Peter Gulia

K2retire, perhaps there is no professional-conduct issue. First, unlike some other professional associations, ASPPA’s Code of Professional Conduct [http://www.asppa.org/pdf_files/mem/code_%20conduct.pdf] doesn’t require a member to report another member’s misconduct. (In my view, ASPPA’s choice makes sense; by contrast, the lawyers’ misconduct-reporting rule has such wide exceptions that it’s worse than useless.) Even if you felt like reporting something, your description suggests that ASPPA members mostly furnished correct information, and that it’s non-members who decided to accept an instruction to process a transaction that might have been contrary to the plan or relevant law. Accepting a plan administrator’s instruction - even if it’s contrary to the plan, or contrary to a law that applies to a person other than the person that implements the instruction - is fairly common practice among non-fiduciary recordkeepers. (I’m assuming that the participant you describe as a plan sponsor also acted as the administrator of his employer’s plan.) Further, a recordkeeper that starts to say which instructions it will or won’t follow risks exercising discretionary responsibility that could be argued as making the recordkeeper a plan fiduciary. Although it’s often unsettling to watch a plan’s administrator make a decision that the observer thinks is “wrong” (especially if the decision-maker has a conflict of interests), we might better understand this frustration as an illustration of why Congress should not permit an employer to serve as the administrator or trustee of the employer’s employee-benefit plan.

GMedley, an “even-stevens” approach of allowing a recordkeeper that must pay up losses caused by errors use inadvertent gains from the same class of errors can, if correctly used, be fair and even favorable to a retirement plan. There are serious issues concerning at least ERISA sections 403(a), 404(a), 406, 408, 410(a) and Internal Revenue Code sections 401(a)(2) and 4975. But there are legitimate ways to design an error-correction procedure so that it meets those concerns and is practical and administrable. I’ve worked on this design from both “sides” – advising a recordkeeper or advising an employer plan fiduciary. The legal analysis and its fact sensitivity makes the topic not a good fit for a bulletin board. If you’d like a (free) talk about how to approach the issues, please call me.

Leaving aside any debate about whether a non-fiduciary service provider should or shouldn’t care about an instructing fiduciary’s decision not to follow a plan’s provisions …. If an employer’s plan is stated using a master, prototype, or volume-submitter document that permits practitioner amendment, a sponsor or practitioner that “reasonably concludes” that an employer’s plan “may [sic] no longer be a qualified plan” must (if the sponsor or practitioner doesn’t submit an EPCRS request) “notify the employer that plan may no longer be qualified, advise the employer that adverse tax consequences may result from loss of the plan’s qualified status, and inform the employer about the availability of EPCRS.” Rev. Proc. 2005-16 at § 8.05 and § 15.07. A fiduciary’s decision to ignore the plan’s provisions and instead instruct a distribution that’s contrary to the plan’s provisions suggests at least a possibility that the fiduciary does not intend to follow the plan’s provisions. Such an intent might tax-disqualify a plan. In some situations of the kind described above, some recordkeepers send a form letter that briefly describes the instruction that’s contrary to the plan, and then tracks the language of the Revenue Procedure. Although a letter of this kind is unlikely to change anything with those who are determined, it’s a way for a recordkeeper to make and keep evidence that someone else was responsible for a failure. And while some people feel that it’s unethical to make and keep unprivileged evidence of a client’s breach, some defend the warning letter by saying “the IRS made me do it”.

Sully, is your client a participant or an employer? If your client is a participant who cares about how State income taxes apply to him or her, you might limit your research to the State or States in which the participant resides (or is domiciled), the State or States in which the participant works (if different), and those other States that have taxing power over the participant (if any). If your client is an employer, often a practical solution is to make sure that its contract with its payroll servicer includes sufficient warranties and indemnities so that the servicer pays the employer's losses that result from the servicer's failure to know or apply a tax law. Also, a service contract with a retirement plan's recordkeeper might obligate the recordkeeper to know and apply all tax laws on tax-reporting, and withholding taxes from, plan distributions - and to indemnify the plan's fiduciaries against the recordkeeper's failures. (To meet these obligations, many recordkeepers engage lawyers for research updates on changing tax laws.)

I have experience drafting completely customized church plan documents, including plans with pre-1974 provisions and a 401(k) plan for a church.

John, thanks for the helpful citation. Because a person usually can’t be a participant unless he or she is first an employee, the simplest way to make ERISA § 510 not apply is to avoid hiring an employee (or not to have any employee-benefit plan). But a business that doesn’t want to go that far sometimes tries a strategy of the kind that Sieve describes. One worry about such a strategy is that ERISA defines a “participant” as an employee who is “or may [sic] become” eligible for a benefit. Because ERISA § 510 proscribes “interfering with the attainment of any right to which [a] participant [as so defined] may [sic] become entitled under the plan”, a plaintiff might argue that interference with an opportunity to stay in, or move into, a job classification for which a plan currently provides a benefit or might in the future be amended to provide a benefit is interference that invokes ERISA § 510. (I don’t suggest that such an argument relates to a fair reading of the statute.) One can imagine a plaintiff’s argument that an employer’s decision not to promote an employee from part-time to full-time is the kind of interference that ERISA § 510 forbids. In Fleming v. Ayers & Associates, 948 F.2d 993, 14 Employee Benefits Cases (BNA) 1673, 57 Empl. Prac. Dec. (CCH) ¶ 41,205, 57 Fair Empl. Prac. Cases (BNA) 330, 1991 U.S. App. LEXIS 25791 (6th Cir. 1991), the court found that firing an employee who had been hired only for a part-time job was an ERISA interference because it deprived her of the opportunity to be considered for a full-time job, which would have (if the plan were not amended) entitled a full-time employee to a benefit. The appeals court’s reasoning was influenced by the trial court’s finding “that Fleming was hired with the intent that she move into a full-time position when a job became available.” Query: Might an employer have somewhat better protection against ERISA § 510 if it affirmatively informed every job applicant and every part-time employee that the employer never considers a part-time employee as a candidate for any full-time job, and never permits a part-time employee to work (or get credit for) more than 18 hours in any week?

If a plan fiduciary assumes that the FTC’s “Red Flag” rules don’t apply to a retirement plan, it nonetheless might use a similar procedure as part of its care to protect people from identity-theft risks. There’s at least some argument that the fiduciary duties of ERISA § 404(a)(1) might require a plan fiduciary to protect information about a retirement plan’s participants, beneficiaries, and alternate payees if a prudent-expert fiduciary would do so in the plan’s circumstances. I’m not saying that I agree or disagree with the argument, only that there is an argument that could be presented. The FTC rules indirectly impose a modest standard of care on persons that otherwise might have even less duty. Reading these FTC rules and thinking about them (especially the rules’ soft spots) might help a fiduciary think through some steps about what a retirement plan’s administrator might do to try to detect identity theft.

That a “customer” is a 401(k) or other retirement plan does NOT remove it from a CIP-program rule. Rather, in response to financial-services providers’ lobbying, the agencies revised the rules to clarify that the customer to be vetted isn’t a plan’s participant, beneficiary, or alternate payee but rather the plan itself. 31 C.F.R. § 103.121(a)(1)(ii)©. Some businesses decide that one’s CIP should vet a plan’s sponsor or the employer that sends the contributions. Likewise, some decide that a CIP should vet a plan’s administrator concerning its power to cause money to be paid in or taken out. A bank also should consider whether to keep or destroy documents (if any) that the bank considered to identify a customer and, especially, a natural person who has authority to act for a customer. Keeping those documents poses obvious identity-theft risks. The rule permits a bank to keep a description of a document, or of a non-document method, it used and some information from the document or method. This alternative helps for a bank that chooses to examine computer-based records of documents of facts without touching an underlying document itself.

bankcompliancemanager, I'm knowledgeable about the rule (and experienced with the business process) you seek help in navigating. As you might guess, because 31 CFR 103.121 and other rules require that a bank's written customer identification program be risk-based and follow the particular setting of the class of customers and the operations of the bank, there is no one-size-fits-all answer. Because you must protect your employer's anonymity, you likely shouldn't reveal on a public bulletin board the information that a professional would need to consider what means of identification, with what controls over the identity of money sent, might be enough for your bank's CIP. If you'd like some practical suggestions about how to get good work out of your bank's inhouse and outside lawyers, please feel free to call me.

QDROphile has it right. In an effort to communicate the possibility of significant differences from an ERISA-governed plan's QDRO, some States' laws use a different label for the form of order that's recognized by a governmental plan. Illinois' statute expressly states that a QILDRO isn't the same as a QDRO, and that Federal law "shall not be deemed a guide to the interpretation of" the QILDRO statute. In Illinois, a QILDRO. In Michigan, an EDRO. Under New York's 457(b) plan, a PCDRO (I'm not sure that's current.) In Pennsylvania, an ADRO. For citations to these laws, see Qs 13:36 to 13:38 in my Domestic Relations Orders chapter in Governmental Plans Answer Book.

On the situation that getaxa describes, whoever is considering the alternatives for corrections might first consider whether ANY employer-provided contribution was lawful. In many States, a public-schools employer has authority only to pay over salary-reduction contributions, and lacks authority to provide a nonelective or matching contribution. If a payment was beyond a governmental employer's State-granted powers, relevant States' laws might require an insurer or custodian to return each mistaken payment. (Often, an investment organization's unawareness that it received money the payer lacked authority to pay is not an excuse or defense; instead, States' laws often hold a financial-services business to a strict standard in dealing with a government.) Moreover, the government might have a right to get its money back without investment losses and with interest. Finding the answers to these questions calls for a close look at State statutes, regulations, Attorney General opinions, and court decisions.

The scenario described above taps into my long-time professional and academic curiosity about how much responsibility a professional has (or should have) for a question that his or her client didn’t ask. For example, imagine that a business owner called her generalist business lawyer and instructed him to form a new corporation. The lawyer collected enough information to do a competent job of writing the incorporation papers. The client said nothing about why she was forming a new corporation. Should a lawyer in those circumstances be expected to anticipate a problem of the kind described in the originating post? Likewise, imagine that an accountant has not been asked to consider whether a retirement plan is a qualified plan. What (if anything) might trigger a duty to consider whether a plan is disqualified in form or operation? And if some duty is triggered, what does the accountant do? And who pays for the accountant’s time on a topic that the client didn’t ask the client to get into?

Why wouldn’t one want to get the fidelity-bond insurance? 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. 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. While there’s a logic gap in that plaintiff-style argument, I’d hate to be a defendant who needs to hope that the judge is a strict constructionist. A fiduciary need not pay for the insurance personally (other than his or her share along with other participants). Just pay (or reimburse) the insurance premium from plan assets. It must be a “reasonable expense[] of administering the plan” to do a specific thing that the statute expressly commands.

I'm curious: do practitioners consider a list compiled by a documents provider more helpful than the IRS's Cumulative List?

John, the government (whatever political subdivision has power over the hospital employees’ compensation) must NOT undo the exclusive-benefit aspect of a governmental employer’s eligible deferred compensation plan. If the next employer is nongovernmental, the choices concerning the “old” governmental employer’s § 457(b) plan are: (1) Maintain the plan (without further payroll deferrals after the workers become no longer government employees), and continue to administer the plan according to its terms. If the local-government unit that has been the plan sponsor will no longer exist, find a related political subdivision to serve as the plan sponsor and, if necessary, the successor plan trustee. This approach is a variation on the facts of an IRS letter ruling I was involved with. (The IRS ruled that substituting a county for a no-longer-operating county hospital district did not impair the eligible status of an unfunded governmental § 457(b) plan. Because this was in the early 1990s, the plan was unfunded before and after the transfer of responsibility.) The letter ruling’s idea, with some new conditions, now is in the regulations. 26 C.F.R. § 1.457-10(b)(3). After 2001, even a worker who takes a similar job with the new charitable-organization employer is likely to have a severance-from-employment regarding the “old” governmental employer, and so might be entitled to choose a distribution. (2) If it’s desirable to pay immediate final distributions of all plan amounts, terminate the plan. 26 C.F.R. § 1.457-10(a)(2)(ii). Choosing between (1) and (2) usually is most influenced by the facts and circumstances of the existing plan’s investment and service arrangements. (Some human-resources people don’t like option 2 because they worry that too many people will undo their retirement savings: some might “opt out” from a default rollover, and non-responders and others might later take money from an IRA.) If I can help, let me know. I’ve done these solutions (and some others) with several different governmental and charitable hospitals.

Sometimes a lawyer suggests that a client seek an ERISA Advisory Opinion because doing so is cheaper than buying a lawyer's opinion, especially if the circumstances involve a significant risk exposure for the lawyer. In AO 2000-10A, the Department did not issue the requested opinion, and also mentioned some of the ways that the IRA's investment might be a prohibited transaction.

davsun, here's a way to think about the situation you describe concerning a plan fiduciary who might hear a label or slogan to say more than it truly means. A fiduciary that performs to ERISA's standard of care would not responsibly approve the portion of a service provider's compensation that's attributable to the value of the provider's assumption of a fiduciary responsibility unless the approving fiduciary is confident that it has a good writing that would enable the plan to prove the scope of the provider's responsibility. Likewise, an approving fiduciary would attribute (and evaluate) differential compensation for a provider's assumption of risk (rather than the sheer work to be performed) based only on the responsibility truly undertaken. Assuming otherwise equally-qualified service providers, a fiduciary shouldn't pay the one that calls itself a co-fiduciary much more than the one that doesn't unless the approving fiduciary prudently believes that the plan will have practical means at least to assert the plan's rights to get a recovery on the fiduciary's breach. Without that, why pay more for a supposed fiduciary responsibility that's unlikely to provide value that the plan could realize?

Before too quickly assuming that a written plan might not be needed, remember that those who operate a plan under an assumption that it is a church plan should want some comfort that it really is a church plan. (If not an EBSA Advisory Opinion or IRS leter ruling, some rely on a lawyer's opinion or advice.) Among the commonly recognized elements for a church plan is that the plan must be administered by a right governing authority of the church (rather than a subunit). It's difficult to feel comfortable about such a fact without at least one document stating these provisions. This matters because administering a plan assuming an absence of ERISA requirements runs some liability risks (not only for fiduciaries, but also for service providers) if one guesses wrong about whether ERISA governs the plan.

ERISA Advisory Opinion 2000-10A (July 27, 2000) [http://www.dol.gov/ebsa/regs/AOs/ao2000-10a.html] was about whether an IRA's investment in a partnership managed by Madoff might be a prohibited transaction. One wonders whether the investor went through with it?

This is where the custom drafting comes in. The IRA would be an irrevocable trust agreement. (The agreement would provide the trustee a power to amend the agreement as necessary to maintain IRA tax treatment.) The agreement would preclude anyone from removing the trustee. The agreement would omit any provision to permit a rollover or transfer. Instead of providing a choice of distribution forms, the agreement would specify only one lifetime distribution provision. It would allow payments not significantly greater than what might have resulted under the relevant QJSA. The distribution might restrain payments to no more than minimum-distribution amounts. The agreement would specify all post-death distributions. The agreement would omit any provision for naming a beneficiary. The agreement would state that the participant’s spouse is an intended third-person beneficiary of these provisions, and would recite that the IRA creator made these provisions to induce the spouse’s consent to the qualified election under the previous retirement plan. This language might persuade the spouse that he has rights to enforce the agreement and make the trustee responsible for the spouse’s loss caused by the trustee’s breach.

Sadly, Merrill Lynch is not alone; other recordkeepers have this weakness of seeking to record only an expected loan-repayment amount. You might re-read the plan's service agreement to consider whether the recordkeeper's work is within, or in breach of, its agreement, and to consider what remedies the plan might pursue. Of course, you'd evaluate this one weakness along with the wider context of the plan's overall satisfaction with recordkeeping services. On the point about a "negative", some recordkeepers don't allow an automated record that could generate even an indirect outflow from a plan trust. Instead, a service provider (including a directed trustee) wants the plan fiduciary's written instruction that a payment into the trust was a good-faith mistake that can be unwound under ERISA 403. Please call me if you'd like help.

If it helps any in finding a trust company that would accept responsibility for not allowing a beneficiary designation after creation of the IRA, it would not need to customize the IRA documents because the person who wants to persuade her husband to allow the rollover would pay for me or another lawyer to write the needed provisions.

John, thanks for thinking about this. I don’t think that an IRA trust creator’s creation of a trust that omits to provide a right to name an after-death beneficiary would make that trust somehow forfeitable or not for the IRA participant’s exclusive benefit during her life. I had thought about using a QDRO, but it’s not an easy fit. First, in the particular situation I would advise on, the only thing that’s arguably marital property under State law is the spouse’s right not to consent to a qualified election against a QJSA or QPSA. None of the account balance is marital property: that’s because all labor was performed and all contributions were made before the marriage, and since the marriage there have been investment losses rather than gains. Second, the separate-property State’s law provides equitable distribution only incident to a divorce or annulment, not during a marriage that neither party seeks to change. Third, even if one could persuade a court to partition the spouse’s right not to consent to a qualified election and exchange his 100% share of that marital property for a distribution from the retirement plan, the spouse (who is not my client) would want some comfort that this distribution is a QDRO distribution and so eligible for rollover. I doubt that the spouse’s lawyer would render that tax advice. Waiting to conclude the court proceeding until after an IRS letter ruling is obtained could defeat the timing that the participant seeks. So has anyone read or heard about a trust company that would accept responsibility for not allowing a beneficiary designation after creation of the IRA?

I’m wondering if other BenefitsLink readers have found a “product” solution to a spouse’s-rights situation that I guess happens often enough that someone might want to get a fee out of it. A small-business owner is the only remaining participant in a money-purchase retirement plan. Because she is retired from the business, her yearly income is less than $100,000. (Her spouse has no income.) She would like to terminate the money-purchase plan, take a single-sum distribution of her entire plan account, and direct a rollover into a Roth IRA. Her spouse understands his survivor-annuity and spouse’s-consent rights. The participant said that she would name her spouse as the primary beneficiary of the IRA. But the spouse understands that mainstream IRA documents allow an IRA owner to change a beneficiary designation. In his view, an IRA beneficiary designation (even 100%) that can be changed without his consent is not as much protection as a QPSA (even 50%) provision that remains in effect unless he consents. So far, the spouse is unwilling to sign a consent. The participant would prefer to “Roth-ize” the retirement accumulation now because she believes that income tax rates after 2009 will be meaningfully higher than current rates, and she happens to have money to pay the “conversion” taxes now (without affecting her lifestyle spending). Maintaining the employment-based plan means losing the opportunity to “Roth-ize” the accumulation. The participant believes that her spouse would sign the necessary consent if an IRA agreement has provisions legally enforceable by the non-owner spouse that make the IRA trustee responsible for not allowing any beneficiary change. Does anyone know of a trust company that would make such an IRA agreement?

Many of the key issues suggested by your inquiry turn on which person made the error, and which person or persons might have responsibility and potential liability for the error. If a service provider reimburses a plan for the plan’s losses without requiring a release of the plan’s claims (and without paying in installments), doing so isn’t a prohibited transaction if the plan hasn’t given away anything. Or resolving a service error might be provided under the terms of a reasonable service contract that’s exempt under ERISA § 408(b)(2). See ERISA Advisory Opinion 95-26A (Oct. 17, 1995). If a service provider wants a release (or wants to pay the restoration in installments), Prohibited Transaction Exemption 2003-39 states several conditions that the transactions must meet to exempt the release or an extension of credit in the settlement transactions. 68 Federal Register 75632-75640 (Dec. 31, 2003). Some of these conditions are meant to show that: (1) there is a genuine controversy; (2) those who act on behalf of the plan aren’t compromised by an interest other than the plan’s best interests; (3) the plan gets a fair recovery; (4) the settlement doesn’t improperly disadvantage the plan or benefit anyone else; and (5) everything is open, written, and kept as plan records. To meet condition 2, it often is improper or at least imprudent for the plan’s negotiators or approvers to include anyone who was involved concerning the underlying breach, error, or problem (or a subordinate or other person who has an interest concerning such an involved person). To meet condition 1, “an attorney … retained to advise the plan on the claim, and having no relationship to any of the parties, other than the plan, [must] determine[] that there is a genuine controversy involving the plan.” Some law firms (including mine) offer a service in roles 1 or 2. 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. 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.