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Must a fiduciary do something about a plan that in form is tax-disqualified?


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Many people guess that a retirement plan’s administrator (not a recordkeeper or TPA) has an ERISA fiduciary duty to maintain the plan as a tax-qualified plan. Recently, a consultant told an employer that this idea is wrong.

The consultant said that ERISA requires a plan’s administrator to administer a plan according to the plan’s written terms and ERISA. Further, the consultant said that if a plan becomes tax-disqualified in form because the employer failed to amend the plan, nothing in ERISA requires the administrator (in its role as the plan’s administrator) even to try to get the employer to amend the plan.

In fairness, the consultant said that the administrator must use prudent care to not make (and not allow) any communication to describe anything about the plan’s or its transaction’s tax treatment in any way that is false or misleading. The consultant suggested revising the summary plan description to omit any explanation about tax treatment. The consultant suggested editing the § 402(f) notice (if any) so that every explanation is preceded by “If the Plan is a plan described in Internal Revenue Code § 401(a), ….”

The consultant said that a plan’s administrator administers the plan that the employer created.

Do you think that the consultant is right about the absence of an ERISA fiduciary duty? If not, why not? So that the reasoning is something more than a sense that something doesn’t seem fair or decent, what language in ERISA’s statutory text supports the fiduciary’s duty?

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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A couple of things. First, most plans I see (and have drafted) contain the proviso that it is intended to be a "tax qualified" plan under IRC sections 401(a) et. seq. Arguably, the fiduciary obligation to abide by the terms of the plan would require at least some consideration of attempting to comply with this "purpose" (amongst the others). In addition, the "fiduciary requirement" to abide by the terms of the plan has a proviso that one does not have to abide by the terms of the plan if it would be a violation of one of the other fiduciary obligations (i.e. the "exclusive purpose", and the "prudent expert" requirements, specifically). One could argue that it clearly would be more prudent, and consistent with the exclusive purpose rule to NOT cause tax consequences to participants (by abding by the terms of a plan that ceases to be, in form, tax qualified) - which in effect abrogate the benefits "promised" by the plan design (the loss of the tax deferral value of the benefits promised, etc.).

Just food for thought. Would love to see a case on point (not involving one of my clients!).

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In most plans (at least most that I see), the Plan Administrator (capital letters important) wears more than one hat. He/she is also an employee (perhaps owner) of the Employer/sponsor. Even if the PA has the limited fiduciary responsibility posited in the original post, those other hats might alter the result.

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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MoJo, thank you for the helpful ideas.

Even if the typical “is intended” language, or a purpose statement (whether in the plan’s documents or ERISA § 404(a)(1)(A)), supports interpreting an ambiguity in the plan’s documents to favor an interpretation that would tax-qualify over an interpretation that would not tax-qualify, that might help avoid in-operation disqualifying defects. But it doesn't resolve the problem that the plan in form is not qualified.

ERISA § 404(a)(1)(D) states: “Subject to sections 403© and (d), 4042, and 4044, a fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and — in accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with the provisions of this title and title IV [of ERISA].”

A possible interpretation of ERISA § 404(a)(1)(D) is to “fill-in” a provision that the plan’s documents do not state if ERISA’s title I requires the plan to have the provision. But what if the missing provision is something that Internal Revenue Code § 401(a) calls for as a condition to tax qualification, but is not anything that ERISA requires? In that situation, ERISA § 404(a)(1)(D) doesn’t supply the missing provision.

Even if the plan's administrator relies on ERISA § 404(a)(1)(A)’s idea that a fiduciary must discharge its duties for the “exclusive purpose” of providing the plan’s benefits and the administrator finds that the intended tax treatment is one of those benefits, the most that this could support is interpreting the plan in operation as if the plan has tax-qualifying provisions. But that still would not solve the problem that the plan in form is not qualified.

If the administrator has some ERISA fiduciary duty to deal with the problem that the plan in form is not qualified, what is the administrator supposed to do? Must the administrator remonstrate with the employer about why it should amend the plan? If the employer doesn’t amend the plan, must the administrator ask a Federal judge to order the employer to amend the plan? What statute would one argue as the source of the Federal court’s authority to order the employer to amend the plan?

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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The consultant said that ERISA requires a plan’s administrator to administer a plan according to the plan’s written terms and ERISA. Further, the consultant said that if a plan becomes tax-disqualified in form because the employer failed to amend the plan, nothing in ERISA requires the administrator (in its role as the plan’s administrator) even to try to get the employer to amend the plan.

Most of the plans that I see specify that the employer is the Plan Administrator. So if the employer and the Plan Administrator are the same natural or corporate person, doesn't that change the answer?

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David Rigby, thank you. And you’re right that many “hats” – including employer, plan sponsor, and plan administrator – often sit on one head. But let’s assume that situation. Imagine that the employer corporation’s sole shareholder, sole director, and president-secretary-treasurer acts both for the plan sponsor and the plan administrator.

By failing to amend the plan as needed to tax-qualify, has the chief also breached an ERISA fiduciary duty? If so, what ERISA fiduciary duty did she breach?

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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I agree that allowing the plan to jeopardize its qualified status would not be exercising the Employer's duties with respect to the plan solely in the interest of the participants and beneficiaries. I don't recall ever seeing a document that allowed the Plan Administrator to amend the plan instead of the Employer. I think the initial fiduciary breach would be on the part of the Employer.

I think the Plan Administrator's liability for the breach would come under ERISA 405(a)(3) unless he makes a reasonable effort to get the problem corrected..

405(a)

Circumstances giving rise to liability.—In addition to any liability which he may have under any other provision of this part, a fiduciary with respect to a plan shall be liable for a breach of fiduciary responsibility of another fiduciary with respect to the same plan in the following circumstances:

(1)

if he participates knowingly in, or knowingly undertakes to conceal, an act or omission of such other fiduciary, knowing such act or omission is a breach;

(2)

if, by his failure to comply with section 404(a)(1) in the administration of his specific responsibilities which give rise to his status as a fiduciary, he has enabled such other fiduciary to commit a breach; or

(3)

if he has knowledge of a breach by such other fiduciary, unless he makes reasonable efforts under the circumstances to remedy the breach.

The other issue to consider is the exposure if the IRS comes to visit before the document problems are corrected. Audit CAP isn't cheap.

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Maybe you can find this book to see what footnote #35 in section 15.02 under "Suits Against the Employer" is citing. http://books.google.com/books?id=uKIz649qCD4C&pg=PT312&lpg=PT312&dq=erisa+plan+disqualification&source=bl&ots=eQk1UsGbsV&sig=29LY54upBiJRsPZ4DL5UM5w8pfQ&hl=en&sa=X&ei=iJ7EUY4iscrQAZHOgNgM&ved=0CDMQ6AEwATgU

"...the courts have held that such causes of action do not apply to violations under the qualification rules that are not reflected under Title I..."

Kurt Vonnegut: 'To be is to do'-Socrates 'To do is to be'-Jean-Paul Sartre 'Do be do be do'-Frank Sinatra

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masteff, thank you for pointing to Professor Kennedy’s LL.M. series book.

I’m guessing that the case cited at that footnote 35 is Trenton v. Scott Paper Co., 832 F2d 806, 9 Employee Benefits Cases (BNA) 1075 (3d Cir. 1987).

In that case, Judge Seitz’s opinion for a Third Circuit panel includes two holdings that relate to our discussion:

  1. An employer’s decision to create or amend a retirement plan is a non-fiduciary business decision.
  2. Even if the employer’s amendment of an existing retirement plan makes the plan top-heavy and tax-disqualified, ERISA provides a participant or beneficiary no remedy concerning that act or its consequence.

Some other cases about the lack of an ERISA remedy concerning a plan that is not tax-qualified include:

Cowan v. Keystone Employee Profit Sharing Fund, 586 F.2d 888, 1 EBC 1184, n.3 (1st Cir. 1978) (“This section [iRC § 401(a)] does not appear to create any substantive rights that a beneficiary of a qualified retirement trust can enforce”).

Vermeulen v. Central States, Southeast and Southwest Areas Pension Fund, 490 F. Supp. 234, 237, n.6 (M.D.N.C. 1980) (“This court agrees with the First Circuit’s holding in Cowan v. Keystone Employee Profit Sharing Fund[.]”).

Wiesner v. Romo Paper Products Corp., 514 F. Supp. 289, 291 n.2, 2 EBC 1361, 1363 n.2 (E.D.N.Y. 1981) (“There is no merit in plaintiff's repeated arguments that federal jurisdiction is available because the defendants’ conduct assertedly entails violations of Internal Revenue Code provisions governing pension plans. The sections relied on, 26 U.S.C. [internal Revenue Code] §§ 401, 404[,] and 503, do not create a substantive right that a beneficiary, participant or fiduciary could enforce”).

Reklau v. Merchants Nat’l Corp., 808 F.2d 628, 8 EBC 1001, 1004 (7th Cir. 1986) (“There is no basis, under [ERISA § 3002©] or elsewhere in ERISA, to find that the provisions of IRC § 401 – which relate solely to the criteria for tax qualification under the Internal Revenue Code – are imposed on pension plans by the substantive terms of ERISA.”)

Hollingshead v. Burford Equip. Co., 747 F. Supp. 1421, 1434, 13 EBC 1302, 1316-1318 (M.D. Ala. 1990) (The employer established a pension plan that was not tax-qualified. The court recognized that the plaintiffs were harmed by a nonqualified plan, but rejected the plaintiffs’ requested relief that the court order the employer to tax-qualify the plan or compensate the plaintiffs for their adverse tax consequences. The court found that the remedy is limited to providing the promised pension, without regard to adverse tax treatment.).

Crawford v. Rome, 53 F.3d 750, 756 (6th Cir. 1995) (“[T]he favorable tax consequences of ERISA plans are not mandatory[,] and cannot be guaranteed by judicial intervention[.]”).

A. Ronald Sirna, Jr., P.C. Profit Sharing Plan v. Prudential Securities, Inc., 95 Civ. 8422, 9016, and 4534, 20 EBC 2620, 2624 (S.D.N.Y. 1997) (“[N]umerous courts have rejected similar claims of an implied right of action under [internal Revenue Code] Section 401.”).

Suozzo v. Bergreen, 00 Civ. 9649, 2002 U.S. Dist. LEXIS 25563 at *4 (S.D.N.Y. Feb. 5, 2003) (“[T]here is no private right of action for an alleged violation of [internal Revenue Code] Section 401, and thus the plaintiff has no claim based on the alleged failure of the Plan to comply with Section 401.”).

Hall v. Nat’l R.R. Passenger Corp., 559 F. Supp. 2d 38, 54-55 (D.D.C. 2008) (“no private cause of action arises under I.R.C. § 401[.]”).

Beiliang Loh v. Richardson-Browne, Civ. No. 10-0054, 2010 U.S. Dist. LEXIS 128016 at *9 (D.N.J. Dec. 2, 2010) (“Section 401 of the IRS Code does not grant Plaintiff a private cause of action[.]”).

Perlman v. Fidelity Brokerage Services LLC, 2:11-cv-00326 (E.D.N.Y. 2013) (“To the extent plaintiff attempts to bring a claim under the IRC, that claim must fail, as plaintiff has no private right of action under the IRC.”).

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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Although Kevin C. mentions ERISA's provision for co-fiduciary responsibilities, one doubts that it applies.

If a plan sponsor's amendment of, or failure to amend, a retirement plan is a settlor business decision, the plan sponsor's failure to establish or maintain a plan that in form is tax-qualified is not a fiduciary breach.

Like other commenters, I'm searching for an argument about why the plan-document failure ought to be a fiduciary breach, but I haven't found it. Any more ideas?

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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