401(k) Self-Directed Brokerage Accounts: A Cautionary Tale

caution4A recently filed lawsuit rekindled some old concerns about self-directed brokerage accounts. What are they? Let’s start at the beginning.

Self-Directed Brokerage Accounts or “SDBAs” is the name the retirement industry has given to individual participant brokerage accounts maintained either on a stand-alone basis or through the 401(k) provider handling the menu of funds.

The driving force is usually a business owner or an important executive with a large account balance who wants to go beyond the fund menu. And those participants have, as we say in Chicago, clout to make it part of the 401(k) plan.

The lawsuit in question is Fleming v Fidelity Management Trust Company which was filed by a group of participants in the Delta Airlines, Inc. retirement plan against Fidelity alleging breach of fiduciary responsibility for excessive fees charged to their brokerage accounts.

Excessive fees are always a concern. What makes SDBAs different – and there is no nice way to say it – are all the problems a participant can cause by making investment decisions that:

  1. Are not in accordance with the documents and instruments governing the Plans;
  2. Jeopardize the plan’s qualified status;
  3. Result in a prohibited transaction;
  4. Result in Unrelated Business Income Tax
  5. Cause a loan or distribution to be made from the plan;
  6. Make an investment in any property, the fair market value of which cannot be readily determined on a recognized market or otherwise requires an appraisal;
  7. Invest in tangible personal property characterized by the Internal Revenue Service as collectibles, other than U.S. Government or State issued gold and silver coins; and; or
  8. Cause the plan to not be in compliance with State or Federal securities laws and regulations.

A plan sponsor can build in all these “shall nots” in their Investment Policy Statement (assuming that they even have one) but sometimes participants do what they do. And that can keep a plan sponsor up at night.

Picture Credit: Jacquie1948 via Flickr

Miss the April 30, 2016 PPA Restatement Deadline? Use Plan B.

canstockphoto6581040The deadline for restating a 401(k), profit sharing, or money purchase pension plan to a pre-approved Pension Protection Act document has come and gone. So what’s a fiduciary to do? It was, after all, a responsibility of the plan fiduciary to ensure that the plan was updated and signed by the April 30, 2016 deadline.

However, there is a Plan B to avoid plan disqualification. The Internal Revenue Service (“IRS”), of course, doesn’t call it that. The proper term is IRS’ EPCRS Late Amender Program. “EPCRS” stands for the IRS’ Employee Plans Compliance Resolution System which provides a method for plan sponsors to correct failures and get their plans back into compliance.

In brief, here’s how the voluntary correction procedure for non-amenders works:

  • Plan sponsors would adopt the restated plan and then submit the required paper work to the IRS for approval.
  • The fee for the submission is based on the number of plan participants.
  • However, if the document failure is corrected and the filing is submitted within one year of the restatement deadline (no later than April 30, 2017) the submission fee is reduced by 50%.

You may be wondering if there is a Plan B, is there also a Plan C. Not exactly, and it’s certainly not voluntary. It’s the consequence of not taking advantage of the afore-mentioned Late Amender Program.

It’s the IRS’ Audit Agreement Closing Program (“Audit CAP”) which is the end result of a plan audit. If the IRS finds the plan to be non-compliant, the plan sponsor would be required to submit an updated plan to avoid disqualification. The cost of which would be significantly more than if the missed deadline was dealt with on a voluntary basis.

The takeaway should be obvious: Contact them before they contact you.

Photo credit: CanStockPhoto.

Does your group health booklet measure up to ERISA?

Tape MeasureIf your employer provides group health coverage, you should have received a detailed booklet, usually prepared by an insurance company that describes your coverage. The booklet is a formidable document that describes your group health benefits and the applicable limitations and restrictions on coverage in great detail.

The ERISA Requirements

But does this booklet measure up to the ERISA requirements? In many cases that answer is “No”, and here’s maybe why:

Plan Document

First, a typical insurance company booklet, or “certificate of coverage,” describes the provisions of an insurance policy. However, this booklet may not contain all of the legally required provisions for a group health plan document. These additional required provisions include a description of the classes of employees who are eligible for coverage, the identification of the plan’s “named fiduciary” and other parties responsible for plan administration, and the procedures for amending or terminating the plan.

Summary Plan Description

Many of these same provisions must be included in the group health plan’s summary plan description, or “SPD.”  The SPD is required to summarize all significant provisions of the plan in simple to understand language.  So, a compliant SPD is required to disclosure 26 separate items including the plan benefits and eligibility requirements, the allocation of any plan costs to covered employees, any circumstances that could result in a loss of benefits, a statement with ERISA rights, disclosure of the plan’s three digit identification number, and the persons responsible for the operation of the plan.

Who’s Responsible?

The insurance company is not responsible for preparing a complete plan document or providing a compliant SPD. Those responsibilities fall on the “Plan Administrator” and that typically is the employer – not the insurance company or contract administrator.


Here are three takeaways to consider:

First, documents containing the provisions required by law can be adopted to supplement the group health booklet. These documents, sometimes called “wrap documents” because they wrap around the plan booklet, can be distributed to participants along with the plan booklet to satisfy applicable disclosure requirements. A wrap document does not necessarily have to be complex because many of the required provisions consist of identifying information as to those individuals who operate the plan and basic plan procedures.

Second, in the event of an audit of your group health plan by the Department of Labor, the first two documents on the audit checklist are: (1) the plan document, and (2) the summary plan description. A failure to have these documents can expose the employer to liability for plan benefits otherwise provided through group insurance (see Silva v. Metropolitan Life, a 2014 decision of the 8th U.S. Circuit Court of Appeals). Also, statutory penalties for non-compliance can apply even if no plan participant is harmed by the lack of an SPD (see cases like Amschwand v. Spherion Corp., a 2006 federal decision).

Finally, for employers that now use the Affordable Care Act (ACA) “look back” rule to identify “full-time” employees who are eligible for group health coverage, a description of how that rule is applied also should be disclosed in the group health plan documents.

About the Author: Andrew S. Williams has practiced in the employee benefits and ERISA arena since ERISA was passed in 1974. He has been recognized by his peers through a survey conducted by Leading Lawyers Network as among the top 5 percent of Illinois lawyers in Small, Closely and Privately Held Business Law and Employee Benefit Law. He maintains a website, Benefits Law Group of Chicago, with additional updates, commentary and analysis on benefits and employment topics.

The above material is intended for general information purposes and should not be relied on or construed as professional advice. Under the applicable Illinois Rules of Professional Conduct, the contents of this e-mail may be considered to be attorney advertising. The transmission of this information is not intended to create, and receipt of it does not create a lawyer-client relationship.

Picture Credit: Connie Posites via Flickr.



Boomerang Employees and 401(k) Considerations


We used to call them “rehires” back in the day: those employees who quit and were hired back. And it didn’t happen all that often. Many companies had policies not to.

They’re now called “boomerang employees, and now it’s different. Different times, different economy. Employees who left the nest decide they want to come back, and employers desperate for qualified, talented workers are happy to have them back.

How desperate? A recent survey by staffing firm Accountemps indicated that nearly all (98%) of human resources (HR) managers would welcome back a returning employee who left on good terms.

401(k) Considerations

Employers who do rehire former employees should keep the following four considerations in mind when it comes their 401(k) plans.

First, make sure that your plan and your Summary Plan Description clearly spell out how returning workers are treated. It’s ERISA, and everyone has to be treated the same.

Second, review how their vesting and forfeitures were handled when they left. Those same ERISA rules govern how non-vested benefits should be treated when an employee returns.

Third, use the appropriate eligibility rules to bring these employees back into your 401(k) plan. Those ERISA rules referenced above may – or may not – allow them to come in immediately.

Finally, keep the recent changes to the Pension Protection Act (“PPA”) in mind. The law made changes to vesting schedules that may affect these employees and how prior service should be credited.


Boomerang employees can be a valuable resource for employers. But employers should plan for the benefit matters in advance.

Image: National Museum of Australia, Aboriginal and Torres Strait Islander Affairs Art Collection



Stolen Laptop Triggers $1.55 Million Fine for HIPAA Violation

stolen_laptop_what_now_400Actually, it was “only” a potential violation of privacy and data security rules imposed by the Health Insurance Portability and Accountability Act of 1996 (HIPAA) for which North Memorial Health Care of Minnesota (“NMHC”) agreed to pay $1.55 million.

The violation alleged by the Department of Health and Human Services Office for Civil Rights (“OCR”) arose from the theft of a laptop from a locked vehicle owned by a contractor’s employee. The laptop, which was password protected, contained the individually identifiable personal health information (“PHI”) of 9,497 individuals.

The contractor also was given access to the PHI of 289,904 individuals while performing its on-site consulting services relating to bill collection and health care operations.

There is no indication in the public record that any individual was actually damaged by the claimed data security breach.

What NMHC was cited for was not having a Business Associate (“BA”) agreement with the contractor and not conducting an adequate analysis of security threats to the PHI  maintained, accessed and transmitted across NMHC’s IT network.

A BA agreement is required to impose privacy restrictions on contractors and other third parties who have access to electronic PHI in their dealings with a “covered entity.”

Covered entities include most medical service providers such as physicians, hospitals, clinics and medical laboratories. Self-funded group health plans (but not employers) are also covered entities. So, self-funded group health plans (those that are not fully insured) also need to be mindful of entering into BA agreements with their contract administrators (TPAs) and other third parties involved in plan administration.


Here are three key takeaways you should consider:

First, lost and stolen laptops have cost hospitals and other medical service providers many millions of dollars in OCR fines. It seems unlikely that such liability can be prevented by physical security measures alone. Covered entities need to consider maintaining PHI in an encrypted format in order to provide an across the board defense to claimed HIPAA violations and associated big dollar OCR files. Password protection by itself will not afford adequate security for electronic PHI.

Second, a properly drafted BA in frequently overlooked by covered entities in their dealings with contract administrators, consultants, collection agencies and others with access to PHI. A BA also can afford the covered entity (medical service provider or self-funded group health plan) additional contract protection in the event of a data breach involving PHI accessed by a contractor/consultant.

Third, an IT security assessment can help not only with HIPAA compliance but also with state laws mandating the confidentiality of personal information. No one wants to pay millions for a lost laptop, but compliance with state law privacy breach notice requirements, providing security monitoring services for affected individuals, and possible civil liability also can prove to be a substantial burden.

Need more compliance encouragement from the OCR? You can follow OCR on Twitter for updates on its HIPAA enforcement activities.

About the Author: Andrew S. Williams has practiced in the employee benefits and ERISA arena since ERISA was passed in 1974. He has been recognized by his peers through a survey conducted by Leading Lawyers Network as among the top 5 percent of Illinois lawyers in Small, Closely and Privately Held Business Law and Employee Benefit Law. He maintains a website, Benefits Law Group of Chicago, with additional updates, commentary and analysis on benefits and employment topics.

The above material is intended for general information purposes and should not be relied on or construed as professional advice. Under the applicable Illinois Rules of Professional Conduct, the contents of this e-mail may be considered to be attorney advertising. The transmission of this information is not intended to create, and receipt of it does not create a lawyer-client relationship.

Retirement Planning for Business Owners: Expectations and Misconceptions

road aheadHere’s a reality check for those business owners whose expectations and misconceptions about saving for retirement prevent them from starting and maintaining a retirement plan through their business.

The State of Business Owners’ Retirement Planning

Let’s start with the big picture. It’s no longer debatable that Americans aren’t saving enough for retirement and that those savings are not going to be adequate. Only approximately 50% of the work force is covered (and not necessarily participating) by an employer-sponsored pension plan which hasn’t change for almost 30 years.

Business owners are less likely to have a retirement plan than people who work for them according to the Small Business Administration. Why not? In many cases, their expectation and misconceptions get in the way.


According to a recent Guardian study, 35% of business owners are expecting to fund their retirement through the sale of their businesses; and only 17% have identified potential buyers. The reality is that they may not be sell their businesses when they want to, or if the price they can get is for the “value” (at least in their minds) of the business.


There’s no formal study on the misconceptions business owners have regarding starting retirement plans, but I’ve got plenty of anecdotal evidence. Here are some of the objections I hear from business owners with an appropriate response:

  1. “Retirement plans are too expensive to set-up and administer.” The 401(k) marketplace provides a wide range of choices, business models, and delivery methods. The business owner has a choice to have a plan is both cost-effective and easy to maintain.
  2. “I have to make a contribution every year.” Not exactly. A 401(k)/profit sharing by its very nature generally allows the business owner to make contributions determined each year on a discretionary basis.
  3. “I have to provide the same contribution to the employees as for me.” Not necessarily. There are allocation methods such as New Comparability which may permit a larger contribution for the owner than for the other employees.
  4. “The tax laws will limit my ability to maximize my 401(k) contribution if not enough employees participate.” Again, not necessarily. A 401(k) Safe Harbor Plan may permit the business owner to automatically meet the 401(k) test at a reasonable cost for the other employee.


Actually there are several takeaways. Here’s what the experts say are their #1 Retirement Planning Tip for Startup Founders on the Levinson Law Office Blog.

Late 401(k) deposits? “An ynche in a misse is as good as an ell.”


My apologies to William Camden for dragging him into ERISA. The proverbial saying in the headline, “An ynche in a misse is as good as an ell” appeared in his Remaines concerning Britaine published in 1637. It was an early forerunner of what we now know as “A miss is as good as a mile.”

What’s the ERISA connection?

Late 401(k) deposits are high priority enforcement matters with the Internal Revenue Service (“IRS”) which oversees the tax aspects and the Department of Labor (“DOL”) which oversees the fiduciary aspects of retirement plans.

There is no such thing as a “miss” with 401(k) contributions. A late 401(k) deposit is a late 401(k) deposit regardless of the amount. It’s considered a prohibited transaction. That is, an extension of credit between the plan and a “party-in-interest”, the employer as plan sponsor.

When are deposits considered late?

The DOL takes the same view of late 401(k) deposits (and loan repayments, if applicable) as the IRS does of late payroll tax deposits. Dim. “Timely” according to DOL regs requires that employee contributions be deposited in the 401(k) plan on the earliest date that they can reasonably be segregated from the employer’s general assets, but not later than the 15th business day of the month following withholding or receipt by employer. This has come to be known as the “15-day rule”.

But there is no such rule. The DOL has taken the view in its audits that the deadline under the timely standard almost always occurs prior to the 15th day of the month following withholding. The deadline in almost every case has turned out to no more than one to two weeks following withholding and, in many cases, to be no more than a few days following withholding depending on the employer’s individual facts and circumstances, i.e., the manner in which payroll taxes are withheld.

What voluntary correction programs are available?

The employer is responsible for contributing the participants’ deferrals to the plan trust. If the employer doesn’t make the deposits timely, the failure may constitute both 1) an operational mistake giving rise to plan disqualification (if the plan specifies a date by which the employer must deposit elective deferrals); and, and 2) as mentioned above, a prohibited transaction.

The operational mistake can be corrected under the IRS Employee Plans Compliance Resolution System (EPCRS). In addition, the initial tax on a prohibited transaction is generally 15% of the amount involved for each year. If the disqualified person doesn’t correct the transaction, there may be an additional tax of 100% of the amount involved. Form 5330 Excise Tax Return with payment of the tax must be filed with the IRS.

The prohibited transaction can be corrected using the DOL Voluntary Fiduciary Compliance Program (VFCP).  for late deposits. The employer must correct the violation by contributing the delinquent contributions and restoring “lost earning” to the affected participants. If the employer’s application is accepted, the employer will receive a “no-action” letter which in essence says that the DOL will not launch a civil investigation or attribute the otherwise applicable 20% penalty for covered transactions. This 20% penalty is not the same as the previously mentioned 15% excise tax levied against prohibited transactions.

As always, be sure to check with your legal counsel on the best way to handle the matter.

Cultural Note: The “ell” referenced above is a now obsolete unit of measurement in England that was usually 45 in (1.143 m), or a yard and a quarter mentioned in Camden’s Remaines concerning Britaine. The book may be out of print, but it’s still available either as a digital copy sponsored by the Boston Public Library, or a print copy available from Patrick McGahern Books, Inc. for US $560.16.

It’s a 401(k) fee state of mind for plan fiduciaries

state of mind2

Class action law suits and Department of Labor enforcement initiatives have created a 401(k) fee state of mind for fiduciaries.

How much, who pays for them, and how they are paid are issues about which service providers offer guidance. @GregIacurci in his article, How Should Retirement Plans Pay Their 401(k) Fees? in Investment News (registration may be required) discusses how advisors can help plan sponsors allocate retirement plan fees.

That is, fees paid for by the plan which by participants. But not all fees are considered equal. Here’s a brief overview of what types can be paid and what shouldn’t.

Settlor vs. Plan Expenses

Plan assets can be used for two purposes: to pay benefits and pay the “reasonable” expenses of plan administration.

The decision to pay fees from the plan is a fiduciary decision subject to ERISA’s fiduciary rules. That is, the plan must be established and maintained by the employer for the “exclusive benefit” of the employees and beneficiaries.

That means that the plan cannot pay for expenses that are considered to be the responsibility of the employer. These are called “settlor” expenses and may include:

  • Legal or consulting services in connection with the formation of the plan
  • Plan design studies and cost projections to determine the financial impact of a plan change
  • Legal and consulting expenses incurred in connection with the decision to terminate a plan

On the other hand, expenses that relate to the fiduciary’s administration of the plan can be paid out of plan assets. These are called operational expenses and may include:

  • Drafting required plan amendments to maintain the tax-qualified status of the plan, e.g., Pension Protection Act restatement
  • Discrimination testing
  • Implementing a plan termination

It’s more complicated than this, of course. The Department of Labor has published Guidance on Settlor vs. Plan Expenses that provides a set of six hypothetical fact patterns in which various plan expense issues are both presented and addressed.


As with all things ERISA, there has to be proper documentation. Best practices would be to specifically state in the plan document that the plan may pay reasonable operating expenses, reflect that in the Summary Plan Description or Material Modification thereof, and have a written Expense Policy.

As you know, ERISA compliance matters are based on individual facts and circumstance, and especially when paying expenses from plan assets. So use caution when doing so including discussing it with your legal advisor.

Image: State of Mind by Vesa Härkönen via Flickr


Happy Affordable Care Act New Year


Ir’s not exactly hats and horns for the 2016 Affordable Care Act (ACA) New Year, but there are a few reasons to celebrate regarding compliance matters.

Filing Extensions

The 2016 ACA reporting deadlines that apply to all subject employers (those with an average workforce of 50 or more full-time employees plus full-time equivalents, or “FTEs”) have recently been extended. The new due dates are:

  • For employee reporting (2015 IRS Forms 1095-B and 1095-C), the deadline is postponed from February 1, 2016 to March 31, 2016;
  • For IRS filings (2015 Forms 1094-B, 1094-C, 1095-B and 1095-C), the deadlines are postponed from February 29, 2016 to May 31, 2016 (paper filers) and from March 31, 2016 to June 30, 2016 (electronic filers).

In addition, Congress acted in mid-December to postpone from 2018 to 2020 the “Cadillac Tax” on high-cost employer health plans that is likely to impact one in four sponsoring employers. It also made this excise tax deductible for subject employers. The postponement comes with Congressional direction to study adjustments to the excise tax threshold that triggers the tax which could afford tax relief to some employers.

Helpful Housekeeping Details

There are also a few helpful housekeeping details buried in the ACA 2015 regulatory barrage:

First, the coverage affordability threshold of 9.5 percent of “household income” has been adjusted for the cost of living, so that percentage increases to 9.56 percent for 2015 and 9.66 percent for 2016.

Second, the annual penalty amounts ($2,000.00 and $3,000.00 per employee for employer “shared responsibility” payments) have been similarly adjusted to $2,080.00 and $3,120.00 for 2015, and $2,160.00 and $3,240.00 for 2016. The regulators have now established penalty amounts that (except for $2,080.00) are divisible by 12! This will, at long last, facilitate their computation on a monthly basis as required by the ACA.

Third, payments to employees on account of non-working time (such as vacation, paid holidays, sickness, lay off, jury duty, military duty and leaves of absence) normally count in measuring “hours of service” to determine full-time employee status and to compute the number of FTEs. Recent clarification provides that workers compensation and employer-funded disability payments to former employees can be excluded from hours of service for this purpose. Fewer hours of service means fewer FTEs, which could be good news for some employers.


  1. The extension of reporting deadlines is good news especially for Applicable Large Employers (ALEs) with fewer than 100 full-time employees plus FTEs. Remember to use 2014 employee information for this purpose, and for 2014 only, employers can select any period of six consecutive months to determine this average number of full-time employees and FTEs.
  2. But get started on compiling the necessary historical information because payroll services will not be able to provide all of the data required to complete IRS Forms 1094-C and 1095-C (1094-B and 1095-B for self-insured plans).

About the Author

Andrew S. Williams has practiced in the employee benefits and ERISA arena since ERISA was passed in 1974. He has been recognized by his peers through a survey conducted by Leading Lawyers Network as among the top 5 percent of Illinois lawyers in Small, Closely and Privately Held Business Law and Employee Benefit Law. He maintains a website, Benefits Law Group of Chicago, with additional updates, commentary and analysis on benefits and employment topics.

Disclaimer: The above material is intended for general information purposes and should not be relied on or construed as professional advice. Under the applicable Illinois Rules of Professional Conduct, the contents of this e-mail may be considered to be attorney advertising. The transmission of this information is not intended to create, and receipt of it does not create a lawyer-client relationship.