One of the more difficult questions that has arisen under the 404a-5 participant disclosure rules is related to those pesky "old" 403(b) contracts. In the multiple vendor ERISA world, where a number of vendors have been in and out of the plan over decades, the question becomes whether-and to what extent-the 404a-5 disclosures have to be made under those contracts into which deposits could no longer be made.  I had heard of a number of practitioners and consultants who had hoped that these disclosures would not have to be made for such contracts.

The DOL’s FAB 2012-2 answered this question in two parts. The first is in Q2, where the DOL exempted from coverage those "old" contracts which are also excluded from 408b-2 and Form 5500 treatment (that is, those contracts issued before Jan 1 2009,and into which no deposits were made after 12/31/2008; the rights under the contracts run solely to the participant without any involvement by the employer; and the amounts in the contract are fully vested).

The second part is in Q15. Here’s what Q15 says:

"Q-15: Must a plan administrator furnish the disclosures required under paragraph (d) for a designated investment alternative that is closed to new investments, but that allows participants and beneficiaries to maintain prior investments in the alternative and to transfer their interests to other plan investment alternatives?

A-15: Yes. A plan administrator must furnish the disclosures required by paragraph (d) of this regulation to participants and beneficiaries for each designated investment alternative on the plan’s investment platform even if the alternative is closed to new money. In the Department’s view, the required disclosures are as important for deciding whether to transfer out of a designated investment alternative as they are for deciding whether to invest in a designated investment alternative. Consequently, participants and beneficiaries are entitled to, and have the same need for, information about a designated investment alternative that is closed to the inflow of new money as a designated investment alternative that is accepting new money. The plan administrator is not required, but may choose, to provide the disclosures required by paragraph (d) about the closed alternative as part of a comparative document furnished only to those participants or beneficiaries that remain invested in that alternative."

This means that, for those "old" 403(b) contracts not excluded under Q2, the 404a-5 disclosures will still need to be made, even though the only act participants can take is to move money from those contracts. This Q15 also makes it clear that the disclosure only needs to be made to those who hold those contracts, if the plan administrator so elects to do so.

What really comes into play here is 408(b)(2). 403(b) plan sponsors have all, by now, been told by vendors which of these "old" contracts are not excluded from the plan for these purposes. This means that, unless the plan sponsor disagrees with the vendor, they now have a list of contracts for which 404a-5 disclosures will need to be made. Often times the employer will not have the contact information for former employees holding these contracts, but these former employees are still considered plan participants. Sponsors will need to work with their old vendors to get the data they need in order to make the participant disclosure, which those old vendors seem to be required to give.

And there really isn’t an easy answer for these sorts of circumstances, given Q21:

 

"Q-21: Must a plan administrator furnish a single, unified comparative chart or may multiple charts, supplied by the plan’s various service providers or investment issuers, be furnished to participants and beneficiaries?

A-21: Plan administrators may furnish multiple comparative charts or documents that are supplied by the plan’s various service providers or investment issuers, provided all of the comparative charts or documents are furnished to participants and beneficiaries at the same time in a single mailing or transmission and the comparative charts or documents are designed to facilitate a comparison among designated investment alternatives available under the plan. However, as stated in the preamble, permitting individual investment issuers, or others, to separately distribute comparative documents reflecting their particular investment alternatives would not facilitate a comparison of the core investment information and therefore would not satisfy the plan administrator’s obligations under paragraph (d)(2)."

 

For all the noise which arose under 408(b)(2), these kinds of issues demonstrate that the more difficult challenge for 403(b) plan sponsors swill be 404a-5.

 

 __________________

 

Any discussion on any tax issue addressed in this blog (including any attachments or links) is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code or promoting, marketing or recommending to another person any transaction or tax-related position addressed therein. Further, nothing contained herein is intended to provide legal advice, nor to create an attorney client relationship with any party.   

  

 

 

 

The disclosures related to 408()(2) are really just a precursor to the next step: the imposition of the prohibited transaction taxes and penalties related to compensation which fails to meet those standards.  It looks like the regs have the effect of shifting the application of the rules related to the "amount involved" in the transaction a bit. The "amount involved" in the transaction is the amount upon which the prohibited transaction taxes and penalties will be assessed.

Well prior to the new 408(b)(2) regulation, the DOL had developed guidance on the application of the prohibited transaction penalties. Compensation would be subject to penalty to the extentt that it was not reasonable. This meant that the penalties and taxes (the two are coordinated by the IRS and the DOL) only applied to the amounts above what would be a reasonable amount. (By the way, if you are looking for the manner in which to compute the correction and penalty amounts, you will need to reference the Tax Code-including the  tax rules governing foundations under 53.4941(e)).

What the new disclosure rules have done is establish the principal that ANY compensation for which proper disclosure has not  been made will not be considered reasonable. This means the "amount involved in the transaction" will be the entire amount of the improperly (or non) disclosed compensation.  The "to the extent" rule will then only apply to that compensation which has been properly disclosed but is unreasonable.

The application of the PT rules like these tend toward the  arcane, but will now become a central part of the service provider’s life.

 

 __________________

 

Any discussion on any tax issue addressed in this blog (including any attachments or links) is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code or promoting, marketing or recommending to another person any transaction or tax-related position addressed therein. Further, nothing contained herein is intended to provide legal advice, nor to create an attorney client relationship with any party.   

  

 

 

Now that the initial 408(b)(2) disclosures are out, the challenge becomes understanding them. Beyond just understanding whether or not the fees disclosed are reasonable (a challenge in itself), the disclosures do something arguably more important: they take us behind the looking glass, opening a window to a world with which most are not familiar, but which is critical to the operation of 401(k) and 403(b) plans. The disclosures provides hints to, and sometimes disclose, the complex series of relationships and financial arrangements which make possible the daily trading and investing of the assets in individual account plans, on both NAV and insurance platforms, and the manner in which those parties involved in those relationships are paid for those services.

 What this new view reminds us of is that 408(b)2 is but one (albeit important) part of the entire scheme of prohibited transaction rules.  There are a myriad of other prohibited transaction exemptions that are necessary to make the system work. Everything does not begin and end with the “covered service provider”: though all CSPs will be “parties-in-interest” and “disqualified persons” (under the Tax Code’s version of the prohibited transaction rules), not all “parties-in-interest” and “disqualified persons” are CSPs. And many of these non-CSPs will pop up during the 408b-2 disclosure process.
The “simple” payment of 12b-1 fees to a broker dealer is a prime example.  Assume a 401(k) trust has purchased a mutual fund share which pays 12b-1 fees, and assume a registered rep made the sale.  The trust will be a CSP to the plan, but the investment company, through the purchase of the mutual fund share, is not. The mutual fund share is merely an investment asset of the plan, under which no services are provided under ERISA 408(b)(2). Further, there is no “look thru” to the dealings of the underlying assets of the mutual fund.
The mutual fund itself is an interesting creature. It is an investment company which typically has no employees.  In order for it to pay the 12b-1 fees which are generated by the 401(k) plans’ purchase of a share, it usually has an arrangement with a fund distributor or a transfer agent (or both), to which it will pay the 12b-1 fee. These fees are authorized to be used for the specific purposes outlined by the mutual fund’s board in its adoption of its 12b-1 program, and it is for servicing the mutual fund, not the 401(k) plan which purchased the share.
That fund distributor is not a CSP, as it provides no services to the plan, and is not a 408(b)(2) subcontractor because the mutual fund to which it provides services is not a CSP (and there is a specific exception in the regs for those which provide the sorts of services fund distributors provide to investment companies).
The fund distributor will then have a selling agreement with the broker-dealer which sells the mutual fund shares, under which the 12b-1 fees are paid to that broker dealer.  That broker dealer then has a registered representative agreement with the selling broker, under which it agrees to pay to that rep a certain percentage of the 12b-1 fees it receives.
Though the fund distributor, the broker dealer and the registered rep are all receiving indirect compensation from the plan, absent any thing else, they are not CSPs or subcontractors to CSPs. They are paid under a contract for 12b-1 services to the mutual fund, not the 401(k) plan.  Therefore, no 408b-2 disclosure would need to be made of this compensation under this set of facts.
Arguably, once a rep and a broker dealer receive the 12b-1 fee, they may become a party in interest to the plan, even though they may not otherwise be a CSP. In that event, the payment of future commissions (being indirect compensation) would become a prohibited transaction unless there is a prohibited transaction exemption, which there is. PTE 84-24 permits a rep to receive a mutual fund commission if it is disclosed (much like 408(b)(2)) beforehand.
I provide this example only as an illustration, as it is very often not as simple as this. In this type of arrangement, there is often an affiliated party which IS providing services to the plan, whether as a plan trustee, a TPA or an advisor, which then changes the entire formula. And some may take issue with the thought that the b/d and rep are not CSPs, and others may take issue with the payment of a commission as creating party-in-interest status. All are legitimate points. On top of everything else, these determinations are notoriously fact-specific.
But the point is that these complex relationships now become a much more open part of the fiduciary mix.
For your reading pleasure, by the way, is the Investment Company Institute’s description of how intermediaries work in this chain described above. It is useful reading. Note that it is a 2009 document, and technology (and the market) continues to shift many of these relationships and arrangements. Note, also, that an analysis involving the purchase of variable annuity contracts by plans is substantially different than the one described above.
 __________________

 

Any discussion on any tax issue addressed in this blog (including any attachments or links) is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code or promoting, marketing or recommending to another person any transaction or tax-related position addressed therein. Further, nothing contained herein is intended to provide legal advice, nor to create an attorney client relationship with any party.   

 

 

It has been quite a time the past few weeks, with working through the details of MEP transitions to the 408(b) 2 July 1st effective date. With a little break to come up for air, I’d like to comment on something for post July 1 consideration, the variable non-registered group annuity contract.

This type of contract remains one of my favorite products in the 401k space. It can, if so designed, serve merely as an efficient investment platform, or serve as a complete package of financial and administrative services, with flexible pricing and compensation. Most of these contracts have within them the fixed account, which typically has enhanced guaranteed returns of the sort never available out of money market funds or the non-insurance “stable value” funds. Wirehouses and their reps typically have a great deal of disdain for these products, which I could never quite understand. Biases, though, often do get in the way of sound businesses judgments.

These contracts, however, are not simple investments. They have a number of moving pieces , which can make them a challenge to review for 408b2 purposes. And many of the insurance company disclosures I’ve seen are far more complicated than need be.

So I offer the following list for these who need to look at the disclosure related to these products under 408(b)-2:

-Trust or not. These contracts do not need to be held by a trustee, but sometimes they are. You need to know if they are so held, because the trustee will be a CSP, and their fees will need to be disclosed and understood.

-Fixed account or not. Most of the contracts have a fixed account into which variable account assets can be transferred. The fixed account, if one which is based on the insurer’s general account, will have no separate 408b2 disclosure. So don’t look for one.

-Variable separate accounts. The assets in these accounts are plan assets. If they hold mutual funds, you typically will not find an investment management fee, but you may find a sort of account fee. Take a look at it. If the funds in the account are actively managed outside of a mutual fund, look for a separate investment management fee.

-Fiduciary status. Depending on the structure of the separate accounts, the insurer may be a fiduciary of the separate account (they’ll never be one with regard to the fixed account). Look for whether or not, and to what extent, they have fiduciary status.

–Allocation models. Many insurers are offering asset allocation and management programs to plans and participants, for managing the separate account investments. Look to see if there is fiduciary status involved in these programs, and the fees related to them.

-Contract charges. Most of these contracts have separate contract or administrative charges. These are related to the fact that they really are providing a package of financial services (such as free trading between a wide range of mutual funds, and in active monitoring those funds). In assessing this fee, make sure you understand the sorts of services you are getting for that fee.

-Termination provisions. Look for surrender charges and market value adjustments. Sometimes, they are worth it given the rate of return being paid under the general account, and for payment of services from your insurance agent. But understand them.

-Commissions. Look to the amount of commissions being paid, and whether you are getting the support you need. Commissions are not bad things; as a matter of fact, they are necessary for many plan sponsors to get the kind of information and support they need in order to adopt and maintain the plan. Just make sure they are reasonable.

-Annuity disclosure. Virtually all of these contracts offer the right to annuitize at a certain prce. You will likely receive this disclosure, but they rarely have a significant  impact on the fees charged on the investment portion of the contract. Unless you are cnsidering offering anutization, don’t spend a lot of tme on this.

By the way, the issues related to a registered group annuity contract, which are typically offered in the 403(b) space, can be different. I will handle those in a separate posting. 

 

 

__________________

 

Any discussion on any tax issue addressed in this blog (including any attachments or links) is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code or promoting, marketing or recommending to another person any transaction or tax-related position addressed therein. Further, nothing contained herein is intended to provide legal advice, nor to create an attorney client relationship with any party.   

  

 

The dust has begun to settle around the DOL’s Advisory Opinion, 2012-4, and a number of different voices have spoken about what the opinion says, and what it doesn’t say. At this point, it may be useful to to put the letter in some context.

The clarity it brings is, in fact, very helpful. What drove the request was that need for that clarity: with the growing size and sophistication of this market, important parts of the marketplace needed more certainty in order to continue to build their business models. Though we were, of course,  hopeful for a different result, the needed guidance is now in place for this (and other similar) arrangements to properly structure and safely grow the businesses.

 Some thoughts:

1. What the DOL said.  The DOL said several important things:

-It simply stated that no two, unrelated employers may co-sponsor a single ERISA retirement plan unless those employers are (a) members of a group with an "association" type of relationship and (b) that the members of that group or association control, directly or indirectly, that retirement plan.  In much of the current discussion, by the way, the "control" aspect is often overlooked.

-In determining whether there is commonalty and control in a MEP, the Department will rely on its guidance outlined in past MEWA rulings.

-From the initial opinion request, and the DOL’s response, its pretty clear that the DOL is taking the position that the decision to join a MEP (and its attendant delegation of responsibility) is a fiduciary act of the adopting employer.

2. General applicability

The Advisory Opinion is the DOL’s position with regard to all MEPs, not just the one at issue. The Opinion was thoroughly vetted within the Department at length, and other agencies were consulted.  It was issued following the DOL’s brief in the Hutcheson matter, and issued with another, similar AO on MEPs. It has, like all seminal DOL advisory opinions in the past, general applicability.

This means that whether a MEP is sponsored by a traditional association or otherwise, it will be subject to both the commonality and control rules. Each MEP’s validity as a single ERISA plan is assessed using the MEWA rulings related to the definition of employer, and this assessment may have fiduciary implications.

Thought I do not agree with the Department’s analysis, and believe that the legal basis in the initial request is a sound one, it is clearly a position with which the Department does not and will not agree. So it is to this DOL position each such arrangement of any sort will need to manage.

3. What the DOL did not say. 

The DOL properly noted, as also reflected in the original opinion request, that close attention needs to be paid in a MEP (as in any arrangement dealing with multiple employers) to the manner in which the prohibited transaction rules apply to the compensation paid to the parties in interest. This, in fact, is a key element of the design of any such arrangement. The DOL did not say that the design submitted to it violated those rules. 

The DOL did not give any type of MEP a "pass." It did make clear the rules that will apply to any arrangement seeking single ERISA plan status as a way to deliver services, and where to seek guidance for the application of those rules.

It did not "go after" TAG; the parties voluntarily sought sought firm guidance from the Department from which to base further growth in its business model.

4. The impact.  For the properly structured arrangement, the transition to comply with the DOL’s formal guidance can be be straightforward, and can actually result in less risk for both the sponsor of the arrangement and the adopting employers. The advantages of scale in administrative and investment services, as well as professional fiduciary support, can and will continue to be able to be offered to the part of the market for which there is still the most need. ERISA offers a number of different ways by which  to continue to doing this, but using the "single plan" method will require that attention be paid to the the DOL’s traditional commonality and control analysis.

 __________________

 

Any discussion on any tax issue addressed in this blog (including any attachments or links) is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code or promoting, marketing or recommending to another person any transaction or tax-related position addressed therein. Further, nothing contained herein is intended to provide legal advice, nor to create an attorney client relationship with any party.   

  

 

 

The DOL’s Advisory Opinion process is a helpful one, as it provides a manner in which to explore and test the development of innovative programs which are necessary for the retirement system to properly adapt and change.

 One of the Advisory Opinions issued today is a case in point. A continuing challenge in the marketplace (and, generally, for policymakers) is how to effectively increase small employer sponsorship of retirement plans in a manner which protects plan participants. In one of the MEPs opined upon, the average size of participants for each employer is small, yet those plan accounts are still subject to an audit (to which they would otherwise not be subject) under ERISA’s audit rules. Plan participants are given access to a level of individual retirement advisory services that are typically only available to the very largest 401(k) plans; these small employers are not subject to the proprietary investment fund requirements typically imposed on plans of this size; there are processes in place which monitor the employers timely deposit of elective deferrals; and, of course, the cost and variety of investments are at a level which is substantially more favorable than a small plan sponsor could get on its own. Nearly half of the adopting employers were start-ups, which most vendors for single employer plans actively avoid (shall I say like the plague?).
 
It is worth noting that this particular MEP is actually based upon accountability and participant protections, and does not relieve adopting employers from their fiduciary obligations related to the plan. It specifically demands such obligations. 
 
In short, arrangements which safely increase small employer coverage; promote fiduciary compliance and accountability by such employers; control costs for employers; while providing plan participants a wide selection of reasonably priced investments is critical to promoting retirement security.   
 
Unfortunately, there will always be “bad actors” which abuse the system. Working together with regulatory agencies, we can address the “bad actor” challenge while further enhancing the structure for a sound, secure and cost effective platform for the small employer sponsored retirement plan.
 
We look forward to continuing these efforts.
 
As you can imagine, I have been asked by a number of folks of my thoughts related to the statements by the DOL in their brief for removal of the fiduciaries in the Hutcheson matter. Besides the observation that this sort of mischief could have (and does happen) regardless of the existence of a MEP,  to my mind, its all about accountability. Lets explore this:
 
An employer, when directly acting for the benefit of its employees in sponsoring an ERISA plan, can do many things. It can delegate its fiduciary authority to a plan administrator responsible for doing those things (such as filing a Form 5500) which are legally required of the plan administrator; it can delegate the responsibility to properly operate the plan to a third party fiduciary; it can hire investment advisors, investment managers and all other manner of fiduciaries for the plan. It can even agree to become a co-fiduciary to a plan, or to appoint co-fiduciaries. 
 
What it can’t do is to do these things in such a way to avoid accountability for these acts.
 
Similarly, what an employer also cannot do is merely entrust those obligations to a group or association to act indirectly on its behalf if that is accomplished by joining a group or organization formed solely for the purposes of joining the plan.
 
This last rule was established by interpretive fiat, because the unaccountable aggregating of ERISA assets which is possible when one attempts to merely entrust a group to act indirectly on its behalf can be fraught with all manner of risks for plan participants, as demonstrated by the MEWA cases.
 
Abusive MEWAS of the past three decades were designed to effectively rob participants of their promised, and paid for, health care coverage, in the cruelest sort of Ponzi schemes. They were designed to do this by attempting to collect and aggregate the premiums of several employers in a single non-regulated pool, which provided the scale necessary to pull the scheme off.  They took advantage of ERISA’s lack (prior to PPACCA) of substantive requirements for health insurance, while effectively hiding the funds from state regulation-where all of the important participant and employer protections existed for health benefit arrangements.
 
Non-regulated “scale” was fundamental to these schemes working: without the ability to pool significant assets in one place, the arrangement would fail before sufficient (and ill-gotten) gain could be had to make it worth the effort.  The DOL’s approach was then a simple and elegant one: prevent scale from happening in the first place.  By requiring “commonality and control” of organizations acting indirectly behalf of employers, illicit organizations would be disrupted in their efforts to do harm.
 
Asset aggregation and co-fiduciary administration in the retirement plan world, however (and unlike in welfare plan world), is a highly regulated activity under ERISA, and has a long history. They have been consistently recognized and well governed from the inception of ERISA, and much earlier. Multi-employer plans; 413(c); ERISA Section 210; collective trusts; 81-100 arrangements; non-registered separate accounts; master and prototype plans; operating companies under the plan assets rules; are among many examples. Even mutual funds are a classic example of asset aggregation which is critical to the retirement world. In short, “regulated scale” is fundamental to retirement security.
 
Even then, applying the “commonality and control” rule to association based retirement plans makes a great deal of sense, as it may serve to limit the ease and availability of abusive arrangements (or structures which would lend themselves to abuse) where an employer seeks to appoint a questionable organization to act indirectly on its behalf, where it may mean that the employer is seeking to inappropriately avoid  accountability for its actions.  Allowing this to happen could undermine an important element in the effective regulation of “scale”-the oversight by, and accountability of, the employer.
 
But it is one thing to merely “entrust” employer actions to a third party appointed to stand in your shoes as an employer. It is quite another to directly and responsibly act as a fiduciary on behalf of your own employees (as permitted under ERISA 3(5)), to accept co-fiduciary responsibility (as permitted under ERISA Section 405) as a plan co-sponsor with ongoing oversight responsibilities. It would be incumbent on the employer adopting any particular MEP, for example, to make sure checks and balances are in place on the handling of funds, and to have ongoing access to data. 
 
Not only then do you have “scale” in assets and professional administration (and all the benefits that can bring to a plan and participants); but “scale” in oversight, with a large number of independent fiduciaries responsible for overseeing the action of the appointed fiduciaries in the MEP. 
 
On the other side of the fiduciary fence, we also recognize that small employers often provide the greatest compliance challenges. Imposing the oversight of a professional fiduciary under a MEP (in addition to the traditional administrative function of the typical TPA) serves well to protect the plan participant in these small plans which may otherwise be unavailable to them; provides audit oversight that typically would never happen for these small sponsors; while bringing these participants a level of investment choice and related services which only scale can bring at a reasonable cost.
 
In the end, the properly designed and well run MEP advances the policy of the small employer adopting plans, while providing a measure of protection against abuses. "Commonality" may be appropriately applied to limit the availability of MEP structures which may be vulnerable to abuse, but should it be broadly used to limit those which, by design, promote accountability?
 __________________

 

Any discussion on any tax issue addressed in this blog (including any attachments or links) is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code or promoting, marketing or recommending to another person any transaction or tax-related position addressed therein. Further, nothing contained herein is intended to provide legal advice, nor to create an attorney client relationship with any party.   

 

 Many of you know of me as being well versed in 403(b) matters; others are familiar with my work in annuities; others still consider my familiarity with MEPS or ERISA  broker dealer issues. But the heart and soul of my practice over the past nearly 30 years has really been the fiduciary rules-in particular, the application of the prohibited transaction rules. From private placements, to securities trading, to product development, to sales and marketing, and all manner of issues in between, the prohibited transaction rules have been an integral piece of my practice, woven into  much of what I have done and continue to do. It is an arcane world, full of unusual concepts-just see what happens when you try to determine under the regs just what is  the "amount involved in a transaction" -and the computation of the penalty often seems like an art to itself.  

They are also very powerful rules, with the capability of significant impact; I have seen uncertainties in their application virtually shut down insurance company general account private placements for a period of time. And given that the value of the assets in IRAs and retirement plans are equal to some 85% of the value of publicly traded securities in the U.S., they will serve as a growing shadow regulation on a large piece of the U.S. economy over time.

It is also why 408b2 is also so intriguing to me. It has the potential for some pretty serious ramifications. Though we get lost in the detail of timely meeting the new disclosure requirements, the real impact will occur once the dust settles, and when we have to deal with all manner of prohibited transactions- arising either from failure to properly disclose compensation or from what is revealed by the disclosure itself.

Interestingly enough, one of the most serious of the impacts of 408b2 promises to arise from application of Code section 4975, not from ERISA Section 406 to which 408b2 is connected.  For those not familiar with it, Code section 4975 is the Tax Code’s corollary of the prohibited transaction rules under ERISA’s Title 1. By a quirky operation of the ERISA Reorganization Plan, the DOL has the authority to issue the regs by which the prohibited transaction tax under 4975 is operated (except for computation of the tax itself), and thus 408b2 acts to interpret 4975 as well. There are, by the way, important distinctions between 4975 and 406 which will come into play (for example, 4975 does not apply to 403(b) plans, but will apply to non-ERISA IRAs).

4975 imposes a tax on the prohibited transaction. It is not a penalty (though there is a penalty in 4975 for failure to timely pay the initial tax and correct the transaction), like under ERISA Section 406. It is a tax on a transaction. Period. There is strict liability for the taxes.  Once the prohibited transaction occurs, the tax liability attaches, and there is a duty to report and pay that tax. The IRS has no ability to waive that tax-unlike the prohibited transaction penalty under ERISA, which grants the DOL the ability to waive penalties-other than through the issuance of a formal prohibited transaction exemption by the DOL.  

This is even if the transaction occurred without any intent to engage in the transaction, or even if it occurred when engaged in doing what is ultimately in the best interests of the plan and participants. 

The 408b2 regs have an important PT exemption for the responsible plan fiduciary (which also applies to the 4975 tax) under certain conditions, should there be a failure of disclosure, but this exemption does not run to the service provider who fails to make a timely disclosure. And even then the exemption only runs to the disclosure itself, not the actual prohibited transaction which may be disclosed under 408b2.

The rubber has not yet begun to hit the road…. 

 

This has become my "annual Mother’s Day" posting, which hopefully helps describe some of the importance of what we do:
 
 
 
ERISA wonks such as ourselves tend to get lost in the press of details which seem to flow non-stop from our regulators and legislators in D.C.  It is sometimes helpful to step back and see the personal impact of the things we do.
 
A few years back, a good friend of mine who ran the retirement plan operations of a large insurance company asked me to speak about ERISA to a meeting of his administrative processing staff. At the time, they were still struggling with some of the more difficult administrative processes related to the QJSA and QPSA rules. Here’s what I told them:
 
My father died at Ford’s Rouge Plant in 1970, after 20 years with the company. Back then, the normal form of benefit under a defined benefit plan was a single life annuity, covering the life of only the employee.  There was no such thing yet as a qualified joint and survivor annuity or a qualified pre-retirement survivor’s annuity.  This meant that my father’s pension died with him. My mother was the typical stay-at-home mother of the period who was depending on that pension benefit for the future, but was left with nothing. With my father’s wages topping at $13,000 annually and five kids at home, there was also little chance to accumulate savings.
 
The Retirement Equity Act of 1984 (a copy of which I still keep in my office) was designed to change all of that. By implementing the requirement of a spousal survivor annuity, a whole class of non-working spouses received protection which was desperately needed.  So in that speech to my friend’s administrative staff, I asked them to take a broader view-if just for a moment- of the important task they were being asked to implement. It was valuable social policy with real, human effect which they were responsible for pulling off, and they should take a measure of pride in the work they were doing.
 
Things have evolved much over the years, and some of those same rules which provided such valuable protection have become the matter of great policy discussions centering on whether they are appropriately designed, and whether they can be modified in a way to accommodate new benefits like guaranteed lifetime income from defined contribution plans. But the point is that Congress sometimes gets it right, and there is very valuable social benefit often hidden in the day to day  "grunge" of administering what often seems to be silly rules.
 
 
In years past, I had reported that Mom is doing well. But with a series of strokes, and advancing dementia, she is now in Memory Care, and "doing well" takes on a whole different set of meanings. She is still healthy,  does know all of us, and remembers well many important things from a very precious past. We come more fully to the understanding that blessings truly  come in many different forms.
 
 

 

The DOL, in its final 408(b)-2 regulation, issued relief for 403(b) plans, under which information related to  certain contracts would not be subject to the the new fee disclosure rules. Though this was very helpful, it did not specifically address the 404a-5 participant disclosure regulations for the same type of contracts. This raised a degree of uncertainty with regard to whether or not that relief would be extended to the participant disclosures–causing a good  friend to comment in his inimitable NY manner, "what are the participant regs anyway, chopped liver?!?"

The DOL has saved those regs from chopped liver status, today making it clear in Question 2 to FAB 2012-2 that the 408b-2 relief for 403(b) plans also is extended to the 404a-5 requirements for said plans, on the same terms and conditions.