Peter Gulia

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).

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.