PT/Disqualified person

[Scuba 401]

Facts: A is a minority shareholder - 1% of a company B. A Runs a TPA/service provider and wants to provide services to Company B's retirement plan.  does this fall under the standard service provider exception?  

[FORMER ESQ.]

If the minority shareholder is not otherwise a ERISA "fiduciary" to the plan, you should be able to rely on the prohibited transaction exemption set forth in the DOL Regs for ERISA Section 408(b)(2). Make sure that the requirements of 408(b)(2) are met: The services are necessary for the plan's operation, and are made under a reasonable contract (including the required service provider disclosures, if applicable) and for reasonable compensation. 

[Scuba 401]

what does not otherwise a fiduciary mean?   lets say for example he is an investment advisor so he would be a 3(21) non discretionary fiduciary.  is that what you mean by otherwise a fiduciary? 

 i think maybe it would be a problem if the RIA/TPA was a plan fiduciary already and by hiring itself it was causing itself to receive additional compensation.

[FORMER ESQ.]

29 minutes ago, Scuba 401 said:

what does not otherwise a fiduciary mean?

Is he also the Plan Administrator or a "named fiduciary" in the plan document? Does he have any discretion or control over the operation of the plan or its assets? 

[Bill Presson]

I have always recommended having the employer pay any fees to anyone that is related to the employer (stockholder, family member, etc), just to be safe.

WCP

[Scuba 401]

2 hours ago, FORMER ESQ. said:

Is he also the Plan Administrator or a "named fiduciary" in the plan document? Does he have any discretion or control over the operation of the plan or its assets? 

no. he would be a 3(21) so no discretion. not the Plan Administrator. 

[FORMER ESQ.]

1 hour ago, Bill Presson said:

I have always recommended having the employer pay any fees to anyone that is related to the employer (stockholder, family member, etc), just to be safe.

WCP

Or Scuba 401, you can always follow Bill Presson's practical advice and keep plan assets out of this (employer pays all TPA fees). 

[Scuba 401]

12 hours ago, FORMER ESQ. said:

Or Scuba 401, you can always follow Bill Presson's practical advice and keep plan assets out of this (employer pays all TPA fees). 

practical maybe but is there legal authority that says you can't do this?

[Peter Gulia]

Under the Labor department’s view (since 1975), the § 408(b)(2) exemption applies only to a § 406(a) prohibited transaction, and not to a § 406(b) self-dealing prohibited transaction. 

 

As a part of that view, a fiduciary must not cause a plan to pay or provide—even indirectly, but involving plan assets—compensation “to a person in which such fiduciary has an interest which may affect the exercise of such fiduciary's best judgment as a fiduciary[.]”

 

29 C.F.R. § 2550.408b-2(e)(1) https://ecfr.federalregister.gov/current/title-29/subtitle-B/chapter-XXV/subchapter-F/part-2550/section-2550.408b-2

 

“A person in which a fiduciary has an interest which may affect the exercise of such fiduciary’s best judgment as a fiduciary includes, for example, a person who is a party in interest by reason of a relationship to such fiduciary described in [ERISA] section 3(14)(E), (F), (G), (H), or (I).”  29 C.F.R. § 2550.408b-2(e)(1) (emphasis added).  But the concept is not limited to those relationships.

 

So, one might ask this question:  Does the plan’s fiduciary or its decision-maker desire to please company B’s minority shareholder, A?  If so, could that desire tempt one to use less than her best judgment for the retirement plan’s exclusive purpose?

 

[Scuba 401]

15 minutes ago, Peter Gulia said:

Under the Labor department’s view (since 1975), the § 408(b)(2) exemption applies only to a § 406(a) prohibited transaction, and not to a § 406(b) self-dealing prohibited transaction. 

 

As a part of that view, a fiduciary must not cause a plan to pay or provide—even indirectly, but involving plan assets—compensation “to a person in which such fiduciary has an interest which may affect the exercise of such fiduciary's best judgment as a fiduciary[.]”

 

29 C.F.R. § 2550.408b-2(e)(1) https://ecfr.federalregister.gov/current/title-29/subtitle-B/chapter-XXV/subchapter-F/part-2550/section-2550.408b-2

 

“A person in which a fiduciary has an interest which may affect the exercise of such fiduciary’s best judgment as a fiduciary includes, for example, a person who is a party in interest by reason of a relationship to such fiduciary described in [ERISA] section 3(14)(E), (F), (G), (H), or (I).”  29 C.F.R. § 2550.408b-2(e)(1) (emphasis added).  But the concept is not limited to those relationships.

 

So, one might ask this question:  Does the plan’s fiduciary or its decision-maker desire to please company B’s minority shareholder, A?  If so, could that desire tempt one to use less than her best judgment for the retirement plan’s exclusive purpose?

 

so following bill presson might be the way to go? no plan assets being paid. 

[FORMER ESQ.]

20 minutes ago, Scuba 401 said:

so following bill presson might be the way to go? no plan assets being paid. 

That is correct. If you want to play it safe, do not involve plan assets. Have the employer pay for 100% of the TPA's services. However, the employer may wish to have the TPA fees paid by the plan (to the extent they can be paid by plan assets--they are not settlor expenses). If so, then remember that the 408(b)(2) exemption from the PT rules does not apply for fiduciary self-dealing. That is why I asked if the minority shareholder was "otherwise an ERISA fiduciary" in my original response.  

[Scuba 401]

55 minutes ago, Peter Gulia said:

a fiduciary must not cause a plan to pay or provide—even indirectly, but involving plan assets—compensation “to a person in which such fiduciary has an interest which may affect the exercise of such fiduciary's best judgment as a fiduciary[.]”

Peter, where does this quote come from?

also what if the person is not a fiduciary so just a record keeper or TPA?

[Peter Gulia]

On your two questions:

 

1.    The paraphrase and quotation are from the rule cited, 29 C.F.R. § 2550.408b-2, which interprets ERISA § 408(b)(2).  The hyperlink points to the government’s Electronic Code of Federal Regulations rendering of that rule.

 

2.    The focus is on whether the fiduciary that engages a service provider makes a fully independent decision.  Even if neither the service provider nor its owner-operator is the engaging plan’s fiduciary, one might consider whether a desire to please the owner-operator, perhaps because she is company B’s minority shareholder, could tempt a decision-maker to use less than her best judgment for the retirement plan’s exclusive purpose.

 

These are sensitive questions, and each party to the would-be service agreement should want its own lawyer’s advice.