Peter Gulia

A related question that some BenefitsLink commenters might help with: How much effort should a plan administrator put into satisfying itself that a writing presented as a domestic-relations order really is a court’s order? I suspect that many plan administrators ordinarily don’t do much checking. But if there is a 13-year gap between the writing received and when it ought to have been received, perhaps a plan administrator may not presume regularity, and instead must take those steps that a prudent-expert fiduciary would take in the circumstances to consider whether the writing is a true copy of the court’s order.

If there were no consideration beyond time value of money, the trustees of a multiemployer pension plan should not “discount” the amount of a correctly determined single-sum withdrawal liability merely because the employer would pay the single sum rather than payments over time. It’s the periodic-payments schedule that’s adjusted for time value of money; the single-sum amount is, at least ostensibly, the “now” value. But in the real world, a skillful negotiator sometimes can negotiate a withdrawal liability. Even if the plan’s true motivation is getting ready money now, the trustees need different reasoning to support a compromise as one that a prudent-expert fiduciary should make in the plan’s best interests and following all of the fiduciary’s many duties. For example, the trustees might consider the risks and expenses of arbitration and litigation, and thus may consider the value of certainty. To provide enough “cover” to allow the trustees to pretend that what’s really a prompt-payment discount is, at least to defensible appearances, a proper compromise of what would be a disputed withdrawal liability, an employer might begin with a credible showing of an ERISA/MPPAA lawyer’s work, and the employer’s readiness to arbitrate and litigate. The stronger the “documentation” of a credible and expensive challenge, the more room the trustees have to compromise. The employer’s lawyer would seek the broadest satisfaction and releases, and would draft the settlement agreement to reduce the risk that a release is a prohibited transaction. In my experience, different plans’ needs and tastes vary considerably, and there is often a difference in outlooks among a plan’s staff, counsel, and trustees.

Below Ground, along with the considerations mentioned above and others that you've likely thought about, consider asking your client to think about what would happen if, between now and the next allocation time in 2009, a participant leaves employment and claims a distribution. If a participant was allocated less than he or she was entitled to, is the employer ready to top up the account before the distribution is paid? If a participant was allocated more than he or she was entitled to, will the employer succeed in removing the excess amount from the account before the routine processing of the distribution claim?

J Simmons, I have some thoughts about the idea you describe and stronger ways of implementing it. But those thoughts would be out of place on this public bulletin board. Please feel free to call me.

CFP in Philly, a few points you might want to think about (especially if you were involved concerning the creation of the plan or the selection of the service provider): (1) Before you say too much or the wrong thing about how the plan fiduciaries (likely the staffing business and its owners and executives) might handle their problem, consider presenting suggestions that don’t invite your client to think that the problem is your fault. (2) After thinking about point (1), consider that some rules about the number of participants count at the beginning of the plan year. (3) There are conditions other than those about the numbers of participants that could require a public accountant’s examination. (4) A competent practitioner might find ways to redo, truthfully, the Form 5500 so that the Labor department asks nothing further and closes the file. (5) After the mess is done with, change the plan. A staffing business should use custom-designed documents. In my experience, a staffing business’ plan needs custom definitions about who is or isn’t an employee, who is or isn’t eligible, and who has or hasn’t ended his or her employment. Creative definitions can help a staffing agency meet its business purposes. A good practitioner can persuade the Internal Revenue Service to issue a clean determination on provisions that go beyond what’s customary in others’ documents. Because this is open comment in a public bulletin board, it’s not tax or legal advice.

Have the plan’s fiduciaries considered whether they need to require that some portion of the participant’s plan account be invested in assets that can be sold quickly to raise money to pay taxes, insurance premiums, and other expenses? Have the plan’s fiduciaries considered that ownership of real property can result in a liability (especially an environmental liability) that exceeds the property’s value? Even if a plan otherwise meets all ERISA § 404© requirements, a fiduciary doesn’t get relief and instead is stuck with responsibility if he, she, or it follows a participant’s instruction that “[c]ould result in a loss in excess of a participant’s or beneficiary’s account balance[.]” 29 C.F.R. § 2550.404c-1(d)(2)(ii)(D). If the plan trust pays such a liability, do the plan’s fiduciaries know what allocation method they would use to apportion that expense among the plan’s participants, beneficiaries, and alternate payees (including those who had no interest in the real property)? Does each fiduciary who also is a participant understand that his or her plan account can be offset to pay his or her fiduciary liabilities to the plan (with that amount allocated among non-breaching participants)? See ERISA § 206(d)(4)(A)(ii).

Lori H’s question reminds us of an idea that we should be talking about more among employee-benefits practitioners: When a practitioner is an advice-giver or service provider but not a plan fiduciary, how much effort should one put into persuading a client to “do the right thing”? And if a client, after getting the practitioner’s advice, persists in doing the wrong thing, how much effort should one put into trying to prevent the wrong thing? Some believe that a practitioner is responsible only for the accuracy, completeness, and understandability of his or her advice. Others believe that upholding the ideals that make one a practitioner includes volunteering some effort to stop the wrongdoing. BenefitsLink readers, what do YOU think?

Although the Labor department's rule to interpret ERISA's requirement for a summary plan description doesn't require naming a privacy official, Department of Health and Human Services rules interpreting the Health Insurance Portability and Accountability Act of 1996 ["HIPAA"] require some health plans to name a privacy official and to furnish a notice that describes a plan's procedures concerning privacy, use, and disclosure of protected health information. See 45 C.F.R. Parts 160 to 164. Some health plans include the HIPAA privacy notice as a part of the plan's SPD package.

ERISA section 3(14)© states: "The term 'party in interest' means, as to an employee benefit plan - an employer any of whose [sic] employees are covered by [the] plan[.]"

Phil, if you're a service provider to the plan, think through your own interests before you put the Labor department on the situation. Often, EBSA investigates an abandoned-plan situation by asking a service provider to produce lots of records (often including information about investments and account balances) about the plan. The requests can get burdensome, and the DoL doesn't pay anything for your work and expense in collecting and copying records and responding to the written requests for information. Given your laudable desire to help the participants, you might be "okay with that", but it's better to make an informed choice to do charitable service.

Oops. ... or to claim a treaty benefit.

A plan’s administrator might reconsider whether it really needs a taxpayer identification number as an element of naming a beneficiary. Some administrators request a TIN as part of a beneficiary designation - because doing so helps collect a record that might be needed later, and using the record might help support a way to reduce the probability of identity fraud. But a TIN isn’t strictly necessary until it’s time to pay or deliver a distribution. If a plan’s administrator requires a number, the would-be beneficiary may use Form W-7 to apply for an individual taxpayer identification number or “ITIN”. An alien who’s about to receive a retirement plan’s distribution almost always can claim that he or she needs an ITIN to file a U.S. tax return or to claim. [see http://www.irs.gov/pub/irs-pdf/p1915.pdf]

There is an argument that an agreement might be so simple and so lacking a need for “administration” that it might not be a “plan” within the meaning of ERISA’s use of that word. Some court opinions support the idea that an agreement with only one person can be a plan. These include: Cvelvar v. CBI Illinois, Inc., 106 F.3d 1368 (7th Cir. 1997), cert. denied, 522 U.S. 812 (1997). Williams v. Wright, 927 F.2d 1540, 13 Employee Benefits Cases (BNA) 2137 (11th Cir. 1991). Healy v. Rich Products Corp., 13 Employee Benefits Cases (BNA) 2083 (W.D.N.Y. 1991). Some court decisions that support a no-plan view include: Fraver v. North Carolina Farm Bureau Mutual Insurance Co., 801 F.2d 675 (4th Cir. 1986), cert. denied, 480 U.S. 919 (1987). Darden v. Nationwide Mutual Insurance Co., 922 F.2d 203 (4th Cir.), cert. denied on this issue, 112 S. Ct. 295 (1991), reversed and remanded on other grounds, 112 S. Ct. 1344 (1992) Lackey v. Whitehall Co., 704 F. Supp. 201 (D. Kan. 1988), amended by 1989 U.S. Dist. LEXIS 2344 (D. Kan. Feb. 23, 1989). McQueen v. Salida Coca-Cola Bottling Company, 652 F. Supp. 1471 (D. Colo. 1987). Jervis v. Eldering, 504 F. Supp. 606 (C.D. Cal. 1980). Of course, you’ll want to Shepard’s®-ize these citations and extend your research. Although an employer’s agreement with only one person might be a helpful fact, the courts’ reasoning has considered the simplicity or complexity of the agreement’s terms. Also, something that otherwise might be a plan isn’t unless it’s a pension plan or a welfare plan. An agreement under which the executive becomes entitled to the deferred wage without retirement or severance from employment might be argued as not a pension plan. That the executive becomes entitled to the deferred wage when he or she is young enough that another executive would not retire might help support such an argument. Whether a deferred-wages agreement might be a welfare plan turns on the agreement’s provisions. Coupled with some kinds of provisions, the employer’s use (if any) of a life (including annuity) or health (including disability) insurance contract could bolster an argument that the overall arrangement is a welfare plan. Whether I try to leave room for an argument that a deferred-wages agreement isn’t a plan (or try to set up reasons why an agreement must be an ERISA-governed plan) turns on whether I represent the executive or the employer, where my client is and which courts might be involved, and other surrounding circumstances.

Before even getting to a dispute, the Internal Revenue Service might use its discretion not to apply a “tougher” interpretation, perhaps especially if the Labor department’s rule hadn’t said that it interprets the tax statute. In a dispute between a taxpayer and the IRS over how IRC § 4975(d)(2) applies to the taxpayer’s situation, a Federal court must apply the statute. If that statute is unambiguous, the court doesn’t need to consider the agency’s rule. If a court looks to a rule, the court decides whether it should defer to the agency’s interpretation and, if it need not, whether the court is persuaded by the agency’s interpretation. In doing so, a court might consider how carefully a rule-making followed the Administrative Procedure Act and other law, and how carefully the agency gave notice of what it was doing. Again, if the Labor department intends its rule as an interpretation of IRC § 4975(d)(2), it should say so expressly (and carve out IRAs, Archer MSAs, Health Savings Accounts, and Coverdell Education Savings Accounts). Although the recent Federal Register publications leave some room for a range of arguments, some aspects of these documents suggest that the Labor department’s proposed rule would be also an interpretation of IRC § 4975(d)(2) concerning plans qualified (or previously qualified) under IRC § 401. The Labor department’s explanation of its reasons for the proposed rule describes some “Consequences of Failure To Satisfy the Proposed Regulation”. After explaining that a service provider failure to furnish a necessary disclosure could make a service arrangement not “reasonable”, it states: The resulting prohibited transaction would have consequences for both the responsible plan fiduciary and the service provider. …. The service provider, as a “disqualified person” under the Internal Revenue Code’s (Code) prohibited[-]transaction rules, will be subject to the excise taxes that result from the service provider’s participation in a prohibited transaction under Code section 4975. [] The Internal Revenue Code (Code) also provides statutory relief for transactions between a plan and a service provider that otherwise would be prohibited. Any excise taxes imposed by Code section 4975(a) and (b) for failure to satisfy the statutory exemption are paid by the disqualified person who participates in the prohibited transaction, in this case the service provider, not the plan fiduciary. The Department believes that this significant result will provide incentives for all parties to service contracts or arrangements to cooperate in exchanging the disclosures required by the proposed regulation. This explanation shows that the Labor department believes that its interpretation about what is or isn’t a reasonable-services arranagement might have some relevance in interpreting IRC § 4975(d)(2). In the proposed rule’s preamble, the Labor department’s explanation of its reasons for the proposed class exemption includes the following: The failure to make the [proposed rule’s] required disclosures also would result in a prohibited transaction by the service provider under section 4975©(1)© of the Internal Revenue Code. In the proposed class exemptions’s preamble, the Labor department’s explanation of its reasons includes the following: A failure to comply with the [Labor department’s] regulation would also result in a prohibited transaction under section 4975©(1)© of the Internal Revenue Code (the Code) because the transaction would not satisfy the Code’s parallel statutory exemption for services at 26 U.S.C. Sec. 4975(d)(2). A prohibited transaction under section 4975 of the Code subjects the service provider as a “disqualified person” to excise taxes as described in section 4975(a) and (b) of the Code. On a service provider’s failure to meet its obligation or duty to furnish required disclosures, the proposed class exemption would provide relief not to the service provider but only to the contracting fiduciary, and then only from ERISA (not tax) consequences. This seems consistent with IRC § 4975(a)&(b): “The tax imposed by this subsection shall be paid by any disqualified person who participates [participated] in the prohibited transaction (other than a fiduciary acting only as such).” I am not alone in assuming at least the possibility that the Labor department’s proposed rule also would interpret IRC § 4975(d)(2); some of the comment letters on the proposed rule {http://www.dol.gov/ebsa/regs/cmt-408(b)(2).html} and the proposed class exemption {http://www.dol.gov/ebsa/regs/cmt-408(b)(2)exemption.html} took seriously a presumption that a Labor department rule would impose new disclosure requirements as conditions to getting the IRC § 4975(d)(2) exemption.

That an employer needs to ask a smart lawyer like Christine Roberts what benefit to provide and exactly what form it should take reveals why ERISA must preempt this ordinance. If a client follows the Ordinance (until it’s preempted or repealed): Based on the Ordinance and its Regulations, I could make a good-faith argument for either of the views suggested. But if a small or medium employer (as SF-HCSO defines them) asks this question, a lawyer’s fee to write up the reasoning for why providing the right coverage limit (rather than claims paid) meets the requirement might be more than the margin of difference in what the employer would spend under the differing interpretations.

The Treasury department adopted its reasonable-services exemption in 1977 before the effective date of Reorganization Plan No. 4 of 1978, and even before President Jimmy Carter signed that Plan on August 10, 1978. The Reorganization Plan { http://www.access.gpo.gov/uscode/title5a/5a_4_103_1_.html} transfers to the Labor department “regulations, rulings, opinions, and exemptions under section 4975 of the [internal Revenue] Code, EXCEPT for (i) subsections 4975(a), (b), ©(3), (d)(3), (e)(1), and (e)(7) of the Code; (ii) to the extent necessary for the continued enforcement of subsections 4975(a) and (b) by the Secretary of the Treasury, subsections 4975(f)(1), (f)(2), (f)(4), (f)(5) and (f)(6) of the Code; and (iii) exemptions with respect to transactions that are exempt by subsection 404© of ERISA from the provisions of Part 4 of Subtitle B of Title I of ERISA[.]” The tax-Code reasonable-services exemption is IRC § 4975(d)(2), which isn’t one of the subsections or paragraphs excepted from the transfer to the Labor department (if one ignores the Plan’s reference errors). But it might be better if the Labor department revises its proposed rule to state expressly that the rule is an interpretation of IRC § 4975(d)(2) to the extent that Reorganization Plan No. 4 of 1978 transfers authority to the Labor department.

Thank you to Becky Miller for pointing out this risk. Even if a Form 5500 does not state a liability for a tax, information about the reported-on plan might be reflected in a tax return of an employer or a participant. If that information is a “substantial portion” of the information user’s tax return, a preparer of a Form 5500 is a preparer of that other tax return. Page 25 of the attached IRS Notice lists Form 5500 as an “information return” that could result in this characterization. But it’s simple to avoid the preparer penalty on an unsupported position. A nonsigning tax return preparer may explain the difference between the penalty standards of a preparer and a taxpayer. There is perhaps a logic gap in the IRS’s thinking: what if a nonsigning tax return preparer delivers a good disclosure concerning a Form 5500 to his or her client (that report’s maker - the plan’s administrator), but the employer or other ultimate taxpayer is a person unaffiliated with the plan’s administrator? Who is responsible to inform the taxpayer about the differences in penalty standards? tax_return_preparer_n_08_13.pdf

As Gary Lesser says …. A person shouldn’t buy an IRA if the transactions would result in providing compensation of any kind to herself, or to someone who’s a relative of the would-be IRA owner. A nonexempt prohibited transaction tax-disqualifies the account from IRA tax treatment, which ordinarily would make the “IRA” unsuitable for the investor. For this purpose, a relative includes a spouse, ancestor (for example, a parent or grandparent), lineal descendant (for example, a child or grandchild), or a spouse of a lineal descendant. IRC § 4975(e)(2)(F), 4975(e)(6). Even if not related, there might be a PT if a set of transactions does indirectly what the fiduciary or disqualified person must not do directly, or if the compensation recipient is a person in whom the IRA buyer has an interest that could affect his or her best judgment in making IRA decisions. IRC § 4975©(D)-(F). Further restrictions might apply under banking, insurance, or securities law. One solution is to find a “product” that has all sales margins stripped out. Another, as Gary Lesser suggests, is that many funds allow a registered representative of a broker-dealer that has a sales agreement with the fund’s underwriter to buy A shares at net asset value – that is, without the sales load. (Often, this privilege extends to the rep and his or her spouse and children.) About CJA’s inquiry, an insurance company and its agents sometimes have a similar arrangement by which a licensed producer may buy a different “version” of an annuity contract. For example, a contract issued to a producer might have no “surrender” or contingent deferred sales charge and a reduced mortality-and-expense charge. Again, this works only if there is no compensation. In my view, this precludes not only money compensation but also production credit and counting toward a “recognition event” (such as, the leading producers’ trip to Hawaii). For more background, you should buy Gary Lesser’s books:  Quick Reference to IRAs  Roth IRA Answer Book  SIMPLE, SEP, and SARSEP Answer Book. http://benefitslink.com/GSL/index.html

Concerning several organizations, I've handled problems of the kind you describe. It happens with many health systems and some other charities. Depending on the facts, there is a solution that has been successful (most often, with zero tax or sanction cost). Because it's not published by the IRS and has at least two aspects that are a little fact-sensitive, I prefer to discuss it directly. Please feel free to call me.

To Bird, david rigby, Everett Moreland, and jpod, thank you so much for your helpful pointers. Whether through these BenefitsLink boards or by telephone or e-mail, please let me return the professional courtesy when I can help you think through a situation.

In 1968, an employer established a money-purchase plan. The plan always has had only one participant, who also is the employer’s sole shareholder and sole director and is the plan’s administrator and trustee. The plan and trust documents are individually-designed. The employer now wants to terminate the plan, and the participant would instruct that her final distribution be paid as a direct rollover into an IRA. The participant’s vested accrued benefit is more than $1 million. A practitioner who preceded me seems to have furnished a regular course of plan amendments through 2003, and all of these are signed. If I accept, I’d be engaged to draw a plan amendment for recent years’ tax-law changes, if any (the plan already has a choice of 100%, 75%, and 50% survivor annuities), and the termination. There is NO IRS determination – ever. For terminating a plan, ordinarily one uses Form 5310 to get an IRS determination that the plan remains tax-qualified in form. Given the facts described above, is a Form 5310 application sensible? Would the IRS reviewer seek to retrace the entire 40-year history of plan documents and amendments? (The Instructions state that, in the absence of a preceding IRS determination, the applicant must submit the initial plan and all amendments.) If so, how worried should one be that the IRS would uncover some decades-ago document defect that disqualifies the plan? (If it matters, it would be difficult to find an operational defect because all that’s happened so far is that the employer contributed each year 25% of its employee’s compensation.) Assuming that the amendment I draw would be correct, is it “safe” to file a Form 5310 (without any preceding determination)? Or should I tell my prospective client that it’s wise not to open this door (and, without any IRS review of the plan, simply to believe it to have been tax-qualified)? I’d appreciate your views, especially about why it would be wise or unwise to use an IRS determination procedure.

Without commenting on any of the choices that Confused in WV faces: Some courts have interpreted the Contracts Clause of the U.S Constitution or a similar or related provision of a State constitution or statute to protect State and local government employees' rights under governmental pension plans. That protection might be less than, similar to, or more than what ERISA provides for those nongovernmental pension plans governed by ERISA. For example, New York law restrains not only a cutback of accrued benefits but also a cutback of an employee's right to obtain future benefit accruals. If understanding this law is important to a participant's decision-making, he or she might want his or her expert lawyer's advice.

The DoL has published some views on other aspects of its rule [29 C.F.R. § 2510.3-2(f)] of safe-harbor conditions under which a made-available 403(b) program is not a plan “established or maintained” by an employer. But on questions about how much choice of “funding media or products” or “contractors” is enough to be “reasonable” in the sense provided by the rule, it hasn’t published guidance beyond the rule itself and the 1977 and 1979 preambles to the interim and final rules. An ERISA Advisory Opinion is unlikely. The 1979 preamble to the final rule stated that “such decisions can be made properly only on a case by case basis” and noted ERISA Procedure 76-1, § 5.01 (“inherently factual”) to signal employers that the DoL didn’t want to “referee” these questions.

Darren, page 8 of Field Assistance Bulletin 2006-1 [http://www.dol.gov/ebsa/pdf/fab2006-1.pdf] includes a suggestion that might be useful in the circumstances you described. Reading that background might help the plan administrator prepare to ask for its lawyer's and other experts' advice. (Please understand that I express no view about whether the Bulletin is a correct explanation or application of relevant law.)

At the outset of this post, I’ll mention my personal view: anyone – whether a lawyer, accountant, actuary, or none of those – ought to be permitted to render legal advice. Along with this, a person should be responsible (as provided or limited by contracts, negligence, and other law) for his, her, or its legal advice. But until we change today’s law, John Simmons has a good idea that we need clearer communication about what that law is. Although it might be nice to have a playbook, it’s doubtful that a nongovernmental association could publish anything that would state enough “bright-line” conclusions to be much help. While I’m reluctant to serve as a messenger of unhappy tidings, here’s one reason why. From 1937 to 1978, lawyers’ associations and associations of persons in other professions and occupations negotiated “peace treaties” that tried to state agreed-on views about what expressions of information are or aren’t legal advice. (And some of the businesses then wanted a “law” or rule to support not answering a question.) Also, some bar associations published advisory opinions. Among these, the New York State Bar Association in 1975 and the American Bar Association in 1977 published opinions on what they thought ought to be allowable or “out-of-bounds” for a nonlawyer’s services concerning employee-benefit plans. The United States Government challenged some of the “treaty” efforts as contrary to antitrust law. See, for example, United States v. New York County Lawyers’ Ass’n, 1981-2 Trade Cases (CCH) ¶ 64,371, 1981 U.S. Dist. LEXIS 16250 (S.D.N.Y. Oct. 14, 1981) (consent decree enjoining lawyers’ association from “[a]dopting, promulgating, publishing or seeking adherence to any statement of principles, code of ethics[,] or other guide, rule or standard which [sic] restricts or governs, or delineates as proper or improper, practices or activities of corporate fiduciaries[.]”). Bar associations withdrew many of the “treaties”. See, for example, 105 Reports of the American Bar Association 291, 382, 637, 789 (1979). A few years ago, an ABA task force tried a project that would publish a model definition of the practice of law. In the face of many negative comments, including a letter from the U.S. Department of Justice and Federal Trade Commission, the ABA abandoned that project. That said, the antitrust concerns don’t preclude employee-benefits professionals (acting personally, rather than for trade associations) from communicating about what makes sense for a practitioner or service provider to answer and how.