J Simmons

As a real world matter most DC plans will not have non allocated assets sufficient to pay a claim for lost profits. Assuming the claim is really worth $150,000 (which as yet to be determined) what happens in the likely event that the fiduciary declares bankruptcy after being adjudged to have breached his fiduciary duty in the amount claimed? What is the adequate remedy? Should the fiducary's own benefits be seized because of an innocent mistake? Can the participant recover some or all of his 150k from the accounts of the other plan participants if no other funds are available? Can the plan sue the non fiduciary employer to pay the judgment instead of taking it out of the participant's accounts? The practical answer to these questions is the reason why Congress limited the recovery for participant benefit claims under 502(a)(1)(B) to the remedies in equity, e.g, the account balance plus any earnings pocketed by the wrongdoer. Recovery is not permitted for money damages such as lost profits or punative damages. Allowing recovery of lost profits by individual participants as a breach of fiduicary duty will have a detrimental impact on DC plans and their participants as well result unpaid judgements. As a separate matter do you think small/midsized DC plans will be able to afford fiduciary insurance? The court decisions I have reviewed did not allow recovery under both 502(a)(1)(B) and 502(a)(2) by a participant. They only allow recovery under one or the other provision, but not both. If you have a case that holds differently I would like to see it. I don't know that small/midsized DC plans will be able to afford fiduciary insurance. Such plans will likely move more towards brokerage windows rather than investment menus set by plan officials, particularly in light of the Hecker v Deere decision of June 21, 2007 (albeit now being appealed by the employee plaintiffs). Others may go all the way to open architecture. I agree that double recovery is not allowed under ERISA, but there does seem to be room for 502(a)(2) relief beyond what 502(a)(1)(B) provides. 502(a)(1)(B) provides a right to claim benefits due under the plan. But the employee might need to pursue a 502(a)(2) action on behalf of the plan against the fiduciaries in order to recoup losses, so that the plan fund has assets with which to honor the 502(a)(1)(B) claim. Equitable recoupment from the fiduciary might be needed so that the plan has the funds to provide the employee an adequate remedy under his 502(a)(1)(B) claim. Here are a couple of cases that slice and dice, finding room for 502(a)(2) and (a)(3) relief to aid an employee who is also pursuing a 502(a)(1)(B) benefits claim: In Ehrman v Standard Ins Co, ND California Case # 3:06-cv-05454-MJJ, the court entered an Order Granting in Part and Denying in Part Defendants’ Motion to Dismiss and to Strike Plaintiffs’ First Amended Complaint on May 2, 2007. There, the court said it did In Schultz v Texaco Inc, 127 FSupp2d 443 (SD NY 2001), the court said:

The issue I see with 502(a)(1)(B) being inadequate is that the plan does not have in LaRue's plan account the other $150,000 he is claiming as additional benefits. Would he have an adequate remedy in a DC plan where the only assets to honor the benefits claim would be through shorting the plan accounts (and thus benefits) of other employees, which would trigger a cascade of additional claims? The employer cannot put the $150,000 into the plan as an 'employer contribution' to cover the benefits claim, as such a contribution would have to be allocated per the plan's formula and LaRue is terminated with no compensation on which to base any. It would appear to me that in a DC plan environment, a 502(a)(1)(B) claim could not be an adequate remedy for a claim about the impact of investment underperformance (such as through failure to implement an investment directive from the employee or through excessive fees being charged). The plan first needs to collect the loss amount from the malfeasant fiduciary per 502(a)(2) in order to have the funds to then pay the benefits claimed by LaRue under 502(a)(1)(B). Until the plan has collected through a 502(a)(2) action from the fiduciary, the employee's 502(a)(1)(B) claim cannot be honored and is an inadequate remedy. I think the net uptake of the 9-0 LaRue decision is two-fold: (a) a former employee whose account balance has all been paid out has standing under ERISA by virtue of having a colorable claim to additional benefits, and (b) even though it would redound just to the benefit of an employee's plan account, the employee can pursue a derivative action under 502(a)(2) on behalf of the plan to recover the losses occasioned by the fiduciary breach. But, for the reasons explained above, I do not see how 502(a)(1)(B) could provide an adequate remedy in a DC plan situation where the employee claims his benefits balance should be greater but the plan doesn't have corresponding other assets to honor the claim for additional benefits--unless the plan has recouped from the malfeasant fiduciary the necessary funds to then be able to honor the benefits claim.

mjb, is your point that while the Supremes say that LaRue can bring the derivative action under 502(a)(2) on behalf of the plan against the fiduciaries for breach and obtain a restoration to the plan for its losses, LaRue might not then receive the restored amount as benefits payable from the plan to LaRue other than per 502(a)(1)(B)? The claim for breach losses belongs to the plan (though brought by a participant). All a participant has is a claim for benefits against the plan, not the fiduciaries.

Thanks, PLAN MAN, I hadn't had time to sift through the footnotes yet. Glad they spelled that out.

An issue not addressed directly in the LaRue decision was whether he yet had standing since he'd been paid out, I understand, the entire balance of his DC plan account. However, implicit is that such a participant may have standing (at least for a 502(a)(2) action brought derivatively on behalf of the plan) "whether his account includes 1% or 99% of the total assets in the plan." Arguably by the time he brought suit, LaRue had zero percent in the plan. However, that was not addressed in the Court's opinion, or in either of the two concurring opinions.

Kind of a cash basis or accrual question of sorts. I would apply the QDRO literally, and split out only 50% of the account balance as of December 1, 2007, and then give all the 2007 accrual to the participant (and the remainder of the 12/1/2007 account balance).

I'm advising a multiple employer plan (MEP) in which unrelated ERs participate. One person works for two of these unrelated ERs. As to one such ER she is an HCE by virtue of ownership interest. She is not an owner in the other ER and does not earn enough from that other ER to be an HCE. In testing these two ERs separately, is she considered an HCE for both ERs or just the ER in which she has the ownership interest that renders her an HCE? I'm thinking that she'd be an HCE only with respect to the owner in which she has an ownership interest, as that is consistent with the notion of separate testing in the first place. However, I'm wondering if anyone knows of a rule/ruling where consistency did not win out?

To have 1099's , 1096's and 945's for the plan separate from the employer's payroll is the only reason that I've ever applied for a plan to have its own EIN. Where John Hancock is handling those forms using its own EIN as the payor, I can see no reason for such a plan to have its own EIN (as opposed to identifying the plan by the employer's EIN/three digit number whenever needed).

(1) I don't know how the employer would meet its duty to properly report taxable income on a Form W-2 if the employer does not determine if the dependent is a federal tax dependent. If the employer simply imputed the income in order to avoid making the determination, wouldn't that be improperly overreporting taxable income on the Form W-2? (2) I think that answer to #(1) answers this too. Can an employer simply overstate taxable income to the employee on Form W-2 in order to avoid having to make that determination? Federal law does not require that health coverage be provided to employees or their dependents. If it is provided, then it is not taxable income to the employee to the extent of the cost of coverage for the employee and federal tax dependents. To the extent that the cost of coverage is for any other dependent--per the plan definition or mandated state law definition--it is taxable income to the employee.

Dig deeper into whether there were employee contributions by this employee. I had a very similar situation 3 years ago with a client. There were employee contributions in that case, sufficient to cover the hardship. The VCP correction permitted was to amend, retro to date of the hardship withdrawal, to allow such out of accumulated employee contributions sans investment earnings per an old revenue ruling. This was better, under the circumstances we were facing, than having to require the employee to pay back the withdrawn amount.

Wow, Peter, thanks for the thorough response. It's exactly what I needed to know. Answers like those you provide are what make this board so valuable.

IRC § 414(p)(1)(B)(ii) and ERISA § 206(d)(3)(B)(ii)(II) require that the order be “made pursuant to a State domestic relations law (including a community property law)” relating to "provisions of child support, alimony payments, or marital property rights to a spouse, former spouse, child, or other dependent of a participant" (IRC § 414(p)(1)(B)(i) and and ERISA § 206(d)(3)(B)(ii)(I)). May the PA accept at face value an order issued by a divorce court that cites to a state statute on domestic relations or community property? or must the PA dig deeper to make sure that the order complies with the wording of such statute? or yet deeper to determine if the order complies with the statute as interpreted by the state's courts? Situation is one where a PA I'm advising has received an order that recites the state's community property division statute. However, the order also purports to make the ex-spouse the 'surviving spouse' of benefits that the employee will accrue after the divorce (a provision as to which a PA cannot reject the order--IRC § 414(p)(5)(A) & ERISA § 206(d)(3)(F)(i)), but under state community property the state's supreme court has ruled (not in this specific situation) is an 'impermissible invasion' of the employee's separate property (property rights earned after the divorce). Does the PA accept the order as issued under state community property law because that's what it says on the face of the order that it is issued under, and thus follow ERISA's requirement to treat the ex-spouse as the 'survivor spouse' to the extent so specified in the order? Or does the PA reject the order as not meeting the IRC § 414(p)(1)(B)(ii) and ERISA § 206(d)(3)(B)(ii)(II) because it is not appropriately entered pursuant to the authoritative interpretation of the statute recited in the order?

Hi, Bird, Suppose that the 'paper' ledger accounting for the pooled DC plan simply adjusts, from time to time, what percentage of the pooled accounts represent each EE's benefits. For example, if I have two EEs and one's benefits are as of 12/31/2007 just 38.8% and the other's is 61.2%, does either EE have "his or her own account under the plan" per ERISA 105(a)(1)(A)(ii) or would it be a DC plan under (iii)? If on the other hand my 'paper' ledger that I keep goes one step further and applies the percentages to the balance of the pooled accounts, say $100,000 as of 12/31/2007, and thus there's a notation of $38,800 for the first EE's benefits balance and $61,200 for the other EE's benefits balance is that a DC plan under which either EE has "his or her own account under the plan" per ERISA 105(a)(1)(A)(ii) or would it be a DC plan under (iii)? The way the statute is structured, it would seem that to avoid reading (iii) out entirely (canons of judicial interpretation abhor such an approach) there must be some type of DC plans in which the EEs do not have their 'own accounts under the plan'. What might that look like? Eartagged accounts that the respective participants do not have the option to direct investments seems the best fit to me. I'm with you, Bird, on the confused part, but I'm having a hard time ignoring the question. One thing about it, if the PA takes the initiative and provides PPA-compliant statements annually for this non-participant-directed plan and again does so in response to a request, there's no possibility of being noncompliant.

Hey, Austin, Are you responding to an EE request for a statement? You say 'replying to PPA pooled account disclosures', so maybe you have a request. If not, you may be providing something that the PPA-amended statute does not require. I think if you have pooled accounts, arguably you only have to provide the statement on request, not the PA taking the initiative to provide annually. ERISA 105(a)(1)(A) has three subparts for "INDIVIDUAL ACCOUNT PLANS". First, (i) provides that statements must be provided quarterly if the EE may direct the investments. The second part provides: "(ii) at least once each calendar year to a participant or beneficiary who has his or her own account under the plan but does not have the right to direct the investment of assets in that account". Thirdly, "(iii) upon written request to a plan beneficiary not described in clause (i) or (ii)." If each EE does not have his own, 'eartagged' account under the plan, but the investments of the DC plan are pooled, then the PA would not have to take the initiative and provide annually, but only upon written request from the EE. It seems that many have chosen to interpret ERISA 105(a)(1)(A) as if it just had the first two subparts, and read (iii) out, by suggesting that all non-directed DC plans must take the initiative and provide annually. That's not what the statute provides.

A DRO to award 1/2 of the EE's accrued defined benefits was determined by the PA to be a QDRO. AP dies before EE reaches earliest retirement age. Thus, payment of the awarded 1/2 of the defined benefits had not commenced to AP. Language of the QDRO provides that AP "shall hereafter own, as her sole and separate property, all right, title, and interest to" the awarded 1/2 of the EE's accrued defined benefits, "and shall have and enjoy all rights and privileges with respect thereto as provided by such plan and [REA]." Payment of the awarded 1/2 of the EE's accrued defined benefits was to commence as early as permitted, i.e. the EE's earliest retirement age. The QDRO specifies that the AP may choose any form of benefit options permitted by the plan as to the awarded 1/2 of the EE's accrued defined benefits. However, given that the amount does not fall below a de minimis dollar cap for lump sums, a single life annuity is the only form of benefit available. Under the plan, the AP could postpone payout commencing on the EE's earliest retirement date, but here the QDRO specified that payments to the AP were to commence as soon as possible. The plan document specifies what happens if the EE dies before the AP, i.e. the AP is treated as the 'surviving spouse' only to the extent provided in the QDRO. If the EE dies before reaching his earliest retirement age, the AP is entitled to benefits only if the QDRO specifies the AP as the EE's surviving spouse. However, the plan is silent as to what happens to the awarded 1/2 of the EE's accrued defined benefits if the AP, as here, dies before the benefits commence. There's two possibilities. The 1/2 of the EE's accrued defined benefits that were awarded by the QDRO do or do not 'revert' to the EE. The argument favoring reversion would seem to be that the benefits were his all along, and the QDRO's provision that payment of that 1/2 of those benefits be made to the AP failed because she died before payout of the single life annuity commenced, and therefore the QDRO ought have no bearing on the benefits to which he is entitled under the plan. Afterall, there's been no loss to the plan since no part of his benefits ever were used to base a single life annuity on as the AP died before that could happen. The argument that the EE does not get a 'reversion' is that the QDRO was valid, for plan purposes following the PA's determination, and the QDRO gave the right to payment of 1/2 of the EE's accrued defined benefits to the AP as "her own, as her sole and separate property, all right, title, and interest". From the time of the QDRO being determined as such, the EE no longer had any right to payment of that 1/2 of the benefits. The QDRO could have, but did not, call for reversion to the EE if the AP died before payment of the awarded benefits began, as was the case here. The plan's actuarial determinations were, after the QDRO, based on two separate individuals' life expectancies, regarding the two halves and not on a joint and survivor basis. The death of the AP does not override the provisions of the QDRO, which only allow payment of that 1/2 awarded to the AP to be made to the AP. Does anyone know how courts have ruled on such situations? Could the EE go back into divorce court, giving notice to the executor of the AP's estate, and get a QDRO modification post-death since no payout of benefits has begun? DoL Reg 2530.206(b)(2), Example 1 permits QDRO's to be entered post-death, but what about after a risk-affecting event (here the AP's death) has transpired? Would the plan have standing to intervene and argue contrary to the EE? Thanks in advance for responses to this post.

My understanding is that without a prior or contemporaneous designation for a different plan year, the contribution counts for the plan year in which actually made. It is either an extreme coincidence or there is a reason that the $11,000 is the amount in question, is the amount of the difference and was made just one day before it could count for 2008 without any plan year designation. The reasons behind that might give indicia that it was intended for 2008 at the time it was made. You might be able to make a case from such indicia for there having been a de facto designation for 2008.

By agreement between Seller (as current sponsoring employer of the plan) and Buyer, the employer sponsorship of the plan may be transferred to and assumed by the Buyer. Note, Buyer's usually do not want the unknown history of the Seller's plans, and prefer starting their own fresh. If the Seller's plan is assumed by the Buyer, those employees that do not go to work for the Buyer have a severance from employment, and may receive distribution per the terms of the plan following severance from employment.

IRC sec 1563(e)(6)(B) (per IRC sec 414© and (b)) would make the Adult Son a deemed owner of Mother's proprietorship, and vice versa. That would make the two Proprietorships a control group as they would, for this purpose, have identical ownership. It might also make Corp X a part of that control group; I don't remember Vogel Fertilizer going so far as to not count deemed owners in the brother-sister corporation analysis under IRC sec 1563.

cnelson4780, For legal authority regarding the timing of payout, in addition to the plan document provisions you may want to take a look at Treas Reg § 1.411(d)-4, Springate v Weighmasters Murphy Inc, 217 FSupp2d 1007 (CD Ca 2002); Saylor v Ret Comm, 2007 WL 2156409 (ED Ark 2007); Janeiro v. Urological Surgery Professional Association, 457 F.3d 130 (1st Cir 2006); Kuper v Iovenko, 66 F3d 1447 (6th Cir 1995); and Wulf v Quantum Chemical Corp, 26 F3d 1368 (6th Cir 1994).

Check out these listings on McKay Hochman's website: http://www.mhco.com/Charts/2007/Amendments...GUST_061507.htm http://www.mhco.com/Charts/2007/Plan_Amendments_042007.htm

Is Bob perhaps a shared employee where his hours for both 'unrelated' employers are combined for purposes of hours thresholds?

#1: Yes, hardship distributions are not allowed to an active employee who is under the normal retirement age stated in a money purchase pension plan. For those that are over that age, or who have terminated but have yet have benefits in the plan, the plan may only allow hardships to the extent permitted in the plan documents. #2: As for a 401k plan, it may allow hardships out of monies you contributed, called elective deferrals, or from company contributions (other than any 401k safe harbor contribution amounts). Many plans are designed to permit employees only to take hardships of amounts previously contributed by the employee. #3: Plan provisions control this issue too. Although rare, a plan can require more than a year pass following termination of employment before the former employee may access the benefits. Administratively, the pension rules permit a plan up to 60 days following the plan year in which your distribution triggering event occurs (other than by reason of reaching normal retirement age) to process and then make the payout. The difference in what you've heard could be due to the time of the year that the different statements were made to other ex-employees. However, companies that are closely-held and run as you describe often fall prey to the tendency to apply the pension rules a bit ad hoc. So you might want to keep asking them, if you quit, for payout and prod them along, asking why others received their benefits more quickly, etc.

The automatic IRA rollover rules took effect 3/28/2005. I am looking over the documents of a plan (new to me) that has an amendment reducing the mandatory distribution threshold from $5,000 to $1,000, rather than specifying auto IRA rollovers. The problem is that the amendment was signed 3/7/2006, stating that it applies back to 3/28/2005. In operations, the plan failed to make automatic distributions to former employees regardless of the how small their accounts, either $5,000 or below prior to 3/28/2005 or $1,000 or below on and after 3/28/2005. I was unaware that there was any retro period for adopting the automatic IRA rollover rules (or reducing the mandatory distributions threshold to $1,000), effective back to 3/28/2005. Is this a situation where there has been an interim amendment failure needing VCP?

Hi again, Don, When at the state regulatory level, does one size fit all? Probably not, but many states don't differentiate or have levels of compliance for health insurers, the full regulatory scheme would apply to all, including surplus levels. If the MEWA gives discretion to the VEBA trustees to self-fund or fund through insurance contracts, the impact on benefits that would go along with different VEBA funding levels would need to be taken into account by those VEBA trustees in making a prudent decision. However, most VEBAs that I've seen specify self-funding or insurance in the trust document. That would be a settlor decision by the sponsoring employer, and as a settlor function generally would not implicate fiduciary duty.

Hi, Don, I think the reason that ERISA preempts state law when there are benefits, even insurance like coverage, provided by a single employer to its employees is that because the underlying relationship (employer-employee) is a matter of regulation of state law, and because that relationship is continuing, the employees are better able to monitor and sense what is happening at the employer level than if the relationship did not exist. When this is coupled with the desire to allow companies with employees in more than one state to deal with just a single, uniform law/regulations, ERISA preempts States' benefit laws from applying. Whenever a plan is maintained by two or more unrelated employers, a MEWA, the employees only have that proximity of relationship with one participating employer. That one participating employer does not have the control over the MEWA that such employer would over a single employer plan, albeit the employer may participate along with other employers sponsoring the MEWA in its funding and administration. In a MEWA situation, an employee only has that proximity of relationship with one of the group of decision makers regarding the MEWA. There, the situation between the covered employee and the MEWA is more akin to a relationship between the covered individual and an unrelated insurer--which states do find the need to regulate. When a state regulates a MEWA the same as a commercial insurer, the state is providing the covered individual some protection against underfunding and other mischief. This type of regulation is more needed where the coverage is self-funded by the MEWA than where insurance is involved, because the insurance is provided by a commercial insurer subject to the state's regulation. Of course, the concept of extending ERISA's preemption to association health plans has been debated much in recent years. To date, no legislation has been adopted to so extend the reach of ERISA preemption. I do agree with vebaguru's comment that from an ERISA fiduciary's point of view, there are more duties when insurance is involved. When self-funded, the fiduciaries must be concerned about the adequacy of the funding to meet the promised benefits obligations. When insurance is involved, the fiduciaries must select and monitor the insurance carrier to be used, and likely need to drill down to consider the insurance company's ratings, history and funding level. Even though the insurance company must meet certain funding standards set by the state, it might yet not be prudent to select an insurance company that does not have capital in excess of that required by the state.