Peter Gulia

A follow-on question: If a big bank, insurance company, or recordkeeper in early May gets the letter on its volume-submitter document, how much time does the institution take to program the computers and set up the services to be ready to process a restatement on the revised documents? (I ask this because a client wants to do its restatement as soon as possible. The employer made ONE modification to state a provision not in the volume-submitter document, and cannot get the IRS's determination until it presents the modification as done on the again-restated plan.)

If the plan's administrator tax-reports deemed distributions, is there an argument to be made that the failure to administer the plan according to its and related documents' terms is so slight that the plan is not tax-disqualified? (I recognize that considering only that tax question, ignores the ERISA consequences of the fiduciary breach.)

GBurns, thank you for the observation about States' insurance laws. For the situation you describe in which an individual must not receive a reimbursement from her employer, what happens when the insurer detects a prohibited reimbursement? Am I right in guessing that an insurer can't do anything to the employer (which is not a party to the individual contract)? Does the insurer have the remedy of rescinding the individual's contract? Does the insurer have any other remedy?

ERISA expressly permits each of (1) an employee-benefit plan, (2) a fiduciary, or (3) an employer or an employee organization to buy insurance to cover losses that result from a fiduciary’s act or omission. ERISA § 410(b)(1)-(3). An employee-benefit plan may buy fiduciary-liability insurance “if such insurance permits recourse by the insurer against the fiduciary in case of a breach of a fiduciary obligation by such fiduciary[.]” ERISA §410(b)(1). If the insurance contract “permits” the insurer’s recourse against a breaching fiduciary, the “premium” can be paid by the plan. If an insurance contract precludes recourse against a breaching fiduciary, an employee-benefit plan cannot pay the portion of the insurance price that is attributable to the non-recourse provision. Interpreting the ERISA provisions that allow a fiduciary “from and for his own account” [ERISA § 410(b)(2)], an employer, or an employee organization to buy fiduciary-liability insurance, an insurer might allow more than one payer to pay the insurance price, and might, for the payers’ convenience, allocate the overall price into portions – a price attributable to the incremental value of the non-recourse provision, which is the price to be paid by a person other than the plan; and a price that is the difference between the total price and the price of the non-recourse provision – that is, the portion of the price that can be paid from a plan’s assets without violating ERISA. An insurer considers it smart business to do the math that helps a premium get paid. An insurer's figuring of the portion of the premium that is attributable to the non-recourse provision often results in a small amount. One imagines that the insurance company has some claims experience from which the actuaries can estimate that the probability of a plan both proving (or settling) its claim against a breaching fiduciary and collecting from him or her is relatively small.

Assuming that the fiduciaries have sufficient fidelity-bond insurance (which sometimes should be more than the ERISA-required coverage), one has difficulty imagining a likelihood of a fiduciary breach so bad that it causes a loss of the whole plan assets in one breach (or one series of breaches). So consider starting with a coverage limit of a round $1 million. That could help resolve a loss of $800k and $200k of attorneys' fees and expenses. If the employer (rather than the plan) bears the premium expense, consider a bigger retention (deductible) if the employer is confident that it will have enough cash flow.

An employer contribution (even if it is a salary-reduction contribution, and perhaps labeled as a participant or plan-defined "Employee" contribution) is not treated as an elective deferral if the contribution is made according to the participant's one-time irrevocable election. 26 C.F.R. 1.402(g)-1©, 1.402(g)(3)-1.

A fiduciary might consider disclosing the double-taxation effects of the U.S.-Canada income tax treaty. Or at least warning an eligible employee to seek tax advice.

Did the plan have, as at December 31, 2013, unpaid plan-administration expenses (perhaps including the TPA's fees)?

austin3515, the linked-to article mentions unnamed experts as the source of the idea that EBSA interpretations might make the use of securities accounts impractical. When I make a prediction about what a government agency will do, I stand behind it with my name.

When the IRS requests an extension, a savvy taxpayer sometimes demands as the extension's price a written closing agreement that some issues are removed from the examination and forever closed. But others, especially those that fear the expense of proving that the taxpayer was correct, indulge the IRS for reasons of the kind that QDROphile describes.

If the employer loaned money to the plan, consider whether it met all conditions of Prohibited Transaction Class Exemption 80-26, as corrected and amended several times.

2009 EBSA answers.pdf Recognizing a customary warning that the responses reflect only unofficial, nonbinding staff views as of the time of the discussion, and do not necessarily represent the official position of the DoL, here's what an EBSA staffer said in 2009. See Q&A 14 in http://www.americanbar.org/content/dam/aba/migrated/2011_build/employee_benefits/dol_2009.authcheckdam.pdf

To answer my own question, it seems that one considering buying or foregoing fiduciary-liability insurance would evaluate how likely it is that she will do an incapable (but not corrupt) job in meeting her fiduciary duty.

austin3515 makes a good point: ERISA fiduciary-liability insurance doesn't respond to a situation that involves an insured's improper personal benefit. The insurance might be helpful if an insured ineptly (but not corruptly) allows a non-exempt prohibited transaction - such as allowing a service provider to take undisclosed or disclosed but unreasonable compensation. Although in theory the plan should recover from the party in interest that has the proceeds of the PT, sometimes that person is insolvent.

ERISA fiduciary-liability insurance pays a covered loss into the plan (making the money available for allocation to a participant's or beneficiary's account). If the insurance contract does not preclude the insurer's recourse against a breaching fiduciary, the premium can be paid by the plan. If the buyer chooses a non-recourse provision, the plan still can pay the premium except the portion that is attributable to the non-recourse provision. Among the reasons participants with good fiduciary-breach claims don't pursue those claims is a belief that the breaching fiduciary doesn't have enough reachable assets to make good the plan's losses. (That's especially so if the fiduciary has a spouse, which means that an otherwise allowable offset against the fiduciary's participant account is restrained by ERISA section 206(d)(4)©. Likewise, having a spouse can allow asset-protection and asset-shifting techniques.) And not everything necessarily requires litigation. A few years ago, I saw a situation in which a fiduciary's obvious breach resulted in a six-figures loss to a participant's account. The fiduciary tendered the participant's short letter to the insurer. The insurer simply paid up. Had the fiduciary's breach not been insured, it is the participant who would have suffered the loss because the employer had no money in the till and the business owner had spent the most recent profit (paying his daughter's tuition). Could a fiduciary decide that the combination of a realistic possibility that the fiduciary might breach its responsibility and that a breach might result in a loss that the fiduciary cannot pay makes it prudent to protect the plan and its participants against that risk?

I have advised clients in situations that involve questions about whether the benefit likely to be obtained from an improved investment menu outweighs the plan's expense for communications that the plan's administrator finds necessary. These evaluations are fact-sensitive, and also often turn on the intellectual rigor of the fiduciaries' assumptions about the probabilities of uncertain events. But here's a point that I suggest as worthwhile to add to a cost-benefit analysis: if the investment alternatives that ought to be replaced were a result of the fiduciary's breach - for example, the fiduciary carelessly failed to evaluate investment alternatives, and could have selected superior investment alternatives at a relevant earlier time - the expense side of the cost-benefit analysis should be offset by the breaching plan fiduciary's liability to restore the plan's losses that result from the fiduciary's breach. A fiduciary should not charge to the plan the expenses of unraveling a bad situation that the fiduciary by its imprudence made.

I am no apologist for insurance sales. But maybe I'll learn something today. Is it always or generally so that fiduciary-liability insurance is a bad deal, or is it possible that some of the retirement plans would benefit from getting a pot of money to recover from when a fiduciary breaches his or her responsibility to the plan?

Msawalski, would an independent observer readily conclude that every transfer happened with obviously correct valuations? Your description suggests a possibility that the profit-sharing plan might have had some difficulty selling some of its securities through a stock exchange or other regular means.

It turns out that my July 2013 resubmission might resubmit in summer 2014. This morning, I heard that the approvals on volume-submitter documents might be done by late March or early April. Although the window could open as soon as May, I suspect that the makers of the volume-submitter document might need some programming time. More importantly, I learned that the IRS is aware of the issue I saw: a modification made during a remedial-amendment cycle might have been in operation for a few years before it's up for IRS review; and it might be impractical to unwind allocations and acts done not knowing that the IRS would later disapprove the plan amendment. I learned that the IRS is aware of this problem, and might be considering some administrative relief for an employer seen to have acted in good faith.

Kevin C, thank you for the good help. This is not a hypothetical. In July 2013, I submitted a Form 5307 application for a determination on a plan that is stated by a volume-submitter document and one short modification. Yesterday, the IRS sent me a letter saying that it will not consider the application. The explanation was: "See Rev Proc 2013-6 9.03." I read this to say that one must not submit the modification until the two-year window in which the user adopts the NEXT edition of the volume-submitter document. The added provision applies beginning with 2013. So by the time the IRS decides whether the modification is fair or foul, the employer/administrator will have made a few years' allocations according to a provision that had not been reviewed by the IRS. While I don't have a particular reason to be worried about whether the added provision disqualifies the plan in form, the point of the determinations procedure is to get certainty. The modification is an amendment to a previously existing plan. The volume-submitter document has an initial-qualification provision. But can we extend that idea to a failure of an amendment to qualify? Does it matter that the application for a determination will be the employer's first (because previously it relied on prototype and volume-submitter letters alone)? The modification/amendment provides an allocation of a nonelective contribution based on a participant's unused vacation hours as at the close of the last day of the plan year.

elang, even if one could be confident that grandson's company is not a party in interest [see ERISA section 3(14) and 3(15)], the loan might be an ERISA section 406(b) prohibited transaction because it might be, indirectly, a transaction between the plan and grandfather because of grandfather's interest concerning his grandson. Also, each fiduciary might evaluate whether investing $500,000 in one non-diversified debt instrument meets a duty to diversify the plan's investments. What might be sufficiently diversified for a $5 billion plan might be less so for a $5 million plan. If grandfather wants communications with a lawyer for which the confidentiality privilege belongs to grandfather rather than to the plan, grandfather should pay his lawyer from personal resources, not plan assets. If you are not that lawyer and you prepare the plan's Form 5500 reports, consider what professional-conduct or tax-preparer duties you might have if the plan does the transaction and you believe that it likely is a non-exempt prohibited exemption.

Under the Internal Revenue Services procedures, a timing rule applies to an employer that adopts a modification from the pre-approved document that the employer otherwise relies on. Instead of applying for a determination promptly after the employer adopts the modification, one instead waits until the two-year window in which the employer adopts the NEXT pre-approved document. Rev. Proc. 2013-6 § 9.03; Rev. Proc. 2007-44 § 16. If all goes as hoped, the IRSs approval of the modification gets reliance. But what if the IRS disapproves the modification? By the time the IRSs dislike of the provision becomes known, the employer might have made contributions, and the plans administrator might have allocated amounts, for several years. Looking to the plans provision for a return of contributions upon the IRSs disqualification of the plans trust, may the employer get a return of contributions attributable to the modification? Alternatively, may the employer end the provision promptly after receiving the IRSs communication that the IRS will not issue a favorable determination on a plan that includes the provision, while not undoing contributions and allocations that were made in good faith (before the employer knew the IRSs view)?

The employer has a few hundred part-time employees with combinations of hours that result in more than 50 full-time-equivalent employees. The employer cares about classifying the executive director as not a full-time employee within the meaning of IRC 4980H©(4) because the employer prefers to avoid exposure to the play-or-pay excise tax.

GMK and David Rigby, thank you for the helpful ideas. This employer's retirement plan provides immediate eligibility and immediate vesting, and has no provision that refers to hours of service. But the employer is unwilling to adopt a group health plan because there is no plan it could adopt that would not disadvantage the other employees. The other employees want the absence of any employer's offer of health coverage so that an individual may qualify for an exchange's premium credit and cost-sharing subsidies.

The agreement obligates the employee only to put in reasonable efforts. Even if the agreement requires the employee to make records of her hours worked (for the limited purpose of showing that she met her obligation to work no more than 24 hours a week), those records could not be meaningfully different from the employee's statement that she did not breach her employment agreement. No other employee of the employer has the same work location as the executive director. Does the employer act in good faith if it relies on a presumption that the executive director did not breach her agreement?