David Ralston is a Dallas attorney specializing in Employee Benefit Plans. He sends out periodic email messages regarding retirement plans, and I wanted to share his most recent email message with you:
ERISA contains rules that prohibit certain transactions between a qualified retirement plan and a “party in interest.” They are referred to as “prohibited transactions.” A fiduciary for a retirement plan (i.e., trustee or plan administrator) shall not cause the plan to receive services from a party in interest or transfer plan assets to a party in interest. A party in interest includes a service provider to the plan. However, an exemption from the prohibited transaction rules exists if the contract or arrangement between the plan and the service provider is a reasonable arrangement, represents necessary services for the operation of the plan and the compensation under the contract or arrangement is reasonable.
The new regulations under 408(b)(2) now require that “Covered Service Providers” must disclose a specific set of information about their services and the fees for these services in order for the provider’s contract or arrangement to be “reasonable” and exempt from the prohibited transaction rules. What happens if a Covered Service Provider does not provide the required information? The contract or arrangement between the Covered Service Provider and the retirement plan is a prohibited transaction.
Under Department of Labor jurisdiction, a prohibited transaction can represent a breach of fiduciary duty for the fiduciaries connected with the retirement plan. Under the Internal Revenue Code, a prohibited transaction is subject to an excise tax equal to 15% of the amount involved in the transaction. Both the fiduciaries connected with the retirement plan and the Covered Service Provider can be liable for the excise tax.
The fiduciaries connected with the retirement plan have a way to avoid the excise tax. They can write the Covered Service Provider and request the applicable information. If the Covered Service Provider does not provide the disclosures within certain timeframes (90 days), the fiduciaries must notify the Department of Labor and terminate the contract if it relates to future services. The Covered Service Provider not only can be subject to an excise tax, but can lose the contract for services to the retirement plan!
The initial disclosure by Covered Service Providers must be to the responsible plan fiduciaries no later than July 1st.