DOL Q&A from 2000 ASPPA Annual Conference

INTRODUCTION

Brad Huss and Fred Reish discussed with Joe Canary, Scott Albert, Lou Campagna and Mabel Capolongo of the Department of Labor a number of questions which were submitted by members of ASPPA. It is intended that the responses to the questions provide the basis for discussion at the 2000 ASPPA Annual Conference. The answers reflected in this presentation are Brad Huss' and Fred Reish's interpretation of responses from Ms. Capolongo, Mr. Campagna, Mr. Albert and Mr. Canary, and not direct quotes. The responses are intended to reflect as accurately as possible the statements made by the government representatives, but this material does not represent the official position of the Department of Labor, or any other government agency; nor has it been reviewed or approved by the Department of Labor.

It is intended that this written material will meet the requirements necessary to qualify for Continuing Education Credits.

5500 Questions

Enforcement Questions

Voluntary Correction

Fiduciary Responsibility and 404(c) Questions

401(k) Deferrals

Other

Appendix A: Agencies Respond to Requests for Extension ofForm 5500 Deadline

Appendix B: Strategic Enforcement Plan

Appendix C: : Identification Number: A00506 Letter

Appendix D: ERISA Opinion Letter No. 94-32A Application of QDRO exception to anti-assignment and alienation rules.

Appendix E: Advisory Opinion

QUESTIONS

Part I: Form 5500

Q1: It is impossible to timely finish the 5500 Series for 1999 calendar plans due to the lateness of the 5500 Series being available. Why has the DOL and/or IRS not announced an extension for the due date of the 5500 Series? It has been done before under extenuating circumstances. What relief is available?

A: See Press Release attached as Appendix A. Additional comments will be made at the program.

Q2: Do you anticipate releasing the 2000 forms in a timely manner so that we will be able to start preparing the 5500 Forms in, say, February?

A: The Department intends to release the 2000 forms in a timely manner and anticipates Form 5500s will be available by February 2001, so that practitioners could use to begin preparing annual return reports. Also, the Department will be working with software developers so that software can be available on a timely basis, but the Department, however, cannot guarantee when developers of software for form filing will have their product available to practitioners. The status of electronic filing will be discussed further from the podium.

Q3: Under Question 8a on the new Form 5500, plans are required to report if they intend to comply with the 404(c) criteria. Why has that question been added to the 5500? What does the PWBA plan to do with the information gathered by that question?

A: A request for information on the self-directed and Section 404(c) features of a plan was included on prior versions of Form 5500 as part of the pension code questions. One of the code items referenced whether the plan was participant directed and the instructions to the Form 5500 referenced Section 404(c). Therefore, this is not really a new question but simply a reformulation of preexisting questions. The change in the question is intended to clarify the form of the previous question concerning a plan's Section 404(c) status and to add two questions concerning whether the plan is partially or wholly self-directed. The two new questions are intended to provide information on participant directed plans without linkage to whether the plans are in compliance with Section 404(c). The questions are intended to be answered based on plan design and how the plan is intended to operate. The question can be answered without a determination if a plan has complied with Section 404(c) in operation in every instance. However, the question contemplates that the plan is intended to satisfy the 404(c) criteria during the reporting period and that the plan can reasonably demonstrate evidence of steps taken to implement that intent. The Department intends to use the information provided by this question for the same purposes as it uses all the information on a Form 5500. The purposes are enforcement targeting, research, policy and development, and public disclosure.

MODERATORS COMMENT: In responding to the question about 404(c) compliance, plan sponsors and preparers of the Form 5500 should look for objective evidence of the intent to satisfy the criteria. For example, does the SPD contain the 404(c) notice and identify the 404(c) fiduciary.

Q4: a. Are there any penalties if a TPA is preparing a 5500 Form for review and signature by the employer and the TPA answers one of the questions on the 5500 without knowing whether the answer is correct or not?

b. If a TPA is preparing a Form 5500, or the attached schedules, for review and signature by an employer, and the TPA answers a question in a way that the TPA knows is incorrect? Are there any penalties?

A: a. The obligation to file the annual report on Form 5500 is placed on the plan administrator under Title I of ERISA. The penalty for a late or incomplete filing of a Form 5500 is the liability of a plan administrator. The plan administrator has a duty to make sure that the Form 5500 being filed is complete and accurate. In addition, if a TPA has undertaken fiduciary duties, then there could be issues of fiduciary breach in the situation posited. The question asked also raises issues outside the purview of the Department, such as whether there could be liability of the TPA to the administrator.

b. Section 501 of ERISA makes it a criminal offense for any person to willfully violate any of the reporting and disclosure provisions of ERISA. In addition, Section 1027 of Title 18 of the United States Code, the federal criminal code, makes it a criminal violation to provide false statements or knowingly conceal facts in relation to documents required by ERISA. The application of these federal criminal provisions is not limited to persons who are fiduciaries but applies to all persons. In addition there are general federal criminal provisions concerning aiding and abetting and providing false answers that may also apply. As above, if the TPA is a fiduciary, there would be a breach of fiduciary duty in this circumstance as well. As also mentioned above, there could be other consequences, for example, under state law, as between the plan and the TPA, that are outside the jurisdiction of the Department.

Q5: A 401(k) plan has 150 participants. The plan must file a full 5500 and have an audit by an accounting firm. Due to the cost of the audit ($10,000 or $15,000), my suggestion to the client is to split the plan into two plans, each with 75 participants. For 2000 there will be an audit. The plans could be split into two plans on December 31, 2000. Therefore, on January 1, 2001, both plans have less than 100 participants and no audit required. For tax qualification testing, they can be permissively aggregated. In fact, my plan is to administer as if it was one plan and just separate for 5500 purposes. Is my conclusion correct?

A: This question raises issues of avoidance and evasion. It is not certain that you really have two plans for purposes of Title I of ERISA in this instance--even if there may be two plans for Internal Revenue Code purposes. In Advisory Opinion 84-35A, the Department stated it would consider, among others, the following factors in determining whether there is a single plan or several plans in existence: who established and maintains the plans, the process and purposes of plan formation, the rights and privileges of plan participants and the presence of any risk pooling, i.e., whether the assets of one plan are available to pay benefits to participants of the other plan. This Advisory Opinion also notes that the Internal Revenue Service has cited the existence or absence of risk pooling between funds as relevant to the determination of single plan status. See §1.414(1)-1(b) 26 C.F.R. §1.414(1)-1(b). In DOL Advisory Opinion 96-16A, the Department stated its position that whether there is a single plan or multiple plans is an inherently factual question on which the Department ordinarily will not opine in the Advisory Opinion process.


Part II: Enforcement

Q6: In the PWBA's Strategic Enforcement Plan (see Appendix B attached), it states that defined contribution plans will be a primary target for enforcement activity. Why is that? What are the specific types of violations that concern the PWBA?

A: Defined contribution plans are a primary target for enforcement activity by the Department because there's a higher risk of loss to the participants in a defined contribution plan. These plans are not covered by an insurance program, such as the Pension Benefit Guaranty Corporation. Further, because these plans do not provide any set level of benefits, issues of investment risk and fees paid with plan assets are more critical than with defined benefit plans. Some of the specific issues that concern the PWBA include late deposit of 401(k) deferrals, valuation of plan assets and diversification of plan investments.

Q7: In the PWBA's Strategic Enforcement Plan (see Appendix B attached), it states that service providers, including third party administrators, will be a primary target for investigative activity. Why is that? What have been the historical results of the PWBA's investigations of service providers? What are the specific types of violations that the PWBA will be focusing on? How does the DOL define "Plan Service Provider" for STEP Program? Does this include recordkeepers, insurance companies, attorney, investment companies, brokers, etc.? In addition to administrators and actuaries?

A: Investigation of plan service providers is one of the three national investigative priorities. Investigations of plan service providers offer the opportunity to address abusive practices that may affect more than one plan. By PWBA focusing its resources on plan service providers, it can address violations involving many plans, often resulting in larger recoveries for more plans and participants. This approach is a mechanism whereby PWBA can leverage its resources and obtain the maximum impact for the participants and beneficiaries.

As the Strategic Enforcement Plan indicates, the term "plan service provider" includes an person or entity which provides a direct or indirect service to an employee benefit plan for compensation. Third party administrators, administrators, accountants, attorneys, and actuaries are plan service providers. Also included as third service providers are financial institutions such as banks, trust companies, investment management companies, as well as others that manage or administer, directly or indirectly, funds or property owned by employee benefit plans.

Specific types of violations that PWBA will be focused on include the failure to provide services to the plan for the compensation, excessive or undisclosed administrative expenses, and imprudent investments made by investment managers.

One of PWBA's most recent cases involving a service provider is the Capital Consultants, LLC (CCI) case out of our San Francisco Regional office. The DOL was successful in appointing a permanent receiver and freezing the assets of CCI and preliminarily barring the principals from doing business with any ERISA plans. CCI is a registered investment manager with the SEC and was responsible for providing investment services to more than 60 Taft-Hartley plans. The allegation is that CCI violated ERISA by investing $150 million in a series of imprudent loans causing the plans to lose over $100 million as well as charging the plan excessive fees on the entire amount of the loans although the investments had declined in value.

Q8: What are the most common violations found by the DOL in its investigations?

A: Some common violations found by DOL in its investigations include:

(1) failure of plan fiduciaries in 401(k) plans to forward employee withholdings to the 401(k) plans in a timely manner;

(2) failure to make employer contributions to pension plans;

(3) improper valuation of plan assets in defined contribution plans, including real estate and employer stock plans;

(4) failure to make benefit payments due under terms of the plan;

(5) abandonment by plan fiduciaries to the plan upon company bankruptcy and dissolution;

(6) taking any adverse action against an individual for exercising his or her rights under the terms of the plan;

(7) failure to hold plan assets in trust;

(8) use of plan assets to benefit certain related parties-in-interest to the plan, including the plan administrator, the plan sponsor, and parties related to these individuals;

(9) failure to have procedures in place for the selection of service providers; and

(10) improper allocation of administrative expenses among related multi-employer plans.

Q9: How does the DOL select the plans it investigates?

A: The DOL selects the plans that it investigates through a number of sources:

(a) computer generated compilations of selected employee benefit plans or service providers derived from reports filed with PWBA;

(b) information concerning employee benefit plans or service providers derived from governmental agencies such as the IRS, the SEC and state insurance agencies;

(c) information concerning employee benefit plans or service providers derived from non-governmental sources such as newspapers, industry journals and magazines, or leads from other knowledgeable parties;

(d) information received as a result of complaints from participants, fiduciaries, informants, or other sources such as attorneys, accountants, and TPAs;

(e) information derived from detailed review of annual reports, financial statements, schedules, exemption application files, ERISA Section 502 complaints, and other internal PWBA sources; and

(f) information derived from plans targeted through use of subpoenas to TPAs and financial institutions pursuant to national or regional initiatives.

Q10: What national enforcement initiatives does the Department have coming up? (See Strategic Enforcement Plan as Appendix B attached.) What about local initiatives?

A: Local initiatives are selected on an annual basis and may become the basis for National initiatives such as the Orphan Plans project which originated as a regional initiative of the Philadelphia Region. This question will be discussed further during the program.

Q11: What can service providers do to get DOL to step in when they hold assets of an orphaned plan? Sometimes we don't have the information needed to determine allocations of the assets among participants or, if we do, we don't have a Trustee fiduciary to direct the distribution. Should we call the DOL?

A: The Office of Enforcement and the Office of Chief Accountant of the DOL, as well as the IRS, are looking at the situation of orphan plans. This National Initiative, started in FY 1999, is called the Orphan Plans project, and deals with situations where plans have been abandoned by plan sponsors and fiduciaries, or fiduciaries have completely abdicated their responsibilities to administer plans prudently and in the sole interest of the participants. The objective of the initiative is to (1) identify plans which have been abandoned by fiduciaries because of death, neglect, bankruptcy or incarceration; (2) determine if the fiduciary is available to make fiduciary decisions such as the termination of the plan and the distribution of plan assets; (3) require fiduciaries to fulfill their duties, file appropriate compliance forms, and ensure that proper actions are undertaken to protect and deliver promised benefits; and (4) where possible, identify and penalize plan officials who do not fulfill their responsibilities to plan participants.

If upon investigation of the orphan plan, it is determined that there is no viable party to administer the plan, the DOL may go to court and appoint an independent fiduciary to take over the administration of the plan. Unfortunately, this would require that the plan cover the expenses of the independent fiduciary but this is still considered a better alternative than having the trust remain with no one to administer the plan. The independent fiduciaries appointed by the court would be encouraged to make all distributions to all participants, terminate the plan and file all final reports.

Because the Orphan Plans project is a national initiative, DOL would welcome any referrals from service providers who could identify such potential cases.

In DOL Advisory Opinion 83-43A, it is stated that, in those cases where a plan administrator may not be determined by the direct application of ERISA section 3(16), it is the view of the Department that, in the absence of regulations, the "administrator" is the person or persons actually responsible, whether or not under the terms of the plan, for the control, disposition, or management of the cash or property received by or contributed to the plan, irrespective of whether such control, disposition or management is exercised directly by such person or persons or indirectly through an agent or trustee designated by such person or persons. Although this ruling did not arise in an orphan plan setting, the position taken therein by the Department may have implications with respect to orphan plans. The IRS has a similar position as to the identity of the plan administrator. (See Treas. Reg. §1.414(g)-1(b)(4)). In addition, issues are raised where a service provider such as a trustee knows that a plan is an orphan plan but just continues to collect fees from plan assets.

Q12: We have had clients who have had a DOL Audit where the field audit has been completed and we have not heard anything for a year. When can we assume the audit is complete and no action is to be taken?

A: The completion of the field audit at the plan level does not always mean that the investigation is complete. Often an investigation will be conducted on other parties or entities connected to the plan.

All investigations will have a closing letter sent indicating the conclusion of the investigation. There may be a few instances where the PWBA office determines that it is not advisable to send a closing letter, but such instances are rare.

If no violations are found, a No Action closing letter is sent to the Plan Administrator at the conclusion of the investigation stating that the investigation is concluded and that the Department would not be taking any action. This closing letter is not sent by certified mail. If violations are found, a voluntary compliance letter is sent detailing the violations and asking for a response. A voluntary compliance letter is sent certified mail. There may also be instances where violations are found but the DOL decides that further action will not be taken at the time. In such instances, the violation would be cited but a statement will be included that the DOL will not be taking any action at that time.

Investigations do take time to completed, whether violations are found or not. Sometimes other investigations take precedence resulting in a delay on other investigations. All investigations are reviewed by management before any official decision is made to cite the plan for violations or close the case. However, there is an attempt to conclude investigations as soon as possible. Finally, plans under investigations are encouraged to contact the DOL to find out the status of the investigation, although only a preliminary status will be released because the review process may not be complete. Also, since No Action closing letters are not sent certified mail, such letters could be lost in the mail, so it may be worthwhile to check with the investigator.

Q13: In cases where the client committed a fiduciary breach, the participants often call the TPA. What is wrong with informing the participant to call the DOL? If a TPA informs the DOL that a fiduciary breach has occurred, is the TPA then deemed to be a fiduciary? In other words, are you damned if you do, damned if you don't?

A: The DOL encourages participants to call the PWBA because it is one of the best targeting methods for PWBA in identifying potential violations. Each of the field offices have Benefit Advisors who handle participant calls. The participant calls are evaluated to determine whether they are good targets for opening an investigation.

The mere fact that the TPA informs the DOL that a fiduciary breach has occurred does not necessary make the TPA a fiduciary. PWBA Investigators will conduct an analysis of the actions of the TPA with respect to the fiduciary breach to determine whether the actions of the TPA or any service provider makes them a functional fiduciary. The functional test will examine what actions the TPA or service provider are doing rather than what the contract says or what they say they are doing. Generally, any person who exercises authority or discretionary control over plan assets is a fiduciary.

Q14: Is there a requirement that the employer pay any of the administrative and/or investment expenses of a 401(k) plan or may they all be paid from plan assets? What types of expenses cannot be paid by the plan?

A: The PWBA has a 401(k) fee initiative which is intended to educate both participants and plan sponsors about the impact of fees on participants' return on investments. The PWBA has developed a consumer information brochure on plan investment fees designed to educate participants on understanding investment fees and to remind plan sponsors of their fiduciary obligations to monitor these fees, especially where the fees are paid by the plan itself rather than by the plan sponsor.

[See the two brochures--"A Look At 401(k) Plan Fees . . . For Employees" and "A Look at 401(k) Plan Fees . . . For Employers" available on the DOL website at www.dol.gov/dol/pwba/.]

It depends on who the plan document states is responsible for the payment of administrative and investment expenses of the plan. The decision as to which expenses will be paid by the plan sponsor, which will be paid by the plan, and/or which will be shared, is a decision of the plan sponsor. That decision is then expressed by the terms of the plan document. However, the plan cannot pay expenses which are for the benefit of the plan sponsor, i.e., "settlor" expenses.

The plan sponsor or the person selected must carry out the following fiduciary responsibilities with respect to 401(k) plans: (1) selection of the investment options from which participants choose, (2) selection of service providers, (3) monitor the performance of the investments and the provision of services. As such, employers are required to consider the costs to the plan and ensure that fees paid to service providers and other expenses of the plan are reasonable in light of the level and quality of services provided.

See the Israel letter, Advisory Opinion 97-03A, attached as Appendix C. That letter states in part:

"Concerning sections 403 and 404 of ERISA, as a general rule, reasonable expenses of administering a plan include direct expenses properly and actually incurred in the performance of a fiduciary's duties to the plan. On the other hand, the Department has long taken the position that there is a class of discretionary activities which relate to the formation, rather than the management, of plans. These so-called "settlor" functions include decisions relating to the establishment, design and termination of plans and, except in the context of multiemployer plans, generally are not fiduciary activities subject to Title I of ERISA. See letter to John N. Erlenborn from Dennis M. Kass (March 13, 1986). Expenses incurred in connection with the performance of settlor functions would not be reasonable plan expenses as they would be incurred for the benefit of the employer and would involve services for which an employer could reasonably be expected to bear the cost in the normal course of its business or operations. See letter to Kirk F. Maldonado from Elliot I. Daniel (March 2, 1987). . . .

With regard to expenses attendant to amending a plan to maintain its tax-qualified status and to obtaining a determination from the Internal Revenue Service concerning the status of the plan in connection with termination, we note that, while ensuring the tax-qualified status of a plan confers significant benefits on the plan sponsor, or in the case of a liquidation, the estate of the plan sponsor, maintenance of tax-qualified status may also be in the interest of plan participants. In the case of a plan that was intended to be maintained as a tax-qualified plan and that permits the payment of reasonable expenses from the assets of the plan, it is the view of the Department that a portion of the expenses attendant to these activities may constitute reasonable expenses of the plan. Where, as here, there are benefits to be derived by both the plan sponsor (or the estate of the plan sponsor) and the plan, and where one party appears to be acting in both a settlor capacity on behalf of the plan sponsor (or the estate of the plan sponsor), and in a fiduciary capacity on behalf of the plan's participants and beneficiaries, it would generally be necessary, in order to avoid violations of ERISA sections 406(b)(1) and 406(b)(2), to have an independent fiduciary determine how to allocate the expenses attributable to those benefits."

In its publication "A Look at 401(k) Plan Fees . . . for Employees," the PWBA, speaking to employees, explained its concern with the payment of inappropriate or excessive fees from plan assets: In addition, the PWBA points out the responsibilities of employers/fiduciaries to prudently manage the fees.

"1. Why consider fees?

In a 401(k) plan, your account balance will determine the amount of retirement income you will receive from the plan. While contributions to your account and the earnings on your investments will increase your retirement income, fees and expenses paid by your plan may substantially reduce the growth in your account. The following example demonstrates how fees and expenses can impact your account.

Assume that you are an employee with 35 years until retirement and a current 401(k) account balance of $25,000. If returns on investments in your account over the next 35 years average 7 percent and fees and expenses reduce your average returns by 0.5 percent, your account balance will grow to $227,000 at retirement, even if there are no further contributions to your account. If fees and expenses are 1.5 percent, however, your account balance will grow to only $163,000. The 1 percent difference in fees and expenses would reduce your account balance at retirement by 28 percent.

. . . . .

You should be aware that your employer also has a specific obligation to consider the fees and expenses paid by your plan. ERISA requires employers to follow certain rules in managing 401(k) plans. Employers are held to a high standard of care and diligence and must discharge their duties solely in the interest of the plan participants and their beneficiaries. Among other things, this means that employers must:

o Establish a prudent process for selecting investment alternatives and service providers;
o Ensure that fees paid to service providers and other expenses of the plan are reasonable in light of the level and quality of services provided;
o Select investment alternatives that are prudent and adequately diversified; and
o Monitor investment alternatives and service providers once selected to see that they continue to be appropriate choices."

MODERATORS COMMENT: There are several steps in analyzing whether an expense may be paid from plan assets: (1) Does the plan or trust document permit the payment of that type of expense? (2) Is the payment legally permissible under Title I of ERISA? (3) Is the amount reasonable? (4) (5) Should a portion of the expense be allocated to the employer? Should the payment be allocated to the trust as a whole, to specific participants, to a forfeiture account, or otherwise? (6) What do the plan documents say about the allocation? And so on.

Q15: I have heard that the PWBA is asking for copies of investment policy statements when it conducts investigations. Is that true? If so, what is the PWBA's interest? If not, what is the PWBA's view about whether retirement plans should--or are required to--have investment policies?

A: As part of the investigation, investigators and auditors will ask for copies of investment policy statements. Investment guidelines are part of the documents and instruments governing the plan, such as the plan document, trust agreements, and summary plan descriptions. As a document and instrument governing the plan, it provides DOL with provisions on how a plan operates so that investigators can, as part of their investigation, determine whether the plan fiduciaries are following the terms of the plan.

While ERISA does not require that the plan have an investment policy, such policies are encouraged because they help assure investments are made in a rational manner and in furtherance of the plan's funding policy. Most plan fiduciaries are involved in the decision making process of investments by their plan. As such the investment policy provides guidance to the fiduciaries as they perform their fiduciary responsibilities. If a plan has an investment policy it is expected that the plan fiduciaries adhere to it unless to follow the policy would be contrary to ERISA.


Part III: Voluntary Correction

Q16: What has the PWBA's experience been with the Voluntary Fiduciary Correction program (VFC)? What comments have you received about that program?

A: The DOL is pleased with the quality of the comments, especially from the financial institutions and benefits industry interests. Generally, the comments have been favorable. Commenters support a formal means of identification and correction of potential breaches of fiduciary duty. Among the advantages cited were increased fiduciary oversight of plans, reduction in litigation costs, and security of benefits.

Commenters have told the DOL that the VFC program contains two major disincentives to participation. First the practitioners and plan sponsors object to the notice provision, because they believe the voluntary correction of potential violations should not be disclosed to participants, who might view the correction out of context and overreact.

Second, commenters have said the Program should offer relief from the IRC §4975 excise tax on the prohibited transactions listed in the program. The Program, as written offers relief from the §502(l) penalty but not the excise tax.

DOL can tell from the comments that there is a need for the Program and that the benefits industry wants the Program to evolve.

The DOL has received a number of applications in its regional offices. Generally, the applications are of acceptable quality and adhere to DOL requirements. Most of the applications concern the correction of delinquent participant contributions. One application involved a loan to a party-in-interest. DOL continues to receive calls from practitioners who want to discuss their clients' potential eligibility for the Program.

Q17: Under the Voluntary Fiduciary Correction program, may the fiduciaries just correct the violations for the nonhighly compensated employees, or must they correct the violations for all employees?

A: Under the Voluntary Fiduciary Correction program, fiduciaries must correct the violations for all employees. There is no distinction made between highly compensated and non-highly compensated employees under the VFC program.

Q18: Does DOL inform IRS that a VFC application has been made and identify the taxpayer?

A: Yes. Section 3003(c) of Title I of ERISA provides that, whenever the Secretary of Labor obtains information indicating that a party in interest or disqualified person is violating section 406 of ERISA (i.e., the prohibited transaction rules in Title I), she shall transmit such information to the Secretary of the Treasury (i.e., the IRS). See Footnote 3 of the Voluntary Fiduciary Correction Program.

Q19: VFC does not require a Form 5330 to be filed. IRS says it will respect a correction under VFC as a correction under the Code. So as a practical matter, Forms 5330 must be filed; or the DOL cross referral will automatically trigger IRS collection of excise taxes; correct?

A: A correction under VFC does not affect the obligation under the Internal Revenue Code to file a Form 5530 with respect to any excise taxes that are owed concerning the transaction that was corrected under VFC. The obligation to file Form 5530 is enforced by the Internal Revenue Service. The Department cannot speak as to what actions will or will not be taken by the IRS if a prohibited transaction is corrected under VFC but a Form 5530 is not filed.

Q20: Is there a de minimis amount with regard to make up of earning for late (k) deferral deposits, i.e., make up amount could be a couple of hundred dollars...such that no VFC application should be submitted?

A: There is no de minimis amount with regard to making up of earnings for late 401(k) deferral deposits. VFC comments have been received on this issue and it is being considered.

Q21: Are there any plans to expand the VFC program? Suppose a sponsor discovers one of the 13 violation types, corrects it per the VFC, but fails to submit the matter to the DOL. Upon a subsequent DOL audit, what likely action would be taken by the DOL auditor?

A: The PWBA initially took a conservative approach and limited the eligible transactions to those where the nature of the transaction and the required correction could be described accurately and corrected without consultation with the PWBA. We have been urged by practitioners to add other transactions. We have seen how the IRS's correction programs have successfully evolved with the input of practitioners, and we would like to improve our program also. The VFC program could cover additional transactions based on our original criteria and our enforcement priorities.

If a sponsor corrects a violation currently covered under the VFC program but does not submit the correction to DOL, and later becomes the subject of an investigation, the DOL will not be precluded from taking further action if total corrective action has not been taken.

Q22: If you discover a VFC eligible breach and others that are not eligible, is there a way to voluntarily correct the non eligible breach in conjunction with DOL-- and avoid 502(l) penalties?

A: This will be discussed during the program.

MODERATORS COMMENT: As a practical matter, the moderators have found that the PWBA Regional Directors are generally willing to discuss correction methodology on a no-names basis for ERISA violations that are not eligible for VFC.


Part IV: Fiduciary Responsibility and 404(c)

Q23: The IRS has recently issued additional guidance on negative elections/ automatic enrollment for 401(k) plans. In automatic enrollment plans, it is likely that some participants will not direct the investment of their accounts. If they do not (in either an automatically enrolled plan or the regularly enrolled plan), what is the responsibility of the plan's fiduciaries? May the deferrals be safely "defaulted" into a money market account? A balanced fund (e.g., 60% equities/40% bonds)? Is the default protected under 404(c)?

A: In Revenue Ruling 2000-8, the IRS said in footnote 1, based on advice from the DOL, that:

"The Department of Labor has advised Treasury and the Service that, under Title I of the Employee Retirement Income Security Act of 1974 (ERISA), fiduciaries of a plan must ensure that the plan is administered prudently and solely in the interest of plan participants and beneficiaries. While ERISA section 404(c) may serve to relieve certain fiduciaries from liability when participants or beneficiaries exercise control over the assets in their individual accounts, the Department of Labor has taken the position that a participant or beneficiary will not be considered to have exercised control when the participant or beneficiary is merely apprised of investments that will be made on his or her behalf in the absence of instructions to the contrary. See 29 CFR section 2550.404c-1 and 57 F.R. 46924."

MODERATORS COMMENT: Thus, 404(c) protection is not available if the participant does not direct the investment of his or her account. In addition, the plan fiduciaries have a responsibility to select the investments for that account and to monitor that decision to determine if it continues to be prudent.

Q24: Does 404(c) apply to participants who are mapped into like funds during administrative changes, i.e., large cap to large cap? How about one S&P index to another S&P index?

A: In order for the protections afforded by Section 404(c) to be applicable, the participant must have exercised independent control in fact with respect to the investment of assets in his or her account. The question presented raises an issue as to whether the participant is making the choice of investment as is required by the Section 404(c) regulations. If the investment choices for mapping purposes are disclosed in advance and a participant affirmatively makes an election with respect to the mapping funds, then presumably Section 404(c) will apply if all other requirements are met. Also, see the answer to Question 23.

Q25: DOL officials have suggested that fiduciaries of participant-directed plans (e.g., 401(k) plans) must consider the nature of the particular employer's workforce in selecting the investment alternatives to be offered to the participants. Would you comment on that? Are some of the specific issues: the complexity of investment options; the number of options; volatility; diversification?

A: There are no constraints currently under the law as to whether self directed plan investments are appropriate for a particular work force. Given the defensive nature of Section 404(c) compliance, the factors mentioned in the question such as number of funds, volatility and diversification, should be considered by the fiduciary in selecting the available investment options under the plan. In structuring a 404(c) program, the plan sponsor or fiduciary should take into account the potential problems of exposing an unsophisticated work force to investment choices involving complexity and volatility.

Q26: What is the Department's view on surrender charges for termination of insurance agreements? When are they permissible and when not? What if the purpose of the surrender charge is to pay for commissions? ERISA section 408(b)(2) permits reasonable arrangements, but that implies the charge can't be in the nature of a penalty. Is there a cause of action against the fiduciary for signing the insurance agreement on behalf of plan?

A: A reasonable compensation provision in a contract for the early termination of the contract is permissible. DOL Regulation Section 2550.408b-2(c) states "A provision in a contract or other arrangement which reasonably compensates the service provider or lessor for loss upon early termination of the contract, arrangement or lease is not a penalty. For example, a minimal fee in a service contract which is charged to allow recoupment of reasonable startup-costs is not a penalty."

A fiduciary who is entering into an insurance agreement or any other contract on behalf of a plan needs to be fully aware of, and understand, termination fees or surrender charges under the contract when the fiduciary is considering the agreement. The fiduciary must make a determination that these charges would be reasonable if incurred.

Q27: What is the consequence of fiduciaries failing to monitor and remove underperforming funds in a participant-directed plan?

A: ERISA sections 404(a) and 404(c) both require that the investment fiduciaries prudently monitor the participant-directed investment options and, where indicated, remove underperforming funds. Section 404(a) imposes an affirmative duty to monitor under ERISA's general fiduciary responsibility rules. Section 404(c), and the regulations under that section, provide that the plan's investment fiduciaries will not be entitled to 404(c) protection for participant investments in funds which are not prudently selected and monitored.

Q28: The IRS has recently issued guidance permitting direct rollovers to IRAs for benefits of less than $5,000 (that is, "forced" distributions) where the participants do not make distribution elections.

I have heard that the DOL may take the position that in making such distributions, the plan's fiduciaries have an obligation under ERISA to determine if such distribution is prudent, including deciding on the investment of the money in the IRA if the participant cannot be located or if the participant does not make an investment decision. Is that right?

A: Footnote 1 to Rev. Rul. 2000-36, the referenced IRS guidance on direct rollovers of forced distributions provides:

"The Department of Labor ('the DOL') has advised Treasury and the Service that, under Title I of the Employee Retirement Income Security Act ("ERISA"), in the context of a default direct rollover described in this ruling, where the distribution constitutes the entire benefit rights of the participant, the participant will cease to be a participant covered under the plan within the meaning of 29 CFR section 2510.3-3(d)(2)(ii)(B), and the distributed assets will cease to be plan assets within the meaning of 29 CFR section 2510.3- 101. The DOL also noted that the selection of an IRA trustee, custodian or issuer and IRA investment for purposes of a default direct rollover would constitute a fiduciary act subject to the general fiduciary standards and prohibited transaction provisions of ERISA. In addition, plan provisions governing the default direct rollover of distributions, including the participant's ability to affirmatively opt out of the arrangement, must be described in the plan's summary plan description furnished to participants and beneficiaries."

MODERATORS COMMENT: There are several issues in making the decision to "force" a distribution into a rollover IRA. Even if the plan document requires that result, the plan fiduciaries must determine if it is prudent, that is, under 404(a)(1)(D) the fiduciaries should follow the terms of the plan documents unless it would be a violation of Title I of ERISA. That raises the question of whether it is "solely in the interests of the participants and beneficiaries" to roll the money into an IRA and to invest it in a particular manner. Part of the difficulty in finding an appropriate investment in this situation is that the plan fiduciaries likely will not--or cannot--monitor and change the investment in the future. As a result, prudence would likely require that the fiduciaries select an investment in the IRA that would be appropriate for many years to come. ERISA requires that the investments be selected "with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use"--the so-called "prudent expert rule."

Part V: 401(k) Deferrals

Q29: If a 401(k) recordkeeper charges additional fees for processing more than 12 contributions per year, could this be considered a valid reason for depositing on a monthly basis, rather than after each paycheck? Is the answer different if the fees are paid by the plan and not the employer?

A: If the plan incurs additional fees because of this arrangement (with no offsetting benefit), it may not be prudent to enter into or continue this arrangement. Regulation 2510.3-102(a) states that employee contributions become plan assets as soon as they "can reasonably be segregated from the employer's general assets". ERISA Section 403 also requires that plan assets be held in trust and this practice may fail to meet the reasonableness test. All the facts and circumstances have to be evaluated to determine whether the plan fiduciary is acting prudently and in the best interest of participants and beneficiaries.

There may be a difference in evaluation if the fees are paid by the plan instead of the employer. If the fees are paid by the employer, then it could be that this arrangement was done for the benefit of the employer to avoid additional fees. If the fees are paid by the plan, then the fiduciaries must evaluate whether this 401(k) recordkeeper should be retained or whether there are other service providers who could accept more frequent deposits. Again, the underlying analysis conducted is whether the plan fiduciary is acting in the best interest of the plan participants and beneficiaries.

Q30: With respect to the rules for the timely deposit of employee deferrals, many bank trustees feel "trapped" because they cannot resign until the employer appoints a successor trustee. What options do trustees have to avoid liability in those situations?

A: A bank trustee is a fiduciary. If the bank trustee becomes aware of a fiduciary breach, they are obligated under Section 405(a)(3) of ERISA which states that co-fiduciaries must take reasonable efforts under the circumstances to remedy the breach. Even as a directed trustee, if the bank becomes aware of the violation, they may have a duty to collect but also may have co-fiduciary liability if they become aware that deposits are not being made. Bank trustees have an obligation to take necessary, prudent steps to correct the violation including notifying the DOL and possibly filing lawsuits.

In Reg. §2509.75-5, the DOL analyzed an analogous situation and concluded that the plan fiduciaries were required under §404 (fiduciary responsibility) and §405 (co-fiduciary responsibility) to take reasonable steps to protect the participants--which could include contacting the appropriate Regional Office of the PWBA. The regulation stated:

"FR-10 Q: An employee benefit plan is considering the construction of a building to house the administration of the plan. One trustee has proposed that the building be constructed on a cost plus basis by a particular contractor without competitive bidding. When the trustee was questioned by another trustee as to the basis of choice of the contractor, the impact of the building on the plan's administrative costs, whether a cost plus contract would yield a better price to the plan than a fixed price basis, and why a negotiated contract would be better than letting the contract for competitive bidding, no satisfactory answers were provided. Several of the trustees have argued that letting such a contract would be a violation of their general fiduciary responsibilities. Despite their arguments, a majority of the trustees appear to be ready to vote to construct the building as proposed. What should the minority trustees do to protect themselves from liability under section 409(a) of the Act and section 405(b)(1)(A) of the Act?

A: Here, where a majority of trustees appear ready to take action which would clearly be contrary to the prudence requirement of section 404(a)(1)(B) of the Act, it is incumbent on the minority trustees to take all reasonable and legal steps to prevent the action. Such steps might include preparations to obtain an injunction from a Federal District court under section 502(a)(3) of the Act, to notify the Labor Department, or to publicize the vote if the decision is to proceed as proposed. If, having taken all reasonable and legal steps to prevent the imprudent action, the minority trustees have not succeeded, they will not incur liability for the action of the majority. Mere resignation, however, without taking steps to prevent the imprudent action, will not suffice to avoid liability for the minority trustees once they have knowledge that the imprudent action is under consideration.

More generally, trustees should take great care to document adequately all meetings where actions are taken with respect to management and control of plan assets. Written minutes of all actions taken should be kept describing the action taken, and stating how each trustee voted on each matter. If, as in the case above, trustees object to a proposed action on the ground of possible violation of the fiduciary responsibility provisions of the Act, the trustees so objecting should insist that their objections and the responses to such objections be included in the record of the meeting. It should be noted that, where a trustee believes that a co-trustee has already committed a breach, resignation by the trustee as a protest against such breach will not generally be considered sufficient to discharge the trustee's positive duty under section 405(a)(3) to make reasonable efforts under the circumstances to remedy the breach." (Emphasis added.)

Q31: Can the employer open a checking account for the trust and make weekly deposits of deferrals to this non-interest bearing account, and then monthly send a check to the mutual funds to be invested as per the participants' directions?

A: The deposit of 401(k) deferrals into a bank account established in the name of the trust for the plan will satisfy the requirement under the plan asset regulations to deposit the employee contributions into trust. At this point, the situation presented in the question raises issues of prudence under ERISA Section 404. Relevant factors will include how long the assets are held in a non-interest bearing account and why a non-interest bearing account has been chosen in the first place. For Section 404(c) purposes, the situation presents a question as to whether the plan participants have actual control over the investment of the assets while they are held in the bank account as well as the fact that, during the period of time the assets are in the bank account, they are not being invested in accordance with the participant investment directions.

Q32: As a TPA, sometimes our clients are "late" in depositing (k) deferrals and we discover the situation. Are we then "other persons" knowingly participating in a fiduciary breach? If so, the language is unreasonable. . . . Reference is to 502(l).

A: No. 502(l) language requires the mandatory penalty to be assessed on a person who "knowingly participates in such breach or violation." Mere knowledge by a non-fiduciary of a breach should not trigger the 502(l) penalty. The mandatory penalty is assessed on any party who repaid the "recovery amount" pursuant to a settlement agreement.

Q33: Assume that an employer is late in making its deposits of employee deferrals into a 401(k) plan. Assume that a fiduciary--who is not directly responsible for either forwarding the contribution or for collecting it--becomes aware of the late payment of deferrals. Can that fiduciary be liable if there are losses of employee money due to the failure to transfer the deferrals? Could an investment advisor be liable in this fact situation as a co-fiduciary?

A: Yes. ERISA Section 405 provides for co-fiduciary liability and, in particular, Section 405(a)(3) provides that a fiduciary shall be liable for a breach of fiduciary responsibility of another fiduciary if he or she has knowledge of a breach by such other fiduciary unless he or she makes reasonable efforts under the circumstances to remedy the breach. An investment advisor could be liable in this fact situation if the investment advisor is a fiduciary itself. Also, see answer to Question 30.

Q34: Loan repayments withheld from pay were not credited to plan for four months. Could this come under late contribution transactions?

A: The preamble to the plan asset regulation states that, although loan repayments were beyond the scope of the regulation, because loan repayments do not meet the definition of "contribution", the position of the Department is that such loan repayments need to be submitted to the plan within a reasonable amount of time.

The Preamble to the DOL's final regulations on plan assets, §2510.3-102, states:

"e. Participant Loans

Clarification was requested from a commenter that the time periods applicable to determining when participant contributions become plan assets also apply to determining when repayments of participant loans that are withheld or received by the employer become plan assets. Another commenter stated that monies withheld for repayment of participant loans should be afforded at least 90 days after withholding because many plans provide for quarterly repayment of loans.

The question of when participant loan repayments become plan assets is beyond the scope of this rulemaking. The notice of proposed rulemaking did not solicit comments on this matter. The record is insufficient for the Department to address this matter in the final regulation. In the Department's view, however, employers should promptly transmit participant loan repayments to plans. An employer's failure to transmit loan payments within a reasonable time after withholding or receiving them could subject the employer to liability for violations of the same provisions of ERISA and criminal law that are violated when an employer is delinquent in forwarding participant contributions to plans."

Q35: Will the DOL be issuing any specific guidance detailing how ERISA preempts state wage and hour laws with regard to automatic enrollment in 401(k) plans?

A: The Department has received requests for advisory opinions on this issue regarding the laws of certain selected states. Those are currently under review in light of the IRS revenue rulings and recent U.S. Supreme Court decisions on preemption.

In the past, the Department has issued Advisory Opinions on the preemption of state wage and hour laws. See DOL Advisory Opinions 94-27A and 96-01A.

In AO 94-27A, dealing with the requirement under New York state law to obtain written authorization for elective deferrals, the DOL stated:'

"In the view of the Department of Labor (the Department), Section 193, by requiring written authorization for employee wage deductions of contributions or payments for "insurance premiums, pension or health and welfare benefits," and "similar payments for the benefit of the employee," clearly "relates to" benefits provided under employee benefit plans in that it is specifically designed to affect employee benefit plans and seeks to restrict the choices of such plans with regard to the administration of their funding policies. Section 402(b) of ERISA requires plans to provide for a funding policy consistent with the plan's and ERISA's objectives. Dreyfus' salary reduction arrangement appears to constitute at least part of such a funding policy.

Therefore, it is the position of the Department that, to the extent that Section 193 is interpreted to limit, prohibit, or regulate the funding of employee benefit plans covered by Title I of ERISA, including wage deductions to employee benefit plans covered by Title I of ERISA, it is preempted by section 514(a) of ERISA."


Part VI: Other

Q36: Many 401(k) plans charge a participant for a distribution of the participant's benefits. For example, I was recently involved in a case where a major mutual fund company, in a bundled arrangement, charged approximately $50 for distributions, but waived that charge if the distribution was rolled over into an IRA funded with their investment product. Is it proper to charge individual participants, or their accounts, for distributions of their retirement benefits?

A: The issue of participant charges for distributions is the subject of pending requests for guidance from the Department which are currently under consideration.

The question also raises the issue of reasonableness of fees, that is, is the charge for the distributions reasonable or excessive (e.g., 100 distributions times $50 equals $5,000). The plan fiduciaries must evaluate the services and the costs in making that decision.

See the Homer Elliott Advisory Opinion (94-32A) attached as Appendix D. That DOL Opinion sates, in part:

"As appears from the foregoing, section 206(d)(3) of ERISA expressly grants an alternate payee the right to receive pension plan benefits payable under a QDRO. In general, it is the view of the Department that a plan may not encumber the exercise of a right mandated by Title I of ERISA by imposing conditions on the exercise of the right that are not contemplated by the statute.(1) We note, in this regard, that nothing in Title I of ERISA requires or permits a plan to impose any separate fees or costs (apart from the appropriate allocation of reasonable administrative expenses of the plan as a whole) in connection with a determination of the status of a domestic relations order or the administration of a QDRO.

Accordingly, it is the view of the Department that imposing a separate fee or cost on a participant or alternate payee (either directly or as a charge against a plan account) in connection with a determination of the status of a domestic relations order or administration of a QDRO would constitute an impermissible encumbrance on the exercise of the right of an alternate payee, under Title I of ERISA, to receive benefits under a QDRO. Additionally, in the Department's view, because Title I of ERISA imposes specific statutory duties on plan administrators regarding QDRO determinations and the administration of QDROs, reasonable administrative expenses thus incurred by the plan may not appropriately be allocated to the individual participants and beneficiaries affected by the QDRO."

Q37: There have been several court cases holding that QDROs need not be as specific as the regulations would require. In an Advisory Opinion (AO 99-13A; see Appendix E) based on "sham" QDROs, the DOL said it is not the administrator's task to "look behind" the QDRO document. Can you give us a little more guidance in this matter?

A: The Advisory Opinion provides that, if the QDRO appears on its face to be valid--and there are no known conflicting facts, then the ERISA Administrator is under no duty to investigate the validity of the DRO, but only to determine if it meets the statutory criteria to be qualified. However, if the ERISA Administrator becomes aware of facts which suggest that the divorce is a sham--or other facts suggesting that the DRO is otherwise invalid, then the ERISA Administrator has an ERISA fiduciary duty to consider and, where appropriate, to investigate those facts.

Q38: After the segregation of participant account balances based on a DRO (in a participant-directed plan), who should direct the investment of the segregated balance while the DRO is being reviewed to determine qualification?

A: The answer depends on the terms of the plan and/or on the terms of the plan's QDRO procedure.

MODERATORS COMMENT: In our experience, very few plans or QDRO procedures have provisions on investment direction prior to the approval of the QDRO. Thus, the plan provisions giving direction responsibility to the participant should be followed, unless it would be imprudent to do so. In that latter case, the plan fiduciaries would have the responsibility for managing the investments and 404(c) protection would be lost.

Q39: If a TPA receives subtransfer agency fees from a mutual fund company and the employer pays all the plan expenses, including the TPA fees, must the TPA disclose the subtransfer agency fees it receives to the participants as well as the employer, even if the participants are not affected?

A: See the Frost (97-15A) and Aetna (97-16A) Advisory Opinions.

The plan fiduciaries responsible for selecting the plan's investments have a fiduciary duty under ERISA to be aware of all fees and expenses paid directly or indirectly from plan assets--and the services to the plan as a result of those payments. The plan fiduciaries also have an obligation to determine that the fees, in the aggregate (which would include the subtransfer agency fees), are reasonable relative to the services received.

If the TPA is not a fiduciary, it does not have an obligation under ERISA to disclose the subtransfer agency fees (see the Aetna Advisory Opinion). However, if the TPA's fees, in the aggregate, are unreasonable, then a prohibited transaction has occurred under §406(a) and the plan is entitled to recover the excessive amount of the fees.

On the other hand, if the TPA is a fiduciary, and does not disclose the fees, the TPA has breached its fiduciary responsibilities by failing to disclose these fees and may have committed a prohibited transaction (see the Frost Advisory Opinion and ERISA §§406(b)(1) and (3)). If a prohibited transaction under 406(b) occurred, then the TPA owes the full amount of those fees to the plan.

MODERATORS COMMENT: While it is not clear, there may be state law claims for fraud or unfair business practices if fees are not disclosed. This is a complex issue which is highly fact-specific and which may vary from state to state. In addition, there are preemption issues.

APPENDIX A

Agencies Respond to Requests for Extension of Form 5500 Deadline

The U.S. Department of Labor's Pension and Welfare Benefits Administration (PWBA), Internal Revenue Service (IRS), and Pension Benefit Guaranty Corporation (PBGC) today announced guidance for employee benefit plans who are unable to file timely Form 5500 Annual Returns/Reports. The guidance is being furnished in response to requests to further extend the filing deadline.

After careful consideration of requests for a second extension of the Forms 5500 and 5500-EZ filing deadline, the agencies concluded that any further extension of the filing period would present significant processing issues. In March, the agencies granted an automatic extension to Oct.16, 2000 for those filers with reporting due dates on or before July 31, 2000. The agencies indicated at that time that they do not intend to impose late filing penalties for the 1999 Form 5500 or 5500-EZ in cases where, despite a good faith effort to meet deadlines, filings are delayed because of transition year difficulties.

With the approach of the October 16 filing deadline for many plans, Leslie B. Kramerich, Acting Assistant Secretary for PWBA, said that "the department recognizes that new forms, a new filing system and delays in form-related software have presented challenges for many 1999 Form 5500 filers. It is our goal to facilitate compliance for this transitional year, not penalize good faith efforts of filers to deal with these challenges."

To this end, Kramerich announced that the agencies are encouraging filers who will be unable to meet their filing deadline to attach a statement to their filing explaining the reasons for the delay. "Where a statement establishes reasonable cause for the late filing, the agencies will not take any further action solely as a result of the late filing," Kramerich said.

The extension of time to file the Form 5500 and 5500-EZ discussed above does not operate as an extension of time to file the PBGC Form 1. Information relating to the PBGC Form 1 is available at www.pbgc.gov. or by calling 1-800-736-2444.

Additional information about the automatic extension is available on the PWBA's website at www.efast.dol.gov. Questions about Form 5500 filing requirements should be address to PWBA's EFAST Help Desk at 202/219-8770.

APPENDIX B

Download Strategic Enforcement Plan


APPENDIX C

January 23, 1997

Mr. Samuel Israel
Cohen, Primiani & Foster
2029 Century Park East
Suite 480

97-03A
ERISA SEC.
403(c)(l) & 404(a)(1)(A)

Re: Identification Number: A00506

Dear Mr. Israel:

This is in response to your request for an advisory Opinion concerning the application of the Employee Retirement Income Security Act of 1974 (ERISA) to the payment of certain plan termination expenses by tax qualified retirement plans administered by the Insurance Commissioner of the state of California (the Commissioner) in its capacity as liquidator of companies which sponsored the plans.

You represent that the Commissioner from time to time is required by California law to "take over" insurance companies that are legally insolvent. Upon taking over an insurance company, the Commissioner acts as a liquidator or conservator of the company and as such is responsible under California law for the winding down and termination of the insolvent insurance company. In connection with its administration of the insurance company during the winding down period, the Commissioner pays creditors and takes other necessary actions to see to the orderly termination of the company.

On occasion, the Commissioner takes over insolvent insurance companies that have tax qualified pension or profit sharing plans, where the insurance companies themselves are no longer operating and have terminated employment of all their employees. In some of these cases, remaining assets in the insurance company's estate are sufficient to pay only a portion of its policyholders; in other cases, the insurance company estate has no remaining assets.(2) In all of these cases, plan participants have expressed concern about their benefits, have requested that the Commissioner take all necessary steps to terminate the plans and distribute their benefits, and in some cases have commenced litigation to force a termination of the plan.

You represent that the Commissioner does not receive a fee from any of the plans for administering the plans. In connection with terminating the plans, however, the Commissioner will engage outside legal counsel and pension administration firms to (i) amend the plan to comply with legislative, case law and regulatory developments; (ii) audit the plan where applicable; (iii) prepare and file annual statements; (iv) prepare benefit statements and calculate accrued benefits; (v) notify participants and beneficiaries of their benefits under the plan; and (vi) seek a determination letter from the Internal Revenue Service (IRS) concerning the status of the plan in connection with its termination. You have further represented that, with respect to certain plans administered by the Commissioner, the plan documents specifically permit the plan administrator to pay expenses incurred in connection with the administration of the plan. In other cases, the Commissioner proposes to amend the plans to include a provision which permits such payments.

You inquire whether, in the circumstances described above, the various fees and expenses for services engaged by the Commissioner in connection with terminating a plan would be appropriate expenses of the plan. You also inquire whether the amendment of a plan to allow it to pay expenses would be an appropriate and permissible amendment. (3)

Your inquiry specifically identifies three defined contribution plans currently being administered by the Commissioner. You have also requested general guidance regarding the payment of plan termination expenses by defined benefit plans. The views expressed in this Opinion would generally be the same for both defined contribution and defined benefit pension plans. We note, however, that there may be special issues, beyond the scope of this response, relative to defined benefit plans which are within the jurisdiction of the Pension Benefits Guarantee Corporation under Title IV of ERISA.

ERISA section 404(a)(1)(D) requires plan fiduciaries to discharge their duties in accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with the provisions of Titles I and IV of ERISA. Thus, evaluating the propriety of the payment by a plan of particular expenses first requires an examination of the language of the plan documents. If the plan documents permit the plan to pay the expense, then the fiduciary must determine whether such payment would be consistent with Title I of ERISA (and Title IV, if applicable), including the general fiduciary responsibility provisions of sections 403 and 404 of ERISA.

Section 403(c)(1) provides, subject to certain exceptions not here relevant, that the assets of an employee benefit plan shall never inure to the benefit of any employer and shall be held for the exclusive purpose of providing benefits to participants and beneficiaries and defraying reasonable expenses of administering the plan. Similarly, section 404(a)(1)(A) requires that plan fiduciaries discharge their duties to the plan solely in the interest of the participants and beneficiaries and for the exclusive purpose of providing them benefits and defraying reasonable expenses of administering the plan.

The prohibited transaction provisions also come into play in connection with payments for administrative services. Subsections 406(a)(1)(C) and (D) of ERISA provide, in part, that a fiduciary with respect to a plan shall not cause the plan to engage in a transaction if he or she knows or should know that such transaction constitutes a direct or indirect furnishing of goods, services or facilities between the plan and a party in interest with respect to the plan, or a transfer to, or use by or for the benefit of a party in interest of any assets of the plan.

Subject to the limitations of section 408(d) of ERISA, section 408(b)(2) provides an exemption from the prohibitions of section 406(a), provided that the services to the plan are necessary and are provided pursuant to a reasonable contract or arrangement for reasonable compensation. Regulations issued by the Department clarify the terms "necessary service" (29 C.F.R. 2550.408b-2(b)), "reasonable contract or arrangement" (29 C.F.R. 2550.408b?2(c)), and "reasonable compensation" (29 C.F.R. 2550.408b-2(d) and 2550.408c-2) as used in section 408(b)(2). The appropriate plan fiduciary(ies) must determine, based on all of the relevant facts and circumstances, whether the conditions of section 408(b)(2) are satisfied.

In addition, section 406(b)(1) of ERISA prohibits a plan fiduciary from dealing with the assets of a plan in his or her own interest or for his or her own account. Section 406(b)(2) provides that a fiduciary with respect to the plan shall not in his or her individual or any other capacity act in any transaction involving the plan on behalf of a party (or represent a party) whose interests are adverse to the interests of the plan or the interests of its participants or beneficiaries.

With respect to the prohibitions of section 406(b), the regulation in 29 C.F.R. 2550.408b-2(a) indicates that section 408(b)(2) of ERISA does not contain an exemption for an act described in section 406(b) of ERISA, even if such act occurs in connection with a provision of services which that section exempts from the prohibitions of section 406(a).

At the outset, it should be noted that it is a fiduciary determination as to whether to pay particular expenses out of Plan assets.(4) Accordingly, in making such determinations, the Commissioner must act prudently and solely in the interest of the plan participants and beneficiaries, and in accordance with the documents and instruments governing the plan insofar as they are consistent with the provisions of ERISA. See ERISA sections 403(c)(1), 404(a)(1)(A), (B), and (D). In this regard, the Commissioner must assure that payment of the expenses by the plan is authorized by the plan, and is in the interest of the plan participants and beneficiaries; and that the amount of the expense is reasonable.

With regard to ERISA section 404(a)(1)(D), relating to the documents and instruments governing the plan, if the plan document is silent as to the payment of administrative expenses, the Department takes the position that the plan may pay reasonable administrative expenses. If the plan document provides that the employer will pay any of such expenses, and if the employer has reserved the right to amend the plan document,

ERISA would not prevent the employer (or in this instance, the Commissioner) from amending the plan to require, prospectively, that the relevant expenses be paid by the plan. However, the prohibition on self-dealing in section 406(b)(1) of ERISA would preclude an employer (or the Commissioner) from exercising fiduciary authority to use plan assets to pay for an amendment to the plan that acquits the employer of an obligation to pay plan expenses.

Concerning sections 403 and 404 of ERISA, as a general rule, reasonable expenses of administering a plan include direct expenses properly and actually incurred in the performance of a fiduciary's duties to the plan. On the other hand, the Department has long taken the position that there is a class of discretionary activities which relate to the formation, rather than the management, of plans. These so-called "settlor" functions include decisions relating to the establishment, design and termination of plans and, except in the context of multiemployer plans, generally are not fiduciary activities subject to Title I of ERISA. See letter to John N. Erlenborn from Dennis M. Kass (March 13, 1986). Expenses incurred in connection with the performance of settlor functions would not be reasonable plan expenses as they would be incurred for the benefit of the employer and would involve services for which an employer could reasonably be expected to bear the cost in the normal course of its business or operations. See letter to Kirk F. Maldonado from Elliot I. Daniel (March 2, 1987). However, while the decision to terminate a plan is such a settlor or business function, activities undertaken to implement the plan termination decision are generally fiduciary in nature. Accordingly, reasonable expenses incurred in implementing a plan termination would generally be payable by the plan. This would include expenses incurred in auditing the plan, preparing and filing annual reports, preparing benefit statements and calculating accrued benefits, notifying participants and beneficiaries of their benefits under the plan, and, in certain circumstances, amending the plan to effectuate an orderly termination that benefits the participants and beneficiaries.

With regard to expenses attendant to amending a plan to maintain its tax-qualified status and to obtaining a determination from the Internal Revenue Service concerning the status of the plan in connection with termination, we note that, while ensuring the tax-qualified status of a plan confers significant benefits on the plan sponsor, or in the case of a liquidation, the estate of the plan sponsor, maintenance of tax-qualified status may also be in the interest of plan participants. In the case of a plan that was intended to be maintained as a tax-qualified plan and that permits the payment of reasonable expenses from the assets of the plan, it is the view of the Department that a portion of the expenses attendant to these activities may constitute reasonable expenses of the plan. Where, as here, there are benefits to be derived by both the plan sponsor (or the estate of the plan sponsor) and the plan, and where one party appears to be acting in both a settlor capacity on behalf of the plan sponsor (or the estate of the plan sponsor), and in a fiduciary capacity on behalf of the plan's participants and beneficiaries, it would generally be necessary, in order to avoid violations of ERISA sections 406(b)(1) and 406(b)(2), to have an independent fiduciary determine how to allocate the expenses attributable to those benefits. However, because the State of California, as liquidator, does not stand to benefit in its own interest or for its own account within the meaning of section 406(b)(1), and in view of the State's broader interest in protecting all of its citizenry, the Department will not seek to enforce any requirement for the State to engage an independent fiduciary to allocate expenses incurred in connection with plan terminations where the Commissioner has determined that an amount payable by a plan is in proportion to the benefit conferred on the plan relative to the benefit conferred on the estate of the plan sponsor.

Finally, you represent that there are numerous insurance company liquidations in which there are no funds to pay the claims of policyholders and other claimants and, indeed, the assets in the employer's estate are insufficient to pay even the basic administrative costs of the insurance company liquidation (such as publication of notices, mailing of proof of claim forms, receipt of claims and forwarding to guarantee associations, court appearances, etc.). Under these circumstances, you state, the Commissioner may seek permission from the supervising court to end all work and close the estate, and it is not uncommon for an estate to be closed without completion of claims adjustment, corporate dissolution, or completion of other tasks. For such estates, you represent, employee benefit plan assets are the only assets available to pay for termination of the plan. (5) If, in accordance with the State's statutory priorities for the payment of claims from the estate of an insolvent insurance company, there are no assets of the estate to pay claims to the IRS that would result from disqualification of the plan, any benefit conferred by maintaining tax qualified status of the terminating plan would inure only to the plan participants. In such cases, it is the view of the Department that the use of plan assets alone to terminate a plan, and to maintain its tax-qualified status as terminated, may be consistent with the above-cited provisions of Title I of ERISA.

This letter constitutes an advisory Opinion under ERISA Procedure 76-1 (41 Fed. Reg. 36281, Aug. 27, 1976). Section 10 of the Procedure describes the effect of advisory opinions.


Sincerely,

ROBERT J. DOYLE
Director of Regulations and Interpretations


APPENDIX D

ERISA Opinion Letter No. 94-32A Application of QDRO exception to anti-assignment and alienation rules.


Mr. Homer L. Elliott
Drinker Biddle & Reath
Philadelphia National Bank Building
Broad and Chestnut Streets
Philadelphia, PA 19107

Dear Mr. Elliott:

This responds to your request for an advisory Opinion on behalf of the VIZ Manufacturing Company (the Company) regarding its Savings and Investment Profit-Sharing Plan (the Plan). Your request concerns the application of the "qualified domestic relations order" (QDRO) exception to the anti-assignment and alienation rules contained in section 206(d)(3) of Title I of the Employee Retirement Income Security Act of 1974 (ERISA) and sections 401(a)(13)(B) and 414(p) of the Internal Revenue Code of 1986 (the Code). (6) At issue is a proposed amendment to the Plan that would allow the costs of determining and administering a QDRO to be charged against the account of the participant affected by the QDRO. Your submission contains the following facts and representations.

The Plan is maintained to provide retirement benefits to eligible employees. Consistent with the Plan documents, alienation of benefits payable under the Plan is prohibited except in the case of a QDRO or any domestic relations order entered before January 1, 1985.

The Plan has received and continues to receive domestic relations orders that purport to be QDROs. In each instance the Plan Administrator must comply with certain notice and procedural requirements in determining whether the domestic relations order is a QDRO. You represent that it is not unusual for a domestic relations order to go through several modifications before it meets the requirements necessary to be a QDRO and each time the Plan Administrator may need to seek the advice of an attorney concerning whether or not the order is a QDRO.

Section 14.4 of the Plan provides that Plan expenses shall be paid solely out of the trust established with respect to the Plan. You represent that the expenses incurred in the determination and administration of any particular domestic relations order affect the earnings available to be allocated to the accounts of all plan participants. Further, you state that since the determination and administration of any particular domestic relations order does not affect all participants and beneficiaries, but only the participant (and any alternate payee(s)) subject to the domestic relations order, the Company desires to amend the Plan to provide that the costs associated with determining the qualified status of a domestic relations order and with administering distributions under a QDRO be charged against the account of the participant affected.

Section 206(d)(1) of ERISA generally requires pension plans covered by Title I to provide that plan benefits may not be assigned or alienated. Section 206(d)(3)(A) of ERISA states that section 206(d)(1) applies to an assignment or alienation of benefits pursuant to a "domestic relations order," unless the order is determined to be a QDRO. Section 206(d)(3)(A) further provides that pension plans must provide for payment of benefits in accordance with the applicable requirements of any QDRO.

Section 206(d)(3)(B) of ERISA defines the terms "qualified domestic relations order" and "domestic relations order" as follows: (B) For purposes of [section 206(d)(3)]- (i) the term "qualified domestic relations order" means a domestic relations order- (I) which creates or recognizes the existence of an alternate payee's right to, or assigns to an alternate payee the right to, receive all or a portion of the benefits payable with respect to a participant under the plan, and (II) with respect to which the requirements of subparagraphs (C) and (D) are met, and (ii) the term "domestic relations order" means any judgment, decree, or order (including approval of a property settlement agreement) which- (I) relates to the provision of child support, alimony payments, or marital property rights to a spouse, former spouse, child, or other dependent of a participant, and (II) is made pursuant to a state domestic relations law (including a community property law).
Section 206(d)(3)(C) requires that in order for a domestic relations order to be qualified such order must clearly specify (i) the name and the last known mailing address (if any) of the participant and the name and mailing address of each alternate payee covered by the order; (ii) the amount or percentage of the participant's benefits to be paid by the plan to each such alternate payee, or the manner in which such amount or percentage is to be determined; (iii) the number of payments or period to which such order applies; and (iv) each plan to which the order applies.

Section 206(d)(3)(D) specifies that a domestic relations order is qualified only if such order does not require (i) the plan to provide any type of benefit, or any option, not otherwise provided by the plan; (ii) the plan to provide increased benefits (determined on the basis of actuarial value); and (iii) the payment of benefits to an alternate payee which are required to be paid to another alternate payee under another order previously determined to be a qualified domestic relations order.

Section 206(d)(3)(G) of ERISA requires the plan administrator to determine the qualified status of domestic relations orders received by the plan, and to administer distributions under such qualified orders, pursuant to reasonable procedures established by the plan. Upon receipt of the order, the plan administrator must promptly notify the participant and each alternate payee named in the order of its receipt by the plan and of the plan's procedures for determining the order's qualified status.

Section 206(d)(3)(I) of ERISA specifies, among other things, that if a plan fiduciary acts in accordance with part 4 of Title I of ERISA in the administration of a domestic relations order, including the determination of whether to treat a domestic relations order as being (or not being) a qualified domestic relations order, then the plan's obligation to the participant and each alternate payee shall be discharged to the extent of any payment made pursuant to ERISA.

Section 206(d)(3)(J) of ERISA provides that a person who is an alternate payee under a QDRO shall be considered a beneficiary under the plan.

As appears from the foregoing, section 206(d)(3) of ERISA expressly grants an alternate payee the right to receive pension plan benefits payable under a QDRO. In general, it is the view of the Department that a plan may not encumber the exercise of a right mandated by Title I of ERISA by imposing conditions on the exercise of the right that are not contemplated by the statute. (7) We note, in this regard, that nothing in Title I of ERISA requires or permits a plan to impose any separate fees or costs (apart from the appropriate allocation of reasonable administrative expenses of the plan as a whole) in connection with a determination of the status of a domestic relations order or the administration of a QDRO. (8)

Accordingly, it is the view of the Department that imposing a separate fee or cost on a participant or alternate payee (either directly or as a charge against a plan account) in connection with a determination of the status of a domestic relations order or administration of a QDRO would constitute an impermissible encumbrance on the exercise of the right of an alternate payee, under Title I of ERISA, to receive benefits under a QDRO. Additionally, in the Department's view, because Title I of ERISA imposes specific statutory duties on plan administrators regarding QDRO determinations and the administration of QDROs, reasonable administrative expenses thus incurred by the plan may not appropriately be allocated to the individual participants and beneficiaries affected by the QDRO. (9)

This letter constitutes an advisory Opinion under ERISA Procedure 76-1. Accordingly, it is issued subject to the provisions of the procedure, including section 10 thereof relating to the effect of advisory opinions.

Sincerely,

Robert J. Doyle
Director of Regulations and Interpretations

APPENDIX E

Advisory Opinion

September 29, 1999

Brian G. Belisle
Oppenheimer Wolff & Donnelly LLP
Plaza VII
45 South Seventh Street
Suite 3400
Minneapolis, MN 55402-1609

99-13A
ERISA SEC.
206(d)(3)

Dear Mr. Belisle:

This is in response to your request on behalf of the UAL Corporation (UAL) and United Air Lines, Inc. (United) for an advisory opinion. Specifically, you ask how a plan administrator should treat domestic relations orders the plan administrator has reason to believe are "sham" or "questionable" in nature.(10)

UAL is a holding company. Its major wholly-owned subsidiary is United. You represent that employees of United participate in three pension plans - an employee stock ownership plan (the ESOP); a 401(k) plan that is a profit sharing plan qualified under section 401(a) of the Code (the 401(k) Plan); and a defined benefit pension plan. The ESOP is a combination leveraged ESOP and non-leveraged stock bonus plan that is qualified under section 401(a) of the Code. Substantially all of the assets in the ESOP are invested in UAL stock.

You represent that the named plan administrator of the ESOP is UAL. UAL has assigned many of its administrative duties under the ESOP, including the duty to establish procedures for determining whether a domestic relations order constitutes a "qualified domestic relations order" (QDRO), to an ESOP Committee consisting of employees of United. The ESOP Committee has delegated to United's Pension Programs Department (Pension Programs) the responsibility of reviewing and determining whether a domestic relations order received by the ESOP Committee is a QDRO within the meaning of section 206(d)(3) of ERISA. Appeals of QDRO determinations are made to the ESOP Committee.

You further represent that the ESOP permits an alternate payee to request the immediate lump sum distribution of any benefits under the plan that are assigned pursuant to the terms of any domestic relations order that the ESOP Committee determines is a QDRO. The ESOP otherwise permits lump sum distributions only following a participant's termination of employment (including by way of the participant's death).

The named plan administrator of the 401(k) Plan is United. United has delegated the authority to control and manage the administration of the 401(k) Plan, including the duty to establish procedures for determining whether a domestic relations order constitutes a QDRO, to a Pension and Welfare Plans Administration Committee (PAWPAC) consisting of employees of United. PAWPAC in turn has delegated to Pension Programs the responsibility for reviewing and determining whether a domestic relations order applying to the 401(k) Plan is a QDRO. Appeals of a QDRO determination are made to PAWPAC. As with the ESOP, the 401(k) Plan permits the immediate distribution of benefits under the plan that are assigned pursuant to the terms of a QDRO. Although an alternate payee may thus receive an immediate lump sum distribution from the 401(k) Plan, participants or beneficiaries are entitled to distributions from the 401(k) plan only following termination of employment (including by way of the participant's death) or upon financial hardship.

You represent that Pension Programs currently has under review 16 domestic relations orders concerning benefits under the ESOP and the 401(k) Plan that Pension Programs believes may be "questionable" or "sham" in nature.(11)

You detail the grounds for Pension Programs' suspicions as to the nature of these domestic relations orders as follows. Pension Programs received within a very short period of time five domestic relations orders from the same lawyer (two of the orders were mailed in the same envelope). Each order related to participants working in United's maintenance facility located in Indianapolis, Indiana. Each of the five orders identically provided for an assignment of 100 percent of the participant's benefit in the ESOP and the 401(k) Plan to an alternate payee. Each order made no provision for any assignment of these participants' benefits in United's defined benefit pension plan. In each of the orders, the alternate payee and participant were shown as having the same address. Despite its suspicions, Pension Programs determined that each of the five orders was qualified because they satisfied the requirements of section 206(d)(3) of ERISA. In Pension Programs' view, these orders differed from other domestic relations orders processed by Pension Programs in that they dealt only with the ESOP and the 401(k) Plan; they provided for assignment of 100 percent of the participant's benefit; and they showed the participant and alternate payee as having the same address.

After its determination that these five domestic relations orders were QDROs, Pension Programs received and reviewed 16 other orders that had unusual characteristics similar to those of the original five orders. These 16 orders similarly provided for a 100 percent assignment of benefits payable under the ESOP and/or the 401(k) Plan, made no mention of the defined benefit pension plan, and specified in most cases that the alternate payee and participant shared the same address. You represent that Pension Programs performed additional investigation in its review of these 16 domestic relations orders to determine whether they were qualified.(12) While these orders were pending review with Pension Programs, two participants from the Indiana facility called at different times to determine the status of the review of their orders. You indicate that, during those conversations, each participant asserted that his order was not one of the "fraudulent QDROs." You represent that these statements led Pension Programs to heighten its scrutiny of the 16 orders assigning 100 percent of the participant's right to the ESOP and 401(k) benefits.

You further represent that, after beginning its investigation of the 16 domestic relations orders in question, Pension Programs learned of a pamphlet entitled "Retirement Liberation Handbook" that was being distributed by at least one United employee in the Indianapolis, Indiana area.(13) The pamphlet advocated, as a method of acquiring a distribution of pension plan benefits before reaching retirement age, that participants and their spouses obtain a divorce for the sole purpose of securing a court order assigning pension plan benefits and then remarry. Such a sham divorce, according to the Liberation Handbook, would enable the participant to obtain direct control over the investment of the participant's pension benefit. The Liberation Handbook also suggested that single employees could go through a sham marriage and subsequent divorce, by paying an individual a percentage of the anticipated pension distribution as compensation for acting as spouse, or could instead quit employment in order to obtain a similar early distribution and later get rehired. The Handbook described in some detail how distributions from pension plans are handled for tax purposes and discussed various options for distributions and investments of the distributions.

After reviewing the Liberation Handbook, Pension Programs determined that all of the 16 orders in question, as well as the original five orders it had previously deemed qualified, had significant similarities to the specific format promoted by the Liberation Handbook. For example, two of the initial five orders requested that distribution be made to an inappropriate account named in the Liberation Handbook.

In addition, all of the orders identified by Pension Programs as questionable relate to the ESOP and 401(k) benefits of employees who, at the time of the order, resided in the Indianapolis area and were in related work groups, and all had a number of common characteristics not typically seen in Pension Programs' review of domestic relations orders. Included in these were rapid remarriage and continued use by the putative alternate payee of United's no-cost travel for spouses.

You represent that Pension Programs engaged local counsel in Indiana to determine whether and to what extent the questionable domestic relations orders might be valid under Indiana law. Indiana counsel opined that, if the orders had been obtained as promoted by the Liberation Handbook, (i) the participant and alternate payee would have committed perjury; (ii) the parties would be in contempt of court; (iii) the order would have been fraudulently obtained; and (iv) if the foregoing could be established to the satisfaction of a judge, the order likely would be vacated by the court.

You have asked for an advisory opinion as to whether, and if so when, a plan administrator may investigate or question a domestic relations order submitted for review to determine whether it is a valid "domestic relations order" under State law for purposes of section 206(d)(3)(B) of ERISA.

Section 206(d)(1) of ERISA generally requires pension plans covered by Title I of ERISA to provide that plan benefits may not be assigned or alienated. Section 206(d)(3)(A) of ERISA states that section 206(d)(1) applies to an assignment or alienation of benefits pursuant to a "domestic relations order" unless the order is determined to be a "qualified domestic relations order" (QDRO). Section 206(d)(3)(A) further provides that pension plans must provide for payment of benefits in accordance with the applicable requirements of any QDRO.

Section 206(d)(3)(B) of ERISA defines the terms "qualified domestic relations order" and "domestic relations order" for purposes of section 206(d)(3) as follows:

(B) For purposes of [section 206(d)(3)] -

(i) the term "qualified domestic relations order" means a domestic relations order -

(I) which creates or recognizes the existence of an alternate payee's right to, or assigns to an alternate payee the right to, receive all or a portion of the benefits payable with respect to a participant under a plan, and

(II) with respect to which the requirements of subparagraphs (C) and (D) are met, and

(ii) the term "domestic relations order" means any judgment, decree, or order (including approval of a property settlement agreement) which -

(I) relates to the provision of child support, alimony payments, or marital property rights to a spouse, former spouse, child, or other dependent of a participant, and

(II) is made pursuant to a State domestic relations law (including a community property law).

Section 206(d)(3)(C) requires that in order for a domestic relations order to be qualified such order must clearly specify (i) the name and the last known mailing address (if any) of the participant and the name and mailing address of each alternate payee covered by the order; (ii) the amount or percentage of the participant's benefits to be paid by the plan to each such alternate payee, or the manner in which such amount or percentage is to be determined; (iii) the number of payments or period to which such order applies; and (iv) each plan to which the order applies.

Section 206(d)(3)(D) specifies that a domestic relations order is qualified only if such order does not require (i) the plan to provide any type of benefit, or any option, not otherwise provided by the plan; (ii) the plan to provide increased benefits (determined on the basis of actuarial value); and (iii) the payment of benefits to an alternate payee that are required to be paid to another alternate payee under another order previously determined to be a qualified domestic relations order.

Section 206(d)(3)(G) of ERISA requires the plan administrator to determine the qualified status of domestic relations orders received by the plan and to administer distributions under such qualified orders, pursuant to reasonable procedures established by the plan. In administering QDROs, plan administrators must follow the plan's reasonable procedures, as required under section 206(d)(3)(G), and must assure that the plan pays only reasonable expenses of administering the plan, as required by sections 403(c)(1) and 404(a)(1)(A) of ERISA. In this regard, plan fiduciaries must take appropriate steps to ensure that plan procedures are designed to be cost effective and to minimize expenses associated with the administration of domestic relations orders. See Advisory Opinion 94-32A (Aug. 4, 1994).

When a pension plan receives an order requiring that all or a part of the benefits payable with respect to a participant be paid to an alternate payee, the plan administrator must determine that the judgment, decree or order is a "domestic relations order" within the meaning of section 206(d)(3)(B)(ii) of ERISA - i.e., that it relates to the provision of child support, alimony payments, or marital property rights to a spouse, former spouse, child or other dependent of the participant and that it is made pursuant to State domestic relations law by a State authority with jurisdiction over such matters. Additionally, the plan administrator must determine that the order is qualified under the requirements of section 206(d)(3) of ERISA. It is the view of the Department that the plan administrator is not required by section 206(d)(3) or any other provision of Title I to review the correctness of a determination by a competent State authority pursuant to State domestic relations law that the parties are entitled to a judgment of divorce. See Advisory Opinion 92-17A (Aug. 21, 1992). Nevertheless, a plan administrator who has received a document purporting to be a domestic relations order must carry out his or her responsibilities under section 206(d)(3) in a manner consistent with the general fiduciary duties in part 4 of title I of ERISA.

For example, if the plan administrator has received evidence calling into question the validity of an order relating to marital property rights under State domestic relations law, the plan administrator is not free to ignore that information. Information indicating that an order was fraudulently obtained calls into question whether the order was issued pursuant to State domestic relations law, and therefore whether the order is a "domestic relations order" under section 206(d)(3)(C). When made aware of such evidence, the administrator must take reasonable steps to determine its credibility. If the administrator determines that the evidence is credible, the administrator must decide how best to resolve the question of the validity of the order without inappropriately spending plan assets or inappropriately involving the plan in the State domestic relations proceeding. The appropriate course of action will depend on the actual facts and circumstances of the particular case and may vary depending on the fiduciary's exercise of discretion. However, in these circumstances, we note that appropriate action could include relaying the evidence of invalidity to the State court or agency that issued the order and informing the court or agency that its resolution of the matter may affect the administrator's determination of whether the order is a QDRO under ERISA.(14) The plan administrator's ultimate treatment of the order could then be guided by the State court or agency's response as to the validity of the order under State law. If, however, the administrator is unable to obtain a response from the court or agency within a reasonable time, the administrator may not independently determine that the order is not valid under State law and therefore is not a "domestic relations order" under section 206(d)(3)(C), but should rather proceed with the determination of whether the order is a QDRO.

This letter constitutes an advisory opinion under ERISA Procedure 76-1, 41 Fed. Reg. 36281 (1976). Accordingly, this letter is issued subject to the provisions of that procedure, including section 10 thereof, relating to the effect of advisory opinions.

Sincerely,

Susan G. Lahne
Acting Chief, Division of
Fiduciary Interpretations
Office of Regulations
and Interpretations

Notes

1. The Department distinguishes such statutorily-granted rights of participants and beneficiaries from rights that a plan may, but is not required to, provide under Title I of ERISA. Thus, for example, under ERISA sections 404(c) and 408(b)(1), and the Department's implementing regulations, reasonable expenses associated with a participant's exercise of an option under the plan to direct investments or to take a participant loan may be separately charged to the account of the individual participant, provided such charges are consistent with Titles I and IV of ERISA and in accordance with the documents and instruments governing the plan.

2. You indicate that under the priority categories specified in California Insurance Code section 1033 for the distribution of estate assets, costs of administering the liquidation are the first priority, and that policyholder claims come ahead of the claims of other unsecured creditors (except to the extent that their claims have preference under state or federal law).

3. ERISA section 402(b)(3) provides that every employee benefit plan shall provide a procedure for amending the plan and for identifying the persons who have authority to amend the plan. The primary purpose of this provision is to ensure that every plan has a workable amendment procedure. See Curtiss-Wright Corp. v. Schoonejongen, 115 S.Ct. 1223 (1995). Whether a plan contains such provisions, and whether they are complied with in a given case are questions which depend upon the particular facts and as to which the Department expresses no views. We note, however, that you have asked the Department to assume that, in each case, the sponsoring employer had reserved in the plan document the right to amend the plan, and that the Commissioner has the authority to amend the plan by virtue of its status, under California law, as liquidator of such employer.

4. ERISA establishes a functional approach to determine whether an activity is fiduciary in nature. Under section 3(21) of ERISA, a fiduciary includes anyone who exercises discretion in the administration of an employee benefit plan; has authority or control over the plan's assets; or renders investment advice for a fee with respect to any plan assets. The Department has indicated that it will examine the types of functions performed, or transactions undertaken, on behalf of a plan to determine whether such activities are fiduciary in nature and therefore subject to ERISA's fiduciary responsibility provisions. See 29 C.F.R. 2509.75-8, D-2.

5. You indicate that, in theory, California Insurance Code section 1035 would permit the Commissioner to pay costs of administering a liquidation from the appropriation of the Department of Insurance when estate assets are insufficient to pay such costs. In practice, however, you state that the appropriation includes very little in the way of funds for this purpose. For purposes of this letter, we have assumed that funds would not be available from the Department of Insurance appropriation.

6. References to the Internal Revenue Code sections that parallel these provisions of Title I of ERISA are omitted from the following, but may be assumed to be incorporated by reference when the parallel section of Title I is cited.

7. The Department distinguishes such statutorily-granted rights of participants and beneficiaries from rights that a plan may, but is not required to, provide under Title I of ERISA. Thus, for example, under ERISA sections 404(c) and 408(b)(1), and the Department's implementing regulations, reasonable expenses associated with a participant's exercise of an option under the plan to direct investments or to take a participant loan may be separately charged to the account of the individual participant, provided such charges are consistent with Titles I and IV of ERISA and in accordance with the documents and instruments governing the plan.

8. By contrast, Title I of ERISA expressly permits plans to impose separate administrative costs in a variety of cases. For example, section 104(b)(4) of ERISA states that the plan administrator may impose a reasonable charge to cover the cost of furnishing copies of plan documents or instruments upon request of a participant or beneficiary. See also, section 602 of ERISA, which permits a group health plan, subject to certain conditions, to require the payment of 102% of the applicable premium for any period of continuation coverage elected by an eligible participant or beneficiary.

9. Of course, in administering QDROs, plan administrators must follow reasonable procedures, as required under section 206(d)(3)(G), and must assure that the plan pays only reasonable expenses of administering the plan, as required by sections 403(c)(1) and 404(a)(1)(A) of ERISA. In this regard, it is the view of the Department that plan fiduciaries must take appropriate steps to ensure that plan procedures are designed to be cost effective and to minimize expenses associated with the administration of domestic relations orders.

10. You do not ask and we do not opine as to whether any of the individual domestic relations orders at issue is "qualified" pursuant to section 206(d)(3) of the Employee Retirement Income Security Act of 1974, as amended (ERISA) and section 414(p) of the Internal Revenue Code (Code).

11. Pension Programs processes between approximately 200 and 300 domestic relations orders per year for all of its qualified retirement plans,

12. You represent that United pays all expenses related to the administration of domestic relations orders and QDROs, including all of the investigative efforts relating to any questionable QDROs and all legal expenses. You state that no plan assets of either the ESOP or the 401(k) Plan have been used directly or indirectly to pay for the expenses of investigating the QDROs at issue here.

13. The Liberation Handbook apparently first appeared in the classified section of a local advertising exchange.

14. Appropriate action could take other forms, depending on the circumstances and the fiduciary's assessment of the relative costs and benefits, including actual intervention in or initiation of legal proceedings in State court.