Peter Gulia

Much has been said and written about missing or unlocated participants. But much less has been discussed about what some describe as recalcitrant participants—those who decline to deposit or negotiate the check that pays a distribution. Imagine this situation. A profit-sharing plan (with no 401(k) arrangement) permits a distribution after a participant has severed from employment and attained age 60. The plan requires a distribution after a participant has severed from employment and attained normal retirement age. After the participant severed from employment, about 40 mailings—including disclosure notices, revised summary plan descriptions, summary annual reports, and benefit statements—were sent to the participant’s address, and nothing came back as undelivered. After this participant’s normal retirement age, the plan’s administrator mailed the participant a check for her required distribution. The participant is not missing; rather, the administrator has solid proof that the distributee accepted delivery of the plan’s mailing. After eight months, the payee has not deposited or negotiated the check. What steps should the plan’s administrator take next? What are the big recordkeepers doing with problems of this kind?

Whether and how ERISA’s blackout-notice provision applies might turn on the “plan year”. ERISA § 101(i)(8)(A) defines an individual-account plan for ERISA § 101(i). That definition excludes a one-participant retirement plan. ERISA § 101(i)(8)(B) defines for ERISA § 101(i)(8)(A) a “one-participant retirement plan” as a plan “that on the first day of the plan year (i) covered only one individual (or the individual and the individual’s spouse) and the individual (or the individual and the individual’s spouse) owned 100 percent of the plan sponsor (whether or not incorporated), or (ii) covered only one or more partners (or partners and their spouses) in the plan sponsor.” The interpretive rule restates those definitions. 29 C.F.R. § 2520.101-3(d)(2)-(3). If those definitions alone do not remove a situation from ERISA’s blackout-notice provision (which might be so if the relevant plan year begins on August 1 or later), consider also whether there is a blackout and, if there is, who it affects. ERISA § 101(i)(1) states: “In advance of the commencement of any blackout period with respect to an individual[-]account plan, the plan administrator shall notify the plan participants and beneficiaries who are affected by such action in accordance with this subsection.” The interpretive rule somewhat similarly states: “In accordance with section 101(i) of [ERISA], the administrator of an individual[-]account plan, within the meaning of paragraph (d)(2) of this section, shall provide notice of any blackout period, within the meaning of paragraph (d)(1) of this section, to all participants and beneficiaries whose rights under the plan will be temporarily suspended, limited, or restricted by the blackout period (the “affected participants and beneficiaries”) . . . in accordance with this section.” 29 C.F.R. § 2520.101-3(a). If, based on the relevant plan year, the plan is not a one-participant retirement plan AND the service change results in a blackout (which might be uncertain on the few facts described above), the plan’s administrator might deliver a notice to the affected participant. ERISA § 101(i) is not the only part of ERISA that might call for a blackout notice or similar communication. For example, an administrator, trustee, or other fiduciary might use a communication to meet a responsibility under ERISA § 404(a). Yet the situation 401(k)athryn describes suggests that the plan’s administrator, operated by the employer’s owner, might find that the affected participant already has information about how the change affects his rights under the plan.

Based on my experiences (most often as counsel to the decision-maker) with several situations in which a designated beneficiary killed the participant, I’ll tell you that a plan’s fiduciaries often don’t recognize fully how their decisions and communications can get scrutiny from many directions, including not only the named primary beneficiary, a named contingent beneficiary, a default beneficiary, and the personal representative of the participant’s estate, but also the alleged killing’s prosecution and defense lawyers (because either “side” might perceive strategic advantages or disadvantages that turn on whether a defendant has or lacks a right to get money). Even if the plan’s sponsor/administrator has excellent written claims procedures and long experience with flawless claims-handling, a slayer situation might put them to the test. Also, the plan’s administrator should not assume (at least not without its lawyer’s advice) that even a proven slaying would undo the slayer’s benefit. Unless the plan’s governing document states a provision, there might be no clear rule.

To help show that the plan’s administrator acts not in the employer’s self-interest in getting the use of forfeitures but instead to prudently administer the plan, the administrator might ask a good lawyer like Luke Bailey to provide written advice.

Many practitioners observe that few recipients read a summary annual report. But some courts might find that, without reading or even opening the SAR, a recipient is deemed to know the information stated in the SAR. And some might find further that an SAR's recipient is deemed to know the information stated in the whole annual report the SAR refers to. In some cases, that knowledge might invoke ERISA section 413(2)'s three-year statute of limitations to bar a fiduciary-breach claim. I don't know anything about the hypothetical plan administration 30Rock describes, but an administrator (particularly if it fears exposure to a former participant's fiduciary-breach claim, even the expense of persuading a court to dismiss an ungrounded claim) might want its lawyer's advice about what protection the plan's fiduciaries might gain by "over-delivering" a final summary annual report. If the plan's assets are not used to meet that expense, an employer might decide in its nonfiduciary business judgment whether the expense is worthwhile. For one illustration (with a different context) about how knowledge can start the clock to time-bar a fiduciary-breach claim, I attach a recent court decision. Bernaola v Checksmart Financial LLC corrected opinion.pdf

While I don't here give legal advice, I would post at least the Form 5500, its Schedule SB or MB, and the attachments to that Schedule. I would not rely on a summary annual report's explanation about how to get further information. And once a plan's administrator is posting to a website any portion of its annual report, why not post the whole annual report?

I apologize for the unintended italicization, which BenefitsLink software added, perhaps because I opened a quotation with brackets around the lower-cased letter i.

If a plan sponsor or plan administrator for its intranet website records data on which document was downloaded or viewed and which user's credentials were used to do so, consider whether a defendant might use that data to support an argument for the shorter statute of limitations under ERISA section 413(2) [ 29 U.S.C.1112(2)]. And even if an intranet posting would gain no such defense, a plan's administrator might consider that posting more information than the Pension Protection Act of 2006 requires might be consistent with a fiduciary's duty of communication. Tom Poje, I guess you had considerably more imagination than did the 109th U.S. Congress, and have much more imagination than does the 115th Congress. Gilmore, the Pension Protection Act of 2006's section 504 refers to "dentification and basic plan information and actuarial information included in the annual report"; an individual-account or defined-contribution plan's annual report might not include any actuarial information.

If the beneficiary you describe prefers that the retirement plan be treated as an IRC 401-qualified plan for one or more Federal, State, and local income tax purposes, consider whether the plan's provisions to follow 401(a)(9) minimum-distribution rule might affect how long the plan's administrator is willing to allow the beneficiary to delay beginning a distribution.

Are the circumstances that this beneficiary would be better off because she anticipates that the asset is likely to increase in value? Does the other beneficiary share a desire not to take a distribution? Who now serves as the plan's administrator?

If there is an undistributed benefit, doesn't the plan continue until all distributions are completed?

RBG, thank you for this helpful information.

RBG and others in this conversation, I hope you can answer a point of my curiosity: When a plan’s fiduciary is reluctant to open a separate bank account for the plan’s trust, does that happen because the fiduciary perceives that the employer would bear the fees of the plan’s account?

Counts VIII and IX in the second amended complaint in Cassell v. Vanderbilt University assert fiduciary breaches and prohibited transactions based on allegations that the plan’s fiduciaries allowed TIAA to use participants’ information for purposes beyond performing or providing TIAA’s recordkeeper services. But what if the retirement plan’s fiduciary: evaluates the communications and disclosures about the budgeting service, and finds they fairly describe the service, its fees, and its risks; evaluates the budgeting service, finds it is not inherently dangerous, and finds that an unknowledgeable person can make his or her own evaluation of the service; negotiates a recordkeeping fee that reflects an expert’s report on the value of allowing access to the participants for cross-selling; and discloses to participants that the fiduciary made this deal to lower participants’ expenses, and communicates to them that they must carefully evaluate the budgeting service for themselves. Could facts like these set up an explanation that a fiduciary acted loyally and prudently?

TaxLawyer1978, while I don’t give you or anyone advice, consider whether there might be some arguments in another direction. A Federal income tax rule suggests arguments that a self-employed individual is an employee for a year in which she has any earned income, and also for a year in which she rendered some personal services (even if her business provided her no earned income): (b) Treatment of a self-employed individual as an employee. (1) For purposes of section 401, a self-employed individual who receives earned income from an employer during a taxable year of such employer beginning after December 31, 1962, shall be considered an employee of such employer for such taxable year. Moreover, such an individual will be considered an employee for a taxable year if he would otherwise be treated as an employee but for the fact that the employer did not have net profits for that taxable year. Accordingly, the employer may cover such an individual under a qualified plan during years of the plan beginning with or within a taxable year of the employer beginning after December 31, 1962. 26 C.F.R. § 1.401-10(b)(1) https://www.ecfr.gov/cgi-bin/text-idx?SID=2ed955aaf30998b5f81b0ccb8bd185b9&mc=true&node=se26.6.1_1401_610&rgn=div8 And the rule doesn’t say ‘for IRC § 401(c)’; it says ‘for IRC § 401, which includes § 401(a)(9). The decision-maker would want to get into the details of the partnership agreement and the partnership accounting to discern whether the 70-something really is a partner. And did he render some personal services? Did he at least make a few courtesy calls to placate clients? If we were debating whether an employee has a severance-from-employment to permit a distribution a plan otherwise would not provide, some (perhaps including the IRS) might argue that part-time work—even a substantial reduction “in the number of hours that an employee works”—is not a severance. See, by analogy, 26 C.F.R. § 1.401(a)-1(b)(3). I don’t suggest these arguments resolve all questions or even lead to a sound conclusion. But a plan’s administrator might get its lawyer’s advice and find there’s enough to support an interpretation that the plan doesn’t compel a minimum distribution.

I sometimes encounter similar questions in contexts about nonowner workers. Perhaps BenefitsLink mavens will help me with some reasoning. If a retirement plan’s administrator were deciding this question about a nonowner, how would we analyze whether a part-timer is “retired”? If someone works one day a month, is she retired? Or does any work at all mean the worker is not yet retired? Does the analysis vary based on whether our question is: Whether the participant has “retired” enough that the plan’s IRC § 401(a)(9) provision compels a distribution? Whether the participant has a severance-from-employment to permit a distribution the plan otherwise does not provide?

ldr, your client might want your advice about how to write the plan's document to express the profit-sharing contribution's allocations.

The 2014 hyperlinks no longer point to the sources described. The court decision is available in Bloomberg BNA's Employee Benefits Cases and in Bloomberg Law. Melendez v. Hatfield’s Equip. & Dedication Servs., Inc., No. 1:13-cv-03684-ELH, 59 Empl Benefits Cas. (BNA) 1637, 1641, 2014 BL 223275 (D. Md. Aug. 12, 2014) (The complaint did not sufficiently allege facts that, if proven, could show that an English SPD was not understandable to “average” participants. 29 C.F.R. § 2520.102-2 refers not to what language a participant speaks; but rather to whether participants read a language other than English and do not read English. “Although [the plaintiffs] allege that they are ‘40 Spanish-speaking employees’ whose ‘first language’ is Spanish, the Amended Complaint contains no allegation regarding the number of total plan participants, the percentage of total plan participants who are only literate in Spanish, or even that they are only literate in Spanish. Accordingly, the facts alleged in the Complaint, taken as true, do not state a claim for relief.”) (emphasis in original). What written and oral communications beyond English a plan's fiduciary ought to provide to meet ERISA fiduciary duties and other duties or obligations is a fact-sensitive question.

Even if a plan’s fiduciaries have reduced their risks of liability (and the plan’s obligation regarding a mistake) to none, is it still worthwhile to reduce further a risk that a plan acts on a false document (if it’s feasible to do so with almost no incremental plan expense)? If so, is my idea about a little delay, communication, and time to respond an effective way to get someone else’s check against a false document? Is there some reason it’s a bad idea?

And ERISA § 206(d)(3)(G)(ii) states: “Each plan shall establish reasonable procedures to determine the qualified status of domestic relations orders[.]” (The statute doesn’t say the procedures must be written, only that the plan must somehow “establish” them.) If an administrator uses written procedures, the administrator might consider whether the procedures document should describe (or deliberately not describe) what kinds of evidence the administrator uses to consider whether a document submitted is a court’s order.

I wanted to remind myself about the standards ERISAAPPLE mentioned, so here’s two points: ERISA § 206(d)(3)(I): “If a plan fiduciary acts in accordance with part 4 [“Fiduciary Responsibility”, ERISA §§ 401-414] of this subtitle in—(i) treating a domestic relations order as being (or not being) a qualified domestic relations order, or (ii) taking action under subparagraph (H) [to separately account for amounts that might be due an alternate payee], then the plan’s obligation to the participant and each alternate payee shall be discharged to the extent of any payment made pursuant to such Act [ERISA].” ERISA § 404(a)(1)(B): “[A] fiduciary shall discharge his duties with respect to a plan . . . with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims[.]” How does this change any preliminary thought about which steps might be prudent or imprudent in discerning whether a writing is an authentic court order?

Whether it’s forgeries of purported death certificates or of purported court orders, that people present forgeries is a continuing problem in administering retirement plans. Let’s extend EHE’s survey. Imagine a plan administrator’s QDRO procedure does these things: It deliberately delays a decision on whether an order is a QDRO until at least 31 days after the date of the order. (Among other reasons, an administrator might set this to get some likelihood that times to seek whatever kinds of reevaluations the court might allow have expired.) It mails the decision to four persons: the participant, the participant’s representative (if there is one); the proposed alternate payee, the alternate payee’s representative (if there is one). It doesn’t separate the accounts or benefits until a month after a QDRO approval, allowing whoever might be harmed by a forgery (or some other defect) a little time to act on the situation. Would these procedures get some guards against forgeries?

Of the casualty claims (without a declared disaster) possibly allowable under the earlier deemed-need rule or under a "facts and circumstances" need, one wonders how many of them incorrectly state that the need cannot be relieved through insurance?

As one bit of information in a wide background to help you consider actuaries’ and lawyers’ advice about withdrawal liability to a multiemployer pension plan, consider the attached court decision. Among other findings, Judge Sweet found fault with the plan’s asymmetric use of a “Segal Blend” rate to assume for withdrawal liability a lower investment return than the plan and its actuary estimate for funding and other purposes. This is one of several cases in which a withdrawn employer challenges, on statutory and even constitutional grounds, a plan actuary’s use of differing assumptions about investment returns. The New York Times Company v Newspaper and Mail Deliverers Publishers Pension Fund.pdf

For employment-based retirement plans, changes made in response to the 2016 investment-advice fiduciary rule are likely to continue beyond the rule's legal effect. That was the theme of my CE session at last week's ASPPA Eastern Regional Conference.