Peter Gulia

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).

The practical effect of the EXPRO exemption is to treat recent exemptions as a persuasive “precedent” for what the Government ought to say yes to. To rely on the EXPRO exemption one must, before executing the transaction, file with the DoL (EBSA) a written submission that includes “a comparison of the proposed transaction to at least two substantially similar transactions which were the subject of individual exemptions granted by the Department within a sixty[-]month period ending on the date of the filing of the written submission and an explanation as to why any differences should not be considered material for purposes of this exemption[.]” To explain differences (or confirm the absence of any difference), one would need at least the text of the published exemption. Also, because the independent fiduciary must act to protect the plan and must enforce all conditions and obligations, he or she would want a full understanding of those details. (If I’m the attorney submitting an EXPRO application, I’d want the independent fiduciary to concur in the descriptions and explanations. Or if I’m agreeing to serve as the independent fiduciary I’d want to check the submission to feel comfortable that it doesn’t unfairly describe my scope.) Although there are also commercial publications, the true source of an exemption is its publication in the Federal Register. A reader can find some individual exemptions that could be a “precedent” for EXPROing at http://www.dol.gov/ebsa/regs/ind_exemptionsmain.html. But rendering the right advice often means research using the full Federal Register (electronic or print) and secondary sources.

PTE 80-26 (as thrice amended) permits an unsecured loan of money from a party-in-interest other than an employee-benefit plan to an employee-benefit plan, and the repayment of that loan according to its terms if, along with other conditions, the proceeds of the loan is used only for the plan to pay its ordinary operating expenses, including the payment of benefits (or for a purpose incidental to the ordinary operation of the plan) AND no interest or other fee is charged to the plan. For transactions on and after December 15, 2004, the “three-business-days” limit that had applied to some of the loans that may be exempted no longer is a condition. But a loan that’s more than 59 days must be under a written agreement, and many practitioners advise that even a shorter loan must be written. As with many exemptions, PTE 80-26 doesn’t exempt any ERISA § 406(b) self-dealing transaction.

A church plan sometimes elects into ERISA if, with an absence of ERISA preemption, more than one State law would govern a plan or a benefit provided under it, or to avoid a particular State law or remedy. Although this kind of idea can relate to any kind of employee-benefit plan, churches are more likely to choose it if a health benefit wouldn't be exempt from State insurance regulation.

ERISA includes statutes of limitation. But the time for barring a claim might not begin to run until a surviving spouse in the exercise of reasonable diligence would have known that he or she had a claim. And a plaintiff's lawyer might argue that breaching plan fiduciaries concealed the situation by failing to meet their statutory and fiduciary duties to deliver a summary plan description, summary annual reports, qualified-election notices and forms, and other information that a beneficiary needed for his or her protection (including to know that he or she had a right). Again, the sooner the plan fiduciaries put the plan's administration on the right track, the likelier they can get statutes of limitation and other defenses helping them.

Many (but not all) of these and other risks of failing to administer a plan often are modest. But usually they don't get better with age. Inexpensive corrections can make it worthwhile to get a plan on a better track before a serious contingent liability builds up. Here's one exposure that can be real money: A participant named a beneficiary other than his or her spouse. The participant never made, and the spouse didn't consent to, a qualified election. After the participant's death, the named beneficiary submitted a claim to an insurer or custodian, which paid the full account balance (without any intervention by the employer). Some time later, the participant's surviving spouse files a claim, demanding at least his or her qualified survivor annuity. If the participant had a six-figure account balance, the award or settlement in favor of the surviving spouse might be significant.

Even if there is no tax-compliance problem, consider ERISA. Might the employer have failed to deliver a summary plan description, failed to file a Form 5500, failed to deliver a summary annual report? Might the employer have failed to administer the plan according to its partially unwritten, or inconsistently written, terms? Might the employer have failed to cause the plan to pay a death benefit or survivor annuity to a participant's surviving spouse? There are steps an employer and plan fiduciary can take to deal with these problems.

Under ERISA, the plan fiduciaries have duties to act prudently in managing the plan's assets, which could include a plan's claim for restoration from a prohibited transaction. The plan fiduciaries also are personally liable to the plan for the plan's losses from a breach, which could include an approval, or an imprudent failure to prevent, a prohibited transaction. (Because some facts are missing, I'm not saying whether the situation you describe does or doesn't include a prohibited transaction. Also, it might be inappropriate to state a conclusion in a web-board post.) In seeking help to evaluate the plan's rights and remedies, consider that the plan fiduciaries could be harmed by conveying or receiving information in a way that doesn't have confidentiality protection. Some lawyers will provide without fee an initial consultation, and, even if not engaged, will keep confidences under the lawyers' conduct rule for information from a prospective client.

For an employer that administers its retirement plan, some key record-retention tax regulations are:  31.6001-1 to -6 (wage reporting and withholding),  301.6058-1©(4) (“Records substantiating all data and information required by this section to be filed [Form 5500, to the extent required by IRC § 6058] must be kept at all times available for inspection by internal revenue officers at the principal office or place of business of the employer or plan administrator.”) More generally, a taxpayer keeps records to support its positions in its tax returns. For example, to support a Form 1120 deduction for § 401(k) contributions to a qualified plan, an employer would keep records that each year’s ADP test was performed or why it was deemed met. A person keeps a record as long as it could be relevant to assert or defend any claim, tax return, information return, or report that the taxpayer, employer, or payer filed or was required to file. Based on the differing limitations period for claims, assessments, and collections regarding different kinds of returns and claims, and different levels of accuracy or completeness, some practitioners suggest keeping a record for at least seven years after the close of the plan year or tax year (whichever is later) to which the record relates.

The key is that each G-4 visa holder must work only as permitted under the terms of his or her G-4 visa and any further authority required. A G-4 visa holder who is an employee of an international organization that is also an IRS-recognized § 501©(3) charitable organization may participate under its § 403(b) plan to the extent that a similarly situated employee (who isn’t the international organization’s official or representative) could. A person who (1) is a G-4 visa holder as the official’s or representative’s spouse, (2) the State department approved for employment (usually in a Form I-566 forwarded to the United States Citizenship and Immigration Services division of the Homeland Security department), and (3) within that approval is an employee of an IRS-recognized § 501©(3) charitable organization may participate under a § 403(b) plan to the extent that a similarly situated employee (who isn’t a G-4 visa holder) could. However, following U.S. tax law, other nations’ tax laws, and treaties, such a person’s tax treatment might be quite different from that of a person who has no relation to any nation other than the United States. For some (not all) provisions of the International Organizations Immunities Act [1945], see 22 U.S.C. §§ 288 to 288k. For background on the G-4 visa, see 22 U.S.C. § 288d(a) and 22 C.F.R. §§ 41.12, 41.21, 41.24. For background on the income tax treatments of contributions to, investments under, and distributions from retirement plans and contracts, see Chapter 19 (International Tax Treatment) in 403(b) Answer Book. But use this only as a starting point for your own research. Further, the chapter’s explanation of a particular treaty might not be up-to-date because the publisher, editors, and I resolved to simplify this part of the book in its next edition.

Although IRAs now are closer to qualified plans in bankruptcy treatment, some professionals still prefer an ERISA-governed plan because it can provide stronger protection against attachments and other creditors' claims before bankruptcy.

Karenm, you mentioned that the anticipated business change is an asset sale. This suggests that your inquirers remain the shareholders, members, or partners of the corporation, company, or partnership that maintains the plan that your inquirers want to keep. Those who control the corporation, company, or partnership could maintain it and cause it to maintain the 401(k) plan - with each of your inquirers not taking a distribution until he or she chooses to, or the plan's MDIB provisions force a distribution. Although it's not part of your charge, your inquirers' investment and creditor-protection reasons for keeping the plan might make sense in their circumstances.

Karenm, you mentioned that the anticipated business change is an asset sale. This suggests that your inquirers remain the shareholders, members, or partners of the corporation, company, or partnership that maintains the plan that your inquirers want to keep. Those who control the corporation, company, or partnership could maintain it and cause it to maintain the 401(k) plan - with each of your inquirers not taking a distribution until he or she chooses to, or the plan's MDIB provisions force a distribution. Although it's not part of your charge, your inquirers' investment and creditor-protection reasons for keeping the plan might make sense in their circumstances.

With a plan that's intended as a 403(b) plan, the opportunities for getting a plan into reasonable ERISA and Internal Revenue Code compliance are more flexible than for section 401 plans. But which solutions are worth pursuing depends heavily on the particular facts and circumstances, including even the identity and charitable purposes of the plan sponsor, and so doesn't work well as a bulletin-board discussion. I've done many workouts with employers that had never imagined the existence of ERISA. Please feel free to call me for a conversation (without fee) about what's feasible.

Leaving aside all other questions and issues, one might advise a plan administrator to consider carefully how it should decide whether a court's writing is or isn't a domestic-relations order. Some practitioners quote the then-PWBA's 1997 QDRO booklet to support a view that "[a] plan administrator is generally not required to determine whether the issuing court or agency had jurisdiction to issue an order[.]" Page 16, Q 2-8. PWBA cited as its suppport for that view ERISA Advisory Opinion 92-17A. But that Opinion did not reach, and expressly set aside, the issue of whether the court had jurisdiction. (And, of course, the booklet is not a rule that a Federal court need defer to.) Further, the Opinion stated that the plan administrator must "determine" that the writing submitted to it is a domestic-relations order. One phrase in the Opinion suggests that a plan administrator might assume that a writing is an order if it "is made pursuant to a State domestic relations law by a State authority with jurisdiction over such matters" even if the court lacked jurisdiction for the particular matter. But a more cautious view might be that it's unclear whether a court's writing is an "order" to the extent that the court lacked jurisdiction for what the order commands. (State law concerning a duty to raise jurisdiction questions and the effect of not doing so promptly shouldn't affect a plan administrator. In the usual situation, neither the plan nor the plan administrator would have been a party to, or otherwise would have appeared in, the State court proceeding, and so would not have had a duty or even an opportunity to raise jurisdiction questions.) Although a plan administrator should not abandon its fiduciary duty to decide claims, in circumstances that involve an ambiguity about what the relevant law is a plan administrator might properly seek a Federal court's decision if the relation of the stakes and the plan expenses makes it prudent to do so. (Concerning an individual-account plan, a plan administrator might need to consider also whether to allocate all or some of the plan expense to the participant's account that's the subject of the question, and whether to allocate some or all of the plan expense generally among all individual accounts.) Please understand that the discussion above is a pure hypothetical: I'm an ERISA guy, and I have not researched what powers a domestic-relations court (of Pennsylvania, or of any State) has after the death of one of the divorced parties.

A local-government employer maintaining two or more plans that the employer intends as 457(b) plans is common; whether it's sound is a different question. The regulations state: "In any case in which multiple plans are used to avoid or evade the requirements of [sections] 1.457-4 through 1.457-10, the [iRS] may apply the rules under [sections] 1.457-4 through 1.457-10 as if the plans were a single plan." 26 C.F.R. 1.457-3(b). As one part of this, the employer remains responsible for applying deferral limits based on all deferrals under all plans regarding the participant's relationship with the employer. 26 C.F.R. 1.457-4(e)(2). And for the "last-three-years" catch-up, the regulation states that an employer "sponsoring more than one eligible plan may not permit a participant to have more than one normal retirement age under the eligible plans it sponsors." 26 C.F.R. 1.457-4©(3)(v). An employer that permits more than one service arrangement (whether under separate plans, or even under one plan) should be alert to how this can increase fraud risks. For example, imagine that separate accounting reports from providers A and B for the quarter ended September 28, 2007 show that Bill Sharp received on August 8 an emergency distribution of $2,352.87 paid by A, and Bill Sharp received on August 20 an emergency distribution of $2,352.87 paid by B. Although it's possible that Mr. Sharp in fact had two different emergency situations, the IRS might assert that the low likelihood that different situations would happen to result in identical need amounts puts the employer on inquiry notice such that it should look into whether this participant submitted a false claim. Two suggestions about potential advice that you might choose to present to your client: Consider integrating all documents into one that is accepted by CalPERS and all other providers. (In this, the insurance company might not care much about which plan provisions the employer selects.) If there is more than one service arrangement (whether under two plans or one plan), the employer might instruct a plan auditor to test for the points mentioned above and other kinds of mistakes and frauds that could become more likely because of the use of more than one service arrangement.

Even if all other securities, tax Code, and ERISA issues are solved, there still can be a prohibited transaction if a transaction or series of transactions has the effect, even indirectly, of creating or supporting a situation for the management company to manage (for compensation or another benefit) if the situation would not have been subscribed without the plan's investment. However, there are right ways to do this kind of retirement plan investment.

It might be unnecessary to consider whether Congress should lengthen the ERISA § 104(b)(1) five-year interval. That statutory command for integrating explanations into a revised SPD is only one of a plan administrator’s duties. Courts have interpreted ERISA to recognize a fiduciary’s duty to communicate information that participants, beneficiaries, and alternate payees need to know. And those communications must be no less helpful than those that a prudent-expert fiduciary would use for the purpose of providing benefits and administering the plan in circumstances similar to those of the plan and participants involved. Some practitioners suggest that it’s easier for a fiduciary to meet those duties if the plan’s administrator revises and delivers a new-edition SPD every year. The expense of the revision will almost always be a proper plan-administration expense. And with many workplaces using e-mail delivery for most participants, the expense of delivery often is quite modest.

A few suggestions without any advice. First, it's important for a State or local government employer (or its worker) to be confident about what State law enables (or doesn't). The Internal Revenue Code doesn't directly preclude deferred compensation between a State or local government employer and its worker. And if neither party wants the Federal income tax treatment of section 415(m), a plan could provide deferred compensation meant to replace the difference between what a retirement plan provides and what it would have provided if qualified-plan restrictions didn't restrain the retirement plan's benefit (whether a defined benefit or from an allocation of a contribution). The hard part is that the portion of that deferred compensation that isn't under a section 457(b) eligible plan will result in income and tax under rules for deferred compensation. Culturally, many State and local government employers and their workers don't like those rules. In particular, many paymasters find it challenging to W-2 tax-report a wage for an amount other than, or a time earlier than, as paid. But if increasing an official's or employee's salary or other compensation is politically a non-starter, a deferred compensation plan might be an outlet. While many lawyers can be competent with deferred-compensation rules (especially since recent regulations and other interpretations have clarified the Treasury department's views), only a very few have experience with the intersection between tax-law knowledge and the environment of State and local government employers.

If a record-keeper is confident that it isn’t a fiduciary but nonetheless wants to do something about anticipated but unpaid contributions, it might consider making clear that it acts not to protect the plan but rather in exercising its rights concerning its service contract, or otherwise to protect itself. See, for example, CSA 401(k) Plan v. Pension Professionals, Inc., 195 F.3d 1135, 1137–38 (9th Cir. 1999); see also Arizona Carpenters Pension Trust Fund v. Citibank, 125 F.3d 715, 722 (9th Cir. 1997); Beddall v. State State Bank & Trust Co., 137 F.3d 12, 21 (1st Cir. 1998); Coleman v. Nationwide Life Insurance Co., 969 F.2d 54 (4th Cir. 1992), cert. denied, 506 U.S. 1081 (1993). Notice that in each of these cases a defendant ultimately succeeded in getting a court to find an absence of an extra duty but paid attorneys’ fees to get to that point. Worst of all, the plaintiffs in the CSA case asserted that the record-keeper’s attempt to get the thief to pay the contributions is what made it a fiduciary. Pension Professionals, Inc.’s mistake was giving the thief a second chance and not getting rid of a dangerous customer at the earliest opportunity. Depending on what facts one knows or doesn’t know and the potential size of the suspected theft, some record-keepers might consider one or more of the following steps: • collect outstanding fees owed to the record-keeper; • send each participant (if the record-keeper has an address) a notice warning that the record-keeper has no obligation to him or her; • send the plan administrator a notice ending the service contract at the earliest time that would not be the record-keeper’s breach. As with any evaluation of risks, one wants to consider the particular facts and circumstances.

While of course this isn’t advice to anyone, here’s one idea. After a plan sponsor has made its settlor decisions to amend and end a plan, the plan’s administrator might (even if not so required by statute) act in its discretion to preserve an employer’s obligation (if any), and a reemployed person’s opportunity, for USERRA make-up contributions. An administrator might do this by getting an annuity contract with an insurance company. The contract would include the insurer’s promises to: • accept contributions that are required or permitted under USERRA, • provide a broad range of investment options, • not pay a death distribution other than to a surviving spouse except under a qualified election, • pay a distribution no later than the applicable IRC § 401(a)(9) required beginning date. Perhaps such a plan administrator could suggest to an insurance company the public-relations value of this availability, and persuade the insurer to bind the contract for an initial premium of $1.00. The plan administrator would distribute the annuity contract to the individual in military service. If reemployed, he or she may use his or her rights under USERRA and the annuity contract.

If the Form 5500 instructions are ambiguous and there’s a choice about which value to report, one practical approach (for a plan administrator that hasn’t already decided which of the many valuation and accounting methods is most informative for the purposes of the report) might be to ask its auditor which value the auditor would prefer to support a professional opinion that the plan’s financial statements “fairly present” the plan’s net assets available to pay plan benefits. In theory, the plan administrator should select (if Form 5500 instructions don’t control the point) the method that it, as a prudent-expert fiduciary, finds is most informative to readers of the Form 5500. But often a real-world path of least resistance is for a plan administrator to say that it reasonably relied on an accounting expert’s professional opinion. The accounting guidance suggests that a CPA shouldn’t go along with a fully-benefit-responsive book-value position unless, along with other conditions, an “event” that would limit the plan’s right to transact at book value was not “probable of occurring”. For many a plan’s report, there might be about nine months between the financial-statements date and the fieldwork-close date; and some auditors might feel that the occurrence or non-occurrence of an event during that time is partial evidence that might help one judge whether the event was or wasn’t “probable” as at the financial-statements date.

There are some right ways for a retirement plan (IRA or § 401 plan) to buy original-issue shares in a new corporation, or otherwise invest in a start-up business. The hard bit is doing so without triggering a prohibited transaction, taxable unrelated business income, or other nasty consequences. Moreover, Labor department interpretations (which also are authority concerning tax-Code prohibited-transaction rules) suggest that the Government might challenge transactions that, even if entirely proper in form, seem to involve some “arrangement or understanding” to evade exclusive-benefit, fiduciary-responsibility, or prohibited-transaction rules, or to do indirectly that which could not have been done directly. So one needs the advice, and usually order-of-transactions hand-holding, of a lawyer who understands this business idea and knows every inch of the prohibited-transactions rules along with the Labor and Treasury departments’ and courts’ interpretations of them. Sometimes, a service provider suggests that it has or will get an IRS determination that a plan using this investment method is “legitimate”. (Others present an IRS determination truthfully, but without explaining the limits on what it means.) An IRS determination that a document in form states a qualified plan doesn’t consider actual transactions and never opines on prohibited-transaction questions. To defend an implementation, a smart participant wants the support of his or her expert lawyer’s candid outlook, reputation, quality opinion letter, and malpractice coverage.