Enrollment gifts and giveaways/prizes - Prohibited transaction?

[MoJo]

I'm trying to find authority on the issue of whether or not enrollment meeting gifts and giveaways (provided by the plan service provider and not the sponsor) constitute a prohibited transaction. The types of gifts and giveaways we're talking about generally are nominal in scope (calculators, pens, etc.) and may be accompanied by food and beverage (of the adult variety!) as an inducement to get employees (and sometimes spouses) to attend the meetings. I can't seem to find any good discussion or authority on point. Any help would be appreciated....

[bzorc]

I have seen many enrollment meetings where the plan sponsor provides beverages and little "trinkets" to encourage attendance (some of my clients said if it were not for the treats, there would be no one there at all!) As to a cite as to whether or not this is a PT, I have no idea.

[Kirk Maldonado]

In my opinion, for there to be a prohibited transaction, the plan must be involved. If the employer or plan service provider pays for the trinkets (with its own funds), that shouldn't be a PT as long as the gratuity is not purchased with plan assets.

Are there any contrary opinions out there?

[KJohnson]

...and as long as a plan fiduciary doesn't receive any of the trinkets raising a 406(B)(3) issue. I recall DOL cracking down on a plan where a service provider picked up hotel bills and refreshments for the plan's trustees. I think the case was called Carell out of Tennessee (...watch out for those brokers picking up greens fees....)

I suppose that if someone wanted to strech it they could look for an indirect prohibited transaction. In other words, the service provider builds into the fees it is paid from the plan the amount that the service provider spends for trinkets and refreshments to parties in interest (the employees) and therefore there is an indirect PT. However I can't imagine DOL would want to take this on.

[MoJo]

Kjonhnson - I recall the same case - I think it involved a golf outing at some plosh resort for trustees and spouses or significant others - where the DOL said the service provider *was* using plan assets, through ridiculously high fees, to offset the cost of the boondoggle.

Thanks everyone for the replies - It was a bit of a reality check - but I'm dealing with a corporate law department that seems to be dead set on stopping the practice of giveaways at plan enrollment meetings, and have the backing of a well respected regional law firm....

[Greg Judd]

So typical of our profession that what should be a matter of basic business propriety is allowed to devolve to pettifoggery.

IMHO, any plan sponsor whose internal legal counsel sees fit to make a federal case out of such an issue, given the facts presented here--regardless of the backing they've gotten from their cronies at the outside firm (think the outside firm would protest if in-house counsel had a strong opinion in the opposite direction?)--should consider recruiting for new counsel. This is a corporate political skirmish, with a small p.

Of course, whether reduced attendance at the plan's enrollment meetings would be bad for the plan, and the plan's participants, is moot.... And alternatives for boosting attendance and/or participation would be outside the corporate counsel's imaginative sphere....

[spoiling for a fight--who, me?]

[MoJo]

Greg: My sentiments exactly! As a "recovering" attorney (I bill myself as an internal consultant for a service provider) I have spent the last upteen years of my professional life working to increase participation in plans (and working with the sales group to sell that service to clients and prospects), always being hindered in the activity by what my boss refers to as the "anti business squad" aka the law group. When did "practicality" leave the legal decision making process anyway.....

[david rigby]

Well, not just anybody can use the term "pettifoggery".

[Greg Judd]

Pax,

was gonna go with persiflage, but couldn't choose between "f" or "ph"....

[MWeddell]

... any incentives for attending the enrollment meeting should go to everyone who attends, not just those who sign up to contribute. Otherwise, if the T-shirt or trinket came from the plan sponsor, some disgruntled employee with too much time on his or her hands could claim a violation of the contingent benefit rule contained in the 401(k) regulations.

[KJohnson]

...also to the extent that the trinkets are deemed to be coming in-directly from plan assets, if a current participant receives the trinket you could have a deemed in-service distribution for participants under age 59 1/2 in violation of 401(k)(2)(B).....or if you run out of t-shirts and have to give away frisbees and too many highly compensated employees have received the t-shirts you could have 401(a)(4) issues...I am sure that counsel will look into all of these deeply troubling issues.

[Guest hank]

Geez Louise!

As an in-house, my response would be to have the plan sponsor pay for the trinkets from its bundle of $$$. Leave plan assets and provider fees out of the discussion altogether. And, I don't think I'd pay outside counsel a dime for an opinion. Not when I can come here for advice!

[Guest jsemo]

You should review the actions of the Department of Labor in reply to a query ---probably in the mid 1980s--- regarding whether banks could give gifts to attract IRA accounts.

[KJohnson]

JSemo might be referring to PTE 93-1. This was the "toaster" exemption regarding bank give-aways for opening an IRA account. However, I am not sure it is applicable to this situation. I think the reason that a PTE was needed is that a person who establishes an IRA is a fiduciary to that account. Therefore you get into 406(B) type issues (as restated Code Section 4975) of a fiduciary receiving a personal benefit for dealing with Plan (IRA) assets for his or her own account.

Here, as long as you aren't giving trinkets to fiduciaries, I agree with Kirk's earlier point--there is no transaction between the plan and a party in interest that should raise PT concerns.

[Guest dheap]

any thoughts about the contingent benefit rule?

[pjkoehler]

The predicate facts of a PT for ERISA 406(a) purposes are: (1) a "fiduciary with respect to the plan" using the discretionary authority that makes him or her a fiduciary to (2) cause the plan to enter into a transaction involving plan assets with a (3) "party in interest." It's not clear whether the "trinkets" are offered by the fund manager merely to induce an employee to attend an enrollment information meeting, or they are a quid pro quo for electing that investment option. My guess is that they are merely a form of solicitation or advertising intended to influence a participant's decision, but not a quid pro quo for their election of a particular fund option, i.e. they get the free lunch, the T Shirt or whatever, regardless of which fund option they choose, or whether they make elective contributions at all. If that's the case, then the trinkets are not part of transaction that includes either predicate facts (1) or (2). It's just one party in interest (service provider) soliciting another party in interest (employee of plan sponsor).

On the other hand, if the employee gets the trinket if and only if he elects the fund manager's investment option, it may be argued that the fiduciary who selected the fund manager, knew or should have known of the fund manager's promotional gimicks. Therefore, the fiduciary allowed the employee to use plan assets (elective contributions) to obtain a benefit in violation of ERISA Sec. 406(a)(1)(D) PT (transfer to, or use by or for the benefit of, a party in interest).

The 401(k) regs prohibit a qualified CODA from making any benefit other than employer matching contributions or cafeteria plan qualified benefit coverages "contingent upon elective contributions." Treas. Reg. Sec. 1.401(k)-1(e)(6). The reg provides a list of examples of "other benefits" all of which are employer-provided. While this is a nonexhaustive list (so I guess you can't say it's free from doubt), the implied condition is that an "other benefit" for purposes of this rule must be employer-provided. Here, it seems quite a stretch to analyze the fund manager's method of solicitation as an employer-provided benefit, whether or not it is a quid pro quo. [Edited by PJK on 09-18-2000 at 07:02 PM]

[KJohnson]

PJK--I don't know that it makes that much of a difference to the analysis in this case, but the term "party in interest" is never used in 406(B).

[pjkoehler]

KJohnson - right you are! I started out trying to compose a more comprehensive response, but after a couple edits I could see that 406(B) was really a nonissue, since there are no facts that suggest that in permitting the fund managers to offer the "trinkets" any fiduciary was self-dealing, subject to a conflict of interest or getting some form of kick-back from the soliciting fund manager. Instead of negating a nonissue, I endeavored to strip out the references to 406(B), but I guess I missed the one in the first sentence.[Edited by PJK on 09-18-2000 at 07:13 PM]