Peter Gulia

Whether it’s wise to name the employer as its employee-benefit plan’s trustee is a separate question. But it’s not at all clear that a plan’s creator can’t establish a trust that names such a corporation as the trustee. Even if a State statute prohibits a non-natural person other than a bank or trust company from acting as a fiduciary, a common exception is for such an organization to serve as the trustee regarding a plan to provide benefits to the organization’s employees. Some States do this expressly in the banking statutes, others in the general-business-organizations statute, and yet others by courts’ interpretations. While I haven’t done a 50-States survey, I’ve rendered advice on enough States’ law concerning this point to believe that there’s usually a way to make it work. Like many practitioners, I usually suggest that it’s “safer” to choose a trust company (even if it’s one that has some business relationship concerning an investment or service provider). If an employer decides to “self-trustee” a plan, naming as trustee the corporation, rather than a particular natural person, sometimes can help keep documenting which natural persons make the trustee’s decisions internal to the corporation’s resolutions and minutes, rather than a matter that might involve documents exchanged with the plan’s other service providers. A natural person who is or might become involved in making the trustee’s decisions could get his or her lawyer’s advice about how ERISA defines a fiduciary and how courts have interpreted, and might further interpret, that definition. Such a person also could get advice about how to protect himself or herself using a combination of ongoing advice (much of which can be paid for from plan assets), liability insurance, and the employer’s additional defense and indemnity.

If the person whose consent is called for is “legally incompetent”, ERISA and the Internal Revenue Code do not preclude a plan from recognizing a guardian’s act as the spouse’s consent, even if the electing participant is the spouse’s guardian. 26 C.F.R. § 1.401(a)-20/Q&A-27. Under a U.S. government-organization plan, the Treasury department’s interpretation also is relevant concerning ERISA § 205. 43 Federal Register 47713 (August 10, 1978). Even if a plan is ERISA-governed, a guardian’s authority is grounded on State law. A guardian must act in the best interests of his or her ward. A guardian serves under a court’s supervision (at least indirectly), and must account for his or her actions. Further, some guardianship decisions require a court’s approval before the guardian implements the decision. Depending on the powers granted and other State law, the guardian might need to persuade a court that choosing against a survivor annuity is the ward’s best interest.

An important principle of the necessary-and-reasonable-services exemption is that the compensation of a fiduciary must be decided by another fiduciary that is independent of the service-performing fiduciary. With an orphan plan, it’s often hard to find any fiduciary, and even harder to find one that’s independent of the one who’s willing to do the wind-up work. That’s why a wind-up fiduciary who isn’t a qualified termination administrator (see below) or an uncompensated volunteer gets the Federal court to approve the appointed fiduciary’s services and compensation. When a wind-up fiduciary has paid himself without independent approval, the Secretary of Labor has sued for restoration of the prohibited transaction. Arguing that the plan really needed the work isn’t a defense to the lack of independent approval. The QTA rule can help only if an eligible bank, trust company, or insurance company that already has assets of the abandoned plan is willing to serve as the plan’s QTA. If such a company (not a natural person) volunteers, its fees for QTA service must be both “consistent with industry rates” and no more than the company’s fee for similar services for similar customers that are not orphan plans.

If the trustee you describe is an employee of the employer that maintains the plan, it's unlikely that the plan could pay for such a trustee's services. Even if an expense otherwise would qualify for the necessary-and-reasonable-services exemption [29 C.F.R. 2550.408b-2] with approval by an independent fiduciary that had no interest in the payee, another regulation interpreting that exemption declares unreasonable (and thus a PT) "compensation to a fiduciary who is already receiving full-time pay from an employer ... (any of whose employees are participants in the plan)[.]" 29 C.F.R. 2550.408c-2(b)(2). What the employer feels like paying for from its resources is the employer's question.

Also, be careful to compute (but see an exception below) contributions only on that portion of the minister's earned income that's attributable to his or her ministry, rather than to work that's not for the church. Usually, only an employee (but not an independent contractor) of a charitable organization may make (or have made for him or her) § 403(b) contributions. Many ministers are self-employed for most tax purposes. Special rules permit § 403(b) contributions for a minister, even if he or she is self-employed. A minister’s earned income from ministry (which might include services for the church or a church-related charity) is treated as his or her § 403(b) includible compensation. Instead of an exclusion, a self-employed minister may deduct his or her § 403(b) contributions. A special $10,000 limit sometimes helps a church employee who has little or no "cash" compensation. After 2001, a § 403(b) contribution of a church employee (see below) meets the annual-additions limit if the contribution is no more than $10,000. The total contributions using this rule (including a pre-EGTRRA version of it) for all years (including pre-2002 years) can’t exceed $40,000. Example: How a church’s housing allowance affects the annual-additions limit Frank is the pastor of Fellowship Church. The Church doesn’t provide Frank any salary or wages; rather, his only compensation is his obligation to live in the Church’s parsonage. If a parsonage allowance doesn’t count in § 415 compensation, Frank’s compensation is $0.00. If the usual annual-additions limit applied, Frank’s limit would be $0.00 [100% x $0.00 = $0.00]. Internal Revenue Code § 415©(7)(A) permits a contribution of up to $10,000 into Frank’s contract. But if Frank continues to have no compensation and contributions to his § 403(b) account are $10,000 each year, he may use this rule only for four years [$10,000 x 4 = $40,000]. This rule applies to an employee of a church, a convention or association of churches, or an organization that’s controlled by or associated with either a church or a convention or association of churches. 26 U.S.C. §§ 403(b)(1)(A)(iii), 404(a)(10), 414(e)(5), 415©(7)(A)-(E); 26 C.F.R. § 1.415©-1(d)(1)-(4) (not yet officially codified). See also Proposed Treasury Reg. § 1.403(b)-9(b)&©. Following the spirit of this bulletin board, please understand that this general information isn't tax advice to anyone.

Although it might not be the kind of obvious public authority that you seek, here's another way to look. It's common for a sponsor of a group trust to include in its trust declaration that the last of the kinds of permitted users is another group trust that has an IRS determination and restricts its use to the same kinds of retirement plans and other eligible users that could directly use the group trust. In my experience, such a provision doesn't cause any difficulty with getting a "clean" routine IRS determination that the group trust is a tax-exempt 81-100 trust. So one starting point might be to look at the text of each group trust's governing documents: does the "investor" group trust authorize investment in another group trust? does the "investee" group trust permit another group trust as a user?

The default-rollover idea depends on both the terminating plan and the receiving plan having the right provisions that support the rollover. First, a terminating plan doesn't allow a participant to receive a distribution, but instead requires the participant to receive a distribution. Even for a plan that no longer has any profit-sharing contributions or other benefit accruals, a qualified retirement plan isn't terminated until it pays the money (or delivers the property or rights) of its final distribution. Many employers' plan amendments to implement a plan termination provide that the final distribution is a single-sum distribution. However, I've seen (and written) provisions for a final distribution that set a series of payments long enough to meet an investment-related purpose but short enough that the distribution still is an eligible rollover distribution. The notice of such a final distribution gives a participant a choice between receiving the distribution as a payment of money or as a payment of a direct rollover to the eligible retirement plan specified by the participant. It's important to keep in mind the likelihood that something less than all of the terminating plan's amounts would move to the retirement plan that's named as the default. Some participants choose against a rollover, and some choose a rollover to a retirement plan other than the default. But I've seen situations in which 80% to 99% of the terminating plan's amounts became rollover contributions (not a merger or transfer) to the "suggested" plan. Of course, the receiving plan must exist before it can receive rollover contributions, and it's smart to make sure that the receiving plan properly can receive, and is willing to accept, the rollover contribution. If there is any significant doubt, the employer writes or amends the documents of the receiving plan at the same time that it writes the plan amendment of the terminating plan. The employer can write the terminating plan's documents and notices so that the plan administrastor had no choice (and thereby little fiduciary responsibility) concerning which retirement plan receives a default rollover of a participant who had not communicated his or her instructions. Nonetheless, an employer likely uses this default-rollover idea because the employer believes that the "suggested" retirement plan is good for a typical non-instructing participant.

Although these are not the only choices, the practical options are: transfer the 457(b) plan's assets and liabilities to another 457(b) plan that is maintained by an eligible State or local government employer "within the same State", or amend the 457(b) plan to conform to then-current IRC 457(b) at the termination time, and provide for and pay or deliver a prompt final distribution to every participant, beneficiary, and alternate payee. See 26 C.F.R. 1.457-10(a)(2). State and local law might impose further conditions.

Concerning your #2, a plan may provide - or, to the extent not precluded by the plan or applicable law, a plan administrator's procedure may provide - a "default" on whether an eligible rollover distribution (which might include a terminating plan's final distribution) will be paid to the distributee or paid to an eligible retirement plan (if not subject to an IRC 401(a)(31)(B) mandatory $1,000-to-$5,000 rollover to an IRA). See 26 C.F.R. 1.401(a)(31)-1/Q&A-7. If such a default is payment to an eligible retirement plan, the plan administrator's IRC 402(f) notice and an explanation of the default provision or procedure must identify the receiving plan, which might be a 403(b) plan. Although this isn't a merger, it can have some practical effects that achieve an employer's goal of maintaining one plan going forward.

Whichever a plan provides - resuming a 401(k) election once the required sitting-out period has expired, or treating a claim for a hardship distribution as including an election for "cash" compensation until the participant "affirmatively" and expressly elects to restart 401(k) contribution, it would be smart (and might be required) to explain this provision in the summary plan description. Further, a plan administrator might have a better answer to "why didn't you tell me" if an explanation of this provision is on the form by which a participant claims a hardship distribution.

Beyond the church plan administrator’s consideration of (1) the plan documents, (2) relevant State law, and (3) smart fiduciary communication, the church authority that has power to amend the plan might consider whether the internal law of the church affects a pension plan amendment or notice of it. For example, a church might have rules about decreasing a minister’s compensation. And even for an amendment that’s fully permitted, there might be rules about how to adopt, implement, and communicate an amendment. Some of the internal law of a church might be legally enforceable, and much might not be; but church people might seek to obey the rules made within their own authority.

Today’s follow-up question is whether insurance company or custodian of regulated investment company shares must be covered by fidelity-bond insurance. But a more immediate question is whether the employer and its people must be so covered. ERISA § 412(a) requires not only “[e]very fiduciary” but also “every person who [or that] handles [money] or other property of” an ERISA-governed plan to be bonded. (There is an exception for an insurance or trust company, but this usually doesn’t excuse the employer and its people.) Further, ERISA § 412(b) makes it a crime to serve as a plan fiduciary or handle plan assets while not bonded as required. “Handling” plan assets can include an opportunity to pay or delay contributions to the plan; a power to decide or instruct whether a participant’s or other person’s claim for a benefit is approved or denied; a power to end the service of a trustee, insurer, or custodian; a power to direct a trustee, insurer, or custodian; or almost anything that can cause a loss from dishonesty. See 29 C.F.R. §§ 2580.412-6 and -14. Beyond what might be required, why wouldn’t an employer 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. If a liability is based on an ERISA violation, a Federal court order or a Labor department settlement agreement can require an offset of a breaching fiduciary’s plan account to help restore the plan’s uninsured losses. A plan fiduciary need not pay for the insurance personally (other than his or her share along with other participants). Just pay (or reimburse) the insurance premium from plan assets. It ought to be a “reasonable expense[] of administering the plan” to do a specific thing that the statute expressly commands.

One method that some employers might consider is delivering the required notices and the summary plan description as enclosures that accompany an employment offer letter (if the employer regularly uses such a letter). With some new employees, doing so might increase how much notice time elapses before the first pay date and work period that might be affected by an "automatic" implied election.

No advice, but a few random thoughts: Before (not instead of) pursuing further corrections, shouldn't the plan fiduciaries start by getting the plan's money back? One would like to think that the drawer's bank has no right to debit its customer's account unless the bank paid the check as the drawer specified. After restoring the plan's bank account, the mistakenly-paying bank can recover from the mistakenly-collecting bank. Then, that bank could reverse the credit to the account of its customer - the person who presented a payment that wasn't hers. All this should happen after the plan's bank account has been corrected. What the banks do about their errors should be their problems. Once the plan is whole, the plan administrator might revisit some of its earlier decisions, and might decide not to pay an alternate payee any sooner than the time provided by a court order that is a qualified order.

Beyond ERISA's requirement to keep the indicia of ownership of all plan assets in the jurisdiction of the district courts of the United States, a trust that isn't a United States person trust could tax-disqualify a plan that otherwise would qualify under IRC 401(a). Even if all other conditions for a U.S.-person trust are met, a trust won't qualify unless "one or more United States persons have the authority to control all substantial decisions of the trust." Consider the difference between directed and decision-making trustees. Also, a non-U.S. person's power to remove a trustee or add another trustee can, depending on the surrounding facts, mean that the U.S. persons lack "the authority to control all substantial decisions of the trust." While it isn't necessarily unlawful (if the ERISA requirement is met) for a retirement plan to have a foreign trust, few employers and participants desire a trust that isn't tax-qualified.

An aside: If a concern is the expense of ADP or other non-discrimination testing, perhaps an employer might inform the plan fiduciary that the employer never had obliged itself to pay for that testing, and that the employer won't pay for it. After receiving this information, the plan fiduciary might find that the plan's documents don't preclude the plan from paying expenses of administering the plan. Following this, the plan fiduciary might find that ADP and related non-discrimination testing is necessary to the correct administration of the plan according to its terms, and meets other conditions as a proper plan-administration expense. Then, the plan fiduciary would (if the plan's documents don't provide the allocation) decide the allocation of that expense among participants', beneficiaries', and alternate payees' accounts.

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.