The Rosenbaum Law Firm P.C. Blog

When it comes to defined contribution plans such as 401(k) plans, an employer’s deductions for their contribution to their plan is limited to 25% of the participant’s compensation.

Internal Revenue Code Section 404(a)(3)(A)(i) limits employer tax deductions for profit sharing plans such as 401(k) plans to “25 percent of the compensation otherwise paid or accrued during the taxable year to the beneficiaries under the stock bonus or profit-sharing plan”.

A recent private letter ruling puts a spin on that limit. Suppose you have a 401(k) plans where a participant defers, but is not eligible for matching and profits sharing contributions, do you include that participant’s compensation for that 25% limit on deductions for employer contributions?

Private Letter Ruling 201229012 says no.  In Private Letter Ruling 201229012, the IRS ruled that a plan does not include the compensation of a participant who is only eligible for the elective deferral portion of the plan. The reason is because of a change in Section 404(a)(4) caused by EGTRRA in 2002, which disregarded salary deferrals when applying the 25% limit. (in the old days, 401(k) plans only had a 15% deductibility limit and salary deferrals counted towards that limit).

The Private Letter Ruling has only precedential value, except to the taxpayer who received it. It just goes to the IRS’ thinking. Is that thinking inconsistent with the Code? Well until further guidance, that’s up for debate.

It’s unfortunate, but the facts are that most people don’t respond to a complaint until there is a letter from an attorney. Service providers and companies hate correspondence from attorneys because that suggests litigation.

That is why it’s paramount that when a plan sponsor gets correspondence from the Internal Revenue Service or the Department of Labor, that they contact an ERISA attorney. It may be the difference between getting something closed out quickly and something that may result in plan disqualification. Too often, damage happens because a plan sponsor and their plan providers are too slow to seek out the experience and the advice of an ERISA attorney who are trained in working with government auditors as well as proficient in answering auditor requests.

So if you are a plan sponsor or know of one being contacted by the government over their retirement plan, seeking ERISA counsel is one of the first calls you should make.

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My latest JDSupra.com article can be found here.

Whenever I hear about someone getting caught with lying about their resume or credentials, I am always astounded. I don’t know why people lie about college degrees they didn’t receive or credentials they didn’t achieve, but I guess the fact is that most people get away with it because people are trusting people and rarely check these credentials.

It happened to me, I used a contractor for a few jobs and assumed that they were members of a remodeling association because they claimed that they did. Of course after a dispute, I find out that they weren’t members of this organization.

I’m a member of the New York, Massachusetts, and California bars. You can look it up.  You can look up the credentials of any financial advisor you’re hiring and see whether they have any issues with their license. A third party administrator (TPA) is much harder to check because anyone can open a TPA shop, so find out information about the folks who run it.  Perhaps the principals are attorneys, enrolled actuaries, or have credentials through ASPPA (American Society of Pension Professionals & Actuaries).

As a plan sponsor, you need to check that the people you are hire are the people they claimed to be. It’s your fiduciary responsibility to do so because the last thing you need is hiring an independent fiduciary who embezzles your funds or a TPA who doesn’t do the work that they were contracted to do.

My latest JDSupra.com article can be found here.

I am a child of the 1980’s and I had my Bar Mitzvah in 1985. When it came time to planning the event, we did what post families did in those days and were going to hire a videographer.

The problem was that in those days, anyone who could afford one of those large VHS camcorders thought that’s all they needed to be a videographer. The problem is that when we started looking at the work of some of these videographers, their videos looked like they were shot in my bedroom, late at night. There was poor editing, poor lighting, most of these videos looked like they weren’t good enough to be on cable access.

My parents remembered that their old friend, Simon, did some dabbling in video. It turns out that he was a videographer. Unlike his counterparts, his work was professional and well lit. He had the expertise to deliver a high quality production. While watching the VHS tape these days, we may laugh at some of his special effects, but they were cutting edge at the time.

Recently, researchers from the business schools at the University of Indiana and the University of Texas at Austin recently looked at some data to try to figure out why many poor 401(k) investment choices linger on fund lineups. The researchers identified one fairly clear explanation: a sub-par fund is much more likely to stay on the menu if it’s managed by the mutual-fund company that’s helping administering the plan.

While it’s very easy to point to the Fidelitys and American Funds of the world to blame, the fact is that regardless of whether you are dealing with a bundled or unbundled product, poor investment options are dependent on the work or lack thereof of the financial advisors and/or the plan fiduciaries.

My old law firm was using an open architecture platform where they hand a fund lineup that hadn’t changed for 10 years. The culprit? The fact that they never bothered to hire a financial advisor until I told them it was a good idea.

There are too many plan sponsor who don’t have a financial advisor and there are too many financial advisors who don’t do enough of a credible job to merit the fee they are getting.

Perhaps plans on mutual fund company platforms are more likely to have stinky fund lineups, but it’s still dependent on a plan sponsor and/or financial advisor sleeping at the end.

My latest JDSupra.com article can be found here.

As an ERISA attorney, I hear it all the time. Whether it’s from plan sponsors, their non-ERISA attorneys, or even from some other ERISA attorneys, is that the fear of any trouble with a breach of fiduciary responsibility is completely overblown. I disagree because the fear is not where you think it is.

The reason I hear that any fear from a fiduciary breach is negligible because the plan we’re talking about is a small to medium sized plan.  These “experts” claim that any potential fiduciary breach is negligible because it’s very unlikely any aggrieved current or former plan participant will sue them.

Well, pal, we have more to fear than any participant lawsuit. The Department of Labor (DOL) is very serious about enforcing ERISA and the regulations they promulgated. A small to medium sized plan that isn’t operating appropriately will be at the mercy of any DOL agent.

How will these DOL audits come about? They could be random, but more likely, as a result of a complaint by a current or former participant.  If you’re a small plan sponsor, do you want to be at the mercy of someone you might have laid off or a problem employee? There is an old saying that “for the want of a nail, a kingdom was lost.” When it comes to a retirement plan, for the want of an aggrieved participant, a lot of liability was created.