Peter Gulia

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.

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