KJohnson

This link has an extensive discussion of the 410(b) testing and ADP/ACP testing issues in an irrevocable waiver situation. http://benefitslink.com/boards/index.php?a...=ST&f=20&t=4708 When it is not an irrevocable waiver I think you have an issue. I know that some plans allow this, even prototypes, but I think that if the employee is "getting something" for the waiver, you may well have an issue regarding another impermissible CODA within the 401(k) Plan. For what it is worth, the 401(k) Answer Book seems to have a related concern when it says that "Unless the waiver is irrevocable, any such waiver provision could attract the scrutiny of the IRS, which might argue that the ability to rescind the waiver on a year-by-year baisis is tantamount to a cash or deferred election". The Answer Book goes on to note that unless the waiver meets the "irrevocable" requirements, the "waiving participant" must be included in the ADP and ACP tests as "Os". As Tom notes (and as the reg and the discussion in the post linked above indicate) if the waiver is irrevocable, then I think it is pretty clear that they are not included in the ADP and ACP test at all.

You're such a stickler....

I think the question you have to ask is: Why is the participant waiving participation in the plan? Is it because he or she will be getting some additional amount in cash or vacation or health benefits etc from the employer ? If so, I think you would have a problem under 1.401(k)-1(e)(6). The participant would be receiving other benefits from the employer in return for not participating in the plan.

I AGREE WITH THE PRIOR POST. HERE IS SOME ADDITIONAL CONFIRMATION: http://benefitslink.com/cgi/qa.cgi?databas...a_distributions

I am not sure where the "minutes by the end of the year requirement " comes from unless the employer decides to alter its matching allocation formula. I have tried to find the basis for this "rule" and have not come up with anything. It is true that a plan’s formula for allocation any profit sharing plan amounts must be definitely determinable under 1.401-1(a)(2)(ii). This includes the allocation of match amounts. I think that the IRS has been inconsistent in “catching” this issue with regard to allocation of discretionary matching contributions. Typically, when it does, it forces a plan to put in an allocation formula that states that, while the match is discretionary, it will be based on a discretionary percentage of the amount of deferrals made by participants (i.e. language like “a matching percentage that the employer deems advisable of the participant’s 401(k) deferrals”). Thus, the amount of match is discretionary but the allocation formula is not. Once you have this language in, I could see an issue if you did not have minutes in by the end of the year and you wanted to modify the allocation formula. Let’s say at the end of the year, the employer decides that it doesn’t want to match any deferrals above 4% of compensation so that its matching formula would be -- 50% of all deferrals made, provided that no deferrals over 4% of compensation will be matched. The problem here is that while the 50% match is fine under the Plan’s "definitely determinable" formula, the 4% “cap” is not in the plan document. Thus, the employer would need minutes changing the match for that year before an employee accrues a benefit under the formula (assuming a last day of employment requirement for the match). In other words corporate action would have to be taken before the participant “accrues” the right to the match with no stated cap. However, if under the example above, the employer decided that it would match 50% of all deferrals with no cap, I don’t see any reason why the minutes would have to be in place by the end of the plan year. Wouldn't this just be the same as a discretionary profit sharing contribution? As long as you follow your allocation formula, you have until the time for filing the corporate tax return to decide on the amount of the match. This has come up on several occassions, and outside what is discussed above I haven't been able to locate the rationale for the "minutes by the end of the year" requirement. I haven't gone looking at PLRs or TAMs, but does anyone else know of anything out there that is definitive on this issue?

Katherine, I think that you are right from the Act side but not the Code side. There is no 404© in the Code and I think the IRS took the position (and won) that PT's can still arise and the 4975 excise tax can still apply by treating the participant as the "fiduciary" with regard to a participant directed account. I think the case was called Arden Bowl. I don't have a cite handy. num1sherm--Are you referring to an "after-tax account" inside the plan our outside the plan?

I HAVE THE SAME ISSUE.

GBURNS-- The problem is that the individual account holder is not the investor who is required to receive the prospectus. The plan is the investor. Therefore it is my understanding that the only securities requirement is to provide the prospectus to the plan. How it gets from the plan to the individual participant is the problem. My experience is that the sponsor, the TPA, and the invesment professionals often assume, to the extent that they think about it, that someone else is responsible. Ironically, the 404© requirement is for the plan to provide the prospectus to the extent that it has a prospectus. Thus if the plan did not have the prospectus, then it would not have a 404© requirment to provide it to the participant... but the SEC requires the plan to receive a prospectus.... Also, to the extent that a mutual fund is an investment option under a group annuity contract then it is my understanding that there is no SEC requirement that the plan receive a prospectus (its investment is the GAC and not the mutual fund). Therefore since the plan does not receive a prospectus it has no requirement to provide it to participants. This is just another thing about the 404© regs that mak no sense...

I agree with the points about the audit trigger and if you think there are other problems "out there" this could be a concern. Also, you have to factor in the administrative costs of responding to an audit. However, if you have self-corrected according to VFC guidelines and the failure to remit deferrals is the only other problem that exists, then I think the cost-benefit analysis changes. It would seem that the DOL might be able to get the 5% penalty under 502(i). But again, you are only dealing with the "amount involved" which is just the interest on deferrals. I am not sure what penalty that could obtain under 502(l) if the problem has already been self-corrected before they even begin their investigation. Then, of course, there is the issue of whether you will be audited at all (rolling the dice). Finally, the 502(l) penalty is offset by the 502(i) penalty and 4975 excise tax. Of course DOL still might take action to "remove fiduciaries" but I would think that unlikely in an instance where deferrals were late a time or two over a several year period. I try and set this all out for companies who run into this problem.

That makes sense. I think the 6621 rate also makes sense if that is the minimum that DOL thinks will make a participant "whole". I think it just needs to be a reasonable rate of interest.

Where did you get prime plus 2 as the rate to use in calculation the interest upon which to base the excise tax? I have always just gone ahead and used the applicable 6621 rate as the "reasonable" rate of interest for purpose of calculation of the excise tax as well as calculation of the "base" amount to be restored to participants accounts. I have a "heck" of a time getting the TPA's to make the caluculation of what the account "would have been" based on the participant's investment elections if the deferrals would have been deposited in a timely fashion. This actually got relatively easy when everyone's account was going down. I would typically see if there were any investments in the plan that made money during the period of the "delinquency" and then see which participants were invested in any of those accounts. This would be the first "cut." Everyone else got the 6621 rate. Then I would look at the weighting of the investments of the participants that had investment choices that made money during the period of the delinquency. Most of these were in cash or or cash equivlaents and the rate of return on the cash would be less than the 6621 rate. In most cases I would only need actual investment returns run for, at most, a handful of participants. Of course some investment choices are actually making a decent return now and this "winnowing" of those that you need actual investment return data for will not be as effective.

You don't send them checks, the IRS will forward a letter drafted by the plan informing the individual that they have benefits coming to them and giving them the contact information to receive a distribution package. I have found the IRS letter forwardng program very effective. For one terminating plan, we sent the IRS seven letters to forward about two weeks ago and there were four calls on my voice mail this morning from these "lost" participants who had received the letter.

Here is an interesting thread about the pros and cons of combining the plan document and spd http://benefitslink.com/boards/index.php?showtopic=6025

I think a number of multis have started having a single document that serves as both the plan and the SPD for their welfare plans. This makes a good bit of sense because in many Circuits the SPD will control over the plan in any event and people have realized that you do not need to fill a plan with "legalese" (especially in the welfare context) to have a workable plan document. However, these plans are typically funded through VEBAs and there should be a separate trust document.

Prudence and diversification are two separate ERISA requirements under 404. You could invest the entire plan in a single asset and, perhaps, in certain situations this might be prudent but it would violate the separate diversification requirement. Without 404© protection (in DOL's view) it is the trustee (or in the case of a directed trustee typically the "named fiduciary") who is responsible for making asset allocation decisions even if the applicable fiduicary is only following participant instructions. Therefore, I believe that DOL would analyze the fact situation presented by the original poster as a fiduciary electing to put 50% of all of the plan's assets in one security. You raise an interesting point on whether the issue of "diversification" is on a plan level or on an individual account level, however the original post indicated that 50% of the entire plan is now invested in the bank securities.

You might want to look at this thread: http://benefitslink.com/boards/index.php?showtopic=1490 And these DOL advisory opinions: http://www.dol.gov/ebsa/programs/ori/advis...ry94/94-24a.htm http://www.dol.gov/ebsa/programs/ori/advis...ry94/94-23a.htm http://www.dol.gov/ebsa/programs/ori/advis...ry94/94-22a.htm

Kirk, How is the purchase of bank stock by a multiemployer fund the purchase of an employer security exempt under 408(e)?

Just using the language of the original poster. DOL's position (and I believe the law) is clear in that you have a duty to monitor investment options offered. If those options are unsuitable, you have the duty to take action. 404© does not get you around this requirement. As to the "insider trading" argument--here is what DOL had to say: . The Administrative Committee Members Could Have Taken a Number of Steps, Consistent With Their Duties Under Federal Securities Laws, That May Have Protected Participants in Accordance With the Fiduciary Provisions of ERISA In their motions to dismiss, the Administrative Committee Defendants and Olson have responded to the Plaintiffs' allegations by arguing, among other things, that they could not have taken action to protect participants without engaging in insider trading in violation of securities laws because the information was not public. See Olson Mot. to Dismiss at 12; AC Mot. to Dismiss at 28-29. While they allegedly sold millions of dollars worth of their own Enron stock during this time period, Complaint at ¶¶ 64-92, 272, 681, they (Olson in particular) contend that because the information they had or could have obtained about accounting irregularities was not public, disclosing the information to the participants would have made the Administrative Committee Member Defendants criminally liable for insider trading, and would have rendered the participants who traded on the information "tippees" subject to disgorgement of profits. Olson Mot. to Dismiss at 12-13. Thus, Olson contends, the Plaintiffs' claim that she "breached her fiduciary duties by failing to do something that was illegal and utterly impractical, also should be dismissed." Olson Reply, at 7. Liability for insider trading is based on § 17(a) of the Securities Act of 1933, 15 U.S.C. 77q(a), § 10(B) of the Securities Exchange Act of 1934, 15 U.S.C. 78j(B), and SEC Rule 10b-5, 17 C.F.R. 240.10b-5. Section 17(a) provides that "it shall be unlawful for any person in the offer or sale of securities . . . to employ any device, scheme, or artifice to defraud, or . . . to engage in any transaction, practice or course of business which operates or would operate as a fraud or deceit upon the purchaser." Section 10(B) similarly provides that it shall be unlawful for any person "to use or employ, in connection with the purchase or sale of any security . . . any manipulative or deceptive devise or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors." Likewise, SEC Rule 10b-5 makes it unlawful "[t]o engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security." 17 C.F.R. 240.10b-5. Although these provisions do not mention or specifically forbid "insider trading," in the seminal case of In the Matter of Cady, Roberts & Co., Exchange Act Release No. 34-6668, 40 S.E.C. 907, 1961 WL 60638 (Nov. 8, 1961), the Securities and Exchange Commission recognized that Rule 10b-5 incorporates the affirmative duty imposed by the common law of some jurisdictions on "corporate 'insiders,' particularly officers, directors, or controlling stockholders" to either disclose material nonpublic information before trading or to abstain from trading altogether. Id. at *3. The SEC set forth two elements for establishing a 10b-5 violation: "first, the existence of a relationship giving access, directly or indirectly, to information intended to be available only for a corporate purpose and not for the personal benefit of anyone, and second, the inherent unfairness involved where a party takes advantage of such information knowing it is unavailable to those with whom he is dealing." Id. at *4. The fraud necessary for establishing a Rule 10b-5 violation arises only where the insider fails to disclose material nonpublic information before trading on it and thus makes "secret profits" at the expense of those to whom he owes a fiduciary duty of loyalty. Id. at *6 n.31.(7) The Supreme Court endorsed this basic approach in subsequent cases. Chiarelli v. United States, 445 U.S. 222 (1980); Dirks v. SEC, 463 U.S. 646 (1983). Defendants' duty to "disclose or abstain" under the securities laws does not immunize them from a claim that they failed in their conduct as ERISA fiduciaries. To the contrary, while their Securities Act and ERISA duties may conflict in some respects, they are congruent in others, and there are certain steps they could have taken that would have satisfied both duties to the benefit of the plans. First and foremost, nothing in the securities laws would have prohibited them from disclosing the information to other shareholders and the public at large, or from forcing Enron to do so. See Cady, Roberts, 1961 WL 60638, at *3. The duty to disclose the relevant information to the plan participants and beneficiaries, which the Plaintiffs assert these Defendants owed as ERISA fiduciaries, is entirely consistent with the premise of the insider trading rules: that corporate insiders owe a fiduciary duty to disclose material nonpublic information to the shareholders and trading public. See id. (incorporating common law rule that insiders should reveal material inside information before trading); see also Plaintiffs' ERISA Opposition at 39 n.18 (arguing that these Defendants could have publicly disclosed or forced Enron to disclose before selling the stock). Second, it would have been consistent with the securities law for the Committee to have eliminated Enron stock as a participant option and as the employer match under the Savings Plan. Indeed, the Complaint alleges that "had Olson and the Committee immediately discontinue Enron stock as an investment option for new contributions," once Olson had learned of Watkins' allegations, the "employees would have been prevented from throwing another $100million into Enron stock, as they did between August and December 2, 2001, in large measure because of the continued encouragement" to do so by Lay and the continued investment of the employer match in Enron stock. Complaint at ¶ 689. The securities rules do not require an individual never to make any decision based on insider information. To the contrary, the insider trading rules require corporate insiders to refrain from buying (or selling) stock if they have material, nonpublic information about the stock. Thus, the "disclose or abstain" securities law rule is entirely consistent with, and indeed contemplates, a decision not to purchase a particular stock. See Condus v. Howard Sav. Bank, 781 F. Supp. 1052, 1056 (D.N.J. 1992) (it is perfectly legal to retain stock based on inside information; violation of insider trading requires buying or selling of stock). It would have been entirely consistent with the securities laws for the fiduciaries to have eliminated Enron stock as a participant option and the employer match. The Administrative Committee had no affirmative duty to injure the plan by continuing to purchase stock that they allegedly knew or should have known was artificially inflated. Finally, another option would have been to alert the appropriate regulatory agencies, such as the SEC and the Department of Labor, to the misstatements. Defendant Olson's assertion that a general disclosure (which she decries as "utterly impractical") would have caused more harm to the plans, see Olson Reply, at 7 & n.7, is clearly a factual issue not amenable to disposition on a motion to dismiss. Indeed, her argument makes the counter-factual assumption that the stock would not ultimately have plummeted in value without regard to the fiduciaries' conduct. In actual fact, the stock's market high was not permanently sustainable and the plans' stockholdings lost essentially all their value even without disclosure by the fiduciaries. Moreover, if the improprieties had been disclosed earlier, it is possible that Enron would not have engaged in further corporate malfeasance. But even if disclosure was not an option, the fiduciaries may have significantly reduced the harm to the plan by eliminating Enron stock as an investment option for participants and by investing the matching employer contributions in something other than Enron stock. Assuming the truth of the Plaintiffs' allegations, the Savings Plan was purchasing stock at inflated prices as a result of Enron's fraud on the market. Merely by putting a stop to the plan's purchases, the fiduciaries would have avoided much of the losses that resulted when the bottom fell out of the market for Enron stock because the Plan would not have purchased the inflated stock in the first place. According to the Complaint, plan participants expended over $100 million on Enron stock from August to December 2001 alone (the period after Lay and Olson had received the Watkins memo). Complaint at ¶ 689. Defendants can point to only one ERISA case, Hull v. Policy Mgmt. Sys. Corp., No. CIV.A.3:00-778-17, 2001 WL 1836286, at *2 (D.S.C. Feb. 9, 2001), to support their argument that any action they could have taken would have violated the insider trading laws. The court in Hull, however, noted that the plaintiffs did not allege that the fiduciaries responsible for investments had any knowledge of any misinformation concerning the company stock or that they participated in the dissemination of information they knew or should have known was misleading. Moreover, to the extent that the court suggested that fiduciaries of employee benefit plans holding employer stock might be in violation of securities laws if they refrained from additional purchases, the decision is simply wrong. Compare Dirks, 463 U.S. at 661 (1983)(viewing the Cady, Roberts rule as requiring insiders to disclose the insider information or refrain from trading the stock). In sum, Plaintiffs have alleged that, instead of taking some action to protect the plan participants, the fiduciaries continued to purchase stock at inflated prices, which proved unsustainable and ultimately resulted in millions of dollars in additional losses – losses that would not have occurred if the plan had simply not continued to purchase the stock. While the Administrative Committee arguably could not have sold the plan's Enron stock without full market disclosure, they were neither allowed under ERISA nor required under securities law to do nothing.

There very well may be. I just glanced through 408 and nothing jumped out at me as a statutory exemption. However, there could well be a DOL class exemption. I haven't gone back and looked.

Kirk, I guess you are right absent the stock being puchased directly from the bank or its officers, employees, directors, or 10% shareholders.

1) Performance and diversification are two separate issues. Your performance can be out of this world and still have a breach of fiduciary duty for diversification. However, what the relief for such a breach would be (other than possible removal of fiduciaries) is a question. 2) Even if the Plan were 404© compliant the trustees of the multiemployer plan, in the DOL's view, would still be liable if the bank stock "pulled an Enron" See the following from DOL's amicus brief in the Enron case: Even if the Savings Plan were a 404© plan, the Defendants could not escape liability if the allegations of the Complaint are true. By its terms, ERISA § 404© provides relief from ERISA's fiduciary responsibility provisions that is both conditional and limited in scope. The scope of ERISA § 404© relief is limited to losses or breaches "which resulted from" the participant's exercise of control. Section 404© plan fiduciaries are still obligated by ERISA's fiduciary responsibility provisions to prudently select the investment options under the Plan and to monitor their ongoing performance. See Advisory Opinion No. 98-04(A) ("In connection with the publication of the final rule regarding participant directed individual account plans, the Department emphasized that the act of designating investment alternatives in an ERISA section 404© plan is a fiduciary function to which the limitation on liability provided by section 404© is not applicable."); Letter from the Pension and Welfare Benefits Administration, U.S. Department of Labor to Douglas O. Kant, 1997 WL 1824017, at *2 (Nov. 26, 1997)("The responsible plan fiduciaries are also subject to ERISA's general fiduciary standards in initially choosing or continuing to designate investment alternatives offered by a 404© plan.").(9) Consequently, if, as alleged, the Defendants violated their fiduciary duties when they continued to offer Enron stock as an investment option, they are personally liable for the losses. 3) 404© compliance would give you relief from participant asset allocation decisions and, I think, may well provide you with relief if a "diversification problem" arises because of participant direction of investments. However, DOL's view is that without 404© compliance you have no such protection. If 50% of the assets of the plan are invested in one stock you surely might have a diversification issue. 4) The bank is a party in interest by serving as a directed trustee. There may very well be a prohiibited transaction exemption for the continuing purchase of bank stock, but you may want to verify this.

I agree with Tom. The soon as administratively possible standard is the deadline for getting them to the Plan. If they are not segregated and remitted to the plan in that time period you have a prohibited transaction and fiduciary breach by the corporation and/or its officers. However, once the money gets to the plan a different analysis applies. Failing to apply the money in accordance with participant investment instructions in a timely fashion may well be a fiduciary breach. However, there may be a number of facts and circumstances that would come in to play in this analysis. Unfortunately for you, once the money "hits" the plan, you don't have the "bright line" guidance (although some would say that 'as soon as administratively possible is not all that 'bright') that is provided by DOL's plan asset regulations.

I agree that it is a good idea to give at least annual statements, and I believe that almost everyone in the industry agrees on this. Mandated annual satements was the recommendation of the ERISA Advisory Council back in 1996: http://www.dol.gov/ebsa/adcoun/3dparty.htm Also, I don't know what will come out of Congress with the new pension reform proposals, but I think some form of updated requirement to issue statements is one of the least controversial issues.

There is actually no requirement that Participants be automatically provided with account statements every year. The statutory requirement is only that a Participant be provided a statement upon written request and within one hundred and eighty days after the Plan Year in which the Participant terminates employment. Only one statement need be provided per year in response to a written request. I believe that the Pension Security Act that cleared the House Commitee on Education and Workforce last week would requie quarterly statements.

Back in 2002 the excerpt posted below was on Sal Tripodli's website. Does anyone know of any updates on this or formal guidance? This provision of EGTRRA with regard to plan terminations is REALLY poorly drafted-- even for a Code provision. IRS apparently interprets IRC §416(g)(3) as applying 5-year add-back rule to plan termination distributions (added March 28, 2002). We have learned that the IRS Headquarters in Washington, DC, interpret IRC §416(g)(3) as applying 5-year add-back rule to plan termination distributions to the extent such distributions are made for reasons other than severance from employment, disability or death. There is some disaggreement in the pension community about the proper interpretation of this provision. An opposing view is that the placement of the rule for plan termination distributions in the last sentence of IRC §416(g)(3)(A), which provides for a 1-year add-back rule, implies that the 5-year add-back rule in §416(g)(3)(B) for distributions made for reasons "other than severance from employment, death, or disability" was not intended to apply to plan termination distributions. We support this opposing view, but apparently IRS feels differently, although it is not clear when any official guidance will be released. The 2002 Edition of The ERISA Outline Book reflects the view that a 1-year lookback applies to plan termination distributions. Given the apparent interpretation by the IRS, we have posted references to pages of the 2002 Edition that are affected. For details, click on "ERISA Outline Book" in the menu in the left margin of this page. At the Outline Book page, there is a submenu under "Outline Book" to search for current developments by chapter and date, and for an Errata Page. The IRS position on the lookback period is discussed in the "Current Developments by Chapter" (see the item added under Chapter 1 for March 28, 2002) and in the "Current Developments by Date" (see the item dated March 28, 2002). The Errata Page, which lists items by Chapter, also includes a discussion of this issue under Chapter 1 in an item dated March 28, 2002.