Peter Gulia

Not having seen the webinar you mention, I don’t suggest a conclusion. Your general premise is right: For most IRC § 403(b) plans and participants, there are only two kinds of investments allowed: a custodial account that holds shares of SEC-registered “mutual” funds, and an annuity contract. A church plan may include retirement income accounts. A “grandfather” rule allows a life insurance contract if it was issued before September 24, 2007 and provides only incidental death-benefit protection. There are other transition rules concerning some State retirement systems’ investments. For more information, see my chapter 6 in 403(b) ANSWER BOOK, published by Wolters Kluwer Law & Business. Despite the general premise, an insurer might design a variable annuity contract and its separate account to obtain deposit insurance coverage. See 12 C.F.R. § 330.8. As always, read carefully (at least) the contract, the prospectus, and the statement of additional information. A bank, insurer, insurance agency, broker-dealer, or investment adviser should get its lawyers’ advice.

Revenue Ruling 2002-45 [http://www.irs.gov/pub/irs-drop/rr02-45.pdf]describes a restorative payment (the ruling’s antidote against counting an amount as a contribution) as a payment “made to restore losses to the plan resulting from actions by a fiduciary for which there is a reasonable risk of liability for breach of a fiduciary duty under title I of the Employee Retirement Income Security of 1974 (ERISA)[.]” Beyond the examples given in the ruling, the IRS in practice has treated a payment as restoration if the employer made a written finding that the selection or negotiation of the insurance or investment contract was (or might have been) a breach of the employer’s fiduciary responsibility, whether under ERISA or other law, and the finding is plausible. The Treasury department’s interpretation requires also that “plan participants who are similarly situated are treated similarly with respect to the [restorative] payment.” For a limitation year that began or begins on or after July 1, 2007, the ruling’s principle is included in the annual-additions-limit rule. 26 C.F.R. § 1.415©-1(b)(2)(ii)©. The Treasury adopted my suggestion about looking beyond ERISA to other Federal law, and to State law. The key driver is that there is “a reasonable risk of liability”.

Some clients ask for advice about whether volunteering optional or additional information might help support a statute-of-limitations defense or a laches defense or argument. Advice could include reasons for furnishing information and reasons for not furnishing it. Tom Poje, thank you for the practical information about one software application.

Will the software permit a filer to answer the questions if the filer wants to?

I've seen experiences similar to some possible reactions austin3515 alludes to: An employer includes for an unfunded plan's select-group employees some who have (unreduced) compensation less than the 401(a)(17) limit. One of those employees makes a salary-reduction deferral under the unfunded plan, and expresses surprise when he discovers that reducing his salary lost him a portion of a nonelective contribution to a funded plan. In the experiences I've seen, the TPA was in a position to prove that plain-language descriptions, for both plans, explained how the deferral under the unfunded plan affects the contribution under the funded plan. But the complaining participant diffidently asserts that someone should have explained the point orally; 'don't you know I'm too busy to read anything?' An employer can diminish this kind of problem by providing a continuation of the nonelective contribution under the unfunded plan.

My 2 cents, thank you for the interesting observation about tax-law nondiscrimination. While it isn't about harm to the plan, at least not the kind that ERISA sections 406 and 408 try to manage, it reveals some of the intellectual challenges of the tax-law nondiscrimination rule. Belgarath, although 12% interest isn't a participant loan provision I would recommend, a fiduciary might reason that it might not have been so obviously outside what ERISA section 408(b) calls for that past acts must be treated as clear nonexempt prohibited transactions to be undone. Also, in the comparison to a commercial lender's hypothetical similar loan, what kind of loan does the fiduciary look to as its proxy measure? A participant loan has some attributes of some security, but also several attributes involving a lack of security. Mike Preston is right that a new fiduciary entering the scene must not ignore a predecessor's acts. After setting new participant-loan provisions "going forward", could there be some room to find that past decisions were not "clearly" imprudent?

Many prohibited-transaction exemptions are worded in terms of making sure the plan receives no less than fair value. How is a plan harmed if the plan receives more than fair-market value?

Atila, some employers use a set of plans' designs and elections that run in the opposite direction: Before the beginning of a year, a participant irrevocably elects deferrals under an unfunded nonqualified deferred compensation plan. That plan provides that the amount that is the lesser of the year's deferrals or the amount that could be allocable to the participant's account under the 401(k) plan is distributed to the participant by March 15 of the year after the year for which the deferral was made unless the participant had irrevocably elected (before the beginning of the year for which the participant earned the compensation) to treat that amount as deferrals under the 401(k) plan. Parallel provisions govern the matching contributions. IRS Letter Rulings 95-30-038, 97-52-017, 97-52-018, 1999-24-067, 2000-12-083, 2001-16-046. An employer considering such a design should consider that not everyone who is a highly-compensated employee for the 401(k) plan necessarily can be a select-group employee for an unfunded plan. A participant considering the elections described above should carefully evaluate the risks of the employer's unsecured promises and creditors' access to amounts not held under the 401(k) plan. Also, this requires picture-perfect drafting of the documents and elections.

29 C.F.R. 2550.408b-1(e) states: "A loan will be considered to bear a reasonable rate of interest if [the] loan provides the plan with a return commensurate with the interest rates charged by persons in the business of lending money for loans [that] would be made under similar circumstances." Could the fiduciary 52626 describes have found that a 12% loan meets that condition because the loan provides commensurate interest within the possibly greater interest the 12% rate provides?

Is the plan ERISA-governed? If so, did the plan's investment in the partnership result in, for any of the preceding plan accounting years, the plan's qualifying plan assets having been less than 95% of the plan assets? If so, did the plan fiduciaries have ERISA fidelity-bond insurance with coverage no less than the value of the non-qualifying plan assets. If neither set of conditions for a waiver of an independent qualified public accountant's examination was met, did the plan's administrator engage an IQPA? If an IQPA was engaged, what did the IQPA's report say about the valuation of the plan's partnership interests? If an IQPA was engaged, what did the IQPA's report say about related-party transactions and prohibited transactions? Is the plan's partnership interest allocated only to the accounts of one or two directing participants, or is it allocated to all participants' accounts?

In Montanile v. Board of Trustees of the National Elevator Industry Health Benefit Plan, the Supreme Court decided an interpretation of law for courts to apply in their findings on whether relief a litigant seeks is or isn’t provided under ERISA § 502(a)(3). The Court’s holding: If a person had money or property that in good conscience belonged to the employee-benefit plan but dissipated that money or property on nontraceable items, a fiduciary cannot under ERISA § 502(a)(3) attach the person’s general assets. The Montanile rule might not preclude a pension plan from getting remedies for overpayments if the payee did not consume all the money and some amount remains traceable. An answer to my question might help a fiduciary think through a discretionary decision about relative fairness regarding consequences of a mistake. For example, a fiduciary’s thinking about how much value to put on burdens from unsettling a beneficiary’s reasonable expectations might be influenced by considering whether some of that burden is ameliorated by the beneficiary’s enjoyment of some proceeds from the overpayments. I do not suggest any conclusion, or even that these are relevant considerations. It’s only that I imagine someone might choose to consider the information among several kinds of information and several modes of analysis. By the way, the health plan’s case against Robert Montanile is (as much as I know) not yet decided. On the first try, both the trial court and the intermediate appeals court found that the plan could enforce its equitable lien even had Montanile dissipated all the money. The do-over now calls for fact-finding about how much is dissipated and how much remains in Montanile’s possession, including in traceable money or property.

If the plan's provision is the regulations' deemed-need provision, it refers to "[p]ayments necessary to prevent the eviction of the employee from the employee's principal residence or foreclosure on the mortgage on that residence[.]" The plan's administrator might ask for information so it can decide whether a foreclosure on the brother's property would result also in eviction of the participant from the participant's principal residence.

Is it at least possible that the participant's surviving spouse might have proceeds from the pension plan's overpayments to the participant because the surviving spouse is a beneficiary, legatee, or other taker from the decedent's money and property?

Internal Revenue Code section 72(m)(10) states: “Under regulations prescribed by the Secretary, in the case of a distribution or payment made to an alternate payee who is the spouse or former spouse of the participant pursuant to a qualified domestic relations order (as defined in section 414(p)), the investment in the contract as of the date prescribed in such regulations shall be allocated on a pro rata basis between the present value of such distribution or payment and the present value of all other benefits payable with respect to the participant to which such order relates.” More than 31 years after the 1984 enactment of the quoted statute, no rule or regulation to interpret section 72(m)(10) has been adopted, or even proposed.

Many practitioners had suggested (including at the February 2015 Baltimore conference) that some kinds of mid-year changes should be recognized as sufficiently benign that the change ought not to disrupt an otherwise good safe-harbor treatment. So what do you think of Notice 2016-16? https://www.irs.gov/pub/irs-drop/n-16-16.pdf Does this do enough to meet the concerns practitioners had expressed?

ERISA section 3 [29 U.S.C. 1002] includes definitions for employee organization (4), employee (6), participant (7), beneficiary (8), and person (9). Under these definitions, an alternate payee might be a beneficiary, but is not a participant because she is an alternate payee. By contrast, a participant is someone who is or may become eligible for a benefit because he or she is or was an employee or a member of an employee organization.

If the plan's administrator has not decided that the participant is dead and no one has submitted a claim for a death benefit, the administrator might consider that it has no current need to discern who might be a beneficiary. Consider that reaching-out efforts often spark false claims. If the participant's employment ended in 2014 (and the balance is low enough to call for an involuntary distribution), shouldn't a routine processing of involuntary distributions have emptied the account before 2016? The plan's administrator should use or engage identity-control, death-information, and address-information services that are under the administrator's control, without communication to a person who seems to be the participant's relative.

For those of us who are less immediately knowledgeable than Ubernerd, My 2 cents, David Rigby, and Mike Preston, it would be nice if the IRS published in the Internal Revenue Bulletin the next year's table (even if nothing but its caption changed) with a one-paragraph introduction about why it didn't change.

What are BenefitsLink mavens' thoughts about whether submitting a "zero" filing for a year in which there was no distribution would be helpful or harmful?

Consider at least two further thoughts: Before the employer relies on an insurer's or custodian's promise that it will decide every question, evaluate whether the promise is signed by a person who has actual authority to make the promise as the insurer's or bank's obligation and that the promise is not void or otherwise legally unenforceable for lack of one or more regulators' approvals. Consider whether the employer really will keep its resolve to support its "hands-off" position. For example, imagine a situation in which a court finds the employer in contempt of court for declining to decide whether the court's order is a qualified domestic-relations order. Suppose that it might cost at least a few thousand dollars in unreimbursable attorneys' fees to win an undo of such an order. Will the employer maintain its resolve, and spend money from the charity's assets, to litigate its non-plan position?

About Q2, consider that a plan that never covers an employee might not be an ERISA-governed plan. See 29 C.F.R. 2510.3-3.

If this employee belongs to a "select group" for an unfunded deferred compensation plan, one wonders whether his pay is governed by a written employment agreement. And if there is such an agreement, how does it express his pay?

If the employer is confident that the 403(b) arrangements are a non-plan, here's one practical path some practitioners suggest: If a Form 5500 report or return was filed for a preceding year, do a "final" 5500 so EBSA's and IRS's computers will treat the record as finished. If no Form 5500 report or return was filed for any preceding year, don't start.

A plan that does not provide participant-directed investment is beyond the particular relief that the quoted FAQ states. But not meeting the conditions for an exception from a general rule does not necessarily mean that a situation is within the general rule. A lawyer advising an SEC-registered investment adviser about whether it has custody within the meaning of IAA Rule 206(4)-2 because of the adviser's or its associated person's role concerning an in-house retirement plan might consider all of the relevant facts and circumstances, and interpretations about other situations, to render advice about whether the in-house retirement plan is or is not a client of the adviser. If I can help, please feel free to call me.

Consider whether such an employer might want the written advice of a lawyer who is experienced with ERISA and the Investment Advisers Act. That advice might be useful if it would conclude that the retirement plan is not a client of the registered investment adviser.