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Employee Benefits

Employee Benefits Developments 10/20 to 10/31 2003

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HOT TOPIC

Department of Labor States Fiduciary Issues May Arise From Mutual Fund Late Trading and Market Timing Practices. Assistant Secretary of Labor Ann L. Combs, in an October 16 speech, addressed fiduciary issues that may arise as a result of investigations into alleged late trading and market timing by mutual funds. Ms. Combs stated, “Allegations of improper mutual fund practices where a plan is invested must be factored into the fiduciary’s determination of the continuing appropriateness of that investment. The plan fiduciary may need to contact the mutual fund’s management for information regarding the trading practices and take appropriate action.” As has been extensively reported in the general press, many large public and private plans and other parties have withdrawn their assets from those mutual fund families identified as being charged with improper practices.

IRS/DOL RULINGS, OPINIONS, ETC.

Garnishment of 401(k) Plan to Collect a Criminal Fine Not Prohibited by Anti-Alienation Rule. The Internal Revenue Service (“IRS”) ruled that where a federal court is seeking to collect a fine in an individual criminal case, the employer would not violate the Internal Revenue Code (“Code”) § 401(a)(13) anti-alienation rule by garnishing the employee’s 401(k) plan account balance. (PLR 200342007.) In this private letter ruling, an individual was convicted of federal drug-related offenses, for which he was imprisoned and assessed a fine. Under the Code § 401(a)(13) anti-alienation rule, a qualified plan must provide that benefits under the plan may not be assigned or alienated. Violating that rule may cause a plan to lose its tax-qualified status. Under federal criminal procedure rules, a fine imposed as part of either (1) a criminal sentence or (2) an order of restitution is a lien in favor of the federal government on all property of the person fined, as if the liability of the person fined were a tax liability. Thus, the IRS ruled the federal government is authorized to collect a fine from an individual’s interest in the 401(k) qualified retirement plan. The only other issue to be resolved was whether the collection would violate the Code § 401(a)(13) anti-alienation rules. Two recent federal district court cases have held the federal government may collect criminal fines from a pension plan without disqualifying the plan. The IRS concluded a judgment rendered by a federal court imposing a fine payable to the federal government is to be treated as a tax liability, and the company may honor the court’s garnishment order without jeopardizing the tax-qualified status of the 401(k) plan. IRS officials reported this technique for collecting criminal fines and restitution is becoming more popular with U.S. Attorneys.

PBGC Finalizes Streamlined Filing and Notice Requirements to Facilitate Use of Electronic Media. The Pension Benefit Guaranty Corporation (“PBGC”) has issued final regulations (Fed. Reg. Vol. 68, No. 208, October 28, 2003, page 61344) that simplify and consolidate the methods used to send a filing to the PBGC, provide notices or information to third parties, determine the date on which a filing is treated as made or notice is provided, compute time periods for filings and notices, and maintain records by electronic means. These changes are intended to make it easier to file electronically and provide electronic notices. The final regulations are generally effective for filings and notices made after November 27. There are certain special transition rules, including a rule providing PBGC premium payments for the 2003 premium year may be made under the prior rules described in the 2003 Premium Payment Package.

CASES

Unlucky in Love … and Unsuccessful in Tax Court. A taxpayer was required to pay a 10% penalty tax on an early distribution from an employee stock ownership plan (“ESOP”) because the distribution did not qualify as a payment to an alternate payee under a qualified domestic relations order (“QDRO”). (Simpson v. Comm’r, T.C. No. 2832-01, TC Memo 2003-294, unpub. October 21, 2003). Randolph Simpson was employed as a shuttle bus driver for Avis Rent-a-Car and was a participant in its ESOP. Simpson received a lump-sum distribution in 1997 of about $43,000 after Avis’s sale to a private company. At the time of the distribution, Simpson, age 47, was in the middle of a divorce proceeding in Texas, a community property state. The divorce decree awarded Simpson all of his interest in the ESOP as his sole and separate property. The divorce decree awarded $17,900 to Simpson’s ex-wife as a just and right division of the community estate. Simpson used part of the ESOP distribution to pay the judgment to his wife. After determining that he had failed to pay a 10% additional tax for having received the distribution before attaining age 59½, the IRS issued him a notice of deficiency. Simpson, who represented himself, argued his former wife should be responsible for the 10% additional tax on the $17,900. While Simpson did not raise the argument, the Tax Court examined Code § 72(t)(2)(C), which provides the penalty does not apply to distributions made to an alternate payee under a QDRO. The Tax Court held the divorce decree simply divested Simpson’s wife of any rights to Simpson’s interest in the ESOP and did not recognize her as an alternate payee under the plan. Because no alternate payee was named in the divorce decree, the decree was not a QDRO and the Code § 72(t)(2)(C) exception did not apply. Next time Simpson is unlucky in love, he, like Avis, will need to “try harder” to have his former wife named as an alternate payee.

Court Says Plan Sponsor as Appointing Fiduciary Has No Duty to Continuously Monitor Other Fiduciaries. The U.S. District Court for the Northern District of Oklahoma ruled the Williams Companies and its directors cannot be sued for breach of fiduciary duty involving the company’s 401(k) plan. (In re Williams Cos. ERISA Litigation, N.D. Okla., No. 02-CV-153-H(M), October 24, 2003.) As we reported earlier (See Employee Benefits Developments, August 25 to September 5, 2003), the U.S. Department of Labor (“DOL”) filed a brief in support of the plaintiff’s claims against the company and certain directors that they, as appointing fiduciaries, had an ongoing duty to monitor the actions of members of the plan’s benefits and investment committees. In declining to reconsider the prior ruling dismissing these claims, Judge Sven Erik Holmes said in a footnote he rejected the DOL’s arguments: “The court observes the position argued by DOL would effectively expand the responsibility of any appointing authority to establish an ongoing process that affects continuous and comprehensive monitoring of appointed fiduciaries and to be a guarantor for any and all actions by those fiduciaries. … The court finds this expansion of responsibility is not warranted by the statute [the Employee Retirement Income Security Act of 1974 (“ERISA”), as amended] and would be inconsistent with the body of law that requires measuring the scope of any plan fiduciary’s duty by the terms of the plan itself.”