Party-in-interest

[Guest KimAnn]

I have a solo Dr. and his father, who is the investment broker and an independent contractor with Raymond James on the son's plan. I explained that this is not allowed as the father is a party-in-interest. Besides appointing another broker or appointing a third party trustee (ie a bank), are there any other ideas of how to break up this problem without taking the father out of control over the assets? Thanks

[KJohnson]

I think you have a problem, because if the Dr. is solo and has no other employees who can be appointed to make the "call" of appointing dad

Look at the following Examples 6 and 7 given in the DOL Regs:

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.

Example (7). T, one of the trustees of plan P, is president of bank

B. The bank proposes to provide administrative services to P for a fee. T physically absents himself from all consideration of B's proposal and does not otherwise exercise any of the authority, control or responsibility which makes T a fiduciary to cause the plan to retain B. The other trustees decide to retain B. T has not engaged in an act described in section 406(B)(1) of the Act. Further, the other trustees have not engaged in an act described in section 406(B)(1) merely because T is on the board of trustees of P. This fact alone would not make them have an interest in the transaction which might affect the exercise of

their best judgment as fiduciaries.

[42 FR 32390, June 24, 1977]

However, could you do something with 404©? I think the argument goes that under 404© the Doctor would no longer have fiduciary responsiblity as trustee and/or plan adminstrator and/or administrative commiteee. The question then is whether he is a fiducary as a particpant under 404©. If not, then there could be no PT because you need a "fiduciary" to act to have the PT to begin with. I haven't explored this further, but you may want to look into it. Let me know what you find.

[Guest KimAnn]

Thanks for that reply. I hadn't even considered 404© as this is a PS/MP Plan, but I don't guess that matters. I've just never set up a 404© except for a 401(k) situation. Does anybody know if the participants in a 404© are fiduciaries or not?

[QDROphile]

The Tax Court, recently affirmed by the Court of Appeals, has ruled that a person who directs his own account is a fiduciary under the Tax Code prohibited transaction rules even though the person may not be a fiduciary under ERISA.

Also, the exclusions under 404© that give one the idea that we can play a little looser under ERISA are usually trumped by the rules on affiliates under 404©.

[KJohnson]

QDROphile--do you have a cite so I can stick it in a research file?

I thought this might be a little to cute.

As to your other comment, I thought that under the 404© regs that a participant would still be judged to exercise "independent control" even if a transaction was with a fiduciary or an affiliate of a fiduciary (Dad) as long as no more than "adequate consideration" was paid.

Also, my statement regarding "needing" a fiduciary was too broad. While 406 of ERISA requires action by a fiduciary for a prohibited transaction, 4975©(1)(A)-(D) of the Code does not have the same language.

[QDROphile]

Flahertys Arden Bowl 115 TC 269. I did not look up the cite for the affirmation. I think it was in the 6th Circuit.

I do not understand your comment about independent control, but there are some key exceptions to regulation section 404c-1(d)(2)(i) in (d)(2)(ii). And you get no exception to prohibited transaction excise taxes in any event because of the tax code definition of fiduciary.

[KJohnson]

Thanks, I was referring to 2550.404©-1©(3)