Peter Gulia

I concur with others that needlessly involving the plan easily could become a no-good-deed-goes-unpunished situation. Why does not the participant's lawyer negotiate for a payment from the alternate payee to the participant (with the amount negotiated to reflect intervening investment changes and tax consequences)? Or if the divorced parties do not succeed in negotiating their arrangement between them, Fielding Mellish's description of the facts suggests a likelihood that the domestic-relations court still has continuing jurisdiction to order a payment from the alternate payee to the participant.

Would "the numbers" on the Schedule be the same numbers if the valuation date had been December 31, 2012?

ERISA section 404(a)(1)(D) tells a fiduciary to discharge his, her, or its duties "in accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with the provisions of [ERISA]." The Supreme Court of the United States has made clear that the "insofar" exception at least permits, and might require, a fiduciary to disobey a plan's document if doing so is necessary to meet an ERISA fiduciary duty, including a duty of loyalty or prudence. Does anyone know of a court decision in which the "insofar" exception applied concerning a situation concerning a health plan?

ERISA section 404(a)(1)(D) tells a fiduciary to discharge his, her, or its duties "in accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with the provisions of [ERISA]." The Supreme Court of the United States has made clear that the "insofar" exception at least permits, and might require, a fiduciary to disobey a plan's document if doing so is necessary to meet an ERISA fiduciary duty, including a duty of loyalty or prudence. Does anyone know of a court decision in which the "insofar" exception applied concerning a situation beyond employer securities? Any case concerning a retirement plan? Any case concerning a health plan? Any case concerning some other ERISA-governed employee benefit?

You are right to be concerned about the possibility of an inappropriate discrimination (not necessarily limited to IRC 401 and IRC 403(b)(12)). One assumes that the Rev. Rul. 2002-45 condition about treating similarly those who are "similarly situated" relates to the participant's exposure to the exit charge. For those and other reasons, it would be unwise for the employer to proceed until it can say that it acted in good faith and prudently following the written advice of its expert employee-benefits counsel.

My employer pays me only once a year, on New Year's eve. Anecdote aside, it's not entirely unusual for a micro business (the originating post mentioned three participants) to use less frequent pay intervals, especially if the workers are owners and executives.

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)[.]” The Treasury department’s interpretation requires also that “plan participants who are similarly situated are treated similarly with respect to the [restorative] payment.” Does the plan’s document provide for using forfeitures as a set-off against future contributions?

Aside from adjusting the past, could this employer considering changing its wage-payment periods to quarterly?

A Delaware general corporation may indemnify a person who serves or served, including concerning an “other enterprise”, at the request of the corporation “if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation[.]” Del. Code Ann. title 8 § 145 http://delcode.delaware.gov/title8/c001/sc04/index.shtml A Pennsylvania business corporation may indemnify a person who serves or served, including concerning an “other enterprise”, at the request of the corporation “if he [the indemnitee] acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the corporation[.]” 15 Pa. Consol. Stat. § 1741 http://www.legis.state.pa.us/cfdocs/legis/LI/consCheck.cfm?txtType=HTM&ttl=15&div=0&chpt=17&sctn=41&subsctn=0 Many States similarly allow indemnification if the indemnitee’s “was at least not opposed to the best interests of the corporation[.]” Although ERISA § 410 does not restrain indemnification provided by a person other than the plan, public policy under a State’s law or Federal common law might restrain or preclude an agreement that would set up an incentive for a fiduciary not to perform his or her responsibility. However, there is a range of conduct that, while a breach of a fiduciary’s duty to a plan, nonetheless can be indemnified by a person other than the plan. The point of getting indemnification from one’s employer (or the business organization that asks one to serve as a plan’s fiduciary) is that such a person can indemnify its indemnitee for conduct that an employee-benefit plan cannot exonerate.

Although a plan cannot relieve a fiduciary from liability, ERISA section 410(a) does not preclude a person other than the plan or its trust from indemnifying a plan fiduciary, as long as that other person uses his, her, or its personal resources rather than the plan’s assets. Before accepting an indemnity promise, a fiduciary should consider whether the provision complies with ERISA’s other fiduciary-responsibility provisions and other applicable law. Further, despite any written agreement that purports to provide more protection, a business organization (if organized under the law of a U.S. State) cannot provide indemnification unless its director, manager, member, officer, employee, or agent acted in good faith and reasonably believed that he or she acted in (or at least not opposed to) the best interests of the business organization. Recognizing the differing standards, an employer may indemnify a fiduciary for conduct that was a breach of the fiduciary’s responsibility to the retirement plan but was not a breach of the individual’s duty or obligation to his or her employer. As QDROphile says, the fiduciary would want an indemnification promise to include not only indemnity against third persons' claims and non-liability to the employer, but also all expenses of investigation, defense, settlement, accounting, and reporting, including advances of all expenses. An indemnitee would want advances subject to an obligation to repay only upon a final court decision that the indemnitee did not reasonably believe that he or she acted in the employer's interests. An employer might prefer an obligation to repay that is triggered by an internal decision. In negotiating and drafting indemnification agreements, I sometimes have acted for the employer, and other times for the executive. Some employers are generous without being asked; others want to set some conditions and restrictions.

It happens. A person might deny that a signature is his. Or even without denying a signature, a person might argue about the validity of an act, or about the legal effect of an act. And yes, I have seen situations in which an individual argued the invalidity of his own acts. I have seen situations in which a person signed a consent or agreement that he knew to be invalid because he intended to influence someone who mistakenly believed that the consent had legal effect. I have evaluated thousands of beneficiary disputes. I no longer have to imagine the positions and arguments that people put forward. Even if one is fully confident that the situation of A, B, the children, and the employer today is entirely harmonious, how does one know what circumstances will be in play after the participant's death? All that observed, whether to recognize a qualified election as supported by the spouse's consent is a plan-administration decision that the plan's administrator will make.

To consider LLHarlow's question, is it feasible to charge the expense of responding to the government's mistake to the plan; or is doing so more trouble than it's worth?

It might be imprudent for SpouseB to act as the plan's "representative" (that's the lingo from ERISA section 205 and the tax-Code counterpart) for a situation in which SpouseB is an actor. One imagines that a prudent fiduciary would use care to protect the plan administrator's decision from a challenge that it was affected by an interest other than the plan's interests, and from a challenge that the consent might not conform to the plan's conditions. While one guesses that SpouseA is not your client, he or she too might be better protected by a spouse's consent that is independently witnessed. Even if SpouseB now is willing to sign the consent, what happens if he later asserts that the consent is invalid?

Kevin C., do the documents say anything (perhaps in a general provision) that restrains an administrator's use of discretion in a way that could discriminate in favor of highly-compensated employees?

Some fact-finders might evaluate the credibility of the employer's statement that it intended the plan to be permanent by considering whether the proffered reason for ending the plan is one that a prudent person would not have foreseen when the employer created the plan.

A part of what makes this kind of deferred compensation unfunded (as described in IRC 457(b)(6)) is that a participant has no better right than another general creditor. If the agreement between the employer and the employee says the employer "will contribute" each year's specified amount, might one interpret the agreement as including the employer's obligation to establish a fund a rabbi trust? But remember, for a rabbi trust not to undo the unfunded nature of the plan, the trust's assets must be available to the employer's creditors.

QDROphile is right that a nonqualified deferred compensation plan is not governed by or subject to the same ERISA and Internal Revenue Code rules and conditions that usually apply to an IRC § 401-qualified plan. But if the deferred compensation is provided by a plan established or maintained by an employer (and is not a governmental plan or a church plan), the plan might be governed by title I of the Employee Retirement Income Security Act of 1974. If so, the exceptions that ERISA sections 201, 301, and 401 provide for an unfunded select-group plan excuse such a plan only from Parts 2, 3, and 4 of subtitle B of title I of ERISA, and do not excuse a plan from Parts 1 and 5. Alternatively, an agreement with an employee – especially if just one has deferred compensation – could be so lacking in a need for administration that it might not be a plan (within the meaning of ERISA § 3(2)(A)). Whether ERISA or State law governs, a deferred compensation agreement might include an implied obligation of good faith and fair dealing. So Lou S.’s suggestion about getting a lawyer’s advice makes sense not only to get a clear picture of the employer’s rights and remedies but also because in a later dispute the employer might be well served by showing it acted in good faith and with fair dealing by seeking and following a lawyer’s advice.

Even if a correction expense otherwise might be a proper plan-administration expense, a fiduciary should not authorize the payment or reimbursement of the expense from the plan's assets if instead the expense should be met through a fiduciary's liability under ERISA section 409 to make good the plan's losses that result from the fiduciary's breach. It is possible that a plan-qualification defect happened without any fiduciary having breached his, her, or its responsibility. But much more often a defect happens because, at least in part, a fiduciary breached a duty. In those situations, the breaching fiduciary should bear the correction expense.

Again, thanks for the trove of information, which is a great help. If the client's issue doesn't resolve itself by other means, I'll present all of the possible interpretations, with my own detailed analysis of the merits and weaknesses of each. A risk decision always is for the client.

Again, thank you for the helpful observations. I recognize all too keenly that I alone am responsible for how I advise a client. The challenge is that I can't fail to inform my client about the risk that payments might violate the market-reforms rule and expose the corporation to an excise tax. Yet once I tell them, they'll expect my recommendation about how to remove the uncertainty. They won't like hearing that the expense of seeking a ruling might cost them more than the value of the tax deductions. Not getting a ruling means that two decent businesspeople, who could not have harmed anyone, remain exposed to liabilities. As a lawyer, I must put the problem to the client's choice; but I can choose to give them full-picture information, and empathize.

Flyboyjohn, thank you for the useful information. (I freely admit not knowing this small-business tax rule because it's never before come up in my work as an employee-benefits lawyer.) Returning to the not-so-hypothetical situation I described, New Jersey law precludes the S corporation from buying group health insurance because the corporation's ONLY employees are its two 50% shareholder-employees. (The shareholders decided not to try employing either of the two sons.) And although interpretations of you, J Simmons, and masteff differ somewhat, the corporation's payment for individual health insurance bears at least some risk of incurring the $36,500-per-year excise tax. Suppose the corporation conditions its payment of each individual health insurance premium on the non-violation of the market-reforms rule, with a legally enforceable right to a repayment (with interest) from each shareholder if it is found that the corporation's payment otherwise would violate the market-reforms rule. Would those terms establish the non-violation of the market-reforms rule?

In considering your potential liability exposures, are you worried only about liability to the max-getting principal, or are you also worried about liability to others?

But even if an individual's tax return claimed the IRC 162(l) deduction and the individual confirms that the payment was for a non-group contract, isn't it at least possible that the individual paid the premium from her resources (other than causing the corporation to pay the insurer)?

If one imagines that a client might handle an ambiguity about whether the market-reform provisions apply by taking some risks .... How likely is it that whichever arm of the Government that is supposed to impose the penalties would (or even could) detect the non-compliance? Is there anything about the S corporation's tax-reporting to its shareholders or in a shareholder's tax return that claims the IRC 162(l) deduction that would show that the payments violated the market-reform provisions? Is there anything in other reporting that would show that the payments violated the market-reform provisions?

Thank you for this news. And how much should a TPA bill its client for explaining the Inspector General's request letter?