Peter Gulia

I have handled this situation a few times, setting up different solutions for different recordkeeper/trustee configurations and business needs. I'm willing to give some free pointers, but it wouldn't be a good discussion for the bulletin board.

It was Letter Ruling 2000-28-042 (April 19, 2000), issued to the State of Idaho. That non-precedent ruling was based on a nice set of facts that supported treating a State and many of its agencies and political subdivisions as one employer. Since then, the IRS has not issued a similar ruling to anyone. Again, even if an employer might be recognized as within the transition rule of Section 1011(f)(2)(B) of the Tax Reform Act of 1986 as amended by Section 1011(k)(8) of the Technical and Miscellaneous Revenue Act of 1988, that transition rule results only in the non-application of the general rule of Internal Revenue Code 401(k)(4)(B). It's State law, not the Internal Revenue Code, that provides what power a governmental employer does or doesn't have.

Yes, a power to pay compensation generally might not include a power to establish a particular kind of retirement plan. (Any one conclusion is beyond what this bulletin board is about because the questions and answers vary widely from State to State, and even within one State based on which governmental employer and what acts are involved.) A State statute that empowers a specified class of governmental employers to pay salaries or wages to its employees often is construed or interpreted not to include a power to establish a retirement plan. Also, if a State has statutes stating governmental employers' powers concerning 403(b) contracts, 457(b) plans, and defined-benefit pension plans but lacks such a statute concerning a 401(a) defined-contribution plan, a court, attorney general, or other decision-making authority might interpret the absence of a statute when others are provided for parellel purposes as some evidence that the legislature did not intend to provide authority for what's missing. That kind of reasoning might have further support when the "plan" mistakenly assumed was one that under Federal tax law could not have had the tax treatment mistakenly assumed. Between an employer and its employee, an agreement to do something that can't be legally valid usually isn't legally enforceable. And relevant law might treat as void or voidable an act that was beyond a governmental employer's powers. So if it turns out that an employer lacked power to establish a 401(k) plan, an employer that failed to pay wages (under a mistaken assumption that a wage reduction was allowed as a "plan" contribution) ought to start thinking about what remedies an employee has on that failure to pay wages. A bulletin board of this kind is about helping another practitioner get some pointers about ideas to pursue. The answers to a specific situation involve a careful reading of the statutes, court decisions, and other sources of law involved.

Beyond thinking about correction procedures for Federal income tax purposes, a governmental employer in the circumstances you describe should want advice about its duties under State law, and a participant should want advice about his or her rights under States' laws. A governmental employer has power to create a retirement plan only to the extent provided by State law. If State law didn't empower the employer to create the plan it mistakenly assumed that it created, the effect of State law might be that the plan never happened. An employer should want to consider what steps it might take to contain its undo and restoration obligations, especially if some of the "participants" have "account" investments with a loss. In my experience, a governmental employer faced with these circumstances can negotiate a conclusion with the IRS and the State and local governments involved. Often, the fitting solution is something different than the presumptive IRS-standard correction. To get the best advice and solutions, an employer might prefer advice from someone who (1) confers legal rights to keep communications about how to fix the problems protected from disclosure, (2) is knowledgeable about governmental plans, and (3) is an outsider, unconnected to the State and local governments (or any employee) involved.

To what State does the public-schools district belong?

mal, as your post suggests, one of the simplest ways to get a trustee who isn't constrained because he or she "is already receiving full-time pay from" the relevant employers or unions [29 C.F.R. 2550.408c-2(b)(2)] is to select a person who has no relationship to any of the relevant employers or unions. Unless a governing document imposes more conditions than the statute requires, nothing in 29 U.S.C. 186©(5) precludes the employers from using their power to elect or appoint a "representative" to fill such a slot with a person who has no relationship to the employers or the unions. Keep in mind that the economic circumstances you describe make a trustee's job a demanding one that requires real work, time, attention, and personal responsibility. A real trustee would want real compensation for that service. Providing compensation to "outside" trustees usually is within a pension plan's proper purposes, which include using plan assets to pay reasonable expenses of administering the plan.

If a service provider treats an amount as a plan's assets, acting consistently with that treatment might suggest paying it to the plan's trustee. However, a service provider (even if it is a non-fiduciary) might use extra care if it has knowledge that could lead a reasonable person to believe that the trustee might steal, or otherwise misuse, the plan's money.

Many of the people who most need advice lack a way to pay a fee other than out of a retirement plan account. There are some Internal Revenue Service letter rulings that shed some light on right and wrong ways, at least for income-tax purposes, of taking a participant-advice fee out of plan assets. Because none of these rulings is precedent and all are fact-specific, a service provider might want a ruling that ties to its standard form of written agreement and other facts. In my experience, it has not been difficult to obtain these rulings.

Consider that a plan's failure to pay or provide a benefit as required by ERISA 205 might not be a failing that the IRS has power, or a purpose, to forgive. Rather, an ERISA-governed plan's administrator might focus on (1) causing the employer to adopt documents that specify provisions within those choices that are proper under ERISA 205, (2) administering that plan correctly for the future, and (3) evaluating what remedies are prudent concerning benefits that ought to have been provided.

While Kansas City is blessed with many fine employee-benefits lawyers, you want Tom Brous, who is always gracious and fixes a situation effectively. http://www.stinson.com/ourattorneys/attypage.asp?key=2446

Without commenting on whether language of the kind described above is or isn’t effective to limit a recordkeeper’s liability to any person, it doesn’t limit the plan fiduciary’s liability to the plan, which could include a personal liability to restore an affected participant’s plan account. Beyond a duty to do the right thing for the plan and its participants, a fiduciary who cares about his or her personal liability might want to negotiate service contracts that get the best mix of services, fees, and other terms in the plan’s interests, which could also help lessen the fiduciary’s personal liability.

Consider a rhetorical question: If the employer really is hands-off and does not "establish" or "maintain" anything, why would it care about restraining loans?

Another two ideas to consider: In the 2008 Q&As of the American Bar Association’s Joint Committee on Employee Benefits with government agencies’ people, one question asked whether an employer might use a protective filing of Form 5500 without conceding that an ERISA plan had been established or maintained. The EBSA staff response suggested that an employer manage some of the uncertainty by getting a lawyer’s opinion or requesting the Labor department’s ERISA Advisory Opinion. See Q&A-22 in the attachment. That response doesn’t consider that many charitable organizations might think that spending money on lawyers’ fees on a question that’s not essential to the charity’s programs isn’t the best use of the charity’s limited money. A Field Assistance Bulletin is internal guidance within the Employee Benefit Security Administration. It is not a rule. One might expect EBSA to follow its own Bulletin in EBSA’s decisions about whether to pursue enforcement. But a court need not give any deference to such an interpretation that didn’t go through Administrative Procedure Act rule-making. The consequences of not filing Form 5500 often are the smallest potential liability concerning a plan that an employer operated as a non-plan. But a plaintiff (for example, a surviving spouse who never was asked to consent to the participant’s naming of a beneficiary other than the spouse) might present sympathetic facts that could make it easier for a judge to be persuaded that an ERISA plan existed. 2008_ABA_QandA_EBSA.pdf

R Vatalaro, your discussion topic suggests at least some possibility of blurred roles between a TPA’s efforts to protect its right to its fee, or a TPA’s desire to help a client plan administrator or fiduciary meet that person’s duties. Even with EBSA’s proposed rule on what’s not a “reasonable” service contract, a service provider faced with the circumstances you describe could argue that full disclosure to the hiring independent plan fiduciary (with incomplete disclosure to participants) is enough to meet the “disclosure-and-approval” aspect of the ERISA § 408(b)(2) exemption so that the TPA’s service contract could be an exempt prohibited transaction. Some TPAs might want to help a plan’s fiduciary negotiate more services from the recordkeeper. Others might prefer to exclude such work from a service contract. Whether a plan fiduciary meets its duties to participants isn’t necessarily a TPA’s duty (if the TPA isn’t, and won’t become, a fiduciary). Separately, how the plan fiduciary must, may, or should inform participants about the compensation trail you describe is another topic for consideration.

For the May 2008 edition of the Q&A sessions that the American Bar Association Joint Committee on Employee Benefits does with people from Government agencies, I posed a question (and, as the JCEB procedure has been, presented my suggested answer) on what makes it prudent to buy more fidelity-bond insurance than the statute requires. The EBSA person more-or-less agreed with a view based on ERISA's prudence duty. Further, the EBSA person suggested that the fiduciary's decision also must meet ERISA's exclusive-purpose duty. In the attachment, it's Q&A 21. One wonders how a fiduciary should consider that exclusive-purpose duty concerning a single-employer plan if the employer, the plan sponsor, and the named plan fiduciary all are the same corporation, and the natural persons handling plan assets (and acting for the named plan fiduciary) all are employees of that corporation. 2008_ABA_QandA_EBSA.pdf

In addition to using J Simmons’ good suggestions, you might consider whether a TPA’s fee really is a fee for writing the document or something else. With some recordkeepers, a fee might be for a bundle of services that includes some service concerning a plan document. The portion of an undifferentiated fee that’s attributable to the document service might be immaterial or even insignificant in relation to the whole fee. Even with a recordkeeper that has a separate fee for a document service, some are careful to say the fee is not for writing the document, but rather for recording customer instructions based on the adoption-agreement choices or other plan terms. Some in-house lawyers (I was among them) have advised descriptions of this kind to support an argument that the recordkeeper’s involvement concerning a document was not to give legal advice or practice law, but rather naturally part of the recordkeeper’s self-defense against its own liability or in some other way a legitimate part of the recordkeeper’s internal business needs. Even in States that sometimes show a hidebound outlook on the unauthorized practice of law, a recognized defense is that one prepared a document because, even if one isn’t a party to it, the document significantly affected the preparer’s rights, duties, or obligations. If the recordkeeper has so described its service, the plan fiduciary’s lawyer might have some room for an interpretation that the recordkeeper’s fee, especially if it’s low enough that it couldn’t have involved advice, was meaningfully for plan administration rather than plan creation. There is another reason for checking that a TPA’s “documents” fee is modest enough that it couldn’t include legal advice. In most States, it’s a crime for a non-lawyer to give legal advice (or draw a document that by implication includes legal advice). {I remind BenefitsLink readers of my longstanding view that the law ought to permit any person to give legal advice, and to be responsible for that advice.} Although that crime might seem to be the actor’s problem, ERISA’s prudence duty [ERISA § 404(a)] and reasonable-service-contract exemption [ERISA § 408(b)(2); 29 C.F.R. § 2550.408b-2] make this the plan fiduciary’s concern. A purported “contract” for a service that’s unlawful for the service provider to perform can’t be prudent, and likely can’t be a “reasonable contract”.

Perhaps the observations above mostly agree on a few principles: An adviser can enhance her client’s autonomy and dignity by providing as much as the client asks (and pays) for. That includes advice about different kinds of risks. That includes advice about how a risk could play out. Because a client bears the consequences of its decisions and acts (or a failure to act), it’s the client that must decide what to do. An adviser shouldn’t make her client’s decision, even if the client wants the “adviser” to make the decision. That said, there are ways for a professional to satisfy herself that a client’s decision really is a considered decision rather than merely accepting an adviser’s suggestion. An adviser who no longer feels like working for the client may resign. (The professional-conduct rule about not withdrawing until one can do it without harming the client rarely imposes much restraint on a professional if her scope is limited to advice-giving.) A client that no longer wants the adviser’s advice may fire the adviser.

Many governmental plans provide that a participant forfeits a benefit if he or she committed an offense related to his or her conduct as a government officer or employee. (For citations to selected statutes and court decisions on this point, see my Q&A 12:84 in Governmental Plans Answer Book.) Plea bargains operate in both directions. Sometimes, an accused admits offenses that don’t forfeit the pension and the prosecutor withdraws charges that would forfeit the pension. In other cases, an accused accepts a pension forfeiture to bargain for less imprisonment or other punishment.

One practical way to get some unofficial guidance is to ask the lawyer who will advise on the VCP submission whether he or she objects to getting a check drawn on the plan trust’s, rather than the employer’s, bank account. A smart employee-benefits lawyer doesn’t want to receive the proceeds of a prohibited transaction or knowingly participate in a fiduciary breach. Although a cautious client would want written advice, the next best thing is to hope that a lawyer’s self-preservation instinct practically results in a safe-enough answer. Also, a client might ask its lawyer to provide fee statements that detail which portions of the fee may be paid from plan assets and which must be paid by the employer without using plan assets.

A related question that some BenefitsLink commenters might help with: How much effort should a plan administrator put into satisfying itself that a writing presented as a domestic-relations order really is a court’s order? I suspect that many plan administrators ordinarily don’t do much checking. But if there is a 13-year gap between the writing received and when it ought to have been received, perhaps a plan administrator may not presume regularity, and instead must take those steps that a prudent-expert fiduciary would take in the circumstances to consider whether the writing is a true copy of the court’s order.

If there were no consideration beyond time value of money, the trustees of a multiemployer pension plan should not “discount” the amount of a correctly determined single-sum withdrawal liability merely because the employer would pay the single sum rather than payments over time. It’s the periodic-payments schedule that’s adjusted for time value of money; the single-sum amount is, at least ostensibly, the “now” value. But in the real world, a skillful negotiator sometimes can negotiate a withdrawal liability. Even if the plan’s true motivation is getting ready money now, the trustees need different reasoning to support a compromise as one that a prudent-expert fiduciary should make in the plan’s best interests and following all of the fiduciary’s many duties. For example, the trustees might consider the risks and expenses of arbitration and litigation, and thus may consider the value of certainty. To provide enough “cover” to allow the trustees to pretend that what’s really a prompt-payment discount is, at least to defensible appearances, a proper compromise of what would be a disputed withdrawal liability, an employer might begin with a credible showing of an ERISA/MPPAA lawyer’s work, and the employer’s readiness to arbitrate and litigate. The stronger the “documentation” of a credible and expensive challenge, the more room the trustees have to compromise. The employer’s lawyer would seek the broadest satisfaction and releases, and would draft the settlement agreement to reduce the risk that a release is a prohibited transaction. In my experience, different plans’ needs and tastes vary considerably, and there is often a difference in outlooks among a plan’s staff, counsel, and trustees.

Below Ground, along with the considerations mentioned above and others that you've likely thought about, consider asking your client to think about what would happen if, between now and the next allocation time in 2009, a participant leaves employment and claims a distribution. If a participant was allocated less than he or she was entitled to, is the employer ready to top up the account before the distribution is paid? If a participant was allocated more than he or she was entitled to, will the employer succeed in removing the excess amount from the account before the routine processing of the distribution claim?

J Simmons, I have some thoughts about the idea you describe and stronger ways of implementing it. But those thoughts would be out of place on this public bulletin board. Please feel free to call me.

CFP in Philly, a few points you might want to think about (especially if you were involved concerning the creation of the plan or the selection of the service provider): (1) Before you say too much or the wrong thing about how the plan fiduciaries (likely the staffing business and its owners and executives) might handle their problem, consider presenting suggestions that don’t invite your client to think that the problem is your fault. (2) After thinking about point (1), consider that some rules about the number of participants count at the beginning of the plan year. (3) There are conditions other than those about the numbers of participants that could require a public accountant’s examination. (4) A competent practitioner might find ways to redo, truthfully, the Form 5500 so that the Labor department asks nothing further and closes the file. (5) After the mess is done with, change the plan. A staffing business should use custom-designed documents. In my experience, a staffing business’ plan needs custom definitions about who is or isn’t an employee, who is or isn’t eligible, and who has or hasn’t ended his or her employment. Creative definitions can help a staffing agency meet its business purposes. A good practitioner can persuade the Internal Revenue Service to issue a clean determination on provisions that go beyond what’s customary in others’ documents. Because this is open comment in a public bulletin board, it’s not tax or legal advice.

Have the plan’s fiduciaries considered whether they need to require that some portion of the participant’s plan account be invested in assets that can be sold quickly to raise money to pay taxes, insurance premiums, and other expenses? Have the plan’s fiduciaries considered that ownership of real property can result in a liability (especially an environmental liability) that exceeds the property’s value? Even if a plan otherwise meets all ERISA § 404© requirements, a fiduciary doesn’t get relief and instead is stuck with responsibility if he, she, or it follows a participant’s instruction that “[c]ould result in a loss in excess of a participant’s or beneficiary’s account balance[.]” 29 C.F.R. § 2550.404c-1(d)(2)(ii)(D). If the plan trust pays such a liability, do the plan’s fiduciaries know what allocation method they would use to apportion that expense among the plan’s participants, beneficiaries, and alternate payees (including those who had no interest in the real property)? Does each fiduciary who also is a participant understand that his or her plan account can be offset to pay his or her fiduciary liabilities to the plan (with that amount allocated among non-breaching participants)? See ERISA § 206(d)(4)(A)(ii).