NUTS AND BOLTS OF
RETIREMENT PLANS
September 28, 2007
Curtis L. Harrington
Harrington & Harrington
(562) 594-9784
curt@patentax.com
http://www.patentax.com
STATE BAR OF CALIFORNIA
80th ANNUAL MEETING
ANAHEIM MARIOTT
ANAHEIM CONVENTION CTR
SEPTEMBER 28, 2007
PROGRAM 112
2:15 - 4:15 PM
Curtis L. Harrington
curt@patentax.com
(562)594-9784
Harrington & Harrington
http://www.patentax.com
Fx(562)594-4414
Disclaimer: Educational Only
 This Power Point Presentation is Educational Only and
no part of this presentation can be considered as federal
or state tax advice, opinion, or position and is not
intended or written to be used, and may not be used, for
the purpose of (i) avoiding tax-related penalties under the
internal revenue Code or (ii) promoting, marketing or
recommending to another party any tax-related matters
addressed herein, nor (iii) constituting guidance on any
tax or intellectual property matter.
Traditional Deduction Model
(PRIMACY)
 By allowing a deduction for monies set aside during a taxpayers
working life (either by the taxpayer or his employer), the government
TEMPORARILY gives up the tax portion then due and allows the
taxpayer to invest both the taxpayers portion (which would have
been kept by the taxpayer after tax was applied) and the IRS portion
(the Tax on the amount invested in a pension plan) .
 At a future time, after the money has grown, the money is withdrawn,
the IRS collects its tax.
 Thus, if you have $1million in your retirement account, up to
$350,000 (about 35%) belongs to the IRS!!
IRS as CO-Investor
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Planning Risks & Opportunities
 Changing Tax Rates: A taxpayer has some advantage when the
general tax rate is high during input & low during payout.
 Within a non-changing Rate Scheme: Assuming the Taxpayer lives
more modestly (less expenses required) in retirement & his income is
reduced within a tax rate schedule (perhaps where the tax rates were
the same at retirement as they were during the working life), the
taxpayer may have his retirement monies taxed at a much lower
based upon lesser income needed.
 It is also hoped that the amount available at retirement has grown
substantially.
ROTH MECHANISM
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NON PENSION INVESTMENT
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IRS T AXED
PORT ION
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Planning Risks & Opportunities
 Note that the IRS has given up tax on any increase in value for Roth
 There have been questions asked such as “what if” the government
started taxing the taxpayers increase. Some believe it can be done,
others say the prohibition on Ex Post Facto changes would enable the
government to have a chance to tax any increases after it changed the
law in order to provide such a tax.
 Note that if the law were changed in future it would make for an even
more complicated tax computation. In theory, one might need to
know WHEN an increase occurred, rather than the beginning and
ending balances. Computations would be a nightmare to administer.
Where to Begin Explaining our
Pension System?
 THEORY / INTRO  MAIN PLAYERS
 IRS
 ERISA WELFARE
 Dept of LABOR
BENEFIT PLAN
 IRS/LABOR
DISTINGUISHED
JOINT ACTION
 ERISA STATUTE
 IRS STATUTE
Where to Begin Explaining our
Pension System?
 STANDARD PLAN  ANTIASSEMBLY
ALIENATION
 PLAN APPROVAL
 WORKING PARTS
 TRUSTEE
APPROVAL
 STOP!! WHAT
HAVE WE
LEARNED?
 FULL PLAN
 IRA/SEP/SIMPLE
Where to Begin Explaining our
Pension System?
 IRS COMPLAINCE  CIRCULAR 230:
RESOLUTION
OBTAINING A
SYSTEM
PLAN TAX
 Qualification
OPINION IS MORE
 Voluntary
DIFFICULT
Compliance
 Plan Re-Approval
 CIRCULAR 230
COVERED
 WAITING FOR IRS
OPINION EFFECT
APPROVAL
Where to Begin Explaining our
Pension System?
 IS PLAN
 ABUSIVE TAX
AVOIDANCE
AVAILABILITY
TRANSACTIONS
AFFECTED?
 LISTED
TRANSACTIONS
 QUALIFIED PLAN
EXCEPTION
 PPA-2006
ENHANCED PLAN
REPORTING
Where to Begin Explaining our
Pension System?
 ILLUSTRATIVE
CASE LAW
DEVELOPMENTS
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Review Principles
Preemption
Plan Interference
Suspension of Benefits
Administrative Problems
Standing
Fiduciary Problems
Anti-Alienation
 MISCELLANEOUS
: PROVISIONS
 Clawback
 Spouse Consent
 Rollovers
ERISA COVERS TWO MAIN
TYPES OF PLANS
 WELFARE BENEFIT PLAN
 This includes health insurance, life insurance, accidental death and
disability, as well as any policy capable of rising to the level of “a
plan”.
 Welfare Benefit plans can be changed daily.
 RETIREMENT & PENSION PLAN
 This includes health insurance, life insurance, accidental death and
disability, as well as any policy capable of rising to the level of “a
plan”.
 Once rights are vested in a retirement and pension plan, they cannot
be divested except under extraordinary circumstances. (e.g. crime)
Where to Begin Explaining our
Pension System?
 History: Studebaker incident, 1963. The Studebaker car
company, which had a pension plan based upon the ability of the
company to make payments based upon its going-business concern
value, declared bankruptcy and put 11,000 people put out of work.
 Money left in the bankrupt company for pensions was allocated:
 Only 3,600 of the workers, those over age 60, were given full
retirement
 Next 4,000 workers, between ages 40 and 59 & 10yrs service
were awarded a scant 15% of full pension rights.
 Remaining 3,400 employees, those either under age 40 or between
the ages of 40 and 70 with less than 10 years of service, received
nothing.
SETTING THE STAGE: MAIN PLAYERS
 Main Players:
 IRS
 Applies the rules, examines plans to see if “Qualified”
 Allows a deduction for the entity paying into the pension
 Allows the pension beneficiary not to be charged with
income
 Administers the tax code relating to pensions
SETTING THE STAGE: MAIN PLAYERS
 Main Players
 Department of Labor
 Has the ability to step in and take action for
Violations
 Has investigatory power for actual & potential
violations
 Promulgates Regulations
SETTING THE STAGE: MAIN PLAYERS
 Main Players
 IRS & Labor Joint Actions
 Establishes Joint Board to Regulate Enrolled
Actuaries to insure competence and compliance
with valuation and discrimination rules
 BROAD Mandate to arrange and agree for
assistance with (a) Any Federal Agency or (b) Any
state or subdivision to enforce the retirement laws.
SETTING THE STAGE: MAIN PLAYERS
 Main Players
 ERISA STATUTE: Selected Provisions
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§ 401 Coverage & Exclusive Purpose for employees
§ 402 Plan requires written instrument
§ 403 Requires Pension Assets to be held by Trust
§ 404 Expansive list of who is a FIDUCIARY
§ 405 Expansion of Liability to Co-FIDUCIARY
§ 406 Prohibited Transactions
SETTING THE STAGE: MAIN PLAYERS
 Main Players
 ERISA STATUTE: Selected Provisions
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§ 407 Limitation on Employer Securities (see ESOP)
§ 408 Transactions Exempt from those Prohibited
§ 409 Personal Liability for Fiduciary Breach
§ 410 Exceptions for Insurance Policies
§ 411 Felons not to be involved in Pension Operation
§ 412 Bonding Requirement for Asset Handlers
SETTING THE STAGE: MAIN PLAYERS
 Main Players
 ERISA STATUTE: Selected Provisions
 § 501 Crim. Liability; 10yrs; $.5M corp/$.1m individual
 § 502 Civil Enforcement
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- By Beneficiary (Pensioner)
- By the Secretary of Labor
- Discretionary Award of Attorney Fees
- Damages = contributions, interest, liquidated damages
§ 503 Formalities Required when denying Claims
§ 504 Power of Sec. of Labor to Investigate
§ 505 Power of Sec. of Labor to make Regulations
§ 506 Coordination with Other Agencies & States
SETTING THE STAGE: MAIN PLAYERS
 Main Players
 ERISA STATUTE: Selected Provisions
 § 507 Administrative Procedure Act Applies
 § 508 Civil Enforcement
 - By Beneficiary (Pensioner)
 - By the Secretary of Labor
 - Discretionary Award of Attorney Fees
 - Damages = contributions, interest, liquidated damages
 § 509 Survival of Non-Invalidated Provisions
SETTING THE STAGE: MAIN PLAYERS
 Main Players
 ERISA STATUTE: Selected Provisions
 § 510 Main Statute: Interference with Protected Rights
 - It shall be unlawful for any person to discharge, fine, suspend, expel,
discipline or discriminate against a participant or beneficiary for
exercising any right to which he is entitled under the provisions of an
employee benefit plan, this title, section 3001, or the Welfare and Pension
Plans Disclosure Act, or for the purpose of interfering with the attainment
of any right to which such participant may become entitled under the plan,
this title, or the Welfare and Pension Plans Disclosure Act. It shall be
unlawful for any person to discharge, fine, suspend, expel, or discriminate
against any person because he has given information or has testified or is
about to testify in any inquiry or proceeding relating to this Act or the
Welfare and Pension Plans Disclosure Act.
SETTING THE STAGE: MAIN PLAYERS
 Main Players
 ERISA STATUTE: Selected Provisions
 § 510 Makes Several Impacts
 Rights and Benefits Earned are Inviolate
 Anyone to acts against a pension beneficiary for asserting a right
is liable
 It is unlawful to retaliate for testimony
 Unlawful to violate anti-discrimination provisions…. However
SETTING THE STAGE: MAIN PLAYERS
 Main Players
 ERISA STATUTE: Selected Provisions
 (other)
 § 511 Criminal Liability for Coersion
 § 514 SUPERSEDES OTHER LAWS
 § 4000 Pension Benefit Guaranty Corporation
SETTING THE STAGE: MAIN PLAYERS
 Main Players
 ERISA STATUTE: Selected Provisions
 IS THIS LIKE WORKERS COMP?
 It creates a regime with limited ability to sue
 It pre-empts laws otherwise important to workers
 It puts retirement system needs over individual
needs
 Without the three points above, would retirement
plans have flourished?
SETTING THE STAGE: MAIN PLAYERS
 Main Players
 IRS STATUTE OVERVIEW
 § 72: Rules for Annuity Contracts & Early Withdrawal
 § 401: Introduces Requirements for Qualification,
Permitted Disparity, Top Heavy Plans, Requirement of
Joint and survivor annuity, Assignment and alienation,
Compensation Limits
 § 402 Employee Distribution Taxed when paid
SETTING THE STAGE: MAIN PLAYERS
 Main Players
 IRS STATUTE OVERVIEW
§ 403: Annuity Tax Rules
§ 404: Employer Deduction of Contributions
§ 406: U.S.Employees of Foreign Affiliates = employee of parent
§ 407: U.S. Employee of foreign subsidiary = employee of parent
§ 408: IRA limited to permitted amounts & in cash
§ 408A: Roth IRA
§ 409: Employee Stock Ownership Plans
§ 409A: NON-Qualified Deferred Compensation (penalties)
§ 409A: COMPRESSION
 Increased penalties for any mechanism not covered by ERISA
 Specifically Exempts (a) Qualified Employer Plans, Tax-qualified
plans, tax-deferred annuities, 457(b) plans, SEPs, SIMPLEs, and
qualified governmental excess benefit arrangements 415(m).
 Identifies NonPension Programs: such as sick leave, vacation,
compensatory time, sick leave, death benefits, disability, bonuses and
some "performance-based compensation“
 PENALTIES: (a) Inclusion of the deferred amounts in Gross Income
of any amounts not subject to substantial risk of forfeiture ( Risk of
forfeiture remains an important fact in all of these cases); (b) Interest
on the taxes due for regular non/underpayments PLUS 1%; (c) 20%
penalty as an “additional tax”.
SETTING THE STAGE: MAIN PLAYERS
 Main Players
 IRS STATUTE OVERVIEW
§ 410: Minimum Participation (age, service, annual hours)
§ 411: Minimum Vesting Required
§ 412: Minimum Funding to eliminate deficiency
§ 413: Collectively Bargained Plans
§ 414: Definitions & Special Rules
§ 415: Limits on Contributions
§ 416: Top Heavy Plans
§ 417: Minimum Survivor Annuity Requirements
SETTING THE STAGE: MAIN PLAYERS
 Main Players
 IRS STATUTE: §410 non-discrimination
 DISCRIMINATION IS A GOOD THING
 IRS Code and Regs Teach Permitted
Discrimination (1/3 of the volume) , at Length
 Ex: Gym Eq.; Exec’s. marginally diminished Utl.
SETTING THE STAGE: MAIN PLAYERS
 § 410 Discrimination Test
 (1) RATIO PERCENTAGE TEST:
 % non-highly/ % highly > 70% or
 (2) AVERAGE BENEFITS TEST:
 benefit % non-highly / benefit % highly
 (3) SAFE HARBOR:
 (a) Compute Non-highly concentration ratio
 (b) Apply to safe harbor table relaxing the ratio
percentage test from 50% to 20.75%
SETTING THE STAGE: MAIN PLAYERS
 The 20.75% entry corresponds to a 99% non-highly
concentration percentage, so the most discriminatory case
occurs where the non-highly compensated employees
overwhelmingly outnumber the highly compensated.
 (2) Example: If you have one highly compensated
employee and 99 non-highly compensated employees, it is
possible to have the pension plan cover only 20.75% of the
99 employees, or about 21 employees.
 Coverage of less than 20.75% is still possible if you are
able to explain it to the commissioner.
SETTING THE STAGE: MAIN PLAYERS
 The mathematics of non-discrimination are set
forth briefly in order to illustrate and
emphasize that the extremes in terms of
discrimination require a high performance,
bulky, “bulletproof” highly individualized
plan. Where NO discrimination is had, the
employer can either (1) opt for a simple, nondiscriminatory plan or (2) a non(substantial)plan option
SETTING THE STAGE: MAIN PLAYERS
 Main Players
 IRS STATUTE OVERVIEW (Punishment)
§ 4971: 10% tax on plan accumulated funding
deficiency/liquidity shortfall & 100% if not corrected
§ 4972: 10% tax on non-deductible contributions to
plan
§ 4973: 6% tax on excess contribution to IRA, Archer
MSA, retirement annuity, Coverdell ed. Saving account,
or Health saving account
SETTING THE STAGE: MAIN PLAYERS
 Main Players
 IRS STATUTE OVERVIEW (Punishment)
§ 4974: 50% tax on distributions which are less than
required distributions.
§ 4975: 15% tax on prohibited transactions of
disqualified persons & 100% if not corrected
§ 4976: 100% tax on provision of disqualified benefit
(key/discrimination)
SETTING THE STAGE: MAIN PLAYERS
 Main Players
 IRS STATUTE OVERVIEW (Punishment Contd)
§ 4979: 10% tax on excess contributions Minimum
Survivor Annuity Requirements
§ 4980: 20% tax on employer reversion, which if not
replaced rises to 50%
§ 72(t): 10% additional tax on withdrawal from plan
prior to attaining 59½
§ 72(t) 10 % Penalty Exceptions
 There are eight exceptions to the § 72(t) 10% penalty for IRA
withdrawals prior to age 59 ½ for distributions that occur due to:
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IRA owner's disability.
IRA owner's death.
Life expectancy of the owner/joint life
Payments for unreimbursed medical expenses > 7 ½ % of AGI
Payment for med.ins. premiums after 12 weeks unemployment
Payments of no more than $10k toward first-time home purchase
Payment for higher education for the IRA owner / family.
Payment of back taxes re: IRS levy against the IRA.
However, ordinary tax is still due on any of the above withdrawals
LIST OF RETIREMENT SAVINGS
“CHARACTERS”
 QUALIFIED PLAN (DB, DC, Profit Share)
 401k Elective Deferral Plan (Profit Sharing / $ Purchase
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IRA
SEP-IRA
SIMPLE-IRA
ROTH-IRA
457(b) Governmental Plan
403(b) Purchased Annuity for 501(c) organization
QUALIFIED PLAN
(DB, DC, Profit Share)
 1. Can be as complicated or as simple as your needs require
 2. The codes don’t define “QUALIFIED PLAN”, but a
“QUALIFIED PLAN” is one that generally meets the code
requirement AND PREFERABLY will operate as a trust
 3. The main idea is that the more language you build in, and
especially trust language, it will become more inviolate as
to people who operate it.
 4. You can build in language on investments, trades,
standards for operation, so long as the basic language
meeting the statutes is met.
QUALIFIED PLAN
(DB, DC, Profit Share)
 1. DB can have its benefits computed based upon a dollar
amount, a percentage of wages, years of service times some
aspect of wages
 2. DB discrimination is measured based upon the yearly
equivalent benefit which is set forth to make the retirement
target formula
 3. With a formula based on salary, later year salary
increases can sharply increase required contributions.
FACTS RELATED TO QUALIFIED PLANS
Max defined benefit plan yearly output:
$180,000
Max yearly input to defined contribution plan:
$45,000
Maximum amount of annual compensation considered:
$225,000
Threshold for separating “HIGHLYS” from “non-highlys” $100,000
Social Security Base for computing Self Employment
$97,500
Threshold where a “HIGHLY” becomes a “KEY”
$140,000
Maximum SS monthly benefit
$2,116
PBGC maximum monthly guarantee for defined benefit
$4,125
QUALIFIED PLAN
REQUIREMENTS
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1. Written Instrument
2. Established by Employer
3. Communicated to EE’s
4. Permanent (open ended)
5. EE benefit only
6. No clawback to ER
7. No Discrimination
8. Minimum vesting
9. Survivor Benefits
10. EE contribution vested
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11. Forced pmts at NRA
12. No SS based benefit red.
13. Pre&Post Death payout
14. Plan Termination rules
15. Merger transfer rules
16. Anti-Alienation Rule
17. Benefits clear/no discretion
18. Benefits payable for life
19. Other’s death, no effect
20. Specific Type Provisions.
401(k) PLANS
 Defined contribution plan that allows employee
salary deferrals and/or employer contributions.
 Can have other retirement plans.
 Can be a business of any size.
 Need to annually file a Form 5500.
 You can make a 401(k) plan as simple or as complex
as you want to. (Preapproved 401(k) plan is
possible)
401(k) PLANS
 Employees may contribute more to this plan than
under IRA plans.
 Optional participant loans and hardship withdrawals
 Higher Administrative costs (since this is/can be a
REAL PLAN)
 Discrimination must be tested
 Additional "catch-up" contribution ~ $5000 is
allowed.
401(k) PLANS
 Employer/Employee The lesser of 25% of
compensation or $44,000 in 2006.
 Annual filing of Form 5500 is required.
 Participant Loans: Permitted.
 In-Service Withdrawals subject possible 10%
additional tax if under age 59-1/2.
IRA FAMILY
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Individual Retirement Annuity is a life insurance company annuity
Employer and Employee Association Trust Account, (group IRA)
Simplified Employee Pension (SEP-IRA)
Savings Incentive Match Plan for Employees IRA (SIMPLE-IRA)
Spousal IRA - spouse w/less than $2k annual compensation.
A Rollover (Conduit) IRA - distribution from qualified plan
Inherited IRA: a non-spouse IRA beneficiary of a deceased owner.
Education IRA, not deductible but provides for education tax free
Traditional IRA, for those with earned income.
Roth IRA: Contributions not deductible
SELECTED IRA - Traditional
 Documents enabling the IRA are those of the financial institution
 Being individual, no discrimination, no trust operation
 No real plan document need be dealt with by owner/beneficiary
 Main mechanism is deposit of monies and taking deduction.
 Withdrawal will cause financial institution to notify the IRS
 AGI Phase out limits ($50,000 - $60,000 )/ ( $80,000 - $100,000)
 Normal contribution limit $4,000 / Catch-up $1,000 (For 50yrs+)
SEP IRA
 In essence, takes a same type of deposit as would be made for a
traditional IRA and builds a slightly expanded rule set around it

Simplified Employee Pension (SEP). A SEP is a retirement “plan”
designed for self-employed persons, partnerships, sole proprietors,
independent contractors, and owner-employees of an unincorporated
trade or business
 A SEP is an easy method for a small employer to establish a
retirement plan as a form which the IRS recognizes as “the plan
document” is a promise to follow some of the requirements for a full
qualified plan (see example next slide)
SEP IRA
 eliminates complex administration and expense
 SEP is permissible only if employer has no other plan
 contribution of up to 25% of compensation or $45k.
 Prior to January 1, 1997, a SEP-IRA could have included a salary
reduction arrangement (SARSEP) where EE’s < 25. w/50%
participate. SARSEPS in existence as of 12/31/96 continue
 Small math correction on the 25% of compensation to make a self
employed more equivalent to a non-self employed case
SIMPLE IRA
 Savings Incentive Match Plan for Employees (SIMPLE).
 Established in 1996 for employers of <100 employees
 Has a “plan document” IRS form similar to that for a SEP
 Employer must have no other retirement type plan
 Employees can defer up to $10,500 per year/ catchup $3,000 for 50+
 Employer Matching scheme for 2-3%
 Prohibition on withdrawal within 1st 2 years (25% penalty tax)
ROTH IRA
 Contribution limits for ROTH-IRA are generally same as
deductible IRA
 Contributions not deductible
 AGI phaseout: married filing jointly $156,000 - $166,000;
otherwise$99,000 - $ 114,000.
 "Qualified" distributions/withdrawals are not taxable
 Penalty for early withdrawal applies
ROTH IRA
 No withdrawals unless made after a five year period from
first contribution to the ROTH IRA the tax year in which
the taxpayer first contributed to a Roth IRA.
 Roth IRAs may be maintained and contributions made even
after the owner reaches age 70½.
 Strict prohibition on ROTH/NON-ROTH rollovers
 Roth-type accounts are now possible with 401(k) and
403(b) plans
457(b) Governmental Plan
 457(b) Plans are for Government Entities & Non-profits
 Treated here to illustrate a few economic concepts and
advantages
 Since the ER is a not-for-profit, deductibility is not a
problem
 401k Elective Deferral Plan (Profit Sharing / Money
Purchase
 Government Plans generally exempt from ERISA
457(b) Governmental Plan
 Exempted from operation of 409A. This means that the
government entity need not maintain an actuarially
accounted for trust fund. Most government retirement
plans are not separately funded and depend upon taxation
to pay benefits
 The 457 plan assets of tax-exempt employers are subject to
the claims of the employer's creditors, but no governmental
plan assets are subject to employer’s creditors. (An
indication that your retirement is as good as the size and
health of your non-profit)
 After 2002 government plan proceeds can be rolled over.
457(b) Governmental Plan
 Contribution limit for non-profit funded plan (or
government plan choosing to set funds aside is $15,500
 Catchup contributions for 50+ are $5,500
 SPECIAL CATCH-UP for three years prior to retirement
of DOUBLE the normal maximum. In 2007, if retirement is
planned for 2010 or earlier, maximum contribution could
total $31,000
 Uncertain if non-profit a rollover to an IRA will qualify for
a Qualified Plan Rollover since funds may never have been
under anti-alienation. Non-profit may be able to use
regular Qualified Plan
403(b) Tax Sheltered Annuity
 Employers limited to (a) public school, (b) college or
university, (c) a church, (d) a charitable non-proift
501(c)(3)
 Economically similar to a 401(k) plan.
 Other plans are possible in addition to the 403(b) plan
 Salary deferment operates for public school employees only
 More restrictive investment options
403(b) Tax Sheltered Annuity
 Annual Contribution Limits are lesser of 100% of pay or
$15,500; with catchup for 50+ = $5,500.
 Investment options in the 403(b) plan are limited to
annuities and mutual funds only.
 Beginning in 2006, 403(b) plans MAY allow participants to
make contributions through those plans to a Roth-403(b)
account at the discretion of the employer. The Roth pass
through contribution, up to the ROTH yearly maximum
limit, will be taxed to the employee, but future qualified
distributions from that account will not be taxed.
NOW THAT WE HAVE THE
ENVIRONMENT,
LETS ASSEMBLE
A “QUALIFIED PLAN”
STANDARD PLAN ASSEMBLY
 1A. Create a main document which is
consistent with ERISA and THE INTERNAL
REVENUE CODE which by its terms:
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is established by the employer
is for the exclusive benefit of employees and/or their beneficiaries
account for contributions to the plan
has statutory vesting standards
prohibit any forfeiture of accrued benefits
is communicated to the employees
will not “impermissibly” discriminate
OR
STANDARD PLAN ASSEMBLY
 1B. FIND A PROVIDER OF PROTOTYPE
OR MASTER PLANS (SELF CONTAINED)
 MASTER PLAN: Plan for employees is
established using a single custodial account
 PROTOTYPE PLAN: A Plan for employees
includes a separate custodial account for each
employer
STANDARD PLAN ASSEMBLY
 1B. FIND A PROVIDER OF VOLUME
SUBMITTER PLANS (PLAN KIT WITH
“PLUG AND PLAY” COMPONENTS)
 VENDORS of MASTER, PROTOTYPE
AND VOLUME SUBMITTER PLANS
MUST OBTAIN A FAVORABLE
ADVISORY LETTERS ON THOSE PLANS
STANDARD PLAN ASSEMBLY
 BOTH PROTOTYPE, MASTER, AND
VOLUME SUBMITTER PLANS MAY BE
AVAILABLE FROM
 Banks
 Trade or Professional Organizations
 Insurance Companies
 Mutual funds
STANDARD PLAN ASSEMBLY
 PROTOTYPE AND MASTER PLANS ARE
REVIEWED ON A STAGGERED 5 YEAR
CYCLE (Rev. Proc 2005-16 & 2005-66)
 The cyclical sweep is looking for any residual
comparison between the plan an a change in the
law.
 Helps insure that employers will not have to file
determination letter applications more often than
5 years.
STANDARD PLAN ASSEMBLY
 HOWEVER, individual Plans, as applied to
particular employers must ALSO be submitted for
an individual letter ruling some cases.
 A given employer therefore SHOULD NOT rely
upon the opinion letter issued to the plan vendor (in
which “non specific” prototype, master or volume
submitter plans were granted favorable opinion)
unless they are CERTAIN that they fit within the
adoption guidelines.
STANDARD PLAN ASSEMBLY
 1. Main document will also include:
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Name and type of administration
Name and address of a person for service of process
Name and address of the plan administrator
Names, titles and addresses of trustees
Description of collective bargaining agreement provisions
A statement of eligibility and benefits
Circumstances for disqualification or ineligibility
Identity of the source of financing and source of benefits
Date of the end of the plan year and timing of records
Procedures for presenting claims & for redress of claims
STANDARD PLAN ASSEMBLY
 2. Create a SHORT FORM “outline”
“SUMMARY PLAN DESCRIPTION of the
document created in step 1 in 3rd grade
language; praying that it doesn’t omit any
provision later held to be “important”; and
then give it to the employees.
STANDARD PLAN ASSEMBLY
 Example (Part 1)
 The Plan is a “defined benefit plan.” Under a defined benefit plan,
you will receive a retirement benefit, calculated in accordance with a
formula selected by your employer. The formula takes into account
your earnings and period of service with your employer. The benefit
is a single life annuity, and which starts on your Normal Retirement
Date (NRD). If your benefit payments start before your NRD, or is
paid in a form other than a single life annuity, the amount of your
benefit payments will be reduced to reflect the earlier start or
different form. Your employer makes periodic contributions to the
Plan, in amounts determined actuarially, to fund your benefit. The
retirement benefit that you will receive, however, does not depend on
the level of the Plan’s funding. Rather, you will receive a retirement
benefit based solely on the Plan’s formula.
STANDARD PLAN ASSEMBLY
 Example (Part 2)
 The purpose of this Summary Plan Description (the “SPD”) is to
describe in general terms the primary features of the Plan. It will help
you understand the benefits the Plan provides. The complete terms of
the Plan are set forth in the Plan document. You may request a copy
of the Plan document from the Plan Administrator. In the event of
any differences between this SPD and the text of the Plan document,
the Plan document will govern. Nothing in the Plan or in this SPD
gives you any rights of continued employment with your employer.
Moreover, your participation in the Plan does not prohibit changes in
the terms of, or the termination of, your employment by your
employer.
STANDARD PLAN ASSEMBLY
 2. Apply to the IRS for approval; i.e. that your
“PLAN” is “QUALIFIED”
 The next slide shows an expanded view of the
fee computation table on form 8717,
requesting an opinion that the plan is
“QUALIFIED”
STANDARD PLAN ASSEMBLY
 USER FEES
 Non-bank Trustee Approval
 (Rev Proc 2004-8)
 Plan for Individual having less
 Than $200,000 per year income
$3,665
$ No Fee
STANDARD PLAN ASSEMBLY
 4. Obtain a trustee
 Utilize an existing company or entity which is
IRS qualified as a trustee
 Request permission from the IRS to become a
trustee (not recommended for YOUR asset
protection ability) , but this is one path to enable
non-traditional investments such as real estate.
STANDARD PLAN ASSEMBLY
 4A. Obtain A PLAN ADMINISTRATOR:
 The plan administrator manages the action in the
plan, supervises administration, filing of tax
returns, agreements with investment entities, and
relationships with investment advisors
 4B. Obtain an enrolled actuary:
 The enrolled actuary checks to make sure that the
proper level of contributions are made under the
plan and certifies the informational tax returns
STANDARD PLAN ASSEMBLY
 OPTION: Non-bank Trustee. Most “professional
trustees” must meet investment standards. It is
possible for others to be appointed to the position of
trustee provided the following conditions are met
and capacity is shown(Treas. Reg. Secs.
1.408-2(e)(2) through (e)(5):
 Fiduciary Ability
 Continuity of performance notwithstanding death or
change of owners.
 Capacity to Account; and
 Fitness to Handle funds.
WHAT IS “TOP HEAVY” ?
 When 60% of the benefits under a plan go to
Key Employees, employees who (a) are
officers and earn more than $135,000, (b) 5%
owners or (C) a 1% owner (non officer)
earning more than $150,000. (adjusted for
inflation), TOP HEAVY RULES CAUSE:
 Accelerated Vesting
 Minimum benefits for Non-Key employees
REQUIREMENTS FOR THE OTHERS
 IRA (Financial Institution Account)
 SEP-IRA (5305-SEP/5305A Sal. Reduction)
 SIMPLE-IRA (5304/5305 financial inst)
 SARSEP (PRE-1997 ONLY)
 ROTH-IRA(Financial Institution Account)
 457(b) (Mostly Exempt from ERISA)
 403(b) (Mostly Exempt from ERISA)
 Note that non-profits and governments
“could” do a regular stand-alone plan!!
ANTI-ALIENATION = Big Dividing Line
 IRC§ 401(a)(13) STATES
 “A trust shall not constitute a qualified trust under
this section unless the plan of which such trust is a
part provides that benefits provided under the plan
may not be assigned or alienated. The antialienation language has been used to indicate a trust
which is not reachable by creditors of the plan
beneficiary.
ANTI-ALIENATION “PROBLEM”
 “Trust” construction defeat creditors
 Treasury Regulations §1.401(a)-13 states that “This
section applies only to plans to which section 411
applies (minimum vesting standards) without regard
to section 411(e)(2) [which excludes church plans,
government plans, etc]. As a result, any “plan”
which violates vesting standards will likely not
have§ 401(a)(13) protection. This prevents debtors
from hiding money which would not truly be held
in trust for an employee.
ANTI-ALIENATION
 “A Supreme Court case in 2004, Rousey v.
Jackoway (Sct 2005-1, USTC ¶50,258) extended
protection for IRA’s and SEPs (and generally any
equivalent type of tax deferred plan) holding that a
taxpayer may may withdraw from the bankruptcy
estate his right to receive payments “on account of
illness, disability, death, age, or length of service”.
 However the asset protection must be sought IN
CONJUNCTION WITH FILING BANKRUPTCY.
ANTI-ALIENATION
 This holding was adopted very quickly in
subsequent tax legislation as section 224 of The
Bankruptcy Abuse Prevention and Consumer
Protection Act of 2005 to amend the bankruptcy act.
You must file for bankruptcy to “exclude” the non
plan/non trust account from the bankrupt estate.
 Section 224 of the Act describes the protected
accounts as "retirement funds to the extent that
those funds are in a fund or account that is exempt
from taxation under section 401, 403, 408, 408A,
414, 457, or 501(a) of the IRC 1986."
ANTI-ALIENATION
 Other protection can be had at the state level. In
California, the California Code of Civil Procedure §
710.110 provides for an exclusion, but limited such
that it is exempt “only to the extent necessary to
provide for the support of the judgment debtor when
the judgment debtor retires” if the account is a
“self-employed retirement plans and individual
retirement. Thus, the self employed are
discriminated against at the state level in California,
versus someone who was not self employed.
 Other states’ provisions may vary.
ANTI-ALIENATION - SOLUTION
 As a result of the foregoing, it can be seen that there is a
“creditor protection gap” for debtor plan holders who do
not have “trust-type” plans falling under 401(a)(13).
Example:
 Debtor has $5million in a regular, non-rollover IRA, a
home worth $2million, and a judgement against him of $3
million. Outside of the problem of California’s
“protection” which is an invitation to argue over the
$5million, namely that the Debtor doesn’t really need that
much money anyway, the Debtor’s only recourse might be
bankruptcy.
BEWARE CO-MINGLING IRAS
BANKRUPTCY PROTECTION IS LIMITED
 There is an inflation-adjusted cap of $1 million on
‘ORDINARY” IRAs and Roth IRAs.
 If a taxpayer was fortunate enough to have a QUALIFIED
PLAN and “rolled over” the assets from the qualified plan
into an IRA, the IRA maintains its “outside the bankruptch
estate” nature so long as you can show by TRACING that
the IRA was rolled over from a QUALIFIED PLAN.
 This STILL doesn’t protect a large IRA from creditors
“outside” of bankruptcy. If you have to move from one
“qualified plan”, move it to another “qualified plan”
STOP!!! WHAT HAVE WE
LEARNED?
 Factors DICTATING FULLY QUALIFIED PLAN:
 1. Complete Anti Alienation-Trust treatment
WITHOUT having to declare Bankruptcy
 2. Vastly enhanced contribution limits
 3. Need for sharply fashioned discrimination
STOP!!! WHAT HAVE WE
LEARNED?
 Factors DICTATING CHEAPER MECHANISM:
 1. Low Risk business with little or no employee or
owner exposure to outside creditors
 2. Need for inexpensive administration
 3. Need to avoid ERISA liability/responsibility for
plan operation (let others be responsible)
IRS Compliance Resolution System
 The plan has been built, approved and funded.
Now its up to you and the IRS to make it operate
 The IRS has a “Compliance Resolution System”
to run periodic maintenance on all plans to
insure that they are compliant
Employee Plans Compliance Resolution Sys.
 Encourages Plan Sponsors to be vigilant in
properly maintaining their retirement plans.
Program may be divided into three tiers:
 (1) Self-Correction Program (SCP) has no fee,
submission, or reporting requirements
 (2) Voluntary Correction Program (VCP) which has a
limited fee
 (3) Audit Closing Agreement Program (Audit CAP) for
which there is a HIGHER fee negotiated with the IRS
Employee Plans Compliance Resolution Sys.
 The overall design works similar to the
configuration for handling non-filers
 “If you confess before we find you, you will have a
soft landing; If you confess after we catch you, we
will be happy to hang you”
 Unlike the non-filer scenario, voluntarily finding
your faults doesn’t “cost” you anything.
Qualification Failures
 EPCRS is available to correct the four types of
Qualification Failures in a Qualified Plan:
 (1) Demographic Failures,
 (2) Employer Eligibility Failures,
 (3) Operational Failures, and
 (4) Plan Document Failures.
Voluntary Correction for Plans Under
Exam is Limited
 Verbal or Written Notification of Employee Plans
(EP) Exam or impending referral.
 Includes those cases that are now in appeals or
litigation.
 Includes determination letter waiting period where
an EP Agent notifies the plan sponsor of a possible
failure.
Voluntary Correction for Plans Under
Exam is Limited
 Includes a plan which is aggregated (for
qualification under Code section 401(a)) or 403(b)
with other plans under an EP Exam
 EO (Exempt Organization) Exams include cases
where the plan sponsor has received verbal or
written notification of an impending EO exam &
includes any plan sponsor that has been under exam
& is now in appeals or litigation
CYCLICAL RE-APPROVAL OF PLANS
 Qualified plans must be restated for EGTRRA and other items identified on the
Cumulative List for each respective cycle by the end of their 5 year cycle
(individual) or 6 year cycle (pre-approved). For an individually designed plan, the
EGTRRA remedial amendment period generally ends on the last day of the plan's
initial applicable 5 year remedial amendment cycle as provided for in section
12.01 of Revenue Procedure 2005-66, e.g. for a cycle A plan 1-31-07.
 For an M&P or VS plan, the EGTRRA remedial amendment period is the end of
the initial applicable 6 year remedial amendment cycle as provided for in section
18.01 of Revenue Procedure 2005-66.
 In general, Rev. Proc. 2005-66, provides that an employer who adopts, or certifies
its intent to adopt, a timely-submitted M&P plan or VS specimen plan by the end
of their respective individual 5 year cycle will have until the end of the 2 year
window (which will generally be the last 2 years of the 6 year cycle) to be
announced by the Service upon the issuance of opinion and advisory letters, to
adopt the final approved version of the preapproved plan.
WAITING FOR IRS APPROVAL
 Contributions can be conditioned on
qualification/deductibility
 Funds recoverable if within one year of contribution
if the employer made a mistake as to “qualified”
nature. ERISA § 403(c )(2)(b)
 De Minimis clawback of up to $25,000 w/o IRS
permission is possible if plan allows it Rev. Proc.
90-49
CIRCULAR 230: OBTAINING A PLAN
TAX OPINION IS MORE DIFFICULT
 Recent changes to Circular 230 (document which
governs ability of Attorneys, Accountants and CPA’s
to practice before the IRS) has been severely
tightened.
 Given the potential for any “pre-tax entity” to
engage in tax avoidance, many pension related
transactions are specifically listed and require more
extreme attention.
CIRCULAR 230: OBTAINING A PLAN
TAX OPINION IS MORE DIFFICULT
 Section 10.35 of Circular 230 (introduced in 2005)
defines “Covered Opinions” as written advice by a
Circular 230 practitioner relating to any transaction
that the IRS considers to be a “tax avoidance”
transaction published under 26 CFR 1.6011-4(b)(2).
 Practice before the IRS goes beyond dealings which
occur directly with the IRS
ALL PRACTITIONERS ARE MORE
LIABLE FOR OPINIONS AND ENTITY
STRUCTURING THAN EVER BEFORE
 Sanctions for violations of Circular 230 include
Suspension, disbarment in their representation of
taxpayers before IRS and censure
 Monetary penalties may also be imposed in addition
to other disciplinary action and may equal the gross
income derived from the conduct giving rise to the
penalty
Why did the IRS focus on Circular 230?
 Tax Opinions can be used to shield a taxpayer against the
imposition of penalties. This mechanism is covered
elsewhere in the Internal Revenue Code, and has
traditionally been used to protect good faith taxpayers who
choose a path of action based upon assurances by a tax
practitioner as to the propriety or outcome of the action.
 By placing a control in the document which governs the
actions of tax practitioners, the IRS has chosen not to
eliminate the benefit to taxpayers from obtaining a
prophylactic opinion or advice, but instead to place the
burden on the tax practitioner.
Circular 230 Covered Opinion Standards
When giving covered opinions, practitioners must
(among other things):
 1. Use reasonable efforts to identify and ascertain
the facts (Independent Efforts, rather than reliance
on the client)
 2. Not base the opinion on unreasonable facts
Circular 230 Covered Opinion Standards
 3. Relate the law to the facts
 4. Not base the opinion on unreasonable
assumptions
 5. Provide his or her conclusion as to the likelihood
that the taxpayer will prevail on the merits with
respect to each significant federal tax issued
considered in the opinion
Circular 230 Covered Opinion Effect
 The issuance of an Opinion might violate the standard and subject
you to discipline from the IRS Office of Discipline
 A Tax Court, U.S. District Court or other court’s holding that the
standards were not met could result in an ethical violation and
disbarment.
 A holding that the Standard was not met might also allow your efforts
to be colored as being in collusion with the client to perpetrate a fraud
on the government and subject the practitioner to liability as a coconspirator in a fraudulent tax scheme.
 Any covered opinion would have to be considered as a large
information gathering and investigation project to insure that the
standards are met and exceeded.
Circular 230 Covered Opinion Effect
 Turns every comment into a potential COVERED OPINION
 Turns every small opinion tangential to a tax transaction which might
be required to have a “COVERED OPINION” into a “COVERED
OPINION”
 Turns an INTENDED task to produce a “COVERED OPINION”
into a MAJOR PROJECT having a cost and depth equivalent to a
MAJOR RESEARCH PROJECT not unlike the size of a dictionary
 Exponentially raises the cost to the client for providing an opinion
from a few thousand dollars to the cost for producing a “MAJOR
PROJECT”
 Most Practitioners have simply stopped preparing opinions
Abusive Tax Avoidance Transactions
 An abusive tax avoidance transaction (ATAT)
means any listed transaction under §1.6011-4(b)(2)
and any other transaction identified as an abusive
transaction in the IRS web site entitled “EP Abusive
Tax Transactions”.
 A Demographic Failure means the failure to satisfy the
nondiscrimination requirements of the Code (e.g., Code
sections 401(a)(4), 410(b), or 401(a)(26)) with respect to a
Qualified Plan, 403(b) Plan, SEP or SIMPLE IRA Plan.
Abusive Avoidance Transactions (Plan)
 An egregious failure is one that involves a flagrant
disregard of the applicable code requirements. Ex’s:
 (a) a plan has consistently and improperly covered
only highly compensated employees
 (b) a plan provides more favorable benefits for an
owner of the employer based on a purported
collective bargaining agreement where there has in
fact been no good faith bargaining between bona
fide employee representatives and the employer
Abusive Avoidance Transactions (Plan)
 (c) a contribution to a defined contribution plan for
a highly compensated individual is several times
greater than the dollar limit set forth in § 415. SCP
is not available to correct
 Operational Failures that are egregious. VCP is
available to correct egregious failures; however,
these failures are subject to the fees described in
section 12.06. Audit CAP is for egregious failures.
LISTED TRANSACTIONS: IRS Website
 401(k) Accelerated Deductions
 S Corporation ESOP Abuse (Delayed Effective Date for § 409(p))
 Treasury, IRS Issue Section 409(p) Regulations
The Treasury Department and IRS issued proposed and temporary
regulations under Section 409(p) which generally prohibits accruals
or allocations under an employee stock ownership plan (ESOP) that
holds stock of an S corporation where the ownership interest in the
ESOP or in rights to acquire the corporation are so concentrated
among 10% owners that they hold >50% of the corp. interests.
LISTED TRANSACTIONS: IRS Website
 Collectively Bargained Welfare Benefit Funds
under § 419A(f)(5)
 Trust Arrangements Seeking Exemption from § 419
 Abusive Roth IRA Transactions
LISTED TRANSACTIONS: IRS Website
 Deductions for Excess Life Insurance in a Section
412(i) or Other Defined Benefit Plan
 Abusive transactions involving specially designed
life insurance policies in retirement plans, section
"412(i) plans".
 As can be seen, any device which enables
movement of money while taking a deduction,
especially followed by ownership type manipulation
is fertile for tax abuse.
LISTED TRANSACTIONS: OTHER
 “listed transactions”
 any partnership or other entity, any investment plan or arrangement or
any other plan or arrangement the principal purpose of which is the
avoidance or evasion of any federal tax
 any partnership or other entity, any investment plan or arrangement or
any other plan or arrangement, a significant purpose of which is the
avoidance or evasion of any federal tax, if such significant purpose
advice is one of the following:
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A “reliance” opinion
A “marketed” opinion
Condition of confidentiality, or
Contractual protections
LISTED TRANSACTIONS: OTHER
 “Tax avoidance” is not (supposed to be) something
that is wrong or unlawful….
 “[o]ne who avoids tax does not conceal or
misrepresent. He shapes events to reduce or
eliminate tax liability and, upon the happening of
the events, makes a complete disclosure.”
Internal Revenue Manual 9.1.3.3.2.1 (7/29/98)
EFFECT ON RETIREMENT PLANS
 Enrolled Actuaries cannot rely as much upon
client/employer provided data in computing benefits for
plan participants. Additional Investigation will be required.
 Combined effect of Circular 230 with the additional duties
under PPA 2006 will place an even greater burden on
Enrolled actuaries, especially as to the depth to which
investigations relating to their expanded duties must be
performed, including target attainment percentage and
endangered or in critical status.
EFFECT ON PLAN SERVICE PROVIDERS
 Enrolled Actuaries, Tax Attorneys, and Accounts will be less able to
rely upon the data provided from the client and will be statistically
forced to have greater personal oversight and inspection of company
records and books when signing documents relating either to PBGC
Form 1 or Form 5500 and associated documents. Because boilerplate
disclaimer language cannot be incorporated into the form signatures,
the only choice is due diligence, resulting in a rise in client costs.
 Previous isolated systems, wherein the client provided data to an
accounting service who provided summaries to various practitioners
in turn, will either be duplicated by practitioners doing the same job
twice, or else will undergo a shift of services to the practitioners, at
least in part.
EFFECT ON PLAN SERVICE PROVIDERS
 The combination of the above will tend to favor
more vertically integrated practitioners who can
bring the data investigation and treatment function
in-house.
 OR
 Further increased reliance on non-practitioners
whose practice is not regulated by Circular 230,
such as financial institution employees who already
have a near monopoly on the retirement plan AND
retirement fund industry.
Covered Advice Could Also Include:
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Section 79 “early distribution” tax
Sections 105 and 106 health benefits
402 distributions, rollovers, direct transfers
404 deductions
409A nonqualified deferred compensation plans
412 minimum funding
403(b) plans
457 plans
Stock options
Mergers and acquisitions
Golden parachutes
Taxation to alternate payees
Pension Potential Gray Areas Include:
 Qualified plan and trust documents
 Merger and Acquisition Agreements
 Cover letters transmitting documents
 Situations where a plan turns out to be not qualified
 SPD (simplified plan document) and SMM (summary of material
modifications
 402(f) and 204(h) Notices
EVEN Enrolled Actuaries Are Uncertain
 The Enrolled Actuaries Society have been pressing the
IRS for answers to specific questions about the new
Circular 230 Rules because of the Continued uncertainty
in its application:
 Confirmation as to whether establishment or maintenance of a
qualified retirement plan is a transaction, “the principal purpose
of which is the avoidance or evasion of any tax imposed by the
Internal Revenue Code (IRC).”
 Whether making calculations and measurements based on an
understanding of the law is tantamount to giving an opinion of
the law.
Enrolled Actuaries Are Uncertain (Contd)
 Whether communicating, in writing, the results of actuarial
computations — constitutes the rendering of a covered opinion.
 The meaning, scope and breadth of the exception in Circular 230
enabling enrolled actuaries regarding the establishment of the
qualification of a qualified plan.
 Guidance on clarification of the provisions of Section 10.33
outlining “best practices.” (This would seem to point out a
“financial engineering” conflict between the plan beneficiaries
who seek maximum funding to maximally insure an abundant
supply of retirement funds versus the plan sponsors who are
seeking to satisfy minimum funding in order to satisfy the rules
and reduce costs.)
Qualified Plan Issues Exception
 “Covered Opinions” do not include advice that concerns the
qualification of a qualified plan
 Except for advice regarding a listed transaction or where the
“principal purpose” of the plan or arrangement is the
avoidance or evasion of taxation
 “Concerns the qualification” must be interpreted very
narrowly to fall within the exception
 As a result of all of the foregoing relating to circular 230
and covered opinions, the Exemption for Qualified Plans
doesn’t mean much.
IS PLAN AVAILABILITY AFFECTED?
 As the creation of a plan moves farther away from the
“non discriminatory” vanilla standards and either
towards sharper discrimination or toward the
structuring of arrangements where increased control is
had over the entities associated with ownership of
investment: you will have to go there without your tax
adviser.
 This will move non-practitioners into position as prime
advisors and plan experts for more complex plans.
PPA-2006 Enhanced PLAN Reporting
 In addition, for regular defined benefit
“QUALIFIED PLANS” have enhanced reporting
rules which cause plan administrators and others to
communicate more often and more completely with
plan beneficiaries
 Much of this new legislation and expanded rules are
in response to the ENRON “event”.
PPA-2006 Enhanced PLAN Reporting
 Report certification that adjusted funding target
attainment %age of the plan is not less than 100%
 Report certification relating to requests extending
amortization periods
 within the 90th day of each plan year, the plan
actuary must certify to the Sec Treasury and to the
plan sponsor whether or not the plan is in
endangered or in critical status (failure to certify can
result in an ERISA penalty of $1,100 per day)
PPA-2006 Enhanced PLAN Reporting
 Funding Improvements: After the adoption of a
funding improvement plan, it may not be amended
to increase benefits unless the plan actuary certifies
that the benefit increase is consistent with the
funding improvement plan
 the construction of a separate mortality table upon
request of the plan sponsor by the actuary based on
a plans own experience
ILLUSTRATIVE CASE LAW
DEVELOPMENTS
Short Review of Preemption & Pension v. Welfare Benefit
PREEMPTION
PLAN INTERFERENCE THRESHOLD
SUSPENSION OF BENEFITS
ADMINISTRATIVE PROBLEMS
STANDING
FIDUCIARY PROBLEMS
ANTI-ALIENATION
Review Pension vs. Health & Safety
 Recall that ERISA governs both plans which are “pension
like” and which are “health and safety-like”
 Pension-Like provisions in which rights arer vested are held
to an inviolate standard.
 Health-Like plans can be changed at the whim of the
employer every day or every week. There is generally no
vested right here
PREEMPTION & INSURANCE
 Insurance Accident Plans typically include a provision which gives
them a claim to any monies recovered from the accident victim from
others (typically the person who caused the accident)
 The insurance plan typically enforces its rights against its own
insured who obtain the double coverage. Without a subrogation
provision, the accident victim would get a double recovery (which
may be permitted in the victim’s jurisdiction.
 Special carve out for Insurance in ERISA section 514. Distinguishes
insurance from others v.self insurance (self insurance is subject to
ERISA)
SUBROGATION RIGHTS
Insurance Accident Plans typically include a
provision which gives them a claim to any
monies recovered from the accident victim
from others (typically the person who
caused the accident)
The insurance plan typically enforces its
rights against its own insured who obtain
the double coverage. Without a
subrogation provision, the accident victim
would get a double recovery (which may be
permitted in the victim’s jurisdiction.
 Special carve out for Insurance 514 insurance from
REVIEW OF PREEMPTION
 ERISA’s Preemption Clause preempts state law which
“relates” to employee benefit plans". ( loose standard)
 ERISA’s “Saving Clause” omits from preemption those
state laws which are directly related to insurance.
 The dividing line between these two characterizations is a
rich battleground
 Policy Behind Preemption:To avoid state laws & allow
uniform policies to be applied to employers.
PREEMPTION WALL
 In addition, preemption, regardless of whether the plan
provision is pension-like or not, builds a wall in which
legal action is severely restricted:
 against the plan by beneficiaries
 against the plan by the states
 by the plan against others
CASE PREEMPTION
 Preemption: Narrow nature of ERISA §510 right to bring suit restricts
the ability to bring other “tort-like” causes of action, such as
INTENTIONAL INFLICTION OF DISTRESS, for example, related
to decisions made with respect to a plan.
 Statutes which are often used “along with” and are “related to”
ERISA, and which make it past preemption include:
 Title 7 &
 Americans with Disabilities Act
 The recent action involving cash balance conversion pension plans
were defeated using age discrimination effect as the main tool.
CASE: PREEMPTION / SUBROGATION
 Great-West Life & Annuity Ins. Co. v. Knudson (2002) 534 US
204 (Jan. 8, 2002):
 ERISA Section 502 does not provide a plan with method of
enforcing the plan’s subrogation provisions against
participants or beneficiaries
 Where participant obtained personal injury recovery
against third party tortfeasor, Plan was not able to obtain
reimbursement
 Comment:: it may be beneficial to consider the use of an
insurance company contractor & to compute a value of
subrogation ability versus increased contractor cost
CASE: PREEMPTION
 Sereboff v. Mid Atlantic Medical Services, Inc. (2006, S.Ct.)
2006 WL 310754

The Supreme Court unanimously affirmed the Fourth
Circuit’s decision that a group health plan’s claim against a
plan beneficiary’s third-party recovery fund for the
reimbursement of advanced payment of medical benefits was
one for “other appropriate relief” allowed by ERISA
 The action was brought to enforce the “Acts of Third Parties”
provision, which thus qualified it as an equitable remedy
 Comment: Here we see something other than subrogation, but
the enforcement of a “trust like” duty on a third party fund
and that plans can generally offensively recover to survive.
CASE: PREEMPTION
 Hutchison v. Fifth Third Bancorp (6th Cir. Ct. App,
Nov. 30, 2006) No: 05-4389. Contractual sweetheart
promises in an agreement between merging
corporations to provide a company's pre-merger
employee benefit (ESOP) plan (a third party?)
additional money availability to ESOP plan members
was held to be pre-empted, even where plan
participants benefitting under the offer were induced to
vote their shares in favor of the merger.
 COMMENT: If the contract had been drawn between
the Plan & the merging company, this case might have
had a different outcome. The plan was not a party to
the agreement, and was not lied to. Here, ERISA is seen
as segregating the plan away from corporate action.
CASE: PREEMPTION/NON-RELATION
TO EMPLOYMENT CIRCUMSTANCES
 Performance Threat is not related to forced retirement
 Fischer v. Andersen Corp., (2007, CA8), 2007 WL 1094442
 An employer did not interfere with an employee's right to
benefits under ERISA § 510 by placing him on a
performance improvement plan (PIP), which “prompted”
him into taking early retirement; no constructive discharge.
 Facts. Rodney P. Fischer (Fischer) began his employment
with Andersen Corp. (Andersen) in 1971 and worked as an
engineer at Andersen's door production facility. NRA was
65 for full benefits but years of service could enable full
benefits by age 62. Early retirement was possible after age
55 w/reduced pension benefits. A supervisor suggested he
either move to a different position or start a PIP.
CASE DEMONSTRATING NECESSITY
FOR SHOWING PLAN INTERFERENCE
 Rather than agreeing to the PIP, Fischer informed his
supervisor he would be retiring by the end of 2003 causing
the supervisor to decide it was futile to start the PIP.
However, in June 2003 the supervisor presented Fischer
with a PIP specifying general categories of project work,
communication, & general work habits requiring
improvement.
 In December 2003, after taking short-term disability leave
due to stress and anxiety, Fisher retired from Andersen,
saying that he chose to retire to retain his existing health
plan, and that he was constructively discharged.
CASE DEMONSTRATING NECESSITY
FOR SHOWING PLAN INTERFERENCE
 Later, Fischer brought an action for benefits interference
under ERISA § 510, contending that Andersen had
effectively offered him a choice between voluntary early
retirement with reduced pension benefits that included
health benefits, and inevitable termination with the same
reduced pension benefits stripped of health insurance.

 HELD: no interference with prospective benefits; 8th circuit
affirmed. No causality between the employment action and
the likelihood of future benefits being transformed to a nonlikelihood of future benefits.
CASE DEMONSTRATING NECESSITY
FOR SHOWING PLAN INTERFERENCE
 Fischer failed to show an adverse employment action and
did not link the motive to the retirement plan. There was no
constructive discharge despite a contention that his
employment was made intolerable under the PIP which
may have carried a risk of termination. The fact that he had
been informed that he and his wife would permanently lose
their health insurance benefits if terminated was irrelevant.
 Fischer did not prove the PIP was setting Fischer up to fail
or that it was unreasonable. Further the instructions in the
PIP that Fischer believed to be unfair were either
ambiguous language or undefined and Fischer should have
asked for clarification.
CASE DEMONSTRATING NECESSITY
FOR SHOWING PLAN INTERFERENCE
 Further, Fischer never asked for clarification, and an
employee who quits without giving his employer a
reasonable chance to work out a problem has not been
constructively discharged, the court stated.
 The court also determined that Fischer's evidence failed to
prove that reasonable employees placed on such a PIP
would have considered failure, subsequent termination, and
permanent loss of medical benefits so imminent that taking
early retirement was the only option. Fischer failed to
show intentional interference with benefits.
 Source: RIA Pension and Benefits Week (preview) 04/30/2007,
Volume 13, No. 18
SUSPENSION OF BENEFITS
 One of the hallmarks of Pension plans is that a benefit
once given, cannot be taken back. This rule is generally
absolute and really contrasts pension plans from
welfare benefit plans.
 Anti-Cutback Rule as a General rule established
under Heinz: conditions imposed after a benefit
has accrued make the “accrued benefit less
valuable” whether or not an actual benefit
suspension occurs. (Heinz v. Central Laborers’ Pension
Fund 303 F.3d 802 (7th Cir. Sept. 13, 2002), aff’d, 124 S. Ct. 2230
(June 7, 2004) Very Strict Standard
CASE: SUSPENSION OF BENEFITS
 Swede v. Rochester Carpenters Pension Fund Cir. Ct. App. Oct
20, 2006, Case Number: 06-0112
 Court instruction to IRS not to revisit the tax-exempt
status in past years of plans that were amended in
reliance on” other rules and procedures, cannot be used
by a Defendant to resist applying the Heinz holding
between the non-permitted plan amendment and the
date of the Heinz holding .
 Comment: Employers can’t get away with cutbacks in
the interim before the cutback rule was solidified.
Revenue Procedure 2005-23
 General Rule: A plan which adopts a “reforming
amendment” and complies operationally with that
amendment may obtain relief from the retroactive
application of Heinz prior to its June 7, 2004 issuance
 Reforming Amendment must contain the following provisions:
 The original (more restrictive) amendment may not apply to
benefits that have already accrued
 Payment of retroactive benefits to an affected plan participant
must include any appropriate interest or actuarial increase for
benefits that have accrued as of the applicable amendment date
 The applicable amendment date is the later of the original
amendment’s effective date, or the date of its adoption

-
But Then, Revenue Procedure 2005-76
 Plan must provide for the payment of retroactive
benefits, and must be in operational compliance with
the reforming amendment no later than January 1, 2007
 Under the Swede case rationale, any conforming
amendments and actions should place the employee in
at least as good a position as it would have been if no
cutback had occurred.
ADMINISTRATIVE
 Plan Administrator acts or omissions can bring/avoid disaster
 PLAN OR NOT A PLAN?:An employee was discharged at age 66
but promised a pension to begin at age 70. (Perhaps an enticement to
let any statute run on the improper discharge). At age 70, pension
was demanded. This 1986 case held for the employer on the grounds
that a “promise” doesn’t create a plan, and ERISA’s requirement that
a plan be written, etc. Today, the employee might have §409A as a
weapon.
 PLAN OR NOT A PLAN?: An employer policy can become a “plan”
and assume the cloak of ERISA, even inadvertently. Example:
insurance company who pays stream of commissions over 5 years
equal to the agent’s last years commission. Employer won this case,
but todays outcome could be affected by §409A
CASE: ADMINISTRATIVE
 Peralta v. Hispanic Business, Inc., 419 F.3d 1064 (9th Cir. Aug. 18, 2005)
 Court held that the plan sponsor has a fiduciary duty to notify beneficiaries
and participants promptly of the termination of coverage
 Although the 210 day notice requirement under ERISA Section 104(b)(1) was
satisfied; the court found that the plan fiduciary had an even more basic duty
to provide timely notice of a plan termination under ERISA Section 404(a)(1)
 However, ERISA does not provide the plaintiff with a remedy
 Comment: again, the omission inures to the benefit of the plan by a holding
that a fiduciary duty was breached. Note that this is a Health-like plan and
not a pension-like plan. Protections in health-like plans are typically reached
by fiduciary duty.
CASE: ADMINISTRATIVE
 Securities and Exchange Commission v. Capital Consultants,
LLC, 397 F.3d 733 (9th Cir. Feb. 2, 2005)
 A receiver in charge of distributing assets from a litigation
recovery, was not in violation of ERISA for enforcing an offset
provision which required a 50 percent offset against recoveries
from third parties, even though receiver was an ERISA fiduciary
 ERISA’s fiduciary duty provisions do not prohibit such offsets
and the receiver was not otherwise legally obligated under ERISA
to favor ERISA plans over non-ERISA plans. A fiduciary is a
“rights balancer” and not an unbridled advocate for the plan.
CASE: ADMINISTRATIVE
 Paul Bard V. Boston Shipping Association;
International Longshoremen's Association Pension Plan
(1st Cir. Ct. App. Dec 19, 2006) No. 06-1810. The plan
is liable where its employee was prejudiced by plan
numerous regulatory violations (summary plan
description not updated since 1988); The reasoning
withheld during a battery of appeals; Plan terms are
disregarded because employee was so prejudiced)
 COMMENT: Will the increase in reporting and
notification provisions of under Pension Protection Act
2006 will put plans at further risk? YES
CASE: ADMINISTRATIVE
 Richard Coleman et al, v. PBGC. (DC Columbia, Dec. 5,
2006) No. 055496. Agreement to remove improper terms
from a plan is effective if the removed provision is
honored, and proper memorialization of the proper
change will not form the basis of a challenge under the
“operational compliance requirement.” of Treas. Reg.
1.411(d)-4, Q&A 8(c).
 COMMENT: The Retirement Equity Act of 1984
(“REA”), Pub. L. No. 98-397, 98 Stat. 1426 (26 U.S.C.
and 29 U.S.C.) prohibits discretionary benefit
provisions in pension plans, & plan provisions should be
rigorously tested provisions to this standard.
CASE: ADMINISTRATIVE
 Tocker v. Philip Morris Co. (2nd Cir. Ct. App, Nov 22, 2006) No.:
04-5904. Making an Exceptions to plan provisions even for the
generous benefit of an employee can trigger extreme liability.
Employee seemingly diagnosed with a terminal illness is granted
an extraordinary retirement benefit, including a lump sum and
long term disability simultaneously (not available to other
employees under the plan). The employee brought suit for
inclusion of the 10-12 years of employment time corresponding to
his long term disability period. It was held that the head of the
plan may have breached his fiduciary duty by not informing the
employee (whom no one expected to survive more than 2 years) of
the effect on his retirement of the job termination in the “special
package”.
COMMENT: Any “special deal” in lieu of a
“regular plan provision” should be examined with the same
scrutiny as you would apply to a new plan.
CASE: ADMINISTRATIVE
 Northcutt v. General Motors Hourly-Rate Employees Pension
Plan (7th Cir. Ct. App, Nov 22, 2006, No: 05-4484. Contractual
self-help (setoffs) are available to enforce plan provisions for
Social Security reimbursement. The use of the Social Security
basic retirement & disability base in pension computations to
reduce employer contributions for the amounts attributable to
Social Security extends to contractual “self help” deductions,
even where employees receive a lump-sum from the government
and thereafter squander it.
 COMMENT: Although the Plan clearly wins under the broad
public policy of “building onto” Social Security as a deductible
base (a permitted disparity in plan discrimination testing), it
would be helpful if Plans included this provision along with a
waiver, especially at the time that lump sum payments are made.
CASE: ADMINISTRATIVE
 Hooven v. Exxon Mobil Corp. (3rd Cir. Ct. App. Oct 20, 2006)
Case Number: 04-3773. In a time consuming merger where
things develop slowly, an omission in the Summary Plan
Description is not fatal where continued employment with the
merged companies, or the divested division (owned by purchasing
company) continues throughout the period.
 COMMENT: Employees should watch the transformation of the
plan like a hawk, as continuing to work after amendments will
likely constitute waiver. In the alternative, the SPD is often
considered a small matter unless it has a big effect, and here the
SPD “omission” wasn’t big.
CASE: ADMINISTRATIVE
 Miller v. Xerox Corp. Retirement Income Guarantee Plan (9th
Cir. Ct. App, Sep13, 2006) No: 04-55582. Use of “creative”
phantom accounts to adjust the retirement of employees
returning from retirement will be stricken. This was also a
problem with the Cooper v. IBM Personal Pension Plan 243 F
Supp. 2d 1010 (S.D. Ill. 2003) cash balance conversion case. A
deduction based upon prior lump sum retirement payment PLUS
time accrual in the employment break period is forbidden.
 COMMENT: An actuary should be utilized to re-integrate a
return to service, with a computed valuation and which is agreed
upon and assented to by both the employee and the employer
PRIOR to re-hire; real actuarial accounting will always be
favored over phony phantom accounts.
CASE: STANDING
 Massachusetts Mutual Life Insurance Co v. Doris Russell, 473 US
134 (1985, S. Ct.): Actions for breach of fiduciary duty under ERISA
Section 502(a)(2) must be brought in a representative capacity on
behalf of the plan as a whole, and not for the benefit of individual
participants
 Barker v. American Mobil Power Corp, (1995, CA9) 64 F.3d 1397:
Remedies for alleged fiduciary breach must inure to the benefit of
the plan (rather than individual participants), or to all plan
participants
 Comment: Again note the similarity to the corporate
shareholder’s derivative actions.
CASE: STANDING
 Milofsky v. American Airlines, 2005, CA5) 404 F.3d 338, vacd &
remd (2006, CA5) 2006 WL 488622 401(k) plan participants lacked standing to bring an ERISA
Section 502(a)(2) breach of duty claim on behalf of the plan
because they were seeking only individualized relief
 Vacated and remanded on March 2, 2006, (Milofsky v. American
Airlines, 2006 WL 488622, vacg & remg (2005, CA5) 404 F.3d
338)
 Comment: Again, the analogy to the approach for Section 502
standing is to that of shareholder derivative suits.
FIDUCIARY LIABILITY
 Prohibited Transactions:
 1. Transfer of funds to or use by a DISQUALIFIED PERSON
 2. Fiduciary deals with the income or assets in their own interest.
 3. Fiduciary receipt of funds to his/her account by person who deals
with the plan relating to plan assets
 4. Plan transactions with a disqualified person regarding:
 Selling, Exchanging, or Leasing Plan Property
 Lending money or extending credit
 Furnishing goods, services or facilities
 ERISA Fiduciaries cannot be relieved from Liability. §410(a)
FIDUCIARY LIABILITY PROPOSALS
 Comments recently requesteds on disclosure of fee and expense information to
participants in individual account plans (72 Fed Reg. 20457, 4/25/2007)
 DOL's Employee Benefits Security Administration (EBSA) has requested public
comments on issues relating to the ERISA rules that require the disclosure of plan
administrative and investment-related fee and expense information to participants
and beneficiaries in participant-directed individual account plans.
 Background. According to EBSA, 41 million participants in 401(k) plans are
permitted to direct the investment of all or a portion of their plan accounts. While
contributions and earnings increase retirement savings in 401(k) and other
participant-directed plans, fees and expenses charged to participant accounts can
substantially reduce that growth. For this reason, it is important that plan
participants consider what and how fees and expenses are charged to their
individual accounts, EBSA noted.
FIDUCIARY LIABILITY PROPOSALS
 Participant control. Labor Reg. 2550.404c-1 sets forth the
conditions under which participants are considered to be
exercising control over the assets in their accounts, thereby
relieving fiduciaries from liability for the results of
participants' investment decisions. Labor Reg. 2550.404c1(b)(2)(i)(B) conditions relief upon participants and
beneficiaries being provided, ERISA Advisory Council.
 The above will bear directly on the added Disclosure of
Information Relating to Plan Investment Options, and
Disclosure of Information Relating to Plan and Individual
Account Administrative Fees and Expenses
CASE: FIDUCIARY LIABILITY
 Beck v. PACE International Union, 2005 U.S. App. LEXIS 23190
(9th Cir. 2005): The sponsor of a single employer plan breached
its fiduciary duties when, rather than investigating whether it
should merge its pension plan with a multiemployer pension
fund, the employer decided without much analysis to annuitize
the plan so as to terminate it.
Comment: Similar to the “duty to bargain” even where a plant is
closing, there is a “duty to try and save a pension plan in trouble”
rather than terminating it (when it is sick).
CASE: FIDUCIARY LIABILITY
 Supreme Court agrees to hear ERISA remedies case involving fiduciary's
failure to carry out investment instructions : LaRue, James v. DeWolff, Boberg
& Assoc., Inc., (2007, S.Ct,) 2007 WL 1730445
 The Fourth Circuit ruled that a Code Sec. 401(k) plan participant's claim that losses
resulted when the plan administrator had failed to make changes to investments in
his plan account as he had directed, was not actionable under either (1) ERISA's
breach-of-fiduciary-duty provision, or (2) ERISA's other appropriate equitable
relief provision. To recover this loss, the complaint sought appropriate “make
whole” or other equitable relief under ERISA § 502(a)(3).

The district court dismissed the case, finding that LaRue's requested remedy was
not available under ERISA. LaRue appealed. The Fourth Circuit found that LaRue
could not qualify for relief under ERISA § 502(a)(2) because recovery under that
provision must inure to the benefit of the plan as a whole, not to particular persons
with rights under the plan.
CASE: FIDUCIARY LIABILITY
 Ellis v. Rycenga Homes, Inc., (2007, WD MI) 2007 WL 1032367
 Trustee entitled to jury trial for ERISA fiduciary breach claim against
brokerage firm (Illustrates the DEPTH of reach for fiduciary claims).
 A profit-sharing plan trustee was entitled to a jury trial on his ERISA
claim that the plan's former stock brokerage firm breached its
fiduciary duties by failing to discover that the plan's former trustee
had taken illegal plan loans.
 COMMENT: An important aspect of every plan is the identity of
WHO IS BEING RELIED UPON TO MAKE INVESTMENT
DECISIONS.
ANTI-ALIENATION
 Anti-Alienation: (ERISA §206(d)(1) & IRC §401(a)(13) “Benefits
may not be assigned or alienated.” Requires that the plan prevent the
participant from doing indirectly what most plans forbid directly,
spending retirement savings before retirement. Much like a
“spendthrift” clause (which prevents invasion of the trust for
purposes of need) and makes it universal/perfunctory
 Anti-Alienation of § 401(a)(13) via § 1.401(a)-13 to apply to plans
which § 411 applies without regard to § 411(e)(2) (exempting church
plans, government plans, society plans and plans which had no
employer contributions since 1974 (government plans are expected
to meet pension obligations by appropriation and budgeting – and
may always be at risk) Church plans generally treated the same way.
CASE: ANTI-ALIENATION
 United States v. Novak, 9th Circuit, No. 04-55838 (March 23, 2006),
the Ninth Circuit Court of Appeals held that the government could
garnish vested pension benefits under a restitution order despite the
anti-alienation provision of ERISA
 Comment: This case might be viewed as enabling federal invasion of
pension plans, but the facts were so terrible that it is unclear as to
how it will be viewed if the facts were not so severe. The employee
garnished had a long history of continuing THEFT of his employer’s
telephone board equipment ($millions) sold in interstate commerce,
and the convicted employee was subject to federal restitution order of
over $1 million (even though the pension was only about $147,000).
CASE: DISCRETIONARY ATTY FEES
 Reasonable hourly rate for ERISA attorneys is $375 to $400 in the 9th Cir;
Welch v. Metropolitan Life Insurance Co., (2007, CA9) 2007 WL 656390
 A district court erred when it awarded a long-term disability benefit plan participant
attorneys' fees at the rate of $250 per hour instead of the $375 to $400 per hour rate
the attorney had requested, AND imposed a 20% reduction for “block billing.”
 Background. Vicki Welch sued Metropolitan Life Insurance Co. after MetLife
denied her claim for long-term disability benefits. After the lawsuit was filed,
MetLife decided to award Welch her benefits. Then Welch requested attorneys' fees
under ERISA § 502(g)(1), requesting $39,112 in fees for 11.5 hours of work at
$375 per hour & 87 hours of work at $400 per hour & produced four experienced
ERISA attorneys who attested that they usually charge between $400 & $475/hr.
Source: RIA Pension and Benefits Week Newsletter 04/16/2007, Volume 13, No.
16
MISCELLANEOUS MATTERS
MISCELLANEOUS: PROVISIONS
 514(b)(7) exempts QDROs from ERISA preemption
 $100/day 502(c) penalty for administrator who refuses to supply a participant
information to which he is entitled.
 10% TAX ON EARLY DISTRIBUTIONS DOES NOT APPLY TO A QUALIFIED
RESERVIST called to active duty for at least 180 days or indefinitely.
 Rollovers after 12/2006 can be made by direct trustee-trustee transfer ( which
avoids the trustee sending a note to uncle sam that you have withdrawn money).
 50% Tax Credit for the Startup costs for creating a SEP, SIMPLE, or regular
qualified plan. Creation costs = cost for (1) setting up, (2) initial administration, and
(3) employee education. Must have 100 or less employees earning $5k per year or
more. (Form 8881)
MISCELLANEOUS: PENSION CLAWBACK
 If a pension plan contributions result in more assets than are needed,
the contributing company can claw them back (reversion)subject to a
tax of 20% (or 50% where the employer fails to either provide a
replacement plan [where the plan is discontinued] or plan benefits
increase of at least 20% of the clawback. IRC § 4980 In other words,
of 100% of monies going to reversion, the company has the choice to
spend 20% on increasing employee benefits, and losing 20% on the
tax to keep 60% of the clawback or alternatively keeping only 50% of
the clawback after paying the 50% tax.
 A 5% owner of the business maintaining the plan pays a tax of 10%
on any benefit he receives from the plan in excess of what he was
supposed to receive under the plan.
MISCELLANEOUS: SPOUSE CONSENT
 Changes Related to Failure to Obtain Spousal Consent
 Rev. Proc. 2003 Rev. Proc. 2003-44 provided that if
spousal consent cannot be obtained, spouse is entitled to a
benefit equal to the portion of QJSA that would have been
payable to spouse under the been payable to spouse under
the plan at the annuity starting date of the plan at the
annuity starting date of the prior distribution prior
distribution.
 Recall that Geraldine Ferraro changed the presumption
quite a while ago. This solidifies the rule.
MISCELLANEOUS: ROLLOVERS
 Rollovers after 12/2006 can be made by direct trusteetrustee transfer ( which avoids the trustee sending a note to
uncle sam that you have withdrawn money).
 The following IRS chart from Fall 2006 summarizes
rollovers
 In general, a non-institution-to-institution transfer will
generate a notification to the IRS to impose tax on the
beneficiary (see chart following the rollover chart)
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