We spend a lot of our time focusing on ERISA’s “Prohibited Transaction” rules, which extensively cover the manner in which compensation is paid under retirement plans, and how it is disclosed. Lurking darkly in the background behind all of our discussions of fee disclosure and how the prohibited transaction rules apply under 408(b)(2), however, is something most of us in the benefits world typically pay little attention to: the U.S. Criminal Code.
We all have a general knowledge that kickbacks and racketeering schemes of any sort are illegal. But many do not realize that there is a specific “anti-kickback” rule applying to ERISA plans that is NOT found in ERISA, but instead under criminal law. I invite you to read the following- and perhaps **gasp** at its breadth. I try to avoid citing the entire section of any statute, but the language of this one is so striking (and so unfamiliar to most of us, and not referenced in most benefits books), I thought it would provide useful reading. This section, by the way, only applies to ERISA plans:
18 USC §1954. Offer, acceptance, or solicitation to influence operations of employee benefit plan
(1) an administrator, officer, trustee, custodian, counsel, agent, or employee of any employee welfare benefit plan or employee pension benefit plan; or
(2) an officer, counsel, agent, or employee of an employer or an employer any of whose employees are covered by such plan; or
(3) an officer, counsel, agent, or employee of an employee organization any of whose members are covered by such plan; or
(4) a person who, or an officer, counsel, agent, or employee of an organization which provides benefit plan services to such plan
receives or agrees to receive or solicits any fee, kickback, commission, gift, loan, money, or thing of value because of or with intent to be influenced with respect to, any of the actions, decisions, or other duties relating to any question or matter concerning such plan or any person who directly or indirectly gives or offers, or promises to give or offer, any fee, kickback, commission, gift, loan, money, or thing of value prohibited by this section, shall be fined under this title or imprisoned not more than three years, or both:
Provided, That this section shall not prohibit the payment to or acceptance by any person of bona fide salary, compensation, or other payments made for goods or facilities actually furnished or for services actually performed in the regular course of his duties as such person, administrator, officer, trustee, custodian, counsel, agent, or employee of such plan, employer, employee organization, or organization providing benefit plan services to such plan.
The language of the statute is broad, and looks at first glance to be able to cover a number of poorly designed compensation schemes or service arrangements. We all know that doing something as foolish as buying a plan sponsor a car in order to keep its 401(k) business would clearly step over the line. But there are some other, maybe more familiar, arrangements which could raise some issues.
Take, for example, a sales rep which has no service agreement with a plan and who is compensated solely by commissions as permitted under PTE 84-24, and the rep otherwise has no service agreement with the plan sponsor. Let us say this rep gets word that a 401(k) client is considering moving its business to a different vendor (and a different sales rep). The rep approaches the clients and offers to pick the TPA fees of the plan if the plan continues to purchase the investment products through him. It is clear that this kind of arrangement won’t be problem when it is made properly part of a negotiated service agreement. But in this example, with a sales rep without a 408(b)(2) service agreement – a problem?
Another example could be “tying” arrangements, where (for example) a bank has a client’s 401(k) plan as well as holding a corporate loan with the plan sponsor. The plan sponsor notifies the bank that it is moving its 401(k) to another institution. The bank responds by threatening to call the loan, or not to extend any future credit if the 401(k) plan is moved- a problem?
This is a criminal statute. Unlike the “civil law” ERISA prohibited transaction rules where “intent” doesn’t matter, “scienter” (that is, intent) is still a critical element, so that helps limit the broad language of the statute. But still the word is caution. Compliant compensation schemes are difficult enough to design, given the prohibited transaction rules and the 408(b)(2) regs. But don’t forget about the non-ERISA criminal rules when addressing these issues.
If, by the way, you find yourself in these sorts of circumstances, it would be helpful to go talk to your lawyer.