Peter Gulia

What if the corporation offers to pay each participant's account a purchase price per share that an independent fiduciary finds is more than what would be the fair market value? Could the corporation offer a purchase price high enough that every participant would be motivated to tender her account's shares?

Does this plan provide participant-directed investment? If so, does a participant's power to direct apply to her whole plan account, or only some portions of it? Did each participant choose to allocate employer securities to her account? Or did another fiduciary decide to contribute employer securities to participants' accounts? Was the investment in employer securities a discretionary fiduciary decision? Or did the plan document mandate investment in employer securities?

CitationSquirrel, for tax rulings that treat a direct payment of an investment adviser's fee from the participant's account as not a distribution that could violate IRC 401(k)(2)(B), 403(b)(7)(A)(ii), or 403(b)(11) (and as not a distribution that could attract the extra 10% tax on a before-retirement distribution), see IRS Letter Rulings 9332040, 9316042, 9047073.

My 2 cents, thank you for your good grace. I understood your observation as 'why would anyone' want to .... I just wanted to help other readers understand that my inquiry really was just an inquiry.

My 2 cents, I don't want to do anything; I asked a question because I remember reading a plan, not one I drafted, that in its definition of excluded employees referred to an alien (and not with the usual lingo from Internal Revenue Code section 410). Kevin C, thank you for the helpful information, which gives me a new way to think about this topic.

GMK, thank you for your further observations. About your last observation, Colorado is an example: It has a statute and a State constitution provision that, if not contrary to the U.S. Constitution, purport to restrict marriage to opposite-sex marriage. But the statutes also provide a civil union. "A party to a civil union has the rights, benefits, protections, duties, obligations, responsibilities, and other incidents under law as are granted to or imposed upon spouses, whether those rights, benefits, protections, duties, obligations, responsibilities, and other incidents derive from statute, administrative or court rule, policy, common law, or any other source of law." Colorado Revised Statutes 14-15-107. In other contexts, when a taxpayer argues for a favorable tax treatment by pointing to the form of a transaction, the Internal Revenue Service often argues substance over form. Could someone who is a party to a Colorado civil union but had taxes withheld on the value of the other party's health coverage argue that a word that describes a legal status must have the meaning that follows the legal consequences of that status? After all, isn't that why law invents categories?

Lou S., thank you for the helpful pointer. The color-coded map gives me a way to think about framing the issues and exposures, while I do the detailed research in States' statutes. About ERISA section 205 provisions, as QDROphile observes, 'anyone can sue for anything'. (And the Labor department's Technical Release is not a rule or regulation to which a court must defer.) Smart fiduciaries understand that even a claim that ultimately doesn't win anything for its claimant might be just plausible enough that a fiduciary must incur attorneys' fees and other expenses to show that there is no claim. But many of those expenses can be avoided or at least lowered by administering a plan in a way that recognizes the potential claims and does so without harming a participant's legitimate interests. I posed my query in this health plans forum because questions about whether an employer should pay over federal tax withholding on coverage that a health plan provides for an everything-but-the-name spouse remain difficult. An employer that wants to help its employees and has a taste for a fight might consider a (disclosed) tax-withholding position that doesn't follow Rev. Proc. 2013-17. An employer, in evaluating whether and how hard it wants to fight, might consider the numbers of employees affected and the amounts involved. I have no fixed idea about what any plan fiduciary or employer ought to decide. I pull together information and analysis so that others can think about it.

Would the analysis be different if the plan document defined an eligible employee to exclude an employee who is alien (even if the alien is admitted as a lawful permanent resident and is fully eligible for any employment)?

Concerning the kinds of everything-but-the-name marriage that some States' laws provide, the Treasury department stated as its view for Federal tax purposes that marriage does not include a relationship that State law does not label as a marriage. That view seems to apply even if State law expressly provides that the relationship gets all the benefits, burdens, and other legal consequences of marriage. I'm trying to size how big the exposures are if a 50+-States employer chooses to treat as not spouse those who have an everything-but-the-name status. Doing so might lead to challenges, legal and otherwise, from participants and beneficiaries. Likewise, I'm trying to size how big a fight such an employer takes on if it asserts, with Form 8275 disclosure, a tax position that an everything-but-the-name relationship that also is recognized under the law of the State in which the participant resides as providing all the legal consequences of marriage is a marriage for Federal tax purposes. Although several States had an everything-but-the-name status, how many of those States still have such a status AND how many of those do not provide with-the-name same-sex marriage?

While my suggestions likely would be different, read Question 14 [pages 17-18] in the 2009 American Bar Association Joint Committee on Employee Benefits Q&As session with EBSA staff. http://www.americanbar.org/content/dam/aba/migrated/2011_build/employee_benefits/dol_2009.authcheckdam.pdf

mal asked for some cases. Here's a selection from the many cases that refer to bigamy and putative-spouse concepts in a context of considering who is or was a retirement plan participant's spouse or surviving spouse. Although one might like to think that ERISA section 205's use of the word "spouse" refers only to someone who is or was the participant's spouse, courts' decisions aren't so simple. Whether a putative spouse, a real spouse, both, or neither is treated as a participant's spouse depends on a plan administrator's, arbitrator's, or judge's thoughts about what might be desirable in the particular circumstances. The courts’ opinions in the following cases state differing reasoning and inconsistent results. In my view, neither court in the first two cases explained the real reason for its decision. A third example illustrates a straightforward application of the law that a person whose marriage has not ended cannot marry another. Example 1. In 1965, John and Susie married in Louisiana. In 1970, a Louisiana court ordered a judgment of separation, but not any divorce or dissolution of John and Susie's marriage. In 1973, Susie, while still married to John, “married” Milton. In 2000, John, while still married to Susie, “married” Gwendolyn in Texas. In 2001, John died (while still married to Susie and “married” to Gwendolyn). He was domiciled in Texas when he died. After John's death, Susie and Gwendolyn each submitted a claim to his pension plan for a survivor annuity; each claimed that she was John's surviving spouse. The pension plan included the following provision: “All questions pertaining to the validity of construction of this Pension Plan shall be determined in accordance with the laws of the State of Illinois and, to the extent of preemption[,] with the laws and regulations of the United States.” (As cited below, these are the relevant facts of a real case.) In resolving the plan administrator's interpleader, the court considered whether to apply Louisiana law, Texas law, Illinois law, or some combination of them in deciding which claimant (if either) was John's surviving spouse. Notwithstanding that neither of the claimants had argued for it, the court chose Texas law. Further, the court used Texas property law to resolve the status question needed to apply an ERISA plan's provision that preempts state law. Following this, the court found that Susie's acceptance of the benefits of her fraudulent “marriage” to Milton precluded her from asserting that she was John's surviving spouse, and recognized Gwendolyn as an innocent putative spouse to be treated as if she had been a spouse. Central States, S.E. & S.W. Areas Pension Fund v. Gray, 31 Employee Benefits Cas. (BNA) 1748, 2003 U.S. LEXIS 18282 (N.D. Ill. Oct. 8, 2003). Example 2. In 1966, Douglas married Ann in Ohio. They lived together in Ohio from 1966 to 1982. In 1972, Douglas began a relationship with Rita. In 1982, Ann left Douglas and moved to Tennessee. In 1985, Douglas and Rita “married” in Nevada. Each of Ann and Rita submitted claims for several benefits to be provided to Douglas' surviving spouse. The pension plan provided that it “shall be construed, governed[,] and administered in accordance with the laws of the State of Michigan[,] except where [sic] otherwise required by Federal law.” In resolving the plan administrator's interpleader, the court considered whether to apply Federal law, Michigan law, or Ohio law, or some combination of them in deciding which claimant (if either) was John's surviving spouse. The court denied summary judgment to allow further development of the facts, and to consider whether laches might estop a claimant from asserting the invalidity of the participant’s “marriage” to the other claimant. Croskey v. Ford Motor Co.-UAW, 28 Employee Benefits Cas. (BNA) 1438, 2002 U.S. Dist. LEXIS 8824 (S.D.N.Y. May 2, 2002). Note 1. In both of these cases, the court did not apply the contractual choice of law and, even further, ignored the plan's provision that the plan be construed using the plan-specified state law. Note 2. Courts' procedures for an interpleader, which focus on the arguments of the competing claimants and often do not require a stakeholder to assert a position, increase the likelihood that a court will render a decision that is unhelpful for future plan administration. Example 3. Philadelphia Eagles running back Thomas Sullivan was a participant under the NFL Player Retirement Plan. Thomas married Lavona in 1979. Thomas and Lavona stopped living together around 1983, and last had contact with one another around 1985. In 1986, Thomas “married” Barbara. Thomas died in 2002. On the plan’s interpleader, the federal court found that neither Barbara’s unawareness of Thomas’s marriage nor an assertion that Lavona “walked out on the marriage,” even if both alleged facts were fully proven, could have changed the fact that Thomas and Lavona remained married until his death. Likewise, Barbara’s belief that she was married to Thomas could not dissolve Thomas’s marriage to Lavona or permit Thomas’s marriage to anyone while he still was married to another. Lavona is entitled to the pension benefits that were the subject of the court proceeding. Hill v. Bell, 50 Employee Benefits Cas. (BNA) 1220 (E.D. Pa. Nov. 4, 2010). The suggestions that a plan's administrator consider claims procedures and experienced employee-benefits lawyers' advice seems apt.

austin3515, a further way to think about the hypothetical situation you described is to ask yourself a rhetorical question: Why did these particular LP interests suddenly become the best thing that the retirement plan could invest in? If there isn't a cogent investment-grounded answer to that internal question, it seems likely that at least one transaction is a prohibited transaction (although perhaps one that might be or become exempt). If you're not sure that everything is perfect, consider suggesting to your client that it engage an independent fiduciary to make the plan's decisions.

Another of the several possible consequences is that a Federal court or State court in proceedings on an ERISA benefit claim could construe the plan as including the provisions the plan is required to provide, and as not including any provision that the plan is precluded from providing. The court could then apply the plan as so reformed, and could decide the claimant's benefits under the reformed plan.

Brenda Wren, has your client asked you to evaluate whether the remaining participant and business owner's tax situation could be improved by deliberately treating the plan as tax-disqualified?

Also, the IRS in 2002 published a Spanish version of the OLD edition of the 402(f) eligible-rollover-distribution explanation. http://www.irs.gov/pub/irs-irbs/irb02-18.pdf

If you go to the IRS's website page for "Forms and Publications" and put "(SP)" in the Find box (and leave the Find function set to "Product Number"), the search retrieves 117 forms and publications. Then, you might scroll through the list to see whether you find anything that might help meet your client's purpose.

What matters is whether a practitioner furnished enough information and explanation so that his or her client could have made an informed choice about whether to seek a determination letter.

Section 114(b)(1)(I) refers to Internal Revenue Code section 3121(v)(2)©, which describes a nonqualified deferred compensation plan. But unlike the rule for "qualified-like" plans, section 114's rule on what retirement income a State can't tax applies for a nonqualified plan only concerning "substantially equal periodic payments" for life or at least ten years. If the hypothetical participant's $1 million payout from a nonqualified plan was paid in a single sum, that fact might have lost whatever protection section 114 otherwise might have provided. If not precluded by 4 U.S.C. 114, a State might tax the portion of a deferred compensation payout that accrued while the participant was a resident of, or worked in, the State.

Consider the potential application or non-application of section 114 of title 4 of the United States Code: §114. Limitation on State income taxation of certain pension income(a) No State may impose an income tax on any retirement income of an individual who is not a resident or domiciliary of such State (as determined under the laws of such State). (b) For purposes of this section— (1) The term “retirement income” means any income from— (A) a qualified trust under section 401(a) of the Internal Revenue Code of 1986 that is exempt under section 501(a) from taxation; (B) a simplified employee pension as defined in section 408(k) of such Code; © an annuity plan described in section 403(a) of such Code; (D) an annuity contract described in section 403(b) of such Code; (E) an individual retirement plan described in section 7701(a)(37) of such Code; (F) an eligible deferred compensation plan (as defined in section 457 of such Code); (G) a governmental plan (as defined in section 414(d) of such Code); (H) a trust described in section 501©(18) of such Code; or (I) any plan, program, or arrangement described in section 3121(v)(2)© of such Code (or any plan, program, or arrangement that is in writing, that provides for retirement payments in recognition of prior service to be made to a retired partner, and that is in effect immediately before retirement begins), if such income— (i) is part of a series of substantially equal periodic payments (not less frequently than annually which may include income described in subparagraphs (A) through (H)) made for— (I) the life or life expectancy of the recipient (or the joint lives or joint life expectancies of the recipient and the designated beneficiary of the recipient), or (II) a period of not less than 10 years, or (ii) is a payment received after termination of employment and under a plan, program, or arrangement (to which such employment relates) maintained solely for the purpose of providing retirement benefits for employees in excess of the limitations imposed by 1 or more of sections 401(a)(17), 401(k), 401(m), 402(g), 403(b), 408(k), or 415 of such Code or any other limitation on contributions or benefits in such Code on plans to which any of such sections apply. The fact that payments may be adjusted from time to time pursuant to such plan, program, or arrangement to limit total disbursements under a predetermined formula, or to provide cost of living or similar adjustments, will not cause the periodic payments provided under such plan, program, or arrangement to fail the “substantially equal periodic payments” test. Such term includes any retired or retainer pay of a member or former member of a uniform service computed under chapter 71 of title 10, United States Code. (2) The term “income tax” has the meaning given such term by section 110©. (3) The term “State” includes any political subdivision of a State, the District of Columbia, and the possessions of the United States. (4) For purposes of this section, the term “retired partner” is an individual who is described as a partner in section 7701(a)(2) of the Internal Revenue Code of 1986 and who is retired under such individual's partnership agreement. (e) 1 Nothing in this section shall be construed as having any effect on the application of section 514 of the Employee Retirement Income Security Act of 1974. Consider too that this Federal statute allows each State to define who is its resident or domiciliary. If the Federal statute's protection concerning "qualified-like" retirement income otherwise would apply, the participant described in your hypothetical might want his or her tax lawyer's advice about whether the participant is a resident or domiciliary of State A.

Yes, an appointer must monitor its appointment. Along with other steps, an appointer might satisfy itself that each year's Form 5500 was filed and that sufficient fidelity-bond insurance (I'd want much more than the statute's amount) is maintained. Can we think of anything else that remains with the employer after an independent administrator is on the job?

Bill, thank you for describing your idea of scheduling the times for attention. About your first-paragraph observation, if the plan's named administrator is an external business, what remaining duties (beyond paying over the specified contributions and furnishing vesting service info to the administrator) might an employer have?

An organization organized after October 9, 1969 must file an application. See Internal Revenue Code (26 U.S.C.) sections 501(a), 508(a); 26 C.F.R. sections 1.501(a)-1(b), 1.508-1(a)(1). Whether one feels comfortable with making or receiving, without waiting for the IRS letter, contributions intended as 403(b)contributions turns on one's evaluation of the risks and burdens, including one's sense of how likely it seems that the applied-for exemption will become recognized. The plan fiduciaries might prefer that none of the investments bears any exit charge. USCODE-2011-title26-subtitleA-chap1-subchapF-partI-sec501.pdf USCODE-2011-title26-subtitleA-chap1-subchapF-partII-sec508.pdf CFR-2012-title26-vol7-sec1-501a-1.pdf CFR-2012-title26-vol7-sec1-508-1.pdf

Again, thanks to everyone for the many thought-provoking suggestions. By the way, Bird hits it on the head: The recordkeeper's instructions about how to get electronic signer credentials and what website held the unfiled draft Form 5500 were near the END of a many-pages dense-text letter that purported to explain how the recordkeeper had compiled the draft Form 5500 (which was not enclosed with the letter, or ever furnished on paper). To those who mentioned an availability of services, I'm keeping your names so that, if my new client doesn't terminate the plan (which might be a realistic possibility), we can consider changing or adding service providers. One remaining question, does any business offer a service of acting as a plan's administrator so that the employer wouldn't need to read or sign anything beyond the plan documents?

Thank you, everyone, for the good suggestions about working with a TPA.

If the plan is ERISA-governed and the appointer has discretion to appoint (or decline to appoint) the second trustee, a mainstream interpretation of ERISA's definition of a fiduciary and ERISA's standard of care is that the appointer must use no less care, skill, caution, and diligence than would be used by an experienced fiduciary making a similar appointment. (And if applying that standard too literally results in an illusory standard of care, a fiduciary must nonetheless perform according to a minimum degree of care that's fitting for a fiduciary.) Without needing to focus on whether the candidate is a U.S. or non-U.S. person, a fiduciary should do at least a check for a crime that under section 411 would preclude the candidate's proper service. A more careful fiduciary might, in some circumstances, consider some further investigations into a candidate's honesty and reliability. Also, an appointer might consider: Why is someone who has no relationship with the employer willing to serve?