Peter Gulia

Thanks everyone for your help. Kevin C, thank you for my confirming my hope that, although more years' errors would mean a walk into IRS-chaperoned correction, it doesn't necessarily narrow the range of corrections. K2retire, would a concern about not doing a cutback to an accrued benefit be removed if the plan defined each HCE's benefit as the largest amount that, after knowing that every NHCE's allocation is 3%, passes cross-testing? Tom Poje, your observation might in some ways be the flip side of K2retire's observation. One can imagine that the plan document might specify each NHCE's share of the profit-sharing contribution as a percentage of his or her compensation, and then could specify an HCE's share as an amount that results from the math of the cross-testing rules. Or one can imagine the converse: that each HCE's allocation is specified, and the NHCEs' allocations are the solve-for. Perhaps the simplest and most straightforward correction is to restore all allocations to what the plan document provided.

Sieve, thanks for your help.

Our hypothetical employer just discovered that the 2009 allocation of its profit-sharing contribution (intended to follow cross-testing rules) was incorrect because it provided only 3% for each NHCE, and this was less than one-third of the allocation rate of the HCE with the highest allocation rate. In a self-correction, must the employer reallocate the profit-sharing contribution it made, or may the employer pay another contribution and allocate it so that each NHCE gets one-third of the top HCE's allocation rate? Does our range of acceptable corrections change if the employer discovers that six years' allocations are affected by the same error?

ERISA § 4212© [29 U.S.C. § 1392©] provides as follows: If a principal purpose of any transaction is to evade or avoid liability under this part [the withdrawal-liability rules], this part [Part 1 of Subtitle E of Title IV of ERISA] shall be applied (and liability shall be determined and collected) without regard to such transaction. The statute doesn’t define “evade”, “avoid”, “transaction”, “principal”, or “purpose”. Likewise, the statute doesn’t define the phrase “a principal purpose”. The statute doesn’t refer to “the principal purpose” of a transaction, but rather to “a principal purpose”. A court should construe a statute to make meaningful each word that Congress used. Further, some courts reason that Congress is presumed to know the differences between otherwise similar phrases that it has used in different statutes. Many Federal statutes (35 that I found on a quick look) include anti-avoidance rules that refer to “the principal purpose” or “a principal purpose”. Each of the Pension Benefit Guaranty Corporation and the Labor department has not made a rule to interpret ERISA § 4212©. None of the PBGC’s opinion letters has analyzed whether a particular set of facts shows that a principal purpose of a completed transaction was, or of a proposed transaction would be, to evade or avoid withdrawal liability. There are hundreds of arbitration and court decisions about this evade-or-avoid rule – some officially published, more commercially published, and many that are available only from practice experience. Beyond Supervalu, here’s a quick look at a few decisions: In Santa Fe Pacific Corp., the Court of Appeals for the Seventh Circuit held that “[the] statutory criterion is not whether the transaction is a sham …. It is whether the avoidance of withdrawal liability … is one of the principal purposes of the transaction.” Santa Fe Pacific Corp. v. Central States, Southeast & Southwest Areas Pension Fund, 22 F.3d 725, 729-730, 18 Employee Benefits Cas. (BNA) 1010 (7th Cir. 1994) (emphasis added), rehearing en banc denied, 1994 U.S. App. LEXIS 14476 (7th Cir. 1994), cert. denied, 513 U.S. 987, 18 Employee Benefits Cas. (BNA) 2536 (1994). In Cuyamaca Meats, the employer had offered to continue contributions to the multiemployer pension plan, but only through August 1983. The Court of Appeals for the Ninth Circuit found that the employer’s “unilateral” implementation, after a bargaining impasse, of the employer’s rejected final offer (with its resulting withdrawal on September 1, 1983, rather than the day after the expiration of the preceding collective-bargaining agreement) was not an ERISA § 4212© evasion. Cuyamaca Meats, Inc. v. Butchers’ and Food Employers’ Pension Trust Fund, 827 F.2d 491, 8 Employee Benefits Cas. (BNA) 2310-2319, 126 Labor Relations Rptr. (BNA) 2193, 107 Labor Cases (CCH) ¶ 10168 (9th Cir. 1987), cert. denied, 485 U.S. 1008, 9 Employee Benefits Cas. (BNA) 1968, 152 Labor Relations Rptr. (BNA) 2640 (1988). The court explicitly found that the after-expiration and after-impasse contributions were lawful. The court’s reasoning concerning why implementing the employer’s final offer was not an evasion is confusing. One interpretation of the court’s reasoning is that the court implicitly found that reducing withdrawal liability was not “a principal purpose” of implementing the employer’s rejected final offer. Rather, the court suggested that the employer’s purpose was to act in a way consistent with its duties under the National Labor Relations Act [NLRA § 8, 29 U.S.C. § 158]. Alternatively, the court implicitly found that there was no “transaction”, perhaps because the bargaining parties never reached an agreement. Cuyamaca Meats, supra, 8 Employee Benefits Cas. (BNA) at 2317 (“Even assuming that this aim [to reduce withdrawal liability] was a principal purpose of the Employers’ last offer to the union, the legislative history [of MPPAA] suggests that [the] offer was not a transaction covered by 29 U.S.C. § 1392©.”). In Sherwin-Williams, an arbitrator found that avoiding withdrawal liability was a principal purpose of a sale of a business, and rejected the seller’s argument that it didn’t have such a purpose because the business was so obviously unprofitable that it would have sold the business even if there were no possibility of withdrawal liability. In re Sherwin-Williams Co. and N.Y. State Teamsters Conf. Pension and Retirement Fund, 17 Employee Benefits Cas. (BNA) 2725 (1994) (Gertner, Arb.). In his reasoning, the arbitrator expressly found that a transaction can have two or more principal purposes. The Federal district court affirmed the arbitrator’s decision. Sherwin-Williams Co. v. N.Y. State Teamsters Conf. Pension Fund, 21 Employee Benefits Cas. (BNA) 1307 (N.D. Ohio 1997), affirmed, 158 F.3d 387 (6th Cir. 1998), cert. denied 526 U.S. 1017. In Banner Industries, a company that had a withdrawal-liability exposure established a retirement plan and transferred the majority of the company’s shares to that retirement plan’s trust. The transactions made the company’s former parent a minority owner. The former parent argued that withdrawal liability could not be imposed on it because when the liability became triggered the former parent no longer was a part of the same employer as its former subsidiary. The former parent argued that the transactions – establishing the ESOP retirement plan and contributing shares to that plan’s trust – were not an evasion because the transactions had business purposes other than making the parent no longer responsible for its subsidiary’s withdrawal liability and had economic substance. The arbitrator rejected those arguments, and specifically found that whether a transaction had economic substance is irrelevant. In the Matter of Arbitration Between Banner Industries, Inc. and Central States, Southeast and Southwest Areas Pension Fund, AAA Case No. 51-621-0014-87-V (Jan. 22, 1989), 11 Employee Benefits Cas. (BNA) 1149, 1167 (1989) (Graham, Arb.), vacated and opinion withdrawn on other grounds, 12 Employee Benefits Cas. (BNA) 1992 (1990). The arbitrator interpreted the phrase “a principal purpose” to mean that if any motivation for a transaction was to avoid withdrawal liability, other motivations or purposes should not be considered. As always, none of this bulletin-board discussion among practitioners is advice, and you’ll want the advice of your lawyer. Perhaps you’d like to describe the hypothetical situation you’re thinking of so that BenefitsLink readers could discuss it with you?

Belgarath, it might be unnecessary for you to sort out whether testing is or isn't needed. Here's a few suggestions for you to get your lawyer's advice on: If the bankruptcy trustee ended your service contract, there might be nothing left to do. If your service contract is in effect, rely on its provisions that say you perform services only as the plan's administrator instructs. Ask the bankruptcy trustee (who has become the plan's administrator) whether the plan does or doesn't want testing. And if the trustee/administrator requests any service, collect the plan's payment before you begin work. If the bankruptcy trustee asks you to advise him or her about whether the plan needs testing, point out your contract's warnings that you don't render tax or legal advice. The trustee/administrator might feel frustrated by that response, but it's not your problem. Remember that the fact of an employer's bankruptcy doesn't undo the plan's ability to pay for the advice and services that the plan needs for its administration. In my experience, few bankruptcy trustees use that power. But why should any of us employee-benefits practitioners work for free?

David, maybe; but it's not clear what question, if any, remains in the thread.

Yes, although the restoration-payment rule is not necessarily the only means by which an employer may put money into a plan without it being a contribution. To meet the cited restoration rule’s conditions, there must be a reasonable risk of liability. One way to begin that analysis is to imagine each claim that an informed plaintiff could assert and then consider whether at least one claim might survive a motion to dismiss – applying recent interpretations that require a statement of a claim (with all facts alleged hypothetically assumed to be true) to be plausible. If helpful to allow money that the employer seems ready to provide, a practitioner might consider that selecting the contract that included the exit charge could have breached one or more duties, or that exiting a contract when doing so would impose an unanticipated (and perhaps undisclosed) charge on participants might be a breach.

The next step is to consider whether the plan sponsor wants to preclude annuity payments. If so, a plan would provide a death benefit to a surviving spouse, but would not allow a participant to choose a QJSA or any kind of life-contingent annuity.

A restoration payment is not an annual addition. 26 C.F.R. § 1.415©-1(b)(2)(ii)©. For a payment to be restoration, there must be (or have been) a reasonable risk of liability. That potential liability need not be limited to ERISA, but may include other applicable Federal or State law. There is a condition that similarly situated participants must be treated similarly. It should be enough that a restoration payment is allocated uniformly in relation to the loss that resulted from the fiduciary's possible breach. If a restoration payment meets all the conditions to be treated as not an annual addition, the Internal Revenue Service usually will concur with a plan administrator’s good-faith treatment of the payment and its uniform allocations as not elective deferrals and not counted in ADP, ACP, or similar non-discrimination testing. This overview is a bulletin-board pointer among practitioners, and isn’t advice to anyone.

While I'm not a labor-relations lawyer, it would seem that a collective-bargaining agreement is an agreement between the employer and the represented workers, and that such an agreement might not require any acceptance by a third person for the agreement to be effective between those bargaining parties. Rather, the way that a multiemployer pension plan can protect itself from a CBA that would provide insufficient contributions (or other terms unacceptable to the plan) is to deny continued participation to the employer and its employees. That would result in a withdrawal, triggering the employer's withdrawal liability.

Ben Schmidt, I suggest that you might revisit your assumption. Many retirement plans provide, at least by implication and sometimes in an express provision, that a participant or other person who has a duty or power to direct investment may appoint an agent to furnish the investment directions. At least for an ERISA-governed plan, a plan may set rules on what power of attorney or other expression of an agency authority the plan administrator does or doesn’t accept. If that’s in the plan documents, the plan’s administrator usually must follow the documents. ERISA § 404(a)(1)(D). Even in the absence of written provisions, a court might defer to the administrator’s exercise of discretion if it’s a plausible interpretation of the plan and relevant law and is not an abuse of discretion. See, e.g., Clouse v. Philadelphia, Bethlehem & New England Railroad Co., 787 F. Supp. 93 (E.D. Pa. 1992). For a plan not governed by ERISA, the plan’s administrator might need to consider whether State law requires the plan to recognize a power of attorney. Whether a plan’s administrator (or its recordkeeper) wants to recognize (or refuse) an agent to furnish directions for a participant or other directing person often turns on practical considerations about whether it’s feasible under the plan’s procedures to record the fact of an agent’s appointment and retrieve information as needed to test the identity of a person who would render a direction. In the 1980s, questions about whether, and on what terms, to recognize an agent mattered. If a plan permits computer-based means to furnish an investment direction, expressly recognizing an agent matters less often. If a direction was furnished using the participant’s identifying information and password and none of the plan’s fiduciaries knows (or, in the exercise of the care required, should know) that the direction was furnished by an impostor, a plan can make the participant responsible for such a direction. Practice pointer: If a plan fiduciary is at least trying for the possibility of a defense under ERISA § 404©, consider whether the explanation that must be furnished under 29 C.F.R. § 2550.404c-1(b)(2)(i)(B)(1)(iv) must or should explain what the plan allows or refuses concerning whether a directing person may appoint an agent.

I might be asking a naive question (but perhaps I'll learn something that way). If correcting the participant count doesn't change the plan's reporting treatment as a small plan, why is the plan administrator reluctant to file an amended Form 5500?

Of the bundled service provider, is any business of it a plan trustee or plan fiduciary?

If the facts are those that I suspect (I've been to this movie too many times), there are stronger solutions. I'm willing to explain them, but not on a public bulletin board that anyone could read. If you'd like to hear the ideas, please call me at the number shown below.

Recently, I advised a client on a situation in which even the simple sum of the 20 years' payments (not adjusted to a present value) is less than half of the assessed withdrawal liability. A plan could argue that a straight reading of the statute means that a missed payment leads to acceleration of the gross withdrawal liability (without the 20 years' limit). I advised my client to make every payment with super-promptness.

Kevin C, Eric A, and Peanut Butter Man, thank you for your good help.

30Rock, if the employer and the executive meant the plan to be unfunded, the employer alone should have all of the rights under the annuity contract. If the participant has a right that could restrain the employer's use of an annuity contract that was meant to be the employer's sole property, your client might need advice about different issues.

A hypothetical employer is content to use its recordkeeper’s “pre-approved” prototype plan with one revision: The employer adds a provision mandating that, in addition to other investment alternatives that the plan administrator selects in its discretion, each of six mutual funds (specified by name) is a designated investment alternative that no plan fiduciary has power to remove (except to the extent that ERISA § 404(a)(1) requires the fiduciary to disobey the plan’s terms). The employer wonders whether this one revision, which doesn’t seem to affect any § 401(a) qualification requirement, results in losing reliance on the prototype’s opinion letter. Revenue Procedure 2005-16 includes the following provisions: [19.02] Nonstandardized M&P Plans and Volume Submitter Plans — An employer adopting a nonstandardized M&P … plan may rely on that plan’s opinion … letter as described below if the employer’s plan is identical to an approved M&P … plan with a currently valid favorable opinion letter, the employer has chosen only options permitted under the terms of the approved plan, and the employer has followed the terms of the plan. Also see section 19.03(3) below. These employers can forego filing Form 5307 and rely on the plan’s favorable opinion … letter with respect to the qualification requirements, except as provided in [other conditions not relevant to this query]. [19.03(3)] An adopting employer can rely on an opinion … letter only if the requirements of this section 19 are met, and the employer’s plan is identical to an approved M&P … plan with a currently valid favorable opinion … letter; that is, the employer has not added any terms to the approved M&P … plan and has not modified or deleted any terms of the plan other than choosing options permitted under the plan or, in the case of an M&P plan, amended the document as permitted under section … 5.09[.] [5.09] Adopting Employer Modification of Trust or Custodial Account Document — An employer that adopts a nonstandardized M&P plan will not be considered to have an individually designed plan merely because the employer amends administrative provisions of the trust or custodial account document (such as provisions relating to investments and the duties of trustees), provided the amended provisions are not in conflict with any other provision of the plan and do not cause the plan to fail to qualify under § 401(a). For this purpose, an amendment includes modification of the language of the trust or custodial account document and the addition of overriding language. What do the experts think, may the employer still rely on the prototype’s opinion letter? Or should the employer submit Form 5307?

Peanut Butter Man, thank you for adding some further thoughts (with rule text to support them). Now that we've uncovered that BenefitsLink readers think that a practitioner must provide a client advice about defects even if the client didn't ask for (and might not welcome) that advice, let's ask ourselves a follow-on question: must a client pay for the advice it didn't ask for? What if a practitioner adds to her engagement letter the following: Despite our agreement generally that I’ll provide only the advice you ask for, I may render the advice that any applicable law requires me to render, and you must pay for that advice (despite the fact that you didn't ask for it, and even if the advice is useless to you). You're obliged to pay for this required advice at the rate of $nnn per hour. Leaving aside the practical problem that a client might be unlikely to pay no matter what the written agreement says, is such a clause is fair? BenefitsLink mavens, what do you think?

Here's a related question for lawyers, consultants, and others who provide services in which some work is for the plan's administration and some work is for the employer's interest (other than as a plan fiduciary): If a client asks you to categorize or allocate your bill to mark which services, in your opinion, may be paid from plan assets, do you provide that service? If not, why not? If you allocate your bill between plan and employer expenses, do you have reservations about the risks of rendering the implied opinion that underlies the allocation? How do you manage those risks? Do you charge your client for the time it takes you to analyze which services may be paid from plan assets?

Let's see whether we understand the facts: The employer seems to be not only the plan's sponsor but also the plan's administrator. Someone believes that at least a portion of the lawyer's services were for the plan's administration (rather than for the employer's interests other than as a plan fiduciary). A plan fiduciary (perhaps someone of the plan's administrator{?}) allocated the lawyer's bill between employer and plan expenses, and gave an instruction to reimburse the employer for amounts that the employer had advanced to pay what the fiduciary decided were the plan's expenses. If this is the situation, doesn't the plan's administrator already know the amounts to be reported as the lawyer's compensation paid by the plan? Also, this isn't indirect compensation; it's direct compensation. Indirect compensation looks for a situation in which a third person pays the plan's expense. In reading the definition of direct compensation [page 22 in the Form 5500 instructions], the negative implication of that paragraph's last sentence is that a payment made by the plan's sponsor and reimbursed by the plan results in direct compensation. And although it isn't authoritative, the FAQ states a similar view: Q37: If a plan sponsor pays a third-party service provider on the plan's behalf and seeks reimbursement from the plan, should the Schedule C reflect a direct payment from the plan to the service provider and not a payment to the employer? Yes. When a plan sponsor pays a plan third-party service provider and then seeks reimbursement from the plan, the Schedule C for the plan should reflect a direct payment from the plan to the service provider. In this regard, direct compensation is defined in the instructions for purposes of Schedule C as ”[p]ayments made directly by the plan for services rendered to the plan or because of a person's position with the plan” and excludes ”[p]ayments made by the plan sponsor, which are not reimbursed by the plan . . . .” The Department notes that if the plan sponsor pays a service provider directly, and does not seek reimbursement from the plan, such payment does not need to be reported on the Schedule C. http://www.dol.gov/ebsa/faqs/faq_scheduleC.html The law firm is a service provider. When a lawyer rendered advice about that plan's administration (rather than the employer's interests other than as a fiduciary), the law firm became a service provider.

Thank you for the responses. It seems that an employer might use plan design (without using information identifiable to an individual) to help motivate higher-cost workers to get coverage outside the employer-sponsored plan. During World War II wage controls, there was some efficiency value for an employer to provide some compensation in a form other than money wages. Perhaps the markets for health coverage might result in an efficiency in the opposite direction with some workers.

The linked-to paper argues that health coverage reform sets up incentives for an employer to design its “self-insured” group health plan to motivate those who consume more medical care than others to prefer individual insurance over employment-based coverage. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1651308 Do you think that the authors’ theory is realistic? The authors suggest that one inducement for an employee (and his or her family) to leave an employment-based plan might be the employer’s cash-wages payment in an amount somewhat more (recognizing some tax differential) than what would have been the employer’s “contribution” to the employment-based health plan. [Pages 22-23 of the paper, pages 23-24 of the .pdf] Is this realistic? If an employer were to offer such a cash-wages payment, would the choice run into constructive-receipt issues? Or would Section 125 protect those who chose the group health coverage as not having had constructive receipt of the available but not-taken cash payment?

While I’m unaware of any court decision on your query under ERISA § 404©, here’s two quick thoughts that might help you prepare to get your lawyer’s advice about whether a participant’s lack of a language ability might unravel an otherwise good ERISA § 404© defense. The general rule on when a summary must mention foreign-language assistance turns on whether a plan covers a particular number of participants who “are literate only in the same non-English language[.]” Whether information about ERISA § 404© and investment alternatives is included in, or furnished apart from, a summary, what matters is whether the directing person reads a language, not whether he or she speaks the language. Many people speak, but don’t read, English. If U.S. laws treated as ineffective a written warning or disclosure in English given to a person who doesn’t read any language, what would an employer do to deliver an effective warning or disclosure? Did Congress in 1974 intend that a plan fiduciary should be unable to get relief from a participant’s claim because the participant doesn’t read any language? Despite those observations, a plan fiduciary might consider carefully what non-English language assistance is prudent and reasonable to provide. Among other steps, a plan fiduciary might consider a notice and some assistance in the non-English language if the plan administrator knows or has reason to believe that a significant number of participants are literate only or primarily in the same non-English language.

The linked-to paper argues that health coverage reform sets up incentives for an employer to design its “self-insured” group health plan to motivate those who consume more medical care than others to prefer individual insurance over employment-based coverage. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1651308 Do you think that the authors’ theory is realistic? The authors suggest that one inducement for an employee (and his or her family) to leave an employment-based plan might be the employer’s cash-wages payment in an amount somewhat more (recognizing some tax differential) than what would have been the employer’s “contribution” to the employment-based health plan. [Pages 22-23 of the paper, pages 23-24 of the .pdf] Is this realistic? If an employer were to offer such a cash-wages payment, would the choice run into constructive-receipt issues? Or would Section 125 protect those who chose the group health coverage as not having had constructive receipt of the available but not-taken cash payment?