Peter Gulia

MoJo, thank you for explaining a view that's helpful for me to think about.

And despite my usually good work, my preceding post has a word missing. If this had been work deliverable to a client, I might have used an assistant to double-check my work (and a client might have borne that expense). But might some clients prefer to tolerate an imperfection?

Should we consider that not all claims are submitted electronically? Of those on paper, might a recordkeeper's employee see a few hundred claim forms in a business day? Might such an employee, even if neither under-paid nor over-worked, sometimes have a bleary-eyed moment in which he believed a question was answered with the form's Yes box checked while the claimant's actual response was a No? Recognizing that each incremental to catch mistakes costs something, could a prudent administrator and a businesslike recordkeeper negotiate how much process and accuracy the plan wants to pay for?

If a plan's administrator and recordkeeper have negotiated a service contract that obligates the recordkeeper to process hardship claims under a procedure set by the administrator, the recordkeeper will want to perform the contracted service. And if a recordkeeper seeks to maintain a position that it lacks discretion because it "performs purely ministerial functions . . . within a framework of policies, interpretations, rules, practices and procedures" instructed by the plan's administrator, the recordkeeper should want the administrator to do enough oversight for the administrator to find that the recordkeeper follows the instructed procedure well enough that one can say it really is the administrator's (rather than the recordkeeper's) procedure. But I doubt an administrator must inspect 100% of the recordkeeper's processing decisions. And for those the administrator evaluates, I doubt prudence requires the administrator to cause the recordkeeper to attain 100% accuracy.

AKconsult, thank you for a helpful explanation!

In typical situations for most single-employer retirement plans, a plan’s administrator might be the same legal person as the plan’s sponsor, or some committee of that person. Typically, such an administrator’s worker also is an employee of an employer that maintains the plan. And usually one assumes the restraints of 29 C.F.R. § 2550.408c-2: Reasonable compensation for services needed to administer a plan doesn’t include any compensation for a fiduciary who gets full-time pay from an employer that maintains the plan. But although that situation might be a norm, it’s not the only way a plan can be administered. MoJo, I’m thinking of a retirement plan that hires its own employees (in addition to the recordkeeper), all of whom do no work for any employer that maintains the plan. In that situation, doing more work in reviewing claims could increase the plan’s expense and so reduce participants’ benefits. RatherBeGolfing, your observation suggests a point that those of the fiduciaries who decide to continue or renegotiate the recordkeeper’s agreement should evaluate whether the scope and quality of those services fits that fee. Also, some service contracts adjust the fees based on independent tests of the service provider’s work. Improving the recordkeeper’s processing (which might in some circumstances support a fee increase) could affect how much supervision or review the fiduciaries find necessary. Mike Preston, thank you for the idea. Assuming the plan’s administrator did not fail to implement a qualified domestic relations order and did not fail to obtain a qualified election (supported by the spouse’s consent) if ERISA § 205 or the plan’s governing documents required it, I assume a nonparticipant’s claim would be beyond those empowered under ERISA § 502(a). Again, thank you, all, for helping me think about this. I wonder if another answer to my question about how much effort to put into reviewing hardship claims is: enough so the fiduciary will have made a prudent effort against the possibility that the IRS might tax-disqualify the plan, but no more than is prudent for that purpose (if the effort would incur unnecessary expense borne by the plan).

RatherBeGolfing is on to something. My hypo is designed to help some fiduciaries gather information about how much effort (beyond the recordkeeper's work) the administrator should put into reviewing hardship claims. And in my imaginary situation, all work done to review hardship claims is paid from plan assets, and so reduces participants' benefits. Some believe the plan's administration should use enough effort for the administrator to have a high confidence level that hardship claims are decided correctly. Others feel that a fiduciary's duty to incur no more than reasonably necessary expenses suggests a greater tolerance for incorrect decisions. A part of their reasoning is their observation that the recordkeeper's processing rarely results in an incorrect denial (and a denial can be remedied through the plan's claims procedure), and an incorrect approval does not harm a participant beyond what the participant asked for. In theory, fiduciaries should care about what is loyal and prudent without regard to what the Labor department might or might not pursue. Yet the fiduciaries feel they should consider the practicalities of the plan incurring expenses to respond to an EBSA investigation (which the fiduciaries believe would not become chargeable to any fiduciary). So let's imagine the fiduciaries adopt a procedure for following the recordkeeper's clerical processing, with after-the-fact reviews of a small random sample that a consultant advises is just enough to detect a defect or systemic weakness in the clerical procedure. If that's the fiduciaries' decision, is there anything for the Labor department to pursue?

Thank you, everyone, for the helpful information. Let's follow-up on MoJo's question: Without doubting the power of the Labor department to pursue a breach of ERISA section 404(a)(1)(D), how likely is it that the DoL would pursue enforcement action against a plan's fiduciary for granting a participant exactly what the participant asked for?

Consider these circumstances: An individual-account retirement plan that includes a 401(k) arrangement allows a distribution as needed to meet a participant's hardship need. A participant submits a claim for such a distribution. The plan's administrator approves the claim, and instructs the plan's trustee to pay the requested distribution. But had the administrator read the participant's claim, it would have known that the participant was not entitled to a hardship distribution. Assuming the plan is ERISA-governed, does the participant have a viable claim against the administrator for its approval of the participant's claim. If there is such a claim, why is it viable or not viable? If there is a claim, what is the measure of the losses that result from the administrator's breach? I guess a court would dismiss a participant's claim. But perhaps I suffer from a failure of imagination. Can anyone pull together a claim a court would recognize?

For a single-employer plan or a multiple-employer plan, ERISA § 403(c)(2)(A)(ii) allows, as an exception from that § 403(c)(1)’s exclusive-purpose and non-inurement commands, a return of an employer’s contribution or payment made by a mistake of fact if the return to the employer is within one year after the mistaken payment of the contribution. Many plans’ governing documents have a provision designed to fit this exception.

If the plan’s provision follows 26 C.F.R. § 1.401(k)-1(d)(3)(iii)(B)(4), that the participant does not own the real property should not, by itself, negate a deemed financial need if the residence is the participant’s principal residence and he or she needs the plan’s distribution to prevent an eviction of his opportunity to live in his principal residence. About whether the participant lacks other resources, consider whether the plan empowers its administrator to rely on the claimant’s written statements.

The originating post refers to a bankruptcy attorney (and doesn't say which person that attorney represents or advises), and doesn't mention any bankruptcy trustee. Also, the originating post says it's a chapter 11 reorganization, so there might have been no appointment of a bankruptcy trustee. (A debtor-in-possession reorganization might be accomplished with no use of a bankruptcy trustee.) Further, it's possible the employer no longer serves as the plan's administrator, and that the current plan administrator or other fiduciary that has power to decide to pay an expense from plan assets is a person that needs no mother-may-I to make a payment from a pension trust not under the bankruptcy court's supervision. The pension plan's current fiduciary might have power to make or instruct a payment, and might be willing to do so. While only the creditor knows the circumstances, there might be little harm that would come from asking for the plan's payment.

And there might be no need to seek a bankruptcy court's approval of an expense not paid by the bankruptcy estate.

Aside from questions about how an employee-benefit plan gets recoveries for a person's acceptance of payments if he or she was not entitled to, let's focus on Brian's query about tax-reporting. Does the reporter have a tax-reporting error that it must correct? If the 1099-R that was filed accurately reports the name and taxpayer identification number of the payee to whom the payer sent a payment, does the fact that a different person received the money mean that there is a tax-reporting error and that it is one the payer or reporter is duty-bound to correct? And if a payer might volunteer to change the tax-reporting for amounts paid in previously-reported periods, how easy or difficult is it to do so?

The employer's reorganization does not by itself impair the pension plan's ability to pay. Even without any action at law, might it be worth asking the plan's current administrator to pay the outstanding invoice (from the plan's assets)?

The key point of DoL-EBSA’s Voluntary Fiduciary Correction Program is excusing a penalty that applies on a nonexempt prohibited transaction or a fiduciary’s breach. If a situation fits within the 19 transactions that can be corrected under the VFCP, neither the plan nor the applicant is under investigation, and the applicant meets all VFCP conditions, a ERISA § 502(l) or § 502(i) penalty is excused on the correction amounts paid without negotiation with the Labor department. (VFCP relief does not apply to the extent that one involves the Labor department in a settlement or a negotiation of the terms of a correction.) Because the Labor department may impose an ERISA § 502(c)(2) penalty on an incomplete or inaccurate Form 5500 report, an administrator might file corrected reports for those reports (if any) that incorrectly stated no contribution was missing or late. As your query explains, for a prohibited transaction regarding an IRC § 403(b) plan there is no IRC § 4975 excise tax to relieve.

A few thoughts and questions for the actuary to consider and get his or her lawyers’ advice on: Employer If the bankruptcy proceeding is under chapter 11, there might not be a bankruptcy trustee serving. If the hospital is a charity, consider whether bankruptcy law and trust law regarding charitable gifts might further limit the pools of assets available to respond to claims against the hospital. Consider whether payment from the business or charitable organization’s bankruptcy reorganization might be unlikely because courts might find that the debtor should not bear the pension plan’s plan-administration expense. Does the debtor (or its attorney) understand that the plan is a person separate from the debtor? Plan Even if the employer is insolvent, this does not necessarily mean that its pension plan is insolvent. Does the pension plan’s administrator need or want the actuary’s cooperation to help accomplish the employer’s reorganization? If the pension plan refuses to pay after the actuary’s reasonable demand, would a court award the unpaid actuary’s attorneys’ fees made necessary by the plan’s unreasonable refusal to pay an owed fee? Risk management Might a lawsuit or other claim attract counterclaims or crossclaims about the actuary’s performance? Professional Does Federal law, including 20 C.F.R. § 901.20(j), allow the actuary to withdraw or disaffirm his or her report? https://www.ecfr.gov/cgi-bin/text-idx?SID=c200ef7b93d787b376d2120dd9a1a124&mc=true&node=se20.4.901_120&rgn=div8 Would withdrawing or disaffirming the unpaid-for report breach any professional-conduct rule of the actuary?

Larry Starr, does the Employee Benefits Security Administration rely on your IRS Form 2848, or does the Labor department ask you to furnish some other power-of-attorney document?

Oops: Is there anything else or further the IRS will require?

Assume the only 403(b) failure an employer seeks IRS relief on is the employer's failure to adopt a written plan. If an employer adopts a written plan and files a VCP submission and pays the $500 (for 20 or fewer participants), is there anything the IRS will require ?

I don't know whether other States impose a similar tax. No client has asked me to do that research.

That a court of Florida might not enforce an obligation (until the tax is paid) is not the only consequence of a failure to pay this tax. Among others: “[A]ny person who fails or refuses to pay such tax due by him or her is guilty of a misdemeanor of the first degree.” Fla. Stat. § 201.08(b). “Whoever makes, signs, issues, or accepts, or causes to be made, signed, issued, or accepted, any instrument, document, or paper of any kind or description whatsoever, without the full amount of the tax herein imposed thereon being fully paid . . . is guilty of a misdemeanor of the first degree, punishable [by imprisonment and a fine, in addition to the unpaid tax, penalty tax, and interest] as provided in § 775.082 or § 775.083.” Fla. Stat. § 201.17(1). While a service provider might decline to offer a service and its client or customer might decide whether to obey Florida’s law, a fiduciary (even one who’s comfortable taking a risk on a civil liability or a tax) might be reluctant to commit a crime. Further, if a plan’s trustee is a bank or trust company, consider whether it might be unwilling to accept a loan agreement if Florida’s tax was not paid.

To meet a concern about using a life insurance contract as a measure of the executive's deferred-compensation right without providing anything that could interfere with the employer's sole and exclusive ownership of its property, I've seen language that refers to the greater of the measuring life insurance contract's actual value or the value the contract would have if the employer had promptly paid over to the insurer each premium equal to each deferral amount and had not taken any surrender under, or loan against, the contract. Understand that I've seen language of this kind, but have not used it in any plan or agreement about which I advised a client. There are practical, and legal, difficulties with such a provision.

AlbanyConsultant, I too read the passages you quote as failing to state, at least by themselves, provisions that would meet ERISA § 205. Understand that even a document the Internal Revenue Service approved under the IRS’s program for IRC § 403(b) preapproved documents could have such a weakness and it would not mean the IRS’s reviewer missed a point. The IRS’s review does not include ERISA § 205. If you still have a task for advising your client, you might check into whether the plan is ERISA-governed or not. If ERISA § 205 governs the plan, a court would, and a fiduciary should, construe or interpret the plan to state provisions that comport with that section.

If the plan your client interprets is an ERISA-governed plan: ERISA § 404(a)(1)(D) requires a plan’s administrator (and other fiduciaries) to “discharge his duties with respect to a plan . . . in accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with the provisions of this title [meaning title I of ERISA] and title IV.” If an ERISA-governed plan’s documents omit a provision that ERISA requires, a court would, and a fiduciary should, interpret the plan as if it includes the required provision. For example, if a plan’s document does not provide for a survivor annuity or other death benefit required by ERISA § 205, a court will supply the missing provision. At least two court decisions support this reasoning: Lefkowitz v. Arcadia Trading Co. Ltd. Benefit Pension Plan, 996 F.2d 600, 604 (2d Cir. 1993) (for a defined-benefit pension plan that omitted to provide for a qualified preretirement survivor annuity, the court interpreted the plan as providing a QPSA.); Gallagher v. Park West Bank & Trust Co., 921 F. Supp. 867 (D. Mass. 1996) (for an individual-account retirement plan that omitted to state any qualified preretirement survivor annuity or other survivor provision, the court interpreted the plan as providing a 50% qualified preretirement survivor annuity). ERISA § 205(b)(1)(C) applies § 205 to an individual-account plan unless, among other conditions, “such plan provides that the participant's nonforfeitable accrued benefit (reduced by any security interest held by the plan by reason of a loan outstanding to such participant) is payable in full, on the death of the participant, to the participant's surviving spouse[.]” ERISA § 205(b)(1)(C)(i). For a reprinting of ERISA § 205 (unofficially compiled as 29 U.S.C. § 1055), see: http://uscode.house.gov/view.xhtml?req=granuleid:USC-prelim-title29-section1055&num=0&edition=prelim