Peter Gulia

Does this difficulty in communications between the plan's fiduciaries and their service provider suggest that the fiduciary responsible for service-provider selections must consider a reevaluation and the possibility of inviting proposals from a range of candidates?

Do you mean paying LESS than the single-sum (not amortized) amount and nonetheless getting a satisfaction and release of the withdrawal liability? If so, I've had success in persuading a multiemployer plan's trustees that ERISA's fidicuary duties at least permit them (and could require them) to compromise their withdrawal-liability claim. A part of that persuasion involved citing relevant court decisions and a PBGC opinion letter. I'd like to help; but I'd want to do so after checking that your client's interest is congruent with my clients' interests. If you're interested, please call me.

A good way to help clients avoid this kind of mistake is to use Gary Lesser's software, which can do some of the internal math about how retirement contributions for oneself and his or her employees affects self-employment income. And it's always good to support a BenefitsLink advertiser: http://benefitslink.com/GSL/QPSEP_profile.html

Beyond caring about Federal income tax treatment, a business owner establishing his or her retirement plan might have other reasons to be careful about the plan's trust. Defending an exclusion, exemption, or other protection under bankruptcy law or other law about protection from one's creditors might turn on whether the plan and its trust meet all tax-qualification requirements or whether the plan's and trust's anti-alienation or spendthrift provisions are valid. Whether the plan's trust is valid under the non-tax law that governs the trust can matter for those protections.

There might be many reasons for a lawyer to give the advice or suggestion that he or she talks about; and to those of us who weren’t in a conversation the reasoning might not be discernible. All of the posters mention a practical observation: that the IRS (and EBSA, if a plan is ERISA-governed) might exercise some discretion not to challenge a way of managing a retirement plan that’s common and sometimes practically necessary. But beyond this, there might be some legal reasoning for why a “one-man show” doesn’t result in an invalid trust. The doctrine about a merger of legal and equitable interests might undo a trust if the would-be trustee owns ALL of the would-be trust’s beneficial interests. Restatement (Third) of Trusts §§ 2, 6, 25, 69; Uniform Trust Code § 402(a)(5). A comment to the Uniform Law Commission’s Uniform Trust Code makes clear the ULC’s view that “[t]he doctrine of merger is properly applicable only if all beneficial interests, both life interests and remainders, are vested in the same person[.]” The above-cited Restatement, which states the American Law Institute’s view of the common law of trusts, recognizes that a provision for a remainder beneficiary (other than the one person’s estate) makes a trust one in which not all beneficial interests belong to the same person. Further, a comment in another Restatement suggests ALI’s view that a settlor’s power to revoke a trust (and thus undo a remainder beneficiary’s expectancy) does not by itself result in a trust-defeating merger of legal and equitable titles. Restatement (Third) of Property: Wills and Other Donative Transfers § 7.1, comment b (2003). Of course, these sources are general, and a lawyer should consider the statutes and court decisions of each relevant State. This caution matters because, as the ULC comment observed, “[t]he doctrine of merger has been inappropriately applied by the courts in some jurisdictions to invalidate self-declarations of trust in which the settlor is the sole life beneficiary but other persons are designated as beneficiaries of the remainder.” Although the Uniform Law Commissioners might have found that some courts’ decisions were wrong, such a decision might be a relevant persuasive authority, or even a controlling precedent, for the law of a particular State. If merely naming a remainder beneficiary is good enough to sustain a revocable trust, it ought to be enough for the kind of irrevocable trust needed to support a § 401(a) retirement plan. A plan and trust creator who wants to be sure should get a lawyer’s written advice.

A tax rule gives us a way to think about how much assurance a receiving plan should ask for. The rule tells us that a receiving plan’s administrator must “reasonably conclude” that a proposed contribution is a valid rollover contribution. The rule includes four examples in which the information presented could allow an administrator to “conclude” that it’s “reasonable” to believe that the proposed contribution is a valid rollover contribution. 26 C.F.R. § 1.401(a)(31)-1, Q&A-14. (Please understand that I’m no defender of the rule. But even if the rule makes little sense, it’s the rule we have.) A plan’s administrator may depart from the procedures described by the examples. But such an administrator should be ready to prove that its departure from that norm was carefully considered and prudent. For example, a pension professional might render written advice that a plan’s different procedures are such that the administrator following them would have a “reasonable” belief that a proposed contribution is a valid rollover contribution. In the absence of such advice, it’s unclear what evidence a plan’s administrator could use to show that its procedure was prudent. Here’s why both employers and recordkeepers should want written procedures. A plan’s administrator should consider that it can’t be prudent to delegate a discretionary decision to a non-fiduciary. But it might be okay to allow a service provider to perform a task if the steps for doing it are sufficiently defined and non-discretionary. Likewise, a recordkeeper or TPA that prefers to be a non-fiduciary service provider should consider that exercising discretion, even if one doesn’t have authority to do so, can make one a fiduciary. That can mean liability to restore losses and expenses caused by one’s breach, and co-fiduciary liabilities for others’ failings. Another way to think about the risks of receiving a “rollover” that wasn’t is that those that benefit from accepting a contribution ought to bear the risks of accepting it. For example, an employer might negotiate with its plan’s service provider indemnities against the consequences of accepting a contribution that wasn’t a valid rollover contribution. Except for a contribution that the plan’s administrator instructed a directed trustee to accept, an indemnity seems fair.

JavaJitterz, without commenting on the particular fact situation you described, here’s two thoughts that you might include in your suggestions to your client. 1) In deciding whether a continuee’s employment did or didn’t end as an involuntary termination, an ERISA-governed plan’s administrator must act as a prudent person familiar with administering employee-benefit plans would act in meeting the administrator’s duties, including the duty to administer the plan in a way that’s consistent with applicable law and the duty to administer the plan for the exclusive benefit of the plan’s participants and beneficiaries (except as otherwise required by law). If an administrator is in doubt about whether a particular employment’s end was or wasn’t an involuntary termination within the meaning of ARRA § 3001(a)(3)© and IRC § 6432(e)(1), it must get expert advice (if a prudent person that acts according to ERISA’s standard would do so). Even in the absence of guidance from the Labor and Treasury departments, many good lawyers are ready to render that advice. It’s tempting to give a continuee “the benefit of the doubt” and find an involuntary termination to allow him or her the Government subsidy. But doing so can harm other participants and beneficiaries. Getting the subsidy might cause someone who otherwise might not have elected continuation coverage to take it. That coverage could affect the experience of the plan, and could lead to cost increases. A cost increase could make coverage less affordable for participants and beneficiaries. In a worst case, a cost increase could move a plan sponsor to end its plan, resulting in a loss of coverage for everyone. Although it seems a cruel choice to worry about whether allowing social subsidies for some could damage a health coverage opportunity of others, meeting fiduciary duties might at least permit (and some might say should require) an employer and plan administrator to consider these potential consequences. 2) If a claimant requests but is denied treatment as an assistance-eligible individual, he or she may choose a review by the Secretary of Labor. If the Labor department follows Congress’s Act, it would decide the review by 15 business days after it received the application for review. See ARRA § 3001(a)(5).

If an employer (or an executive of the employer) serves as a retirement plan's trustee, the typical plan and trust documents don't even try to exclude a duty (and power) to pursue collection from the employer. (Trying to allocate away a collection duty is among the favored provisions of a trust agreement designed for a directed trust company.) Rather, the employer trustee has the authority, but too often neglects to use that authority. This is another good illustration about why Congress should require that every ERISA-governed retirement plan have at least one fiduciary that is independent of the employer.

John, I can help you negotiate this in a way that the insurer or custodian should accept, and that avoids a task for the employer. (I've done the negotiation from both sides.) My legal analysis about how to approach the problem is one that I don't feel comfortable posting on a public website. Please feel free to call me.

Someone might argue that ERISA doesn't preempt a State law to the extent that the law regulates insurance. ERISA 514(b)(2)(A). An employer that obligates itself under a group health insurance contract has some obligations under that contract. Along with this, a continuation provision might be an express or implied provision of the contract. Following this, some might argue that an employer could be included in "any person" that ERISA doesn't "exempt or relieve" from a State law that regulates insurance. On the other hand, I wouldn't mind seeing an employer refuse to collect continuation premiums. I'd like to see how the litigation turns out.

John, I don't know your client's situation, but in my experience few governmental or tax-exempt employers are ready to pay a lawyer or any professional for the time it takes to read a plan; and fewer still will pay a professional to think about the plan's provisions. Depending on your client's circumstances, a method that sometimes helps a little is to focus the limited effort that the client will pay for on negotiating the service agreement so that the recordkeeper will be stuck with fixing defects without any incremental fee and at the recordkeeper's expense. If the employer maintains a nongovernmental 457(b) plan, there are some opportunities to use others' desire to protect against personal liability as a way to get more professional attention on a plan.

Here's an explanation of one of New Jersey's continuation provisions. http://www.state.nj.us/dobi/division_insur...sehblt07_02.pdf

Another ambiguity to unravel: How does a multiemployer health plan get reimbursement of the portion of a continuation premium not paid by the continuee? A multiemployer plan might have few employees (or none at all) to take a credit against payroll taxes. And there might be no law or agreement that requires the continuee's former employer to have any involvement in collecting continuation premiums. Concerning union-represented employees, some employers don't provide any facility for handling welfare-benefits contributions, even for active employees. The statute does say that if the premium assistance due is more than the credit against payroll taxes aborbs, the Secretary of the Treasury treats it as an overpayment of payroll taxes. But the mechanics might be difficult, especially concerning a multiemployer plan that happens to have no employee. The statute also says that its provisions for the person entitled to reimbursement, and the method of reimbursement, are "except as otherwise provided by the Secretary".

If one wants ERISA 404© protection concerning participant-directed investment in employer securities, passing through voting rights isn't permissive, but rather necessary. 29 C.F.R. 2550.404c-1(d)(2)(ii)(E)(4)(vi). Also, the plan must have procedures that are designed and implemented to prevent the employer and its affiliates from knowing how participants voted, or even whether a participant invested or didn't in employer securities. See 29 C.F.R. 2550.404c-1(d)(2)(ii)(E)(4)(vii)-(ix). Further, if the fiduciary responsible for the confidentiality procedures finds that there is a potential for the employer to influence participants, it must appoint an independent fiduciary for those situations. 29 C.F.R. 2550.404c-1(d)(2)(ii)(E)(4)(ix). The only logically sound solution is to use an independent fiduciary for all stages concerning employer securities.

George Chimento, thank you for asking insurers about what they expect to do. Is anyone aware of a State's "mini-COBRA" law that doesn't require the employer or group contract holder to collect continuation premiums?

An employer considering whether to allow the arrangement that Benny Guy describes might want its lawyer's advice about: whether a purported life insurance policy really is a contract enforceable against the insurance company; whether the IRC 79 exclusion from income might not apply because the arrangement might not be group-term life insurance carried by the employer; whether the employer must tax-report as its employee's wages the fair-market value of the life insurance protection (if any) provided; whether the employer must withhold FICA taxes and Federal and State income taxes from those wages; whether the arrangement is an ERISA-governed plan; what fiduciary and other responsibilities the employer has under ERISA or other law.

Some plan administrators inform the payee that the portion not rolled over, including the mistaken-payment portion not rolled over because it wasn't eligible for rollover, is subject to income taxes AND, if contributed to an IRA, an additional excise tax on excess contributions. If the payee purportedly made a "rollover" into another employer's plan, the mistakenly-paying plan administrator demands that the other plan return the amount that was mistakenly paid to it.

Just an observation: I don't think that a recordkeeper has no choice but to implement the administrator/trustee's instruction; rather, it's that ordinarily a non-fiduciary recordkeeper has no duty or obligation to question an instruction. Nonetheless, there are some recordkeepers that prefer to question, and even refuse, troublesome instructions. That too is a business choice.

K2retire, perhaps there is no professional-conduct issue. First, unlike some other professional associations, ASPPA’s Code of Professional Conduct [http://www.asppa.org/pdf_files/mem/code_%20conduct.pdf] doesn’t require a member to report another member’s misconduct. (In my view, ASPPA’s choice makes sense; by contrast, the lawyers’ misconduct-reporting rule has such wide exceptions that it’s worse than useless.) Even if you felt like reporting something, your description suggests that ASPPA members mostly furnished correct information, and that it’s non-members who decided to accept an instruction to process a transaction that might have been contrary to the plan or relevant law. Accepting a plan administrator’s instruction - even if it’s contrary to the plan, or contrary to a law that applies to a person other than the person that implements the instruction - is fairly common practice among non-fiduciary recordkeepers. (I’m assuming that the participant you describe as a plan sponsor also acted as the administrator of his employer’s plan.) Further, a recordkeeper that starts to say which instructions it will or won’t follow risks exercising discretionary responsibility that could be argued as making the recordkeeper a plan fiduciary. Although it’s often unsettling to watch a plan’s administrator make a decision that the observer thinks is “wrong” (especially if the decision-maker has a conflict of interests), we might better understand this frustration as an illustration of why Congress should not permit an employer to serve as the administrator or trustee of the employer’s employee-benefit plan.

GMedley, an “even-stevens” approach of allowing a recordkeeper that must pay up losses caused by errors use inadvertent gains from the same class of errors can, if correctly used, be fair and even favorable to a retirement plan. There are serious issues concerning at least ERISA sections 403(a), 404(a), 406, 408, 410(a) and Internal Revenue Code sections 401(a)(2) and 4975. But there are legitimate ways to design an error-correction procedure so that it meets those concerns and is practical and administrable. I’ve worked on this design from both “sides” – advising a recordkeeper or advising an employer plan fiduciary. The legal analysis and its fact sensitivity makes the topic not a good fit for a bulletin board. If you’d like a (free) talk about how to approach the issues, please call me.

Leaving aside any debate about whether a non-fiduciary service provider should or shouldn’t care about an instructing fiduciary’s decision not to follow a plan’s provisions …. If an employer’s plan is stated using a master, prototype, or volume-submitter document that permits practitioner amendment, a sponsor or practitioner that “reasonably concludes” that an employer’s plan “may [sic] no longer be a qualified plan” must (if the sponsor or practitioner doesn’t submit an EPCRS request) “notify the employer that plan may no longer be qualified, advise the employer that adverse tax consequences may result from loss of the plan’s qualified status, and inform the employer about the availability of EPCRS.” Rev. Proc. 2005-16 at § 8.05 and § 15.07. A fiduciary’s decision to ignore the plan’s provisions and instead instruct a distribution that’s contrary to the plan’s provisions suggests at least a possibility that the fiduciary does not intend to follow the plan’s provisions. Such an intent might tax-disqualify a plan. In some situations of the kind described above, some recordkeepers send a form letter that briefly describes the instruction that’s contrary to the plan, and then tracks the language of the Revenue Procedure. Although a letter of this kind is unlikely to change anything with those who are determined, it’s a way for a recordkeeper to make and keep evidence that someone else was responsible for a failure. And while some people feel that it’s unethical to make and keep unprivileged evidence of a client’s breach, some defend the warning letter by saying “the IRS made me do it”.

Sully, is your client a participant or an employer? If your client is a participant who cares about how State income taxes apply to him or her, you might limit your research to the State or States in which the participant resides (or is domiciled), the State or States in which the participant works (if different), and those other States that have taxing power over the participant (if any). If your client is an employer, often a practical solution is to make sure that its contract with its payroll servicer includes sufficient warranties and indemnities so that the servicer pays the employer's losses that result from the servicer's failure to know or apply a tax law. Also, a service contract with a retirement plan's recordkeeper might obligate the recordkeeper to know and apply all tax laws on tax-reporting, and withholding taxes from, plan distributions - and to indemnify the plan's fiduciaries against the recordkeeper's failures. (To meet these obligations, many recordkeepers engage lawyers for research updates on changing tax laws.)

I have experience drafting completely customized church plan documents, including plans with pre-1974 provisions and a 401(k) plan for a church.

John, thanks for the helpful citation. Because a person usually can’t be a participant unless he or she is first an employee, the simplest way to make ERISA § 510 not apply is to avoid hiring an employee (or not to have any employee-benefit plan). But a business that doesn’t want to go that far sometimes tries a strategy of the kind that Sieve describes. One worry about such a strategy is that ERISA defines a “participant” as an employee who is “or may [sic] become” eligible for a benefit. Because ERISA § 510 proscribes “interfering with the attainment of any right to which [a] participant [as so defined] may [sic] become entitled under the plan”, a plaintiff might argue that interference with an opportunity to stay in, or move into, a job classification for which a plan currently provides a benefit or might in the future be amended to provide a benefit is interference that invokes ERISA § 510. (I don’t suggest that such an argument relates to a fair reading of the statute.) One can imagine a plaintiff’s argument that an employer’s decision not to promote an employee from part-time to full-time is the kind of interference that ERISA § 510 forbids. In Fleming v. Ayers & Associates, 948 F.2d 993, 14 Employee Benefits Cases (BNA) 1673, 57 Empl. Prac. Dec. (CCH) ¶ 41,205, 57 Fair Empl. Prac. Cases (BNA) 330, 1991 U.S. App. LEXIS 25791 (6th Cir. 1991), the court found that firing an employee who had been hired only for a part-time job was an ERISA interference because it deprived her of the opportunity to be considered for a full-time job, which would have (if the plan were not amended) entitled a full-time employee to a benefit. The appeals court’s reasoning was influenced by the trial court’s finding “that Fleming was hired with the intent that she move into a full-time position when a job became available.” Query: Might an employer have somewhat better protection against ERISA § 510 if it affirmatively informed every job applicant and every part-time employee that the employer never considers a part-time employee as a candidate for any full-time job, and never permits a part-time employee to work (or get credit for) more than 18 hours in any week?

If a plan fiduciary assumes that the FTC’s “Red Flag” rules don’t apply to a retirement plan, it nonetheless might use a similar procedure as part of its care to protect people from identity-theft risks. There’s at least some argument that the fiduciary duties of ERISA § 404(a)(1) might require a plan fiduciary to protect information about a retirement plan’s participants, beneficiaries, and alternate payees if a prudent-expert fiduciary would do so in the plan’s circumstances. I’m not saying that I agree or disagree with the argument, only that there is an argument that could be presented. The FTC rules indirectly impose a modest standard of care on persons that otherwise might have even less duty. Reading these FTC rules and thinking about them (especially the rules’ soft spots) might help a fiduciary think through some steps about what a retirement plan’s administrator might do to try to detect identity theft.