Peter Gulia

The Investment Advisers Act of 1940 rule can apply only if the adviser “ha custody of client funds or securities[.]” 17 C.F.R. § 275.206(4)-2(a) [http://www.ecfr.gov/cgi-bin/text-idx?SID=4bca3a6fcc528a39a291f8260cae61c9&mc=true&node=se17.4.275_1206_24_3_62&rgn=div8];Custody of Funds or Securities of Clients by Investment Advisers, 75 Federal Register 1,484 (Jan. 11, 2010); Investment Advisers Act Release IA-2968 (Dec. 30, 2009). The word client is not specially defined in the rule’s definitions section. But consider this off-rule interpretation: Question XII.1 Q: A related person of an investment adviser ([for example], an officer or director of the adviser) may act as the trustee of the participant-directed defined contribution plan established for the benefit of the adviser’s employees. As trustee of the plan, the related person selects the service providers for the plan, such as an administrator[,] and may select the investment options available under the plan, [for example], mutual funds. Must the adviser treat the assets of the plan as client assets of which it has custody? A: The Division will not recommend enforcement action to the Commission against an investment adviser that does not treat the assets of a participant-directed defined contribution plan established for the benefit of adviser’s employees as those of a client of which it has custody in these circumstances solely because a related person of the adviser is trustee which [sic] may select service providers and investment options for the plan, provided that (i) neither the investment adviser nor a related person otherwise acts as an investment adviser to the plan or any investment option available under the plan[,] and (ii) the investment adviser and the related[-]person trustee are, to the extent applicable, in compliance with the Employee Retirement Income Security Act of 1974 (ERISA) and rules and regulations issued thereunder with respect to the plan. (Posted March 5, 2010.) https://www.sec.gov/divisions/investment/custody_faq_030510.htm The rule and off-rule interpretation cited above are for an adviser registered (or required to be registered) with the U.S. Securities and Exchange Commission. For an adviser registered (or required to be registered) with a State (or several States), no rule or a different rule might apply. This general information is not advice to anyone.

An ESOP retirement plan has fewer than 100 participants at both the beginning and the end of the plan year. All of the plan's assets are "qualifying plan assets" within the meaning of the 104-46 rule. The employer securities are not publicly traded. Is there anything about the ESOP nature of such a plan that would preclude it from relying on the small-plan excuse from an independent qualified public accountant's audit of the plan's financial statements?

An important caution: My example above often won't work. To get the IRC § 7525 privilege, the communication must have been made for the purpose of obtaining tax advice. If the practitioner is an employee or agent of a business that denies that it provides tax advice, that denial might make doubtful the taxpayer's assertion that the communication was made for the purpose of obtaining tax advice.

Do any of the questions involve something for which the Labor department would be the enforcer and disclosing a problem on Form 5500 could cause the agency to have enough knowledge to trigger the shorter statute of limitations?

Remember, this privilege can protect only a communication, not underlying facts. Internal Revenue Code § 7525 provides its limited privilege by analogy to the evidence-law privilege for confidential communications with a lawyer. So a communication can be protected only if, among other conditions, the communication was made for the client’s purpose of obtaining tax advice and was made in confidence (not to be read or heard by a person beyond the client and the practitioner). Likewise, a client that wants to rely on the privilege as a ground for not producing or revealing a communication that otherwise the taxpayer was required to furnish or reveal should do something to invoke the privilege. The Internal Revenue Service ordinarily recognizes a taxpayer’s privilege claim made by the taxpayer’s representative. For an examination, consider that a taxpayer might be represented by a practitioner other than the ERPA who was the maker or recipient of a communication. Under the rule that authorizes an ERPA’s limited practice, an ERPA “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.” 31 C.F.R. § 10.3(e)(2). An examination of a taxpayer might not be so confined.

Internal Revenue Code § 7525, which provides a limited evidence-law privilege in non-criminal Federal proceedings for some confidential communications with a “federally authorized tax practitioner”, refers to 31 U.S.C. § 330. The statute codified there grants the Secretary of the Treasury power to "regulate the practice of representatives of persons before the Department of the Treasury[.]" The statute's implementing rule, 31 C.F.R. part 10, was the ground for the Florida court's legal reasoning. Some might welcome the idea that the § 7525 privilege applies to a communication made for the purpose of getting a practitioner's tax advice that was "within the scope of the individual’s authority to practice[.]" For example, the IRS may not compel an ERPA to reveal a confidential communication her client made to ask for the ERPA's tax advice about whether a user may rely on an IRS letter issued to the ERPA's employer as a prototype sponsor.

The originating query was whether "this taxable fringe benefit [providing health coverage for a domestic partner] is not included in wages for the retirement plan." As QDROphile mentions, a retirement plan's definition of compensation, at least for benefit-accrual purposes, might involve possible variations, even within the range of safe-harbor definitions. Moreover, a plan might state a definition that is not a safe-harbor definition.

austin3515's description is the behind-the-scenes essence of the Florida court's reasoning. It's also the outlook of many employee-benefits lawyers. For advice-giving rights and responsibilities, I continue to advocate getting rid of unnecessary distinctions.

Florida’s Supreme Court decided not to approve a proposed opinion about the unauthorized practice of law. The court reasoned that some of what the proposed opinion would have proscribed is authorized under the U.S. Treasury department’s rules that allow not only a lawyer but also a certified public accountant, an enrolled agent, an enrolled actuary, and an enrolled retirement plan agent to practice before the Internal Revenue Service. The Florida Bar re Advisory Opinion – Nonlawyer Preparation of Pension Plans, 571 So.2d 430 (Fla. 1990) [slip opinion attached]. A State cannot prohibit a practice that Federal law authorizes. Sperry v. State ex rel. The Florida Bar, 373 U.S. 379 (1963). This idea might protect a preapproved document sponsor’s responses to its user’s questions about those documents. To maintain the document that the IRS calls a pre-approved document (such as, a prototype or volume-submitter document), such a document’s sponsor must include the sponsor’s (or its authorized representative’s) address and telephone number, to receive “inquiries by adopting employers regarding the adoption of the plan, the meaning of plan provisions, or the effect of the opinion letter.” One could argue that a plausible interpretation of this Treasury department administrative law is that a document’s sponsor is at least expected to answer a pre-approved document user’s questions. From that premise, one could argue that State law cannot preclude acts that Federal law at least authorizes. About a document sponsor that answers a user’s questions, consider that a nonlawyer is held to at least the same standard of care and expertise as a competent lawyer.

So let's ask the question at least one BenefitsLink reader will raise: What does the plan document say? Also: Has the employer decided to tax-report a portion of the amount it paid for health coverage as the participant's wages? Might the person described as a domestic partner also be the participant's spouse for Internal Revenue Code sections 105 and 106? Might the person described as a domestic partner also be the participant's dependent for Internal Revenue Code sections 105 and 106? Resolving your query might turn on the exact text of the retirement plan's provisions.

It's uncertain, and there are at least two appeals court decisions with reasoning that points in opposite directions. Also, it might be more difficult to challenge a tax as an indirect command to maintain a plan if an employer can meet the condition for non-imposition of the tax by implementing a payroll-deduction convenience that the U.S. Labor department's rule will define as a non-plan.

401 Chaos, thank you for your further observations. Before an employer relies on an indemnity as a reason to take on risks, the employer might want advice about exactly which risks the indemnity responds to, and about whether the indemnity might be legally unenforceable. If the employer knew or ought to have known that it was accepting legal advice from a non-lawyer, a court might be reluctant to enforce an indemnity promise that facilitates the non-lawyer's conduct of engaging in the unauthorized practice of law.

If you're following States' legislation on using a play-or-pay tax to push an employer to make available payroll-deduction retirement savings, this link is to a bill pending in New Jersey's legislature. http://www.njleg.state.nj.us/2014/Bills/A4500/4275_R2.PDF It would, after a phase-in, impose a $500-per-employee tax on an employer that maintains no retirement plan and does not send payroll-deduction contributions to IRAs.

I'm unaware of an employee-benefits lawyer who would say an employer's reimbursement of its employees' payments for individual health insurance is proper.

Whatever one thinks about what JPIngold's client heard about when some document should be adopted, it seems likely that the statement was made by a worker of Voya, which is the recordkeeper for plans that buy under the American Bar Association's program. http://www.abaretirement.com/

Again, a key to avoiding funding of the employer's unsecured promise and avoiding an economic benefit provided by the employer is that the participant buys the insurer's obligation. There is a dance to how the participant's lawyer approaches the insurer and sets up the participant's insurance purchase.

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. IRS Letter Rulings 93-44-038 (Aug. 2, 1993), 84-06-012 (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. Because a letter ruling is not precedent, each taxpayer should get his, her, or its lawyer’s advice. Among other methods, a lawyer might evaluate changes in relevant law. I remember this insurance being available in the 1980s from Bermuda-based insurers. The underwriting tightened in the 1990s.

benefitsguru, I doubt one would find a State statute for the provision you imagine. If for the set of issues you're thinking about State law becomes relevant, consider that an IRA contract often states a choice-of-law provision. Following this, the applicable State law might not be the law of the State in which the IRA holder resided or was domiciled. Imagine that a Vanguard IRA might specify Pennsylvania law; a Fidelity IRA, Massachusetts law; or a "Wall Street" broker-dealer's IRA, New York law or Delaware law. (A choice-of-law provision might matter, for example, if someone assumes that a revocation-on-divorce statute of the State in which the IRA holder resided undid a beneficiary designation, but the IRA's chosen State law has no such law.) As jpod suggests, it's unlikely that the IRA does not state a default-beneficiary provision.

I don’t remember any Treasury department rule that precludes using an electronic signature to adopt a prototype or volume-submitter document. If I’m right, that follows a Federal law presumption that “a signature, contract, or other record . . . [should] not be denied legal effect, validity, or enforceability solely because it is in electronic form[, or] . . . solely because an electronic signature or electronic record was used in its formation.” 15 U.S.C. § 7001(a). Although a Federal agency has some powers to prescribe standards and formats, an agency should not “require retention of a record in a tangible printed or paper form [unless] (i) there is a compelling governmental interest relating to law enforcement or national security for imposing such requirement; and (ii) imposing such requirement is essential to attaining such interest.” 15 U.S.C. § 7004(b)(3)(B). A few recordkeepers permit, and even prefer, using electronic signatures to adopt a prototype or volume-submitter document. But others might do things differently.

Thank you - Bird, masteff, Mike Preston, and Tom Poje - for the further help.

What does the sponsor of the prototype or volume-submitter document say about whether that sponsor will accept an electronic signature?

ETA Consulting and jpod, thank you for the good help. In my experience, many participants prefer to avoid a need to explain a tax position, and so try to persuade the payer to tax-report a payment so everything is logically consistent for the IRS's computers. Does any BenefitLink maven have experience with how a payer reacts to a request that the payer make a finding that the plan's administrator had not made?

Internal Revenue Code § 72(t)(2)(A)(iii): Except as provided in paragraphs (3) and (4), paragraph (1) [the imposition of the tax] shall not apply to any of the following distributions: Distributions which are — (iii) attributable to the employee’s being disabled within the meaning of subsection (m)(7)[.] A fact-finder might find that a distribution grounded on severance from employment is “attributable to the employee’s being disabled” if the employment ended because the former employee is unable to work. In the situation I described, the payer makes its tax-reporting decision separately from the administrator’s decision that a severance from employment entitled the participant to a distribution. If the payer does not put the disability code on the Form 1099-R, will the IRS look for the extra 10% tax?

The participant became entitled to a distribution not because she attained any 50-something age but rather because she was severed from employment. This circumstance is why the tax-reporting question turns on a point the plan's administrator had not decided. BenefitsLink mavens, what happens in the real world?

A participant took a distribution that attracts the extra 10% tax on a too-early distribution, unless the participant is totally and permanently disabled. The plan's administrator approved the participant's claim for the distribution because the participant was severed from employment. (Nothing in the plan's provisions calls for any decision about whether a participant is disabled.) The payer asked the plan's administrator to sign a form to state the administrator's finding that the participant is disabled. The administrator declined to sign, not only because it had not made such a finding but also because such a finding is unnecessary in the plan's administration. The participant is worried that the payer will tax-report the distribution without putting the disability code on the Form 1099-R. She worries that the IRS's computer will flag her tax return as one that ought to have included the form for declaring the extra 10% tax on a too-early distribution. Is the participant's worry grounded in BenefitsLink mavens' experience? If the payer wants to respond to the participant's worry, may the payer make its own decision (without involving the plan's administrator), solely for tax-reporting purposes, about whether the distributee is disabled?