Proposed Fee Disclosure Regulations

[jpod]

Please tell me if I am missing something that should be obvious.

The DOL's proposed regulations would amend the regulations under the service-provider exemption under Section 408(b)(2) of ERISA to add new fee disclosure conditions to the availability of the exemption. There is an identical exemption from the Section 4975 excise tax in Section 4975(d)(2), and the existing regulations under 4975(d)(2) are identical to the existing regulations under Section 408(b)(2) of ERISA. However, the Treasury has not proposed any amendment to the regulations under Section 4975(d)(2).

Question: Assuming the fee disclosure regs are finalized, why would an employer and/or service-provider be subject to excise taxes under Section 4975 if it complies with the existing regulations under Section 4975 but not with the regulations under 408(b)(2)?

[Peter Gulia]

The Treasury department adopted its reasonable-services exemption in 1977 before the effective date of Reorganization Plan No. 4 of 1978, and even before President Jimmy Carter signed that Plan on August 10, 1978.

The Reorganization Plan { http://www.access.gpo.gov/uscode/title5a/5a_4_103_1_.html} transfers to the Labor department “regulations, rulings, opinions, and exemptions under section 4975 of the [internal Revenue] Code, EXCEPT for (i) subsections 4975(a), (b), ©(3), (d)(3), (e)(1), and (e)(7) of the Code; (ii) to the extent necessary for the continued enforcement of subsections 4975(a) and (b) by the Secretary of the Treasury, subsections 4975(f)(1), (f)(2), (f)(4), (f)(5) and (f)(6) of the Code; and (iii) exemptions with respect to transactions that are exempt by subsection 404© of ERISA from the provisions of Part 4 of Subtitle B of Title I of ERISA[.]”

The tax-Code reasonable-services exemption is IRC § 4975(d)(2), which isn’t one of the subsections or paragraphs excepted from the transfer to the Labor department (if one ignores the Plan’s reference errors).

But it might be better if the Labor department revises its proposed rule to state expressly that the rule is an interpretation of IRC § 4975(d)(2) to the extent that Reorganization Plan No. 4 of 1978 transfers authority to the Labor department.

[jpod]

Are you saying that the DOL can "interpret" the existing 4975 reg. in such a fashion as to add a list of additional exemption requirements which cannot be found in the existing reg? If you are saying that, I disagree. Presumably, the DOL can amend the 4975 reg. by virtue of the reorganization plan, but it is not proposing to do so, so my question still stands.

[Peter Gulia]

Before even getting to a dispute, the Internal Revenue Service might use its discretion not to apply a “tougher” interpretation, perhaps especially if the Labor department’s rule hadn’t said that it interprets the tax statute.

In a dispute between a taxpayer and the IRS over how IRC § 4975(d)(2) applies to the taxpayer’s situation, a Federal court must apply the statute. If that statute is unambiguous, the court doesn’t need to consider the agency’s rule. If a court looks to a rule, the court decides whether it should defer to the agency’s interpretation and, if it need not, whether the court is persuaded by the agency’s interpretation. In doing so, a court might consider how carefully a rule-making followed the Administrative Procedure Act and other law, and how carefully the agency gave notice of what it was doing.

Again, if the Labor department intends its rule as an interpretation of IRC § 4975(d)(2), it should say so expressly (and carve out IRAs, Archer MSAs, Health Savings Accounts, and Coverdell Education Savings Accounts).

Although the recent Federal Register publications leave some room for a range of arguments, some aspects of these documents suggest that the Labor department’s proposed rule would be also an interpretation of IRC § 4975(d)(2) concerning plans qualified (or previously qualified) under IRC § 401.

The Labor department’s explanation of its reasons for the proposed rule describes some “Consequences of Failure To Satisfy the Proposed Regulation”. After explaining that a service provider failure to furnish a necessary disclosure could make a service arrangement not “reasonable”, it states:

The resulting prohibited transaction would have consequences for both the responsible plan fiduciary and the service provider. …. The service provider, as a “disqualified person” under the Internal Revenue Code’s (Code) prohibited[-]transaction rules, will be subject to the excise taxes that result from the service provider’s participation in a prohibited transaction under Code section 4975. [] The Internal Revenue Code (Code) also provides statutory relief for transactions between a plan and a service provider that otherwise would be prohibited. Any excise taxes imposed by Code section 4975(a) and (b) for failure to satisfy the statutory exemption are paid by the disqualified person who participates in the prohibited transaction, in this case the service provider, not the plan fiduciary.

The Department believes that this significant result will provide incentives for all parties to service contracts or arrangements to cooperate in exchanging the disclosures required by the proposed regulation.

This explanation shows that the Labor department believes that its interpretation about what is or isn’t a reasonable-services arranagement might have some relevance in interpreting IRC § 4975(d)(2).

In the proposed rule’s preamble, the Labor department’s explanation of its reasons for the proposed class exemption includes the following:

The failure to make the [proposed rule’s] required disclosures also would result in a prohibited transaction by the service provider under section 4975©(1)© of the Internal Revenue Code.

In the proposed class exemptions’s preamble, the Labor department’s explanation of its reasons includes the following:

A failure to comply with the [Labor department’s] regulation would also result in a prohibited transaction under section 4975©(1)© of the Internal Revenue Code (the Code) because the transaction would not satisfy the Code’s parallel statutory exemption for services at 26 U.S.C. Sec. 4975(d)(2). A prohibited transaction under section 4975 of the Code subjects the service provider as a “disqualified person” to excise taxes as described in section 4975(a) and (b) of the Code.

On a service provider’s failure to meet its obligation or duty to furnish required disclosures, the proposed class exemption would provide relief not to the service provider but only to the contracting fiduciary, and then only from ERISA (not tax) consequences. This seems consistent with IRC § 4975(a)&(b): “The tax imposed by this subsection shall be paid by any disqualified person who participates [participated] in the prohibited transaction (other than a fiduciary acting only as such).”

I am not alone in assuming at least the possibility that the Labor department’s proposed rule also would interpret IRC § 4975(d)(2); some of the comment letters on the proposed rule {http://www.dol.gov/ebsa/regs/cmt-408(b)(2).html} and the proposed class exemption {http://www.dol.gov/ebsa/regs/cmt-408(b)(2)exemption.html} took seriously a presumption that a Labor department rule would impose new disclosure requirements as conditions to getting the IRC § 4975(d)(2) exemption.