Kirk Maldonado

For what it is worth, the IRS told the ABA a number of years ago that distributions were not permitted upon going from union to non-union status.

vebaguru: What I've seen out of the ECFC (which hasn't been much) has impressed me. However, I understand that it is a very expensive organization for an employer to join. Are the membership costs for TPAs more reasonable?

mjb: I think that a more appropriate case would be Ruocco v. Bateman, Eichler, Hill, Richards, Inc., 12 EBC 1563 (9th Cir. 1990). My notes on that case (made many years ago) indicate that the court held that the employer acted improperly in retaining all of the demutualization proceeds even though most of the contributions to the plan had been made by participants. Merlin: I think that one way to avoid this entire issue would be for the fiduciaries to obtain a legal opinion on this issue, assuming that the legal fees would equal (or exceed) the amount in question. However, for some reason that I can't fully comprehend, most employers would rather give the money to their employees than to spend it on legal fees.

Locust: My guess is that the answer (if one exists) would be in the regulations regarding required minimum distributions, not in the IRA regulations.

Locust: Did you check to see if the applicable regulations address this issue? (I honestly don't know whether they do or don't.)

I once worked on a transaction that was going to generate UBTI. Despite that fact, some of the largest pension funds in the country were investors (there were a lot of dollars at stake). The investors that were pension plans demanded (and got) the promotor to take care of all of the administrative complications resulting from the UBTI (other than actually paying the taxes). There was even a group trust set up in connection with the deal.

jpod: I was surprised, to say the very least, to see your remark: when I was the person that initially raised the question. I guess you didn't read the prior posts in this message thread. Gompers: Are you saying that a plan would not have UBTI even if it built the property? Isn't there a concern about it engaging in a trade or business? I'm not sure that constructing one dwelling would necessarily cause a problem, but if the plan built five or ten, I think you have a UBTI problem.

I think that the employer accepting the loan rollover should require the participant to execute some new documentation, if for no other reason but to demonstrate that the participant has agreed to have the loan repayments be withheld out of his or her paychecks. This is because many state laws require that an employee agree in writing to any such payroll withholdings. It also avoids the issue as to whether or not ERISA preempts those state laws.

While this is off the subject, are there any UBTI or UDFI issues implicated in that arrangement?

vebaguru: Thanks for your input.

Vince Szeligo: Do you have a citation for the UPS case out of the Second Circuit? I did a bit of research and I couldn't find it.

Jim: While I realize that you aren't completely unbiased because you are a fee-based advisor, I still think it might be useful for some of the readers if you explained the advantages and disadvantages of using a fee-based advisor. I should probably disclose two things. First, in the distant past, I worked with Jim on a project that lasted longer than a year, and I hold him in high regard. Second, based upon my rudimentary understanding of the situation, I think that using a fee-based advisor makes sense, but I eager solicit opposing viewpoints (so as to clear up any possible misconceptions that I might have).

DOL Regulation Section 2550.408b-2(f) provides in relevant part as follows: Example (6). F, a fiduciary of plan P with discretionary authority respecting the management of P, retains S, the son of F, to provide for a fee various kinds of administrative services necessary for the operation of the plan. F has engaged in an act described in section 406(b)(1) of the Act because S is a person in whom F has an interest which may affect the exercise of F's best judgment as a fiduciary. Such act is not exempt under section 408(b)(2) of the Act irrespective of whether the provision of the services by S is exempt.

What can I say? The courts are flagrantly wrong. Nobody bothered to read the statute. The answer is obvious to anybody who reads it. Section 201 of ERISA expressly states that Part 2 does not apply to a welfare benefit plan. Life insurance is a welfare benefit. The QDRO rules are contained in ERISA section 206. I can't understand how it could possibly be more clear that the QDRO rules do not apply to life insurance. This reminds me of the COBRA issue that the U.S. Supreme Court had to resolve in Geissal v. Moore. There was a lot of litigation regarding this point because none of the judges or the attorneys bothered to read the statute. How anybody could litigate the issue involved in Geissal v. Moore is beyond me. The answer was so clear that it was the shortest Supreme Court decision on an ERISA issue I've ever read.

I think that the wording of section 515 is pretty clear that the obligation only has to arise under one of the documents; not both of them. Specifically, Congress used the disjunctive (or) rather than the conjunctive (and). Here is the statutory language: Every employer who is obligated to make contributions to a multiemployer plan under the terms of the plan or under the terms of a collectively bargained agreement shall, to the extent not inconsistent with law, make such contributions in accordance with the terms and conditions of such plan or such agreement.

The Metropolitan case did involve life insurance. The QDRO rules don't apply to life insurance benefits.

Here is Advisory Opinion 2006-1 January 6, 2006 Debra C. Buchanan, Esq. Guidant Legal Group, PLLC 225 Commerce Street, Suite 450 Tacoma, WA 98402 2006-01A ERISA Sec. 29 CFR 2509.75-2 Dear Ms. Buchanan, This is in response to your request for an advisory opinion as to whether the following proposed transaction would be prohibited under section 4975 of the Internal Revenue Code (the “Code”), 26 U.S.C. § 4975.(1) You represent that Salon Services and Supplies, Inc. is a Washington state “S” Corporation (“S Company”) which is 68% owned by Miles and Sydney Berry, a marital community (M). The other 32% is owned by a third-party, George Learned (“G”). Miles Berry (Berry) proposes to create a limited liability corporation (“LLC”) that will purchase land, build a warehouse and lease the property to S Company. The investors in the LLC would be Berry’s individual retirement account (“IRA”) (49%), Robert Payne’s (“R”) IRA (31%) and G (20%). R is the comptroller of S Company. R and G will manage the LLC. You represent that S Company is a disqualified person with respect to Berry’s IRA under section 4975(e)(2) of the Code. You represent that R and G are independent of Berry. You also represent that the LLC does not contain plan assets because it is a “real estate operating company” (REOC) as defined by 29 C.F.R. § 2510.3-101(e). You state that an independent qualified commercial real estate appraiser has appraised the rental value of the lease and has found that the terms of the lease are not less favorable to the LLC and its IRA investors than those obtainable in an arm’s length transaction between unrelated parties. Finally, the custodian for Berry’s and R’s IRAs has reviewed the LLC operating agreement and has approved the investment for those two self-directed IRAs. Section 4975©(1)(A) of the Code prohibits any direct or indirect sale, exchange or leasing of any property between a plan and a “disqualified person.” Section 4975©(1)(D) of the Code prohibits any direct or indirect transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan. A “disqualified person” is defined under section 4975(e)(2)(A) of the Code to include a person who is a fiduciary. Code section 4975(e)(3) defines the term “fiduciary” to include, in pertinent part, any person who exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets. Section 4975©(1)(E) prohibits a fiduciary from dealing with the income or assets of a plan in the fiduciary’s own interest or for his or her own account. Section 4975(e)(1)(B) of the Code defines the term “plan” to include an individual retirement account described in Code section 408(a). We first address the proposed lease as it relates to Berry’s IRA. Berry is a fiduciary to his own IRA because he exercises authority or control over its assets and management. 26 U.S.C. § 4975(e)(3). As a fiduciary, Berry is a disqualified person under section 4975(e)(2)(A) of the Code. You represent that S Company is a disqualified person under section 4975(e)(2) of the Code. R, the comptroller of S Company, is a disqualified person with respect to Berry’s IRA under section 4975(e)(2)(H) as an officer of S Company. R, as an employee of S Company, a company 68% owned by M, cannot be considered independent of Berry. Based upon your representations, it is the opinion of the Department that a lease of property between the LLC and S Company would be a prohibited transaction under Code section 4975, at least as to Berry’s IRA. The lease constitutes a prohibited transaction regardless of whether the LLC qualifies as a REOC under the Department’s plan assets regulation. 29 C.F.R. § 2510.3-101. The Department’s regulation at 29 C.F.R. § 2509.75-2(a) (Interpretative Bulletin 75-2), explains that a transaction between a party in interest under ERISA(2) (or disqualified person under the Code, in this case S Company) and a corporation in which a plan has invested (i.e., the LLC) does not generally give rise to a prohibited transaction. However, in some cases it can give rise to a prohibited transaction. Regulation section 2509.75-2© and Department opinions interpreting it have made clear that a prohibited transaction occurs when a plan invests in a corporation as part of an arrangement or understanding under which it is expected that the corporation will engage in a transaction with a party in interest (or disqualified person).(3) According to your representations, it appears that Berry’s IRA will invest in the LLC under an arrangement or understanding that anticipates that the LLC will engage in a lease with S Company, a disqualified person. Therefore, the lease would amount to a transaction between Berry’s IRA and S Company that Code section 4975©(1)(A) and (D) prohibits. Additionally, the proposed lease, if consummated, may also constitute a violation by Berry, a fiduciary, of Code section 4975©(1)(D) and (E). Finally, we note the express emphasis in 29 C.F.R. § 2509.75-2© that the Department considers “a fiduciary who makes or retains an investment in a corporation or partnership for the purpose of avoiding the application of the fiduciary responsibility provisions of the Act to be in contravention of the provisions of section 404(a) of the Act.” Thus, the proposed lease, which would violate section 4975©(1) of the Code, would also have to be referred to the Internal Revenue Service for a determination as to whether it would consider the transaction a violation of the exclusive benefit rule of section 401(a)(2) of the Code, which is the Code’s analogue to the fiduciary responsibility provisions of section 404(a) of ERISA. Because we have concluded that the proposed lease would constitute a prohibited transaction with respect to Berry’s IRA, the issue of whether the Code prohibits the lease as it relates to R’s IRA is moot, and does not need to be addressed. This letter constitutes an advisory opinion under ERISA Procedure 76-1, 41 Fed. Reg. 36281 (1976). Accordingly, this letter is issued subject to the provisions of that procedure, including section 10 thereof, relating to the effect of advisory opinions. Sincerely, Louis J. Campagna Chief, Division of Fiduciary Interpretations Office of Regulations and Interpretations Footnotes Under Reorganization Plan No. 4 of 1978, effective December 31, 1978 [5 U.S.C. App. at 214 (2000 ed.)], the authority of the Secretary of the Treasury to issue interpretations regarding section 4975 of the Code was transferred, with certain exceptions not here relevant, to the Secretary of Labor. As a result, citations to section 406 of the Employee Retirement Income Security Act (ERISA), 29 U.S.C. § 1001 et seq. and applicable regulations also refer to the parallel citations of section 4975 of the Code. Section 3(14) of ERISA defines the term “party in interest” for purposes of Title I of ERISA, including the prohibited transaction provisions of ERISA section 406. See 29 C.F.R. § 2509.75-2©; Opinion No. 75-103 (Oct. 22, 1975); 1978 WL 170764 (June 13, 1978). Further, prior to the promulgation of the Department’s plan assets regulation, 29 C.F.R. § 2510.3-101, the Department had issued Interpretive Bulletin 75-2 which discusses certain prohibited transactions under section 406 of ERISA or section 4975 or the Code. As indicated in the preamble to the plan assets regulation, part of Interpretive Bulletin 75-2 was revised to coordinate it with the final regulation (51 Fed. Reg. 41278). The remainder of the Interpretive Bulletin 75-2, published at 29 C.F.R. § 2509.75-2©, remains in force and was not affected by the plan assets regulation. Regulation section 2509.75-2© sets forth that a transaction between a party in interest and a corporation in which a plan has invested may constitute a prohibited transaction under certain circumstances. Such transactions are prohibited regardless of whether or not they meet the plan assets regulation.

I agree with all of the sentiments already expressed.

Effen: Thanks for your informative reply. It is very useful to learn what those plans are contemplating, even if nobody has actually implemented such an approach (yet).

Department of Labor [Application No. D-4950A] 52 FR 30977, August 18, 1987 News Release 87-359 In the view of the Department, the mere investment of assets of a plan on identical terms with a fiduciary's investment for its own account and in the same relative proportions as the fiduciary's investment would not, in itself, cause the fiduciary to have an interest in the transaction that may affect its best judgment as a fiduciary. Therefore, such an investment would not, in itself, violate section 406(b)(1). In addition, such shared investment, or an investment by a plan with another account maintained by a common fiduciary, pursuant to reasonable procedures established by the fiduciary would not cause the fiduciary to act on behalf of (or represent) a party whose interests are adverse to those of the plan, and therefore, would not, in itself, violate section 406(b)(2). With respect to section 406(a)(1)(D) of the Act which prohibits the transfer to, or use by or for the benefit of a party in interest including a fiduciary) of the assets of a plan, it is the opinion of the Department that a party in interest does not violate that section merely because he derives some incidental benefit from a transaction involving plan assets. We are assuming, for purposes of this analysis, that the fiduciary does not rely upon and is not otherwise dependent upon the participation of plans in order to undertake its share of the investment. Thus, with respect to the investment of plan assets in shared investments which are made simultaneously with investments by a fiduciary for its own account on identical terms and in the same relative proportions, it is the view of the Department that any benefit that the fiduciary might derive from such investment under these circumstances is incidental and would not violate section 406(a)(1)(D) of the Act.

Effen: While the trustees might have the authority to do that, isn't it highly unlikely that they would take such an approach? It seems to me that there could be long-term negative political fallout from implementing such a drastic measure. Have you seen or heard of other plans where the trustees have taken such action?

It seems to me that there are two relevant authorities that need to be considered in this discussion. The DOL seems to take the position that the alternate payee can designate any beneficiary. See Q 3-8 of the DOL's booklet on QDROs at http://www.dol.gov/ebsa/publications/qdros.html. The court in Shelstead v. Carpenters Pension Trust For Southern California, Ct of Appeals, 4th Dist., 1998 Cal App LEXIS 782 (1998) concluded that for a beneficiary designation to be effective, any person designated as the beneficiary of an alternate payee must (also) qualify as an alternate payee. (I am ignoring for this purpose the issue as to whether or not a state court has jurisdiction to decide whether a domestic relations order is a QDRO.)

Rev. Rul. 2002-45, 2002-2 CB 116, 06/26/2002 Employee benefit plan qualification requirements—restorative payments. Headnote: In two factual situations where employer had placed large amount of defined contribution plan's assets in one investment, which later became worthless, and then made restorative payments back into plan allocated among accounts of all beneficiaries in proportion to each account's investment in worthless co., payments weren't treated as “contributions”, but are considered restorative payments. In first scenario, payment was made under court-approved settlement of suit alleging breach of fiduciary duty filed by plan participants; in second scenario, payment was made after employer determined that it had reasonable risk of liability for breach of fiduciary duty. In both, employer merely restored losses to plan in proportion to each account's investment in worthless co., so similarly situated plan participants aren't treated differently. Issue Under the facts described below, are payments to the trust of a defined contribution plan qualified under § 401(a) of the Internal Revenue Code (the Code) treated as contributions for purposes of § 401(a)(4), 401(k)(3), 401(m), 404, 415©, or 4972? Facts Situation 1. Employer M maintains Plan X, a defined contribution plan, for the benefit of M's employees. The plan is qualified under § 401(a). Employer M caused an unreasonably large portion of the assets of Plan X to be invested in Entity G, a high-risk investment. It is later determined that the investment has become worthless. A group of participants in Plan X files a suit against Employer M alleging a breach of fiduciary duty in connection with the investment in Entity G. Following the filing of the suit, the parties agree to a settlement pursuant to which Employer M does not admit that a breach of fiduciary duty occurred but makes a payment to Plan X equal to the amount of the losses (including an appropriate adjustment to reflect lost earnings) to Plan X from the investment in Entity G. The settlement also provides that the payment will be allocated among the individual accounts of all of the participants and beneficiaries in proportion to each account's investment in Entity G over the appropriate period. The court approves the settlement and enters a consent order. Employer M makes the payment to Plan X and the payment is allocated to the appropriate accounts. Situation 2. The facts are the same as in Situation 1, except that no lawsuit is filed against Employer M. However, Employer M becomes aware that participants in Plan X are concerned about the investment in Entity G and are considering taking legal action. Employer M also learns that lawsuits alleging fiduciary breach have been filed against other companies by those companies' employees over losses to their qualified retirement plans due to investment in Entity G. Employer M decides to make the payment to Plan X before a lawsuit is filed, after reasonably determining that it has a reasonable risk of liability for breach of fiduciary duty based on all of the relevant facts and circumstances. Law and Analysis The provisions of the Code that apply to contributions to qualified defined contribution plans include §§ 401(a)(4), 401(k)(3), 401(m), 404, 415 and 4972. Section 401(a)(4) generally provides that the contributions or benefits provided under a qualified defined contribution plan may not discriminate in favor of highly compensated employees. Whether contributions under a defined contribution plan are discriminatory is generally determined by comparing the amount of contributions allocated to the accounts of highly compensated employees with the amount of contributions allocated to the accounts of nonhighly compensated employees. Section 401(k)(3) contains participation and nondiscrimination standards for elective deferrals to qualified cash or deferred arrangements. Section 401(m) contains nondiscrimination tests for matching contributions and employee contributions. Both § 401(k)(3) and § 401(m) provide rules regarding qualified matching contributions and qualified nonelective contributions. Section 404 generally provides that contributions paid by an employer to or under a plan, if they would otherwise be deductible, are only deductible under § 404, subject to various limitations under § 404(a). Section 415© generally limits the amount of contributions and other additions under a qualified defined contribution plan with respect to a participant for any year. Section 4972(a) imposes a 10 percent excise tax on the amount of the nondeductible contributions made to any “qualified employer plan,” including a plan qualified under § 401(a) or 403(a). A payment made to a qualified defined contribution plan is not treated as a contribution to the plan, and accordingly is not subject to the Code provisions described above, if the payment is made to restore losses to the plan resulting from actions by a fiduciary for which there is a reasonable risk of liability for breach of a fiduciary duty under Title I of the Employee Retirement Income Security Act of 1974 (ERISA) and plan participants who are similarly situated are treated similarly with respect to the payment. For purposes of this revenue ruling, these payments are referred to as “restorative payments.” The determination of whether a payment to a qualified defined contribution plan is treated as a restorative payment, rather than as a contribution, is based on all of the relevant facts and circumstances. As a general rule, payments to a defined contribution plan are restorative payments for purposes of this revenue ruling only if the payments are made in order to restore some or all of the plan's losses due to an action (or a failure to act) that creates a reasonable risk of liability for breach of fiduciary duty. In contrast, payments made to a plan to make up for losses due to market fluctuations and that are not attributable to a fiduciary breach are generally treated as contributions and not as restorative payments. In no case will amounts paid in excess of the amount lost (including appropriate adjustments to reflect lost earnings) be considered restorative payments. Furthermore, payments that result in different treatment for similarly situated plan participants are not restorative payments. The failure to allocate a share of the payment to the account of a fiduciary responsible for the losses does not result in different treatment for similarly situated participants. Payments to a plan made pursuant to a Department of Labor (DOL) order or court-approved settlement to restore losses to a qualified defined contribution plan on account of a breach of fiduciary duty generally are treated as having been made on account of a reasonable risk of liability.1 In no event are payments required under a plan or necessary to comply with a requirement of the Code considered restorative payments, even if the payments are delayed or otherwise made in circumstances under which there has been a breach of fiduciary duty. Thus, for example, while the payment of delinquent elective deferrals or employee contributions is part of an acceptable correction under the VFC Program, such payment is not a restorative payment for purposes of this revenue ruling. Similarly, payments made under the Employee Plans Compliance Resolution System (EPCRS), Rev. Proc. 2002-47, at page [insert page number] of this Bulletin, or otherwise, to correct qualification failures are generally considered contributions and do not constitute restorative payments for purposes of this revenue ruling. However, the payment of appropriate adjustments to reflect lost earnings required under EPCRS is generally treated in the same manner as a restorative payment. In Situation 1, the payment by Employer M to restore losses to Plan X on account of the investment in Entity G is made pursuant to a court-approved settlement of the suit filed against it by plan participants and is not in excess of the amount lost (including appropriate adjustments to reflect lost earnings). In Situation 2, the payment by Employer M is made after it reasonably determines, based on all of the relevant facts and circumstances, that it has a reasonable risk of liability for breach of fiduciary duty even though no suit has yet been filed. In reaching this determination the following facts are taken into account: that Entity G was a high-risk investment, that a large portion of the plan assets had been invested in Entity G, that participants expressed concern about the investment, and that several lawsuits had been filed against other employers alleging fiduciary breach in connection with the investment of plan assets in Entity G. In both Situation 1 and Situation 2, therefore, the payment is made based on a reasonable determination that there is a reasonable risk of liability for breach of fiduciary duty and to restore losses to the plan. In addition, the payment is allocated among the individual accounts of the participants and beneficiaries in proportion to each account's investment in Entity G so that similarly situated participants are not treated differently. In both Situation 1 and Situation 2, the payment is a restorative payment (as defined in this revenue ruling) and, as such, is not a contribution to a qualified plan. Accordingly, the payment is not taken into account under § 401(a)(4) or 415© or, if applicable to the plan, § 401(k)(3) or (m). In addition, the restorative payments to Plan X are not subject to the provisions of § 404 or 4972. Holding The payments to the defined contribution plans qualified under § 401(a) under the facts described in Situation 1 and Situation 2 above are not contributions for purposes of § 401(a)(4), 401(k)(3), 401(m), 404, 415©, or 4972. Drafting Information The principal author of this revenue ruling is Diane S. Bloom of the Employee Plans, Tax Exempt and Government Entities Division. For further information regarding this revenue ruling, please contact the Employee Plans' taxpayer assistance telephone service at 1-877-829-5500 (a toll-free number), between the hours of 8:00 a.m. and 6:30 p.m. Eastern time, Monday through Friday. Ms. Bloom may be reached at 1-202-283-9888 (not a toll-free number). -------------------------------------------------------------------------------- 1 Whether a payment is made under the Voluntary Fiduciary Correction (VFC) Program established by the DOL may be taken into account in determining whether there is a reasonable risk of liability. Final rules describing the VFC Program were issued by the DOL on March 28, 2002 (67 Fed. Reg. 15062). The VFC Program is designed to encourage employers to voluntarily comply with Title I of ERISA by correcting certain violations of the law. If an applicant meets the VFC Program criteria it will receive a no action letter from the DOL, pursuant to which the DOL will neither initiate a civil investigation under ERISA regarding the applicant's responsibility for any transaction described in the letter nor assess a civil penalty under section 502(l) of ERISA on the correction amount paid to the plan or its participants.

Here's something from Derrin's Q&A column here on BenefitsLink entitled Who's the Employer? that may be useful: http://benefitslink.com/modperl/qa.cgi?db=...oyer&id=113.

You may find some guidance here (I didn't check to see): http://www.irs.gov/pub/irs-pdf/p1828.pdf.