scope of the review is to review the plan’s or its administrator’s agreements with providers of services used for the plan’s administration, that review is reasonably needed for the plan’s administration, the fee is no more than reasonable compensation for the services rendered, incurring the expense is not contrary to the plan’s governing documents, and the responsible fiduciary loyally and prudently incurs that expense for the exclusive purpose of providing the plan’s benefits to participants and their beneficiaries, it ought to be an expense a fiduciary could pay from plan assets. For some partial subregulatory guidance: https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/advisory-opinions/2001-01a https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/advisory-opinions/settlor-expense-guidance

When I advised a charity that preferred not to be involved in claims decisions, we got each provider’s contract obligation that it will decide all claims without asking the employer for anything beyond furnishing factual information (not discretionary findings) the employer has and the provider reasonably needs. For an IRC § 403(b) non-plan, the trick is to get each provider’s obligation before the employer permits the provider “to publicize [its]products to employees” and before accepting a wage-reduction agreement that would specify a contribution to the provider. Likewise, the employer would avoid being a party to, or otherwise adopting or approving, an agreement, plan, or other writing that states, or without the employer’s assent could be amended to include, a contrary provision. Such a constraint narrows the available investment and service providers. If the employer had not obtained role-limiting provisions, a participant’s claim can result in the hard place Belgarath describes. Many employers, unwittingly or reluctantly, do things that establish or maintain a plan. And many businesspeople don’t understand that what an employer intended as a non-plan became a plan. Enforcement is almost none until a participant’s surviving spouse discovers the spouse was not named as the participant’s beneficiary (and learns that, if the plan is ERISA-governed, the beneficiary designation might be invalid). Even then, not everyone pursues it.

If ERISA § 404(c) applies, a fiduciary is not “liable for any loss, or by reason of any breach, which results from [a directing participant’s or beneficiary’s] exercise of control.” 29 C.F.R. § 2550.404c-1(a)(1). However, a plan does not fail to provide an opportunity for a participant, beneficiary, or alternate payee to exercise control over his or her individual account merely because the plan permits a fiduciary to decline to implement an instruction that would result in a non-exempt prohibited transaction. Because the conditions of the ERISA § 408(b)(2) exemption (or another prohibited-transaction exemption) include that the plan pays no more than reasonable compensation, a plan’s administrator might set an outer limit on a fee the plan’s directed trustee will pay under a directing participant’s, beneficiary’s, or alternate payee’s instruction. If a fiduciary sets such a limit, whether to draw the line at 250 bps, 150 bps, or something else involves risk-management and other practical choices. A fiduciary might prefer to set a limit so it imposes no more constraint than the fiduciary can show does no more than avoid a nonexempt prohibited transaction. Of course, any of this supposes the plan’s fiduciaries decided to allow an instruction to pay an investment adviser’s fee.

Because C.B. Zeller and others are generous in helping me, I thought I’d explain a way to resolve the 404a-5 question. I concur that no exception under the 404a-5 rule results because an individual incurred (or even negotiated) the fee. Rather, I think it’s feasible to state the disclosure the rule calls for. ERISA’s 404a-5 rule recognizes some expenses not apportioned among all individuals’ accounts. The yearly disclosure must include “an explanation of any fees and expenses that may be charged against the individual account of a participant or beneficiary on an individual, rather than on a plan-wide, basis ([for example], fees attendant to processing plan loans or qualified domestic relations orders, fees for investment advice, . . .) and which are not reflected in the total annual operating expenses of any designated investment alternative.” 29 C.F.R. § 2550.404a-5(c)(3)(i)(A). For that explanation, one could write: If you hire an investment adviser to manage your individual account or advise you about how to direct investment, we may pay your adviser’s fees you instruct us to pay, and would charge your account for those payments. Quarterly statements must show “[t]he dollar amount of the fees and expenses described in paragraph (c)(3)(i)(A) of this section that are actually charged (whether by liquidating shares or deducting dollars) during the preceding quarter to the participant’s or beneficiary’s account for individual services[.]” But a yearly disclosure might explain an individual-incurred expense by a narrative, rather than specifying an amount, rate, or formula, especially for an expense not in the plan administrator’s knowledge. When a text includes a purpose statement, one may interpret the text according to its purpose. The rule describes its purpose as enabling directing participants, beneficiaries, and alternate payees “to make informed decisions with regard to the management of their individual accounts.” 29 C.F.R. § 2550.404a-5(a). If an expense is charged only according to a directing individual’s instruction to pay the fee, it seem reasonable to presume the individual had the information she stated in her instruction.

Thank you, everyone, for the further observations. In my experience (which includes hundreds of PWBA/EBSA investigations), I’ve never seen a Labor department investigator question whether advising a participant about how to direct investment for her plan account is a necessary service that plan assets can pay for. And the IRS in letter rulings decided that redemptions to pay the reasonable fees of a participant’s adviser are not distributions (and not reported on Form 1099-R) because they are plan-administration expenses. (At least three regulators—EBSA, IRS, and SEC—look for whether the payment arrangement is sufficiently documented, and for whether the adviser’s fees are reasonable, disclosed, and reported.) Some recordkeepers routinely pay, as instructed, the fees of an investment adviser affiliated with the recordkeeper. For example, Great-West (a/k/a Empower Retirement) will pay fees if the investment adviser is Great-West’s affiliate Advised Assets Group, LLC. Likewise, Fidelity Management Trust Company will do it if the participant’s adviser is Fidelity Personal and Workplace Advisors LLC or another FMR affiliate. So far, I’ve found few recordkeepers provide payment arrangements for investment advisers unaffiliated with the recordkeeper. I assume a directed trustee would want (1) the plan administrator’s or other named fiduciary’s approval; (2) the participant’s or beneficiary’s direction and instructions; and (3) the investment adviser’s warranties that the adviser is and will remain adequately registered; the fees are reasonable and sufficiently disclosed; and all conditions for a prohibited-transaction exemption are met. Does anyone know whether John Hancock, The Principal, or other providers will pay (assuming satisfactory instructions) fees of unaffiliated investment advisers?

BG5150 and C.B. Zeller, thank you. C.B. Zeller, for a plan that has no brokerage feature and restricts a participant's choice to core designated investment alternatives, have you ever seen an arrangement for paying an unaffiliated investment adviser at the participant's instruction? And other BenefitsLink commenters?

Informal poll and query for BenefitsLink readers: Considering only individual-account (defined-contribution) retirement plans that provide participant-directed investment: Does a plan with its recordkeeper’s or TPA’s help permit a participant to charge against the participant’s account the fees of an investment adviser unaffiliated with the recordkeeper or TPA? Always Often Sometimes Seldom Never When a recordkeeper or TPA allows such an opportunity, what conditions are imposed? What, if anything, does the recordkeeper or TPA require the adviser to sign to be recognized for a plan’s payment regime? Does the regime for paying an unaffiliated adviser’s fee allow any rate the participant instructs, or is there an upper limit?

Does the “written plan” for the § 403(b) plan refer to the collective-bargaining agreement or collective-discussion document so that the other document is a part of the § 403(b) plan? If there is a defect, a sound resolution would call for coordination about tax law and labor-relations law. If the public-schools employer does not use the same law firm for both, the employer should want the firms to collaborate. If you’re a service provider on this situation, consider asking the school business officer to instruct the law firms to receive information from you. (That’s if your contact wants to deal with the weakness.) Without your help, lawyers who lack practical experience with payroll and retirement plan administration might render advice that doesn’t meet the employer’s fully considered needs. Consider also that the employer might prefer not to get into this. While doing what’s needed to protect your work, try to avoid unnecessary writings that could make it easier for a State or local government auditor or an IRS examiner to spot a defect. Even if the problem is obviously not your fault, your firm might be blamed or punished.

Gilmore, thank you for the helpful information.

When the plan’s administrator is an organization (for example, the corporation, limited-liability company, or registered partnership that is the plan’s sponsor), does anyone affix as the signature, however “manual”, a signature of the organization’s name—for example, Worldwide Widget Company—rather than a human’s name?

BG5150, thank you.

Bird, thank you for your further observation. I too often see forms that use extraneous text, and ask for more items of information than is needed to decide the claim.

Is this a defined-benefit plan or an individual-account (defined-contribution) plan? About the years for which you suppose the plan had no participant beyond the owner and her spouse: Was there a former employee who had an accrued benefit, even if not yet nonforfeitable, more than $0.00? Did 2008/2009 or 2017/2018 have a partial termination? If so, does it affect the administrator’s count of whether there was a participant beyond the owner and her spouse?

The reporting is less about that code 1-or-2 point and more about whether the church plan’s administrator or withholding agent reports a distribution’s taxable amount. Some get a church’s designation of an amount of retirement pay that could be treated as an IRC § 107 parsonage allowance and information from the minister, and use those to report a taxable amount less than the gross distribution amount. But many find that the reporter is “unable to reasonably obtain the data needed to compute the taxable amount”, and mark box 2b as “taxable amount not determined”. The minister then reports on Form 1040 the amount the minister finds is the taxable portion of her distribution. It might not matter that a 1099-R displays a code that would alert the IRS to look for a too-early tax if the distribution’s taxable amount is $0.

JOH, I suggested to the requesting officer that it might be unwise for the university to spend its money (no matter how inexpensively I would do the task) if the vendors’ forms are adequate. Further, even if I would write the form as a freebie, I’m still thinking through potential disadvantages. While I’m waiting for information about why the university might want a distinct form, I seek BenefitsLink neighbors’ observations about whether it’s a good idea or bad idea. Beyond a claimant’s burden of filing-out duplicate forms (and the employer/administrator’s burden of reviewing duplicate forms), is there some other disadvantage to using a form besides the investment vendor’s form?

Thank you for your helpful perspective. Is a vendor's hardship form one you consider inadequate?