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Avoiding the Temptation to Bend Plan Rules

Some candid insights to avoid an ERISA breach

from SPBA Active Past President Fred Hunt

This is not in any way legal advice.

We've had calls from TPAs whose client employers or trustees want to bend how plan rules are applied to some employees versus others (usually showing favoritism). I think the issue is arising because many employers want to keep especially-valuable employees happy, yet the pressure of rising health costs and economic pressures pushes the employer to control costs overall. Our members often ask if I have some handy sheet that outlines what is allowed and not allowed. The problem, here, is that TWO PROBLEM AREAS ARE TRIGGERED:  First is IRS, and it takes a little mental adjustment to comprehend. While employers and plans think of the money in the plan as being "theirs"...Uncle Sam, thinks he can exercise great control over the use of the money, because he thinks of the plan assets as only existing because of the generosity of government tax policy. Thus, IRS calls & thinks of it as "revenue loss", meaning money they did not collect.  (See, I told you this would take some mental adjustment.) The reason Uncle Sam feels he has control authority is because the money being contributed by the employer is a tax deduction, and the benefits received by plan participants are tax free. So, viewing this from the government mindset...they feel they are a major investor, and they thus feel they can demand that it be used very carefully and fairly. So, if an employer starts playing Santa Claus in giving some people greater value than others (or paying some claims ahead of others if money is short) from this government generosity, Uncle Sam gets mad. It usually triggers what the IRS calls "discrimination", especially if it involves people among the top 25% highly paid employees, (which is usually the case). If IRS feels you've been using the plan inequitably, they simply declare that ALL of the tax deductions taken for payments by the employer(s) into the plan ALL year are null and void. That's expensive!! So, if anyone has ideas about doing something unusual, pretend you are trying to convince a tough IRS agent.....and see how you feel after that imaginary conversation.

Second, ERISA has a very strict fiduciary duty to be sure that plan assets are only used for authorized persons for authorized purposes. The actual wording of the plan document dictates who and what is allowed, and that should be consistent with what employees are told in their Plan and/or Summary Plan Description (SPD). Here again, Uncle Sam (the U.S. Department of Labor, in the case of ERISA) is very protective of the plan assets. If any money was used that did not meet the precise specifications of the plan or would not be judged by a "prudent" outsider to have been the wisest use of the money, consistent with the wording in the plan, then that is prosecuted as fraud. Furthermore, ERISA allows DOL to prosecute for civil penalties and/or criminal (jail time). This does not mean that you can't change or interpret the meaning of your plan, but it must apply equally and not seem rigged. So, while bending the rules may seem like smart personnel strategy to reward certain people...or it may be based on kindness to help someone...you have to think of Uncle Sam constantly looking over your shoulder to be sure that the money is only used for prescribed situations and people within the limitations and rules of the plan language and consistent with the Summary Plan Description you gave the employee.