April 25, 2013

NAVIGATING THROUGH PARTY-IN-INTEREST TRANSACTIONS

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WEBCASTWELCOME TO TODAY’S

On behalf Morgan Lewis and WithumSmith+Brown, welcome and thanks for spending your lunch time with us.

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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.

Today’s Disclaimer

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DAVID DACEY, CPA Partner, Practice Leader, Employee Benefit &Pension Plans Group, WithumSmith+Brown, PCddacey@withum.com

AMY POCINO KELLYPartner, Employee Benefits and Executive Compensation Group, Morgan, Lewis & Bockius, LLP akelly@morganlewis.com

Meet Your Presenters

Recent Court Cases and DOL MattersRegarding Party-In-Interest Transactions

Tibble vs. Edison Tussey vs. ABB

Other Self-dealing cases

Conflicts of Interest cases

Prohibited transactions in

the news

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Today’s Discussion Topics

DEFINITIONS AND CONCEPTS

EXEMPT VS. NON-EXEMPT

PROHIBITED TRANSACTIONS

CORRECTION PROGRAMS

INTERNAL CONTROLS

Q&A

Definitions and Concepts

Who is a party-in-

interest (Pii)?

How does a party-in-

interest differ from a related party?

Why does the Department of

Labor place such an

emphasis on parties-in-interest?

How does the concept of a

party-in-interest

transaction affect the

plan?

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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?1

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Who Is a Party-in-Interest?7

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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.

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Parties-In-Interest vs. Related Parties

Broader concept under ERISA,

which includes related party transactions

Could influence the

Plan or its fiduciaries

Are subject to the prohibited transaction

rules

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

Parties-In-Interest

RelatedParties

• If a transaction is “prohibited”, it is prohibitedregardless of whether the transaction otherwisebenefits 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

Prohibited Transaction Opening Concepts

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ERISA

ERISA vs. Internal Revenue Code (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.

Prohibited transactions subject to a two-tier excise tax:

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

deficiency

IRC

Prohibited transaction rules affect parties-in-interest

Parties-in-interest is a broader range of individuals

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 civil penalties

• 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(a)

• 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

Categories of Prohibited Transactions

ERISA Section 406(b) Self-Dealing

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• Party-In-Interest transactions that meet an exemption are permitted for the Plano 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 Reportingo Footnote disclosure and supplemental schedule for audited financial

statements of a large plan

Exempt vs. Non-Exempt Transactions

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 non-compliance

• Discontinuance of service for unresolved non-compliance

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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.

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VFCP CHECKLISTThe 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

VFCP CHECKLIST10. Purchase of Assets by Plans from Parties in Interest

11. Sale of Assets by Plans to Parties in Interest

12. Sale and Leaseback of Property to Sponsoring Employers

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

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

15. Holding of an Illiquid Asset Previously Purchased by Plan

16. Benefit Payments Based on Improper Valuation of Plan Assets

17. Payment of Duplicate, Excessive, or Unnecessary Compensation

18. Improper Payment of Expenses by Plan

19. Payment of Dual Compensation to Plan Fiduciaries

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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.

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Plan Internal Control Considerations

Develop and document a

complete list of parties-in-

interest

Review organization documents

Annual report filings

(specifically Schedule C of Form 5500)

Review recent and historical

Plan transactions

Internal inquiries

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Plan Internal Control Considerations

Document monitoring over

party-in-interest

transactions

Review investment statements

Bank transactions

Proper identification

and accounting of ERISA spending accounts

Nature of services and benefits to

the Plan

Evaluate any potential

self-dealing issues

Other conflicts of

interest with parties-in-

interest

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

Internal Controls: Section 408(b)(2) Compliance

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Thank You for Your Time!

DAVID DACEY, CPA Partner, Practice Leader, Employee Benefit &Pension Plans Group,WithumSmith+Brown, PCddacey@withum.com

AMY POCINO KELLYPartner, Employee Benefits and Executive Compensation Group, Morgan, Lewis & Bockius, LLP akelly@morganlewis.com

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