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FALL 2016

I. Chapter One: Introduction to Employee Benefits Law

A. Benefits Law Many issues/areas:
1. Employment law, Family law/divorce (QDRO), Tax law, Estate planning, Health care
2. Retirees: Social Security, Pension plans, Retirement Plans, Health Plans
3. Workers: Retirement Plans, Health Care Plans, Benefit Plans for new hires
B. Themes/Policies/Issues
1. Retirement Planning:
a. Where is the money coming from and why?
b. Is this the best way to set up retirement and health care benefits?
2. Federal Tax Benefits:
a. Encourage employers to have retirement plans
b. One of the largest tax expenditures in entire federal budget (health care plans close second)
1. Question: Is this a good idea? Does this make sense? Why do we do this?
a. Yes: Social Security
1. takes burden off SS (but often works other way benefits from private plan might go
down b/c of what you get from SS but SS will not go down b/c of what you get from
private plans)
2. SS never meant to be full-funding for retirement meant to be safety net for elderly
a. But will not keep many to the standard of living they are used to
b. If not SS, then welfare, Medicare/Medicaid (again on TPs)
2. Question: Why doing it through the tax code? Why have retirement plans that are employer based?
Why not bump up SS with all the money we are saving on tax benefits?
a. Avoids administrative costs encourages people to save for themselves instead of putting into
govt program and have govt administer
1. But current system millions of employers w/ separate retirement plans Are they truly
saving transaction costs?
b. Historical accident
1. Before SS, some employers who cared about EEs starting having retirement plans
a. That idea caught on - Slowly Govt starting reacting and did things in tax code to
encourage this behavior
c. Huge amounts of money at stake employers are paying a lot/Individuals are saving a lot of money
paying a lot in premiums and co-pays
1. Extremely bulky system of regulation and legislation trying to keep them from spinning out of
2. Questions: Who is paying?
d. Risks:
1. Who is bearing risks? **very important when talking about retirement plans**
a. Someone always bearing the risk when talking about planning for the future
2. Kinds of Risks:
a. That investments arent going to perform well (wont keep up w/ inflation, wont keep up with
plans for retirement)
b. That company sponsoring plan will go out of business w/o putting enough money in the plan
for peoples retirement
C. Employee Retirement Income Security Act of 1974 (ERISA) 29 USC 1001-1461
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1. Primary federal law that regulates retirement, health care, disability and other welfare benefit plans
sponsored by private employers for their employees
a. Governs: how the employer must administer the benefit plan, what type of information an employer
who participates in the plan must distribute, what you can and cant write into the benefit plan
2. Relied on common law of trusts, codified, then many amendments and court decisions
a. Statutory law with decisional superstructure
3. Pre-ERISA:
a. Over course of 20th Century, regulation of EE benefits plans has progressed to increasingly complex
and comprehensive regulation
1. Before 1921 few, if any, employee benefit federal or state laws
b. 1935: Congress passed the Social Security Act
1. Old age and survivor benefits
2. Congresss reaction to the awareness of a need for programs that would contribute to the retirement
income security of the population
c. 1935: Congress passed National Labor Relations Act
1. Provided basic framework for the regulation of relations between organized labor and management
and of collective bargaining (Unions)
d. 1947: Inland Steel v. NLRB
1. Holding: Pension benefits were a mandatory subject of collective bargaining
e. 1947: Labor Management Relations Act of 1947 (LMRA or Taft-Hartley Act)
1. Sec. 302 enacted to prevent corruption and disloyalty in labor-management relations
2. Prohibits employers or agents of employers from providing any money or thing of value to its
employees, a labor organization, its officers, or a representative of employees (criminal penalties)
3. Employee Benefit Plan must be administered by a joint board of trustees with equal representation
of management and labor
4. Also required that there be a provision for breaking deadlocks (no agreement is reached, it is a
deadlock, and can only be resolved by alternative measures)
5. Section 302(c)(5) established certain principles of fiduciary responsibility for the administration
of these plans and the investment of their assets
f. 1958: Welfare and Pension Plans Disclosure Act (WPPDA)
1. Required limited reporting to the DOL by private sector plans and disclosure of certain
information to their participants
2. Amended in 1962: required bonding of all persons who handled plan assets and provided limited
investigatory and enforcement powers for the DOL
g. 1973: comprehensive legislation introduced by Senators Williams and Javits
1. Formed the basis of what was to become ERISA
2. (Legislative history on p. 6)
a. Primary purpose of bill: protection of individual pension rights;
1. Establish equitable standards of plan administration,
2. mandate minimum standards of plan design with respect to the vesting of plan benefits
3. require minimum standards of fiscal responsibility by requiring the amortization of
unfunded liabilities
4. insure the vested portion of unfunded liabilities against the risk of premature plan
5. promote a renewed expansion of private retirement plans and increase the number of
participants receiving private retirement benefits
b. Major Issues:
1. Vesting refers to the non-forfeitable right of interest which an employee participant
acquires in the pension plan
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a. Recommended legislation to make minimum vesting provisions mandatory

2. Funding refers to the accumulation of sufficient assets in a pension plan to assure the
availability of funds for payment of benefits due to the employees as such obligations rise
a. Minimum funding rules require employer to make contribution to a pension fund,
qualified by the IRS, of amounts equal to the pension liabilities currently being created
1. Promise and commitment of a pension plan can only be fulfilled when funds are
available to pay the EE participant what is owed to him
3. Fiduciary Responsibility and Disclosure
a. Conduct in fund transactions, degree of responsibility required of the fiduciaries, types
of persons who would been deemed pension fiduciaries and the standards of
h. ERISA Public Policy Goals ERISA 2, see page 15
1. (a) benefit plans as affecting interstate commerce and the Federal taxing power (public reasons to
create ERISA)
2. (b) Protection of Interstate Commerce and Beneficiaries by requiring disclosure and reporting,
setting standards of conduct for fiduciaries
3. (c) Protection of Interstate Commerce, the Federal Taxing Power, and Beneficiaries by vesting of
accrued benefits, setting minimum standards of funding, requiring plan termination insurance
D. Public Policy Issues
1. Federal Tax Policy and Employee Plans
a. Internal Revenue Code of 1986 26 USC 1-9833
1. Specific requirements that retirement plans must satisfy to qualify for highly favorable income tax
treatment for both the employer who sponsors the plan and the EE who participates in the plan
a. Qualified Plan: retirement plans that satisfy the IRC requirements
b. Tax Expenditure: Revenue that the government does not collect in the form of income taxes because
an economic activity receives preferential treatment under the IRC
c. Public Policy: Encourage employers and employees to save for retirement
d. Social Policy: Retired workers able to have an additional source of income during retirement other than
SS benefits
2. Demographic Trends
a. Significant strains over the next several decades on both SS and on retirees own financial resources
1. Americans are living longer than ever before
2. Employers are moving away from defined benefits plan to defined contribution
3. Lack of any retirement saving accounts among households, has made individual work longer past
normal retirement age
II. Chapter Two: Plan Operation and Administration
A. Statutory Structure of ERISA
1. Title 1 Regulatory Scheme (7 Parts)
a. Part 1 Statutory reporting and disclosure requirements for all employee benefit plans
b. Parts 2 and 3 minimum participation, vesting, benefit accrual and funding rules applicable to
employee pension plans
c. Part 4 rules that govern fiduciaries of employee benefit plans
d. Part 5 mechanisms for enforcing requirements of Title I through civil litigation
e. Parts 6
f. Part 7 special rules applicable to health care plans (use to be HIPPA now Affordable Care Act
2. Title II IRS
3. Title III established authority of the DOL and Department of Treasury to enforce provisions of Title I and
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4. Title IV addresses underfunding in multiemployer DB plans and abusive practices in the termination of
DB plans
Type ERISA Title I
Pension Plan Part 1, 4, 5, 2, 3
Welfare Plans Part 1, 4, 5, 6, 7

5. ERISAs Regulating Federal Agencies, Title III

a. DOL Employee Benefits Security Administration
1. Primary jurisdiction over reporting, disclosure, fiduciary responsibility (inc. prohibited
transactions) and administration and enforcement under Title I
b. Treasury Department
1. Primary jurisdiction over standards for employee pension plans in Parts 2 and 3 of Title I and
independent IRC requirements for qualified plans
c. Pension Benefit Guaranty Corporation
1. Primary jurisdiction over matters in Title IV
B. Types of Plans Subject to ERISA
1. Definitions: ERISA 3
a. Employee Benefit Plan: ERISA 3(3)
1. Employee welfare benefit plan or an employee pension benefit plan, or a plan which is both
b. Pension Plan: ERISA 3(2)
1. Designed to provide retirement income to the employee or results in a deferral of income by the
employee until the termination of employment or beyond
c. Welfare Benefit Plan: ERISA 3(1)
1. Designed to provide other types of benefits to EE, such as health care benefits or benefits in the
event of sickness, accident, disability, death or unemployment
d. Employee: ERISA 3(6)
1. means any individual employed by an employer
e. Participant: ERISA 3(7)
1. Any employee or former employee of an employer, or any member or former member of an
employee organization, who is or may become eligible to receive a benefit of any type, or
f. Severance Pay Plan:
1. Provide payments to former employees when the employer involuntarily terminates the employment
2. DOL Regs these plans will be a welfare plans not pension plans if plan payments are not
contingent on the employees retirement, and the payments do not exceed twice the employees
annual salary, and the payments cease within 24 months of termination of employments
a. See DOL Reg. 2510.3-2(b)
g. Nonqualified Plans:
1. Do not receive favorable tax treatment like qualified retirement plans that satisfy the requirements
of IRC 401(a)
2. Top-Hat Plan:
a. Executive-only plans where high ranking executive of corporation may participate in a plan
where the payment of part of the executives compensation is deferred until the executive
terminates employment
b. If more generous in amount or duration of payments than DOL regs permit, it may be
classified as pension plan under ERISA 3(2)
2. Distinguishing between Pension and Welfare Benefit Plans
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a. Distinction between pension plans and welfare benefit plans

1. Significant because Parts 2 and 3 of Title 1 dealing with participation, vesting, benefit accrual
and funding requirements apply only to pension plans
b. Most plans are single employer
c. Multiemployer Plan: defined ERISA 3(37)
1. Plan that is sponsored by more than ER pursuant to a collective bargaining agreement
a. Plans for union members
b. Primarily regulated under Taft-Hartley/LMRA
c. Administered by a board of trustees comprised of an equal number of representatives from
management and labor
2. Common in construction, trucking, industrial sectors who are all in the same line of business
3. Not just one single company with a plan instead, pooled arrangement with several companies
who all pay fund for EEs
4. Generate much litigation plan sues ER for not making required contributions
d. Multiple Employer Plan:
1. More than one unrelated employer maintains a plan but ERs do not maintain the plan pursuant to
a collective bargaining agreement
2. A.k.a. Multiple Employer Welfare Benefit Plans MEWAs
3. Plans Excluded from Coverage under ERISA
a. Important b/c if not a plan, not covered by ERISA and participants will not have any claims or
remedies under ERISA
1. If plan is regulated under Title I of ERISA, a potential plaintiff is limited to the claims and
remedies available under ERISA
a. See ERISA 502(a)
2. Potential state law claims and remedies, including punitive damages, are preempted by federal law
a. See ERISA 514
3. Not being a plan may sometimes be good might prefer to be under State law
a. If plan is not subject to ERISA, state law claims and remedies may be asserted
4. To recover possible damages, participant must know if you are covered under ERISA and if you
can sue under ERISA
b. ERISA 4(b) Types of Plans Expressly Excluded from coverage under Title I not subject to
ERISAs Requirements:
1. Governmental Plans defined ERISA 3(32)
2. Church Plans defined ERISA 3(33)
3. State workmens compensation, unemployment compensation, or disability insurance laws
4. Plans maintained outside of the United States primarily for the benefit of persons who are
nonresident aliens
5. Unfunded excess benefit plans defined ERISA 3(36)
c. DOL Regs. 2510.3-3 Also Excluded from definition of Employee Pension Plans:
1. Basis: individual cant be both ER who establishes and maintains the plan and the sole EE who
receives retirement benefits under the plan
2. Plans having as participants only the partners of a partnership
3. Plans having as a participant only the sole proprietor of a trade or business
4. Plans having as participants only an individual and the individuals spouse, where the trade or
business that sponsors the plan is wholly owned by the individual or by the individual and the
d. Also Excluded:
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1. Certain payroll practices where the ER continues to pay compensation, out of the ERs general
assets, to EEs who are absent from work due to illness, vacation, jury duty, active military service,
or educational sabbatical
2. Other benefits that are commonly provided to EEs:
a. E.g. maintaining recreational, dining or first aid facilities, providing holiday gifts to EEs,
giving EEs a discount on the purchase of the ERs goods or services, providing flowers at
death of EE, or tuition and education expense reimbursement programs where the payments are
made from the ERs general assets
4. What is a Plan?
a. Dillingham
1. Trust set up to give insurance coverage for EEs, was a plan under ERISA
2. Dillingham Plan Factors: A plan, fund, or program under ERISA is established if, from the
surrounding circumstances, a reasonable person can ascertain:
a. the intended benefits,
b. a class of beneficiaries,
c. the source of financing, AND
d. procedures for receiving benefits
3. Fiduciary duties under ERISA only arise if there are employee benefit plans under ERISA
a. ERISA 4(a) - Title I applies to any employee benefit plan if it is established or maintained by
any employer or employee organization (or both) engaged in commerce or in any industry or
activity affecting commerce
4. Employee benefit plan means an employee welfare benefit plan or an employee pension
benefit plan or a plan which is both a welfare plan and a pension plan. ERISA 3(3)
a. Merely selling insurance or being a fiduciary does not determine whether employee welfare
benefit plans exist
b. Just because they manage the trust or fall within ERISAs fiduciary definition does not
necessarily mean that an employee welfare benefit plan exists
5. Employee Welfare Benefit Plan ERISA 3(1)
a. Requires (1) a plan, fund or program
1. Implies the existence of intended benefits, intended beneficiaries, a source of financing, and
a procedure to apply for and collect benefits
b. (2) established or maintained
1. Written instrument satisfies 102 and 402 and would constitute a plan, fund or program
a. But ERISA does not require a formal, written plan
1. Writing is not a prerequisite to coverage under the act, it would be a breach of
fiduciary care
b. But once it is determined that ERISA covers a plan, the Acts fiduciary and reporting
provisions do require the plan to be written
c. (3) by an employer or by an employee organization, or both,
1. A plan falls within the ambit of ERISA only if the plan covers ERISA participants because
of the employee status is an employment relationship, and an employer is the person that
establishes or maintains the plan
a. If no union members, employees or former employees participate, there is not an
ERISA plan
d. (4) for providing medical, surgical, hospital care, sickness, accident, disability, death,
unemployment, or vacation benefits, apprenticeship or other training programs, day care
centers, scholarship funds, prepaid legal services or severance benefits
e. (5) to participants or their beneficiaries
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1. Must be established or maintained for the purpose of providing for its participants or
their beneficiaries, through the purchase of insurance or otherwise, those items in #4.
f. Reasonable Person Standard:
1. In determining whether a plan (written or not) is a reality, a court must determine whether
from the surrounding circumstances a reasonable person could ascertain the intended
benefits, beneficiaries, source of financing, and procedures for receiving benefits
a. No single act necessarily constitutes the establishment of a plan, fund or program
1. i.e. purchase of insurance doesnt mean there is a plan, but is evidence that a plan
has been established
2. To be an employee welfare benefit plan, the intended benefits must be health, accident,
death, disability or vacation benefits, etc
3. Intended beneficiaries must include union members, employees, former employees or their
4. An employer and not individual employees or entrepreneurial businesses, must establish or
maintain the plan, fund or program
b. Musmeci
1. Grocery store, voucher program, no written procedures, had to be 60 and supervisor to qualify
2. Employee Pension Plan ERISA 3(2)(A)(i)
a. Any plan, fund, or programestablished or maintained by an employer, to the extent that by
its express terms or because of surrounding circumstances such plan or programprovides
retirement income to employees
3. Neither ERISAs statutory provisions nor the federal regulations define the term income
a. No requirement that pension benefit be paid in cash
b. Vouchers are retirement income
1. Vouchers would be income under IRC
2. Vouchers have cash value, and are readily ascertainable
3. Therefore, voucher plan is governed by ERISA
5. Who is an Employee?
a. Darden
1. Darden sold insurance, was enrolled in company retirement plan, would lose plan if violated non-
compete clause, he quit Nationwide and became independent insurance agent, NW said he was
disqualified from plan, he sued for benefits, claimed benefits had vested
a. Ct remanded to determine if employee under agency law principles
2. Participant ERISA 3(7)
a. Any employee or former employee of an employerwho is or may become eligible to receive a
benefit of any type from an employee benefit plan
1. Firestone test for determining a participant:
a. Means either:
1. Employees in, or reasonably expected to be in, currently covered employment; or
2. Former employees who have a reasonable expectation of returning to covered
employment or who have a colorable claim to vested benefits
b. To establish that he or she may become eligible for benefits, claimant must have a
colorable claim that:
1. 1. He or she will prevail in a suit for benefits, or that
2. 2. Eligibility requirements will be fulfilled in the future
c. Does not include a former employee who has neither a reasonable expectation of
returning to covered employment nor a colorable claim to vested benefits
3. Employee ERISA 3(7)
a. Any individual employed by an employer
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1. Is circular and explains nothing

b. AppCt definition (rejected by USSC): ERISA plaintiff can qualify as an employee simply by
1. 1. He had a reasonable expectation that he would receive pension benefits
2. 2. That he relied on this expectation; and
3. 3. That he lacked the economic bargaining power to contract out of [benefit plan] forfeiture
c. Common-law Agency Doctrine:
1. USSC adopts a common-law test for determining who qualifies as an employee under
a. When Congress has used term employee without defining it, the USSC concludes
that congress intended it to describe the conventional master-servant relationship
under agency law
2. In determining whether a hired party is an employee under the general common law of
agency, consider:
a. The hiring partys right to control he manner and means by which the product is
b. Skill required
c. Source of instrumentalities and tools
d. Location of the work
e. Duration of the relationship between the parties
f. Whether the hiring party has the right to assign additional projects tot eh hired party
g. The extend of the hired partys discretion over when and how long to work
h. The method of payment
i. The hired partys role in hiring and paying assistants
j. Whether the work is part of the regular business of the hiring party
k. Whether the hiring party is in the business
l. The provision of employee benefits
m. The tax treatment of the hired party
3. All the incidents of the relationship must be assessed and weighed with no one factor being
4. Notes:
a. Voluntary Waiver
1. ERISA does not prohibit an individual from waiving his or her right to participate in an
employee benefit plan
a. To be valid, the waiver must be knowing and voluntary
b. A court will consider the surrounding circumstances of the waiver, including:
1. Individuals education, sophistication, experience; clarity of the waiver agreement,
amount of time given to study the waiver
b. Independent Contractors Microsoft
1. Microsoft used to enter individualized contracts with freelance computer programmers.
The court found that the contracts were the product of a mutual mistake and therefore not
determinative of whether the free lancers should be allowed to participate in the 401(k)
6. Who is a Spouse? Supp. 3
a. 14th Amendment requires that the civil marriage laws of each state must apply to same-sex couples on
the same terms and conditions as opposite-sex couples
b. The state cannot refuse to recognize a lawful same-sex marriage performed in another State on the
ground of its same-sex character
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c. Effects:
1. The state income tax treatment of spousal plan benefits became the same as under Federal Law,
with same sex spouses being afforded equal treatment for state tax purposes
2. Eliminated the problems that emerged when same-sex couples attempted to divide qualified
retirement plan benefits in divorce proceeding using qualified retirement plan benefits in divorce
C. Plan Documents, Trust Requirements and Plan Amendments
1. Plan Documents and the Written Instrument Rule, ERISA 402
a. 402(a) Plan Document or Written Instrument Rule
1. a plan must be established and maintained pursuant to a written instrument that provides for one
or more named fiduciaries
a. every covered retirement and welfare employee benefit plan must be in writing
b. so that every employee can determine exactly what his rights and obligations are under the plan
c. so that the employee can know who is responsible for operating the plan
2. a plan document must provide for named fiduciaries
a. have authority to control and manage the plan operations and administration
1. may be person whose name appears in the document
2. may be a person who holds an office specified in the document (i.e. co pres)
3. may be a person who is identified by the employer or union under a procedure set out in
the document
4. may be identified as a committee or as the company that sponsors the plan (best option)
3. Donovan federal courts will recognize the existence of an employee benefit plan that is not
established in writing if the plan has characteristics of an employee benefit plan
a. But most ERs prefer it in writing
b. Writing precludes claims by plan participants that oral statements by a plan fiduciary have
amended the terms of the plan
4. Prototype plans
a. Used by many employers as the written instrument establishing pension plan
b. 2 documents:
1. 1. Prototype plan document
a. Contains boilerplate language required by Code Section 401(a) for a qualified
retirement plan
2. 2. Employers adoption agreement
a. Contains the ERs individual choices concerning various optional design features for
qualified retirement plans
5. Welfare Benefit Plan
a. Usually more than one document; written instrument establishing plan consists of insurance
policy and another attached document designed to satisfy ERISAs written plan document
b. 402(b) Required Provisions that must appear in the Plan Document
1. Every plan subject to ERISA must:
a. (1) Provide a procedure for establishing and carrying out a funding policy
1. Must say where the money to fund EBP is coming from
a. If retirement plan say that ER is going to make contributions
b. If 401k say that EEs will set up rules for deferring pay
c. If health benefit plan must say that ER are funding these benefits through purchase
of insurance policy
b. (2) Describe the procedure for allocating and delegating fiduciary responsibilities for the
management and administration of the plan
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1. Circular: named fiduciaries can delegate some authority to others in the company or an
outside administrator
a. If delegate named fiduciary still has responsibilities
b. Can have subordinates do; Hire third party administrator
c. (3) Describe the procedure for amending the plan, including the identity of the person or
persons who have authority to amend the plan; and
1. See Curtiss-Wright case below
d. (4) Specify the basis on which payments are made to and from the plan
1. Setting out eligibility for benefits (contributions to and payment from)
e. Under what circumstances are you entitled to benefits
c. 402(c) Optional plan features
1. Not required but must appear in the plan if the plan fiduciaries intend to take advantage of these
a. Are desirable, common
2. Include:
a. A provision authorizing a person or persons to serve in more than one fiduciary capacity
with respect to the plan (i.e. trustee and administrator)
b. Provision authorizing a fiduciary to employ advisors to assist the fiduciary in carrying out his
or her responsibilities; and
c. A provision authorizing a named plan fiduciary who is responsible for the plans assets to
appoint an investment manager to manage all or part of the assets of the plan
2. Trust Requirement for Plan Assets and Types of Trustees
a. 403(a) Requires assets of the employee benefit plan to be held in trust by one or more trustees
1. Benefits law rests on trust law (4 components: settlor, trustee, beneficiaries, and asset)
2. Each trustee must be named in the trust instrument or plan instrument (see 402(a))
a. Or The fiduciary named on the plan (who would be the trustee) may appoint the trustee to the
3. Two types of authorized trustees:
a. Discretionary trustee:
1. Has exclusive authority and discretion to manage, invest, and control the plan assets
(garden variety)
b. Directed trustee:
1. Subject to the directions of the fiduciary named on the plan (the directing fiduciary) with
respect to the management and investment (not control) of the plans assets
a. Directing fiduciary cannot be another trustee, but can be a sponsoring employer,
property designated investment manager, or plan participants (401k);
b. These along with named fiduciary and plan administrator can all tell the trustee how to
manage the assets
2. Directed trustee is a fiduciary
a. Duty of prudence care, skill and prudence that reasonable man would use
b. 403(a)(1) requires that directed trustee follow the proper directions of the directing
fiduciary so long as those directions are made in accordance with the terms of the
plan and are not contrary to ERISA
1. Has residual fiduciary responsibility for determining whether a given direction is
proper and whether following that direction would result in a violation of ERISA
2. Issue: what degree of investigation the directed trustee must undertake to ascertain
whether the direction provided by the directing fiduciary is proper and is in
accordance with the provisions of ERISA; results vary
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3. All courts: directed trustee is not whitewashed cant always hide some level of
duty to do more than just rubber stamp what it is told to do
4. Can usually say they are not liable if they follow the advice of the named
fiduciary; but this can be dicey
b. 403(b) various exemptions to the trust requirement
3. Plan Amendment Procedures
a. Curtiss-Wright
1. C-W has postretirement health plan, reserved right to amend plan at any time
a. Held: standard provision in many ER-provided benefit plans stating that The Company
reserves the right at any time to modify or amend the plan sets forth an amendment
procedure that satisfies 402(b)(3)
2. 402(b)(3): requires that every employee benefit plan provide a procedure for amending such
plan, and for identifying the persons who have authority to amend the plan
a. Primary purpose: ensure that all interested parties [including beneficiaries] will know how a
plan may be altered and who may make such alterations; only if they know this information
will they be able to determine with certainty at any given time exactly what the plan provides
1. Ensure that every plan has a workable amendment procedure
2. Procedure does not have to convey exact detail to enable beneficiaries to inform them of
their rights and obligations
a. But ERISA has an elaborate scheme in place for enabling beneficiaries to learn their
rights and obligations built around reliance on the face of the written plan documents
- 402(a)(1) Written Plan documents and reporting and disclosure requirements
b. Welfare Plans: ERISA does not create any substantive entitlement to employer provided health
benefits or any other kind of welfare benefits
1. Generally free to adopt, modify or terminate welfare plans, other than requiring that the
amendment procedure as specified in the plan document must be followed
2. No minimum participation, vesting, or funding requirements for welfare plans
3. See note 3, page 65: Employer is acting under settlor function doctrine
c. 402(b)(3) has two requirements:
1. (1) Procedure for amending the plan
a. Saying the plan may be amended by the Company states an amendment procedure
1. Says plan may be amended by a unilateral company decision to amend and only by
that decision and not, for example, by the unilateral decision of the 3rd party
trustee or approval of the union
2. We look to the company for the procedure
b. Language says nothing about level of detail of an amendment procedure; only that
there be an amendment procedure
c. More complicated plans may have more complicated amendment procedures
2. (2) Procedure for identifying the persons who have authority to amend a plan
a. Person includes companies
b. A plan that simply identifies the persons outright necessarily indicates a procedure for
identifying the persons as well
1. To identify the company as the person with amendment authority is to say that
the procedure for identifying the person with amendment authority is to always
look to the company
2. Look only to the company
3. The Company look to corporate law principles, only natural persons can make
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a. Person under ERISA includes companies, but we are referring the board of directors,
b. A corporation is bound by contracts entered into by its officers and agents acting on
behalf of the corporation and for its benefit, provided they act within the scope of their
express or implied powers
D. Plan Reporting and Disclosure Requirements
1. Legislative History and Policy Objective
a. Disclosure = device to provide EE with sufficient information and data to enable them to know whether
the plan is financially sound and is being administered as intended; enables employees to police their
b. 2 objectives: enough information for individuals to self-police, and deterring fiduciary misconduct
1. Individual participant needs to know exactly where he stands with respect to the plan:
a. What benefits he may be entitled to, what circumstances may preclude him from obtaining
benefits, what procedures he must follow to obtain benefits, who are the persons to whom the
management and investment of his plan funds have been entrusted
2. If fiduciaries know that their actions will be open to inspection, and that individual participants and
beneficiaries will be armed with enough information to enforce their own rights = less
mismanagement and deterring fiduciary misconduct
2. General Reporting and Disclosure Requirements
a. See page 68 for Table 2.1
b. Summary Plan Description (SPD) and Summary of Material Modifications (SMM)
1. 102(a): Plan administrator must give summary plan document and summary of any material
modifications to each plan participant and each beneficiary who is receiving benefits under the plan
a. No prescribed format, but must be
1. Written in a manner calculated to be understood by the average plan participant, AND
2. Sufficiently accurate and comprehensive to reasonably inform such participants of their
rights and obligations under the plan
b. Neither required to be filed with the Department of Labor
1. But must provide a copy if requested ERISA 104(a)(6)
c. No monetary penalty, but breach of fiduciary duty
1. Willful violation is subject to criminal penalties ERISA 501
2. Enforcement established through ERISAs fiduciary responsibility provisions
a. Duty of Prudence: duty of a trustee to administer a trust with degree case, skill, and
b. Includes compliance with the statutory requirements for disclosures to plan
c. If SPD or SMM is inaccurate, incomplete, or misleading, plan participant may allege
1. Plan and administrator are estopped from denying a claimed benefit, OR
2. Plan administrator breached his fiduciary Duty to Inform
2. 102(b): Summary Plan Description (SPD)
a. Must accurately convey the contents of the plan (easily understood and informs)
b. 102(b) basic information to be included in SPD
1. Plans eligibility requirements for participation;
2. A description of the plans benefits;
3. Circumstances that may result in disqualification, ineligibility, or denial or loss of benefits,
including termination of the plan
4. The relevant provisions of any collective bargaining agreement;
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5. For retirement plans, the plan rules for benefit accrual, vesting, and distribution of
6. The procedures for filing a claim for benefits under the plan, along with procedures for
appeal of a denied claim;
7. The names and addresses of various plan fiduciaries, and the name and address of the
agent for service of process; and
8. DOL office where participants may seek assistance or info concerning rights under ERISA
c. For new plan plan administrator must distribute SPD to plan participants and any
beneficiary within 120 days of the date is adopted or becomes effective
d. For new participants within 90 days of the date the individual becomes a participant in the
plan ERISA 104(b)(1)
e. Must furnish plan participants and beneficiaries with an updated SPD every 5th year
1. Updated SPD must incorporate all amendments made
f. May provide SPD using electronic media email or website
3. Summary of Material Modifications (SMM):
a. Material Modification = any change in the terms of the plan or in the information that is
required to be included in the SPD
1. If modification is a material reduction in covered services or benefits provided under a
group health plan within 60 days after material reduction
2. Plan admin must provide SMM within 210 days after end of plan year for all other
amendments to the plan
b. May provide via electronic media
c. Not required to be filed with the
c. Annual Report
1. ERISA 103(a) requires the plan administrator to prepare and file with the DOL an annual
report for each employee benefit plan that is subject to Title I of ERISA
a. Form 5500
1. Is accompanied by a lengthy list of schedules for various types of plans and different types
of plan funding mechanisms
2. Must be filed electronically with the DOL
b. Certain 1-participant retirement plans having less than $250,000 in assets are exempt
2. Simplified annual reporting requirements
a. E.g.: Plans with fewer than 25 participants & Top Hat Plans
b. Instead of Form 5500, can file one-time statement with DOL
1. Content in Reg. 2520.104-23
c. Must file within 120 days after the plan become effective
d. If you fail to file form, you must comply by filing 550 annually
3. Must be filed within 210 days after the close of the plan year
a. Civil monetary penalties if fail to file
1. Section 502(c)(2) Sec of Labor can impose civil penalty for each day that the report is
2. Max daily penalty= $1,100 per day
b. IRS penalty= $25 per day, max $15,000
c. Criminal sanctions if willful violation
4. Delinquent Filer Voluntary Compliance Program DFVCP
a. Available to all plan sponsors who failed to file a required annual report and have not received
notice of a delinquency
b. If voluntarily file reduced penalty
c. To encourage plan admins to comply with annual reporting requirements
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5. See Appendix B
d. Summary Annual Report and Annual Funding Notice ERISA 101
1. Annual report data used to produce either SAR or annual funding notice
2. Summary Annual Report (SAR)
a. Description of plans finances and funding mechanism
b. Must be provided to each participant
c. Must be furnished to each plan participant in a DCP or Welfare Plan
d. Format and contents in DOL Reg. 2520.104(b)-10
e. For Defined Contribution Plan (401(k)):
1. A basic financial statement
2. A description of the minimum funding standards (if any) for the plan
3. A statement of the participants rights to additional information
f. For Welfare Plans:
1. Includes insurance information if applicable
g. Must be filed within 210 days after the close of the plan year
h. No penalty for nondisclosure, but breach of fiduciary duty
3. Annual Funding Notice
a. Must be provided to each participant in a DBP, 101(f)(1)
1. Provides detailed information concerning Plans funding status, assets and liabilities, the
investment allocation of plan assets and the projected financial effect of any plan
amendment or scheduled benefit increase
2. Must provide a description of ERISAs rules concerning plan termination and the plan
benefits that are insured by the Pension Benefit Guaranty Corporation ERISA 101(f)
b. For plans with more than 100 participants:
1. Must provide annual funding notice to part within 120 days after the end of the plan year
c. For plans with 100 or fewer participants:
1. Must provide annual funding notice to participants at the same time as the annual report
d. Federal court has discretion to award up to $100 daily penalty paid to each participant who is
not given timely notice
e. Periodic Benefit Statement ERISA 105
1. Plan administrator must provide to participants in employee pension plans
2. Must describe the value of the participants total accrued benefit under the pension plan
a. And the part non-forfeitable portion of that accrued benefit
1. If accrued benefits are forfeitable, statement must inform the participant of the earliest
date when benefits will be non-forfeitable ERISA 105(a)(1)-(2)
3. For Defined Contribution (DCP) Plans:
a. Benefits statement must:
1. Include the value of each investment to which assets in the participants individual plan
account are allocated
2. Provide an explanation (average language) of the importance of a well-balanced and
diversified investment portfolio
3. Provide a notice directing participant to DOL website for more info
4. Contain an explicit warning that concentrating more than 20% of the participants plan
investments in a single investment may not be adequately diversified ERISA 105(a)(2)
b. Must be provided at least quarterly if participant has right to direct the investment of assets
c. Must be provided at least annually if participant does not have right to direct the investment
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4. Violations:
a. Civil penalty ERISA 502(c)(1)
1. Up to $100/day assessed by fed courts
b. Penalty Paid to each participant who is not given a timely statement
f. Blackout Period Notice ERISA 101(i)
1. Advance notice of period during which the individuals right to direct or diversify investments,
obtain a loan, or receive a distribution under the plan is suspended
2. Plan administrator must provide at least 30-day notice to all participants prior to start of blackout
3. Exception: not required for certain one-participant retirement plans ERISA 101(i)(8)
4. Purpose: to give plan participants the opportunity to take appropriate action with respect to their
plan accounts in anticipation of a blackout period; in response to ENRON
5. Violations:
a. Civil Penalty ERISA 502(c)(7)
1. Up to $100/day for each participant who was not given timely notice, assessed by
Secretary of Labor
g. Diversification Notice ERISA 101(m)
1. Plan administrator must notify participants of diversification rights
a. Participants with 3 years or more of service are permitted to diversify employer
contributions to their plan accounts that are invested in publicly traded employer securities
ERISA 204(j)(3)
1. Many employers match with company stock
b. Employee contributions to a DCP that are invested in publicly traded employer securities can
be diversified by the participant at any time ERISA 204(j)(2)
2. Plan administrator must provide a notice for contributions that are invested in publicly traded
employer securities at least 30 days prior to the commencement of the diversification right
ERISA 101(m)(1)
a. Must also explain the importance of diversifying ERISA 101(m)(2)
3. Violations:
a. Civil penalty ERISA 502(c)(7)
1. Up to $100.day, assessed by Secretary of Labor
h. Upon Request Disclosures and Other Information ERISA 104(b)(4)
1. Plan administrator must furnish to any participant or Secretary of Labor, who makes a
written request the latest updated summary plan description and the latest annual
report, any terminal report, the bargaining agreement, trust agreement, contract, or
other instruments under which the plan is established or operated
2. Up to 30 days to furnish the requested information
a. Satisfied if mails to last known address within 30 days
3. Penalties:
a. Administrator personally liable (in fed cts discretion)
1. Up to $100/day ERISA 502(c)(1)
b. Up to $100/day, assessed by SoL if fails to give to DoL w/in 30 days
i. Glocker
1. Glocker retired, entitled to medical benefits, prostate cancer, employed private nurses
recommended by doc, died, wife filed reimbursement claim for nurses, denied, sued saying Grace
violated disclosure provisions because it failed to give her plan documents in timely manner
a. Held: remanded, civil penalties for failure to timely provide docs
2. ERISA 104(b)(4) Upon Request disclosure
a. She asked them 16 times, after motion to compel
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3. DCP said she suffered no prejudice from the delay

a. Prejudice is a factor to be considered
1. but is not absolute requirement for imposing penalties
a. 502(c) claim (failure to provide disclosure) is unrelated to any injury suffered by
plan participant
2. Where prejudice consists mainly of aggravation and frustration
a. Courts have awarded penalties in range of $10 to $30 per day
b. Bad Faith
1. the absence of bad faith is a factor in determining whether penalties are warranted
2. but does not exonerate the failure to provide timely statement of benefits
4. Section 502(c)(1) excuses failure to comply for request for information if it results from
matters reasonably beyond control of the administrator
a. Purpose of civil penalty provision is to encourage otherwise reluctant employers to provide
beneficiaries with documents without undue delay, and to punish those who remain intransigent
in the face of requests for information
E. Notes on Reporting and Disclosure Requirements Unique to Health Care, Supp. 4
1. Summary of Benefits and Coverage: Notice of Modi cation :

a. Notice must be provided no later than 60 days prior to the date on which the modication will become

b. Supersedes ERISA Section 104(b)(1) 60 days after

F. Notes on Estoppel Claims (enforcing legal right)
1. Typically arise when a plan participant or beneficiary expects, based on written or oral representations
made by the administrator, to receive certain benefit under the plan
a. When later receives less benefit than anticipated (or no benefit), the individual seeks to compel the
administrator to furnish the expected benefit under the doctrine of equitable estoppel
2. Federal Common Law of Estoppel under ERISA
a. Not expressly authorized as a statutory claim under ERISA
1. But is a claim recognized by the federal courts under their authority to develop a body of federal
common law governing the rights and obligations under ERISA-regulated plans
b. Courts must balance competing policy interests:
1. Written instrument rule ( 402(a)(1)) emphasizes importance of abiding by the terms of the
written plan document
2. Formal Amendment Procedures (402(b)(3)) deters other informal writings or oral statements
to amend the plans written terms
3. Settlor Function Doctrine plan sponsors are free under ERISA, for any reason at any time, to
adopt, modify, or terminate welfare plans Curtiss-Wright
a. Also, extends to the modification or termination of future accrued benefits under a pension
4. Balance these (which favor the ER) against ERISAs overall purpose of protecting the rights of
plan participants concerning plan benefits and the important role of ERISAs disclosure
3. Basic Elements for an Estoppel Claim
a. Much variation among federal circuits
b. But all circuits require the plaintiff to prove:
1. A misrepresentation of material fact;
2. Reasonable reliance on the misrepresentation; and
3. Detriment to the individual resulting from reliance on the misrepresentation
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4. Two Factual Situations:

a. SPD provides more generous benefits than terms of written plan document (conflict)
1. Courts routinely award the more generous SPD benefit to the participant
a. Rule: in event of conflict between plan and SPD, SPD prevails
1. Viewed as furthering Congresss desire that the SPD be transparent, accurate, and
2. Based on Amara, actual reliance actual reliance must be shown for estoppel claims
3. Elimination of class action claims bases on an estoppel theory due to the required showing
of actual and detrimental reliance
b. To prevent these claims, employers often insert a disclaimer clause in SPD
1. Stating that in the event the provisions of the SPD conflict with the plan document, the
terms of the plan will control
2. Courts are divided over whether these are enforceable
2. Some claims involve vested benefits claims P believes that P has a non-forfeitable right to
benefits under the terms of the SPD, and the ER later modifies or terminates the welfare benefits
a. Cases turn on whether the plan document contains a clause that unambiguously reserves to the
employer the right to modify or terminate the benefits provide in the welfare benefit plan
b. Most ERs include a reservation of rights clause in the SPD of every plan to preclude
estoppel claims in the event the ER later amends or terminates the plan
b. 2. Estoppel claims based on other Informal or Oral Representations
1. Must weigh policy considerations
a. Allowing estoppel for informal or oral communications undermines the integrity of the written
plan documents formal amendment procedures and ERISAs mandatory form of formal
disclosure the SPD
b. Most courts require that the P must demonstrate extraordinary circumstances
c. Affirmative act of fraud or deception, a pattern of making misrepresentations over time, or an
intention misrep designed to induce the participant to take some action
2. Informal communication: sharp distinction between a pension plan and a welfare plan; between a
single employer plan and a multiemployer; more at stack
3. Oral statement: Sharp line between circumstances where oral statement is contrary to the
unambiguous terms of the written plan document or SPD, and circumstances where the oral
statement can be characterized as merely a verbal interpretation of an ambiguous provision in the
plan document or SPD
a. If written plan terms unambiguous Courts generally will not allow an oral statement to
1. This encourages participants to rely on the terms of the written plan and SPD
b. If terms are ambiguous PAs oral statements are likely to be characterized as an
interpretation of the written terms
1. PAs verbal explanation can form the basis of an estoppel claim w/o undermining ERISAs
c. But based in Varity v. Howe P tend to rely on the fiduciarys duty to inform rather than the
theory of estoppel in situations involving oral misrepresentations
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III. Chapter Three - Qualified Retirement Plans

A. Introduction
1. Comparison of the Code and ERISA requirements for Qualified Plan
a. An employee pension plan will not receive favorable income tax treatment as a qualified plan unless the
plan satisfies the requirements listed in IRC 401(a)
b. ERISA Requirements:
1. Designed to protect and secure the assets of the plan and the benefits promised to the plans
c. IRC 401(a) Requirements:
1. 2 competing policy goals:
a. to encourage employers voluntarily to sponsor qualified plans so that workers will have a
source of income (other than SS) during retirement
1. Favorable income tax treatment designed to encourage this
b. But tax expenditure is difficult to justify unless qualified plan coverage and benefits are
broadly available to all workers, and do not disproportionately favor higher income workers
1. Provisions are designed to distribute the favorable federal tax expenditure, in the form of
qualified plan coverage and benefits, broadly among workers of all income levels
d. Table 3.2 page 104
2. Vocabulary and Basic Tax Principles
a. Qualified Retirement Plans v. Nonqualified (Top Hat)
1. Qualified Plan:
a. Satisfies the requirements of IRC 401(a)
1. Receives favorable income tax treatment, qualified to be a plan under IRC
2. Nonqualified Plan (a.k.a. Deferred Compensation Agreement)
a. Plan providing retirement benefits that does not meet the requirements of IRC 401
1. Receive less favorable tax treatment
3. Top Hat Plans:
a. Nonqualified plans that are exempt from ERISAs participant eligibility, vesting, benefit
accrual and funding requirements because they are unfunded and maintained by the employer
primarily to provide deferred compensation for a select group of management or highly
compensated employees
1. ERISA requires that all employee pension plans must satisfy certain standards governing
participant eligibility, vesting, benefit accrual and funding, but exempts these plans
a. Normally, a nonqualified plan that satisfies the definition of employee pension plan
under ERISA 3(2) would be subject to ERISA standards
b. But top hat plans are exempt from these requirements
b. Reasons why companies adopt nonqualified plans for executive employees that are also
exempt top hat plans under ERISA:
1. ER may want to limit eligibility to participate in the plan to executive employees
a. This isnt usually possible under Code requirements IRC 410(b)
2. ER may want to provide executives with greater amount of retirement benefits than are
permitted under IRC IRC 415
a. This type of nonqualified plan is known as a Supplemental Executive Retirement Plan
3. ER may want to retain the use of funds that represent the EEs deferred compensation
under the plan until the future when the benefits from the plan are paid to the EE
a. This is not possible unless the plan is exempt from ERISAs funding and trust
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4. ER may want to use the future benefits promised under the plan as incentive for future
performance and a penalty for undesirable conduct
a. Performance goals or golden handcuffs
5. It is because the top hat plan avoids many of ERISAs requirements that an ER may want
to sponsor a nonqualified plan that are also top hat plans for purposes of ERISA
c. Must still satisfy ERISAs Part 1 (reporting) and 5 (disclosure)
1. And any claims concerning plan benefits must be litigated under ERISAs civil
enforcement provisions 502(a)(1)(B)
2. State law claims that relate to top hat plan are preempted by ERISA 514(a)
d. Carraba v. Randalls Food Markets
1. If ER establishes top hat plan and court later determines that the plan fails the statutory
criteria for an exempt top hat plan, the financial consequences can be catastrophic
2. Carraba set up a plan to provide retirement benefits for managers, plan was terminated,
there were 244 employees participating, including management employees at every level
a. Even though they were classified as managers, court found that that many people
could not be characterized as a select group
b. Plan was not a top hat plan thus, court ordered plan to retroactively comply with
ERISAs vesting, benefit accrual and funding rules
3. Had to pay $6.7 mil to participants; $3.8 mil in prejudgment interest, $3.1 mil in attorneys
4. Unfunded Excess Benefit Plan
a. A nonqualified plan that is exempt from all the provisions of Title I of ERISA, including the
reporting and disclosure requirements ERISA 4(b)(5)
b. Is a plan maintained by an employer solely for providing benefits for certain employees
more than the limitations on contributions and benefits imposed by IRC 415 ERISA
1. But most plans dont meet this b/c not solely for this purpose
b. Statutory Criteria for a Top Hat Plan Under ERISA
1. 3 key definitional components of a top hat plan:
a. Plan must be unfunded
b. Plan must be maintained primarily for the top hat group
c. Plan must provide deferred compensation for a select group of management or highly
compensated employees
2. Unfunded:
a. Means that the employers promise to pay plan benefits is unsecured and payable only out of
the employers general assets (no trust)
1. If ER insolvent, participant must have the same priority as any other general unsecured
creditor of the ER
b. But ER can still set aside funds to pay the benefits promised
1. Rabbi Trust: technique approved by IRS by which ERs can place funds in a separate trust
to pay the benefits promised under the top hat plan
a. But trust assets must remain subject to the claims of general creditors of the ER
3. Primarily for top hat group:
a. Refers to the purpose of the plan (i.e. the benefits provided) and not the participant
composition of the plan
1. A plan that extends coverage beyond a select group of management or highly
compensated employees would not constitute a top hat plan
2. Having just 1 participant of the plan who is not a bona fide member of the select group
(the secretary) causes the entire plan to fail as a top hat plan
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4. Highly Compensated Employee:

a. IRC: defined by amount of employees annual compensation
b. DOL/ERISA: certain individuals, by their position or compensation level, can affect or
substantially influence, through negotiation or otherwise, the design and operation of their
deferred compensation plan, taking into consideration any risks attendant thereto, and,
therefore would not need the substantive rights and protections of Title I of ERISA
c. The Income Tax Treatment of Qualified Plans and Nonqualified (Top Hat) Plans
1. Significant income tax advantages for ER and plan participants
2. Normal rules of income taxation are suspended for qualified plans
a. Matching Principle
1. Normally, ERs tax deduction must match up with a like amount included in an EEs
gross income
a. Would prevent the ER from claiming a deduction for the ERs contribution to the plan
until the amount attributable to the contribution is included in the EEs gross income
2. Qualified Plan an ERs contribution to qualified plan is exempt from the matching
a. ER can claim a current income tax deduction for a contribution, even though
contribution will not be included in EEs gross income until participant receives the
benefits in the future
b. Doctrine of Constructive Receipt
1. Normally, individual taxpayer is taxed on compensation if has an unrestricted right to
compensation that is not subject to risk of forfeiture
a. An individual must include in gross income both compensation the individually
actually received and compensation deemed to be constructively received
2. Qualified plan if this applied, plan participants benefit would be received when vested
and would be included in gross income
a. But vested benefits from a qualified plan are exempt from the doctrine of constructive
1. Amount of vested accrued benefit is not included in the participants gross income
until the participant gets a distribution/payment of the benefit
2. Deferred compensation = deferred tax liability
c. Investment Earnings
1. Normally, investment earnings generated by assets held in plans trust would be subject to
a. Earnings would normally be taxed as income to trust or to plan participants
b. Undistributed investment earning = deferred tax liability
2. Qualified Plan trust of a qualified plan is not subject to income tax on the
undistributed earnings from trust assets
a. And - Participant in DC plan is not taxed on investment earnings from assets held in
qualified plan account until a distribution is made to the participant
3. Non-qualified plans:
a. Are subject to the matching principle, doctrine of constructive receipt, and are taxed on
investment earnings
b. Taxation of Deferred Compensation Benefits:
1. IRC 409A all amounts deferred under a nonqualified deferred compensation plan that are
not subject to a substantial risk of forfeiture are included in the gross income of the EE
who is the beneficiary of the plan, unless the nonqualified plan satisfies many other
statutory requirements
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a. If fails statutory requirements all of the EEs deferred compensation under the
nonqualified plan is immediately taxable
1. Even if deferred comp has not yet been paid to EE
b. Imposes an additional 20% tax on deferred comp amount that are included in the EEs
gross income
2. But nonqualified deferred compensation plans that are operated in good faith compliance
with the statutory provision of 409A will not be treated as violated Code 409A
d. Another Advantage of Qualified Plans: Benefit Security
1. Under ERISA, the assets of nonqualified plans must be subject to the claims of general creditors of
the employer even if assets are held in rabbi trust
2. With qualified plan, assets held in trust are not subject to the claims of creditors of the ER in the
event of ERs insolvency or bankruptcy
a. Assets held in trust of qualified plan are secure from general creditors of the ER
b. Assets can be used only for the exclusive purpose of providing benefits to the plans
participants and beneficiaries
1. Anti-Alienation Rule
e. Other Tax-Deferred Vehicles for Retirement Savings
1. 403(b) and 457 Plans
a. Same income tax advantage as qualified plans
b. Designed to satisfy the requirements of IRC 403(b), or 457
c. 457 plans: limited to ERs who are state or local governments or tax-exempt organizations
1. Not subject to ERISA - 4(b)(1)
d. 403(b) Plans: limited to ERs who are either public educational organizations (schools,
universities, colleges) or who are tax-exempt organizations
1. Whether subject to ERISA depends on plan (i.e. public state university No b/c govt plan)
a. But private secular university would be under ERISA
2. Traditional and Roth (Nondeductible) IRAs
a. Traditional IRA IRC 408
1. Individuals annual contribution may be deductible from gross income
2. Amounts distributed are included in gross income in year of distribution
3. Contributions are pre-tax
b. Roth IRA IRC 408A
1. Individuals annual contribution NOT deductible from gross income
2. Amounts distributed tax-free, subject to certain restrictions and conditions
3. Contributions are post-tax
c. Total contribution cant exceed $4000 (2007) or $5000 if over 50 (2007)
d. Neither are subject to ERISA when they are established by the individual rather than the
3. SEPs and Simple IRAs
a. Designed to combine the tax incentives of qualified plans with the simplicity of administration
of IRS
1. If ER doesnt want to deal with complicated rules of qualified plans
b. SEP IRC 408(k)
1. Generally funded by ER contributions to participant accounts
2. Preferred if self-employed but dont have other employees
a. May contribute 25% of compensation to SEP account, up to max authorized - $52,000
b. Not ERISA
c. Simple IRAs IRC 408(p)
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1. Permits only EE salary deferral contributions and ER matching contribution

2. If do this, cant have another type of qualified plan for EEs
3. EE salary deferral contributions are subject to lower dollar limit - $12,000 (2014)
d. Rules governing traditional IRAs govern distributions, rollovers and penalties for early
withdrawals for both
3. Investment Fundamentals
a. Qualified plans are built upon several fundamental principles of investing:
1. Time value of money
a. Discount rate
1. Lower discount rate, higher present value
2. Higher discount rate, lower present value
3. Shorter period of time, higher present value
4. Longer period of time, lower present value
b. Annuity
1. Insurance company selects an appropriate discount rate and determines the PV of paying
the monthly payments to participants over the course of the participants estimated life
c. Minimum funding requirements
1. Operate as a safeguard for plans participants ensure that the plan is adequately funded
today so plan will be able to pay the level of retirement benefits promised to participants in
the future
2. Compounded investment earnings
a. Compounded rate of investment return
1. Occurs when an investor chooses to reinvest his or her investment earnings rather than
withdrawing them
2. See Table C.2
3. Longer the amount of time invested, the greater the compounded rate of investment return
will be
b. Rule of 72
1. To estimate how long it will take an investment to double in amount because of
compounded investment earnings:
a. simply divide 72 by the anticipated average annual rate of return
b. Result will be the approximate number of years it will take the investment to double at
the assumed rate of return, 72/6%=12
c. Economic Effect of Deferred Taxation
1. Wait until retirement to withdraw money and pay taxes because presumably in a lower
income tax bracket - will pay less income tax (earning less)
2. Words of Wisdom:
a. Invest as early as you can, invest as much as you can,
b. avoid paying income tax on your retirement investment and related earnings for as
long as you can
c. if you must take a distribution that triggers payment of income tax, minimize the tax
paid by controlling the timing or amount of the distribution so that you are in lowest
possible income tax bracket
3. Investment diversification
a. Do not put all of your (retirement nest) eggs in one basket
b. Diversified portfolio one where assets are invested broadly across the spectrum of the
national or world economy
1. Maximizes the average rate of investment return over time
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2. Minimizes the risk of catastrophic investment loss

3. Invest in the stock of many different individual companies or mutual funds
B. Types and Characteristics of Qualified Plans
1. Qualified plan sponsorship by ER is voluntary
a. ER will sponsor qualified plan only if it is affordable, suitable for business, will serve as attractive
recruiting and retention tool for EEs
b. What type of plan best suits my business
2. Pension Plans:
a. Defined Contribution Plans (Individual Account Plans)
b. Defined Benefit Plans
3. Within both various plan design alternatives
4. Defined Contribution Plans and Defined Benefit Plans
a. Defined Contribution Plans
1. Plan document defines the amount of the contribution the ER must make to the plan each year
a. ERs funding obligation is limited to plan-defined amount
b. ERs contribution is allocated among each participants account per the allocation formula
described in the plan document
2. Participants benefit at retirement consists of the non-forfeitable/vested balance in the
individuals account
a. Includes both contributions to account and accumulated investment earnings
3. No guarantee that the participant will receive a specified amount as a benefit at retirement
4. Types: (characterized by nature of contribution)
a. Profit Sharing Plan:
1. Describes any DCP where ER has discretion to determine the amount of its annual
contribution to the plan
a. ER may contribute specified percentage of each participants compensation
b. ER may contribute a lump sum amount representing EEs collective share of ERs
profits for the year
1. Lump sum contribution allocated among individual EEs per allocation formula
2. Not subject to minimum funding requirements of IRC
b. Money Purchase Pension Plan
1. ERs annual contribution obligation fixed by formula under plan terms
2. Typically requires ER to contribute a predetermined percentage of each participants
compensation to participants individual plan account each year
3. Subject to minimum funding requirements of IRC
a. Excise tax if ERs contribution is less than dictated by plan terms
c. Target Benefit Plan
1. Variation of money purchase pension plan
2. Uses contribution formula that is actuarially designed to produce a specific account
balance at retirement
d. 401(k) Plans a.k.a. cash or deferral arrangement (CODA)
1. Plan participants individually direct the ER to contribute part of their current
compensation to their plan accounts rather than receiving that amount as compensation
a. Pre-tax contributions
2. ER is not required to make contribution
a. But sometimes voluntarily does employer matching contributions up to a certain
percentage or amount of each participants salary deferral contributions (compare to
profit sharing where it is based on compensation)
b. Incentive for EEs to make salary deferral contributions to 401(k)
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e. Thrift Savings Plans

1. Before 401(k)s were after-tax contributions, usually in form of payroll deduction
5. Characteristics:
a. Risk of Investment loss shifted from ER to plan participants in DCPs
1. Retirement benefits depends on investment earnings generated by assets in accounts
2. Growing trend to allow participants, who bear the risk of investment loss, to direct the
investment of the assets in their accounts
b. Portability
1. If participant changes jobs can transfer (rollover) the non-forfeitable balance of the
participants account to an IRA (or new 401k/plan sponsored by ER)
c. Income Tax Advantages
1. Almost all profit-sharing plans and 401(k) plans pay the participants benefit at retirement
in the form of a lump sum
a. Can be rolled over into an IRA or withdrawn as needed
b. So long as money remains in IRA defer income taxation
1. Only pay income tax when amounts are distributed from the IRA
c. If take lump sum face risk of longevity
1. Risk of living very long, outliving retirement savings
2. Tradeoff can transfer an unused benefit to beneficiaries
b. Defined Benefit Plan
1. Plan document defines the amount of benefit that will be paid by the plan to the participant at
a. Amount typically determined by a formula based on combination of the participants earnings
and years of service with the employer
1. Usually provides most generous benefits to workers who have long years of service with
the ER
b. Employer Funding Obligation
1. Make certain that the plan will have sufficient assets in the future to provide retirement
benefits promised under the plans formula
2. Federal law requires a minimum level of funding
a. Purpose: to ensure that the plan has adequate assets today so that the plan will be able
to pay the promised level of benefits to the plans participants tomorrow
b. If assets fall below minimum funding standard, ER is must contribute an amount to
the plan sufficient to bring the plans total assets up to min level
c. Greater Fiscal and Fiduciary Responsibility on Employer
1. Financial unpredictability may make ER reluctant to sponsor a DB plan
d. No Portability
1. If participant terminates employment prior to attaining normal retirement age, the
participants accrued benefits under the plan cannot be transferred to a new employer
e. Annuity Payments
1. Unless waived by the participant, the benefits paid at retirement are in the form of a
monthly annuity for the life of the participant or the joint lives of the participant and the
his/her spouse
f. Pension Benefit Guaranty Corporation
1. Unlike DC, DB plans are federally insured by PBGC
2. In the event of insolvency, the PBGC will pay the plans promised benefits to each plan
participant, up to the limit established under federal law
2. Types
a. Flat Benefit Formula Plan
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1. Plan formula provides that a fixed dollar amount will be paid for every year of service
b. Career Average Formula Plan
1. Plan formula provides a benefit equal to a fixed percentage of the participants
compensation, multiplied by the participants years of service
a. Percentage may be calculated on each years compensation, or may use participants
average compensation calculated over entire period of service
c. Final Pay Formula Plan
1. Compensation figure used is the average compensation measured over the period at the end
of the participants career (usually last 5 or 10 years) when presumably the participants
earnings are the highest
c. Hybrid Plans
1. A defined benefit plan that simulates a defined contribution plan
a. ER is still responsible for investing the plans assets and must make contributions to the plan
sufficient to comply with the min funding rules
2. The value of each participants retirement benefit is presented as a lump sum balance of a
hypothetical individual account
3. Designed so that the participant has the choice of receiving the distribution either as lump sum or
a. Makes the plan benefit portable
4. Types:
a. Cash Balance Plan
1. Each participants benefit is the balance of a hypothetical account
2. Benefit formula requires the ER to contribute annually an amount = specified % of the
participants pay, plus an assumed rate of investment return
3. ER retains investment responsibility and assumes the risk of investment loss
4. Contribution Holiday
a. When investment returns from the plans assets significantly exceed the plans assumed
rate of credited interested
b. ER is not required to make any contributions b/c plan is already adequately funded
b. Pension Equity Plan
1. Benefit formula defines each participants benefit as a lump sum equal to a percentage of
the participants final compensation, multiplied by the participants number of ears of
1. E.g. 20% of final compensation X 25 years of service = lump sum benefit of
d. Employee Stock Ownership Plans - ESOP
1. Type of DCP but may not be for purpose of providing retirement income
2. ER may establish ESOP as financing mechanism for a corporate acquisition or as part of overall
estate plan for the owner of a privately held business
3. Designed to invest primarily in Qualifying Employer Securities IRC 409, 4975(e)
a. Include the publicly traded stock of the ER, or if ER is privately held, the common stock of the
ER having the greatest voting power and dividend rights IRC 409(l)
4. Exempt from prudent diversification rules of ERISA - 404(a)(2)
5. If company stock held by ESOP is not publicly traded participant who receives ESOP
retirement benefit in the form of distribution of stock must be given the option to sell the stock
back to the ER put option for its FMV IRC 409(h)
6. Leveraged ESOPS:
a. ESOP is permitted to borrow money from the sponsoring employer if the loan proceeds are
used to purchase qualifying employer securities
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1. Qualifying employer securities held by ESOP are pledged as collateral for the loan that is
used to acquire the employer securities as part of a corporate acquisition
2. As loan is repaid, pledged shares of stock are released and allocated to the accounts of the
ESOP participants
b. This loan or loan guarantee would normally be prohibited ERISA 406
7. Estate Planning Tool
a. Shareholder of privately held business can sell stock and defer recognition of capital gains
b. By selling at least 30% of the ownership of the company to an ESOP and purchasing
qualifying replacement property, the founder of the company can simultaneously defer
capital gains tax on the sale of company stock while diversifying his investment portfolio
IRC 1042
C. Age, Service and Vesting Requirements
1. Introduction
a. IRC and ERISA have duplicate age, service, and vesting requirements for participants in qualified
b. 2 fundamental questions:
1. 1. What is the maximum amount of time an employer can exclude an otherwise eligible new
employee from participating in the employers qualified plan based on a minimum age requirement
or a prerequisite period of service with the employer?
2. 2. If a plan participant terminates employment, how much, if any, of the participants accrued
benefit under the plan can be forfeited?
a. Answers: IRC 410(a), 411(a); ERISA 202, 203
c. Age, service, and vesting rules protect only EEs who have already been designated by ER as
eligible to participate
1. Rules do not prevent the ER from designating certain groups of EEs as ineligible to participate
(e.g. all hourly or certain division, etc)
2. Prospective approach only, not retrospective application
d. Minimum Coverage Rules
1. Constrain the ERs ability to exclude employees from participation in a qualified plan
2. Are only in IRC, not in ERISA
2. Age and Service Rules for Eligibility
a. Age
1. ER may require that an EE who is otherwise eligible to participate in the QP must attain a certain
minimum age before becoming a participant in the plan
a. Qualified plans min age requirement generally cannot exceed age 21 IRC 410(a)(1)(A)
(1); ERISA 202(a)(1)(A)(i)
2. EE cant be excluded from participating in a QP because individual exceeds a certain age
a. Prevents ER discrimination against older EEs IRC 410(a)(2); ERISA 202(a)(2)
b. Service
1. ER may require that newly hired eligible EE must perform a prerequisite period of service before
being admitted as a participant in the QP
a. Service period generally cannot exceed 1 year of service IRC 410(a)(1)(A)(ii); ERISA
b. Year of Service: 12 consecutive month period during which an EE has worked at least 1000
hours of service IRC 410(a)(3)(A); ERISA 202(a)(3)(A)
c. Regulation Guidance: 2530
1. 12 consecutive month period begins on the date employment is commenced
a. If new EE fails to obtain 1000 hours of service during 1st year, plan may continue to measure
hours of service required for eligibility to participate using EEs commencement date, or
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b. The plan may switch to a calendar year measure (so long as the calendar year includes the first
anniversary of the EEs commencement date. DOL Reg. 2530.202-2(a)-(b) (Note: NOT
plan year)
2. EE does not have to work continuously during the eligibility year of service period
a. The EE can work intermittently during the 12-month period
b. If individual works 1000 hours during the consecutive 12-month period, then the individual
must be given credit for an eligibility year of service
3. Hour of Service is more than just EEs regularly scheduled working hours
a. Every hour for which the employee has received or is entitled to receive compensation
1. Includes unscheduled or irregular work periods and overtime
2. Includes periods where no work is performed but EE is still being paid passive hours of
3. E.g. paid vacation, paid holidays, paid time for jury duty, paid sick leave, paid disability
leave, paid time for military leave, periods of employment for which a court has awarded
damages in the form of back pay
b. ER is permitted to use alternative methods (other than hour by hour standard) to measure
hours of service 3 alternatives. DOL Reg. 2530.200b-3, page 136
4. ER cannot exclude a group of EEs from participating solely because they are classified as part
time or temporary
a. Solely violates min service requirements of IRC 410(a); ERISA 202(a)
5. ER can exclude individuals from participating in the plan b/c they are classified as independent
a. But classification may later change because of facts and circumstances
b. Darden factors (consider relationship between ER/EE, right to control, etc)
c. Microsoft case, Chapter 2
6. Plan can have more generous rules than the minimum age and service requirements of the IRC
a. Age and service requirements are the maximum restrictions the plan can impose to exclude an
otherwise eligible employee from participating in QP
b. ER can establish rules that allow for earlier participation or eligible EEs (immediately or 3-6
months, etc)
7. Once new eligible EE has satisfied the min age and service requirements, the EE must be admitted
to the plan as a participant on the next available plan entry date
a. Even if EE has completed 1000 hours of service before the initial 12-month period has ended,
ERs plan can delay the EEs participation until the next available plan entry date after the 12-
month consecutive month period has been completed
1. If service hours completed before 12-months, could do the longer of 12-month or 1,000
b. But ER is free to design the terms of the qualified plan so that its employees enter the plan as
participants at an earlier time, such as immediately upon completing min age and service
d. Minimum Service Requirements and the Accumulation of Retirement Savings
1. Many ERs require min service period
2. An EE who is not yet admitted as a participant in DCP, does not share in any ER contributions to
the plan
3. For DBP, EEs period of service prior to becoming a plan participant still counts as service for
purposes of vesting
4. Min service requirements vary widely for 401(k) plans -
a. If EE changes jobs a lot, can reduce amount of retirement savings accumulated
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b. 22 yr old who contributes $4000 each year until 62 will have 1.1 mil (8% return)
c. 22 yr old who changes jobs 7 times and must sit out a year each time before being eligible will
only have $534,000 by age 62 (8% return)
1. Lost economic benefit of pre-tax compounded investment earnings inside 401(k) over long
3. Vesting Rules
a. Become significant when the participant terminates employment
1. If participants benefits in QP are fully (100%) vested, the benefits cannot be forfeited if the
participant terminates employment
b. IRC 411(a); ERISA 203 max amount of time the ER can delay a participant from fully investing
in the participants benefit under a QP
c. Accrued Benefit:
1. For DC: total balance (both vested and non-vested) of participants plan account
2. For DB: the monthly annuity amount the participant will receive
d. 2 Factors determine the degree of vesting
1. (1) Applicable Vesting Schedule under the plan terms
a. 6 possible schedules
1. DBP employee benefits
a. 5-year cliff vesting
b. 7-year graduated vesting
2. DCP employer contributions
a. 3-year cliff vesting
b. 6- year graduated
3. Top Heavy Schedule
4. Special vesting rule if plan termination has accrued
b. DB - Defined Benefit Plan Vesting Schedules
1. 5-year Cliff Vesting IRC 411(a)(2)(A)(ii)
a. Participant is not vested in any portion of the participants benefit until the participant
has attained 5 years of vesting service
b. Upon attaining 5 years of vesting service participant immediately becomes fully
(100%) vested
2. 7-year Graduated Vesting - IRC 411(a)(2)(A)(iii); ERISA 203(a)(2)(A)(iii)
Years of Service Non-forfeitable % of Benefit
3 20%
4 40%
5 60%
6 80%
7 or more 100%

c. DC Defined Contribution Plan Vesting Schedules

1. EEs salary deferral contributions to 401(k) plan are immediately and fully vested IRC
2. ER Contributions:
a. 3-year Cliff Vesting IRC 410(a)(2)(B)(ii)
1. Participant is not vested in any portion of the ER contributions to the account until
participant has attained 3 years of vesting service
2. Upon attaining 3 years of vesting service participant immediately becomes fully
(100%) vested in ER contributions to participants account
b. 6-year Graduated Vesting IRC 411(a)(2)(B)(iii); ERISA 203(a)(2)(B)(iii)
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Years of Service Non-forfeitable % of Benefit

2 20%
3 40%
4 60%
5 80%
6 or more 100%

d. Vesting Schedules for Top Heavy, Terminated, and Hybrid DBP Plans
1. Top Heavy IRC 416
a. Special accelerated vesting schedule (discussed later)
2. Terminated Plans IRC 411(d)(3)
a. Upon termination of a QP those participants whose employment was previously
terminated may be immediately and fully vested in their plan benefits, regardless of
actual years of vesting service at the time when employment was terminated
1. Can include partial termination determined by facts and circumstances
3. Hybrid DBP IRC 411(a)(13)
a. When plan computes participants accrued benefit under the plan by reference to a
hypothetical account, the plan must use a three-year vesting schedule
2. (2) Determining Years of Vesting Service
a. General Rule: plan must count all years of service for vesting IRC 411(a)(4); ERISA
b. Year of Service: 12 consecutive month period during which the participant has 1,000 hours of
service IRC 411(a)(5)(A); ERISA 203(b)(2)(A)
c. Hours of Service: counted in same manner as hours of service for purposes of determining
eligibility to participant in the plan
d. May elect to use calendar year, plan year, or other 12 consecutive month period to measure
vesting years of service IRC 411(a)(5)(A); ERISA 203(b)(2)(A)
e. It is possible for participant already to have earned a year of vesting service before entering the
plan as a participant
1. E.g. plan requires 1 year of eligibility service, plan has 2 entry dates Jan 1 and July 1.
Plan measures vesting service on calendar years. X started on Jan 15, 2007, and completes
1000 hours of service by July 2, 2007. X completes eligibility service on Jan 14, 2008. X
will become participant in plan on July 1, 2008 next plan entry date. b/c plan measures
vesting by calendar year, when X enters plan on July 1, 2008, X will have already earned 1
year of vesting service. X earned 1000 hours of vesting service during 2007 calendar year
3. Notes page 143
a. Plans Excluded from Age, Service, and Vesting Requirements
1. Welfare benefit plans and top hat plans ERISA 201
a. These plans are not subject to ERISAs restrictions on ERs ability to amend the plan
or reduce the plans benefits
b. Exceptions to Age and Service Requirements
1. Plans sponsored by educational institutions min age can be set to age 26, instead of 21
2. QP that immediately and fully vest plan benefits once EE enters plan as new participant
can require up to 2 years of service before new EE becomes a participant in the plan; no
accrued benefits until 2 years
c. Administrative Simplification through Cash Out Distributions
1. Many plan participants are at least partially vested in plans when terminate employment
may be small amount
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2. To reduce administrative burden of retaining small benefit amounts, QP is permitted to

make a cash out distribution
a. Allows the plan to distribute the vested portion of the former participants benefit
without the participants consent IRC 411(a)(11); ERISA 203(e)(1)
d. Special Rules for Rehired Employees
1. General Rule: plan must consider all prior years of service by rehired employee when
determining whether the rehired EE has satisfied a year of service eligibility and when
counting years of vesting service
2. If 1 year service requirement for eligibility 2 optional exceptions to general rule:
a. One Year Holdout rule
1. Plan may disregard a rehired EEs prior service if the rehired EE has not complete
501 hours of service within a year; 1-year break in service (calendar year, plan
year, other 12 months by plan terms)
2. If the rehired EE completes a year of service after being rehired, the plan must
consider the rehired EEs prior service
3. Temporary effect plan may only holdout the rehired EE from participating in
the plan until the rehired EE completes a new year of eligibility service
b. Rule of Parity Eligibility
1. Permits plan permanently to disregard a rehired EEs prior years of service for
purposes of determining eligibility to participate in the plan
2. Only if at the time the EE terminated the employment, the EE was both (1) non-
vested (0%) under the plan and (2) rehired EE has incurred 5 consecutive one-year
break of service
3. QP may also use rule of parity to disregard a rehired EEs prior years of vesting
3. When calculating one-year breaks in service for exceptions:
a. Count unpaid pregnancy leave, adoption leave, maternity/paternity leave as hours of
service up to 501 total hours in 12-month period
D. Benefit Accrual Requirements
1. 2 questions:
a. 1. What constraints does federal law place on the ERs ability to alter the benefits offered under a
qualified plan?
b. 2. What protections does federal law provide to plan participants concerning the benefits promised to
them under a qualified plan?
2. Plan Amendments, Accrued Benefits and the Anti-Cutback Rule
a. Benefits Protected by the Anti-Cutback Rule, ERISA 204(g); 204(h)
1. Anti-Cutback Rule
a. An amendment to a QP cannot reduce a participants accrued benefit under the plan or
eliminate an optional form of benefit available under the plan IRC 411(d)(6)(A)-(B)
b. Purpose: to ensure that the plans sponsor cannot use a plan amendment to retroactively repeal
or reduce a participants benefit once it has accrued per the terms of the plan
1. Ensures the integrity of the vesting rules; without it, the vesting rules would be
c. 411(d)(6) Benefits
1. Accrued benefits protected by the anti-cutback rule
d. Violations:
1. If plan amendment violates the anti-cutback rule, ERISA 204(g) (which duplicates IRC
411(d)(6)) provides a basis for the plans participants to bring a private civil action
challenging the plans amendments
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e. Also, protects early retirement benefits

1. A plan amendment that has the effect of eliminating or reducing an early retirement
benefit or a retirement-type subsidywith respect to benefits attributable to service before
the amendment shall be treated as reducing accrued benefits
2. Particularly significant if the early retirement benefit is subsidized
a. Is not actuarially reduced to account for the commencement of benefit payments before
the participant attains normal retirement age so are more valuable to participant and
costlier for plan to offer
3. Central Laborers Pension Fund v. Heinz (2004)
a. Application of anti-cutback rule in context of early retirement benefits in
multiemployer plan with suspension of benefits clause.
b. ERISA permits multiemployer plan to suspend a retired participants benefits if the
participant accepts employment in the same industry, in the same trade or craft, and
the same geographic area covered by the plan ERISA 203(a)(3)(B)
c. Here suspension clause prohibited a participant receiving early retirement benefits
from engaging in certain types of disqualifying employment after retirement.
Suspended payments until participant stopped working there.
d. Heinz took job as construction supervisors (plan prohibited union or nonunion
construction worker only). Plan was amended, after, to expand disqualifying
employment to include any construction job, including Ps, then plan suspended
e. Heinz challenged amendment as violation of anti-cutback rule
f. SC: amendment violated anti-cutback rule
1. The amendment has effect of eliminating or reducing an early retirement benefit.
An amendment placing materially greater restrictions on the receipt of the benefit
reduces the benefit just as much as a decrease in the monthly benefit payment.
2. Heinz worked and accrued retirement benefits under a plan with terms allowing
him to supplement retirement income by certain employment and he was being
reasonable if he relied on those terms in planning his retirement.
b. Benefits Protected by the Anti-Cutback Rule
1. Individual account plans/DC participants accrued benefit =
a. The total balance (both vested and non-vested portions) of the participants individual account
IRC 411(a)(7); ERISA 3(23)(B)
1. E.g. Even if EE is not yet vested in any portion (e.g. 1 year into a 6 year graduated vesting
schedule), ER cant amend the plan to decrease the amount in EEs account. Under anti-
cutback rule, EE must be given the opportunity to vest in the accrued benefit through the
passage of time.
a. If EE terminates employment gets portion of nonforfeitable (vested) accrued benefit
depending on vesting schedule. This doesnt occur as part of plan amendment but
rather through termination of employment and vesting rules and is ok.
2. DB Plans participants accrued benefit =
a. Determined under the plan and expressed in the form of an annual benefit commencing at
normal retirement age IRC 411(a)(7)(A)(i); ERISA 3(23)(A)
b. Formula used by plan to determine accrued benefit must satisfy 1 of 3 benefit accrual
methods IRC 411(b); ERISA 204:
1. Purpose: prohibit the practice of back-loading benefits under DP plan; ensure that a
participant accrue benefits more proportionately over the course of the participants period
of employment (not screwed b/c terminate and dont get accrued benefits until later)
c. Statutory Benefit Accrual Methods for DB Plans
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1. 1. The 133 1/3% Method

a. The accrued benefit payable at normal retirement age must equal the normal retirement
benefit under the plan, and
b. The annual rate at which any individual who is or could be a participant can accrue
the retirement benefits payable at normal retirement age for any plan year cannot be
more than 133 1/3% of the annual rate at which he or she can accrue benefit for
any earlier plan year
1. E.g. if plan provides that participant accrues a benefit of 1.5% of compensation
for each year of service up to 20 years and 2% for each year after 20, plan
satisfies 133 1/3% requirement.
2. 2% / 133.3% = 1.5004% (= 1.5%) = ok
3. If plan accrues at rate of 1% of compensation for year 1-20, and 1.5% for every
year after 20, does not satisfy the 133 1/3% method
4. 1.5% / 133.3% = 1.1253% (> 1%) = No
2. 2. The Fractional Method
a. Accrued benefit to which a participant is entitled at any time must equal or exceed the
participants fractional rule benefit multiplied by a fraction (not exceeding 1)
1. Numerator = participants total years of participation in the plan
2. Denominator = total years of plan participation the participant would have if he
separated from service at normal retirement age
b. Fractional Rule benefit = normal retirement benefit to which the participant would be
entitled under the plan if the participant attained normal retirement age on the date the
benefit is being determined (based on the participants current amount of compensation
and years of service)
1. E.g. if plan provides normal retirement benefit at 65 of 2% of compensation for
each year of service up to 20 years.
2. If had 15 years of service - Fractional rule benefit of 30%
3. If began at age 21 and is now 36, accrued benefit under fractional method =
participants fractional rule benefit (30%) multiplied by fraction 15/44 (15 years of
participation (36-21)/projected years of plan participation at normal retirement
(65-21)) = 10.22% of compensation
4. If began at age 35 and is now 50. Fractional rule benefit = 30% (2% x 15).
5. Multiplied by fraction 15/30 (15 years of participation (50-35) / projected years
until 65 (65-35)) = 15% of compensation
3. 3. 3% Method
a. Not used dont worry about
c. Optional Forms of Benefits
1. Anti-cutback rule also prohibits the elimination of optional form of benefit
2. Optional Form of Benefit = any form in which accrued benefits under the plan may be distributed
to the participant,
a. including payment schedule, timing, commencement, medium if distribution (cash or in-kind),
portion of benefit to which distribution feature applies, participants right to elect among
different forms and features of distributions Treas. Reg. 1.411(d)-4
b. cannot be made subject to the exercise of employer discretion
3. Types:
a. Option to choose between lump sum or annuity
b. Option to choose among annuities with different payout amounts and features
c. Right for participant to receive in-service distributions from his account under profit sharing
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4. Anti-cutback rule does not apply to plan features that are characterized as ancillary benefits or
administrative features
a. Examples (not protected by anti-cutback rule plan free to make changes to) :
1. Ancillary life insurance protection
2. Accident or health insurance benefits
3. Certain social security supplements IRC 411(a)(9)
4. Availability of loans (other than distribution of an EEs accrued benefit upon default of
5. Right to make after-tax EE contributions or elective deferrals IRC 402(g)(3)
6. Right to direct investments
7. Right to a particular form of investment (e.g. investment in ER stock or securities or
investment in certain types of securities, commercial paper, or other investment media)
8. Allocation of dates for contributions, forfeitures and earnings
9. Time for making contributions (but not the conditions for receiving an allocation of
contribution forfeitures for a plan year after such conditions have been satisfied)
10. Valuation dates for account balances
11. Administrative procedures for distributing benefits, such as provisions relating to the
particular dates on which notices are given and by which elections must be made
12. Rights that derive from administrative and operational provisions, such as mechanical
procedures for allocating investment experience among account s in DC plans
b. These allow plan administrators of DC plans to eliminate optional forms of benefits
d. Plan Amendments Reducing the Rate of Future Benefit Accrual
1. Anti-cutback rule does not prohibit an employer from amending the plan prospectively to
reduce the participants rate of future benefits accrual
a. Or to eliminate an optional form of benefits with respect to benefits yet to be accrued under the
2. Participants in DB plan or money purchase plan must receive advance written notice of this plan
amendment that will significantly reduce the rate of future benefit accrual IRC 4980F(e)-(f);
ERISA 204(h) aka Section 204(h) Notice
a. Must be provided within a reasonable time before the plan amendment takes effect to every
individual whose benefit may be affected by the amendment
1. Amendment may be ineffective if notice not provided in timely manner
2. Failure to comply with notice reqt does not result in disqualification of the plan
3. Failure to comply = individuals will get the greater of pre-amendment benefits or benefits
under plan as amended
b. Must be written to be understood by average person
c. Must provide sufficient information to allow participants to understand the effect of the
d. Excise tax penalty for failure to comply with advance written notice requirement
e. Diversification Rights for Accounts Invested in Company Stock
1. Pension Protection Act of 2006
a. Created new diversification rights for participants in DC plans holding company stock
b. Beginning in 2007 participant must have right to diversify immediately any salary
deferral contributions to a 401(k) plan that are invested in company stock
c. Once participant attains 3 years of service, participant must be permitted to diversify all
employer contributions to the participants plan that are invested in company stock
2. Plan must offer at least 3 alternative investment options to diversify
a. Each alternative investment option must be diversified (be a mutual fund) and must offer
materially different risk and return characteristics
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3. These rights apply even if participant is only partially vested in the ER contributions b/c uses 6-
year graduated vesting schedule
4. Years of service same measurement as vesting service
5. Traditional ESOPs are exempt from these diversification requirements
6. If plan accounts before 2007, special transition rules (1/3 2007, 2008, 100% 2009)
f. Eligibility, Vesting and Benefit Accrual During Periods of Active Duty Military Service
1. Uniform Services Employment and Reemployment Rights Act of 1994 IRC 4301 4333
2. Reemployed veterans must be credited for purposes of eligibility to participate in the plan, vesting
and benefit accrual
a. For DB: plan must treat reemployed veteran as receiving compensation during the period of
active duty military service that is equal to the compensation the EE otherwise would have
received if wasnt called up
b. For ER contributions to DC plan: same rule of equivalent compensation
1. If ERs contributions are dependent on EEs contributions (matching), reemployed veteran
must be given at least 3 (but no more than 5) years to make up the EE salary deferral
contributions for the period of active duty military service
2. ER is not required to make up the reemployed veterans own lost investment earnings in a
DC plan
3. Cash Balance Plans
a. 1990s many large ERs converted DB plans into cash balance plans
1. ERs min funding obligation under CB plan is less volatile than for DB plan
2. Benefit accrual more attractive to increasingly mobile workforce
3. Hybrid feature (accrued benefit is present value of hypothetical account) is more favorable to
b. Older workers usually accrue lesser future retirement benefits after CB conversion than anticipated
c. Younger workers almost immediately accrue greater retirement benefits in CB plan than they would
have under DB plan
1. In DB plan promise to pay fixed monthly annuity - this is further than for older workers
a. As a result present value of younger workers accrued benefit under DB plan would be less
than present value of accrued benefit of older person only a few years away from retirement
b. In DB greatest benefits are accrued in the later years
2. In CB present value of accrued benefit is unrelated to time remaining until reach normal
retirement age
a. Instead benefit formula requires ER to contribute annually to each participants account an
amount equal to a specified percentage of the participants pay, plus an assumed rate of
investment return
b. Benefits under CB plan accrue more consistently over time than under DB plan
c. Favors younger, more mobile workers
3. Older workers disappointed to know they would be receiving much less retirement benefit under
CB plan than would have under DB plan
4. Issues raised in Berger, Campbell and Cooper were addressed as part of Pension Protection Act of
a. But issues presented in cases remain relevant for CB plan conversions that occurred prior to
the effective date of PPA of 2006
4. Age Discrimination Claims and the Pension Protection Act of 2006
a. PPA of 2006 addresses age discrimination in the context of cash balance plan ERISA 203(g);
204(b)(5); IRC 411 (a)(13), 411 (b)(5).
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b. A cash balance plan will not violate the age discrimination rules of ERISA 204(b)(1)(H) if the plan
satisfies certain requirements for the interest rate used to credit amount to participant accounts and
adopts a vesting schedule where participants are fully vested after 3 years of service.
c. Wear Away Periods and Cash Balance Plan Conversions
1. Cambell conversion of plan from DB to CB resulted in a wear away period for P
2. Wear away period occurs when, under the terms of the amendment converting a DB into a CB,
a participant in the DB receives the greater of the participants accrued benefit under the old DB
plan or the participants accrued benefit under the new CB plan
a. Are controversial among older workers and workers with long periods of service b/c may take
several years for the value of a participants accrued benefit under the CB plan to grow to an
amount that exceeds the value of the participants accrued benefit under the DB plan
b. During the wear away period participant does not experience a net gain in accrued benefits
3. CB plans converted on or after June 29, 2005 are prohibited from imposing wear away periods for
the accumulation of accrued benefits following the conversion
a. When DB plan is converted to CB, each participant in the DB plan must receive an accrued
benefit, after the conversion, that is not less than the sum of the participants accrued benefit for
years of service under the DB plan prior to the amendment, plus the participants accrued
benefit for years of service under the cash balance plan after the amendment
b. Plan may also be required to credit the value of any early retirement subsidy to the participants
accrued benefit under the defined benefit plan
E. Code Requirements for Qualified Retirement Plans:
1. Nondiscrimination Requirements
a. Violation of unique IRC requirements for QPs does not give rise to a private cause of action by a plan
participant under ERISA
b. Enforcement mechanism for IRC requirements is primarily deterrence
1. If ERs plan fails to satisfy these requirements, IRS may deem the plan disqualified and income tax
advantages lost
c. Nondiscrimination Requirements
1. Product of Tax Reform Act of 1986
2. 2 significant constraints on ERs voluntary decision to sponsor a QP:
a. 1. The nondiscrimination requirements establish minimum standards for how many of the
employers rank and file EEs must be participants in the QP
b. 2. The nondiscrimination requirements influence how much in benefits or contributions the
ERs plan must provide to those rank and file employees who are participants in the plan
3. 4 Most Important Code Nondiscrimination Requirements for QP:
a. 1. The minimum coverage requirements of IRC 410(b)
b. 2. The IRC 401(a)(4) prohibition against discrimination in favor of highly compensated
employees with respect to benefits or contributions made under the plan;
c. 3. The special nondiscrimination requirements of IRC 401(k) and 401(m) for EE salary
deferral contributions and ER matching contributions to 401(k) plans (known as actual
deferral percentage test and actual contribution percentage test)
d. 4. The requirements of IRC 416 for top heavy plans
d. Definitions
1. Discrimination:
a. QP is discriminatory if it favors highly compensated employees in excess of the numerical
testing limits established under the relevant Code provision
1. IRC 410(b), 401(a)(4), 401(k) and 401(m) all permit a certain amount of discrimination
in favor of HCEs but only up to a specified numerical limit
2. Highly Compensated Employee (HCE):
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a. Any employee who:

1. 1. Was a 5% owner during the present or prior year 5% ownership test or
2. 2. Earned annual compensation from the ER in excess of $100,000 (2007) Annual
Compensation Test
b. IRC 414(q)
c. 5% Ownership Test:
1. Individual owns any stock owned directly or indirectly by his or her spouse, children,
grandchildren or parents family aggregation rule
a. Applies even if the other family member is not associated in any capacity with the ER
2. Incorporates by reference the statutory criteria for a 5% owner under the top heavy rules
of IRC 416
3. Nonhighly Compensated Employee (NHCE):
a. Any employee who does not qualify as an HCE
4. Top-Paid Group Election:
a. ER can make an election in original plan document itself or by subsequent plan amendment to
limit the number of individuals who qualify as HCEs under the annual compensation test
1. IRC 414(q)(3)
b. If make a top-paid group election, only those EEs who earn in excess of the annual
compensation test and who are among the top 20% of EEs when ranked by compensation
are counted as HCEs IRC 414(q)(1)(B)
c. Any EEs who are not among the top 20% drop down into the pool of NHCEs and are
counted as NHCEs
d. Enables small ERs QP to satisfy the IRCs nondiscrimination requirements
5. Employer Aggregation Rules / Controlled Group Rules
a. Under certain circumstances, different entities must be aggregated and their EEs treats as EEs
of a single ER for purposes of nondiscrimination testing
1. Purpose: without these rules, ER could easily circumvent the IRC nondiscrimination
2. Prevents Co A from having all HCEs and Co B subsidiary having all NHCEs
b. Rules are triggered if related business entities are:
1. 1. Members of a controlled group of corporations under IRC 414(b)
a. Companies that share at least 80% common ownership are deemed to be members of a
controlled group of corporations and are treated as 1 ER
1. E.g. Co A owns 100% of Co B and 50% of Co. C. A and B are treated as 1 and C
is treated as separate ER
2. 2. Trades or businesses under common control under IRC 414(c); or
a. Applies to unincorporated business entities partnerships, sole proprietorships, trusts
b. Similar 80% common ownership test
3. 3. Members of an affiliated service group under IRC 414(m)
a. Applies when an organization has as its principle business the performance of services
or management functions for 3d parties, and regularly uses other affiliated
organizations to provide these services or management functions to 3d parties
6. Employee
a. Apply Darden factors: When Congress has used term employee without defining it, the
USSC concludes that congress intended it to describe the conventional master-servant
relationship under agency law
7. Leased Employees
a. Temporary workers leased from employment agency
b. IRC 414(n)
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c. Leasing Organization: the employment agency

d. Leased Employee: the temporary worker
1. defined as any person:
a. 1. Who is not otherwise and EE of the ER for whom the leased EE performs services;
b. 2. Who has provided services for the ER on a substantially fulltime basis for a period
of at least 1 year pursuant to an agreement between the ER and a leasing organization;
c. 3. Whose services for the ER are performed under the primary direction and control of
the ER primary direction and control test
2. If satisfy these three requirements, temp worker must be counted as an EE when testing
the ERs QP under the nondiscrimination requirements
a. Temp Worker Leased EE
3. If ER does not want to count temps as EEs, dont lease services for more than 1 year
4. Primary Direction and Control test (#3) ER may attempt to prove the temp fails this
a. Whether services are performed by an individual under primary direction and control
of the ER depends on the facts and circumstances
b. Means that the ER exercises most direction and control over the individual
c. Factors: whether individual is required to comply with instruction of the ER about
when, where and how he or she is to perform the services, whether the services must
be performed by a person, whether the individual is subject to the supervision of the
ER, whether the individual must perform services in the order or sequence set by the
d. Factors Not relevant: whether individual works for others, whether ER has the right
to hire or fire the individual
e. Leg history of IRC 414(n); HR Rep No 104-586
5. Exception:
a. If the leasing organization itself provides the temp worker with a money purchase
pension plan and the leasing organization contributes at least 10% of the temporary
workers compensation to the workers account under the plan, the temp worker is not
counted as leased EE of the ER (even if satisfy all 3 criteria)
1. Rare
e. If ER later hires temp as regular EE, ER is required to count prior period of service for
eligibility, vesting, and benefit accrual purposes IRC 414(n)(1), (n)(3), (n)(4)(B).
e. 410(b): The Minimum Coverage Rules
1. Dictate how many NHCEs can be excluded from benefiting as participants in the ERs QP based
on neutral, business-related criteria
a. ER may decide to include only salaried works and exclude hourly, or may decide to limit to
those who work at a certain facility or location of the business
2. To Satisfy the Minimum Coverage Rules, QP must pass 1 of 3 Alternative Tests IRC
a. The Percentage Test IRC 410(b)(1)(A)
1. Plan satisfies this test if the plan benefits at least 70% of all NHCEs
a. E.g. 10 EEs, 2 HCEs and 8 NHCEs, of those 8, 7 benefit under the plan and 1 is temp
worker who qualifies as leased employee, plan excludes leased employee from
participation. Plan satisfies percentage test b/c 7 out of 8 NHCEs 87.5% benefit
under the plan.
b. The Ratio Test IRC 410(b)(1)(B), see page 174
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1. Plan satisfies this test if plan benefits a percentage of NHCEs of the ER that is at least
70% of the percentage of HCEs who benefit under the plan
2. Computational Steps:
a. 1. Calculate the percentage of HCEs who benefit under the plan during the testing year
b. 2. Multiply the HCE percentage times 70%.
1. Result is the minimum percentage of NHCEs who must benefit under the plan to
satisfy the ratio test
c. 3. Calculate the percentage of NHCEs who benefit under the plan during the testing
d. 4. Compare the percentage in step 2 with the percentage in step 3.
1. If % in 2 is less than % in 3, plan satisfies the ratio test
2. If % is 2 is more than % in 3, plan fails the ratio test
c. The Average Benefits Test IRC 410(b)(1)(C)
1. Only used if plan cant satisfy either of the first 2 tests
2. If get this far, call a ERISA tax expert
3. These tests are based on the number of participants who benefit under the plan
a. DC (other than 401(k)): EE benefits if ER contribution amount or a forfeiture amount has been
allocated to the EEs plan account during the testing year
b. DB: EE benefits if EE has an accrued benefit under the plan during the testing year
c. 401(k) plan: EEs benefit if they are eligible to make salary deferral contributions to the 401(k)
plan, regardless of whether they actually do so
4. EEs not counted when Conducting IRC 410(b) Testing
a. 1. EEs who have not satisfied the plans minimum age and service requirements for eligible to
participate IRC 410(b)(4)
b. 2. Union EEs who are subject to a collective bargaining unit agreement where retirement
benefits were the subject of good faith collective bargaining with the employer IRC 410(b)
c. 3. Nonresident aliens who receive no US earned income from ER IRC 410(b)(3)(C)
d. These exclusions are applied before the ER beings testing the plan under 410(b)
5. Summary of Procedures for IRC 410(b) Testing
a. 1. Determine who the employer is by applying the Codes employer aggregation rules
b. 2. Eliminate from consideration all employees of the ER who are not counted b/c they are
excluded from testing under one of the three exclusion categories
c. 3. Add to the number of EEs remaining after #2 any temporary workers who must be counted
as leased EEs of the ER under IRC 414(n)
d. 4. Based on results of #2 and #3, determine the number of HCEs and NHCEs of the employer,
considering the effect of a top-paid group election, if such election was made.
e. 5. Using the numbers of HCEs and NHCEs determined under #4, perform minimum coverage
testing using one of the tests described in 410(b)
6. Demonstrating Compliance with Code Section 410(b)
a. Majority of plans satisfy the percentage or the ratio test
b. IRS permits ER to demonstrate compliance with the minimum coverage rules by conducting
periodic snapshot testing
1. ER selects a single day during plan year that is reasonably representative of the ERs
workforce and plan coverage for that year. If ER uses snapshot testing, the IRS may
require that the plan must benefit a slightly higher than 70% (may require 73.5%)
7. Minimum Participation Requirement of Code 401(a)(26) for Defined Benefit Plans
a. DB Plan must benefit the lesser of:
1. 50 EEs of the ER; or
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2. The greater of (1) 40% of all the ERs EEs or (2) two employees (one employee if the ER
only has 1 EE)
b. Does not apply to DC plans
c. To curb the practice amount ERs of adopting a DB plan solely for the benefit of certain older
8. EEs of Qualified Separate Line of Business
a. ERs with a division or subsidiary having at least 50 EEs can exclude these EEs from testing if
division or subsidiary satisfies the requirements for a qualified separate line of business
(QSLOB) IRC 410(b)(5), 414(r)
1. If QSLOB offers a separate WP limited solely to the EEs of the QSLOB, the QSLOB is
treated as a separate ER and plan tested separately under 410(b)
9. Exemptions for Governmental Plans and Multiemployer Plans
a. QPs sponsored by governmental ERs are exempt from min coverage rules of IRC 410(b)
b. DB plans sponsored by state and local government ERs are exempt from min part req of IRC
c. Multiemployer plans benefiting only collective bargaining unit employees are exempt from in
cov rules and min part req for DBs Treas. Reg. 1.410(b)-2(b0(7); IRC 410(a)(26)(E)
10. Transition Period for Changes in Aggregated ER Group
a. IRC 410(b)(6)(C) if ERs QP satisfied the requirements under IRC 410(b) immediately
before the change in the aggregated employer group, the plan is deemed to satisfy 410(b)
during the transition period and until the last day of the first plan year after the date of change.
11. Penalty for Failure to Satisfy Minimum Coverage and Participation Requirements
a. Only the HCEs who participate in the plan are penalized if violation of 410(b) or 401(a)(26)
b. Each HCE must include in his gross income the total amount of his vested accrued benefits
under the plan for the taxable year for which the qualification failure occurs
1. The vested accrued benefits of the NHCEs who participate in the plan are not subject to
income taxation
f. 401(a)(4): Nondiscrimination in Benefits or Contributions
1. IRC 401(a)(4) dictates how much each NHCE who participates in the ERs QP must receive in
benefits or contributions
a. A QP and its accompanying trust are nondiscriminatory if the contributions or benefits
provided under the plan do not discriminate in favor of highly compensated employees
2. Regulations rely on a combination of safe harbor plan designs, and the heavily quantitative
general test for plans that do not satisfy the safe harbor designs
a. If meet safe harbor criteria, plan is deemed to automatically satisfy IRC 401(a)(4)
3. Defined Contribution plan safe harbors - Treas. Reg. 1.401(a)(4)-2(b)
a. Pro Rata Based on Compensation allocates ER contributions to the plan so that each
participant receives:
1. 1. the same percentage of the participants compensation as an allocation to the
participants account
a. E.g. ER who sponsors profit sharing plan makes contribution to plan equal to 10% of
each participants compensation
2. 2. A discretionary contribution in the form of a lump sum dollar amount
a. E.g. ER contributes $10,000 to plan. 5 participants 1 = $120,000, 2 = $60,000, 3 =
$50,000, 4 = $40,000, 5 = $30,000.
1. 1. Add compensation of all participants - $300,000
2. 2. Divide individual compensation by amount of total plan compensation
3. 120,000/300,000 = 40%, 60,000/300,000 = 20%, etc
4. 3. Multiply each persons percentage by $10,000
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5. 40% x. $10,000 = $4,000, 20% x $10,000 = $2,000, etc

6. 4. Make sure each participant receives the same percentage. Divide each
participants dollar allocation by individual compensation
7. $4,000/$120,000 = 3.33%, $2,000 x $60,000 = 3.33%, etc
8. This is ok
3. Allows HCEs to receive a much higher contribution or benefit amount than the NHCEs
4. Plan Compensation
a. Defined: the actual EEs compensation amount used for purposes of the QP
1. May differ from the actual compensation amount paid to the participant by the ER
b. QP may use one of several options for defining a participants plan compensation
1. Plan may elect to use an alternative definition of plan compensation and exclude overtime
pay, shift differential premiums and bonuses
a. This is permitted if the plan can demonstrate, through additional numerical testing,
that the alternative definition does not favor HCEs
c. Or Limit on a participants plan compensation imposed by IRC 401(a)(17)
1. Under 401(a)(17) plan cannot consider the annual compensation that exceeds $260,000
2. Indirectly limits benefits or contributions for HCEs because a QP cant consider
compensation over that limit
3. Plan may not consider compensation over that limit when conducting nondiscrimination
4. Higher the plan compensation limit, the larger the benefits or contributions a QP will be
able to provide HCEs
5. Permitted Disparity (Integration for Social Security) under IRC 401(l)
a. QP that is integrated for SS considers the ERs payment of taxed for each EE under FICA.
b. FICA requires both ER and EE to pay 6.2% of EEs compensation up to dollar amount -
$102,500 (2008)
c. Under an integrated plan, ER can increase contributions or benefits for participants who earn
over the SS taxable wage base amount creates a disparity in benefits or contributions the
plan provides for HCEs (who are likely to earn over that amount)
1. This disparity is permitted under IRC 401(a)(4) if plan satisfies safe harbor under IRC
2. If plan integration formula doesnt satisfy IRC 401(l) safe harbor, plan may demonstrate
compliance with IRC 401(a)(4) through the general test
d. If making $102,500 (2008) or less, all income is subject to Social Security
e. If making more, only pay SS tax on $102,500
f. Policy: ER can make additional contributions in range from excess, b/c not only are you
paying 6% up to cap, so is ER. ER can give more money to those at the top.
1. Criticized they dont need it as much
6. Nondiscrimination in Other Benefits, Rights and Features of the Plan
a. 401(a)(4) requires that benefits, rights and features of the plan must be both currently and
effectively available on a nondiscriminatory basis
1. Currently Available: Satisfied if the group of employee to whom the benefit, right or
feature is available satisfies the ratio percentage test of IRC 410(b)
2. Effectively Available: satisfied if, based on all relevant facts and circumstances, the group
of employees to whom a benefit, right or feature is effectively availably does not
substantially favor HCEs
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b. Example: plan amended so that if retire from June to July, can get lump sum. Only 1 person
retires then, a HCE, and therefore the plan is discriminatory b/c the feature (lump sum) is not
effectively available to all equally
7. Cross-Tested Plans
a. To satisfy requirements, must demonstrate nondiscrimination in either benefits or
1. DC contributions; DB benefits
b. Cross-tested plans
1. Cross-tested DC compliance by showing by showing that the benefits each participants
receives at normal retirement age are nondiscriminatory under IRC 401(a)(4)
2. Cross-tested DB compliance by showing that ER contributions to the plan for each
participant are nondiscriminatory under IRC 401(a)(4)
c. Cross-testing performed by specialized pension actuary
d. Controversial
e. Predominately used by cash balance plans and age-weighted profit sharing plans
8. Plan Forfeitures
a. DB: When participant in DB terminates employment before becoming fully vested, forfeiture
amount remains part of the assets held in the plans trust.
1. DB plan forfeitures help fund the accrued benefit of the other participants
b. DC: forfeitures in DC also help fund the accrued benefits
1. Forfeited portion remains in plans trust
c. In profit sharing plan that uses a safe harbor allocation formula, the forfeiture amount
eventually will be allocated among the accounts of other participants in the plan pro rata based
on plan compensation
g. 401(k) and 401(m) Tests
1. 401(k) plans Have ER contributions but mainly about salary deferral
a. Participants finance their own retirement benefits
b. Each participant directs ER to contribute part of the participants current compensation (salary
deferral compensation) to the participants 401(k) account
c. Amount of participants salary deferral compensation is not included in EEs income
1. Higher the level of participants compensation:
a. more likely he can make salary deferral compensations
b. greater participants income tax savings will be
d. Benefitting under 401(k) if EE is eligible to make salary deferral contribution
1. Even if EE chooses not to make deferral to plan
2. Those NHCEs who do not make deferral contributions are still counted as participants
e. Special nondiscrimination tests for 401(k)s focus on salary deferral compensation made by
HCEs and NHCEs and related matching contributions
2. Special nondiscrimination tests
a. Policy:
1. Necessary b/c min cov req of IRC 410(b) do not prohibit large disparities in the salary
deferral contribution made by HCEs and NHCEs
2. To address potential inequalities in EE salary deferral contributions and ER matching
contributions that may arise between HCE and NHCEs in 401(k) plan
b. 1. Actual Deferral Percentage Test (ADP) IRC 401(k)
1. Focuses on EE salary deferral compensations
a. 401(k) plan nondiscrimination testing done by computer
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2. Step 1: calculate the ratio (expressed as %) for each individual employee who is
eligible to participate in the plan of the individuals salary deferral contribution to the
individuals compensation
a. Ratio = actual deferral percentage
1. I.e. if salary = $120,000 and contributions = $12,000, ADP = 10%
b. If EE is eligible to participate but doesnt, ADP 0%
3. Step 2: calculate the average of all the individual actual deferral percentages for the
group of HCEs and the group of NHCEs
a. (remember over $100,000 = HCE)
b. Zeros are counted
4. Step 3: Compare the average for the HCE to average for NHCE
5. Satisfies Test:
a. 2 testing options (401(k) satisfies ADP If 1 is satisfied)
1. 1. Average percentage for group of HCEs does not exceed average percentage for
NHCEs multiplied by 1.25.
2. HCE Avg. is less than or equal to 125% of NHCE Ave
3. If HCE avg = 8% and NHCE ave 2.67% - test not met
4. 2.67% x 1.25 = 3.34% (less than 8%)
5. 2. Amount that average HCE exceeds average of NHCEs is not more than 2%
AND the average percentage for the group of HCEs is not more than the average
percentage of the NHCEs multiplied by 2
6. HCE Ave NHCE Avg is less than or equal to 2%
7. If HCE avg = 8% and NHCE ave 2.67% - test not met
8. 8% - 2.67% = 5.33%, (more than 2%) and
9. 2.67 x 2 = 5.34% (less than 8%)
c. 2. Actual Contribution Percentage Test (ACP) IRC 401(m)
1. If 401(k) plan also provides for ER matching contributions, plan must also satisfy this test
a. Same pattern (125% and 200%)
b. But focused on ERs matches as opposed to EEs own contributions
3. Correction Method
a. If plan does not satisfy these tests, can correct which will allow them to pass the ADP test.
1. 1. Reduce the salary deferral contributions to the HCEs until ADP is satisfied
a. Plan admin distributes the excess salary deferral amounts to the HCEs
b. Reports these distributions amounts as part of HCEs gross income
c. Have to pay tax but still stay in the plan
2. 2. Increase the benefits of the NHCEs under a 401k plan
4. 401k Plan Design and the ADP Test: Policy Implications
a. Under ADP test, the ability of HCEs to make salary deferral contributions to 401k plan is
constrained by the salary deferral contributions made by the HNCEs who participate in the
401k plan
b. ERs may adopt certain 401k plan designs that encourage NHCEs to voluntarily increase their
salary deferral contributions to the plan
1. Examples of design features: employer matching contributions, permitting loans from EEs
401k plan account, permitting early distributions in cases of financial hardship
a. But if permit loan and hardship distributions defeats purpose b/c reduces
participants ultimate benefit from the 401k plan at retirement
5. Problem on ADP Testing and IRC 401(a)(17)
a. If Congress lowers the plan compensation limit under IRC 401(a)(17), the percentage of
contribution goes up.
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1. Makes it harder for HCE to come close to meeting both tests

2. Average for HCEs increases and makes it harder to meet tests
b. If lower the cap, limitation becomes more strict
1. Have to either reduce or give back with deferrals of HCEs or make additional
contributions on behalf of NHCEs to make plan comply
h. Automatic Enrollment (Negative Election) 401(k) Plans
1. Normally, eligible EE must complete admin paperwork to participate in 401k plan by default, a
certain number of eligible EEs will fail to sign up and not participate in the plan
2. Some ERs adopt automatic enrollment or negative election feature for 401k plans
a. Instead of having participants opt-in, you must opt-out if you dont want in
b. ER will put money in plan unless you put in writing that you dont want it
c. These designs boost participation a contribution levels among NHCEs
3. Still many are reluctant
a. 1. ERs fiduciary responsibilities and liability under ERISA under this are unclear
b. 2. State payroll withholding laws generally required affirmative consent by an EE to any
amount withheld from EEs wages by ER. Arguably preempted by ERISA.
1. PPA of 2006 all conflicting state laws are preempted for those 401k plans with an
automatic enrollment feature that meets minimum contribution standards, automatic
investment option requirements, and participant notice requirements
i. Simple 401(k)
1. Idea to make an easier 401(k) for small employers to reduce burdens of administration and
a. Smaller companies (still doesnt really increase likelihood that they will participate in plan)
b. May be sponsored by ERs who do not maintain another QP and who do not have more than
100 EEs earning more than $5000
2. 2 characteristics make them attractive to smaller employers:
a. 1. Less costly to administer b/c
b. 2. exempt from ADP/ACP testing and top heavy plan requirements
1. So ER can make salary deferral contributions to plan up to max dollar amount
3. Disadvantages:
a. 1. Salary deferral contribution limit is less than limit for traditional 401k plan
1. E.g. $10,500 (2007), compared to $15,500 (2007)
b. 2. ER must make contributions based on statutory formula
1. Matching contribution that is equal to participants contribution, up to 3% or
2. ER can make contribution equal to 2% for each employee who makes more than $5000
regardless of whether EE makes salary deferral contribution
4. In reality, lower admin costs are not the driving motivation, but rather business reasons
j. Safe Harbor 401(k) Plans and Qualified Automatic Enrollment Features
1. IRC 401(k)(12) = safe harbor 401(k) plan
a. Safe harbor 401(k) plan is exempt from ADP/ACP testing and exempt from requirements for
top heavy plans
b. Treas. Dept lays out plan design requirements and as long as plan meets requirements, dont
have to go through hoops of doing nondiscrimination testing
2. Advantages:
a. Lower costs in exchange for statutory standards
b. Not limited to small employers
c. Can sponsor another QP
d. Max salary deferral contribution amount is higher - $15,500 (2007)
3. Safe Harbor 401(k) plan must satisfy 3 sets of detailed design requirements:
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a. 1. Plan must annually provide a special notice to each EE eligible to participate in 401(k) plan
describing EEs rights and obligations under the plan.
1. May be provided electronically,
2. must be given at least 30 days and no more than 9 0days before beginning of each plan
b. 2. ER must make ER contributions to plan using 1 of 2 statutory formulas:
1. 1. May make a matching contribution for each NHCE who makes a salary deferral
contribution to the plan
2. 2. May contribute for every NHCE who is eligible to participate in the plan, regardless of
whether the individual does.
3. Under either, total min amount ER must contribute will not exceed 3% of the total
compensation of all NHCEs who are eligible to make matching contributions, cant exceed
6% of EEs contributions
c. 3. ERs contributions to plan must satisfy special vesting and withdrawal requirements.
1. ERs contributions must be immediately and fully vested
2. Are subject to same restrictions on distributions that apply to an EEs salary deferral
contributions to 401k plan
k. Qualified Roth Election Programs
1. Under IRC 402A a 401k adopting a Qualified Roth Election Program EEs can designate
their salary deferral contributions to the plan as an after-tax contributions
a. ER cant establish 401k plan under which EEs can only make after-tax Roth contributions
b. Must also permit EEs to make pre-tax salary deferral contributions
2. After-tax Roth contributions are included in 401k participants income and subject to income and
FICA taxes at time of contributions
a. Pre-tax contributions cant later be designated as after-tax
b. After tax amount must be irrevocably designated by the 401k plan participant at time amount
is contributed and maintained in a separate account w/in the 401k plan
3. People who may benefit:
a. Participants who are many years from retirement, in low income tax bracket, anticipate that in
future years they will be in higher income tax bracket
1. The tax-free accumulation of investment earnings in the Roth account compounds over
many years
b. High-income individuals who are disqualified from making contributions to Roth IRA b/c
income exceeds limits ($95,000 in 2007)
l. Tax Consequences Associated with Distributing Excess Salary Deferral Contributions
1. If have to distribute excess salary deferral contributions to HCEs to pass ADP test within 2
months after end of plan year, distributed amount is included in GI of HCE in year distribution is
2. If later than 2 months after plan year, distributed amount is included in GI of HCE and ER is
subject to 10% excise tax penalty on amount of excess
3. If not made within 12 months after end of plan year, 401k plan is disqualified for the testing year
and for all subsequent years in which excess salary deferrals are in plans trust
m. Other ADP Testing Correction Methods
1. Qualified Nonelective Contributions (QNECs) make to accounts of NHCEs in 401k plan until
plan satisfies ADP test
a. Must be immediately and fully vested
2. Qualified Matching Contributions - when ER already makes matching contributions to 401k plan
and these are immediately and fully vested- may be counted for purposes of retesting the plan
3. Recharacterize a portion of the excess made by HCEs as after-tax contributions to the 401k plan
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a. Recharacterized amounts are included in each HCEs gross income but are not included as part
of each HCEs salary deferral contributions when 401k plan is retested
n. 416: The Top Heavy Rules
1. Affect qualified plans that skew benefits too heavily in favor of the owners and highly paid officers
a. Based on concept of a key employee
2. Key Employee v. Nonkey Employee
a. If not key employee, are a nonkey employee
b. Key Employee: any individual/EE who is either:
1. An officer of the ER earning over $130,000 ($145,000 in 2007)
2. A 5% owner or
3. A 1% owner earning over $150,000 - IRC 416(i)
c. Sort of overlap for those who are HCE for purposes of nondiscrimination testing and top heavy
1. HCE could be 5% owner (same) (same aggregation rules w/ children, spouses, etc)
2. HCE could also be anyone earning more than $100,000 (different)
3. Top Heavy Rules
a. A DB is top heavy under IRC 416 if the present value of the cumulative accrued benefits for
all key employees is more than 60% of the cumulative accrued benefits for all employees
participating in the plan
1. Take all money in all account and see if money for key employees is more than 60%
a. If it is it is top heavy
b. Count all money, whether vested or not vested
b. A DC is top heavy under IRC 416 if the total value of the accounts of key employees under
the plan exceeds 60% of the total value of all accounts of all employees under the plan
c. Both vested and nonvested portions of the accrued benefits or account amount for key and
nonkey employees are counted when testing for top heavy rules
4. Consequences of Top Heavy Status
a. If DB is top heavy, must satisfy special vesting requirements under IRC 416
1. Must use accelerated vesting schedule for determining the nonforfeitable amount of
accrued benefits for nonkey employees
2. If DB normally uses 5-year cliff vesting schedule, must use 3-year clieff0vesting
3. If DB uses 7-year graduated vesting, must switch to 2 to 6 year graduated schedule
a. Accelerated Graduated Vesting Schedule for Top Heavy Plans (table 3.8)
Years of Vesting Nonforfeitable %
2 20%
3 40%
4 60%
5 80%
6 100%

b. If DC both the 3-year cliff vesting and the 6-year graduated schedule is identical to
accelerated vesting schedules required by IRC 416 if DC is top heavy. Thus, normal
vesting schedule for a top heavy DC plan is not affected by top heavy rules
4. Top Heavy Plan must provide Minimum Level of Contributions or Benefits for nonkey
a. DC: ER must contribute a minimum of 3% of compensation each year to the account
of each nonkey EE until the plan is no longer top heavy
b. DB: 416 describes the minimum annual benefit that must accrue each year for
nonkey EEs so long as the plan is top heavy
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5. If ER has more than one QP, complex plan aggregation rules govern how the top heavy
rules of IRC 416 apply to multiple plans
a. Policy: prevent ER from circumventing the top heavy rules by operating multiple plans
2. Limits on Qualified Plan Benefits
a. Individual Limits
1. IRC has limits on the amount of benefits or contributions for a participant in a qualified plan-
b. Employer Limits
1. IRC also has limits on the amount the employer may deduct for contributions to a qualified plan
c. Limits are most fluid provisions of the IRC requirements
1. Regularly reformed/adjusted by Congress as part of overall federal budget negotiation process
when new tax legislation is enacted
a. E.g. Economic Growth and Tax Relief Reconciliation Act of 2001
1. Recent example of changes to the Code provisions governing individual and employer
2. Significantly increased the individual and employer limits for qualified plans and IRAs
permanent via Pension Protection Act of 2006
a. Estimated total revenue loss b/c permanent: $20.46 trillion (2007 2016)
b. This presents a significant challenge for lawmakers
c. Balance:
d. Tax expenditure associated with increased individual and employer limits that could be
used to fund other programs; against
e. Lower limits/increased tax revenues whereby Employers respond to the limits by
reducing the number of qualified plans they voluntarily sponsor
d. Individual limits under IRC 415
1. IRC 415 Max level of benefits an individual participant may receive from a qualified plan
2. Amounts indexed for inflation
Types of Plan 2009 Limit
Defined Benefit Plans (Annual Benefits) $*
Defined Contribution Plans (Annual Additions) $*
401(k) Plans (Exclusion Amounts for Trad or SH) $*
Catch Up Contributions for Trad or SH 401(k) $*
Exclusion Amounts for SIMPLE 401(k) $*
Catch Up Contributions for SIMPLE 401(k) $*
3. Defined Benefit Plans
a. Capped at average for 3 highest years
1. Regardless of what plan says
b. Individual limit expressed in terms of Maximum Annual Benefit that plan may pay to
participant in form of straight life annuity commencing at age 65
1. Maximum annual annuity benefit is lesser of
a. $160,000 ($180,000 for 2007) or
b. 100% of the participants average compensation for the highest paid 3 consecutive
2. Is actuarially adjusted of participants gets benefit before 62 or after 65, or if EE has less
than 10 years of participation in DB
3. If EE participates in more than one DB, individual limit applies to combined total of all
benefits from all DB plans.
a. IRC 415(b)
4. If plan says that get no more than $180,000 per year for rest of life
a. If spouse survives gets 5- or 75%
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5. Plan takes annuity based on participants life (single life) b/c covering risk that you die and
have to pay spouse
a. If take distribution in some other form (annuity on you and spouse) will get less
6. Have to adjust so if start taking benefits before 62, get less
7. If start after 65, could get more
8. Cap could change based on survivor annuity (compared to straight life annuity)
4. Defined Contribution Plans
a. Individual limit is expressed in terms of Maximum Annual Addition that may be made to an
individuals plan account
1. Max Annual Addition is lesser of
a. $40,000 ($45,000 for 2007) or
b. 100% of the participants compensation
2. Talk about input b/c what you have in end depends on investment changes
a. DC annual additions, how much you and ER can put in
1. Also consider forfeitures added to account
2. If leave plan early count as forfeiture
3. If EE participates in more than one DC qualified under 401(a), individual limit applies to
combined total of all annual additions to all DC plans
a. IRC 415(c)
b. Annual Additions Include:
1. Employer contributions;
2. Employee salary deferral contributions to 401(k) plan; and
3. Forfeitures that have been allocated to the participants account.
a. Plan administrators job to keep an eye on this and make sure that all annual additions
dont exceed the cap.
c. Annual Additions do NOT include:
1. Direct rollover amounts from another plan or an IRA;
2. Assets transferred from the trustee of one plan to the trustee of another;
3. Plan loan repayments; and
4. Catch up contributions.
d. If both DB and DC, individual may receive benefits from both plans up to the separate
individual limits for defined benefit plans and defined contribution plans
5. 401(k) Plans: Exclusion Amounts
a. IRC 402(g) maximum dollar amount of EE salary deferral contributions that can be made to
a 401(k).
1. Limit = Exclusion Amount
a. Determines the maximum amount of salary deferral contributions to a 401(k) plan
that can be excluded from the EEs gross income
2. 2007 - $15,500 (traditional or safe harbor 401(k)); $10,500 for SIMPLE 401(k).
a. Amount keeps going up
6. 401(k) Plans: Catch Up Contributions
a. Participants who are 50 or older may elect to take additional salary deferral contributions to a
401(k) plan
1. Additional salary deferral contributions = Catch up Contributions
a. Permitted so that older participants will have an opportunity to save additional
amounts for retirement
2. 2007 - $5000 (trad or sh 401k); $2500 (SIMPLE)
3. Can put an additional $5000 if older, nearer to retirement
a. Given compounded interest extra $5000 will not grow a whole lot until retirement
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b. But allows older folks to catch up for what they havent done
b. NOT subject to nondiscrimination requirements of IRC 410(b) and 401(a)(4), ADP testing
under 401(k)(3), top heavy rules of IRC 416, or limit on annual additions under IRC 415(c)
7. Employer Deduction Limits Under Code Section 404
a. ER can take deduction even though EE is not counting it as gross income in that year
b. IRC 404
1. 2 significant functions:
a. 1. Determines when ER may claim a deduction for contribution to a qualified plan
b. 2. Determines how much ER may claim a deduction for contribution to a qualified
2. Policy Significance
a. 404 exempts contributions from the matching principle of income taxation (normally
delays ERs deduction until contribution is included in EEs gross income)
1. 404 requires ER deductions for contribution to nonqualified plans to be matched
ER cant deduct until EE include payment sin taxable income
2. For qualified no matching required. ER contribution deductible when payment
paid to the trust ER may take immediate unmatched deduction
3. Financial incentive for ER to contribute to qualified plans
c. Deduction Limits for DCP
1. Limit 25% of aggregate plan compensation
a. Plan compensation own statutory limit ($225,000 for 2007)
b. Add it all together for all participants can ER cant get deduction for more than 25%
of that
1. Have to count deferrals that EEs put in themselves
2. Max deduction for total ER contributions to a profit sharing plan, stock bonus plan or
money purchase pension plan and ER matching contributions to a 401(k) = 25% of the
Aggregate Plan compensation for all participants in the ERs plan(s) -- IRC 404(a)(3)
a. Aggregate plan compensation includes salary deferral contributions made by a
participant to a 401(k) plan, even though this amount is excluded from EEs gross
1. Each participants compensation is subject to the dollar amount limitation of IRC
401(a)(17) for purposes of determining aggregate plan compensation
2. (thus if individual participant in a plan earns annual compensation of $400,000 in
2007, when calculating the aggregate plan compensation of all plan participants,
only $225,000 of the individuals compensation is counted.
3. ER deduction limit is linked to individual limits of IRC 415(c) through IRC
4. 404(j) ER is not permitted to deduct that portion of the annual additions to a
participants account that exceeds the individual limit for annual additions under
IRC 415(c)
3. Exception: Employee Stock Ownership plans
a. ESOP DC plan that is set up to invest primarily in stock of the sponsoring company
1. Often leveraged. ESOP is only type of qualified retirement plan that can borrow
2. So plan borrows money to buy shares of company stock
3. Then ER makes contribution to plan and plan uses contribution to pay on loan its
4. ER can deduct principle payments on loan up to 25% of total plan compensation
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5. But can deduct unlimited amounts of payments made to interest

d. Single Employer Defined Benefit Plans
1. Amounts increased by Pension Protection Act of 2006
a. Allows higher deduction amount for ER contributions to DBs
b. Permits an ER to contribute more than the statutory minimum during times of
financial prosperity create a funding cushion for future years
2. Pension plan actuary
a. Required to determine the maximum annual deduction amount for contributions to
single employer DB plan
b. Looks at EEs plan
c. Tells ER to contribute x amount in order that plan has enough money to meet
obligations when they come due
d. Now
3. 2007: Maximum employer deduction is not less than the excess (if any) of:
a. 150% of the plans current liability, over
b. The value of the plans assets
c. IRC 404(a)(1)(D)(i)
4. 2008: Employers deduction limit is sum of:
a. Funding target for the plan year;
b. Target normal cost for the plan year; and
c. The cushion amount for the plan year
e. The value of the plans assets for the year
f. IRC 404(o)
g. Encourages ERs to overfund plan in good years so later when investment performance
declines, ER will be less likely to be faced with huge new funding requirement in year
when it is not doing very well
h. Trying to reduce on Guarantee fund
5. If ERs DB plan is required to make a larger contribution under the minimum funding
rules of IRC 430, then larger minimum funding contribution is deductible by ER
8. Consequences for Violation of the Employer Deduction Limit
a. ER can contribute more than cap and may be able to deduct amount in future years wont
disqualify plan - but there will be a 10% excise tax for every year you are above the limit
b. Contribution Plans:
1. If ER contributes to a DC plan in excess of the ER deduction limit in 404(a)(3) the
excess contribution may be carried forward in certain circumstances
a. Excess annual additions in violation of the individual limit of 415() must be
corrected to avoid disqualification of the plan
2. ER normally subject to 10% excise tax on amount of an ER contribution that is not
immediately deductible under IRC 404
a. Deters ERs from making nondeductible contributions
c. Benefit Plans:
1. Failure to comply with minimum funding requirements does not result in disqualification
of the companies DB plan
2. But IRS may impose excise tax penalty of 10% of the aggregate unpaid minimum funding
a. ER can request waiver of min standard based on substantial business hardship
3. If make annual additional above individual limits have to correct that or plan will be
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9. Stock Market Volatility, Interest Rates and Minimum Funding for DB plans:
a. Amount of ERs contribution necessary to maintain adequate funding for DB plan can vary
dramatically depending on stock market conditions and prevailing interest rate
1. If stocks up investment returns are sufficient to maintain adequate funding for the plan
under minimum funding standards
2. If stocks down ER has to contribute more to maintain minimum funding standards
b. 2008: New system for determining minimum funding contributions for DB plans
1. IRC 412 and ERISA 303 - dictate minimum funding rules for single employer defined
benefit plans
2. IRC 431 and ERISA 304 minimum funding rules for multiemployer defined benefit plans
c. Special minimum funding rules
1. Designed to bring an underfunded plan up to fully funded status more quickly
a. Single ER plans: IRC 430(i) and ERISA 303(i) additional funding requirements for
single ER DB plans whose funding status puts them at risk
b. Multi-ER plans: IRC 432 and ERISA 305 additional minimum funding requirements
for endangered or critical plans
d. Interest Rates
1. Lower rates = increase in ER funding obligations for DB plans
2. Alternative use corporate bond rates (instead of 3-year Treasury Bond rate)
10. FAS 158 and Accounting Disclosures
a. A publically traded company must:
1. Recognize in its statement of financial position an asset for a plans overfunded status or
liability for a plans underfunded status;
2. Measure a plans assets and its obligations and determine plans funded status at end of
fiscal year; and
3. Recognize changes in funded status of DB
b. Wanted more transparency
3. Distributions, Rollovers, and Participant Loans
a. Voluntary of Payments from Qualified Plans
1. Distribution: Payment of the participants vested accrued benefit under the plan
a. Either in lump sum or an annuity
1. Lump Sum: single cash payment
a. DC: amount determined by nonforfeitable portion of participants plan account
b. DB: amount determined by calculating the present value of the vested accrued benefit
the participant will receive once the participant attains normal retirement age under the
c. Present value calculation: use interest rate and mortality assumptions
2. Annuity: stream of fixed periodic payments
a. Normally based on life expectancy of the participant or joint life expectancies of
participant and designated beneficiary.
b. But may be for a fixed term of years
2. Direct Rollover:
a. Alternative to distribution
b. Is payment of all or part of the participants vested accrued benefit in a lump sum form that is
made directly to the trustee of another tax-favored retirement plan or to participants IRA or
Roth IRA
1. Distributions from a qualified plan made in form of an annuity cannot be rolled over to
another plan or IRA
3. Trustee to Trustee Transfer (2 situations)
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a. 1. Plan merger: transfer of assets and liabilities, or spin-off of plan assets to another qualified
1. Trustee of one plan transfers all or part of the plans assets to the trustee of another
qualified plan
b. 2. Deceased participant: transfer when beneficiary of a deceased participants plan account is
not a surviving spouse
4. In-Service Distribution
a. Lump sum payment made from participants plan while the participant is still employed by the
employer who sponsors the plan
1. Optional
2. Defined contribution plans only
b. Hardship Distribution
1. Particular type of in-service distribution
2. Requires that participant demonstrate and immediate and heavy financial need for the
payment from the participants plan account
a. Plan can provide for hardship distributions
b. Limits has to be actual short term hardship where participant needs money, Is
subject to tax and 10% excise tax w/o jeopardizing tax treatment of whatever you have
left in there
c. Phased Retirement Distribution
1. In-service distribution
2. Distribution of benefits from a DB plan to a participant who is age 62 or older
a. Permit older workers to work less than full time for their ER prior to retirement and
supplement their reduced wages by commencing distribution of their monthly
retirement benefits
5. Plan Loan
a. Made from participants account in a defined contribution plan
1. Optional not required
2. If do allow can pick and choose purposes for which you allow them
b. Participant must repay the loan pursuant to a regular repayment schedule
c. Repayments typically made to plan through payroll deduction
b. Distributions and Direct Rollovers
1. Most important issues raised by payment from qualified plan:
a. Whether plan administrator will report the payment as part of recipients gross income;
b. Whether participant has a choice concerning the timing or form of payment; and
c. Whether participant must pay an excise tax penalty in addition to any income tax due as a
result of the payment
2. Distributions and Direct Rollovers:
a. General Rule: distribution to a plan participant is included in the participants gross income
1. Exception: Rollover Distribution
2. If participant elects to receive a distribution instead of a direct rollover, plan administrator
must withhold 20% for federal income taxes
3. If elects distribution may still rollover all or part of the distribution by making a deposit
to an IRA w/in 60 days of the date of distribution
a. 60 day limit can be waived for casualty, disaster or other events beyond reasonable
control of the individual.
b. Eligible Rollover Distribution: not included in participants gross income
1. Participant can choose to have the payment sent directly to the trustee of another tax-
favored retirement plan or IRA in form of tax-free direct rollover
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a. Do it right never touch the money

b. If do take it into you own hands administrator has to take 20% off top to pay federal
1. If take money assumption is that it is a distribution and is taxable
2. Can still put money in new plan w/in 60 days and be counted as a rollover and not
included in taxable income but have already lost 20%
c. Safer way dont flirt w/ 60 day limit and dont lose 20% (temporarily tax refund)
2. Not eligible for rollover distributions (must be included in GI):
a. Annuity payments for 10 or more years;
b. Annuity payments for the life of a participant;
c. Required minimum distributions; and
d. Hardship distributions
1. IRC 402(c)(4)
3. Roth IRA
a. Participant in a qualified plan may also make a rollover to the trustee of the
participants Roth IRA if the participant satisfies the income limit for contributions to
a Roth IRA
1. This must be included in gross income
4. Qualified plan must offer a participant the option of directly rolling over any payment
that is an eligible rollover distribution (IRC 401(a)(31))
c. Purpose: switching jobs we have a highly mobile workforce move from RR to ER and
plan to plan
1. Dont want to leave plan administrator of previous plans with administrative burdens of
having to administer account for next 40 years
2. Not very efficient way of doing things if have switched many jobs, have to manage this
in retirement
3. Want people to carry money with them
a. Rollover to new employer without paying tax now
3. Cash Out distribution
a. PA may make cash out distribution when present value of the participants vested accrued
benefit is $5000 or less
b. If vested accrued benefit exceeds $5000, plan must obtain participants consent to make
distribution prior to the time the participant attains normal retirement age under the plan
c. Before making cash out distribution, PA must notify the participant of the option to elect a
direct rollover in lieu of a cash out distribution
1. Then burden on participant to direct plan administrator to make it a rollover
2. If plan administrator does not get any direction it will be a distribution and has to count
in taxable income
3. Purpose: avoid having plan admins have to keep track of small account for a long period
of time
d. If cash out distribution is more than $1000, payment must be made in form of direct rollover
to an IRA established by the ER for the benfefit of the plan participant IRC 401(a)
1. Safe harbor for PA DOL Reg. 2550.404a-2
e. If take distribution that is not a rollover, it is included in gross income
f. If distribution made before 59 , participant subject to excise tax penalty equal to 10% of
the distribution amount
1. Exceptions excise tax does not apply if:
a. Distribution is made to beneficiary or participants estate b/c participant died
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b. Distribution being made b/c participant disabled

c. Participant has separated from service and is 55 or older
d. Distribution is in form of annuity for the life expectancy of participant or joint life of
participant and beneficiary
e. Distribution made to an alternate payee of QDRA
g. Policy: this is retirement savings, not a piggy bank dont touch money until in retirement
c. Plan Loans
1. Only defined contribution plans may offer plan loans
a. Not required
b. Plan may permit loans for any reason or may establish criteria for loans
1. E.g. financial hardship, selected purposes, purchase of primary residence, payment of
medical or educational expenses
2. Requires compliance with other sections of the IRC and ERISA:
a. Anti-alienation rule of 401(a)(13) and ERISA 206(d)
b. Prohibited transaction exemption of IRC 4975(d)(1) and ERISA 408(b)(1); and
c. Income tax provisions of IRC 72(p)
3. Requirements
a. Available to all plan participants on a reasonably equivalent basis;
b. Not available to highly compensated employees, officers or shareholders in an amount greater
than the amount mad e available to other employees;
c. Made in accordance with specific provisions regarding loans that are set forth in the plan
d. Bears a reasonable rate of interest; and
e. Is adequately secured
1. If participants plan account is used as security for the loan, the loan is treated as
adequately secured only if the loan amount is secured by not more than 50% of the
participants nonforfeitable accrued benefit.
4. Must sign enforceable loan agreement
a. Promising that you will pay your own account back with interest
5. Income Tax
a. Plan loan is subject to income taxation as a distribution under IRC 72(p)(1)
1. Are certain exceptions
a. loan amount will not be treated as a distribution if the participants loan balance does
not exceed the lesser of:
1. 1. $50,000 or
2. 2. The greater of $10,000 or 50% of the participants nonforfeitable account
2. Failure to comply with this does not disqualify plan
a. But does subject loan to adverse income tax consequences
b. Plan could accept other collateral as security for the participants loan of $10,000 if the other
collateral is of a type and amount of security which would be required in the case of an
otherwise identical transaction in a normal commercial setting between unrelated parties on
arms-length terms
1. Allowing for toher collateral as security increases the administrative burden PA assumes
role of commercial lender
c. Plan loan program is usually designed so that the max amount of any loan is limited under the
terms of the plan document to an amount that does not exceed the lesser of $50,000 or 50%
of the participants nonforfeitable accrued benefit under the plan
6. To avoid inclusion in participants Gross Income, a plan loan must:
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a. 1. Be documented by an enforceable loan agreement

b. 2. Have repayment term not exceeding 5 years
1. Except for loans used to purchase a principle residence any reasonable repayment
period is allowed; and
c. 3. Provide for at leats quarterly payments with level amortization of principal and interest over
the repayment terms
7. Failure to comply with any of these subjects entire amount of loan to income taxation as a deemed
8. If participant terminates employment before the plan loan has been fully repaid, plan must
provide that the participant repay the loan in full within a short period of time, or else the account
balance will be reduced/offset to repay the loan
a. A plan loan offset is treated as a taxable distribution to the participant
d. Required Minimum Distribution
1. IRC 401(a)(9) dictates the longest period of time that a participant may delay receiving a
distribution from the plan
a. Some have no incentive to take money out b/c want it to accrue more interest
b. But Congress says you have to start taking money out at one point
1. Want to prevent the accumulation of large amounts of wealth through qualified plans by
forcing the annual distribution of a minimum amount once a participant is well into his or
her retirement years
c. When planning with higher income folks this is a huge part of planning figuring how much
they have in the plans, how much they have to take out
2. Required Beginning Date:
a. April 1 of the calendar year following the calendar year in which the participant attains age 70
1/2 .
1. Exception:
a. If less than 5% owner and still working for plan sponsor when hit 70 1/2, can delay
distributions until you leave the company
3. Required Minimum Distribution Amount:
a. Divide the value of the participants nonforfeitable accrued benefit by the life expectancy
of the participant, or, if the participant has designated a beneficiary, the joint life expectancy of
the participant and the beneficiary
1. If want to leave money in account longer- make son or grandson beneficiary b/c much
longer joint life expectancy
2. Life expectancies determined under tables promulgated by Treasury Department
actuarial tables
4. Failure to comply with the required minimum distribution rules results in plan disqualification
a. If plan distributes less than required minimum distribution - Participant is subject to excise tax
of 50% of the deficiency amount
1. High incentive to comply with rules
e. Special Distribution Forms for Married Participants
1. If single, unmarried participant dies before reaching retirement age,
a. DC administrator pays vested balance to designated beneficiary or estate is distribution and
1. Beneficiary can avoid tax by doing trustee to trustee rollover
b. DB no requirement in IRC or ERISA that accrued benefit go anywhere (estate or anywhere
1. Plan can provide that it can be paid to estate but it doesnt have to
2. So vested benefit may get absorbed back into the plan
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2. Retirement equity act of 1984 certain safeguards for the spouses of plan participants
a. Requires special distribution forms for married participants
b. Defined benefit or money purchase pension plan (ER makes contribution every year based
on percentage of each participants compensation)
1. These plans always have an annuity option for way participant can take a benefit
3. Qualified Joint and Survivor Annuity (QJSA) and Qualified Preretirement Survivor Annuity
a. QJSA plan will pay participant normal amount
1. If die spouse gets a portion of that payment until she dies
a. Portion can be 50% to 100% of participants benefit
2. 2008: plan has to offer both 50% option and 75% option
3. This will reduce benefit while you are alive
a. If take 50% QJSA, amount you get in retirement will be less
1. Plan is charging you for risk that plan will have to pay spouse when you die
4. New spouses dont count
a. If married when start taking distributions, wife dies, and remarry, then you die new
wife will not get amount
b. QPSA if participant dies before start taking distributions
1. If elected this option, spouse can still get an annuity distribution based on participants
account balance
a. Will be less than QJSA
c. Spouse can waive either one of these
1. If lump sum option, wife can waive annuity option
4. Lorenzen
a. Facts: he decided that when he did retire he woud take his retirement benfits as a lump sum,
rather than as a series of monthly payments for his life, then 50% to his wife. Plan says that if
you die before retirement date QPSA is all you can get.
b. Rule: Employee must live until the day of his retirements.
c. Widow loses b/c signed consent; Plan terms are clear and dont violate code or ERISA
d. Election doesnt matter choice to delay retirement date is what matters
e. What do you tell someone who is considering retirement?
1. Dont delay or at least consider these risks
f. Wife is NOT due the lump sum amount her husband planned to take, instead of a 50% QJSA,
when he was asked to stay on for a few months and then died, since they were benefiting from
the retirement income getting larger while the husband kept working.
g. The husband voluntarily took a risk, not thinking he would die.
h. The couple was benefiting from the retirement income getting larger while the husband kept
i. There was no duty by the Company to advise the husband that if he died, the wife would only
get a QJSA, or to the wife as to the repercussions of unplugging her husbands life support.
4. Mechanisms to Avoid Plan Disqualification, Supp. 4
a. Must satisfy requirements of IRC 401(a) in both form and operation
1. Words of written plan document must comply with IRC 401
2. Plan must be administered in compliance with IRC 401(a)
3. Plan must strictly adhere to all requirements of IRC 401(a) regardless of size of plan or legal
sophistication of ER
b. If plan fails to comply with one of the requirements of IRC 401(a) plan is disqualified
1. Disqualification = Means favorable income tax treatment is forfeited, and plan becomes subject to
general rules of income taxation
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a. ERs contributions are deducible only when matched with inclusion in participants GI
b. Participants subject to income tax on plan benefits immediately once benefits are vested
c. Investment income earned by assets in trust no longer exempt from income taxation
2. Exception: when disqualification due to violation of IRC 410(b) or 401(a)(26)
a. Here only HCEs are penalized by being subject to the normal rules of income taxation for
plan benefits
c. 2 Regulatory Mechanisms to Assist ERs in maintaining the Qualified Status of Plans
1. Determination Letters
a. ER can submit written plan document and any amendments to the IRS for a determination that
the plan satisfies all of the requirements of IRC 401(a)
1. ER submits application Form 5300 (appendix D)
b. Going forward, the Service will limit the scope of determination letters for individually
designed qualified plans to initial plan qualification and qualification upon termination of the
c. Employers who use prototype and volume submitter retirement plan documents, however, still
will be able to obtain determination letters for interim plan amendments.
2. Employee Plans Compliance Resolution System - EPCRS
a. Several programs that allow ER to correct various types of errors
1. Self-Correction Program
a. ER who has established an internal procedure to ensure plan compliance may correct
insignificant operational defects at any time w/o notifying IRS
b. May correct significant operational defects if correction made w/in 2 years following
the end of the plan year in which the operational defect took place
2. Voluntary Correction Program (VCP)
a. ER uses VCP to correct certain types of qualificiation failures that cannot be self-
b. Include: plan document failure (plan language fails to comply with reqts),
demographic failure (plan fails reqts of IRC 401(a)(4), 401(a)(26) or 410(b),
employer eligibility failure (ER adopted plan that is not eligible0
c. Also used to correct significant operational defects
d. ER submits letter and docs to IRS describing failure and proposing correction method
e. For some things VCP has standardized correction methods
3. Audit Closing Agreement Program (Audit-CAP)
a. Last resort if plan under examination by IRS, this is only way to correct (unless plan
already begun self-correction mechanisms and were substantially completed before
b. ER must correct the failure and pay a negotiable penalty to IRS
c. Closing agreement end of Audit Cap, ER and IRS enter into final settlement.
Describes corrective steps taken by ER, negotiated penalty amount paid by ER, any
other future requirements for ongoing plan operation
F. Qualified Plans Issues in Bankruptcy and Divorce
1. Protection from qualified plans
a. Policy based rule giving benefits to participants and plan sponsors to encourage retirement saving,
Dont want goal subverted for people using it as piggy bank for other purposes
1. Dont want taking it out and spending on other things
2. Dont want creditors coming and taking money
2. Issues involving qualified plans often arise in context of personal bankruptcy and divorce
a. Bankruptcy:
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1. Creditors of an individual plan participant may seek repayment of the participants debts by
attempting to get some of the participants qualified plan benefits
b. Divorce:
1. Participants qualified plan benefits may be part of a negotiated division of the couples property
3. Bankruptcy
a. Anti-Alienation Rule for Qualified Plans
1. IRC 401(a)(13); ERISA 206(d)
2. Qualified plan generally must prohibit the assignment or alienation of a participants benefits
provided under the plan (w/o taking significant tax penalities)
a. Combination of anti-alienation rule and ERISAs preemption of state law that provides
qualified plan participants with shield against 3d party creditors
3. Derived from Trust law prohibited assignment or alienation
a. CL of Trust whoever set up the trust determined the conditions and circumstances under
which the trustee could distribute trust assets to the beneficiary
1. Written trust agreement of terms and conditions
2. If grantor thought trust beneficiary was financially irresponsible, could impose constraints
3. Constraint on ability to distribute trust assets to creditors = Spendthrift clause, addressed
2 situations:
a. 1. Prohibited trust beneficiary from voluntarily assigning the beneficiarys right to
receive payment from the trust to a creditor
b. 2. Restricted involuntary alienation of the beneficiarys interest in the trust by a court
order from a creditor
c. Trustee could not be forced by a court order to make premature payment of trust
assets to a judgment creditor
4. Judgment creditor could only receive those trust assets that the trust beneficiary was
entitled to receive, and not before
5. Even if owe creditor a bunch of money cant attach funds of the trust
a. Only when money is paid to participant can the creditor get the money
4. Anti-alienation rule for qualified plans expands the common law trust concepts of a
spendthrift clause
a. Trusts: spendthrift clause was optional; limited in use to financially irresponsible trust
b. Qualified plans: anti-alienation rule is mandatory and applies to all participants
1. Prohibits the participants from voluntarily assigning payment of their benefits from
the plan to 3d parties
c. Trusts: spendthrift clause prohibited a judgment creditor of a trust beneficiary from reaching
trust assets prior to the time that a distribution to the trust beneficiary was permitted
1. E.g. if ben could not get assets until 50, ct could not order trustee to pay trust assets to
creditor until ben was 50
d. Qualified Plans: more effective against involuntary alienation
1. Trustee of qualified plan can only pay plan benefits directly to plan participant (or p
and spouse) while the participant is still alive
2. Any state law mechanism that might override the distribution provisions of the plan is
preempted by ERISA
5. Such as order of garnishment by state court, or attempt to levy on participants plan benefits in
satisfaction of a state court judgment
6. ERISA does not preempt the federal Bankruptcy Code (ERISA 514(d))
a. ERISA preempts state law
1. If state law or state judicial proceeding is trying to get at that -
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b. Patterson v. Shumate:
1. SC: benefits from a qualified plan subject to ERISA are excluded from the debtors
bankruptcy estate
a. If go bankrupt creditors can take car, income, etc but cannot take pension plan
b. Anti-alienation rule for quailed plans was a restriction on the transfer of a beneficial
interest of the debtor in a trust that was enforceable under nonbanruptcy law
2. Policy:
a. ERISAs goal is to protect pension benefits.
1. Ensure a worker that has been promise a defined pension benefit plan upon
retirement will actually get it
b. ERISA 206(d) congressional policy
1. Want to safeguard a stream of income for pensioners, even if that decision
prevents others from securing relief for wrongs done by them
c. Uniform national treatment of pension benefits
1. Security of debtors pension benefits will be governed by ERISA
2. And not left to the vagaries of state spendthrift trust law
c. Rousey v. Jacoway:
1. Assets in a traditional IRA are exempt from the debtors bankruptcy estate under
federal bankruptcy law
d. Bankruptcy Abuse Prevention and Consumer Protection Act of 2005:
1. Expanded Patterson to all employer-sponsored retirement plans that are exempt from
taxations 403(b) plans and 457 plans and Roth IRAs
a. 11 U.S.C. 522(b)(3)(C), (d)(12)
2. $1 million limit on assets held in traditional and Roth IRA accounts that are exempt
from debtors bankruptcy estate
a. 11 USC 522(n)
1. $1 million limit does not apply to amounts that have been rolled over to an IRA or
Roth IRA from an ER-sponsored retirement plan
b. Exceptions to Anti-Alienation Rule
1. 1. Loan by the plan made to a participant from assets held in the participants plan account
a. IRC 401(a)(13)(A); ERISA 206(d)(2)
b. As long as loan complies with the rules
2. 2. Voluntary and Revocable assignment made by participant to a third party of not more than
10% of any benefit payment made to the participant
a. IRC 401(a)(13)(A); ERISA 206(d)(2)
3. 3. State or federal court order, judgment, consent decree, or settlement agreement attaching
the plan benefits of a participant who is also a fiduciary of the plan, where the fiduciary engaged in
a breach of fiduciary duty that caused loss to the plan
a. IRC 401(a)(13)(C); ERISA 206(d)(4)
b. Someone higher up has fiduciary duties and is found to have breached fiduciaries to the plan
and causes the plan to lose a lot of money so participants lose money plan can get at
breaching fiduciaries account
1. ERISA v. ERISA - Fiduciary rules win
4. 4. A payment of the participants plan benefits to an alternate payee pursuant to a qualified
domestic relations order (QDRO)
a. IRC 401(a)(13)(B); ERISA 206(d)(3)
c. Anti-alienation rule does not apply to welfare benefit plans (only retirement plans)
1. Patient can assign benefits to a health care provider before services rendered
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a. Then health care provider can seek to be paid directly by the health care plan for the health
care plan for which the participant is entitled
2. Gives health care provider standing under ERISA to sue the plan on behalf of the patient-
participant if the plan administrator refuses to pay
3. Can assign benefits from health care plan to doc or hospital
4. Qualified Domestic Relations Orders
a. QDRO commonly used to secure the payment of alimony or child support after divorce
1. Order from state court relating to child support, alimony or retirement benefits that says that
some other person should get all or part of the benefits due under the plan
2. Defined: a judicial judgment, decree or order made pursuant to state domestic relations law
a. Establishes the right of an alternate payee to receive, or assigns to the alternate payee the
right to receive, all or a portion of the benefits payable to the participant under the plan;
b. Relates to the provision of child support, alimony payments or marital property rights of
the alternate payee
3. State court law is not preempted by ERISA and can allow a participant to alienate to another
person some part or all of benefits
a. Exception to anti-alienation and preemption
b. Alternate Payee:
1. Spouse, former spouse, child or other dependent of the participant
a. IRC 414(p)(8); ERISA 206(d)(3)(K)
c. QDRO Statutory exemption to the anti-alienation rule
1. Plan trustee is permitted to pay the plan benefits described in the QDRO directly to the alternate
d. Requirements for valid QDRO:
1. Contents of QDRO must clearly specify the items listed in the statute:
a. IRC 414(p); ERISA 206(d)(3)
1. Lawyer of alternate payee must be careful to strictly comply with these requirements or
not a QDRO and no benefits
b. 1. The name and mailing address of the participant and any alternate payee covered by the
c. 2. The amount or percentage of the participants benefits to be paid by the plan to each
alternate payee,
1. Or a description of the method the plan administrator must use to determine the amount
or percentage;
d. 3. The number of payments to be made to the alternate payee
1. And, if applicable, the period during which the order applies; and
e. 4. The name of each qualified plan to which the order applies
2. QDRO cannot require the plan to provide a benefit to the alternate payee that is not
authorized under the terms of the plan
3. QDRO cannot require the plan to provide greater benefits to the alternate payee than the plan
provides to the participant
a. IRC 414(p)(2)-(3); ERISA 206(d)(3)(C)-(D)
e. If plan administrator rejects the courts order as an invalid QDRO, the alternate payee has
1. 1. Can go back to state court that issued original QDRO an amend the terms of the courts order
2. 2. Alternation payee may attempt to enforce the state order against the plan administrator though
the judicial system (Dickerson)
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f. Dickerson
1. Issue: Whether divorce decree is a QDRO w/in meaning of ERISA 206(d)
a. Holding: No
2. Analysis:
a. ERISA contains spendthrift provision which states that benefits provided under covered
retirement pension plans may not be alienated or assigned (ERISA 206(d)(1))
1. Purpose: Protect and secure the financial well-being of employees and their dependents
2. Retirement Equity Act of 1984
a. Enacted b/c ERISA does not delineate a spouses interest in an EEs pension plan
1. Safeguards the financial security of widows and divorcees
2. Protects the interests of women who may suffer inequities as economic victims of
divorce or separation from wage-earning husband
b. Creates express statutory exception to spendthrift provision
1. ERISAs spendthrift provision does not apply to a QDRO
2. Ct may divide the rights of spouses in pension benefits through a QDRO and
award the non-employee posue her proper share of those benefits
3. State Court has authority to issue a QDRO
b. A self-proclaimed QDRA does not in and of itself create a right in an alternate payee to
obtain pension benefits
1. Spouse is not participant
a. Is alternate payee or beneficiary
2. Not entitled to a distribution under the pension plan just because QDRO says she has a
right to be paid as quickly as administratively possible
3. Divorce decree is not automatically a QDRO
4. Cant get benefits when divorce decree says you can
a. Get benefit when reach retirement age
c. Intent of Congress
d. ERISA: as if the participant had retired
1. Presumes that the participant has reached the age where he is eligible to receive retirement
benefits under the terms of his pension plan but has not actually retired or terminated
e. Spouse can get benefits when participant reaches eligible retirement age even if he hasnt
retired yet
f. Spouse cant get benefits greater than the participant is or would be entitled to receive
3. QDRO Review Procedures
a. In reviewing terms of ct order, PA is not required to look beyond the face of the order to
ascertain the validity of the order under state domestic relation law
b. PA is responsible for determining whether a domestic relations order from state court satisfies
statutory requirement for QDRO
1. Monograph issued by DoL to help Pas
c. If order is not QDRO, assignment of benefits to the alternate payee pursuant the order
will result in disqualification of plan under anti-alienation rules
d. Erroneous assignment and payment to alternate payee would be breach f fiduciary duty
subjecting PA to fiduciary liability in private civil action brought by participant under
4. Income and Gift Tax Consequences of QDRO Distributions
a. QDRO distribution Included in income of alternate payee
1. Alternate payee can elect a direct rollover and avoid tax
b. If alternate payee is dependent child participant is taxed
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c. QDRO distribution to former spouse may be deemed a gift for federal gift taxation
1. A gift to former spouse does not qualifiy for marital deduction
2. To avoid paying possible gift, order containing QDRO must be structured to meet
requirements for divorce property settlement agreements under IRC 2516
5. Dividing Benefits Under the QDRO
a. 2 approaches:
1. Shared payment approach
a. Generally used for orders of alimony and child support when participant has already
begun to receive benefits in form of annuity payments from the plan
b. QDRO directs that a specific dollar amount or percentage of each annuity benefit
payment must be paid to alternate payee
c. QDRO specifies the period during which alternate payee is to share in the payments
(e.g. if for child, until 18; if former spouse, until remarriage)
2. Separate Interest Approach
a. Used to divide plan benefits as part of a marital property settlement
b. QDRO divides entire benefit of participant into 2 separate portions so alternate payee
can receive his or her portion at a different time and in different form (usually lump
sum) than the time and form that apply to a plan participants portion
c. DC: value is balance of the individuals account under the plan. If less than fully
vested, parties can negotiate over amount to be allocated under terms of QDRO
d. DB: value can change over time, more difficult, may have a subsidized early retirement
benefit or disability benefit with greater actuarial value than the actuarial value of
participants accrued benefit payable at normal retirement age. If a lot, hire pension
G. Qualified Plan Issues in the Representation of Corporate clients
1. Plan Mergers, Asset and Liability Transfers, and Spin-Offs
a. Qualified plan cannot adversely impact the accrued benefits of the plan participants
b. Termination basis is satisfied by transferring each participants entire account balance to the recipient
c. Benefits that are the subject of a merger are protected under the anti-cutback rule
2. Plan Terminations
a. DCP, the primary requirement is compliance with the special vesting rule of 411(d)(3) requires that
all participants in the terminated plan must be immediately and fully vested in their accrued benefits
under the plan
b. DBP, same rule applied, but the benefits are insured through the federal Pension Benefit Guaranty
c. Standard Termination
1. The plan administer gives advance notice to plan participants
2. The employer files a notice of plan termination with PBGC and IRS
3. The plan admin provides an individual benefit statement to each of the plans participants
4. PBGC reviews and approves the proposed termination
5. Trustee distributes benefits
6. Employer filed closing statement with PBGC
d. Distress Termination
1. Chapter 7, 11, inability to pay debts, pension cost have become unreasonably burdensome
2. Single employer plan, the sponsoring employer are jointly and severally liable for the plans
unfunded benefit liabilities
3. To avoid large future pension liabilities, the ER may attempt to sell part of its business, and
transfer the associated pension plan liabilities to the buyer
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e. Partial Terminations of Single Employer Plan

1. DBP represents a significant liability for the employer because the funding status of the plan is
determined in part by the amount of accrued benefits under the plan that are vested; fully vested
2. DCP each terminated participants plan account is already funded in the sense that the account
already holds that participants accrued benefits.
H. Multiemployer Plans
1. Gerber
a. Three drivers for a trucking service were covered by a union contract requiring the service to make
pension and welfare payments. Defendant employer had no union employees and, when it acquired the
assets of the trucking service, it told the union that it wanted to limit pension coverage to the three
drivers. The union representative orally agreed to not enforce any written contract beyond those three,
so defendant signed two agreements that required it to make contributions for all employees represented
by the union. Defendant later chose not to renew the union contract, but did not give written notice of
withdrawal from pension obligations. Consequently, when defendant stopped paying and it was learned
that payments had been made for only the three drivers, plaintiff pension fund sued under ERISA for
back payments for all employees.
b. The district court refused to extend the coverage and plaintiff appealed. In reversing, the appellate
court ruled en banc that ERISA required that plaintiff could rely on the union contracts as written and
the oral agreement to limit coverage to the three drivers was without effect.
2. Independent Fruit and Produce
a. Employee pension funds challenged judgments favoring produce wholesalers in the funds' lawsuits
seeking delinquent contributions. The funds claimed that the wholesalers failed to make contributions
for certain employees as required by the collective bargaining agreements. The funds argued that these
employees were regular employees for whom contributions were due.
b. The district judge found that the collective bargaining agreements were ambiguous and looked to the
intent and past practice of the parties to define "casual employee." He held that a "casual employee"
was not necessarily a person who worked only intermittently or sporadically, but, instead, included
those employees so designated by the employer, with the consent of the union, regardless of their work
schedules. On appeal, the court reversed. It held that the parties to a collective bargaining agreement
were bound by the terms of their agreement, regardless of their undisclosed intent.
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IV. Chapter Four - Welfare Benefit Plans

A. Introduction to Welfare Benefit Plans
1. Welfare benefit plans, health care plans sponsored by private employers
2. Subject to requirements of Part I, Title I reporting and disclosure, Part 4, Title I fiduciary duty
provisions, Part 5, Title 1 Rules on state law preemption
3. ERISA does not regulate eligibility for participation or the benefits provided under health care plans or
welfare benefit plans
a. Eligibility criteria and benefits are determined by ER who sponsors the welfare benefit plan
4. Play significant rule in national health care policy
5. Types of Welfare Benefit Plans and Other Employee Benefits
a. ERISA 3(1): Welfare benefit plan (broad definition)
1. Any plan, fund or program whichis established or maintained by an employer or by an employee
organization, or by both,for the purpose of providing for its participants or their beneficiaries,
through the purchase of insurance or otherwise,
a. (A) medical, surgical, or hospital benefits, or benefits in the event of sickness, accident,
disability, death or unemployment, or vacation benefits, apprenticeship or other training
programs, or day care centers, scholarship funds, or prepaid legal services, or
b. (B) any benefit described in section 302(c) of the Labor Management Relations Act, 1947
(other than pension on retirement or death, and insurance to provide such pensions).
b. Many types of EE welfare benefit plans possible
1. Benefit design, coverage and administration of the plan are closely coordinated with the income tax
provisions of the IRC to achieve the most favorable tax treatment possible for employer
contributions to the plan and benefits paid to the plan participants
6. Definition of Welfare Benefit Plans
a. Health care plans
1. Designed to provide medical, surgical or hospital benefits
b. Disability Income Plans
1. Provide payments to replace an employees lost income when the EE is unable to work due to
illness, disease or injury
a. Short Term Disability Plans: Pay income replacement benefits to the EE for a limited period
of time (e.g. 6 wks). If period of coverage under the short term disability plan is relatively
brief, the benefits under the disability plan may be paid by the ER from its general assets.
b. Long Term Disability Plans: Pay income replacement benefits to the EE after an initial period
of disability has transpired and continue to make payments until the EE reaches retirement age
or the EE is no longer disabled
a. Usually provided through an insurance policy
b. If plan is well-designed will allow for long-term coverage to pick up coverage when
short-term plan expires
c. Accidental Death Plans
1. Pay benefits to the EEs surviving spouse and dependents when the EEs death is the result of an
accidental injury
d. Life insurance policies
1. Pay a benefit to the EEs designated beneficiary in the event of the employees death, irrespective of
the cause of death
2. Group Life Insurance Plan many ERs provide $50,000 of death benefit coverage for every EE

a. ER may also offer EEs opportunity to purchase additional individual life insurance from
company that provides group term life insurance policy
e. Long-term care Plans
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1. Benefits for nursing home or custodial care provided through insurance contracts satisfying IRC
7702B for Qualified Long Term Care Insurance
a. Plans cover Qualified Long Term Care Services not covered by Medicare, include:
diagnostic, preventative and rehabilitative services, maintenance and personal care services for
the chronically ill
f. Educational Assistance Programs
1. May qualify as training program; provides ER payments for tuition for courses, fees, books,
supplies, equipment and other educational expenses incurred by EE
a. ER may limit payments to courses that are reasonably related to the business of ER
b. Can be structured to receive favorable tax treatment under IRC 127(b)
g. Dependent Care Assistance Programs
1. May be daycare operated by ER for benefit of EEs, may be reimbursement program
h. Severance Pay Plan
1. Provides benefits to an EE whose termination of employment from ER satisfies the eligibility
criteria for payments under the terms of the plan
a. If single ER, paid from general assets
i. Vacation Plan
1. ER will continue to pay EEs regular compensation during EEs absence from work for a specified
number of days or weeks each year
j. Sick Leave Plan
1. ER will continue to pay EEs regular compensation for specified number of days each year when
EE is absent from work due to illness
k. Paid Leave or Paid Time off
1. Combination of vacation and sick leave plan benefits
2. ER will pay EE when EE is absent from work , regardless of the reason
l. Payroll Practice
1. When EEs regular compensation for vacation or sick leave is paid out of general assets of ER
2. Not subject to ERISA DOL Reg. 2510.3-1(b)(2)-(3)
7. Income Tax Treatment of Welfare Benefit Plans
a. ER contributions deductible by the ER: IRC 162(a)
1. Health care plan
2. Accidental death plan
3. Disability plan
4. Life insurance plan
5. Long term care insurance plan
b. Tax incentives to encourage ERs to offer some of these plans
c. Whether benefits will be included in gross income and subject to income depends on the type of plan
1. EE can elect, Have to figure out what type of plan it is and go from there
2. Table 4.2 page 285
d. ER contributions to, and benefits paid from, an EE health care plan are usually not included in EEs
gross income
e. * If accidental death or disability plan structures plan so that premium payments to group insurance
company are paid by EEs using after-tax dollars, the benefit payments will be excluded from EEs (or
beneficiarys) gross income
8. Cafeteria Plans
a. Not a welfare benefit plan subject to regulation under ERISA
b. Is a financing arrangement/tax mechanism created in writing pursuant to IRC 125
1. Allows EEs to choose, based on how much the make, between receiving compensation from ER in
form of cash or qualified benefits offered under terms of the arrangement
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a. If choose qualified benefits value of them are not included in EEs gross income
b. Is pre-tax use money to get coverage you would normaly be taxed on, for no tax
2. Qualified benefits: group term life insurance, health care expense reimbursement, health care plan
premium payments, disability and accidental death benefits, dependent care assistance and vacation
a. No qualified long term care benefits
c. Flexible Spending Accounts: how health care expense reimbursement and dependent care assistance
benefits are structured under cafeteria plan
1. Allows each individual EE to decide how much if any of the EEs cash compensation the ER should
contribute to the EEs flex spending account to cover expenses incurred by the EE during a defined
period of coverage
d. Use it or lose it policy
1. Need to adequately predict how much your coverage will cost cant carry it forward and used in
subsequent coverage period
2. Make election at beginning of year, money comes out each pay check hard to change
3. Can use pre-tax money to pay your portion of your premium on your healthcare plan
9. Code Nondiscrimination Requirements for Welfare Benefit Plans
10. The Vocabulary of Health Care Plans
11. Innovation: Consumer-Driven Health Care
B. Insured and Self-Insured Health Care Plans
1. The savings and Deemer Clause of ERISA Section 514
a. Metropolitan Life
b. FMC Corp.
2. How Self-Insured Health Care Plans Work (and why they cost less)
a. Bartlett
3. Statute Book: ERISA 514(a)-(b)(2)
C. The Alphabet Soup Requirements for Health Care Plans (COBRA)
a. Overview of COBRA
1. Holford
b. Overview of OBRA
a. Nondiscrimination Requirement
b. Role of the HIPPA in National Health Care Reform
c. Health Information Privacy
d. Statute Book: ERISA 601-609
3. Targeted Federal Reforms
4. Affordable Care Act, Supp. 5
a. Requirements for Maintaining Grandfathered Plan Status
b. Coverage of Essential Health Benefits
c. Coverage Requirements for Dependents and Adult Children
d. Prohibitions on Rescission of Coverage
e. Automatic Enrollment Requirements for Very Large Employers, deleted
f. Additional Requirements for Non-Grandfathered Plans
g. Guaranteed Issue and Renewability for Group Health Insurance Policies
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h. Minimum Essential Coverage and the Employer and Individual Mandates

i. Challenges to the Affordable Care Act
1. Sebelius
a. Note 4, Supp. 6
b. Note 5, Supp. 6
c. Note 6, Supp. 7
2. Hobby Lobby
5. Enforcement of the Federal Requirement for Group Health Plans
D. Amending or Terminating Welfare Plan Benefits
1. McGann
2. Statute Book: ERISA 510
E. Welfare Benefit Plans and Other Federal Laws
1. Americans with Disabilities Act
2. Title VII and the Pregnancy Discrimination Act
3. Family and Medical Leave Act
4. Medicare as Secondary Payer Rules
5. Uniformed Services Employment and Reemployment Rights
6. Age Discrimination in Employment Act
F. Retiree Health Care Plans and ERISA Litigation
1. The Impact of Financial Accounting Standards on Retiree Health Care Plans
2. The Evolution of Retiree Health Care Plan Claims in ERISA Litigation, Supp. 7
a. Bland
b. Tackett, Supp. 7
1. Notes, Supp. 7
V. Chapter Five - Fiduciary Duties and Prohibited Transactions
A. Who Is An ERISA Fiduciary? Supp. 16
1. Varity Corp.
2. Pegram
3. Statute Book: ERISA 3(21)(A)
B. Fiduciary and Co-Fiduciary Responsibilities
1. Legislative History
2. Illustration of Fiduciary and Co-Fiduciary Responsibilities
a. Overview of Fiduciary Duties
b. Duty of Loyalty
c. Duties of Prudence and Prudent Diversification of Plan Assets
d. Fiduciary Responsibilities and Social Investing
e. The Duty to Follow (or Disregard) Plan Terms
f. Co-Fiduciary Duties
3. Note on Duty to Inform
C. Prohibited Transactions and Exemptions
a. Overview of Prohibited Transaction Rules
1. Definition of Party in Interest
2. Party in Interest Prohibited Transactions
3. Fiduciary Prohibited Transactions
4. Prohibited Transactions Involving Qualified Plans
5. Restrictions on Plan Investments Involving Employer Securities or Employer Real Property
6. Exemptions
b. Legislative History
c. Supreme Court Interpretations
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1. Keystone Consolidated
2. Spink
D. Emerging Fiduciary Issues in 401(k) Plans
1. Company Stock and 401(k) Plans
2. Participant Investment Behavior in 401(k) Plans
a. History and Evolution of the Participant-Direct 401(k) Plan
b. Research Studies Concerning Financial Literacy and Investment Decisions
c. The Role of Financial Education in Improving Retirement Saving
3. Fees and Expenses in 401(k) Plans
4. Trends in 401(k) Plan Litigation, Supp. 19
a. Dudenhoefer
1. In Dudenhoeffer, participants in Fifth Thirds 401(k) plan brought a putative class action alleging
the plans fiduciaries breached their ERISA fiduciary duties by continuing to invest in and hold
Fifth Third stock despite its decline in value. The complaint alleged that the defendants knew or
should have known on the basis of both publicly available information and inside information
that Fifth Third stock was overpriced and excessively risky. According to the complaint, by
virtue of their positions as corporate officers, some of the defendants had inside information
indicating that the market was overvaluing Fifth Third stock. The complaint alleged that a prudent
fiduciary in the defendants position would have used this inside information by: (1) selling the
[employee stock ownership plan] holdings of Fifth Third stock; (2) refraining from future stock
purchases (including by removing the plans ESOP option altogether); or (3) publicly disclosing the
inside information so that the market would correct the stock price downward, with the result that
the ESOP could continue to buy Fifth Third stock without paying an inflated price for it.
According to the plaintiffs, the defendants did none of these things, and the price of Fifth Third
stock ultimately fell, reducing the participants retirement savings.
2. In considering the plaintiffs duty to disclose theory, the Supreme Court did not specifically hold
that any such affirmative fiduciary duty exists under ERISA. Rather, where a complaint faults
fiduciaries for failing to decide, on the basis of the inside information, to refrain from making
additional stock purchases or for failing to disclose that information to the public, the Supreme
Court instructed lower courts to consider the extent to which an ERISA-based obligation either to
refrain on the basis of inside information from making a planned trade or to disclose inside
information to the public could conflict with the complex insider trading and corporate disclosure
requirements imposed by the federal securities laws or with the objectives of those laws.
b. Statute Book: ERISA 404(c)(1)
c. Tibble, Supp. 20
1. In a unanimous decision, the Supreme Court has ruled in favor of participants in Edison
Internationals 401(k) plan who claimed company fiduciaries violated their duty to monitor three
retail-class mutual funds.
2. ERISAs fiduciary duty is derived from the common law of trusts, which provides that a trustee
has a continuing dutyseparate and apart from the duty to exercise prudence in selecting
investments at the outsetto monitor, and remove imprudent, trust investments, wrote Justice
Stephen Breyer, who delivered the opinion for the court.
3. The question before the court was whether the plaintiffs claim against three retail-class mutual
funds Edison added to its investment lineup in 1999 constituted a fiduciary breach, because
materially equivalent and cheaper institutional shares existed. With respect to three other retail-
class funds added in 2002, the lower courts found Edison in breach of its fiduciary duties for
adding the more expensive investment options.
4. The District and Appellate court rulings dismissed the claims against the three funds added in 1999
on the grounds that they were not timely; one part of ERISAs statute of limitation says that claims
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must be brought within six years of the alleged fiduciary breech. Edison participants brought their
claim in 2007, eight years after Edison fiduciaries added the first three retail-class funds in 1999.
5. Plaintiffs counsel argued all along that ERISAs statute of limitation requires fiduciaries to
prudently monitor their investment selections, and that the six-year limit to make a claim begins at
the last point fiduciaries proved to have not prudently monitored the investments, not at the time
the investments were first chosen.
6. When accounting for that component of ERISAs statute of limitations, the plaintiffs claim in
Tibble vs. Edison came well before the six-year limit expired.
VI. Chapter Six - Civil Enforcement Actions
A. Nuts and Bolts of ERISA Litigation
1. Federal Court Jurisdiction and Removal
a. Taylor
2. Statute of Limitations, Right to Jury Trial and Attorneys Fees
B. Section 502(a)(1)(B) Claims: Judicial Review of Claims for Plan Benefits
1. Department of Labor Regulations Governing Claims Procedures
2. Illustrations of Claims Litigation
3. The Standard of Judicial Review
a. Firestone
b. Section 502(a)(1)(B) Claims
c. Glenn
1. Wanda Glenn, a long-time employee of Sears and manager of its women's department, was covered
by the company's long-term disability plan. In 2000, Glenn took medical leave from Sears based on
an ailing heart condition and submitted a disability claim under her ERISA plan. Metlife, the
insurance carrier, approved the claim and told Glenn to seek social security payments which could
then be deducted from her Metlife payments. However, after an administrative law judge
determined, based in part on information provided by Metlife, that Glenn was disabled and eligible
for social security payments, Metlife revised its own opinion and decided Glenn was no longer
eligible for disability benefits.
2. Glenn brought suit against Metlife in district court, where Metlife's change of heart was vindicated,
however the U.S. Court of Appeals for the Sixth Circuit reversed. In making its decision, the Sixth
Circuit took into account Metlife's dual role as both the entity determining when disability awards
should be paid out as well as the entity actually funding those payments, noting the possible
conflicts of interest that could arise based on this arrangement. In seeking Supreme Court review,
Metlife drew attention to circuit splits on the issue of whether these conflicts should be taken into
account in determining the validity of Metlife's decisions on disability. In addition to the conflict of
interest argument, Glenn pointed out that Metlife's flip-flop did not take into account certain of
Glenn's doctor evaluations and that Metlife's representations to the administrative judge were at
odds with its own eventual determination that she was not disabled.
d. Issue: Does an insurance carrier, acting both as the entity determining when awards are to be paid and
actually funding those awards, have the right to represent to a court that an individual is disabled when
the insurance carrier separately determines for other purposes that the individual is in fact not disabled?
e. Maybe. The Court, in a 7-2 opinion, relied on its prior ruling in Firestone Tire & Rubber Co. v. Bruch
to hold that a possible conflict of interest such as MetLife's should be taken into account in determining
the legality of a claim denial. The significance and severity of the conflict must be determined by the
facts of each individual case. Here, the Court found that the evidence was sufficient to prove that a
strong conflict of interest existed. Based on the principle of deference to lower court decisions, the
Court affirmed the Sixth Circuit. Justice Stephen Breyer delivered the opinion of the Court. Chief
Justice John G. Roberts concurred in part and dissented in part, framing his dissent around his view
that conflicts should be taken into account only where there is evidence that the benefits denial was
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motivated or affected by the administrator's conflict. Justice Anthony Kennedy also concurred in part
and dissented in part, suggesting that the case should be remanded to the Sixth Circuit where it could
apply the majority opinion to the facts of the case on its own. Justice Antonin Scalia, joined by Justice
Clarence Thomas, dissented, finding the mere fact that an entity both determines claims and funds those
claims insufficient to prove a conflict of interest.
C. Section 502(a)(2) Claims: Breach of Fiduciary Duty
1. Fiduciary Liability
a. Russell
b. Larue
2. Measuring Investment Losses
a. Donovan
D. Section 502(a)(3) Catch-All Claims
1. Claims against Non-fiduciaries
a. Mertens
b. Harris Trust
2. Claims to Enforce Plan Reimbursement Clause
a. Great-West Life
Fiduciary ?
3 (21)(A)

Assist BFD? State Law BFD? PT? 406,

PT? Claims? 404, 405 407, 408


Claims / PE? Claims /
Remedies (Ch. 7) Remedies
(Ch. 6) (Ch. 6)
c. Montanile, Supp. 26
1. Questions, Supp. 34
3. Claims for Interference with Protected Rights Under Section 510
a. Inter-Modal Rails
b. Note 5, Supp. 35
4. Claims for Individual Relief for Breach of Fiduciary Duty
a. Varity Corp.
b. Amara
VII. Chapter Seven - Preemption of State Law SEE page 25
A. Overview of ERISA Preemption of State Law
1. Statutory Provisions and Legislative History
2. Evolution of ERISA Preemption Analysis
B. The Early Preemption Cases
1. Shaw
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2. Pilot Life
3. Ingersoll-Rand
C. Modern Preemption Jurisprudence
1. Travelers
2. Egelhoff
D. States Laws Regulating Health Care Plans and Health Care Providers
1. Rush Prudential
2. Miller
3. Davila
4. Gobeille, Supp. 38
a. Questions 48
Fiduciary ?
3 (21)(A)

Assist BFD? State Law BFD? PT? 406,

PT? Claims? 404, 405 407, 408


Claims / PE? Claims /
Remedies (Ch. 7) Remedies
(Ch. 6) (Ch. 6)