Peter Gulia

If a group health plan allows an employee to cover his or her spouse only if the spouse does not have an offer of coverage from another group health plan, what sources of information would such a plan's administrator use to determine whether a spouse has or lacks another offer of coverage? If the only source of information is the employee's written statement, how reasonable is it for the plan's administrator to assume that an employee who seeks coverage for his or her spouse tells the truth? If the information to be evaluated goes beyond accepting at face value the employee's (and spouse's) statements, what research and investigation methods would the plan's administrator use?

While I'm all for carefully monitoring and changing investment alternatives, I also can see reasons why a fiduciary might in the right circumstances slightly delay implementing an investment-menu change. And by delay, I mean a couple of months (or, for a small plan, a few months). Thinking through all the facts, circumstances, and interests is something for the plan's fiduciary to consider. Just to pick one example, I recently saw a situation in which sending an off-cycle notice would spend an incremental $33,000 of participants' retirement savings. Waiting a couple of months for the next quarterly account mailing spent a more modest $3,000. While recognizing that the replacement fund is better than the to-be-replaced fund, the fiduciaries estimated that the difference likely would not be $30,000 in investment improvement, not in a couple of months' time, recognizing that only a small portion of the plan's participants use the asset class involved and use it only for a small portion of the participant's account. Also, the fiduciaries were concerned about whether it would be fair for all participants to bear expenses that relate to an asset class used only by a distinct subset of participants. Conversely, if a fund has gone seriously wrong and the fiduciary decides that a change can't wait, those circumstances suggest that the fiduciary also can find that it's proper to spend the plan's money on a prompt communication. If a fund has gone bad, shouldn't we want to tell participants about it?

12AX7, thank you for sharing your experience. We see that you too have some quality-control methods for detecting some miscues. (I recognize that my SPD method tends to work with an employer that's big enough to have a human-resources person, and much harder to do if the would-be reviewer is the chief executive.) I have tried the method of out-loud checking each adoption-agreement selection, including line-by-line explanations of each choice. In your experience, how long does it take you to do such an exercise (while still feeling comfortable that the employer expresses the choices it really intends)?

If a plan's menu of diversified investment funds was prudently selected (and at least annually monitored), how does it happen that a fund becomes so inferior so quickly that, instead of waiting for the next cycle, the fiduciary must replace the fund immediately?

GBurns, thank you for this helpful information.

Situations of this kind suggest another reason for writing a summary plan description independently from those who compile the plan document. If an employer relies on a recordkeeper's or document provider's system to produce both the plan and the SPD, using the software will result in the SPD expressing the same mistake made in the plan document. If the employer (or a service provider separate from the one that produces the plan document) writes the summary plan description, doing so sets up an opportunity for the employer (or someone!) to read both documents to consider whether they are logically consistent.

Before thinking about how the universal-availability and coverage rules apply, how confident are you that the two charitable organizations really are under common control? Because charities don't have stock or ownership rights to look to in evaluating control, the section 1.414©-5 regulations look to whether 80% of the governing body of an organization are "representatives of" the other organization.

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.