Company Owner Found Personally Liable for Unpaid Contributions to Union Benefit Funds
Trustees of N.Y. City District Council of Carpenters Pension Fund v. Nguyen, SDNY 2017

A woodworking company in the Bronx participated in union benefit plans (the “Funds”). Following a series of audits and an arbitration, it was determined that company employees performed covered work during relevant audit periods but the company made no contributions for those periods. The company’s owner disputed the dollar amount of the contribution shortfall, but agreed that the company had not paid any portion of the relevant contribution delinquencies. In connection with the audits and arbitration, the company owner acknowledged that he was the "only person currently or previously employed or engaged by [the company] who has or had authority to withdraw funds…from one or more of [the company’s] bank accounts," and that he used company funds “to pay parties other than the Funds; his own personal expenses; and undocumented immigrant employees.” Following the company’s filing for bankruptcy protection, the Funds commenced a lawsuit against the company’s owner in which it alleged a breach of fiduciary duties under the Employee Retirement Income Security Act of 1974 (“ERISA”).

The significant issues considered by the federal district court, as it ruled on the parties’ cross-motions for partial summary judgment, were whether the company’s unpaid contributions constitute plan assets of the Funds, and whether the company’s owner exercised sufficient control over those plan assets to make him an ERISA fiduciary. While some federal courts have found that unpaid plan contributions are not plan assets, the court in this instance ruled that the unambiguous language found in the Funds’ trust agreements “clearly demonstrates the parties’ contractual agreement that any unpaid [company] contributions constitute plan assets.” Because the company’s owner had exclusive control over the withdrawal of funds from the company’s bank accounts, the court also ruled that the company owner “possessed sufficient discretionary ‘authority or control over the management of …plan assets’” to be an ERISA fiduciary with respect to the Funds. And because the company’s owner used the “plan assets” that were within his control “for other purposes than to make [the company’s] requisite contributions to the Funds,” the court concluded that he breached his ERISA fiduciary duties which made him personally liable for those contributions. Trustees of N.Y. City District Council of Carpenters Pension Fund v. Nguyen, SDNY 2017.

Administrative Services Program Not an ERISA Plan or a MEWA
ERISA Op. Letter No. 2017-01A (2017)

The Department of Labor’s Employee Benefits Security Administration (EBSA) issued an ERISA Opinion Letter concluding that the Health Transformation Alliance (HTA) is neither an employee welfare benefit plan, nor a multiple employer welfare arrangement. The HTA is a member-operated cooperative. Large employer-members pay capital contributions and fees to access the HTA services designed to improve the way the employer-members and their employee benefit plans purchase healthcare coverage for their employees. These services include giving members access to cost, quality, and access standards for medical networks based on spending and utilization analysis. The HTA also negotiates with health care benefit providers on behalf of its participant members. HTA members operate separate employee benefit plans under administrative services agreements contracts with various insurance agencies. The EBSA determined that the HTA, and the bundle of administrative services HTA offers its members, is not an ERISA employee welfare benefit plan because it has no employee participants and does not provide covered benefits to their employees or their dependents. Also, the HTA is not a MEWA because no component of the HTA program “offers or provides” any welfare benefits to employees of its member-employers. In addition, the HTA program is not a MEWA because no component of the program underwrites or guarantees welfare benefits, provides welfare benefits through group insurance contracts covering more than one employer, pools risk among participating employers, or provides similar insurance or risk spreading functions. (ERISA Op. Letter No. 2017-01A (2017))

ERISA Not a Shield to Plan’s Illegal Acts
Johnson v. Carlson

In a rather unusual setting, the application of ERISA to enforcement of a judgement against a retirement plan has come to issue. Two individuals borrowed money from a pension plan in 2000 and in 2002. The parties borrowing the money were not participants in the plan and therefore these were not participant loans. The individuals defaulted on payment of the promissory notes. The retirement plan sued to collect. The individuals raised the defense to payment of the loans based on the claim that the promissory notes contained a usurious interest rate. The original trial court concluded that the interest rate charged violated the State of Washington’s usury statute and entered a judgement against the pension plan for over $535,000. The individuals then went on to enforce the judgement and garnished slightly over $1,500 from the pension plan’s bank account. The pension plan filed a claim that the bank account money was exempt from garnishment because it represented retirement funds that were due to be paid to the plan participants. The trial court denied the claim of ERISA exemption and ordered judgement for the individuals. On appeal, the Court of Appeals in the State of Washington, upheld the judgement in favor of the individuals. The court found that a pension plan may be sued for its tortious acts, including the charging of interest on the loan that is usurious. The pension plan also made claims of preemption under ERISA and other ERISA related defenses; however, the court dismissed those actions finding that the pension plan was and remained liable for the judgement that was entered against it by the original trail court. Johnson v. Carlson (Wash. Ct. App., 2017)

Investment with Lifetime Income Elements May be a Prudent Default Investment Alternative
(DOL Information Letter No. 2016-12-22)

In a recent information letter, the Department of Labor (“DOL”) opined that a plan fiduciary’s selection of a default investment with lifetime income elements may be prudent, even if the investment has liquidity and transferability restrictions preventing it from being a Qualified Default Investment Alternative (“QDIA”). The DOL’s information letter was issued in response to a request from TIAA for guidance regarding whether its Income for Life Custom Portfolios (“ILCP”), a target-date fund product with a fixed guaranteed annuity feature (“Annuity Sleeve”), may be selected by a plan fiduciary as a default investment alternative for a participant-directed individual account plan. As an initial matter, DOL noted that the ILCP would not qualify as a QDIA because of its liquidity and transferability restrictions. The regulations governing QDIAs set out various conditions for default investment options that, if satisfied, provide the fiduciary selecting the investment with protection from liability for losses or breaches resulting from investment in it (although the plan fiduciary remains responsible for prudent selection and monitoring of the QDIA). While QDIAs may generally be preferable from a plan fiduciary standpoint because of the protections afforded, DOL explained that QDIAs are not the exclusive option for a plan fiduciary to satisfy its obligation to prudently select default investments. Accordingly, a plan fiduciary may choose to forgo the QDIA protections and prudently select a default investment alternative for a plan that is not a QDIA. DOL specifically expressed its view that an investment with lifetime income elements that meets all other QDIA requirements except for those related to liquidity and transferability could be prudently selected by a plan fiduciary as a default investment. Evaluating whether selection of such an investment is prudent would require “an objective, thorough and analytical process that considers all relevant facts and circumstances” of the given investment in the context of the specific plan. Some important considerations DOL noted include the investment’s guarantees related to interest rates, the expected lifetime income to be provided during retirement, costs associated with the investment, and whether selection of the investment would warrant additional notice to participants to ensure they are aware of liquidity and transferability restrictions on the investment. (DOL Information Letter No. 2016-12-22)

IRS Rules Spouse May Rollover IRA Amounts from Trust
(PLR 201707001)

A trust was designated as the beneficiary of a decedent’s seven Roth IRAs and one traditional IRA. There were several subtrusts established under the trust. The survivor’s subtrust was primarily designed to benefit the decedent’s surviving spouse. The surviving spouse, as trustee of the survivor’s subtrust, allocated the entirety of four of the Roth IRAs, and one-half of the remaining Roth IRAs and the traditional IRA, to the survivor’s subtrust.

The surviving spouse wished to establish her own Roth and traditional IRAs for purposes of rolling over any distributions of the IRA amounts held by the survivor’s subtrust (other than required minimum distributions for any year through the year the rollover occurred). In response to the surviving spouse’s request for a private letter ruling, the IRS ruled as follows:

1. Under Section 408(d)(3) of the Internal Revenue Code, an individual may not rollover a distribution from an inherited IRA. An IRA is considered an inherited IRA if the individual for whose benefit the IRA is maintained acquired the IRA by reason of the death of another person, and the surviving individual is not the surviving spouse of the decedent. The IRS ruled that the decedent’s IRAs would not be treated as inherited IRAs with respect to the surviving spouse, as the surviving spouse was effectively the beneficiary of the decedent’s IRAs. As a result, if the surviving spouse received a distribution from the survivor’s subtrust attributable to the decedent’s IRAs, the surviving spouse would be permitted to rollover the distribution to her own Roth or traditional IRA, as applicable.
2. Treasury Regulation Section 1.408-8, Q&A 5, provides that a surviving spouse of an individual may elect to treat the spouse's entire interest as a beneficiary in the individual's IRA as the spouse's own IRA. However, in order to make this election, the spouse must be the sole beneficiary of the IRA and have an unlimited right to withdraw amounts from the IRA. If a trust is named as beneficiary of the IRA, this requirement is not satisfied even if the spouse is the sole beneficiary of the trust. Accordingly, since the surviving spouse was not the sole designated beneficiary of the decedent’s IRAs, the IRS ruled that the surviving spouse could not treat the decedent’s IRAs as the surviving spouse’s own.
3. Section 408(d)(3)(B) of the Internal Revenue Code generally limits a taxpayer to one rollover during any 12-month period. Accordingly, the trust would generally need to consolidate the Roth IRAs into a single Roth IRA by means of a trustee-to-trustee transfer before making any distributions.
4. The surviving spouse would be permitted to exclude any distributions from the IRAs that were timely rolled over to her own IRAs, subject to the one rollover per year rule.
5. Beginning with the year following the year in which the surviving spouse rolled over a Roth IRA distribution to the surviving spouse’s own Roth IRA, the surviving spouse would not be required to take any required minimum distributions from the surviving spouse’s own Roth IRA.
6. Beginning with the year following the year in which the surviving spouse rolls over a distribution from decedent’s traditional IRA to the surviving spouse’s own IRA, required minimum distributions from the surviving spouse’s traditional IRA would be calculated based on the surviving spouse being the IRA owner.

The IRS’s ruling raises a number of potential planning options. For example, by rolling amounts over to a surviving spouse’s own IRA, the surviving spouse may designate his or her own beneficiaries. In addition, under this approach, it may be possible to delay or lengthen the period over which required minimum distributions may be taken. (PLR 201707001)