real prohibited transaction issue for retirement plans

[Guest ERISAKing]

ERISA section 408©(1) provides that it is not a prohibited transaction to pay benefits to a fiduciary (to the extent entitled as a participant under the terms of the plan). Where in the Code or ERISA is a similar exemption allowing a plan to pay benefits to non-fiduciary participants? Participants are parties in interest. Paying benefits to participants (pursuant to the plan document) is a transfer of plan assets to a party in interest. This is a prohibited transaction absent an exemption. Can anybody help me?

Similarly, an employer that maintains a plan is a party in interest with respect to the plan. An employer's contributions to the plan (in accordance with the plan document) would constitute an exchange of assets between the plan and a party in interest. This is a prohibited transaction, absent an exemption. Where does ERISA or the Code exempt this transaction from the 406(a) rules? Thanks, EK

[KJohnson]

You may want to look at some language in Lockheed v. Spink 517 U.S. 882 (1996) which states that the payment of benefits in accordance with a Plan document is not a "transaction" as contemplated by Section 406 of ERISA.

[Guest ERISAKing]

Thanks! Good thought. But if payment of benefits is not a transaction contemplated by 406, then why did Congress feel the need to adopt section 408©(1)?

[KJohnson]

I spoke to broadly. I do not think that payment of benefits is a transaction for purposes of 406(a). Fiduciary "self-dealing" in 406(B) is another matter and that is why you see the exception in 408. You may want to look at the following letters/opinions

Adv. Op. 2001-05A, DOL found that §406(a) of ERISA would not be implicated by payments to a party in interest as long as the benefits are “clearly specified as plan benefits in the plan document.”

DOL Adv. Op. 81-30A (Section 406 “does not prevent the payment of plan benefits to a party in interest who is entitled to them”)

DOL Op. F-2987 A, 1985 Lexis 55 (same);

DOL Adv. Op. 82-32A (no prohibited transaction if payments to a party in interest are “payable …pursuant to a plan’s provisions”).

[R. Butler]

See 4975(d). For distributions specifically 4975(d)(9).

[KJohnson]

Good catch R. Butler. The differences between the Code and ERISA with regard to PT's is often subtle.

Of course payment of benefits to an active employee is not a PT. On the ERISA side, however, you need to strain a little to get there but on the Code side it is apparent.

[Guest ERISAKing]

4975(d)(9) is really just an analog of 408©(1). It doesn't address non-fiduciary participants, other than owners, officers, directors.

[KJohnson]

I think thats the point.

This gets back into the distinction between a "disqualified person" under the Code and "party in interest" under ERISA.

Under the Code, an employee is not a "disqualified person" unless he or she is a highly compensated employee, officer, director, or 10 percent shareholder. Thus, if you are not a disqualified person, you cannot have a Code PT to begin with. Accordingly, paying benefits to an "ordinary" employee would not be a Code PT. However, even for those employees who are enumerated as "disqualfied persons" there is the exemption that R. Butler points out. (Not the exemption says "disqualfied person" it does not say fiduciary)

Under ERISA, however, any employee of a sponosring employer is a "party in interest. "