Peter Gulia

If ERISA governs the retirement plan, a State’s community-property law ought not to apply in deciding the plan’s payment. However, States’ laws might apply in sorting out whether the plan’s distributee must pay over to a person who is a rightful taker under State law. Although ERISA preempts State laws, some courts treat a State’s slayer rule as not preempted or finds a slayer rule is included under the Federal common law of ERISA. For example: Mendez-Bellido v. Trustees of Div. 1181, A.T.U. Pension Fund, 709 F. Supp. 329 (E.D.N.Y. 1989); New Orleans Elec. Pension Fund v. DeRocha, 779 F. Supp. 845 (E.D. La. 1991); New Orleans Elec. Pension Fund v. Newman, 784 F. Supp. 1233 (E.D. La. 1992); Addison v. Metropolitan Life Ins., 5 F. Supp. 2d 392 (W.D. Va. 1998); H.E.B. Inv. & Ret. Plan v. Harris, 217 F. Supp. 2d 759 (E.D. Tex. 2002). At least one court held that ERISA preempts States’ slayer laws. Ahmed v. Ahmed, 817 N.E.2d 424 (Ohio 2004).

Even if the public-schools employers attend to these issues, often there might not be much to do. A typical public-schools employer's 403(b) plan is salary-reduction-only. Most often, there is no Form 5500 report to do (or undo). Most often, there is no plan trust to change. Combining two or more governmental plans' written plans into one written plan shouldn't be too difficult. If the combining employers are in a State that has collective bargaining or discussion, each employer should attend to those duties. For example, it's unusual to discontinue an investment alternative without the assent of each union or association.

I've heard some practitioners suggest not restating a plan if doing so might make it more difficult to show that the plan remains the same as what obtained the most recent determination letter. Others hate the distraction and inconvenience of piecing together a plan from more than one document. If you found no amendment is needed, doesn't that mean there is no document failure to correct?

What, if anything, does the health and welfare trust's document provide? If you don't find a right there, get a participant or beneficiary, who can use his or her rights under ERISA section 102-104 and 502.

RatherBeGolding, jpod, and My 2 cents, thank you for helping me sharpen my thinking.

Consider this situation (hypothetical, but I hope grounded in enough reality to be useful for our BenefitsLink conversation). An employment-based retirement plan’s fiduciary seeks a rollover-IRA for default rollovers. The fiduciary receives three offers. Each offer presents a form of agreement closely based on 29 C.F.R. § 2550.404a-2(c)(3), including contract promises and warranties on all five conditions. Every offer represents and warrants that the IRA’s and its investments’ fees and expenses don’t and won’t “exceed the fees and expenses charged by the individual retirement plan provider for comparable individual retirement plans established for reasons other than the receipt of a rollover[.]” Yet these offers differ not only in their illustrations of the capital-preservation investment’s past performance (which anyhow might not predict future performance) but also in the current fees and expenses. If the fiduciary does no analysis, chooses one offer, and over the years it turns out to have had the highest fees and expenses and the worst investment performance, is the fiduciary nonetheless protected by the rule’s safe harbor? (Assume full disclosures, and that neither the selection of the IRA nor investing a rollover into it results in a nonexempt prohibited transaction.) If the fiduciary has some responsibility beyond what the safe harbor deems “satisfied”, what is that responsibility?

Despite an employer/administrator’s worry (as perhaps advised by its lawyer or independent qualified public accountant) that the IRS might tax-disqualify even a plan that adhered to the IRS memo’s conditions, could there be circumstances in which a loyal and prudent fiduciary might decide the plan should take that risk to gain for the plan expense savings? Imagine a plan has been paying its recordkeeper a fee to collect the hardship claims, to image those documents (including underlying source documents), and to review the claims under a procedure the administrator set. Imagine further the plan allocates its expense for that service by charging a $25 processing fee to the account of each participant who gets a hardship distribution. The recordkeeper offers the plan electronic processing of the hardship claims under a method that meets the conditions of the IRS memo. For those claims, the incremental fee is $0. (To make this hypo simpler, assume the plan receives no contribution beyond salary-reduction contributions, so the employer gets its tax deduction whether the plan is qualified or isn’t.) Could a fiduciary decide the harm to participants caused by a tax disqualification (adjusted for probability) is smaller than the burden of the processing expenses made necessary by not allowing participants a choice of the newer claims-handling method?

As Bill Presson explains, recognition as an ERPA can be useful for one who lacks the wider rights of practice that come with the first four categories of practitioners. 31 C.F.R. § 10.3(e)(2): Practice as an enrolled retirement plan agent is limited to representation with respect to issues involving the following programs: Employee Plans Determination Letter program; Employee Plans Compliance Resolution System; and Employee Plans Master and Prototype and Volume Submitter program. In addition, enrolled retirement plan agents are generally permitted to represent taxpayers with respect to IRS forms under the 5300 and 5500 series which are filed by retirement plans and plan sponsors, but not with respect to actuarial forms or schedules. http://www.ecfr.gov/cgi-bin/text-idx?SID=26de942d1f173f514d88111e2fe63237&mc=true&node=se31.1.10_13&rgn=div8

The not-so-hypothetical situation I described yesterday is based on a real situation I worked on. Unlike ESOP Guy’s illustration of a different fact pattern, there was no investor before the retirement plan’s purchase of all the corporation’s original-issue shares. Rather, the retirement plan paid the corporation an amount for 100% of the corporation’s original-issue shares. The appraiser’s report said the corporation’s value was identical, to the penny, to the amount the retirement plan paid in for the shares. So if, as the appraiser’s report concluded, the corporation had no value beyond its money (which it didn’t have before the only investor put it in), why would an investor part with money with no expectation of a return? RatherBeGolfing is right that investors generally, and investors in these businesses particularly, might not be coldly rational. But meeting ERISA and Internal Revenue Code rules for doing transactions at fair-market value calls for a valuation grounded on what such a hypothetical arm’s-length investor would do. There can be proper ways to value the fair-market price of a share of a start-up business. But that isn’t what was done in the appraisal I saw.

Wouldn’t a rational investor pay no more than fair-market value based on what a share’s value is when the investor makes the purchase (rather than what the value becomes after the investor made her purchase)?

Here’s a question to ponder: If a corporation invites an arm’s-length investor to purchase 100% of the corporation’s original-issue shares before the corporation has any customer, any business activity, any franchise right, any intellectual property, any other property, any money, or any other asset (beyond the corporation’s right to be a corporation), how much should the investor pay for the shares? If your answer is anything more than $0.00, why?

If a plan has a significant number of participants who get postal-service mail (rather than e-mail), some such plans bunch many required notices (at least for retirement plans, or for all health, other welfare, and pension benefits) so they can be mailed in one envelope - often in late November, to include notices to be delivered at least 30 days before a new year begins. (Please understand that I don't advocate for or against this idea; I seek only to learn more.) Has anyone made a list of the many notices and other required or desired communications one could put into such a Thanksgiving envelope?

And as everyone suggests, if the contribution obligation might have already accrued, read carefully the plan's governing documents to consider its express and implied provisions; and read carefully the summary plan description to evaluate whether the plan's administrator met its fiduciary responsibility in communicating the plan's provisions.

There was a BenefitsLink conversation in 2002. Working from the six authorities cited there, one might use legal-research tools and methods to find what's been published over the past 15 years.

If you're asking about a nonelective contribution, one of the several practical points - rules about how long after a relevant year an employer may pay the contribution while still getting a tax deduction attributable to that year - might not matter much if the tax-exempt organization lacks income against which the deduction might be useful. I've had experiences working with charitable organizations to write plans and summary plan descriptions that conditioned a nonelective contribution on the employer's collections of a specified set of revenues. Setting up provisions of that kind calls for careful lawyering, which often must consider business and legal questions beyond those customary for most employee-benefits practitioners.

The Labor department PROPOSES to delay the fiduciary rule from April 10 to June 9, 2017. Ending a month’s internal deliberation on what the Labor department might do or propose about an investment-advice fiduciary rule and related prohibited-transaction exemptions, today the Labor department filed [at 8:45] the prepublication text [31 pages] of a proposed delay rule, which is scheduled to be published in tomorrow’s (March 2) Federal Register. The proposed rule – if adopted, published, made effective, and not enjoined – would extend the applicability date of the 2016 investment-advice fiduciary rule from April 10 to June 9, 2017. It would likewise extend the expiration date of the 1975 investment-advice fiduciary rule. The proposed rule would extend the availability date of the Best Interest Contract Exemption from April 10 to June 9, 2017. Likewise, relevant dates for other new and revised exemptions published on April 8, 2016 would change to June 9, 2017. Comments on the proposal to extend expiration, applicability, and availability dates beyond April 10 are due March 17. (Comments beyond whether to delay are due April 17.) If the Labor department’s people can read and analyze the many comments in two weeks, it might be feasible to publish the delay rule in early April, slightly before current law’s April 10 “compliance” date.

Knowing that you're a careful practitioner, let's assume you already read the plan's document and didn't find enough information there. Is your query about whether an excess is treated as attributable to the latest contributions in the year or as evenly proportioned across the whole year?

And does anything preclude a 100% owner from using a limited-liability company (for whatever protections it affords) while treating the company as a disregarded entity so its business stays on Schedule C?

Federal court upholds investment-advice fiduciary rule. The 2016 investment-advice fiduciary rule wins; the challengers lose. The U.S. District Court for the Northern District of Texas acted in a case that consolidated three civil actions challenging the investment-advice fiduciary rule. (Challenges in other districts’ courts have been unsuccessful.) Chief Judge Barbara M. G. Lynn found that recent executive actions (the President’s memo and the acting Secretary of Labor’s news release), which plaintiffs’ attorney Eugene Scalia had yesterday brought to the court’s attention, “do not moot this dispute.” Today, attorneys of the Justice department asked the court to stay its proceedings until March 10. Filing her 81-page opinion and order, Judge Lynn denied that request. Deciding the case, Chief Judge Lynn denied all challenges, and granted the Labor department’s request to uphold the 2016: investment-advice fiduciary rule; amendment of Prohibited Transaction Exemption 84-24; and Best Interest Contract Exemption. If you want to read the full story, I attach the court’s opinion. Chamber of Commerce v Hugler opinion.pdf

If the employer/administrator has made written QDRO procedures, it might want to revise that document to specify which person directs investment during the period you describe. Perhaps BenefitsLink mavens might weigh in on which provision is more likely to support efficient plan administration.

Each of the rule, each prohibited-transaction exemption, and each amendment of a previously published exemption is an administrative-law act, each of which could be changed. For BenefitsLink readers following this topic, here's a link to the President's memo as published in this morning's Federal Register. https://www.federalregister.gov/documents/2017/02/07/2017-02656/fiduciary-duty-rule

On Q1, read the plan or agreement to consider which person decides whether a claim sufficiently states an unforeseeable emergency, and how much discretion the person has. A discretionary decision-maker might consider a non-cessation of deferrals as some evidence suggesting that the claimant might not really need an emergency distribution. On Q2, read the plan, the forms, the claims procedure, and for a point not resolved by those consider the administrator's discretion.

Without wading into the public-policy discussion, here's a practical point some practitioners might consider. Even if the applicability date of the 2016 investment-advice fiduciary rule somehow becomes delayed, this might not delay the availability date of the Best Interest Contract Exemption. An investment or service provider that is (or might be) an investment-advice fiduciary under the 1975 rule might want to use the new exemption to exempt a prohibited transaction that might be impractical or more difficult to exempt under other exemptions.

A further thought: In some of the situations I mentioned, there was a concern that allowing early distributions would deplete the plan's assets so much that the plan would become unable to pay for necessary services, including an independent qualified public accountant's reports the Labor department insisted on. In one of those situations, the administrator balanced the concerns by allowing partial distributions, but leaving reserves to meet anticipated payments to service providers. These situations can be fact-sensitive.

ETA, your concern is why the group's consensus was only that a fiduciary might consider how an earlier distribution affects the allocation of the plan's expenses. Your allusion to the blackout rule is interesting. In one of the situations I remember, the plan's administrator decided, without any lawyer's advice, to send a blackout notice, explaining that the plan would delay distributions until the wind-up administration was completed. That administrator also treated a participant's complaint about not getting a distribution before the final distribution as a request to review a denied claim, and followed the plan's ERISA section 503 claims procedure. Returning to AlbanyConsultant's query, might the differences in how the plan's expenses would be allocated among participants' accounts be small enough that the claimed in-service distribution would not significantly harm other participants?