Lurking darkly in the background behind all the recent discussions of fee disclosure and how the prohibited transaction rules apply under 408(b)(2), 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. I rarely cite 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

 

Whoever being—

(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 some other, and 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. 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 can be sound when it is made properly part of a negotiated service agreement with a plan vendor.  But with a sales rep without a service agreement- a problem?

Another example could be "tying" arrangements, where 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.  But still the word is caution.  Compliant compensation schemes are difficult enough to design, given the prohibited transaction rules and the forthcoming 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.

 

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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.   

 

As 403(b) plan sponsors continue to understand and apply new regulations, meet expectations in their roles as fiduciaries and seek assistance with some very tough decisions, the comparison between 403(b) and 401(k) plans generally takes place.  Spending time pondering this question is not a waste of time.  However, there is NO blanket statement declaring either plan type is better than the other for every plan sponsor.  Facts and circumstances must be identified and considered before starting up a new plan or terminating a plan possibly with the intent to set up a different type of plan.

Expenses related to plan documentation, investment products and administrative services are usually the first items to hit the list for consideration on what plan is best suited for the plan sponsor. Weighing the cost is certainly an appropriate approach.  But don’t end up paying the piper because you failed to consider potential limitations with your new plan design… 

 

Continue Reading WEIGH THE COST WITHOUT PAYING THE 403(B) PIPER!

It had to happen if we kept at this long enough. We have written often over the past few years on the minutiae of 403(b), particularly where they demonstrate the often goofy differences between 401(k) plans and 403(b) plans. We have also written some on the finer technical rules which apply to plan distributed annuities, which tend to apply in some pretty unusual ways.

Now there is the rare opportunity to discuss the "crossing" of these two worlds, hopefully without the cataclysmic effect of the crossing of the "proton ray gun" beams in the original Ghostbusters movie. These two areas find a common theme in the handling of mandatory cash outs to terminated employees, of all things.

I make light of this point, but minutiae like this is not without important effect: the "form and operation" plan document rules require us to get it right, or risk serious tax consequences.

It goes something like this: Code Section 401(a)(31) contains the direct rollover rules and applies to both 401(a) and 403(b) plans. Oddly enough, this section also contains the mandatory cash out rules which applies to account balances of less than $5,000 (I say "oddly" because 411(a)(11) actually has the old rule, which still exists, which permits the distribution without consent of amounts less than $5,000 from a tax qualified plan) for terminated participants.

Now suppose you have a 403(b) plan funded with individual annuity contracts, and you diligently drafted 401(a)(31) language containing a mandatory cash-out clause. This rule, buy the way, requires cash-outs to be  made for all participants, and into an IRA, if the plan chooses to have cash outs..

It appears to me as if you may have a problem on your hands.  If the Plan Administrator cannot access those funds in the individual annuity contract, how is it to "mandatorily" cash out sums less than $5,000 and roll it into an IRA when it has no control over those assets? Sounds like a serious "form and operation" challenge.

The real answer probably lies in the  oft-overlooked section 401(a)(31)(C), which only requires a mandatory rollover if the force-out would otherwise be subject to immediate taxation. Forcing a 403(b) annuity contract out of a plan as an in-kind distribution does not appear to have to comply with 401(a)(31), because that force out would not be a taxable event. This means you can turn to ERISA Section 203(e) (Code Section 411(a)11 does not apply to 403(b) plans) which permits the distribution, without consent, of the vested "present value of the nonforfeitable benefit. " It does not require an IRA, or a rollover, or even a cash distribution. The in-kind annuity account distribution seems to work.

A handy tool, by the way, to help manage the Form 5500 "100 participant" rule for audit purposes.

This is where those "beams cross" into the Plan Distributed Annuity (PDA) world.  A 401(a) plan could, instead of following the 401(a)(31) rules,  merely purchase a PDA in the name of the participant without that being a taxable distribution, either. Code Section 411(a)11 DOES apply here (as well as ERISA Section 203(e), in most cases. It uses the term "nonforfeitable accrued benefit," not cash lump sum).  Perhaps a handy tool  clean out certain kinds of plans.

By the way, this further demonstrates the caution one should use: ERISA 203(e) will not apply to governmental and church 403(b)plans-which raises the possibility of forcing out larger amounts. You do not save on the Form 5500 and audit fees (there are none), but it offers some interesting planning opportunities.

 

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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.   

Growing up, I often listened to Paul Harvey with great fascination. His stories were most interesting in topic alone. However, I grew to understand that capturing even the smallest of details could shift the entire meaning of a story. I must confess my intrigue with details is probably deeply rooted with years of listening to Mr. Harvey, a broadcasting legend.

The significance of details has once again been confirmed. Just last week, I read an article titled “Recession No Hindrance to 403(b) Transformation” on planadviser.com.

Several colleagues and I found we were skeptical with the results because the survey indicates that plan sponsors are adjusting well to the final 403(b) regulations. These results are simply not consistent with the perception in the market.

 

Continue Reading “And the survey says”… Check your paradigm!

 ASPPA, AARP and WISER  are taking the bull by the horns and, rather courageously, are putting representatives from the mutual fund industry and the annuity industry together on panels in the "Lifetime Income Summit" to be held on May 21.

The agenda promises to be an interesting one. An insurance industry representative will chair the mutual fund panel on lifetime income, while a mutual fund representative will chair the insurance industry panel.

Both have much to learn from each other in this discussion, and I do hope they do listen. The industry responses to the DOL’s and IRS’s RFI on lifetime income show the continuing stark division between these two industries: Insurers, of course, love the thought of a retirement policy which favors lifetime guarantees from defined contribution plans;  with the mutual fund industry taking the stance that such is not needed from DC plans.

Both should take a closer look at their positions, as their economic self interests actually can align well here.  While it is true that only insurers have the legal ability to pool interests and actually provide guarantees, it is the mutual fund industry that has the products that make these guarantees attractive.

Participants love accumulating wealth in mutual funds, and even where annuity contracts are used for accumulation, the investment funds in those annuities are managed by mutual fund investment managers. But participants also love the security that only a pooling of interests can provide.

Folks from these two industries really need to scrap their historical stance on this issue, as its beginning to look a lot like a fight for the sake of a fight.  Plan and plan participants need investment products which can best be had by cooperation by these two groups-they should work together to find ways to embed guarantees in mutual funds; modify regulations to allow guarantees on DC plans that allow continued equity exposure; to find ways to allow participants a safe way to purchase insurance in DC plans to preserve a chunk of their mutual fund gains; and other assorted designs.

Forget about bickering about annuities. Find ways to allow plan participants the best of both worlds, combining the good guarantees with the good investment funds as a way to help provide their customers a chance for a secure retirement.

 

 

 

 

 

 

For , as these sorts of protections should be drawn from elsewhere than defined contribution [plans.

 

 

 

Roger Siske, dear friend, mentor and traveling companion had taught me much about the art of travel, about enjoying myself well while on the road for what seems at times like far too many hours. One of the places to which we had traveled several times together was San Francisco, home of the two labyrinths of Grace Cathedral.

The Cathedral’s Labyrinths are part of an impressive church meditative tradition.  It is a walking maze,  with many interconnecting paths,  offer blind alleys and cul-de-sacs as part of the design, often deliberately disrupting the sensibilities of the human mind.

It is with pleasure I think of visiting those mazes, not of the one’s created by the 403(b) rules regarding church plans.

It truly is an odd maze, one where differences in the manner in which a church approaches its missions reflects in a different way in which the rules will apply. This short piece will hopefully help wend through the maze.

“Church” is really used in three different ways in governing 403(b) plans, to different effect:

1.  Definition of Church Plan for ERISA purposes. This definition determines whether or not a 403(b) plan (or 401(a) plan, for that matter) will be subject to ERISA or not. it is the definition under 414(e) of the Code :

A plan established and maintained for its employees (or their beneficiaries) by a church or by a convention or association of churches includes a plan maintained by an organization, whether a civil law corporation or otherwise, the principal purpose or function of which is the administration or funding of a plan or program for the provision of retirement benefits or welfare benefits, or both, for the employees of a church or a convention or association of churches, if such organization is controlled by or associated with a church or a convention or association of churches.

An organization, whether a civil law corporation or otherwise, is associated with a church or a convention or association of churches if it shares common religious bonds and convictions with that church or convention or association of churches

This is a broad definition of church, effectively meaning the church itself and any other org which shares its common religious bonds.  This would include the likes of church hospitals and church affiliated universities.

2.  Definition of “Church related organization.”  The 403(b) regs uses the term 414(e) definition of church, and calls it a “church related organizations” (note the emphasized language in the 414(e) definition above) when it addresses most issues which the typical practitioner sees as a “church.”  It is used for identifying what organization can have a retirement income account; defining a minister under 403(b) (you don’t need to be a minister of a “steeple church, below, to be a minister) and church employees; qualified organization for the 15 year long service catch-up; permissive disaggregation; and the extended effective dates or specific 403(b) reg purposes.

The only special treatments attendant to this designation are those listed in the prior sentence.  The other 403(b) rules which apply to other 501(c)(3) orgs apply to “church related organizations” which are not “churches,” as defined below.

3. Definition of “Church.”   “Church,” under the 403(b) regs, is a very limited term. It only refers to “steeple churches,” (as defined under 3121(w)) and determines what kind of church organization gets extraordinary treatment under the 403(b) regulations. The plans offered by these churches are still 414(e) church plans for the rest of the regulation’s purposes, and not ERISA covered (unless they elect otherwise). The special treatment is that they do not need plan documents; nor are they required to perform discrimination testing. “Church,” for these purposes, is defined as follows:

 “Church” means a church, a convention or association of churches, or an elementary or secondary school which is controlled, operated, or principally supported by a church or by a convention or association of churches, and includes a “qualified church-controlled organization.”  This means any church-controlled tax-exempt organization described in section 501(c)(3), other than an organization which—

(i) offers goods, services, or facilities for sale, other than on an incidental basis, to the general public, other than goods, services, or facilities which are sold at a nominal charge which is substantially less than the cost of providing such goods, services, or facilities; and

(ii) normally receives more than 25 percent of its support from either (I) governmental sources, or (II) receipts from admissions, sales of merchandise, performance of services, or furnishing of facilities, in activities which are not unrelated trades or businesses, or both.

Church organizations that which fall out of the definition of “steeple church” are typically still 414(e) churches, and subject to the “church related organization” 403(b) rules, and are still 501(c)(3) orgs.
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 It has been well over a month since my last posting, as my “writing time” has been tied up with finalizing Thompson Publishing’s “403(b) and 457 Handbook,” co-authored with Conni Toth of Applied Pension Professionals, LLC; working on annuity stuff; as well as being fully engaged in this spring speaking season. This week, I am speaking at Wilmington Trust’s client seminar,on a Businessperson’s Guide to Paying, Making and Keeping ERISA Compensation- coordinating with Jan Jacobson’s fed update session. The book will be published shortly, and I look forward to re-engaging.
Look soon for more frequent posts.
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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.  

 

 

 

 

Sheri Fitts, marketing Guru of The Standard, and I put on a webcast which detailed the steps an advisor can take in assisting their clients in winding their way through the maze of ERISA issues that 403(b) plans need to deal with. This webcast includes some thoughts on moving a plan from non-ERISA status to ERISA status.  The webcast is just over 45 minutes long, and can be accessed for free by following this link. There is an accompanying, detailed checklist, which you can download by this link. 

 

 

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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.  


  

 

BNA’s  Tax Management Advisory Board published a Memorandum as an "Advisory Board Analysis" last week, "Income Guarantees in Defined Contribution Plans."   Click on the title to download a copy. It speaks in some detail of the technical issues confronting the provisions of annuities through a defined contribution plan.

I authored this paper, and have also committed to Al Lurie and NYU to do an even more detailed paper in the NYU "Review of Employee Benefits and Executive Compensation: 2010" to be published this summer. This paper will be a bit more extensive, further detailing the ERISA Title 1 issues related to these contracts, as well as a number of other points made in the BNA paper.

I look forward to your comments.

 

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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.  


  

 

 

Well, technically, we didn’t write this idea on the beer napkin, but the thought occurred to us to do so as David John and I were sitting in a restaurant at Union Station quaffing one or two. The beer napkin was too wet to write on, but here’s the idea as best I remember it. Lets call it the Beer Napkin Annuity.

As many folks work to answer the IRS’/DOL’s RFI, one thing is clearly coming out: there is a LOT of resistance to mandatory annuitzation of 401(k) account balances. I can’t say that I really disagree with that resistance.  Heck, I saved that money, didn’t I? But what should we do to address the fact that account balances run out?  We continue to hear of "Pension Envy" against those fortunate few who are eligible for those steady, comforting monthly DB benefits. 

Traditionally,  the tax system was designed so that an employee can have the full, intended retirement plan benefit by an employer maintaining BOTH a DB and a DC plan.  The benefit from each plan is limited (generally a $195,000 per year payment from the DB for 2010, and a $49,000 plus a 5k "old guy catch-up" for DC plans. In reality the limits get a whole lot more complicated in application, particularly when combined with other plans).  These two limits were one time coordinated, so you couldn’t get the max out of each plan. But this coordination  was repealed in 1996. This means that employees can max out in both plans (up to the employer’s deduction limit) if the employer chose to offer them. And many did. Now, for a variety of reasons (many upon which I have blogged), employers have been dumping the DB;  trying to goose the DC plans;  or trying to turn their DB plans in DC plans via the inartful effort of the Cash Balance Plan.  

 So, we have been talking much lately about annuitizing that account balance in the DC plan to make up for the loss of this lifetime guarantee.  But one of the biggest problems with DC annuitization as a replacement for DBs is that we are still stuck with a single, DC 415 limit-the DB limit is left unused.
 
The funny thing about DB plans is that the benefits from these plans are expected and intended to come out as monthly payments, not as a lump sum (though DB plans have been dramatically amended in the last few years to provide lump sum benefits).  And no one complains about this sort of "mandatory" annuitization.
 
So it it occurred to me: why not  permit the use of the existing DB limit (or  its actuarial equivalent) to be used in a DC  plan, to the extent that a lifetime guarantee program is purchased with that additional limit. It can be used by the employer to make contributions to either the DB or DC side, or both, as long as a lifetime guarantee is purchased. I can see a portion of an employer match going into the DB like program (perhaps as a "safe harbor" contribution which relieves the discrimination testing on the DC side); maintaining the  employees’ right to access and invest their own elective deferrals; while allowing participants  to take any portion of their DC account balance and purchase additional lifetime guarantees under that "DB limit" program.
 
The DB portion would be fashioned as a DC contribution, and the benefit coming out being treated as a payment from the investment under the plan. This prevents turning the DC plan into a DB plan. You see, as much as I love DB plans, they have  has this nasty side-effect of turning a widget maker into an insurance company. This program avoids that, and would require that this" DB-like" guarantee be fully funded upon purchase by use of an "investment" annuity product in the marketplace.  Alternatively, I guess, it could be fashioned as an insured pension plan under the existing 412(i) rules-which contemplates level premiums paid to an individual contract for level payments guaranteed over a lifetime.
 
It’d take a little bit to figure out the rules, but heck. It uses a tax benefit currently on the books in a way for which it was intended, and could be implemented relatively simply in the current regulatory scheme. It uses a concept folks have accepted and are used to: a DB benefit is paid in a monthly payment, but I (that is the participant) still get to invest my own money (ie, 401k elective deferrals) as I want.
 
The Beer Napkin Annuity……

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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 independent auditor is really at the heart of the growing storm in the 403(b) world. For all the problems and challenges caused by the tax regulations, they really pale when compared to what has to happen on the ERISA Title 1 side of things as employers and the market attempt to transform to an accountability to which they have never been held in the past.

To those of us who are the "non-initiates" when it comes to accounting and auditing standards, we have suspected for the past year that there may be massive problems when it comes to compiling the 403(b) audited financial statement. The problem: you need prior year data to do the current year financials.

The AICPA released a FAQ on 403(b) plan audits.  Here’s what they said on the "prior data" issue. Though it is lengthy, these are words that every professional dealing with 403(b) plans needs to be familiar with. It fully explains the conundrum faced by the auditor-and the costs that will need to be incurred by plans:

5.   Generally, what initial audit procedures would the auditor perform on the beginning of year (e.g. – January 1, 2009) contract and accounts?

Audit procedures include testing the accuracy and completeness of the beginning balances of reported contracts and accounts. The nature, timing, and extent of auditing procedures applied by the auditor are a matter of judgment and will vary with such factors as the length of time the plan has been in existence, adequacy of past records, the significance of beginning balances and the complexity of the plan’s operations (such as the number and consistency of vendors). In accordance with Chapter 5 of the AICPA Audit and Accounting Guide, Employee Benefit Plans, areas of special consideration are the completeness of participant data and records of the prior years, especially as they relate to participant eligibility, the amounts and types of benefits, the eligibility for benefits, and account balances.

The auditor should also make inquires of the plan administrator and outside service providers, as applicable, regarding the plan’s operations during those earlier years. The auditor also may wish to obtain relevant information (for example, trust statements, recordkeeping reports, reconciliations, minutes of meetings, and reports prepared in accordance with Statement on Auditing Standards (SAS) No. 70, Service Organizations [AICPA, Professional Standards, vol. 1, (AU sec. 324)] for earlier years, as applicable, to determine whether there appear to be any errors during those years that could have a material effect on current year balances. Further, the auditor should gain an understanding of the accounting practices that were followed in prior years to determine that they have been consistently applied in the current year. Based on the results of the auditor’s inquiries, review of relevant information, and evidence gathered during the current year audit, the auditor would determine the necessity of performing additional substantive procedures (including detailed testing or substantive analytics) on earlier years’ balances. (See AICPA TIS 6933.01 Initial Audit of a Plan (AICPA Technical Practice Aids, vol.1) for additional discussion of initial audits.)

The inability of the auditor to obtain sufficient appropriate audit evidence supporting the accuracy and completeness of beginning balances of reported contracts and accounts is considered a restriction on the scope of the audit and may require the auditor to modify his or her opinion.

6. What procedures does the auditor need to apply to the comparative statements of net assets available for benefits?

ERISA requires that audited plan financial statements present comparative statements of net assets available for benefits (for example, December 31, 2009 plan year would present a comparative December 31, 2008 statement of net assets available for benefits.) The prior year comparative statements of net assets available for benefits may be compiled, reviewed, or audited. Practically speaking, however, although a compilation or review of the prior year is acceptable, the auditor would need to apply sufficient auditing procedures on the beginning balance of net assets available for benefits in the current year to obtain reasonable assurance that there are no material misstatements that may affect the current year’s statement of changes in net assets available for benefits. (See AICPA TIS 6933.01 Initial Audit of a Plan (AICPA Technical Practice Aids, vol.1)

7. What if historical records do not exist or are not available for reported contracts and accounts?

The DOL has indicated that they expect the plan administrator to use “good faith efforts” to locate and provide all of the necessary records in accordance with its fiduciary responsibilities under ERISA. If historical records (such as payroll records and participant data) do not exist or are not available for the reported contracts and accounts, and the amounts of reported contracts and accounts are material, the auditor may need to modify the report because of a restriction on the scope of the audit.

This would actually be funny if it weren’t such scary stuff. We know that this past data (in a useful form) will be virtually impossible to collect and compile in GAAS acceptable formats, even in the case of a single vendor plan. But the plan will need to still hire the CPA to establish the good faith effort at collecting the data necessary, and then wrestle with the financial services company to try to get something which may not even exist-or at least not at prices that won’t bankrupt the charity. The good news is that if good data that can’t be found, it can then be excluded from the financial statement and the audit.

But that just begs the question: if you exclude an opening balance, can you really even have a financial statement? Ever? THEN what? Without relief from the CPA’s standards setting body, we will have our own, permanently recurring, expensive conundrum. 

 

 

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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.