navigating through party-in-interest transactions - Withum

navigating through party-in-interest transactions - Withum

April 25, 2013 NAVIGATING THROUGH PARTY-IN-INTEREST TRANSACTIONS WELCOME TO TODAY’S WEBCAST  On behalf Morgan Lewis and WithumSmith+Brown, welcom...

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April 25, 2013



WEBCAST  On behalf Morgan Lewis and WithumSmith+Brown, welcome and thanks for spending your lunch time with us.  Have a question or comment? Please use the Q&A box. If we don’t get to your question, we will reach out to you at the conclusion of the webcast.  Today is interactive. Your participation in the “I Am Present” pop-ups is required to be eligible for CPE credit.  You can download the handouts for today’s webcast by clicking on the Handout section on your toolbar.  We will begin shortly!

Today’s Disclaimer The information presented in this webinar represent our perspectives, is not necessarily all inclusive, does not constitute legal or any other advice, and should not be relied upon without first consulting with appropriate qualified professionals for your plan’s individual facts and circumstances.


Meet Your Presenters 

AMY POCINO KELLY Partner, Employee Benefits and Executive Compensation Group, Morgan, Lewis & Bockius, LLP [email protected]

 DAVID DACEY, CPA Partner, Practice Leader, Employee Benefit & Pension Plans Group, WithumSmith+Brown, PC [email protected]

Recent Court Cases and DOL Matters Regarding Party-In-Interest Transactions Tibble vs. Edison

Tussey vs. ABB

Other Selfdealing cases

Conflicts of Interest cases

Prohibited transactions in the news



Definitions and Concepts

Who is a party-ininterest (Pii)?

How does a party-ininterest differ from a related party?

Why does the Department of Labor place such an emphasis on parties-ininterest?

How does the concept of a party-ininterest transaction affect the plan?


Who Is a Party-in-Interest? 1

2 3 4 5 6

Any fiduciary (including, but not limited to, any administrator, officer, trustee, or custodian), counsel, or employee of such plan; A person providing services to the plan; An employer any of whose employees are covered by the plan; An employee organization any of whose members are covered by such plan; • A 50 percent or more direct or indirect owner • A spouse, ancestor, lineal descendant, or spouse of a lineal descendant of any individual described in item (1), item (2), item (3), or item (5) above;

Who Is a Party-in-Interest? 7

A corporation, partnership, or trust or estate of which (or in which) 50 percent or more of: a. The combined voting power of all classes of stock entitled to vote or the total value of shares of all classes of stock of such corporation; b. The capital interest or profits interest of such partnership; or c. The beneficial interests of such trust or estate; or d. Is owned directly or indirectly, or held by persons described in item (1), item (2), item (3), item (4), or item (5) above;


An employee, officer, director (or an individual having powers or responsibilities similar to those of directors or officers) or a 10 percent or more shareholder directly or indirectly, of a person described in item (2), item (3), item (4), item (5), or item (7) above, or of the employee benefit plan; or


A 10 percent or more (directly or indirectly in capital or profits) partner or joint venture of a person described in item (2), item (3), item (4), item (5), or item (7) above.


Parties-In-Interest vs. Related Parties Broader concept under ERISA, which includes related party transactions

Parties-In -Interest

Could influence the Plan or its fiduciaries

Related Parties

A concept under GAAP for financial reporting that includes any party that significantly influences the management and operating policies of the Plan

GAAP requires certain disclosures for these transactions

Are subject to the prohibited transaction rules

Prohibited Transaction Opening Concepts • If a transaction is “prohibited”, it is prohibited regardless of whether the transaction otherwise benefits the Plan • Non-ERISA plans are excluded from prohibited transaction rules • Prohibited transaction rules are included in both ERISA and the Internal Revenue Code (IRC) • Secretary of Labor has general authority to issue regulations, rulings, opinions and exceptions under IRC concerning prohibited transactions


ERISA vs. Internal Revenue Code (IRC) ERISA Prohibited transaction rules affect parties-in-interest Parties-in-interest is a broader range of individuals

IRC Prohibited transaction rules affect disqualified persons Less broad than ERISA (e.g. doesn’t include fiduciaries who didn’t participate in the transaction) For employees, only highly compensated employees >=10% or total wages paid by the employer can be considered a disqualified person.

Fiduciary liable for prohibited transactions where they were engaged as a prudent person, who should have known the transaction was prohibited

Prohibited transactions subject to a two-tier excise tax:

Prohibited transactions subject to civil penalties

• Tier 1 – 15%, even if inadvertent • Tier 2 – 100% if uncorrected within 90 days of notice of deficiency

Categories of Prohibited Transactions ERISA Section 406(a)

• Unless Exempted, fiduciaries can’t engage in any transaction for which they knew or should have known constitutes a direct or indirect transaction between the Plan and a party-in-interest: • Sales, exchange or lease of property • Loan or extension of credit • Furnishing goods, services or facilities • Transfer of any Plan assets • 10% limitation on employer securities or employer real property

ERISA Section 406(b) Self-Dealing

• Prohibits dealing with Plan assets in the fiduciaries own interest or account • Acting in any transaction, involving the Plan on behalf of a party, whose interest are adverse to the Plan or its participants or beneficiaries • Receiving any consideration for his or her personal account from a party dealing with the Plan


Exempt vs. Non-Exempt Transactions • Party-In-Interest transactions that meet an exemption are permitted for the Plan o Statutory exemption • 408(b)(2) – Reasonable services • 408(b)(17) – Leases, loans and transfers o Class exemption (applies to a specified transaction or industry) o Individual exemption (created for a specific party) o Above exemptions provide no relief from other fiduciary requirements of ERISA, such as Section 404. • Non-Exempt party-in-interest transactions are “prohibited transactions” o Schedule G, Form 5500 Reporting o Footnote disclosure and supplemental schedule for audited financial statements of a large plan

What Are the Principles of Section 408(b)(2) Exemption?

Service must be necessary for the Plan

There must be a reasonable written contract from the covered service provider in advance of the service

Must be reasonable compensation to the service provider

Proper response regarding non-compliant covered service providers: • Follow-up communications for resolution • DOL reporting for unresolved noncompliance • Discontinuance of service for unresolved noncompliance


VFCP • The Voluntary Fiduciary Correction Program or VFCP (PTE 2002-51) is designed to encourage employers to voluntarily comply with the ERISA by self-correcting certain violations of the law. • Anyone who may be liable for fiduciary violations under ERISA, including employee benefit plan sponsors, officials, and parties in interest, may voluntarily apply for relief from enforcement actions, provided they comply with the criteria and satisfy the procedures outlined in the VFCP.

VFCP CHECKLIST Persons using the VFCP must fully and accurately correct violations. Incomplete or unacceptable applications may be rejected. If rejected, applicants may be subject to enforcement action, including assessment of civil monetary penalties under Sections 502(l) and 502(i) of ERISA.


VFCP CHECKLIST The VFCP provides descriptions of 19 categories of transactions and their methods of correction. Corrective remedies are prescribed for the following fiduciary violations involving employee benefit plans: 1.

Delinquent Participant Contributions and Participant Loan Repayments to Pension Plans

2. Delinquent Participant Contributions to Insured Welfare Plans 3. Delinquent Participant Contributions to Welfare Plan Trusts 4. Fair Market Interest Rate Loans With Parties in Interest 5. Below Market Interest Rate Loans With Parties in Interest 6. Below Market Interest Rate Loans With Non-Parties in Interest 7. Below Market Interest Rate Loans Due to Delay in Perfecting Security Interest 8. Participant Loans Failing to Comply with Plan Provisions for Amount, Duration, or Level Amortization 9. Defaulted Participant Loans


Purchase of Assets by Plans from Parties in Interest


Sale of Assets by Plans to Parties in Interest


Sale and Leaseback of Property to Sponsoring Employers


Purchase of Assets from Non-Parties in Interest at More Than Fair Market Value


Sale of Assets to Non-Parties in Interest at Less Than Fair Market Value


Holding of an Illiquid Asset Previously Purchased by Plan


Benefit Payments Based on Improper Valuation of Plan Assets


Payment of Duplicate, Excessive, or Unnecessary Compensation


Improper Payment of Expenses by Plan


Payment of Dual Compensation to Plan Fiduciaries


Employee Plans Compliance Resolution System (EPCRS)

IRS program used to remedy mistakes and avoid consequences of plan disqualification

Correction needs to be reasonable and appropriate

Three components of EPCRS: • Self Correction Program (SCP) • Voluntary Correction Program (VCP) • Audit Closing Agreement Program (Audit CAP)

Use the correction principles of Rev. Proc. 2013-12

Plan Internal Control Considerations Review organization documents

Internal inquiries

Develop and document a complete list of parties-ininterest

Annual report filings (specifically Schedule C of Form 5500)

Review recent and historical Plan transactions


Plan Internal Control Considerations Review investment statements Other conflicts of interest with parties-ininterest

Evaluate any potential self-dealing issues

Bank transactions

Document monitoring over party-ininterest transactions

Nature of services and benefits to the Plan

Proper identification and accounting of ERISA spending accounts

Internal Controls: Section 408(b)(2) Compliance • Obtaining advanced written disclosure from covered service provider(s), prior to service being commenced. • Initial and annual written disclosure from covered service provider(s) • Monetary reasonableness and basis for conclusions • Changes in services offerings (within 60 days of the change) • Dealing with covered service provider non-compliance • Proper reporting of any non-compliance o o o

Schedule C of Form 5500 Financial reporting requirement(s) Other DOL communication requirements


Thank You for Your Time! 

AMY POCINO KELLY Partner, Employee Benefits and Executive Compensation Group, Morgan, Lewis & Bockius, LLP [email protected]

 DAVID DACEY, CPA Partner, Practice Leader, Employee Benefit & Pension Plans Group,WithumSmith+Brown, PC [email protected]

IRS Circular 230 Disclosure To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein. For information about why we are required to include this legend, please see