Peter Gulia

In some States, whether a lawyer is or isn't a member of a bar association is a choice of voluntary association. In other States, there is an "integrated" or "unified" State Bar, in which membership is mandatory if one wants to be a licensed lawyer. A "unified" State Bar often has some governmental powers, and sometimes is recognized as an instrumentality of the State. If a State Bar is an instrumentality of a State, it's an eligible employer under IRC 457(e)(1)(A). Although a 501©(6) business league (which a voluntary bar association might be) also is an eligible employer (under IRC 457(e)(1)(B)), the governmental-or-not distinction matters for some important differences: A nongovernmental employer's plan is unfunded (see IRC 457(b)(6)); a governmental employer's plan must use an exclusive-benefit trust, custodial account, or annuity contract (see IRC 457(g)). A nongovernmental employer's plan that's not a church plan must limit participation to a "select group" so that ERISA Part 4's funding requirement won't apply.

Sorry to hear that. So far, it seems that BenefitsLink readers don't have obvious magic for your (hypothetical) client's situation. And one imagines that Y might not be in a good mood to hear that it should have considered the true expense of the job before taking it. In the right circumstances, a carefully written request for a review of the accuracy of the plan trustees' withdrawal-liability demand (done with all the right ERISA/MEPPAA details, and leaving behind some traps for the plan's vulnerabilities) could set the stage for a negotiation. Although in theory the plan trustees aren't supposed to accept less than the true withdrawal liability, in the real world they weigh the risks (and there is some law support for the idea that it can be proper and prudent for them to do so). More than a few of us have had some success with getting a satisfaction on a compromised amount. At this stage, the hardest part is for a client to decide how much professional effort is worthwhile.

This isn't an answer to your question; but: Before making the agreements, did Y ask a lawyer for advice about the effect of the agreements? If so, what was the advice?

For Pennsylvania's personal income tax, a benefit under an IRC-qualified cafeteria plan might or might not be compensation (one of Pennsylvania's eight classes of income) depending on the terms of the plan, whether the plan is discriminatory, and the nature of the benefit. For example, a health-care arrangement usually is not compensation, but a dependent-care arrangement is taxable compensation. The attached regulations explain the rules. 061_0101.pdf

Before a plan fiduciary or a plan sponsor decides whether either really wants funds managed by the employer or its affiliate as investments of the retirement plan, those involved might read the plaintiffs’ complaints in some of the lawsuits on that topic. (Some settled; at least one began recently.) Even if they’re confident they’ll win it, does your client want to invite litigation? Further, even if the client’s practical legal risk is remote or almost none, some practitioners worry about one’s own reputation risk or just can’t get comfortable ethically. To answer cac1134’s question, there are some ways to design a plan or choose its investment menu to use “house-brand” funds so that the investment is not an ERISA § 406(b) prohibited transaction. All of the ways that I know about require lawyering, and all but one or two require independent experts. Any real discussion of this topic involves information that one wouldn’t want written in a forum that’s open to anyone with an Internet browser. (I’ve advised clients on both sides, about attacking or defending these arrangements.) If you’d like to talk about this, please feel free to call me.

Whether any particular decision is or isn’t a fiduciary breach always depends on all of the surrounding facts and circumstances. Although the call for “care, skill, prudence, and diligence” is unchanging, the measure is what one would do applying those behaviors and skills “under the circumstances then prevailing”. ERISA § 404(a)(1)(B). A decision that’s wrong for a $100 million plan might be sensible for a $10 million plan. To answer MSN’s question, yes, there are fiduciaries of smaller plans that don’t merely eat out of a recordkeeper’s can but add their own language to individual-account statements. Some recordkeepers provide a “slot” to put plan-customized language on a statement. While such a slot often is limited to a specified number of lines and characters, a careful writer can convey information in two or three sentences. If space is very tight, an explanation’s last or second sentence might point to a website page that provides more information. Another choice: a recordkeeper might give a plan administrator a choice to include or “suppress” a rate-of-return display. Until one finds a way to explain the information, a plan fiduciary could consider whether potential harms to participants who might misunderstand the information might outweigh potential benefits to those who might understand and might use the information. (Even if a good explanation of a rate-of-return approximation could be furnished, some plan fiduciaries believe that the display is unnecessary for a participant who would understand the information, and useless or even harmful for a participant who wouldn’t understand the information.) While smaller plans might have fewer good choices, there’s always some choice – even if that’s pushing a recordkeeper to improve its services, or finding another service provider. The one thing that’s not acceptable is for a plan administrator to abdicate responsibility for individual-account statements. ERISA § 105(a)(1)(A) makes account statements the plan administrator’s duty. ERISA § 105(a)(2)(A)(iii) requires that a statement “be written in a manner calculated to be understood by the average plan participant”. ERISA § 404(a) calls a plan administrator to act diligently and as a prudent expert would in carefully considering what is or isn’t helpful for an “average” participant. A fiduciary can’t delegate to a non-fiduciary. And while service providers can offer tools that plans might want, they should design them to let the plan fiduciary be in charge. If our society’s pensions are provided from participant-directed investments for individual accounts, it’s time for us to care about building good “train tracks”, and to recognize that the information of an individual account is itself part of a plan’s benefit.

The method that David Rigby describes is in use with some recordkeepers. (Some furnish it regarding a year and a quarter.) A few observations: If a plan fiduciary chooses to furnish this information, the same statement should include a plain-language explanation of the formula, why the illustrated return “rate” is only an approximation, why that illustration likely doesn’t match a “rate” that could be computed by counting the actual flows of the account, and the conditions under which the illustration might or might not closely approximate the account’s return. If a statement includes any investment-return information, the same statement should include a plain-language explanation that the past isn’t an indication of the future. To try to avoid the mind-numbing haze that comes from something that looks like “disclaimer” language, a plan fiduciary should write this with an emphasis and style that makes it noticeably different from what most securities people write. Even if the plan fiduciary is certain that participants will ignore all explanations, it’s still worth doing. If a plan fiduciary volunteers to furnish information that’s not required by law, its fiduciary duties require it to communicate carefully – with a prudent expert’s appreciation of the possibility that a participant could be misled or otherwise harmed by information that isn’t sufficiently explained.

As you already suspect, you'll want to turn your mind to the super-specialized world of governmental plans. If you don't already have it, Governmental Plans Answer Book [Aspen Publishers] is the source you're looking for. It explains, in Q&A form, governmental plans to a practitioner whose grounding is with nongovernmental qualified plans. The citations are thorough, and include off-Code sources. Also, consider that Federal tax law is not the only law that's relevant to your questions; State law governs what a municipality may, or must not, do in providing or maintaining a retirement plan.

Assuming all the facts you described (and the absence of any that would support the decision as prudent and diligent), the breaching fiduciary might want to reevaluate his or her business decision after understanding that he or she bears uninsured personal liability. (For many, such an evaluation would next turn on the decision-maker’s perceptions about the risk of detection.) Concerning a fidelity-bond insurance contract, the insurer would deny coverage, saying that the situation described isn’t the kind of theft loss that the contract covers. (And if any coverage is provided, the insurer may pursues its rights against the wrongdoer.) Concerning a fiduciary liability insurance contract, even a contract with the fewest possible exclusions typically provides no coverage to an insured who personally benefited from the breach alleged. Beltane, if you’re a practitioner who would touch the assembly of the plan’s Form 5500 or financial statements at any turn, consider how to protect your engagement. Even if you’ve done a good job of making sure that you’re not responsible, consider asking your lawyer whether you should (or shouldn't) make and keep evidence that you warned the plan administrator that he, she, or it should report prohibited transactions and fiduciary breaches. And remember that each prohibited transaction is continuing (until the plan is restored) and there’s a continuing fiduciary breach until the plan fiduciary takes prudent action to get the plan’s restoration from those involved in the prohibited transactions.

Assuming the IRA holder requests a distribution .... If a distribution consists only of a delivery of worthless property, the instructions to Form 1099-R make clear that a report, while not required, is permitted, and may show a distribution amount of $0.00. See page 7. Some practitioners consider doing a "zero" 1099-R a good idea because it creates a record that one could use as evidence of the delivery, and, if it was the only investment, the end of the account. If you decide to do this, check your tax-reporting software: some include an assumption that zero can't be a distribution amount, and it might take a little time to figure out an override.

Without considering anything of what the plan fiduciaries ought to be thinking about, might the TPA (assuming it’s confident that it’s a non-fiduciary) choose to provide the service, if paid for, of sending whatever writing the plan administrator has composed to whatever audience it instructs - while carefully reminding the client that the TPA hadn’t been asked to, and didn’t, advise the client about any effects of delivering that writing. Your query asks: “What are the inherent dangers of doing [a notice the way the client suggests]? If the “client” already has said that it doesn’t want to pay for records work, how likely is it that they’ll pay for advice? Please understand that this post doesn’t express a view about to whom a default-investment notice should be sent or what a notice should or shouldn’t say. That’s a set of questions that a plan fiduciary should carefully consider by prudently considering the facts, circumstances, expenses, and needs of a particular plan. The solution that’s the right answer for one particular plan might not be for a different plan.

Beneficiary is a minor While nothing in ERISA or the Internal Revenue Code precludes a retirement plan from paying a distribution to a minor, many plan administrators prefer to pay a minor’s conservator, natural guardian, or UTMA custodian. Why? A payer wants to be sure that a payment is a satisfaction of the obligation to pay the benefit. Ordinarily, a beneficiary’s deposit or negotiation of a check that pays a retirement plan distribution is the beneficiary’s acceptance that the payment satisfied the claim under the plan. A minor is a person still young enough that he or she can’t make a binding contract. At common law, the age of majority was 21. Now, all but three States’ laws end a person’s minor status at age 18. Before a child reaches age 18 (or the other age of competence to make contracts), his or her conservator may disaffirm an agreement or promise the minor made. After a child reaches age 18 (or the other “full age”), he or she may disaffirm an agreement or promise he or she made before he or she reached the age of competence to make contracts. A typical payer won’t take the risk that paying a distribution isn’t a satisfaction of the plan obligation. Thus, payers usually are unwilling to pay a plan’s benefit to a minor. To facilitate payment in these circumstances, most plans permit payment to a minor’s conservator, guardian, or Uniform Transfers to Minors Act custodian. If a participant named a minor as a beneficiary (rather than naming as beneficiary a trustee or custodian), a typical payer is likely to honor a claim made by the child’s conservator or natural guardian. As always, a plan administrator should read carefully what the plan says, and, if the right administration isn’t obvious, get its lawyer’s advice. Beneficiary is not a U.S. person If a retirement plan distribution is payable to a foreign person (such as a nonresident alien), a withholding agent must withhold 30% for U.S. Federal income tax unless the withholding agent has proper documentation (such as a withholding certificate on Form 8233 or the correct form in the Form W-8 series) that it properly relies on to treat the payment as made to a beneficial owner who is a foreign person entitled to an exemption from, or a reduced rate of, withholding. Detailed rules govern the circumstances in which a withholding may or must not rely on the distributee’s or payee’s certificate. See 26 U.S.C. §§ 1441-1443; 26 C.F.R. §§ 1.1441-1 through 1.1441-9, 1.1443-1. The United States has an income-tax treaty with the United Kingdom. A distributee who’s entitled to claim that treaty’s protection likely qualifies for an exemption or a reduced rate.

The publisher provides this website and its message boards without asking practitioners to pay any fee; instead, advertising supports this website. If we want that to continue, it's business-smart to use the advertisements. So a good place to start would be this website's advertisements, including those at benefitslink.com/software.

Yesterday, I looked at this question for a Delaware corporation, and found that Delaware law is favorable to allowing a general corporation that is not a bank or trust company to serve (without compensation, of course) as the trustee of a qualified retirement plan for the benefit of the corporation's employees.

I guessed wrong on the software's rules; here's the plaintiff's complaint. LaRue_complaint.pdf

Here's the plaintiff's complaint, and the defendants' answer. DeWolff_answer.pdf

The news reporting (and even the parties’ and friends’-of-the-court briefs on the appeal and review) are thin about the facts of the participant’s investment direction and the plan administrator’s handling of it for two reasons: (1) the case proceeds on the law question of whether LaRue stated a claim; and (2) LaRue’s complaint never went to trial, or even discovery. In the dismissed trial-court proceeding, LaRue didn’t describe how he requested investment changes, and DeWolff didn’t describe how LaRue “rescinded” anything that he did submit. LaRue’s action asks the court to order restoration to the plan of what was lost by not following his alleged investment direction, to be followed by an allocation of that restoration to LaRue’s individual account. What’s in play now isn’t the facts of what did or didn’t happen, but rather whether ERISA provides or precludes this kind of remedy. If LaRue is successful with the Supremes (and it helps to have a brief and oral argument of the United States Government on your side), he doesn’t win his claim; he wins the opportunity to return to the trial court to begin trying to prove his claim. As some have observed, there seem to be weaknesses in this participant’s claim. The defendants admitted that LaRue requested an investment change, but also say that he later “rescinded” his request [see attachments]. If the Supremes send the case back for a “do-over”, the plan fiduciaries could state the facts and arguments that they believe would show that LaRue didn’t really direct the investment change he sued for (for example, that he failed to act according to the plan’s investment-direction procedure), or that he somehow ratified or accepted his individual account as the plan stated it to him. For now, the important question is whether a participant may pursue relief under ERISA § 502(a)(2)or(3) if his is the only account affected by an alleged fiduciary breach.

1) Just as an employee-benefit plan’s procedures should do for any claim or other matter that requires the plan administrator’s decision, inform the participant that he or she is welcome to furnish as much evidence as he or she likes to support his or her claim that there is a marriage. 2&3) Because of how long ago Arizona and New Mexico ended informal marriage, only a very old or foolish claimant would assert that he or she made his or her informal marriage in either of those States. Instead, a claimant will remember (sometimes truthfully) that he or she made the marriage while in a State that then permitted informal marriage. For informal marriage, often there is no residence requirement. Court decisions of States in which informal marriage is not permitted for a marriage made within the State have recognized a present-tense exchange of words and informal marriage made during a weekend, or even one-day, trip into another State. 4) United States law and State law recognize a marriage made according to the law or custom of a Native American Indian tribe. 5) If, from the evidence furnished [see #1], it’s uncertain whether a marriage exists, remember that an ERISA plan’s administrator must act as a prudent expert would. If the plan administrator lacks expertise, ordinarily it must engage an expert. 6) While you’re thinking about informal marriage, think about how much checking the plan administrator does (or neglects) concerning all marriages. What prevents a participant from filling-out a form with a name and saying that it’s his or her spouse? (Does anyone check?) And how does a plan administrator know that people who were married remain so? 7) Consider requiring a participant, if he or she requests coverage for a spouse, to certify the marriage on every year’s re-enrollment.

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.