Don t Be That Guy Avoid Party Fouls (Understanding Parties-in-Interest

Transcription

1 Don t Be That Guy Avoid Party Fouls (Understanding Parties-in-Interest J.K. Nowiejski, J.D., QKA, ERISA Counsel Nova 401(k) Associates J.K. Nowiejski, J.D., QKA, ERISA Counsel Nova 401(k) Associates J.K. Nowiejski is an attorney specializing in ERISA, and a former Senior Investigator with the Department of Labor. J.K. has extensive experience as legal counsel and as a consultant for retirement plan service providers, including third-party administrators and trust companies. J.K. received his J.D. from Indiana University Maurer School of Law in 2005, and he is licensed in Texas and Arizona. Prior to attending law school, J.K. was a consultant with KPMG and Hewitt Associates, where his focus was on large-scale benefit administration for Fortune 500 clients. He currently works with Nova 401(k) Associates in their Scottsdale office. 1

2 UNDERSTANDING PARTIES-IN- INTEREST What is a Party-In-Interest? What are the Differences between Parties-In- Interests and other people related to plans Why it is important to understand Parties-In-Interest? How to identify Parties-In-Interest? PRE-PARTY ERISA 406(A) & (C) 406(a) TRANSACTIONS BETWEEN PLAN AND PARTY IN INTEREST Except as provided in section 408 of this title: A fiduciary with respect to a plan shall not cause the plan to engage in a transaction, if he knows or should know that such transaction constitutes a direct or indirect (A)sale or exchange, or leasing, of any property between the plan and a party in interest; (B)lending of money or other extension of credit between the plan and a party in interest; (C)furnishing of goods, services, or facilities between the plan and a party in interest; (D)transfer to, or use by or for the benefit of a party in interest, of any assets of the plan; or acquisition, on behalf of the plan, of any employer security or employer real property in violation of section 407(a) of this title. (2)No fiduciary who has authority or discretion to control or manage the assets of a plan shall permit the plan to hold any employer security or employer real property if he knows or should know that holding such security or real property violates section 407(a) of this title. 2

3 PRE-PARTY ERISA 406(A) & (C) 406(c)TRANSFER OF REAL OR PERSONAL PROPERTY TO PLAN BY PARTY IN INTEREST A transfer of real or personal property by a party in interest to a plan shall be treated as a sale or exchange if the property is subject to a mortgage or similar lien which the plan assumes or if it is subject to a mortgage or similar lien which a party-in-interest placed on the property within the 10- year period ending on the date of the transfer. CONSEQUENCES OF A PROHIBITED TRANSACTION (PT) INVOLVING A PARTY-IN-INTEREST Breach of Duty Non- parties involved in the PT may be liable for damages Party-in-Interest involved in a PT for welfare plan and non-qualified pension plans are subject to a 5% civil penalty under 502(i), rising to 100% if uncorrected Interested Persons participating in a PT are subject to a 15% penalty under IRC 4975, rising to 100% if uncorrected 3

4 LET S GET THE PARTY STARTED! AN INVITATION TO PROHIBITED TRANSACTIONS (... AND EXEMPTIONS) ERISA Rules for Fiduciaries Affirmative Duties: Exclusive Benefit Rule Prudence Rule Diversification of Plan Investments Acting in Accordance with Plan Documents Fiduciaries must not allow a plan to enter into a prohibited transaction (PT), including transactions with Parties-In-Interest ERISA 406(a)(1) IT TAKES TWO TO TANGO: FIDUCIARIES AND PARTIES-IN-INTEREST Fiduciaries: 24/7 Fiduciaries (de facto fiduciaries): Named, ERISA 402(a)(1) Plan Administrator, ERISA 3(16) Trustee, ERISA 403(a) Investment Manager, ERISA 402(c)(3) & 3(38) Functional Fiduciaries (de jure fiduciaries) 4

5 WHERE ARE ALL MY PARTY PEOPLE AT: Located in ERISA 3(9),, 3(15) ERISA 3(9) defines Person : Individual Partnership or joint venture Corporation Mutual company or joint stock company Trust or estate Unincorporated organization Association organization ERISA sets forth a laundry list of Persons, people, entities that are PII (Warning: Buzzkill coming up!) ERISA 3(15) relative means a spouse, ancestor, lineal descendant, or spouse of a lineal descendant. PARTIES-IN-INTEREST: ERISA The term party in interest means, as to an employee benefit plan (A) any fiduciary (including, but not limited to, any administrator, officer, trustee, or custodian), counsel, or employee of such employee benefit plan; (B) a person providing services to such plan; (C) an employer any of whose employees are covered by such plan; (D) an employee organization any of whose members are covered by such plan; an owner, direct or indirect, of 50 percent or more of (i) the combined voting power of all classes of stock entitled to vote or the total value of shares of all classes of stock of a corporation. (ii) the capital interest or the profits interest of a partnership, or (iii) the beneficial interest of a trust or unincorporated enterprise, which is an employer or an employee organization described in subparagraph (C) or (D); a relative (as defined in paragraph (15)) of any individual described in subparagraph (A), (B), (C), or ; a corporation, partnership, or trust or estate of which (or in which) 50 percent or more of (i) 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, (ii) the capital interest or profits interest of such partnership, or (iii) the beneficial interest of such trust or estate, is owned directly or indirectly, or held by persons described in subparagraph (A), (B), (C), (D), or ; an employee, officer, director (or an individual having powers or responsibilities similar to those of officers or directors), or a 10 percent or more shareholder directly or indirectly, of a person described in subparagraph (B), (C), (D),, or, 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 subparagraph (B), (C), (D),, or. 5

6 FIRST DEGREE PARTIES-IN-INTEREST JUST A SMALL GATHERING OF FRIENDS The term party in interest means, as to an employee benefit plan (A) any fiduciary (including but not limited to, any administrator, officer, trustee, or custodian), counsel, or employee of such employee benefit plan; (B) a person providing services to such plan; (C) an employer any of whose employees are covered by such plan; (D) an organization any of whose members are covered by such plan; Party-In-Interest Roadmap PLAN (ERISA 3(3)) (A) (B) (C) (D) (A) any fiduciary (including, but not limited to, any administrator, officer, trustee, or custodian), counsel, or employee of such employee benefit plan; (B) a person providing services to such plan; (C) an employer any of whose employees are covered by such plan; (D) an organization any of whose members are covered by such plan; 6

7 EXAMPLE Identify Parties-in-Interest ABC Construction sponsors the ABC Holdings Pool P/S Plan ABC Construction Pooled P/S Plan was established for union employees receiving prevailing wages (members of Pavers International Union, Local #234) Allen B. Carney is the Plan Trustee Brian C. Douglass is the plan auditor The Plan owns a multi-story building located in Las Vegas. ABC Construction s headquarters is located on the first floor of the building. Brian C. Douglass leases office space of the second floor, next to Hoover Dam Tours Unlimited. Floors 3 and higher are residential apartments. Allen Carney lives on the top floor. Local #234 provides maintenance services for the parking garage. EXAMPLE ABC Construction Pooled P/S Plan (A) (B) (C) (D) Allen B. Carney Trustee () Brian C. Douglass ABC Construction Local #234 ABC Construction sponsors the ABC Holdings Pool P/S Plan ABC Construction Pooled P/S Plan was established for its union employees receiving prevailing wages (members of Pavers International Union, Local #234) Allen B. Carney is the Plan Trustee Brian C. Douglass is the plan auditor 7

8 SECOND DEGREE PARTIES-IN-INTEREST IT S A BLOCK PARTY! The term party in interest means, as to an employee benefit plan an owner, direct or indirect, of 50 percent or more of (i) the combined voting power of all classes of stock entitled to vote or the total value of shares of all classes of stock of a corporation. (ii) the capital interest or the profits interest of a partnership, or (iii) the beneficial interest of a trust or unincorporated enterprise, which is an employer or an employee organization described in subparagraph (C) or (D); Party-In-Interest Roadmap PLAN (ERISA 3(3)) 1 st (A) (B) (C) (D) 2nd an owner, direct or indirect, of 50 percent or more of (i) the combined voting power... (ii) the capital interest or partnership profits or (iii) the beneficial interest of a trust or unincorporated enterprise, which is an employer or an employee organization described in subparagraph (C) or (D); 8

9 SECOND DEGREE PARTIES-IN-INTEREST The term party in interest means, as to an employee benefit plan a relative (as defined in paragraph (15)) of any individual described in subparagraph (A), (B), (C), or ; a corporation, partnership, or trust or estate of which (or in which) 50 percent or more of (i) 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, (ii) the capital interest or profits interest of such partnership, or (iii) the beneficial interest of such trust or estate, is owned directly or indirectly, or held by persons described in subparagraph (A), (B), (C), (D), or ; Party-In-Interest Roadmap PLAN (ERISA 3(3)) 1 st (A) (B) (C) (D) 2nd a relative... of any individual described in subparagraph (A), (B), (C), or ; a corporation, partnership, or trust or estate of which (or in which) 50 percent or more of (i) the combined voting power, (ii) the capital interest or partnership profits, or (iii) the beneficial interest of such trust or estate, is owned directly or indirectly, or held by persons described in subparagraph (A), (B), (C), (D), or 9

10 SECOND DEGREE PARTIES-IN-INTEREST The term party in interest means, as to an employee benefit plan an employee, officer, director (or an individual having powers or responsibilities similar to those of officers or directors), or a 10 percent or more shareholder directly or indirectly, of a person described in subparagraph (B), (C), (D),, or, 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 subparagraph (B), (C), (D),, or. Party-In-Interest Roadmap PLAN (ERISA 3(3)) 1 st (A) (B) (C) (D) 2nd an employee, officer, director (or an individual having powers or responsibilities similar to those of officers or directors), or a 10 percent or more shareholder directly or indirectly, of a person described in subparagraph (B), (C), (D),, or, or of the employee benefit plan; or a 10 percent or more (directly or indirectly in capital or profits) partner or joint venturer of a person described in subparagraph (B), (C), (D),, or. 10

11 EXAMPLE Identify Parties-in-Interest ABC Construction sponsors the ABC Holdings Pool P/S Plan ABC Construction Pooled P/S Plan was established for union employees receiving prevailing wages (members of Pavers International Union, Local #234) Allen B. Carney is the Plan Trustee Brian C. Douglass is the plan auditor Charlie D. Eggbert, private equity investor, buys 60% percent of outstanding ABC stock. Charlie needs to sell shares of one of his other investment. The Plan has $2.3 million in cash, and Charlie wants the Plan to purchases those shares. Douglas also dabbles in securities and owns BCD Investments, Inc. He hired Allen s daughter, Ashley Carney, and she is the brains behind that operation. Ashley will be the broker for the transaction. Allen Carney approves the purchase. EXAMPLE ABC Construction Pooled P/S Plan (A) Allen B. Carney Trustee () (B) Brian C. Douglass (C) ABC Construction Ashley Carney BCD Investments, Inc Charlie D. Eggbert Ashley is a lineal descendant see 3(15) for Relative Brian owns 100% of BCD Charlie owns more the 50% of ABC Construction 11

12 THIRD DEGREE PARTIES-IN-INTEREST MARDI GRAS The term party in interest means, as to an employee benefit plan through do not only reference 1 st Parties References are made to Second Parties-in-Interest THIRD DEGREE PARTIES-IN-INTEREST The term party in interest means, as to an employee benefit plan a relative of any individual described in subparagraph (A), (B), (C), or ; a corporation, partnership, or trust or estate of which (or in which) 50 percent or more of (i) the corporate voting power/shares, (ii) the partnership capital interest or profits interest, or (iii) the beneficial interest of such trust or estate, is owned directly or indirectly, or held by persons described in subparagraph (A), (B), (C), (D), or ; an employee, officer, director, or a 10 percent or more shareholder directly or indirectly, of a person described in subparagraph (B), (C), (D),, or, 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 subparagraph (B), (C), (D),, or. 12

13 Party-In-Interest Roadmap PLAN (ERISA 3(3)) 1 st (A) (B) (C) (D) 2nd 3 rd FOURTH DEGREE PARTIES-IN-INTEREST BUT WAIT... THERE S MORE! The term party in interest means, as to an employee benefit plan an employee, officer, director, or a 10 percent or more shareholder directly or indirectly, of a person described in subparagraph (B), (C), (D),, or, or of the employee benefit plan; or a 10 percent or more (directly or indirectly in capital or profits) partner or joint venturer of a person described in subparagraph (B), (C), (D),, or. 13

14 Party-In-Interest Roadmap PLAN (ERISA 3(3)) 1 st (A) (B) (C) (D) 2nd 3 rd 4 th EXAMPLE Identify Parties-in-Interest ABC Construction sponsors the ABC Holdings Pool P/S Plan Allen B. Carney owns 100% of ABC Construction, which sponsors the Plan Allen is the Trustee of the Plan Allen also owns 75% of XYZ Rentals, GP Allen s friend, Zoe, borrows money from the Plan so that she can purchase real estate for $500,000. Zoe is credit worthy, executes a valid promissory note with a reasonable rate of interest that is.5% higher than what local banks are currently charging, and uses the real estate and a 5-year $250,000 Certificate of Deposit as collateral. Is Zoe a Party-In-Interest? 14

15 ABC Holdings Pool P/S Plan Party-In-Interest Roadmap PLAN (ERISA 3(3)) ABC Construction 1 st (A) (B) (C) (D) 2nd 3 rd XYZ Rentals Allen 4 th Zoe Is Zoe a Party-In-Interest? What if Zoe owns the other 25% of XYZ Rental? DEFINITON OF PARTY-IN-INTEREST ERISA (3)(14) (29 USC 1002(14)) (14) The term "party in interest" means, as to an employee benefit plan -- (A) any fiduciary (including, but not limited to, any administrator, officer, trustee, or custodian), counsel, or employee of such employee benefit plan; (B) a person providing services to such plan; (C) an employer any of whose employees are covered by such plan; (D) an employee organization any of whose members are covered by such plan; a relative (as defined in paragraph (15)) of any individual described in subparagraph (A), (B), (C), or ; a corporation, partnership, or trust or estate of which (or in which) 50 percent or more of -- (i) 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, (ii) the capital interest or profits interest of such partnership, or (iii) the beneficial interest of such trust or estate, is owned directly or indirectly, or held by persons described in subparagraph (A), (B), (C), (D), or ; an employee, officer, director (or an individual having powers or responsibilities similar to those of officers or directors), or a 10 percent or more shareholder directly or indirectly, of a person described in subparagraph (B), (C), (D),, or, or of the employee benefit plan; or a 10 percent or more (directly or indirectly in capital or profits) partner or joint venturer of a person described in subparagraph (B), (C), (D),, or. an owner, direct or indirect, of 50 percent or more of -- (i) the combined voting power of all classes of stock entitled to vote or the total value of shares of all classes of stock of a corporation, (ii) the capital interest or the profits interest of a partnership, or (iii) the beneficial interest of a trust or unincorporated enterprise, which is an employer or an employee organization described in subparagraph (C) or (D); 15

16 Party-In-Interest Roadmap PLAN (ERISA 3(3)) 1 st (A) (B) (C) (D) 2nd 3 rd 4 th Don t be That Guy Avoid Party fouls UNDERSTANDING PARTIES-IN-INTEREST Questions or Comments? J.K. Nowiejski, Esq jkn@nova401k.com