Peter Gulia

The IRS language speaks only to what the IRS would recognize concerning 26 U.S.C. 403(b). Further, the IRS expressly stated that some of that language states provisions that might be improper under non-tax law. For a non-ERISA 403(b) plan of a public-schools employer, an implied-election provision is in many States unlawful, and in some would, if followed, result in a crime. A public-schools employer should get expert advice about States' laws.

John Simmons' mention of the 18-month period and how the Tise court understood that period opens at least two more questions: For a typical temporary restraining order that doesn't specify a payment but rather asks for the absence of a payment, when does the 18-month period end? The statute says that the 18-month period "begin with the date on which the first payment would be required to be made under the domestic relation order." ERISA 206(d)(3)(H)(v). If the order would not require a payment, does the 18-month period never begin? Or does it begin on the day that the plan administrator received the order? ERISA 206(d)(3)(H)(iii) states in part that "f within the 18-month period ... it is determined that that the order is not a qualified domestic relations order, ... then the plan administrator shall pay the segregated amounts (including any interest thereon) to the person or persons who would have been entitled to such amounts if there had been no order." Does this mean that once the plan administrator decides that an order is not a QDRO the plan administrator may (not must) approve a participant's claim for a distribution (if there is one, and if it's proper)?

Looks like I succeeded in sparking some discussion. Many practitioners suggest that a plan's administration procedures build in some go-slow features, including some of the ideas that QDROphile mentioned. Has anyone experience complaints from the opposite direction - that a plan administrator's go-slow resulted in a participant not getting a benefit that he or she was entitled to under the plan, or suffering some investment loss or other harm because of a delay. Varying my hypo described above, what if the medical expenses and hardship claim were legitimate? Imagine that lacking money to pay the past-due medical expenses resulted in the participant's bankruptcy and the loss of her second job. A fiduciary's duties include administering a plan according to its terms. (A "policy" decision about whether a retirement plan should or shouldn't have a hardship provision doesn't belong to a fiduciary.) Is there some tension between conflicting fiduciary duties: a duty to protect the plan from the expense of a would-be alternate payee's claim that the plan paid a participant's claim too hastily, and a participant's claim that the plan didn't pay quickly enough. Please understand that I'm not "taking sides" or advocating a particular view. Rather, I'm hoping to widen my experience by learning from yours.

Imagine that a retirement plan’s written procedure “for determining the qualified status of domestic relations orders” [ERISA § 206(d)(3)(G)(i)(I)] includes putting an administrative “stop” on a participant’s plan account when the plan administrator has received a court order that appears to identify or relate to the participant’s plan account. Imagine that this “stop” begins with the day that the order was received, and ends with the day that the plan administrator signed the communication stating its decision that the order is not a QDRO (or, if the plan administrator decides that the order is a QDRO, with the day that a segregated subaccount for the alternate payee was established). The plan administrator receives a State court’s order that does not ask the plan to pay anything; rather, the order asks the plan not to pay anyone. Imagine that the plan administrator’s DRO reviewer reads this order on the day that it arrived and in a few minutes decides that it is not a QDRO. In a letter dated, signed, and mailed that same day, the plan administrator informs the participant, the other litigant, and both attorneys that the order submitted is not a QDRO. A few days later, the participant submits a claim for a hardship distribution based on medical expenses. Assume that this claim seems regular and is supported by written evidence attached to the claim. Assume that all of the facts stated in the claim are such that a plan administrator that performed with the skill, care, prudence, and diligence required by ERISA § 404(a) would not have known that the participant’s claim is false. The participant’s claim is for a “hardship” expense of $10,000. Applying a “gross-up” for Federal, State, and local income taxes, the plan pays the participant $15,000. When the would-be alternate payee later discovers that the participant “cleaned out” a significant portion of her account, his lawyer threatens to pursue legal remedies. What legal claim (even if wrong) might the would-be alternate payee assert? Assuming that the would-be alternate payee is unwilling to allege facts inconsistent with those described above, is there any legal claim that would survive the plan’s and its administrator’s motions to dismiss? Does ERISA preempt all State-law claims so that the would-be alternate payee’s only claims must be grounded on Federal law? If the would-be alternate payee wants to allege that the plan administrator breached an ERISA fiduciary duty, what duty might that be and what facts would show that the administrator breached it?

John, thanks for your great work in recalling and describing these Tax Court cases. Here's pushing my luck, but do you know anything about whether Stark Truss Company pursued its remedies against the lawyer it said it relied on? Did it sue (or threaten to sue) for breach of contract or malpractice? And if so, did it succeed in getting some recovery?

If a 403(b) plan remains limited to one insurer and a handful of participants, it might be not too difficult to administer.

I have handled this situation a few times, setting up different solutions for different recordkeeper/trustee configurations and business needs. I'm willing to give some free pointers, but it wouldn't be a good discussion for the bulletin board.

It was Letter Ruling 2000-28-042 (April 19, 2000), issued to the State of Idaho. That non-precedent ruling was based on a nice set of facts that supported treating a State and many of its agencies and political subdivisions as one employer. Since then, the IRS has not issued a similar ruling to anyone. Again, even if an employer might be recognized as within the transition rule of Section 1011(f)(2)(B) of the Tax Reform Act of 1986 as amended by Section 1011(k)(8) of the Technical and Miscellaneous Revenue Act of 1988, that transition rule results only in the non-application of the general rule of Internal Revenue Code 401(k)(4)(B). It's State law, not the Internal Revenue Code, that provides what power a governmental employer does or doesn't have.

Yes, a power to pay compensation generally might not include a power to establish a particular kind of retirement plan. (Any one conclusion is beyond what this bulletin board is about because the questions and answers vary widely from State to State, and even within one State based on which governmental employer and what acts are involved.) A State statute that empowers a specified class of governmental employers to pay salaries or wages to its employees often is construed or interpreted not to include a power to establish a retirement plan. Also, if a State has statutes stating governmental employers' powers concerning 403(b) contracts, 457(b) plans, and defined-benefit pension plans but lacks such a statute concerning a 401(a) defined-contribution plan, a court, attorney general, or other decision-making authority might interpret the absence of a statute when others are provided for parellel purposes as some evidence that the legislature did not intend to provide authority for what's missing. That kind of reasoning might have further support when the "plan" mistakenly assumed was one that under Federal tax law could not have had the tax treatment mistakenly assumed. Between an employer and its employee, an agreement to do something that can't be legally valid usually isn't legally enforceable. And relevant law might treat as void or voidable an act that was beyond a governmental employer's powers. So if it turns out that an employer lacked power to establish a 401(k) plan, an employer that failed to pay wages (under a mistaken assumption that a wage reduction was allowed as a "plan" contribution) ought to start thinking about what remedies an employee has on that failure to pay wages. A bulletin board of this kind is about helping another practitioner get some pointers about ideas to pursue. The answers to a specific situation involve a careful reading of the statutes, court decisions, and other sources of law involved.

Beyond thinking about correction procedures for Federal income tax purposes, a governmental employer in the circumstances you describe should want advice about its duties under State law, and a participant should want advice about his or her rights under States' laws. A governmental employer has power to create a retirement plan only to the extent provided by State law. If State law didn't empower the employer to create the plan it mistakenly assumed that it created, the effect of State law might be that the plan never happened. An employer should want to consider what steps it might take to contain its undo and restoration obligations, especially if some of the "participants" have "account" investments with a loss. In my experience, a governmental employer faced with these circumstances can negotiate a conclusion with the IRS and the State and local governments involved. Often, the fitting solution is something different than the presumptive IRS-standard correction. To get the best advice and solutions, an employer might prefer advice from someone who (1) confers legal rights to keep communications about how to fix the problems protected from disclosure, (2) is knowledgeable about governmental plans, and (3) is an outsider, unconnected to the State and local governments (or any employee) involved.

To what State does the public-schools district belong?

mal, as your post suggests, one of the simplest ways to get a trustee who isn't constrained because he or she "is already receiving full-time pay from" the relevant employers or unions [29 C.F.R. 2550.408c-2(b)(2)] is to select a person who has no relationship to any of the relevant employers or unions. Unless a governing document imposes more conditions than the statute requires, nothing in 29 U.S.C. 186©(5) precludes the employers from using their power to elect or appoint a "representative" to fill such a slot with a person who has no relationship to the employers or the unions. Keep in mind that the economic circumstances you describe make a trustee's job a demanding one that requires real work, time, attention, and personal responsibility. A real trustee would want real compensation for that service. Providing compensation to "outside" trustees usually is within a pension plan's proper purposes, which include using plan assets to pay reasonable expenses of administering the plan.

If a service provider treats an amount as a plan's assets, acting consistently with that treatment might suggest paying it to the plan's trustee. However, a service provider (even if it is a non-fiduciary) might use extra care if it has knowledge that could lead a reasonable person to believe that the trustee might steal, or otherwise misuse, the plan's money.

Many of the people who most need advice lack a way to pay a fee other than out of a retirement plan account. There are some Internal Revenue Service letter rulings that shed some light on right and wrong ways, at least for income-tax purposes, of taking a participant-advice fee out of plan assets. Because none of these rulings is precedent and all are fact-specific, a service provider might want a ruling that ties to its standard form of written agreement and other facts. In my experience, it has not been difficult to obtain these rulings.

Consider that a plan's failure to pay or provide a benefit as required by ERISA 205 might not be a failing that the IRS has power, or a purpose, to forgive. Rather, an ERISA-governed plan's administrator might focus on (1) causing the employer to adopt documents that specify provisions within those choices that are proper under ERISA 205, (2) administering that plan correctly for the future, and (3) evaluating what remedies are prudent concerning benefits that ought to have been provided.

While Kansas City is blessed with many fine employee-benefits lawyers, you want Tom Brous, who is always gracious and fixes a situation effectively. http://www.stinson.com/ourattorneys/attypage.asp?key=2446

Without commenting on whether language of the kind described above is or isn’t effective to limit a recordkeeper’s liability to any person, it doesn’t limit the plan fiduciary’s liability to the plan, which could include a personal liability to restore an affected participant’s plan account. Beyond a duty to do the right thing for the plan and its participants, a fiduciary who cares about his or her personal liability might want to negotiate service contracts that get the best mix of services, fees, and other terms in the plan’s interests, which could also help lessen the fiduciary’s personal liability.

Consider a rhetorical question: If the employer really is hands-off and does not "establish" or "maintain" anything, why would it care about restraining loans?

Another two ideas to consider: In the 2008 Q&As of the American Bar Association’s Joint Committee on Employee Benefits with government agencies’ people, one question asked whether an employer might use a protective filing of Form 5500 without conceding that an ERISA plan had been established or maintained. The EBSA staff response suggested that an employer manage some of the uncertainty by getting a lawyer’s opinion or requesting the Labor department’s ERISA Advisory Opinion. See Q&A-22 in the attachment. That response doesn’t consider that many charitable organizations might think that spending money on lawyers’ fees on a question that’s not essential to the charity’s programs isn’t the best use of the charity’s limited money. A Field Assistance Bulletin is internal guidance within the Employee Benefit Security Administration. It is not a rule. One might expect EBSA to follow its own Bulletin in EBSA’s decisions about whether to pursue enforcement. But a court need not give any deference to such an interpretation that didn’t go through Administrative Procedure Act rule-making. The consequences of not filing Form 5500 often are the smallest potential liability concerning a plan that an employer operated as a non-plan. But a plaintiff (for example, a surviving spouse who never was asked to consent to the participant’s naming of a beneficiary other than the spouse) might present sympathetic facts that could make it easier for a judge to be persuaded that an ERISA plan existed. 2008_ABA_QandA_EBSA.pdf

R Vatalaro, your discussion topic suggests at least some possibility of blurred roles between a TPA’s efforts to protect its right to its fee, or a TPA’s desire to help a client plan administrator or fiduciary meet that person’s duties. Even with EBSA’s proposed rule on what’s not a “reasonable” service contract, a service provider faced with the circumstances you describe could argue that full disclosure to the hiring independent plan fiduciary (with incomplete disclosure to participants) is enough to meet the “disclosure-and-approval” aspect of the ERISA § 408(b)(2) exemption so that the TPA’s service contract could be an exempt prohibited transaction. Some TPAs might want to help a plan’s fiduciary negotiate more services from the recordkeeper. Others might prefer to exclude such work from a service contract. Whether a plan fiduciary meets its duties to participants isn’t necessarily a TPA’s duty (if the TPA isn’t, and won’t become, a fiduciary). Separately, how the plan fiduciary must, may, or should inform participants about the compensation trail you describe is another topic for consideration.

For the May 2008 edition of the Q&A sessions that the American Bar Association Joint Committee on Employee Benefits does with people from Government agencies, I posed a question (and, as the JCEB procedure has been, presented my suggested answer) on what makes it prudent to buy more fidelity-bond insurance than the statute requires. The EBSA person more-or-less agreed with a view based on ERISA's prudence duty. Further, the EBSA person suggested that the fiduciary's decision also must meet ERISA's exclusive-purpose duty. In the attachment, it's Q&A 21. One wonders how a fiduciary should consider that exclusive-purpose duty concerning a single-employer plan if the employer, the plan sponsor, and the named plan fiduciary all are the same corporation, and the natural persons handling plan assets (and acting for the named plan fiduciary) all are employees of that corporation. 2008_ABA_QandA_EBSA.pdf

In addition to using J Simmons’ good suggestions, you might consider whether a TPA’s fee really is a fee for writing the document or something else. With some recordkeepers, a fee might be for a bundle of services that includes some service concerning a plan document. The portion of an undifferentiated fee that’s attributable to the document service might be immaterial or even insignificant in relation to the whole fee. Even with a recordkeeper that has a separate fee for a document service, some are careful to say the fee is not for writing the document, but rather for recording customer instructions based on the adoption-agreement choices or other plan terms. Some in-house lawyers (I was among them) have advised descriptions of this kind to support an argument that the recordkeeper’s involvement concerning a document was not to give legal advice or practice law, but rather naturally part of the recordkeeper’s self-defense against its own liability or in some other way a legitimate part of the recordkeeper’s internal business needs. Even in States that sometimes show a hidebound outlook on the unauthorized practice of law, a recognized defense is that one prepared a document because, even if one isn’t a party to it, the document significantly affected the preparer’s rights, duties, or obligations. If the recordkeeper has so described its service, the plan fiduciary’s lawyer might have some room for an interpretation that the recordkeeper’s fee, especially if it’s low enough that it couldn’t have involved advice, was meaningfully for plan administration rather than plan creation. There is another reason for checking that a TPA’s “documents” fee is modest enough that it couldn’t include legal advice. In most States, it’s a crime for a non-lawyer to give legal advice (or draw a document that by implication includes legal advice). {I remind BenefitsLink readers of my longstanding view that the law ought to permit any person to give legal advice, and to be responsible for that advice.} Although that crime might seem to be the actor’s problem, ERISA’s prudence duty [ERISA § 404(a)] and reasonable-service-contract exemption [ERISA § 408(b)(2); 29 C.F.R. § 2550.408b-2] make this the plan fiduciary’s concern. A purported “contract” for a service that’s unlawful for the service provider to perform can’t be prudent, and likely can’t be a “reasonable contract”.

Perhaps the observations above mostly agree on a few principles: An adviser can enhance her client’s autonomy and dignity by providing as much as the client asks (and pays) for. That includes advice about different kinds of risks. That includes advice about how a risk could play out. Because a client bears the consequences of its decisions and acts (or a failure to act), it’s the client that must decide what to do. An adviser shouldn’t make her client’s decision, even if the client wants the “adviser” to make the decision. That said, there are ways for a professional to satisfy herself that a client’s decision really is a considered decision rather than merely accepting an adviser’s suggestion. An adviser who no longer feels like working for the client may resign. (The professional-conduct rule about not withdrawing until one can do it without harming the client rarely imposes much restraint on a professional if her scope is limited to advice-giving.) A client that no longer wants the adviser’s advice may fire the adviser.

Many governmental plans provide that a participant forfeits a benefit if he or she committed an offense related to his or her conduct as a government officer or employee. (For citations to selected statutes and court decisions on this point, see my Q&A 12:84 in Governmental Plans Answer Book.) Plea bargains operate in both directions. Sometimes, an accused admits offenses that don’t forfeit the pension and the prosecutor withdraws charges that would forfeit the pension. In other cases, an accused accepts a pension forfeiture to bargain for less imprisonment or other punishment.

One practical way to get some unofficial guidance is to ask the lawyer who will advise on the VCP submission whether he or she objects to getting a check drawn on the plan trust’s, rather than the employer’s, bank account. A smart employee-benefits lawyer doesn’t want to receive the proceeds of a prohibited transaction or knowingly participate in a fiduciary breach. Although a cautious client would want written advice, the next best thing is to hope that a lawyer’s self-preservation instinct practically results in a safe-enough answer. Also, a client might ask its lawyer to provide fee statements that detail which portions of the fee may be paid from plan assets and which must be paid by the employer without using plan assets.