Peter Gulia

Assuming the IRA holder requests a distribution .... If a distribution consists only of a delivery of worthless property, the instructions to Form 1099-R make clear that a report, while not required, is permitted, and may show a distribution amount of $0.00. See page 7. Some practitioners consider doing a "zero" 1099-R a good idea because it creates a record that one could use as evidence of the delivery, and, if it was the only investment, the end of the account. If you decide to do this, check your tax-reporting software: some include an assumption that zero can't be a distribution amount, and it might take a little time to figure out an override.

Without considering anything of what the plan fiduciaries ought to be thinking about, might the TPA (assuming it’s confident that it’s a non-fiduciary) choose to provide the service, if paid for, of sending whatever writing the plan administrator has composed to whatever audience it instructs - while carefully reminding the client that the TPA hadn’t been asked to, and didn’t, advise the client about any effects of delivering that writing. Your query asks: “What are the inherent dangers of doing [a notice the way the client suggests]? If the “client” already has said that it doesn’t want to pay for records work, how likely is it that they’ll pay for advice? Please understand that this post doesn’t express a view about to whom a default-investment notice should be sent or what a notice should or shouldn’t say. That’s a set of questions that a plan fiduciary should carefully consider by prudently considering the facts, circumstances, expenses, and needs of a particular plan. The solution that’s the right answer for one particular plan might not be for a different plan.

Beneficiary is a minor While nothing in ERISA or the Internal Revenue Code precludes a retirement plan from paying a distribution to a minor, many plan administrators prefer to pay a minor’s conservator, natural guardian, or UTMA custodian. Why? A payer wants to be sure that a payment is a satisfaction of the obligation to pay the benefit. Ordinarily, a beneficiary’s deposit or negotiation of a check that pays a retirement plan distribution is the beneficiary’s acceptance that the payment satisfied the claim under the plan. A minor is a person still young enough that he or she can’t make a binding contract. At common law, the age of majority was 21. Now, all but three States’ laws end a person’s minor status at age 18. Before a child reaches age 18 (or the other age of competence to make contracts), his or her conservator may disaffirm an agreement or promise the minor made. After a child reaches age 18 (or the other “full age”), he or she may disaffirm an agreement or promise he or she made before he or she reached the age of competence to make contracts. A typical payer won’t take the risk that paying a distribution isn’t a satisfaction of the plan obligation. Thus, payers usually are unwilling to pay a plan’s benefit to a minor. To facilitate payment in these circumstances, most plans permit payment to a minor’s conservator, guardian, or Uniform Transfers to Minors Act custodian. If a participant named a minor as a beneficiary (rather than naming as beneficiary a trustee or custodian), a typical payer is likely to honor a claim made by the child’s conservator or natural guardian. As always, a plan administrator should read carefully what the plan says, and, if the right administration isn’t obvious, get its lawyer’s advice. Beneficiary is not a U.S. person If a retirement plan distribution is payable to a foreign person (such as a nonresident alien), a withholding agent must withhold 30% for U.S. Federal income tax unless the withholding agent has proper documentation (such as a withholding certificate on Form 8233 or the correct form in the Form W-8 series) that it properly relies on to treat the payment as made to a beneficial owner who is a foreign person entitled to an exemption from, or a reduced rate of, withholding. Detailed rules govern the circumstances in which a withholding may or must not rely on the distributee’s or payee’s certificate. See 26 U.S.C. §§ 1441-1443; 26 C.F.R. §§ 1.1441-1 through 1.1441-9, 1.1443-1. The United States has an income-tax treaty with the United Kingdom. A distributee who’s entitled to claim that treaty’s protection likely qualifies for an exemption or a reduced rate.

The publisher provides this website and its message boards without asking practitioners to pay any fee; instead, advertising supports this website. If we want that to continue, it's business-smart to use the advertisements. So a good place to start would be this website's advertisements, including those at benefitslink.com/software.

Yesterday, I looked at this question for a Delaware corporation, and found that Delaware law is favorable to allowing a general corporation that is not a bank or trust company to serve (without compensation, of course) as the trustee of a qualified retirement plan for the benefit of the corporation's employees.

I guessed wrong on the software's rules; here's the plaintiff's complaint. LaRue_complaint.pdf

Here's the plaintiff's complaint, and the defendants' answer. DeWolff_answer.pdf

The news reporting (and even the parties’ and friends’-of-the-court briefs on the appeal and review) are thin about the facts of the participant’s investment direction and the plan administrator’s handling of it for two reasons: (1) the case proceeds on the law question of whether LaRue stated a claim; and (2) LaRue’s complaint never went to trial, or even discovery. In the dismissed trial-court proceeding, LaRue didn’t describe how he requested investment changes, and DeWolff didn’t describe how LaRue “rescinded” anything that he did submit. LaRue’s action asks the court to order restoration to the plan of what was lost by not following his alleged investment direction, to be followed by an allocation of that restoration to LaRue’s individual account. What’s in play now isn’t the facts of what did or didn’t happen, but rather whether ERISA provides or precludes this kind of remedy. If LaRue is successful with the Supremes (and it helps to have a brief and oral argument of the United States Government on your side), he doesn’t win his claim; he wins the opportunity to return to the trial court to begin trying to prove his claim. As some have observed, there seem to be weaknesses in this participant’s claim. The defendants admitted that LaRue requested an investment change, but also say that he later “rescinded” his request [see attachments]. If the Supremes send the case back for a “do-over”, the plan fiduciaries could state the facts and arguments that they believe would show that LaRue didn’t really direct the investment change he sued for (for example, that he failed to act according to the plan’s investment-direction procedure), or that he somehow ratified or accepted his individual account as the plan stated it to him. For now, the important question is whether a participant may pursue relief under ERISA § 502(a)(2)or(3) if his is the only account affected by an alleged fiduciary breach.

1) Just as an employee-benefit plan’s procedures should do for any claim or other matter that requires the plan administrator’s decision, inform the participant that he or she is welcome to furnish as much evidence as he or she likes to support his or her claim that there is a marriage. 2&3) Because of how long ago Arizona and New Mexico ended informal marriage, only a very old or foolish claimant would assert that he or she made his or her informal marriage in either of those States. Instead, a claimant will remember (sometimes truthfully) that he or she made the marriage while in a State that then permitted informal marriage. For informal marriage, often there is no residence requirement. Court decisions of States in which informal marriage is not permitted for a marriage made within the State have recognized a present-tense exchange of words and informal marriage made during a weekend, or even one-day, trip into another State. 4) United States law and State law recognize a marriage made according to the law or custom of a Native American Indian tribe. 5) If, from the evidence furnished [see #1], it’s uncertain whether a marriage exists, remember that an ERISA plan’s administrator must act as a prudent expert would. If the plan administrator lacks expertise, ordinarily it must engage an expert. 6) While you’re thinking about informal marriage, think about how much checking the plan administrator does (or neglects) concerning all marriages. What prevents a participant from filling-out a form with a name and saying that it’s his or her spouse? (Does anyone check?) And how does a plan administrator know that people who were married remain so? 7) Consider requiring a participant, if he or she requests coverage for a spouse, to certify the marriage on every year’s re-enrollment.

Beyond the other suggestions, if the debtor served as the plan's administrator and a bankruptcy trustee is serving in the debtor's liquidation or reorganization case, the bankrupty trustee must "continue to perform the obligations required of the [plan] administrator[.]" 11 U.S.C. 704(a)(11), 1106(a)(1). As David Rigby suggests, a recordkeeper should satisfy itself that a person who seeks to instruct those services for which the recordkeeper follows the plan administrator's instructions is in fact the bankruptcy trustee duly appointed by the court. To the extent that the trust agreement provides for the trustees to follow the plan administrator's directions, they may follow only those that are "proper" (genuine and not contrary to the plan or ERISA), and they must decline to follow an instruction that is not proper. While the bankruptcy trustee likely has power (because the relevant documents likely put power to remove and appoint plan trustees in the plan sponsor or the plan administrator) to remove a trustee and appoint another, a removed trustee's service doesn't end until his or her successor has been appointed and has begun service.

For query 3, could some (after a portion that's at least enough to meet all tax withholding) of each minimum distribution be met not by paying money but instead by delivering property? Each year, the plan's trustee would deliver to the participant a deed for a fractional ownership of the property. This assumes prudent-expert valuations that would satisfy ERISA, the Internal Revenue Code, and other tax-planning purposes. Also, the plan should use a special-purpose trustee who's independent of the distributee.

If the prospective client has no ties to any insurance business and wants a candid assessment about whether a plan and insurance contracts followed IRC 412(i), or would square with PPA-revised IRC 412(e)(3), and avoided, or would avoid, anything that could trigger an unintended Federal income tax treatment, please feel free to call me.

While many States’ laws prohibit a corporation that’s not a bank or trust company from engaging in a business of serving as a trustee or other fiduciary, a State’s law might permit a corporation to serve as the trustee of a trust for an employee-benefit plan for the corporation’s employees. To pick just one example, Pennsylvania’s Banking Code expressly permits a non-bank corporation to act as trustee of a trust “for the benefit of [the corporation’s] own employe[e]s[.]” 7 Pa. Stat. § 106(a)(iii). With many retirement-plan trusts (especially those under which a participant directs investments within a menu that the employer selected), a trustee has no discretion other than to consider whether a directing person’s direction is genuine and “proper” – which many ERISA practitioners interpret as not precluded by the plan’s documents or ERISA. And usually the employer is, or some of its employees are, the named plan fiduciary that must decide claims and must decide the directions (other than those permitted to a participant, beneficiary, or alternate payee). In those circumstances, the value of an “outside” trustee is the trustee’s duty to refuse to obey an instruction that’s obviously wrong. If the identity of the trustee is specified by the plan’s documents, that selection was a “settlor” decision. But if a person has or exercises discretionary authority to appoint a trustee, the selection is a fiduciary decision. A fiduciary must make a trustee selection using at least the prudence, care, diligence, and skill that a prudent expert would use in making the selection in similar circumstances. PSteinhart, you asked about “the pros and cons” of naming the employer as a retirement plan’s trustee. An advantage is that the employer ordinarily should not get compensation beyond reimbursement of direct expenses. See 29 C.F.R. § 2550.408c-2(b)(2). A disadvantage is that an employer, acting as directed trustee, is less likely than a trust company to refuse or question a fiduciary’s wrong direction – especially if the people who make the trustee’s decision are subordinates or co-workers of, or the same people as, those who make the plan administrator’s or named fiduciary’s decisions.

A notice on May 12, 1975 redesignated rules under the Welfare and Pension Plans Disclosure Act of 1958 as temporary rules to interpret ERISA 412. Those rules provide support for the idea that a service provider may maintain, for the required coverage against dishonesty, an insurance contract that refers to a schedule of covered plans. See 29 C.F.R. 2580.412-18 and -20. What matters is that each plan has a right legally enforceable against the insurer to at least the coverage that the plan should be entitled to if insured separately. Underwriting separately the likelihood of an investment adviser's or its employee's dishonesty causing loss to a plan sometimes results in a better price than otherwise might apply. Although some advisers try to require the employer as named plan fiduciary to get coverage to include the adviser and its employees, a risk is that the employer fails to do so (or lets the coverage expire) - leaving the adviser exposed to civil and criminal consequences.

ERISA § 514(a) preempts a State law that “relate to” an employee-benefit plan. Many lawyers and judges continue to argue about what those quoted words mean. But I wonder how a State law that would govern a wage-reduction election may be said not to “relate” to a § 401(k) plan if that election is the only way an employee can contribute to the plan? ERISA preempts a State law that “relate to” an employee-benefit plan, even if all 50+ States (see ERISA § 3(10)) have the same law on a point. Still, Congress’s legislative purpose for ERISA’s preemption rule becomes yet clearer if the point is one on which States’ laws differ. The general age of competence differs from State to State (although most are at 18, a few are at 19 or 21), and some States provide different competence ages for different kinds of acts. Further, some States’ laws provide differing kinds of exceptions concerning one who is an employee before the relevant competence age. And States’ laws differ concerning the effect of a minor’s misrepresentation about his or her age. SRP, we don’t know whether your client is the employer, the plan administrator, a potential participant, or a different person, and what advice you might give (if any) turns on your role. Consider this: the risk is on the employer, and your description suggests that the employer is willing to accept that risk. If ERISA doesn’t preempt State law and the employee disaffirms the deferral election, the employer must pay its employee’s “back” wages. Before giving any advice, consider at least the possibility of differing interests from one person to the next. Unless the employer’s demand for a return from the plan is sooner than one year after the employer’s payment of the contribution that was in exchange for the wage reduction AND the employer proves to the plan fiduciaries’ satisfaction that the employer paid the contribution innocently under a good-faith mistake of fact, a plan would refuse to return money to the employer. See ERISA § 403©(2)(A)(i). Because clause (i) refers only to “a mistake of fact” while clause (ii) (concerning a multiemployer plan) refers to “a mistake of fact or law”, a court might use a whole-statute or every-word-must-have-meaning construction maxim to interpret that the 93rd Congress must have meant that being uncertain about how laws would apply to a particular set of facts is not a mistake of fact. Even if State law concerning a disaffirmed contract requires a disaffirming person to return to his or her counterparty whatever remains of what was received from the counterparty in exchange for the disaffirmed promise, that applies to the disaffirming person. Except perhaps for undoing the disaffirming person’s fraudulent transfer, it’s doubtful that a court could order a third person to implement such a return. (Remember that the plan is a separate person.) It also might be troublesome regarding an ERISA-governed pension plan that precludes a participant’s alienation of his or her right under the plan. Conversely, if an employer - after understanding the risks that could be in play if ERISA doesn’t preempt State laws - is reluctant to accept a deferral election of an otherwise eligible employee, the employer might take practical steps to cause the employee or the plan administrator to put the issues before a Federal court.

Beyond any look at the statutes and regulations, consider whether the doctrine of the taxpayer's duty of consistency precludes him or her from taking a position that's inconsistent with the position in earlier years' tax returns.

The proposed regulations to interpret section 125 include an explanation: health coverage for a person other than the employee, his or her spouse, or his or her dependent “is includible in the employee’s gross income.” See Federal Register page 43951 (middle column). This isn’t really a proposed or new interpretation; the cafeteria-plan rule cites other regulations as already stating the point. The bit that’s an interpretation of section 125 is that an employee may elect health coverage as a taxable benefit. The drafters said this much to have an answer for plans’ coverage of a former spouse or a same-sex spouse (if such a person isn’t a spouse for Federal income tax purposes). But the proposed rule sidesteps any explanation about how an employer decides the hypothetical “fair market value”. Although a price attributable to a portion of coverage (or differences in coverage) might be some evidence concerning the value of that coverage, it isn’t necessarily the measure of that value. One imagines that the Internal Revenue Service shouldn’t be too exacting about an employer’s method for estimating a hypothetical value. Instead, the IRS should recognize a good-faith effort. And the IRS might expect much less from a small employer that has only one or two employees with taxable-health-coverage wages than from a large employer that could have thousands of employees with such wages. But it seems strange to suggest that the value of group health coverage on any human being is zero. If so, why do so many divorcing people negotiate it, and why do people in same-sex couples ask their employers for it? Perhaps this bulletin board can be a forum for practitioners’ experiences about what employers are doing. E7_14827.pdf

Not spending too much makes sense, and what "not too much" means again relates to role. A person who or that gets advice to protect his, her, or its personal interests is free to consider cost-benefit trade-offs as a businessperson or even on personal taste. An ERISA fiduciary must act as carefully, skillfully, and diligently as an expert experienced in making these fiduciary decisions would act in the circumstances. If it has become clear that the plan has almost no chance for getting a recovery, spending on advice should be restrained. But sensible spending to find out what the plan's opportunities are should be okay.

Almost everyone thinks it stinks for a participant to get a commission on a retirement plan's investment. In addition to the Labor and Treasury departments' opportunitites to pursue equitable relief, civil penalties, and excise taxes on one or more prohibited transactions, the IRS could assert that each year's plan loss - the difference between what is and what would have been if the plan held investments not loaded for the commission - or, if more, the commission paid is really a distribution, which is ordinary income and, if the participant is under 59-1/2, subject to the additional tax on an early distribution.

Even if one wants to use the Labor department’s Interpretive Bulletin to argue that displaying illustrative asset-allocation models isn’t advice, it seems unclear whether the enrollment form described above meets the Bulletin’s conditions. Among those conditions, “all material facts and assumptions on which such models are based ([for example], retirement ages, life expectancies, income levels, financial resources, replacement[-]income ratios, inflation rates, and rates of return) [must] ACCOMPANY the models[.]” Further, one might consider that the Interpretive Bulletin wasn’t the subject of a rule-making that followed the Administrative Procedure Act, and so a court need not defer it. A court might not be persuaded by the Labor department’s reasoning that displaying an asset-allocation model isn’t a recommendation because the information and materials described in the Bulletin (without more) would “enable” a participant to evaluate the suggestion or information.

ERISA 3(14) defines a party-in-interest to include "an employee ... of a person described in subparagraph (B), ©, (D), (E), or (G) [which includes "an employer any of whose employees are covered by [the] plan"] ...." The subparagraph of IRC 4975(e)(2) that's "parallel" to the quoted part of the ERISA definition refers to an officer, a director, a natural person with similar powers, some shareholders, and some highly-compensated employees - but not an employee who is none of those.

While it makes sense to get an expert lawyer’s advice, consider that the different interests might need or want separate lawyers (or should understand the risks of going without). In particular, a Form 5500 preparer or compiler shouldn’t rely on the advice of a lawyer who represents or advises a person other than the preparer or compiler. • A practitioner wants advice about how to manage his or her engagement and services to avoid his or her personal liability or professional-conduct problems. • A fiduciary who made a decision that a plaintiff or claimant might assert was imprudent wants advice about how to defend his or her conduct. • The plan wants advice about how to pursue a restoration or recovery of the plan’s losses. A fiduciary’s personal interest is at least different than – and in circumstances like those described might conflict with – the plan’s interests. Along with this, a practitioner might have as his or her client the plan or the fiduciary, but shouldn’t take both (at least not without both clients’ informed, clear, and independent approval of the conflicts). Even then, a practitioner must be mindful that some of his or her personal interests (including those concerning professional conduct) can conflict with a client’s interests. Beyond considering the possibility of conflicting interests, one might consider how the differences in roles affect a person’s rights to preserve the secrecy of communications to and from a lawyer. (This matters because some decisions about how to react to what happened remain open or ongoing.) • If a practitioner seeks a lawyer’s advice about the practitioner’s conduct (and not to get advice for the practitioner’s client), usually communications in such a lawyer-client relationship are privileged against disclosure without the client’s consent. • If a fiduciary gets a lawyer’s advice not as a fiduciary but to defend his or her conduct or protect other personal interests, usually communications in such a lawyer-client relationship are privileged. • By contrast, if a person seeks a lawyer’s advice as a plan fiduciary, the privilege for confidential lawyer-client communications belongs to the plan. By the way, even if the plan isn’t protected by ERISA fidelity-bond insurance, a plan fiduciary might consider whether another person’s insurance might respond to the theft and, if there is a significant possibility, whether a Form 5500 should or shouldn’t disclose the plan’s decisions concerning whether or how to pursue such a recovery.

What (if anything) did the adviser say about what its service is? If the adviser says that setting the asset-allocation pre-fills is merely "education" and not advice, did it produce any lawyer's opinion letter to support that view? If so, what warnings are in the opinion letter?

Whether a reimbursement to an employer that maintains the plan is reported in Schedule C or elsewhere in Form 5500 can turn on the nature of the plan’s expense that was reimbursed or obligated to be reimbursed. Schedule C focuses on payments for services. If, for example, the plan’s expense was for a person’s labor, such an expense (if more than the threshold, which isn’t always $5,000) is reported in Schedule C. If there is a plan expense for someone who works for the plan and less than full-time for another employer, or who for convenience isn’t paid directly by the plan, the plan administrator and the plan’s auditor might want the comfort of a lawyer’s opinion that the expense and the indirect payment for it are exempt prohibited transactions. Even if an exemption’s conditions are met, a plan fiduciary can’t use its fiduciary role to select as a service provider a person in whom or which it has an interest. A plan’s expense for buying equipment, supplies, and other goods (not services) isn’t reported in Schedule C, but instead on Schedule H’s Part II line 2i(4) (other administrative expenses).

While a State retirement system won’t be the public-schools employee’s “employer” for § 403(b) purposes, it’s possible for a contract issued under a plan that was established on or before May 17, 1982 and that meets several other conditions to continue as a permitted § 403(b) investment. If all of the transition-rule conditions are met, such a contract may continue to cover those participants covered on May 17, 1982, including “an employee who becomes covered for the first time under the plan after May 17, 1982[.]” Treasury Reg. § 1.403(b)-8©(3). For citations to, and explanations about, the 1960s rulings on these plans, see Q 5:19B in the current supplement of 403(b) Answer Book (Aspen Publishers).