mbozek

Kirk : paying the distribution to the IRS is permissible when there are no other options in a terminated plan but why does a plan fiduciary want to take the such a risk if a) the administrator knows where the employee lives and b) the employee has not complied with the plan terms for requesting a distribution of the funds. Some employees have ulterior motives to hide assets (e.g, revenge against an ex spouse who is trying to enforce a QDRO or meet income requirement for medicaid). Why should the administrator be a dup especially if the employee has not requested a distribution. Secondly is paying over the entire distribution to the IRS permitted under the plan terms instead of an involuntary cashout of balances of $5000 or less? Third isnt paying all of the benefit to the IRS a violation of the plan terms to withhold only 20% of the taxable amount?

Carol: if the benefits under the Vt public plan are paid to the other party of the civil union under an dro that is not a QDRO, (because the non employee is not a spouse under the tax law) isn't the employee taxed on the benefits paid to the non spouse under the assignment of income doctrine? I thought that the purpose of obtaining a QDRO under a non ERISA plan was to prevent such taxation.

CCalhoun: your post of 2-6 on civil unions and state qualified plans is perhaps answered by a recent case in Ga. involving Susan Freer. On jan 23rd a Ga appeals court ruled that that civil unions are not marriages and even if they were Ga would not recognize them. If state cts outside Vt reject civil unions as valid marriages then VT dros involving benefits will not be enforced against pension plans in other states. But I thought that the defense of marriage act also allowed a state ct to reject same sex marriages which were legal in another state which would prevent a dro being issued in favor a person who was a partner in a same sex union. Thinking practically would the IRS really disqualify a public plan and cause the taxation of the participants (and anger all of the local public officals, e.g. governor, who would call their congressmen/senators) because the plan complied with a legaly issued ct order? Disqualifiying a public plan would not not be a voter friendly thing to do for a government agency that needs all of the congressonal suport it can get.

Under IRS revenue ruling ( 80-140?) vested benefit cannot be forfeited or refused by the participant. Plan can be disqualified for not paying benefit. Pay out the money as involuntary cashout.

Butch: Before doing anything check with tax counsel to determine whether the $150,000 is a gift which is exempt from income tax if it is not provided for the performance of services. The church could elect to put the gift into a trust and pay the income to the pastor or just give it outright.

I concur except to note that a person is only a fiduciary under ERISA to the extent that they perform a fiduciary function under Section 3(21(A). Advisors have duty to determine if a party is a fiduciary under the law and this requires a review of the operative documents and fiduciary status cannot be based on a title such as trustee.

Julie - post mortem IRA distributions are a disaster because no one focuses on the distribution issues until it is too late. A lot vendors report post death payments under the decesed's ss # because there is no data field for another person's ss #. But u need to answer some questons: Who received the payments from the IRA? Was it paid to estate and then to the beneficaries? Was the value of the estate over $675,000 and therefore subject to estate tax? I believe the estate could deduct the medical expenses from the gross estate. If the payments were made to the beneficaries then they have received IRD but u can deduct a prorata amount of the estate taxes attributable to the IRA from the distributions. There are ways in which the payment can be reversed under the claim of right doctrine but it would require proof that the beneficaries were not legally entitled to receive the payment. You should retain a CPA or tax preparer to advise u on the options before 4/15. Don't rely on information provided on the web.

STL Giant: there is a big difference between being audited and penalities being imposed. IRS officials are not anxious to annoy local government officials who have clout in Washington with congressman who control appropriations and these matters are usually settled with nominal penalities being assessed. Also the S/l generally limits the IRS ability to recover taxes against employees to three years. As for as amending ERISA, I have seen proposals for the last 20 years to apply Title I oF ERISA to public and church plans. For the constitutional reasons cited in my prior post, ERISA type provisions will NEVER be enacted. Besides the cost of enacting these provisons would require too great an expenditure of political capital to be worthwhile. Hold harmless agreements can protect the employer if properly drafted. All vendor contract start off with exculpation from liability.I have never had a vendor refuse to add a hold harmless agreement that makes them liable for their own acts of negligence (but they will usually not agree to be laible for mistakes caused by the employer, e.g., incorrect compensation.) The contract can provide that the vendor will provide counsel to the employer or pay for all expenses. But the employer has to demand these provisions. If the vendor won't give these assurances then go to another provider. Disclaimers will not protect parties from criminal charges so there may be there people playing with fire. Around here it is not unusual to see public officials charged with various forms of malfeasence. Finally a tax free transfer under IRC 1041 applies to property not held in trust if the transfer occurs within 1 year after the marriage ceases. The biggest 403(B) providers will split an annuity contract pursuant to a court order.

Mary C ; Certain states require that the spouse be allowed to remain as a dependent under the health plan after divorce indefinitley. MA and MI are two states that have enacted such laws and Fed cts have held that ERISA does not preempt these state laws. Must have counsel review the applicable state laws.

Jon: The regulation you cited in your last post is a 25 year old opinion of the US Labor Dept and is not the standard used by the Courts to determine fiduciary liability of a trustee under ERISA. In Beddall v. State St. Bank and Trust, 137 F3d 12 (1998), the First Circuit Court of Appeals held that a bank acting in the capacity of a trustee for assets of a qualified plan was not an ERISA fiduciary merely because the bank held legal title to the assets and perfomed certain administrative functions for the plan. The bank had been sued by the fiducaries for an Eastern Airlines pension plan because an investment manager appointed to manage the real estate portion of the plan had over valued the assets. The court stated the term fiduciary is functional and a party must have discretion over the plan assets to be fiduciary. Where a trustee acts on the instructions of a duly appointed advisor (the RE manager) or other plan representative, the trustee is performing a ministerial function, not a discretionary function and is not a fiduciary because it follows such instructions in disposing of plan assets. The Court also cited several prior cases for this principle. By the way the Beddell case did not even review the regulation you mentioned in your last post indicating that it has no weight in a judical review if the trustee has no discretion. The case you cited is not on point either because it deals with plan fiducaries who had the obllgation under the Plan to review the acts of the administrator they hired but failed to exercise it. They are no different than the fiducaries for the Eastern Airlines pension plan who had the obligation to review the actions of the RE manager who they appointed but that does not make the bank fiduciary because it followed the manager's instructions.

STL Giant: Last time I looked political subdivisions of states were not subject to income tax under IRC 115. School districts are political subdivsions if established under state law. Under the prinicipal of federalism going back to the 1830's the states/ susbdivisions are soverign entities not subject to federal taxation. I don't know how the IRS can sue a soverign entity exempt from income tax or seize their assets. You will need expert tax counsel to determine if payment of withholding taxes automatically waives the exemption from income taxation. There never will never be any extension of Title I of ERISA to governments because of the 11th amendment or to church plans (First amendment). The Supreme court has imposed restrictions on the ability of Congress to extend laws to states (ADEA, ADA). While some states require that school districts take all vendors the school districts protect themselves by having the vendor sign a hold harmless and indemnification agreement in favor of the district and sometimes reqire that a vendor purchase a surety bond. If payments are made to become a vendor (pay to play) then criminal laws have been violated and federal prosecutors routinely send people on an all expenses paid trip to club fed for mail or wire fraud. By the way under IRC 1041 a transfer of property directly or held in trust pursuant to a divorce is regarded as a tax free gift. The recipient takes the transferor's basis. Also under the 1984 tax act, the transfer of an annuity contract pursuant to a divorce is treated as a tax free event to the recipient, including the recovery of the transferor's basis. This allows tax free division of 403(B) annuities into two contracts. Why do you need a QDRO?

Carol: You are missing my point. Property settlement notes are used in those states where state law does not allow the state retirement benefits to be divided by a qudo and there are state plans that have spendthrift clauses. The fact that the state pension benefits are included as marital assets does not automatically mean that the spouse can receive a payout of the interest upon divorce. Also a property settlement note can be paid out after divorce on an installment basis to the alternate payee. Second many insurance companies are willing to do a tax free division of a 403(B) annuity contract under the terms of the divorce decree where the alternate payee receives his or her own annuity contract equal to the amount their interest in the employees annuity. The terms of the APs contract are identical to the employee's contract. This avoids the need to do a QDRO. ( I dont know if mutual funds can be split this way).

STL Giant: Non litigation type persons always under estimate the amount of evidence and proof required to prevail in civil litigation, the financial resources of the defendants and the difficulty of finding competent counsel to take a complex financial case on a contingency fee. Your relaince on the GIC cases is misplaced. Unysis union employees sued the the plan fiducaries for putting 20% of the 401(k) plan assets into Executive life annuities (Exec life became insolvent). After 4 separate courts reviewed the case the final decision was that there was no breach of fiduciary duty because the plans assets had been diversified. The Plaintiff must do more than just produce an expert who will give an opinion--- the expert must prepare a detailed research report comparing the performance of the funds in the plan with other comparable funds-- This will cost big bucks and will be disputed by the industry experts for the fund/ employer. If the employees scrimp on the costs of the expert testimony they get killed at trial or the case gets tossed out on summary judgment. The will get killed anyway because of the lack of investment advisors who are willing to take on a fund family. Also federal courts will impose monetary sanctions on plaintiffs who file frivilous claims under Rule 11b. As far as having a single fixed annuity option under a non erisa plan u must look to the applicable state law. I have advised clients that local counsel must be retained to determine whether there is any fiduciary responsibility under the applicable law (e.g., some plans may not be the responsibility of the employer any more than an IRA would be) because the plan does not hold the assets in trust and what is the standard for review. The simpliest anwer is to use a vendor that offers more than one investment option. Kkost- Since there is no ERISA preemption of state law, most public retirement plans are structured as spendthirft trusts under state law which do not permit the alienation of assets under a divorce decreee. The alternate payee receives a property settlement note from the employee for the amount of the alternate payee's interest in the public retirement plan which will be paid at retirement. The note may be secured by the employee's interest in other property, e.g. ,the marital residence to guarantee payment.

Why not just terminate the MP plan as end of Feb or Mar, send out 204(H) Notice, then get IRS approval and allow all employees to rollover distribution to the PS plan after getting spousal consent. Cost of termination will be worth elimination of J & S annuity provision which is pain to offer since fiduciary must conduct review to find best available annuity provider each time distribution in excess of $5,000 is required and custodian may charge additional amount for separate record keeping of mp plan account balances. Pro rata contribution would be made as of date of freezing plan if such contribution is required under terms of plan and could reduce any contribution to PS plan for remainder of 2002. Termination will require 100% vesting of all accounts. Plan amendment can be signed by corporate officer subject to board consent at a later date. There was also case law that said an employer was not required to give a 204(h) notice if the employer previously notified employees that plan was being terminated. Other option is to freeze and merge mp plan into newly adopted ps plan but ps plan must include all of the mandatory provisions required for mp plans (e.g., J & s annuity) and must still give 204(h) notice. See if prototype sponsor will be able to merge mp plan into Ps plan. If plans are merged, vesting schedule for mp plan can be continued after merger. Pro rata contributon can be made to both plans for 2002.

Jon my analaysis is based upon the principle that to be a fiduciary a person must agree to excercise some discretion over plan assets. A party who under the terms of the opertative agreements can only act upon the instruction of another person is not a fiduciary regardless of whether they have legal title to the assets and is designated as the trustee. In the Metz case Metz deposited $400k into an IRA with a bank named as trustee. Metz later instructed the bank to transfer $360 k to another IRA operated by Metz's investment advisor. The advisor absconded with the money and Metz sued the bank for a breach of fiduciary duty in not reviewing the backound of the advisor before releasing the funds. The bank prevailed because Metz had signed an agreement that the bank would not be liable for transactions excuted by the bank based upojn directions received from Metz. This is sop for all banks that are not acting as an investment advisor. The ERISA case law is the same. All bank documents that I review have similar language that requires instruction from a representative of the plan before funds will be transferred/ invested unless the bank is being paid a fee for investment advice. As noted in the definition of a fiduciary, the key is the word "discretionary" . Without discretion a trustee is not a fiduciary under ERISA regardless of the title under which the property is held. This is settled case law. I don't know of any financial institutions that use f word in ERISA trust documents unless they are being compensated for discretionay investment of assets because there is no reason to take such a risk.

Jon- There is a common misconception by investment advisors and attorneys that a trustee is automatically a fiduciary and therefore is the "deep pockets" in the event of the loss of assets. A trustee can only be a fiduciary to the extent the trustee agrees to excercise discretion over the assets under its control or performs an ERISA fiduciary function. A fiduciary relationship cannot arise by default or merely because the trustee is the owner of the assets. There is plenty of case law under federal and state law that absolves trustees with no discretion to act on behalf of plan assets from liability for misuse or loss of plan assets under their control if they could not act without instruction from another person. Ask Robert Metz, the former wall st. journal reporterabout that. Most investment advisors and employers pay little attention to the trust documents of directed trustees which requires that instructions be provided for any action involving investment or distribution of plan assets. The financial institutions require those provisons to limit their liability in the event of a loss of plan assets. I would be please to provide you with the Metz case upon your request . I spend a lot of time reviewing such documents and advising plan sponsors on the liability issues.

If the employee was not an HCE (earned less than 85k) the employer can make the contribution for 2001 and reduce the employees back pay award since an employer contribution can be made as late as the date for filing the 990 form. Er contributiuons are not reported on any tax form. If the employee is an HCE, treat the contribution as a salary reduction contribution for 2001 (employers can contribute the salary reduction contribution as infrequently as once a year to the annuity provider). But the employer will have to issue a W-2 for 2001 which the accountants may not approve since the employee is a cash basis taxpayer (see below). The real issue is whether under the terms of his reinstatement the ee is permitted to make a contribution for a prior year. If not then the argument is that his wages are earned in the year he receives the payment and since he is a cash basis taxpayer the money can only be contributed for the year he receives it. If the reinstatement provides otherwise then the er can argue that contributions cannot be made for a prior year because ee is a cash basis taxpayer. Also remember that for 2002 contributions to a 403(B) can total $40,000 and if ee is not hce it will not be a problem for er to structure contributions for both 01 and 02 up to the 2002 limit.

Jon I concur except that not all trustees are fiducaries-- many trustees are nondiscretionary trustees, i.e., they only respond to instructions received by the employer or investment advisors. Hence they are not fiducaries under ERISA. Also HR -10 plans can use custodians to hold plan assets. Finally There are some financial entities that are affilated with broker dealers that offer margin loans for both personal assets and pension plans as part of a line of credit to a busiesss. I know of a PS plan that got a margin call from the fiancing entity which wiped its assets.

Jon- buying stock on margin using funds loaned by a party in interest (e.g., broker/ dealer) is permitted by DOL opinion 86-12A. Only fiducaries are prohibited from loaning funds to the plans. There is nothing inherently illegal in a plan entering into margin loans secured by stock or other assets - just that the gains are subject to UBIT at the rate for trusts, e.g., 40% income tax rate for gains in excess of about $9,000. However, there is a large fiduciary risk if the stocks used to secure the loan are subject to a margin call and participant's account balnace are decimated. Also there are hidden margin risks in investments in leveraged limited partnerships. Plans that invest in such instruments will be suprised by UBIT at the end of the tax year with a 1099 form. I would review the prospectus for any of the "leveraged funds" recommended for IRAs to make sure that there is no borrowed money used to purchase the funds which will result in UBIT tax.

STL Giant: Plans exempt from ERISA ares subject to applicable state laws. If a state has adopted ERISA fiduciary provisions, then prudent investment rules will apply to the extent applicable under state law. Note- some states have adopted the ERISA prudent investor rules for asset allocation in place of the old common law rules that a fiduciary could be surchared for a single bad investment regardless of the overall performance of the portfolio. While anyone can sue anyone else in the good old USA, a plaintiff would have the burden of pleading and proving that the use of one vendor was imprudent . This is very expensive and difficult because expert testimony would be required from a registered investment advisor that the performance of the vendors products was an imprudent investment not related to market conditions. E.g, a mere drop in rates of return is not impudent if the martket conditions have changed. Many small plans subject to ERISA use only one vendor because they do not have enough revenue to make it profitable for multilple vendors. The real issue is whether the participants have sufficient opportunity to diversify their investments, not whether there are duplicate investment choices. Many small plans use one provider because they get bundled services which cover the cost of plan administration for a low cost. There is a trade off between offering multiple providers and low administration cost. There is nothing in ERISA that prohibits an employer from using a single vendor for 403(B) plan investments.

Mike: The plan is not charging beneficaries. Plan/trustee can initiate interpleader in federal court and name all beneficaries as defendents. After all parties have been served the plan/ trustee can deposit the participant's account balance with the court and asked to be dismissed from the case. The plan can ask the court to award legal fees for costs in its discretion. Since the court is awarding the fees under rules of federal procedure there is no violation of ERISA. Otherwise, the plan (or in a DC plan the participants) must eat the cost of this kind of litigation. Only other alternative is for the plan to wait to be sued by a beneficiary and counter claim with an interpleader.

When Congress enacted QDROs in 1984 as an exception from the nonalienation rules of ERISA, governmental and church plans were not subject to compliance with the QDRO provisions of the IRC with one exception: 414(p) (11) permits distributions from government and church plans exempt from ERISA to be treated as made pursuant to a QDRO if they meet the requirements for a QDRO. This allows a division of plan benefits from a government or church plan to be treated as a tax free distribution if (1) the plan permits such division and (2) the dro meeets the requirements for a QDRO. As far as civil union statutes are concerned there can be no tax free division of the benefits under a QDRO because IRC414(p) limits an alternate payee under a QDRO to a spouse, child or dependent of the participant. Relationships recognized as a a "civil union" or "domestic partnership" are not between spouses under the enaced state laws but are alternative relationships between persons of either the opposite or same sexes. That is why it called a civil union or domestic partnership, not marriage. Persons designated under these relationships are not regarded as legal spouses for QDRO purposes any more than employer provided health benefits are a tax free benefit of domestic partners who receive them because they are not legal dependents under the IRC nor can there be a tax free rollover under an IRA to a domestic partner or a person recognized under a civil union because the recipient is not a spouse under the tax law. As far as protecting women's rights Congress has based the exemption from ERISA on first amendment grounds (churches) and 11th amendment grounds, federalism, (states). By the way the board member is right -- the only requirements that a government 403(B) plan is subject to are the requirements in Section 403(B) itself. None of the ERISA requirements, e.g., written plan document, apply. IRS audit guidelines list the requirements for govt and church 403(B) plans which are thankfully few.

Christa- There is no uniform answer. Need to look at the relevant documents- e.g., beneficiary designation to see how benefits were divided- per stirpes or per capita; also read the IRA custodial account agreement to determine who receives assets in the case of multiple beneficaries or under the default option. Depending on the state in which the decedent lived you may also need to review the will to see if there is any other instruction to distribute IRA assets. Finally you may need to review any applicable state laws that may apply. Real question is how much money is involved? If it is a small amount then the parties should be able to reach a voluntary settlement that will permit the distribution of the funds. In cases like this the IRA custodian will not make a distribution of the assets unless all potential beneficaries consent to the distribution in writing and provide a waiver of liability of the custodian. I usually get the parties to settle by reminding them that if they do not voluntarily agree to a settlement then they will have to hire their own lawyers to litigate the matter who will be paid out of their IRA proceeds as well as pay for the cost of the lawyers for the custodian who will be reimbursed from the IRA proceeds.

Harry O - that may be correct See PTE 77-9 and 84-24 which permit insurance companys that act as fiduciaries or service providers to plans to purchase insurance contracts from themselves. But i don't know if the insurance co can loan money to the plan from the cash value of the policy. Belgarath- I still don't understand the economic advantage of taking the cash value as a loan (and paying a market interest rate of 8%+) plus the cost of paying an annual premium on the amount of insurance which will be used soley to pay back the loan balance at death. I don't see the leverage in this transaction for the insured. Economically it may be cheaper to rollover the cash value of the policy to an IRA and find a replacement policy on the internet e.g., 10 year term, if the employee needs death protection.

Belgarath- I have always thought that service providers include any company that provides investments to the plan, e.g, mutaul fund family- otherwise how would they be subject to the pT rules when plan uses their investments. Soloman Smith Barney was held to have violated the PT rules last year because because a plan indavertly purchased one of its investment funds.