If plan assets are used to purchase a typewriter at Office Depot for the exclusive use by the plan in its administration by the plan sponsor (and the plan sponsor is not Office Depot, an affiliate, or its not a plan also covering Office Depot’s employees), the purchase is merely a direct expense of the plan which is not subject to the prohibited transaction rules. If the plan paid an unreasonable amount for that purchase, it may be a fiduciary breach, but it wouldn’t be a prohibited transaction.  It is not subject to 408(b)(2).

If, on the other hand, the plan leased several computers from Office Depot for the exclusive use by the plan in its administration, and there was an ongoing maintenance contract also purchased, the arrangement becomes subject to the prohibited transaction rules. An unreasonable payment for that purchase becomes subject to the prohibited transaction rules-and Office Depot would be required to return the unreasonable compensation, and be subject to the prohibited transaction tax. It is subject to 408(b)(2).

In the first example, Office Depot is neither a "party in interest" under ERISA Section 3(14)(b), nor a "disqualified person" under the Code’s PT corollary, 4975((e)(2)(B)-which defines a party in interest/disqualified person as a "person providing services to the plan."  This means that mere sale of the typewriter by a non-party in interest to the plan isn’t going to be a prohibited transaction, even if the price is unreasonable.

In the second example, the lease and the maintenance contract are likely both to be seen as providing services to the plan, which then makes Office Depot a party in interest to the plan subject to the PT rules.  Any unreasonable compensation would need to be returned by Office Depot.

The purchase of typewriters and computers from an office supply store is not covered by the new 408(b))(2) regulations, which only covers specified transactions. But example 2 is still governed by 408(b)(2), generally.

So why do I even bother raising this? This whole area of party in interest status under ERISA was a hot topic a few years back in the Mertens and Harris Trust (not the Hancock case, but Smith Barney) Supreme Court cases, where the Court was deciding whether or not to allow ERISA lawsuits against non-fiduciary parties-in-interest. But its important now, once again, because it really does serve as a threshold issue to the new 408(b)(2) regs.

If a person is a not a party in interest, (here, if the party is not one providing services to a plan, or a subcontractor of one providing a service to a plan), 408(b)(2) will not apply, or it will not apply until you are providing a service. So lets consider a few things:

Lets say an insurance agent is selling a group annuity contract (or a QLAC, for that matter) to the plan. She sells the contract, receives a commission, and walks away from the plan. The insurance company now deals directly with the plan, and the agent is out of the picture (which may happen for a number of reasons), and is not a subcontractor of the insurance company in the provision of services. I would argue that the agent is not a party in interest, so that 408(b)(2) would not apply to the payment of trail commissions to her. Schedule A reporting, however, would still need to be done. And unless she is consider a subcontractor of the insurance company for the services it provides, the insurance company would not disclose that compensation under 408(b)(2). In reality, most sales folks stay involved in a plan when receiving commissions, and do provide services (which triggers 408(b)(2)), but not always. 

Lets say that a promoter of a private placement or a hedge fund approaches a plan to sell the plan interests in a partnership or the fund. The sale is successful, the commission is paid, and the promoter walks away-the partnership or the fund now deals directly with the plan.  I would argue that the promoter is not a party in interest. You can sell, as I have said in the past, ’til the cows come home (or at least until your "sales" becomes "service", which is, under many circumstances though, inseparable-either as a CSP or a subcontractor).

And here’s a much tougher one: suppose a marketing company related to a mutual fund complex approaches an advisory firm offering to pay $50,000 to sponsor a golf outing for the firm’s advisors. The $50,000 payment is not related to, or based upon any level of production the mutual funds receive from the advisory firms clients.  It would appear that, under these circumstances, the marketing firm is not a party in interest which would need to report, and (even it were otherwise a CSP to a plan) this may not be indirect compensation that the advisory firm or the marketing firm would need to report to a responsible plan fiduciary, either (though there would be a potential PT issue, outside of 408b2, if the firm promoted this arrangement to influence its advisors). This type of arrangement, by the way, would have had to have been reported under the original iteration of the 408(b)(2) regs.

What this discussion points out is something that has been lost in the massive 408(b)(2) discussions in the market: this is about prohibited transactions, and prohibited transactions have ALWAYS been, uneasily, very fact specific. A slight shift in the facts will often determine whether or not a prohibited transaction has occurred.

So it is around what I call the "edges" of 408(b)(2). Though the regs will apply to a significant part of very common transactions and relationships, there are a number of them where the answer is not so clear. And, as with other eccentric prohibited transaction matters, a close look at the particular facts will be determinative.

Discretion being the better part of valor,  we should take seriously DOL’s caution that the regs will be read broadly, and error should be made on the side of disclosure. But sometimes the rules will just not apply, and in circumsatnces that may be surprising.

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