Peter Gulia

(A defined-benefit pension plan's tax-qualified treatment is subject to an IRC 401(a)(26) minimum-participation condition.) JPIngold, is your client's plan an individual-account plan? Is it feasible to divide it into two or more plans?

Consider creating two plans: one plan under which the business owner is the only participant, and another plan for other employees. You'd test the plans together for coverage, non-discrimination, top-heavy, and other purposes. Is there any other reason why an employer couldn't maintain more than one retirement plan?

Matt, your elegant solution of the equation reminds us that we've come almost full circle from how many employee benefits grew: as a loophole against World War II wage controls, to help meet collective-bargaining needs, and following tax treatment. Your solution ought to work (and sometimes can if the employer and employees have enough intelligence and maturity). But in the workaday world it often doesn't fly because people have been conditioned to think in terms of health, pension, and fringe benefits rather than cash wages, and few understand well enough that benefits is a form of compensation. Moreover, collective bargaining often is designed to obscure the terms negotiated, and bears agency effects.

Leaving aside concerns about whether a choice between health coverage and a retirement contribution results in tax consequences, a first question is whether it is possible for the public-schools employer to make the contribution described. A local government instrumentality has only the power that State law grants. Under typical State law, a public-schools employer might have power to pay over salary-reduction elective deferrals, and often does not have power to pay any other contribution. A starting point is to read the statutes that might empower a 403(b) or 457(b) contribution.

You're right; I'm hoping that my client (the taxpayer's representative) is right, but seeking to find out whether the IRS has an argument that she hasn't thought of.

Even if none of the IRC 72(u)(3) exceptions applies, IRC 72(u)(1) applies only if an annuity contract is held by a non-natural person. A fact missing from my beginning description is that the employer isn't a corporation or any kind of business organization, but rather a natural person who operates her business as a sole proprietorship. So not only are all participants and annuitants natural persons but also the holder of the group annuity contract is a natural person. Based on this, the taxpayer's representative might argue that an estimate of what taxes would result from a disqualified plan includes undoing deductions for contributions, but doesn't include assuming that the plan's trust (which doesn't exist) would be taxed as a complex trust and bear tax on the trust's realized capital gains and dividends. Instead, the income on the annuity contract would be taxed under IRC 72 rules as a participant gets payment.

Just to be clear: the taxpayer's representative would show taxes on not having a deduction for contributions to the plan, and would treat only the build-up in the annuity contract as not yet income under IRC 72.

A practitioner is negotiating the closing of an IRS audit. The IRS describes the settlement range as based on the taxes that could be imposed if the plan is treated as not qualified. The IRS requests that the taxpayer's representative submit a worksheet showing those taxes. Because the plan's only investment is rights under a group annuity contract, the representative intends to show the plan's investment income as zero for every year, taking the position that the annuity contract still gets the tax treatment of an annuity contract. In your experience, do IRS people commonly accept or question such a position (in the context of Audit CAP)?

To interpret the significant-detriment interpretation, the Treasury department stated its view that a plan may charge the accounts of former employees (even while not charging current employees) as long as the expense otherwise is proper and a severed participant’s account bears no more than its “fair share” of the plan’s expense. To illustrate the “fair-share” idea, the Treasury department’s ruling expressly cautions that former employees’ accounts must not subsidize current employees’ accounts: “[A]llocating the expenses of active employees pro rata to all accounts, including the accounts of both active and former employees, while allocating the expenses of former employees only to their accounts” would be an improper allocation. Also, the reasoning of the ruling suggests some possibility that an expense allocation that’s more than the “analogous fee[] [that] would be imposed in the marketplace … for a comparable investment outside the plan” might be a precluded “significant detriment”. Working within these rules, an employer might absorb the portion of recordkeeping expenses that's attributable to participants who are current employees, while letting the plan charge a proper portion of expenses to the accounts of severed participants. irb04_07.pdf

A class exemption allows, under some conditions, a retirement plan that covers employees of an open-end SEC-registered investment company (and employees of that company's investment adviser) to buy and sell shares of that company. 42 Federal Register 18734-18735 PTCE 77-3 (April 8, 1977). The kind of entity that practitioners call a "hedge fund" usually lacks at least one of the conditions needed to meet that "mutual fund" exemption. There can be ways for a retirement plan to invest in hedge fund interests. But in the absence of a class exemption, it calls for a lawyer with experience in unraveling prohibited transactions.

If your service contract with the plan expired or became terminated and your business is not the plan's administrator, trustee, or other fiduciary, what (if anything) provides you any authority or imposes a duty or obligation?

Sieve, thank you for helping me think about this. (By the way, the terminator administrator's idea that I described isn't my idea, and doesn't reflect my advice.) Your thought about the interests of a receiving plan that might accept a contribution in reliance on a participant's incorrect statement that the paying plan is a qualified plan is especially helpful.

The hypothetical termination administrator (not a QTA) is managing a situation in which the Plan lacks enough money to pursue an IRS correction. Even if the IRS were to impose no sanction and proceed without a user fee, using a professional's time would consume the Plan's modest assets, leaving nothing to distribute to participants. On Sieve's question, the payor (an insurance company) expects to 1099 the distributions under an assumption that it does not know that the plan is not qualified. The termination administrator believes that she may interpret the plan (i) to include an IRC 401(a)(31) provision that would have been adopted had the employer not abandoned the plan, and (ii) to interpret that provision as requiring a payment directly to the eligible retirement plan specified by the distributee if the plan's final distribution is such that it would be an eligible rollover distribution if the plan is 401-qualified. The question that remains is whether it's appropriate for the termination administrator to inform a distributee that a payment to an eligible retirement plan might not be a rollover.

I'd like to see what BenefitsLink people think about the following hypothetical situation. A person serves as an administrator of a retirement plan for the limited purpose of instructing the recordkeeper and insurer to pay final distributions. The former employer ceased operations many years ago. If the employer kept records of the plan's administration, they are long gone. The termination administrator, based on her experiences, suspects that the plan might be tax-disqualified, but lacks evidence to prove or disprove whether the plan is qualified. Given this uncertainty, the termination administrator does not want to send a standard 402(f) notice because she does not want to take responsibility for even an implied statement that the plan is tax-qualified. Rather, the administrator would prefer to edit the notice, adding the following: This notice describes Federal income tax treatments and rollover opportunities that could apply if the Plan qualifies for tax treatment under Internal Revenue Code section 401(a). The termination administrator will obey the Plan's terms that allow you to instruct that your distribution be paid to an eligible retirement plan. However, the termination administrator does not know whether the Plan is tax-qualified. If the Plan is not tax-qualified, this notice's explanations of Federal income tax treatments and rollovers would be incorrect. Assuming that the termination administrator isn't worried about dealing with inquiries (she'd answer them all by saying that the notice speaks for itself), are there downsides to using the disclaimer and warning?

For decades, relevant law has recognized as a signature any kind of writing (including a name, symbol, or mark) made (or adopted) with an intention to authenticate a document as made by the signer. So again, let's ask ourselves: If a Form 5500 page has on it the signer's name in block (not cursive) letters, do we imagine that EBSA might question whether such a name or mark truly is the plan administrator's signature? And if EBSA inquires, wouldn't the plan administrator answer that its officer or employee had written that signature with the intent to authenticate the Form 5500 as the administrator's annual report?

EBSA's procedure seems to lack a means for comparing a handwritten signature to a previous example of expected handwriting. If a Form 5500 page has on it a squiggle that's not especially recognizable as a particular natural person's handwriting, do we imagine that EBSA might question whether the squiggle truly is the plan administrator's signature? And if EBSA inquires, wouldn't the plan administrator answer that its officer or employee had written the squiggle with the intent to authenticate the Form 5500 as the administrator's annual report?

As you already suspect, if the investment fund's computer facility is an all-or-nothing for which the fund's customer isn't permitted to specify exactly which tasks are or are not authorized, such an arrangement might leave you vulnerable to an argument about the effect of your powers. While you might argue that you and the plan had agreed to limits on your authority, others might argue that, once an authorization of you to use the computer facility is in effect, the investment fund had no duty or obligation to restrain you from exceeding the limits of your agreement with the plan. You might weigh the benefits and burdens of a computer facility after both you and your lawyer have read its documents and evaluated its risks. Many recordkeeper businesses price the services with some assumptions about the possibility that it might become necessary to defend against assertions that the recordkeeper's scope or duty was greater than its service contract. Some consider a risk of an assertion that the recordkeeper was a fiduciary as a normal or intrinsic risk of the business.

The hypothetical employer that wondered about whether listing the common-control group's employers really is necessary isn't concerned about privacy. Rather, they'd feel better about avoiding a work burden of compiling the information if they felt comfortable that the IRS doesn't really need the list because the IRS isn't asked to consider coverage or non-discrimination.

The Instructions for Line 6 of Form 5307 tell an applicant that is a member of a group under common control to "[a]ttach a statement showing in detail: 1. All members of the group, 2. The relationship of each member to the plan sponsor, 3. The type(s) of plan(s) maintained by each employer, and 4. Plans common to all members." If the application does not seek any assurance about whether the plan would meet any coverage or non-discrimination rule, is it really necessary to furnish this information? What (if anything) does the IRS do with the information?

If any trustee signature might be needed, what does the current trust document (before any amendment that now might be made) say about whether trustees may act by one of them, may act by a majority, or must act by a unanimity?

A plan fiduciary must make an effort that's reasonable in the circumstances to get a restoration of the plan's loss. But in considering how much effort to use (even to the point of almost none), a fiduciary may balance expense against the amount sought, discounted by the probabilities of successful action and collection. On the hypothetical situation that RCK described, if there is no collection from a wrongdoer, it seems doubtful that the employer must restore the loss because the facts suggest that there might not be any fiduciary that breached a duty to the plan (or that has personal possession of the plan's money, property, or rights). If the theft loss stays an unrestored loss, should it be allocated to the individual account of the one participant?

rocknrols2 presents some sensible suggestions about not being too quick to assume facts that might not be fully known. However, suppose that the employer doesn't volunteer to pay the plan's expenses. In meeting fiduciary duties to take on no more than reasonable plan-administration expenses, what factors should a plan fiduciary consider in deciding how much of the plan's money to spend on trying to uncover the facts of a particular theft loss? Further, might a plan fiduciary decide that - although there might be some value in investigating to the extent that it would find information that the plan fiduciaries could consider in designing the plan's controls to guard against future thefts - tracing where the money went after it left the plan seems unlikely to meaningfully benefit the plan?

Under the Labor department's interpretation, a blackout period doesn't include a restriction that occurs because of a QDRO or because of a time for deciding whether an order (or even an anticipated order) is a QDRO. 29 C.F.R. 2520.101-3(d)(1)(ii)©. However, consider whether the restrictions (if any) that apply because an order is submitted ought to be explained in the plan's summary plan description, QDRO procedures, and other notices.

frank1971, although there are some things that truly are permanent or indefinite records, I don't generalize that into an undifferentiated "keep everything". By focusing on the particular laws and business needs involved, it is possible to design a records-retention and records-destruction plan that keeps what you need but gets rid of what you don't really need. If you'd like to learn more, please feel free to call me.

A person seeking to help protect the retirement plan might remind the bankruptcy trustee that he, as the plan's administrator, has fiduciary duties to the retirement plan. However, it's unclear what a bankruptcy trustee should do if his or her duties to a retirement plan are in conflict with his or her duties to the bankruptcy administration. In those circumstances, a trustee might consider whether to ask a Federal district court to decide what to do.