Peter Gulia

The regulations that J Simmons helpfully describes govern whether a plan is or isn't an eligible plan (within the meaning of IRC 457(b)) for Federal income tax purposes. While helpful in understanding the distinction between funded and unfunded plans, those regulations don't interpret (at least not directly) non-tax law, including an employer's obligation or a participant's right. For a deferred compensation plan under which a participant's rights are contract rights, a participant's rights (or an employer's obligations) are stated by the written plan and, if not precluded, other relevant documents. For example, a plan could specify when a payroll deferral is credited to a participant's bookkeeping plan account. If no relevant document specifies the time, it's less clear what (if anything) the employer and the participant agreed on. If an absence of terms doesn't make a plan void or voidable, some courts might find that the parties impliedly agreed on a "reasonable" time, and then use fact-finding procedures to evaluate what "reasonable" means. If a court finds that some law interpretation beyond the documents is needed, the court would look to ERISA (sometimes including the Federal common law of ERISA) or, if the plan is a church plan, State law. Knowing that the protections of ERISA's Part 4 might not apply - because the plan is a church plan or is maintained for a select group of highly compensated or management employees, a participant should read the plan carefully (and evaluate other risks) before he or she decides whether the plan rights and other compensation are satisfactory to make him or her willing to accept or continue an employment or engagement. In providing an exception (for a plan other than a governmental plan or a church plan that had not elected to be governed by ERISA), Congress assumed that a select-group employee would be capable of evaluating or negotiating the risks of unfunded deferred compensation. Some of the risks to evaluate include considering the possibility that the employer's management (or its ownership, and then its management) could change, that a change in the employer's financial circumstances could make it unable or unwilling to pay the deferred compensation, that other creditors might be quicker or more skillful than the participant in pursuing their rights, and that the expense of pursuing the participant's rights could be out of proportion with the value likely to be realized by pursuing the rights. This evaluation matters even more if the organization's exposure to other potential creditors involves signficant uninsured risks. Likewise, a participant would want to be alert to an organization's potential for an operating loss or lack of a meaningful surplus. If your inquiry isn't entirely hypothetical, how to handle it depends on whether your client is dealing with something that already happened or is planning ahead. If it's planning, there are opportunities in drafting documents to say what your client wants or is willing to do. (Concerning churches and charities, I've advised both sides about unfunded compensation, and you might be surprised by how much is negotiable.) If the less-than-prompt credit is an open problem, there are often non-dispute reasons to get the parties to "do the right thing".

It's likely that a currently-serving plan fiduciary - if he or she is a potential buyer, is a relative of a buyer, is a subordinate of a buyer, or otherwise has an interest or conflict that could compromise his or her best judgment as a fiduciary - must hand off this negotiation and transaction to a special-purpose independent fiduciary. In my view, engaging the independent fiduciary needs to happen first because the selection of the valuation expert needs to be free from compromising interests, and letting the independent fiduciary engage the valuation expert is the simplest way (and usually the only practical way) to get that independence. Also, some proposed transactions involve a difficult issue about how the plan raises money to pay the fees of its fiduciary, valuation expert, and lawyer. Again, the solution must be designed to avoid a conflicting interest for those who represent the plan.

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In considering the Federal income tax treatment of participants, one might look to IRC 402(b)(4), which provides varying treatments based on whether a 410(b) failure is "[one] of the reasons" or the sole reason that the plan trust is not exempt from tax, and also sometimes provides a treatment that differs according to whether a participant is or was a highly-compensated employee or not.

Does the plan provide participant-directed investment? If it doesn't, ERISA 205(a)(1)(A)(ii) requires only annual statements. If a plan provides participant-directed investment but restricts directions to less often than quarterly, or allows quarterly or more frequent directions but shows a participant the change to his or her individual account less often than quarterly, a plan fiduciary might have liability exposures that are more serious than meeting the statements rule. Cf. 29 C.F.R. 2550.404c-1(b).

QDROATTY, I'm curious, if you represent only the participant, don't you have an opportunity to advance an interpretation of the settlement agreement that your client, after hearing your advice, believes is most likely to preserve benefits for himself and those he chooses to benefit? Or is there some court rule or customary domestic-relations practice that requires a proposed-DRO drafter to be more even-handed?

I’m hoping for a little old-fashioned (and courteous) debate. The Labor department’s EBSA has stated an informal view [FAB 2007-1] that the “level-fees” condition of the new statutory prohibited-transaction exemption for the first of the two different kinds of eligible investment-advice arrangements can be met looking only to the fees of the adviser, without counting fees of persons that control, are commonly controlled with, or otherwise are affiliates of the adviser if the affiliate does not render investment advice. I’m not seeking views on whether the view described in the bulletin is a correct interpretation of the statute. The same bulletin reaffirms a view that a fiduciary who or that selects an investment adviser must do so prudently. (To focus the discussion, let’s assume that the adviser that wants to use the new PTE is a company or other non-natural person, and that a human, if any, involved in rendering the advice is not himself or herself a registered investment adviser but rather is a representative or employee of the adviser company.) Many practitioners might agree that at least some participants who use investment advice don’t know enough about the subject of the advice to evaluate independently whether an adviser gave advice that was compromised by a conflict of interests. (And those who do know enough might not need the advice.) If a plan fiduciary believes this, how comfortable should he or she be in approving an arrangement concerning which an adviser is permitted to render advice that could be compromised by the adviser’s interests in recommending the investments and services of an affiliate? 1) Does the selecting fiduciary have a duty to consider independently the quality of the adviser’s disclosures about the conflicts? 2) Even if all conflicts are fully disclosed in very plain language, does the selecting fiduciary have a duty to consider whether some participants might lack the skills needed to evaluate whether a conflict compromised the advice rendered? 3) Even if the selecting fiduciary finds credible evidence that participants are capable of detecting whether a conflict compromised the advice rendered, is it sensible for a fiduciary to approve an arrangement that leaves a participant to pursue the plan account’s remedies only after the harm already happened? 4) Could a selecting fiduciary decide prudently that participants need advice so badly that even conflicted advice is better than none at all? If so, does it matter whether an unconflicted alternative is available to the plan? 5) What should a selecting fiduciary do to evaluate the probability or risk that the incremental investment returns that participants achieved because of following the adviser’s advice might turn out to be less than participants' incremental losses from following the adviser’s advice? To be fair about starting the debate, my instinct is to doubt that a prudent fiduciary should approve an arrangement that lets a conflicted person render advice to a non-expert. But human nature doesn’t always neatly follow theory, my experiences are a less-than-complete sample, and I try to learn from others’ observations. Your ideas, please?

My writing for Wolters Kluwer’s Answer Books has been mostly for the opportunity to put education out to other practitioners and especially to smart people who haven’t yet engaged a lawyer. But a book (or an Internet bulletin board) is about general information. Advice about a particular situation and not-hypothetical facts belongs in a client-lawyer setting, with all of the many protections that Federal and State laws provide for such a relationship. If your committee hasn’t already selected a lawyer in whom you have confidence, consider that the first duty of a fiduciary is to gather sound information needed to support his, her, or its decision-making – and that includes expert legal advice if that’s what a fiduciary needs to evaluate a choice or support a negotiation. Your note last evening tells us that you’re passionate about trying to help the plan’s participants. So I wish you and everyone involved luck in finding the information and advice that would help; and express my own hope that all people will learn how to work together to produce good retirement incomes.

mjb, thanks for suggesting my work in Wolters Kluwer's 457 Answer Book. Mr. Schullo, as you already knew, the key for an investment committee of an individual-account plan that provides participant-directed investment isn't the ultimate decisions but rather selecting a menu of investment options from which a participant could direct investment to meet his or her retirement investment goals. In my experience, making menu decisions for a participant-directed plan is much harder than making an ultimate investment decision.

In the IRS's view, there is no requirement to furnish a section 402(f) written explanation in a language other than English. See IRS Announcement 2002-46; see also 26 U.S.C. 402(f), 26 C.F.R. 1.402(f)-1. If a distributee that the plan administrator seeks to help reads Spanish, the IRS published its safe-harbor 402(f) explanation in Spanish. IRS Announcement 2002-46. To the extent that furnishing information about the tax treatment of a distribution involves administering the plan, a plan administrator should consider whether furnishing a 402(f) explanation in a language other than English is prudent for the purpose of providing the plan's benefits to participants and their beneficiaries while incurring only reasonable expenses of administering the plan. See ERISA 404(a)(1). The IRS's safe-harbor explanation reflects some (but not all) of the 2001 EGTRRA changes, does not reflect a Roth program, and does not reflect law changes after 2001. See Notice 2002-3.

According to the Treasury department's interpretation, deferred compensation attributable to a nonelective "contribution" counts against the section 457 deferral limit for a tax year when that deferred compensation "vests". See 26 C.F.R. 1.457-4©(1)(iv), example 3.

Correcting errors in implementing investment directions A conservative approach is to credit each participant’s account with the better of: the as-of corrected investment result or the benefit of the incorrect investment (until the error was corrected) if that would be better. The theory is that a fiduciary, or even an ordinary service provider that stands by its work, shouldn’t benefit from its own error. (For a trust under which the beneficiaries together enjoy the results of a common pool of investments – especially a trust without directed investment, this might make sense. For a participant-directed individual-account plan this makes less economic sense because correcting errors could cause some participants to subsidize others.) Recognizing that the nature of participant-directed plans and a recordkeeper’s services naturally involves some reasonable range of errors (whether it’s 1% or 0.000001%), some recordkeepers (especially those that assume the absence of any fiduciary duty) believe that – as long as “gaming” is avoided, and exclusive benefit for the plan preserved – it’s fair to uniformly correct an individual account to the participant’s, beneficiary’s, or alternate payee’s actual investment direction, even if that leaves the directing person with a worse-off investment result. Some ERISA lawyers are willing to sign an opinion to support that view. I’m one of them (if the client presents, or changes to, the right contract and other facts and circumstances), and can do the opinion for either a non-fiduciary or a fiduciary. Without getting into all of the facts and conditions that would be needed to support such a view, an important part of it is disclosure to, and approval by, an independent plan fiduciary. The ideal is that the parties have an open conversation, and a real negotiation, about understanding the relationship between how much service expense a plan has to bear to improve accuracy, or how much inaccuracy a plan should tolerate to keep service expense reasonable. The minimum disclosure needs to be enough so that the independent plan fiduciary could evaluate the trade-offs. The independent plan fiduciary has a duty (and thus authority) to make decisions, prudently, about what’s in the best interests of the plan. How a good fiduciary goes about doing that is another discussion. There is no one DoL Interpretive Bulletin that will give you a single “the answer”. If your business chooses anything beyond the most conservative answer, you’ll want to build good support for what you do because a business that gets it wrong will have a nasty contingent liability and excise tax payable. This bulletin board is about giving a fellow practitioner a starting point, so please understand that none of this is legal advice.

If the participant is a party-in-interest (or a disqualified person) regarding the plan, a plan distribution to him that delivers the property involves a prohibited “sale” or exchange of the plan’s property to a party-in-interest or disqualified person. If the only prohibited transaction is the fact of the distribution and its delivery of the property, it might – by meeting several conditions - be exempted as an ordinary-course distribution made according to uniform plan terms. Even if exempted, a plan administrator still must correctly tax-report a distribution. • The plan administrator or other “payor” might require a lawyer’s opinion on the prohibited-transaction exemption to satisfy itself that it need not report distribution code 5 on Form 1099-R. • The amount reported in box 1 of Form 1099-R must be no less than the fair market value of the property (with a little “give” concerning the valuation date). • If the distribution of the property is not directly rolled over into another eligible retirement plan, the payor will need to compute and collect the withholding taxes on the distribution. All of these steps turn on getting a correct valuation of the property. To do so, a plan fiduciary who’s independent of the participant and anyone else who’s conflicted should evaluate the appraisal of an independent valuation expert.

Is serving as a plan fiduciary or handling plan assets while not bonded a Federal crime? 29 U.S.C. 1112(b) [ERISA 412(b)] describes it as "unlawful", a word that in other U.S. statutes often means punishable as a crime, which Black's Law Dictionary (8th) gives as the word's second meaning. More immediately, unless a plan fiduciary himself or herself intends to steal plan assets, why wouldn't one want to get the fidelity 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. What's nutty about not buying the insurance is that the fiduciary need not pay for it personally (other than his or her share along with other participants). Just pay (or reimburse) the insurance premium from plan assets. While the addressee of the famous Maldonado letter might have further information for us, it seems that it ought to be a "reasonable expense[] of administering the plan" to do a specific thing that the statute expressly commands. Peter Gulia Fiduciary Guidance Counsel

As always, the choice of solutions often turns on how much of the plan's assets the plan fiduciares find it prudent to spend, or how much of their own assets they're willing to spend. But some steps don't require significant expense. Without seeing the plan or the full set of facts, a few questions to lead your analysis: (These assume that the plan provided, and still provides, participant-directed investment.) Is the property temporarily worthless (later, someone might buy it), or is it permanently worthless (for example, because it was destroyed)? Did the participant request the distribution? Or is it that the participant severed from employment, the plan's involuntary-distribution provision applies, and the plan administrator has decided that the participant's accrued benefit is less than the plan's cash-out limit? If a distribution will become payable, does the plan give the distributee a choice between delivery of some (or all) of the property allocated to her account (or her account's proportionate share of property held generally under the plan trust) -or- an instruction to the plan trustee to sell property, getting payment of an amount that reflects the proceeds of the property sold? When a plan trust invests only in shares of SEC-registered open-end funds, it's customary not to provide this choice, because (unless the fund is closed to new purchases) all shares are fungible and the distribution, whether taken or rolled over, can't have different tax or other economic consequences based on a difference between money and property. But with many other kinds of property, it's sometimes smart to provide the choice. Don't be too quick to assume that the plan doesn't allow a distribution of property. The plan administrator might thoroughly read the document and find that the plan administrator or the plan trustee has some discretion that's useful. Moreover, amending the plan (if that's necessary or would be clearer) shouldn't be an anti-cutback problem if the amendment expands (rather than limits) the manner of distribution. (Depending on the kind of property, one might worry about whether it's wise to extend the choice to other participants.) If the plan's usual claim form doesn't describe a choice between a distribution in money or property, a plan administrator might revise the form (even if only for the one participant) to be super-clear about all of the consequences of the property-or-money choice. Or if it's really impossible to sell the property, the form should say so, explain why, and explain the distribution of property. If the distribution is a delivery of property and it's not feasible to deliver the ordinary document of title for that kind of property, the plan fiduciaries should prudently consider doing something to make sure that they complete the best possible delivery of the property. For example, the plan trustee might sign and deliver a deed that coveys the trustee's rights to the distributee (to the extent of the individual account's portion of the plan trust's property). In one situation I handled, the plan trust's property had been destroyed, and I drafted the trustee's deed to covey property to each distributee, including rights to claim remedies against any persons that one might allege had destroyed the property. If the distribution is a delivery of property, the plan administrator or other "payor" must make an honest effort to estimate the fair market value of the property. If the distributions to a distributee for a year total a value less than $10, a Form 1099-R is not required. See IRC 6047(d). But it is not prohibited. As you suggest, filing a tax-information return or report might be a way to leave behind more records showing that a transaction happened. The Form 1099-R Instructions expressly states: "If you are distributing worthless property only, you are not required to file Form 1099-R. However, you may file[,] and enter 0 (zero) in boxes 1 and 2a[.]" If the distribution is a delivery of property rather than money, a plan administrator might be reluctant to omit the usual 402(f) notice about rollover opportunities. Why? A distributee might assert that the true value of the property was more than $200 and that the absence of the notice harmed her. How? "If the plan administrator had done its duty and informed me that the distribution was rollover-eligible, I could have found an IRA or other eligible retirement plan trustee that would have accepted the property, and I could have kept it accumulating under a tax-deferred plan." The regulations recognize that although a plan administrator might, in good faith, tax-report a distribution on estimated values, an eligible distributee retains her right to a rollover based on the actual values. See by analogy 26 C.F.R. 1.402©-2/Q&A-15. If the plan fiduciaries fear litigation (and worry about a less-than-secure defense against participant-directed investment), communicating fully now might be a way to shift some remaining responsibility to the former participant, and so weaken or in time bar her claims. I've been to this movie before, so please call me if I can help you. Peter Gulia Fiduciary Guidance Counsel 215-732-1552