pjkoehler

mjb: If the employer made up the shortfall plus lost earnings after discovering the TPA's mistake, then there is no fiduciary liability issue. It's not clear from the first message whether the employer thinks that its obligations to make the minimum required top heavy contributions are contingent on the likelihood of recovering damages from the TPA. But, if that's the case, I hope you see the fiduciary liability issue. The TPA could be judgement proof and it wouldn't affect the employer's fiduciary obligations to the plan. Some of the confusion stems from who "the client" is. One way to interpret this is "client" means "participant." The problem with the employer suing the TPA is (1) it's prohibively expensive, (2) it's difficult to measure the employer consequential damages and (3) there is probably all sorts of liquidated damages provisions in the administrative service agreement that reduce the TPA's exposure to a miniscule amount. Certainly, the TPA is not liable to restore the minimum top heavy contribution itself, but perhpas the lost earnings and costs of administration, amended 5500s, etc. . The best approach is probably to either demand a credit against future TPA fees or just fire the TPA and exercise greater care in hiring and monitoring a new one.

Eilano: Isn't the concern here that the employer knows of the TPA's mistake or disputes that the error occurred and so is not inclined to accede to the participants' view that it underpaid the minimum top-heavy contribution? If so, then the nonkey employees and the employer are adverse on this issue and an outcome satisfactory to them cannot be expected to result from the course of action mjb suggests. mjb: First, I'm sure you know that an employee lacks standing to bring a claim for wrongful denial of benefits under ERISA section 502(a) until the employee is eligible for payment of the amount in dispute under the terms of the plan. If the employer didn't make the minimum top heavy contributions, then all nonkey employee participants are adversely affected by the underpayment and lost earnings. Unless they have terminated their employment or otherwise become eligible for a distribution, they have no cause of action under 502(a) for wrongful denial just because the TPA made a mistake that the employer failed to correct it. Second, a 502(a) action is a claim against "the Plan." In this case it's the Plan that got short-changed by the employer's reliance on the incompetent number-cruncher. How does the plan make up the shortfall unless the employer makes it up? Third, in view of your aversion to "federal cases," I'm sorry to inform you but an action under ERISA Sec. 502(a) . . . yep, you guessed it - federal courts have jurisdiction to hear this claim. Fourth, most of the provisions of an ERISA Title I plan that is a qualified plan are there by dent of the requirements of tax qualification, e.g. top-heavy rules. So what? Once set forth as a plan term, ERISA requires plan fiduciaries discharge their duties in accordanced with such terms. Do you advise that the aggrieved nonkey employees just wait around to pursue their claim for the underpayment plus lost earnings until they eventually become eligible to receive a distribution through voluntary termination, layoff, death or what have you, perhaps many years from now or employer relents? (That's a rhetorical question.) Eilano what do you think? In contrast, these participants have standing to bring a breach of fiduciary duty claim right now to enjoin the employer to make the minimum top-heavy contribution and mitigate the potential lost earnings. More importantly, ERISA's statute of limitations is running and they'll lose the opportunity if they don't commence the action before it runs.

eilano: There's generally a fiduciary around somewhere who is a likely defendant. In this case, the plan administrator (probably the board of directors - but check the plan document) relied upon a contract administrative service agent. Assuming the service agent didn't engage in any discretionary activities that would have rendered it a fiduciary (and there's no indication on the facts you've given us that the TPA did anything other than screw up the top heavy calculation, which isn't a discretionary act), then the fiduciary breach would be a claim brought by the participant against the plan administrator, as fiduciary, probably on a theory that the failure to seek collection of the unpaid minimum contribution from the employer was a failure to discharge its duties in accordance with the plan documents. The participant is not in privity with the TPA, although the participant might be able to argue that he is a third-party beneficiary of the service agreement between the company and the TPA. Nonetheless, bringing a breach of contract action against the TPA in state court is probably not a cost-beneficial exercise. Far better, to bring an ERISA action for breach against the plan administrator for failure to seek collection of the unpaid top heavy minimum contribution. If the Plan Admininstrator and the employer are one and the same, well then ... we have mother's milk to the ERISA plaintiff's bar - the classic conflict of interest, which is yet another theory for fiduciary breach as well as a potential prohibited transaction. The more effective approach here is not to sue the incompetent number-cruncher, but rather the fiduciary that engaged the incompetent number-cruncher and who turned its back on the losses incurred by the plan in reliance upon the incompetent number-cruncher top heavy calculations.

eilano: The answer depends on what theories of recovery the plaintiff pursues. ERISA imposes a federal statute of limitations with respect to claims of fiduciary breaches. See ERISA Sec. 413. In general, the plaintiff must commence the action no later than the earlier of - 6 years after the date of the last action which constituted a part of the alleged breach or, in the case of a failure to act, the latest date on which the fiduciary could have cured the alleged breach; or - 3 years after the earliest date on which the plaintiff had actual knowledge of the alleged breach, BUT In the case of fraud or concealment, the plaintiff must commence the action no later than 6 years after the date of discovery of the alleged breach.

LVanSteeter: Since the effective date of the amendment apparently occurred during the 2001 plan year, the plan would have had MPP characteristics during the pre-effective date period and PSS characteristics thereafter. It would be logical to code the response to question 8a as you indicate. While there is nothing in the instructions that makes use of these two codes mutual exclusive, I guess it's not beyond doubt (but unlikely) that the IRS data match software could be designed to flag it and request a written explanation. More importantly, I trust the plan sponsor was fully observant of the pre-EGTRRA version of ERISA section 204(h) notice requirements and the dash 6 regs under 1.411(d)? Failure to have satisfied these requirements is potentially disasterous.

scottyd: Code Section 457(f) applies to ineligible plans that provide elective (salary deferrals) as well as nonelective forms of deferred compensation. The nonelective form of deferred compensation that you mention is more commonly referred to as a Supplemental Executive Pension Plan or SERP. Amounts paid or made available under a 457(f) plan are taxable to the participant under the rules applicable to the taxation of annuities set forth in Code Sec. 72 in the first taxable year in which the amounts are not "subject to a substantial risk of forfeiture." This term is defined as a condition that exists so long as a the participant's right to receive the amount requires that he yet perform substantial future services for the employer, usually considered not vested. This is the key disadvantage of the 457(f) plan vis a vis the eligible or 457(B) plan. A participant in an eligible plan is not taxable until the amount is actually distributed, even if he's fully vested. Whether restrictions other than performance of future servcies may also rise to the level of the "substantial risk of forfeiture" is a debate that recently played out in another thread. If the exempt org's executive is not inclined to take aggressive tax filing positions, deferral of taxation under an ineligible plan will require a plan design that anticipates the year in which he will first become taxable whether or not he terminates employment.

Ephrail: Isn't the answer to your "funding question" a function of how the employer contribution credit to the Funding Standard Account prescribed in Sec. 412(B)(3)(A) operates for MPPs, i.e. "the amount considered contributed by the employer to or under the plan for the plan year?" For Sec. 412 purposes, the focus is on having a nonnegative FSA for the "plan year." Code Sec. 412©(9) mandates that the plan conduct an annual valuation of the plan's liability not less frequently than once every year, which if performed on a current year basis (as would be the case of MPP) must be as of "a date within the plan year to which the valuation refers . . . ." Since, under Sec. 412©(10)(B) an employer contribution made within (effectively) 8 1/2 months after the plan year end "shall be deemed made on such last day," it would be reasonable to conclude that the balance in the FSA should be determined using the FMV of the employer's in-kind contribution as of the last day of the plan year if it is made any time during the 8 1/2 month period. See also Sec. 412©(2)(A) and Treas. Reg. Sec. 1.412©(2)-1(a)(3).

DDDLump: The SPD probably wont tell us about the limitations on the appointment of co-trustees and the segregation of assets. However, we can make an educated guess if you can find out if Company A's plan is a master or prototype plan, i.e. the sort of standardized plan document sold in tandem with a turn-key record-keeping system by an insurance company, brokerage firm, bank or other financial institution. Other thoughts: you indicate that the assets of Company B are held in a pooled investment arrangement, which I assume means that the assets are NOT participant-directed; rather, the trustee determines the net investment earnings as reported by the investment manager and ratably allocates them probably in a ratio of beginning period account balances. Such an arrangement may further deter Company A from engaging in a straightforward plan merger if, for example, Company A's plan is an ERISA 404c Plan (i.e. participant-directed) and the financial position of Company B's trust reflects significant unrealized losses. Company A could reasonably conclude it would not be prudent currently to liquidate the assets of Company B's plan for the purpose of merging them into the participant-directed arrangement of Company A's plan. Also, although the fiduciaries of Company B's Plan remain exposed for under ERISA's fiduciary standards (most notably, under the prudent expert rule, but also the documents, exclusive purpose and diversification rules), and while a merger may make good employee-relations sense, the employees of Company B should understand that they have no right to have their Plan B accounts merged into Plan A.

mjb: just for the sake of argument, let's assume that Company A's plan and trust agreement have language that permits Company A to merge the two plans and appoint the trustee of Company B's plan as co-trustee of the merged plan with respect to the former assets of Company B's plan, i.e. that Company A's plan is not a Master or Prototype arrangement and or other highly standardized plan document tied to one or another form of funding vehicle or investment media, which would almost certainly preclude such language for administrative reasons. (DDLump could check the plan and trust documents and chime in here for a little reality check?) Let me ask you a question: On what system would the valuation of plan accounts be performed? The system operated by the co-trustee responsible for the assets of former plan A wont handle this otherwise it wouldn't have objected to the transfer in the first place, right? So that leaves the co-trustee of the former plan B. Ok, now how do we consolidate the accounting information for oh say: (1) participant benefit statements, (2) 5500 form preparation, (3) plan loan calculations. etc., etc. I'm sure you get the picture. It will have to be done manually. Now, I don't think I'm going too far out on a limb here to say that even if you get over the hurdle of limiting plan language, that that sort of manual consolidation of financial information most definitely "affects the merger of the plans" to the extent that Company A could reasonably conclude it makes more sense to adopt the arrangement described in the first message of this thread.

DDDLump: If the transaction was an asset acquistion, Company A's objective may have been to insulate itself from Company B's liabilities other than those it expressly assumed to accomplish its business purposes. Company A may not see that a plan merger effects its limited business purposes. Even if this was a stock deal and Company B represented and warranted to Company A that it's plan had no qualification defects, the assets of Company B's Plan may include nonpublicly traded or other exotic assets (limited partnership interests, real property, etc), the transfer of which is declined by the Trustee of Company A's due to limitations on its record-keeping systems and valuation issues. If, in order to complete the plan merger, these assets would have to be involuntarily liquidated at a time that would cause the participant accounts to incur realized loses, Company A may be concerned about its exposure to fiduciary liability. Even if there are no exotic assets, Company A may have decided to avoid plan merger in the post-Eron era out of an abundance of caution.

Tom Greer: First of all, beyond asserting "your notions" you haven't laid out, let alone analyzed, any "arguments" that create a logical nexus between the factors taken into account under the section 83 regulations and an expansion of the term "substantial risk of forfeiture" set forth in section 457(f)(3)(B) beyond the plain language of the statute. What authority do you have for "your notions?" All your notions do is demonstrate a preference for an Internal Revenue Code, which often fuels the Zen-like belief systems apparent in these threads, in which identical terms used for arguably analogous purposes must have indentical meanings. By the way, of what possible relevance is Reg. Sec. 1.457-2(e)(3) to a discussion of ineligible plans? See what's confusing?

Tom Greer: Talk about confusing! There is nothing in the definition of a "substantial risk of forfeiture" set forth in Code Sec. 457(f)(3)(B) that refers to, "looks back" to or floats around within the penumbra of that term as it is defined Code Sec. 83. To the contrary, Code Section 457(f)(2)(3) expressly exempts "transfers of property described in section 83" from the application of the general timing rule set forth in sec. 457(f)(1). The term "property" doesn't include an unfunded and unsecured promise to pay money or property in the future. Reg. Sec. 1.83-3(e). Interpreting section 457(f)(3)(B) by imputing the section 83 principles flies in the face of this unambiguous statutory language.

ERead: In the initial message in this thread, we're told that the employer makes the matching contribution per payroll cycle. "However, neither the plan nor the SPD states that the match will be made on a pay period basis." Therefore, the initial question is whether or not the employer is determining the matching contribution in accordance with the plan terms, notwithstanding any express plan terms that support its practice as the binding interpretation of the plan by the responsible fiduciary. There are two possible scenarios: (1) If this is the fiduciary's interpretation, then why worry about true-ups? Such an issue arises only if the plan administrator takes the view that the employer matching contribution is not correctly computed by determining the match payroll cycle by payroll cycle. This is a classic Firestone fiduciary dilemma that can be resolved by the plan administrator's interpretation that this is how the plan determines the matching contribution. That's enough under Firestone. Disgruntled participants who think otherwise can have at the fiduciary on a theory of breach, but there cause of action will go no where unless they can show that such a construction was unreasonable on its face. (2) The employer only matches on a payroll cycle basis for administrative convenience but would like to true-up. Ok, no problem, assuming the plan administrator (who is also probably the employer or some delegate) interprets the plan to require that matching contributions be determined on an annual abasis. Let the employer make the true-up when necessary. Either way, it's initially an interpretation by the responsible fiduciary, communicated to participants and reflected in subsequent plan amendments and SPD restatements. Trying to devine the one true meaning of undefined or poorly defined plan terms, is like searching for the settlor's intent. If plan language is subject to multiple reasonable interpretations then it is indisputable "truly ambiguous" in that regard. No need to get into a literaray exegesis of plan text. Courts will not second-guess fiduciary's that can show their interpretation was based on a reasoned judgement. That's where the buck is supposed to stop. The lesson of Firestone, is that plan fiduciary's who don't make official interpretations may be second-guessed by the courts.

jpod: Let's try to keep this on terra firma. I don't think you've framed the issue correctly. We're not looking for a plan provision that sets conditions which must be satified before the 60-year old, former employee "gets" his money. We're looking for a plan provision that sets conditions the lapse of which automatically causes the executive to forfeit his entire benefit. This is an essential distinction with deferred comp plans of taxable entities with respect to which a risk of "forfeiture"may exist even if the employee is fully vested under the terms of the plan. Are you saying that you have a 457(f) plan under which a 60-year old, former employee forfeits his entire account balance if the company fails to achieve specified performance goals over a 2-year period and that the achievement of these goals is subject to a substantial risk of not occurring. You raise an interesting theoretical question, but I've never seen a plan where an executive placed such a value on a 2-year tax deferral over benefit security. If the deferred comp is anything other than play money, that's a heck of a roll of the dice for anyone on the threshhold of retirement to make. I suspect that virtually no one would participate in such a deferred comp plan and that's the reason for the lack of any official guidance on the question you ask.

One of ERISA's fundamental fiduciary duties is to act in accordance with the governing instruments of the plan. How is a fiduciary to do that in this case? To "true-up" or not to "true-up?" The responsible fiduciary cannot be "stuck" within the quandry of ambiguous plan terms and still satisfy this standard. There's no punting when you're the fiduciary. ERISA provides for this magical, ambiguity-resolving mechanism called discretionary authority. The fiduciary has to use the discretion that makes it a fiduciary to construe the plan to eliminate the ambiguity. Firestone allows the fidiuciary to "read" such a provision into the plan as long as such a construction is reasonable. I'm not suggesting this problem doesn't reflect poor plan draftsmanship and the employer should definitely communicate the decision to the participants and incorporate it into the next plan amendment and SPD restatement. I'm also not suggesting that it would be equally reasonable either way. That should not deter the fiduciary. Under Firestone, it doesn't matter how many alternative reasonable interpretations could have been made, it just matters that the fiduciary's interpretation was itself reasonable. To satisfy the reasonableness standard, the fiduciary may have to research the plan history, consider the plan's pattern or practice of not providing true-ups, any exposure to disqualification that any interpreation might create, etc. . While others may disagree with the fiduciary's interpreation, the plan provides that the fiduciary's reasonable construction has more far reaching implications, i.e. it has the force plan language.

jpod: I'm not aware of any case law that concluded that 457(f)(3)(B) was somehow ambiguous and should be given a more expansive reading. If you're looking for a policy reason that may have motivated Congress to use this more stringent standard, you should research the Committee Minutes. There, you'll find that Congress was concerned that, unlike deferred compensation plans for employees of taxable entities where a natural tension between the employee's ongoing deferral of taxation and the employer's desire to obtain a compensation expense deduction arises, tax exempts have no financial interest in the length of the deferral of their employees. Thus, to avoid the potential of indeterminate deferral periods in 457(f) plans, Congress imposed a more stringent standard of the "substantial risk of forfeiture."

MWeddell: I'm not sure how to interpret your statement: "if the plan is silent on the issue, the document may be worded in a way that implies that the match is calculated annually." But, anyway . . . all plan documents contain terms that are arguably ambiguous (otherwise plan documents would be very lengthy). Although this is isn't intentional, the ambiguity arises typically because the document is not an administration manual. For that you need the plan administrator, who based on the responsible fiduciary's interpretation of such terms, sets forth administrative procedures and rules that resolve the ambiguity. A well-drafted plan will contain a provision that allows the plan administrator to construe the meaning of plan terms. The Supreme Court provides a milestone analysis of the importance of such a provision in Firestone Tire & Rubber v. Bruch, 489 US 101 (1989). There the challenged plan term was the definition of the term "participant." The Court held that so long as the plan document assigns the duty of interpreting the meaning of plan terms to the plan administrator, a court should defer to the administrator's interpretation unless that party making the challenge can show the administrator's interpretation was an abuse of his discretion (i.e. was totally unreasonable) or unless the plan administrator was subject to a conflict of interest in making the interpretation. When an ambiguous plan term is discovered, the potential for a dispute can be minimized if the administrator makes an official determination in writing, which is then disclosed to the participants. In the absence of this, should a dispute arise, a court may have no record of the administrator's interpretation of the challenged term and would be constrained to makes its own determination on the merits (which is always a risky proposition).

If the plan and SPD language is actually ambiguous on this issue, the plan fiduciary(ies) with the authority to interpret the plan document (most likely the Plan Administrator or administrative committee) should be asked to clarify this plan term by adopting the current pattern or practice as the meaning of this term pursuant to whatever rules of internal governance under which it operates (resolutions, committee meeting minutes, etc.) This should also be distributed to the participants under the SMM timing rules. This administrative interpretation should be incorporated in the next plan amendment and SPD restatement (as a clarification of the original plan language).

smm: Kirk is right. Take a look at the definition of "substantial risk of forfeiture" set forth in Sec. 457(f)(3)(B). Such a condition exists only so long as the participant would forfeit its right to receive the "compensation" by failing to perform substantial services for the employer in the future. The lapse of such a condition almost certainly occurred because the plan gives the employee the right to an immediate distribution on termination of employment. Sec. 83 is not applicable to taxation of deferred compensation. See Reg. Sec. 1.83(d)(e). The noncompete agreement mentioned in Reg. 1.83-3(B)(2) is not a factor given any significance in the 457 regs for purposes of the timing rule set forth in Sec. 457(f)(1)(A).

kman: Although the IRS has not been actively litigating constructive receipt second election cases post-Martin, even if the proposed plan amendment is on "all fours" with the facts in Martin, you might, out of an abundance of caution, consider amending the plan to provide two different installment option elections with respect to current plan participants: (1) a first-time election for their future deferrals (i.e. the first day of the calendar year following the effective date of the amendment) and (2) a second election as to their earlier deferrals, i.e. those subject to a pre-amendment election, on the condition that the second election must provide for the same form of benefit as the first-time election. This would eliminate some of the potential administrative burden of bifurcated accounts, while limiting the deferrals subject to IRS challenge to those subject to a second-election.

kman: Sec. 83 is not applicable to traditional deferred compensation plans because the term "property" does not include the employer's mere unsecured and unfunded promise to pay money in the future. Treas. Reg. 1.83-(e). The twin doctrines of constructive receipt, codified at Sec. 451, and economic benefit, codified at Sec. 402, govern the timing of taxation of deferred compensation generally. I suggest you read the Martin case with respect to an employee's second election to change a lump sum method of payment to an installment method and/or defer the benefit commencement date. Martin v. Comr. , )96 T.C. 814 (1991), appeal dism'd (10th Cir. 1992). The tax court laid out a five-factor analysis in holding that an employee permitted to make a second election to change the method of payment from lump sum to installment was not in constructive receipt of the entire amount.

Payroll systems whether vendor-based or proprietrary in all but the most primitive, "green eye shade" record-keeping and processing environments can produce all the information that is necessary to compute the amounts withheld from individual employee paychecks within a matter of 7-10 business days on average at the absolute outside, even allowing for the occaisional misstep. ADP, for example, boasts of a 24-hour turnaround following the payroll cycle processing date to prepare a report that details the employee salary deferral breakdown. How much more information does the employer need to cut the check to the trustee? As far as the 15th day rule is concerned (which by the way is actually the 15th "business day" rule and ends up being as much as 52 calendar days from a first day of the month pay period end) it is merely the date beyond which the employer would technically have strict liability for a failure. Prior to that date, the employer can avoid liablity by showing that its payroll system was incapable of producing the information sooner or, if it did, the deposit lagged this date for plan-related reasons. A burden only the most uncommon fact patterns imaginable could satisfy after 10 business days, e.g. hundreds of locations with different systems, etc. (and even that may be too generous). As a practical matter, for the vast majority of plan sponsors, the 15th-day rule should be ignored. It will never apply to them. The magical date on which payroll deductions are transmuted into the "plan assets" for ERISA Title I purposes will simply have to be determined on facts and circumstances basis, but given the emerging uniformity in payroll processing software and payroll cycle regimes, there will rarely be wide discrepancies between similarly situated employers. The employer who fails to deposit by that date has engaged in a prohibited extension of credit from the plan at the very least. Several other "per se" PTs might well apply, as well as self-dealing theories, were the employer is extremely negligent. Some parties who wilfully diverted these funds are now guests of a federal correctional institution.

RLL - ever heard of reading the first message in a thread? It helps to keep the comments on point; to wit: "client decided to forgive one of the payments due from ESOP last year." I'm sure you're going to tell me that this should be interpreted as evidence of renegotiation rather than the lender's ad hoc departure from the terms of the note. What's the point of engaging in the formalities of renegotiation and dealing with those sticky contract law issues like consideration, enforceability, statute of frauds, etc.; when the parties are content to make-it-up as they go along.

IRC401: Not everything that has form has no substance. Compensatory stock options that do not have RAFMV are taxable at exercise regardless of when they vest under Code Sec. 83. An option agreement (with exercise price discounts that do not exceed 75%) impose material economic detriment to obtain the benefit, expiration deadlines and no ERISA protections. These distinguish it from an ERISA "top hat" plan. If all the actuarial assumptions that are used to determine the value of a participant's account balance in a Cash Balance Plan are exactly realized, then it produces the same "economic" benefit as a Profit Sharing Plan that had similar cash flows and investment experience. Because that is possible, does that mean that a Cash Balance Plan and a Profit Sharing Plan are identical and that all other distinctions should be ignored for purposes of determining deduction limits, funding requirements, etc.? Arguments can be made on both sides of this. If you're on a crusade to shoot these programs down, you can make a strong argument. In the post-Enron era, the IRS may have decided that time is right to pounce on these arrangements. But that doesn't mean the issue if free from doubt.

I guess what I'm saying is that the methods of curing the borrower's default should be prescribed in the note. The thread describes the proposed method inconsistently. Forgiveness and granting the plan a payment holiday and tacking the missed payment to the end are distinguishable and neither is probably one of the prescribed methods. The plan document may not have pledged securities release rules that adapt to either transaction. So you have fiduciary "document's rule" issues for one thing. If the tacking extends the repayment period, the requirement that the loan be for a specific term may be an issue for another. Reg. 54.4975-7(B)(13).