Peter Gulia

Even when asked an obviously leading question with a suggested answer that could support a different outcome, some Labor department staff suggested (in 2009) that "it would be reasonable" to look to the plans' documents to "determine" whether they are separate plans. See Q&A 14 in http://www.americanbar.org/content/dam/aba...uthcheckdam.pdf Of course, whether with ABA, ASPPA, or any "seminar law" situation, none of these answers binds any of the government agencies. Some interpretations ask what assets are available to respond to a participant's (or his or her beneficiary's) claim. But splitting what otherwise could be one pool of assets into two or more might not matter if even an undivided pool doesn't have much purchasing power. Don't get me wrong; I do NOT advocate avoiding plan audits. I'm just describing what others have said.

Do we think that anyone will use the new statutory exemption [ERISA § 408(b)(14) and 408(g)] for an eligible investment advice arrangement? The Labor department says that the 2006 Act provision “did not invalidate or otherwise affect prior guidance of the Department relating to investment advice[,] and that such guidance continues to represent the views of the Department.” Either the “new” exemption or the “old law” uses the same two ideas to manage a conflict: leveling compensation, or using a person independent of the conflict to make the advice. The key difference seems to be that the statutory exemption requires an independent audit and some extra conditions not in the earlier guidance. For a business that wants to render investment advice to participants, isn’t following the “prior guidance” good enough? Why would a business prefer the statutory exemption?

LHart, one deduces from your query that the plan provides, in the absence of a qualified election with the spouse's consent, a qualified joint and survivor annuity. Is there some reason why the plan's administrator is reluctant to deliver to the participant an annuity contract?

J4FKBC, thank you for the 1984 and 1987 information.

Here’s another reason why a recordkeeper might prefer to send participant statements directly to the participants rather than through the employer: business owners sometimes steal participant contributions. If the statements are a participant’s only or primary source of information about his or her plan account, routing statements through the employer allows a thief to send false statements or take other steps that slow down how participants uncover the theft. See, for example, CSA 401(k) Plan v. Pension Professionals, Inc., 195 F.3d 1135, 1137–38 (9th Cir. 1999). That recordkeeper ultimately succeeded in getting an appeals court to find an absence of an extra duty but paid attorneys’ fees to get to that point. Would it have taken two levels of Federal court litigation if the recordkeeper’s statements mailed directly to participants had informed them that the money taken from their paychecks had not been invested? We’d like to believe that a non-fiduciary recordkeeper shouldn’t have to be the one to police the plan fiduciary, but service arrangements that reduce the controls against a plan fiduciary can harm the recordkeeper too. As with any evaluation of risks, one wants to consider the particular facts and circumstances, and get its lawyer's advice.

This sounds like a "ROBS"-like situation, with some potential for a prohibited transaction or other fiduciary breach. (It's also possible that it could be a legitimate, but perhaps incorrectly managed, directed investment.) How serious it is, as a practical matter (rather than under relevant law) might turn on whether these investments affect only two directing participants (as the OP seems to suggest), or relate to assets invested commonly for all participants. metallic, you might prefer to thoroughly evaluate this prospective client before you decide to accept any engagement. If you find that each of the two participants received his or her expert lawyer's opinion or advice and is knowingly and intelligently choosing some risks, you might feel better about that situation than you would about someone who just did it without any professional help (not counting those who have a stake in selling these things). And think about what these investments suggest about whether the plan fiduciary is inclined to listen to you, and whether you'll have a comfortable working relationship. If you do accept anything, write in your agreement that responding to EBSA, IRS, SEC, and other government examiners isn't included in any fixed fee, and instead is on your highest time-billing rates. You want those protections and more, even if you wouldn't be representing anyone, because the agencies have powers to summon third persons and they'll try to scour your records to find what others didn't reveal.

While many of us are getting ready to do our updated tables of inflation-indexed (or law-changed) limits, let me throw out a challenge to some experienced (or knowledgeable) BenefitsLink mavens, what were the limits in 1984? And what were the limits in 1987 (the first year after the Tax Reform Act of 1986)?

Before evaluating who must, may, or may not serve as a trustee, it might be smart to evaluate whether the employer is authorized to maintain the plan. A political subdivision (such as a municipality) or agency of a State has only the power that State law provides for it. Read the New York (or other State's) statute that authorizes this employer (perhaps by the class it belongs to) to maintain this plan. If you find the statute, it might include information that could say (or at least help one discern) who must, may, or may not serve as a trustee. If you don't find an enabling statute, there might be bigger problems because the "plan" might be beyond this governmental employer's powers. As always, get your lawyers' advice. If instead of 401(k) this is about an IRC 457(b) eligible deferred compensation plan of a New York local government employer, I can help point you to relevant provisions in the New York statute and implementing regulations (I've worked with these many times over the past 27 years.).

Without expressing a view about whether there was a prohibited transaction .... And leaving aside questions about which correction or restoration opportunities might be available .... If the plan's administrator is the business organization controlled by family members and the plan's trustee and other fiduciaries all are family members, is there anyone who wants to pursue correction or restoration of a prohibited transaction?

A related point for practitioners to ponder: If a retirement plan's administrator has contracted with a recordkeeper to process claims (often up to the point of the administrator "rubber-stamping" what the recordkeeper presents), a recordkeeper might receive what seems to be a good-order claim (with internal consistency of the name and taxpayer identification number), and might lack a way to test whether the squiggle in a box for the participant's signature is consistent with any other plan record or whether that squiggle belongs to a person who is a participant or is or was the employer's employee. The address in the plan's records might be an address of the impostor, or known to the impostor. A check made payable to the name in the plan's records is one that an impostor who has or had a fake or stolen identity document with that name could negotiate for money.

Beyond the preceding suggestions, consider also the possibility that the plan might not know the worker's name. If the taxpayer identification number furnished to the employer does not match the name furnished, it is also possibile that the name furnished is not the name of the person who performed the work.

The idea allows a participant to request voluntary withholding, and then computes the "gross-up" on no more than that ACTUAL withholding. [The hardship claim form builds in a substitute for Form W-4P. There is a regulation that governs how to do such a substitute.] As in my first post on this, I do suggest limiting the gross-up based on the sum of the highest marginal rates of the taxing jurisdictions that the claimant requests withholding for - or some other rule of reason that approximates that effect. For example, if the claim states that the participant resides only in a place that has no State or local tax, the maximum gross-up should be restrained based on no more than 45% [35% + 10%] withholding toward Federal income tax. A plan sponsor or plan administrator should limit the gross-up based on the highest marginal tax rates that could apply to a participant (for example, about 57.846% for a resident of the State and City of New York [and more for years after 2012]). To simplify this point, a sponsor or administrator might restrain a hardship distribution to no more than double the demonstrated-need amount (thus allowing no more than 50% for income taxes). An employer does not know its employee's (and his or her spouse's) income beyond the wage that the employer pays. So it might be reasonable to provide a gross-up that is grounded on an actual withholding election that specifies a percentage up to the highest marginal rate that could apply. (For example, if a claim states that the participant resides only in Philadelphia, a plan might allow Federal 45%, Pennsylvania 3%, Philadelphia 4% [52%].) Again, because a "gross-up" gets quite steep for any marginal tax rate above 50%, a sponsor or administrator might stick with a no-more-than-double rule, perhaps reasoning that perfect even-handedness is not required concerning those who have the highest incomes. Tieing the hardship gross-up to actual withholding restrains a participant who otherwise might be motivated to suggest that his or her "reasonably anticipated" income taxes are more than they really are. Because a claim gets a gross-up based on the withholding requested, the net distribution never is more than the demonstrated-need amount. And for a lower-income distributee, the idea helps a claimant see that 10% withholding toward Federal income taxes usually is not enough. I suggest showing the percentage that a claimant ought to request for Federal income taxes as the sum of two percentages: nn% plus 10%, with an explanation that a participant should want withholding of the extra 10% unless that early-distribution tax does not apply.

And has anyone yet taken the position that ERISA preempts the New York law that otherwise would require this information?

The procedure that I invite criticism on is based on the idea that a "gross-up" in a hardship distribution is permissive, not mandatory. (I regret not writing a full explanation while my wife was waiting for me to leave the office for Friday supper.) Under this idea, a plan would provide (whether expressly in the plan's documents or at least by implication of the plan's written procedures) that a "gross-up" cannot be more than what the claimant requests to be withheld for income taxes. Thus, a claimant who wants to get the most money that the plan allows would be motivated to request more withholding. By requesting at least "enough" withholding (to meet anticipated income taxes), a claimant's net distribution (after withholding) would be the amount of the demonstrated need. Admittedly, the regime now used by many plans - providing a "gross-up" that assumes some middle or high marginal income tax rates and an additional 10%, but allowing a claimant to choose much less withholding - pays more immediate money for the participant to spend. But it does so by allowing a person to "borrow" by not setting aside enough money to meet his or her tax obligations. That this might be against a participant's better interests seems to be a concern that an employer could choose to help a participant plan against. Some of this gets to a "philosophical" discussion about how involved (or not) an employer should be in helping its employees manage the personal weaknesses of some of them. Moreover, different employers with different people can have different ideas about this. But can a procedure that ties "gross-up" to withholding be useful for those employers that do want to guide their employees? And is there any advantage if a form could show in big and bold letters: The hardship amount you say you need: $10,000.00 The tax-withholding percentages you request: Federal 28% + 10% State 5% Local 2% The amount you would take out of your Plan Account if we approve your claim (and tax-withhold as you request): $18,181.82 The amounts you request the Plan to withhold toward your income taxes: Federal (38%) $6,909.09 State (5%) $909.09 Local (2%) $363.64 The check the Plan would pay you (if we approve the hardship amount you claim): $10,000.00

A wild, and perhaps crazy, idea: Imagine a hardship claim form that allows the claimant to specify a percentage for each Federal, State, or other income tax withholding that the claimant requests. The form also says that the "gross-up" (from the demonstrated need amount to the distribution amount the plan pays) is computed from the sum of those tax-withholding percentages (or, if less, from the sum of the highest marginal rates of the taxing jurisdictions that the claimant requests withholding for). While it might be a moment more in work that can be computerized, tieing the gross-up to withholding would illustrate the relationships in a way that might assuage some of the concerns that Jim Chad describes. Any takers for criticism of this idea?

To jpod, Sieve, Peanut Butter Man, and David Rigby, thanks for the further thoughts. The issues are not academic; they come from real-life law firms and litigation-funding businesses. (As I sometimes do on BenefitsLink, the hypothetical describes essential facts of the issue we're thinking about, while varying some facts to preserve confidences.) The law firm also was worried that, on a $1 million claim, its contingency fee might be no more than $400,000 and that - after discounting for even a slight probability of not winning or not collecting - the amount is not enough for the time and opportunity cost that they would invest. The currently-serving fiduciary is worried about her responsibility from a moral perspective, not a fear of liability. (The fiduciary believes that the plan's participants would have even more difficulty finding help to pursue claims.) The fiduciary simply wants to do the best of what she can do in a difficult situation.

Out-of-court dispute resolution seems unlikely because none of those who would be defendants has agreed to it. Moreover, the plan might need court-ordered discovery and interrogatories to prove the breach that the fiduciary knows happened. About a contingency fee, some plaintiffs' lawyers are concerned that ERISA (through a combinatoin of ERISA 514 and ERISA 502's fee-shifting provision) might preempt State law that provides a charging lien on a client's recovery, leaving the lawyers with a contract right to a fee but no property from which to self-enforce it if the plan breaches its agreement. Litiigation-funding businesses are even more concerned about a practical ability to control the recovery proceeds. Yes, the currently-serving fiduciary is worried about her responsibility to participants, which is the source of the query about what she might do if arbitrating or litigating the plan's claim isn't practical.

Here's the hypothetical situation that a plan fiduciary faces: Her predecessor obviously breached his duties to the retirement plan, and it is clear that the breach caused a loss of at least $1 million. The fiduciary found that the predecessor has sufficient assets so that he could pay a judgment up to about $5 million. The small plan lacks money that it could use to pay lawyers to pursue the plan's fiduciary-breach claim. The fiduciary asked a few law firms if they would take the case with no current fee payments but the right to court-awarded fees. Each of the law firms said "no dice; the case is too small for us to take any risk." The fiduciary also talked about this situation with the Labor department, and it too said that the Department lacks the resources to litigate this fiduciary-breach claim. Any bright ideas about what the fiduciary can or should do?

Matt Bozek is right in describing an unlikelihood that a plan written before 2001 would meet all current conditions for treatment as a 457(b) eligible deferred compensation plan. But however unlikely, it remains possible. (Just to choose one illustration, it's possible that a plan that provides only a single-sum distribution at a fixed time after the employment ends might not trip on any of the distribution rules.) In this bulletin-board hypothetical, we're all imagining what the facts might be. In real practice, we'd read the plan. To return to Randy Watson's query, if there is a defect, whether and how gracefully the IRS will negotiate relates to the tax amounts in play, the persuasiveness of the employer's explanation about why the employer neglected to maintain the plan, and the skill of the practitioner who presents a suggested solution. Outside EPCRS, the opportunities (good and bad) are more open.

Before too quickly moving toward an IRS correction procedure or correcting earlier years' W2s, one might first look into whether there is a document defect (or an operational defect). For a nongovernmental deferred compensation plan, it's at least possible that a document written many years ago could, despite later tax-Code changes, state a 457(b) eligible deferred compensation plan. For example, a document from late 1986 could say everything that's needed, and might not have any "disqualifying" provision. For deferred compensation between a nongovernmental exempt organization and its employee, the essential conditions haven't changed much since 1974 (ERISA) and 1954 (the restatement of the Internal Revenue Code). Have you found a particular provision that you think makes the plan an ineligible plan?

Or even with a one-owner business, imagine that there is an employee who - even without authority to sign a check or initiate a bank wire - performs some bookkeeping services for the business. Recording false bookkeeping entries could be enough so that the owner might not detect (at least not promptly enough) that plan assets, especially a contribution taken from payroll but not yet paid into the plan investments, were diverted to uses other than for the retirement plan.

Or the independent fiduciary could be a natural person rather than a trust company. Some lawyers and other professionals, including some who have a combination of ERISA and business experience, are willing to accept the weighty and personal responsibility of serving as an independent fiduciary.

Bird, thank you for the opportunity to clarify my illustration. No, I'm imagining a situation in which the person who handled and stole plan assets is someone other than the fiduciary who failed to cause the plan to get fidelity-bond insurance. Then, I'm imagining that participants - on behalf of the plan, for themselves, and as representatives of a class of all participants harmed by the theft - sue the fiduciary for his or her breach of the duty to cause the plan to get fidelity-bond insurance. ERISA 409 makes a fiduciary personally liable to restore a loss that results from the fiduciary's breach. The lawsuit would ask the court to order the breaching fiduciary to restore the plan's assets that were stolen, up to the amount that would have been insured had the plan been covered by fidelity-bond insurance that met ERISA 412.

Instead of looking to whether administrative agencies try to enforce a requirement for fidelity-bond insurance, a practitioner might advise a fiduciary about his or her exposure to personal liability. Imagine a theft. Imagine it’s a theft that the insurance contract, if the plan held it, would respond to. Now imagine the participants’ claim (against the plan's trustee, administrator, or other fiduciary): You were a fiduciary. Even without expert testimony about what would be “the care, skill, prudence, and diligence” of an expert retirement plan fiduciary, it must be a per-se breach to fail to do that which the statute expressly commands. Had you caused the plan to get the fidelity insurance, the plan would have been covered. Therefore, you are personally liable to make good the plan’s loss. And think about this from the TPA's, recordkeeper's, or other practitioner's perspective. Even if you can prove that you reminded the fiduciary to get the fidelity-bond insurance, are you ready for his or her rhetorical cry of "You know that I don't pay attention to most of the stuff you send me; why didn't you tell me that this one is important, and why didn't you explain why it matters?"

Yes, COBRA (or some other continuation right) is among the possibilities that I'm wondering about.