ERISA — Fiduciary Responsibility and Prohibited Transactions (Portfolio 365)

Part of Tax

Tax Management Portfolio No. 365-3rd, ERISA — Fiduciary Responsibility and Prohibited Transactions, reviews the principal issues arising under Part 4 of Subtitle B of Title I of the Employee Retirement Income Security Act of 1974. The Portfolio examines the issue of which activities related to a plan generate the status of “fiduciary” under ERISA. It discusses fiduciary responsibility under ERISA — the duties to act prudently, with loyalty, consistently with governing plan documents and with a view to minimizing the risk of large losses by diversifying plan assets. The Portfolio analyzes the prohibited transaction rules, discussing statutory, class, and administrative exemptions from ERISA's ban against dealings between plans and “parties in interest.” It also describes the remedies available under ERISA and considers procedural issues arising in litigation under ERISA.

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Description

Tax Management Portfolio No. 365-3rd, ERISA — Fiduciary Responsibility and Prohibited Transactions, reviews the principal issues arising under Part 4 of Subtitle B of Title I of the Employee Retirement Income Security Act of 1974. The Portfolio examines the issue of which activities related to a plan generate the status of “fiduciary” under ERISA. It discusses fiduciary responsibility under ERISA — the duties to act prudently, with loyalty, consistently with governing plan documents and with a view to minimizing the risk of large losses by diversifying plan assets. The Portfolio analyzes the prohibited transaction rules, discussing statutory, class, and administrative exemptions from ERISA's ban against dealings between plans and “parties in interest.” It also describes the remedies available under ERISA and considers procedural issues arising in litigation under ERISA.

Authors

Edward B. Horahan III, Esq.

Ed Horahan currently acts as of counsel to the Groom Law Group, Chartered, in Washington, D.C. A 1976 graduate of Yale Law School, he formerly served on the staff of the Securities and Exchange Commission and litigated ERISA cases while with the Solicitor's Office of the Department of Labor. In the private sector, he was a partner in the Washington offices of New York City law firms and the proprietor of his own law practice.

Benjamin A. Rosemergy

Benjamin A. Rosemergy, Member of the Employee Benefits and Executive Compensation Group, Sidley Austin LLP; B.A., University of Missouri (2001, magna cum laude); J.D., University of Missouri School of Law (2004, Order of the Coif, cum laude).

Beth J. Dickstein, Esq.

Beth J. Dickstein, Co-Head of the Employee Benefits and Executive Compensation Group, Sidley Austin LLP; B.S., University of Illinois (1985, with highest honors); J.D., University of Pennsylvania Law School (1988, cum laude); Certified Public Accountant; member and former Chair of the Employee Benefits and Executive Compensation Committee of the ABA Business Law Section.

Table of Contents

I. Introduction
II. Coverage by ERISA Title I
III. Fiduciary Status Under ERISA
Introductory Material
A. Discretionary Authority or Control Over Management of Plan or Plan Assets
B. Rendering Investment Advice for a Fee
1. DOL Regulations and Developed Law
2. General Rule Under Vacated Regulations: Best Interest Standard
a. Temporarily Applicable Vacated Regulations
b. 2016 Vacated Regulations
(1)  Recommendations that Constitute Investment Advice —
(2) Key Definitions
(a) What was a Recommendation?
(b) What was Not a Recommendation?
(i)  Platform Providers
(ii) Selection and Monitoring Assistance Provided in Connection with Provision of Platforms
(iii) General Communications
(iv) Education
(c) Fees or Other Compensation, Direct or Indirect
(d) Plan or IRA
(3) Exemptions under the Vacated Regulations
(a) Transactions with Independent Fiduciaries with Financial Expertise
(b) Swap and Security-Based Swap Transactions
(c) Employees of Plan Sponsors, Plans or Fiduciaries
(d) Assets of the Plan and Securities Transactions
3.  Class Prohibited Transaction Exemptions and Related Amendments Released with 2016 Regulations
a.  Best Interest Contract (BIC) Exemption (Class PTE 2016-01).
b.  Principal Transactions Exemption
c.  Other Class Exemptions
(1)  Class PTE 86-128
(2)  Class PTE 75-1, Part V, As Amended
(3) Class PTE 84-24
(4)  Class PTE 75-1, Parts III & IV, Class PTE 77-4, Class PTE 80-83 & Class PTE 83-1
d.  Proposed Best Interest Contract Exemption for Insurance Intermediaries
4.  Status of the Fiduciary Conflict of Interest Rule
a. Challenges in Court
b. Agency Action
(1) IRS and DOL
(2) SEC
C. Discretionary Authority or Responsibility in Plan Administration
D. Scope of Fiduciary Activity
E. Bankruptcy Trustee
F. Independent Fiduciaries
IV. Plan Assets Under ERISA
Introductory Material
A. Insurance Company Guaranteed Benefit Policies
B. Effect of Plan Assets
C. Plan Assets
1. Regulatory Rule
2. Exceptions to the Plan Asset Rules
a. Publicly Offered Security and Investment Companies
b. Operating Companies
c. Venture Capital Operating Companies
d. Real Estate Operating Companies
e. Significant Equity Participation by Benefit Plan Investors — Look-Through Rule
f. Governmental Mortgage Pools
g. Transitional Rules
3. Participant Contributions and Loan Repayments
a. Small Plan Safe Harbor
b. Retirement Plans
c. Welfare Plans
4. Demutualization Proceeds
5. Allocation of Plan Expenses Among Plan Participants
6. Revenue Sharing
7. Float Income Used to Pay Fees on Float Accounts
V. Elements of Plan Structure
A. Written Plan Document
B. Named Fiduciary
C. Plan Procedures
1. Funding
2. Plan Administration
3. Plan Amendments
4. Payments to and from the Plan
D. Establishment of a Trust
VI. Fiduciary Duties
Introductory Material
A. Prudence
1. Investment Duties
a. Economically Targeted Investments (ETIs)
b. Investment Policies and Proxy Voting
2. Selection and Monitoring of Service Providers
3. Participant-Directed Individual Account Plans
4. Purchase of Annuities for Terminating Plans
5. Settlement Proceeds
6. Plan Data Supplied by Nonfiduciary
B. Diversification
1. Diversification of Investments Made by Plans
2. Diversification for Individual Account Plans
C. Loyalty
D. In Accordance with Plan Documents
E. Co-Fiduciary Liability
F. Disclosure
G. Fee Reasonableness and Disclosure
1. Cases Involving Excessive Fees and Revenue Sharing
2. Fiduciary Disclosure Requirements
3. Service Provider Disclosure Requirements
a. Covered Service Providers
b. Manner and Timing of Disclosure
c. Required Disclosures
d. Special Rules for Recordkeeping Services
4. DOL Enforcement Program
VII. Limitations on Fiduciary Responsibility
A. Allocation or Delegation of Fiduciary Responsibilities
B. Participant-Directed Individual Account Plans
1. Regulations Implementing ERISA §404(c)
a. Indicia and Scope of Participant Control
b. Mandatory Distributions and Involuntary Rollovers
c. Default Investment Arrangements
d. Qualified Change in Investment Options
2. Participant Investment Education
a. Participant Investment Education Under the Vacated Fiduciary Conflict of Interest Rule
b. Participant Investment Education Guidance
3. ERISA §404(c) as Defense to Claim of Fiduciary Breach
VIII. Prohibited Transactions
A. Parties in Interest and Disqualified Persons
B. Party in Interest Transactions
1. Sales, Exchanges or Leases
2. Loans or Credit
3. Furnishing Goods, Services or Facilities
4. Transfers of Plan Assets
5. Employer Securities or Real Property
C. Fiduciary Prohibited Transactions
D. Excise Taxes
E. Employer Securities and Employer Real Property
F. Statutory Exemptions
1. Loans to Participants: §4975(d)(1) and ERISA §408(b)(1)
2. Office Space and Necessary Services Provided by a Party in Interest: §4975(d)(2) and ERISA §408(b)(2)
3. Leveraged Employee Stock Ownership Plans (ESOPs): §4975(d)(3) and ERISA §408(b)(3)
4. Transactions with Banks and Similar Financial Institutions: §4975(d)(4), §4975(d)(6) and §4975(d)(8), ERISA §408(b)(4), ERISA §408(b)(6) and ERISA §408(b)(8)
a. Bank Deposits
b. Ancillary Services
c. Common Trust Fund
5. Insurance Companies
6. Conversion of Securities
7. Fiduciary Benefits and Compensation
8. Transactions with Owner-Employees
9. Sales of Bank Stock Held by IRA in Connection with S Corporation Election
10. Investment Advice Tailored to Participants and Beneficiaries
a. Overview of Exemption
b. Fee Leveling Arrangements
c. Computer Modeling Arrangements
d. Disclosure to Participants
e. Disclosure to Authorizing Fiduciary
11. Transactions with Service Providers for Adequate Consideration
12. Correction of Transactions Involving Securities
13. Block Trades
14. Transactions Made Through an Electronic Communications Network
15. Foreign Exchange Transactions
16. Cross Trading
17. Plan Asset Transfers to Retiree Health Accounts
G. Procedures for Requesting Class and Individual Exemptions
1. Administrative Exemption Overview
2. Application for Exemption
3. Appealing Denials of Exemption Applications
4. Applicants’ and DOL's Obligations When Granting Exemption Applications
H. Class Exemptions
1. Qualified Professional Asset Managers (QPAM)
2. Multiemployer Plans
3. Insurance Company Separate Accounts and Bank Collective Investment Funds
4. Investment Companies
5. Securities Broker-Dealers
6. Insurance Agents and Brokers and Pension Consultants
7. Securities Lending
8. Short-Term Investments
9. Residential Mortgage Financing
10. Mortgage Pool Investment Trusts
11. Customer Notes
12. IRAs and Keogh Plans
13. In-House Asset Managers (INHAM)
14. Sale of Individual Life Insurance Contracts and Annuities
15. Litigation Settlements with Parties in Interest
16. Holding REIT Interests by Trust REIT Individual Account Plan
17. Foreign Exchange Transactions
18. Abandoned Individual Account Plan Terminations
19. Service Provider Contracts and Arrangements
20. Investment Advice for Self-Directed Defined Contribution Plans and IRAs
21. Voluntary Fiduciary Correction Program
22. Short Term Loans
I. Individual Exemptions
1. Retroactive Individual Exemptions
2. Types of Exempt Transactions
3. Expedited Exemptive Relief Under PTE 96-62
J. Class Exemption Modifications and New Exemptions Under Vacated Final Rules on Retirement Investment Advice
1. Best Interest Contract Exemption
2. Principal Transactions in Certain Debt Securities Between Investment Advice Fiduciaries and Employee Benefit Plans and IRAs
3. Modifications to Existing Class PTEs
4. Enforcement of Class Exemption Modifications
IX. Remedies
A. Parties Plaintiff
B. Relief Against Fiduciaries
C. Relief Against Non-Fiduciaries
D. Contribution and Settlement Bars
E. Procedural Matters
1. Venue
2. Statute of Limitations
3. The Effect of Fraud or Concealment
F. Punitive and Extracontractual Damages
G. Attorney's Fees and Liquidated Damages
1. Limits
2. Delinquent Contributions
H. Penalty Provisions
I. Voluntary Fiduciary Correction Program
J. Delinquent Filer Voluntary Compliance Program (DFVC)
X. Exculpatory Provisions and Indemnification
XI. Preemption of State Law
XII. IRAs and Keogh Plans
XIII. Church and Governmental Plans
XIV. Bonding
Introductory Material
A. Nature of Bond
B. Coverage of the Bond
C. Amount of the Bond
D. Exceptions
E. Penalties
XV. Felons Prohibited from Holding Plan Positions

Working Papers

Worksheet 1 Certain Transactions Identified in the Voluntary Fiduciary Correction Program — PTE 2002-51
Worksheet 2 Certain Transactions Involving Insurance Agents and Brokers, Pension Consultants, Insurance Companies, Investment Companies and Investment Company Principal Underwriters — PTE 84-24, as Amended by 71 Fed. Reg. 5887 (2/3/06)
Worksheet 3 To Permit Employee Benefit Plans to Invest in Customer Notes of Employers — PTE 85–68
Worksheet 4 Exemption to Permit Certain Authorized Transactions Between Plans and Parties in Interest [Expedited Procedure for Certain Individual Prohibited Transaction Requests] — PTE 96–62
Worksheet 5 ERISA Technical Release No. 86–1 — Statement on Policies Concerning Soft Dollar and Directed Commission Arrangements
Worksheet 6 ERISA Technical Release No. 92–1 — Revised Enforcement Policy with Respect to Welfare Plans with Participant Contributions
Worksheet 7 DOL Field Assistance Bulletin 2008-03 — Qualified Default Investment Alternatives
Worksheet 8 DOL Advisory Opinion 2002-14A, Selection of Annuity Providers
Worksheet 9 DOL Voluntary Fiduciary Correction Program
Worksheet 10 DOL Delinquent Filer Voluntary Compliance Program
Worksheet 11 DOL Field Assistance Bulletin 2003-3 (5/19/03) – Allocation of Expenses in a Defined Contribution Plan
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