To all those Howard Stern fans, did you see that Sal the Turtle won a race at Belmont Park the other day? Pretty funny. It looks like the horse went off at some pretty steep odds, and, seeking not to look a gift horse in the mouth, to coin a phrase, Sal himself apparently bet some decent money on his namesake.
And, as long as we're talking about gift horses, let's talk about . . . gift horses, ERISA-style. (You're authorized to let out an audible GROAN now.) What do I mean by that? Over the years, I've noticed situations in which the regulators give stuff away, and somehow the private legal community winds up believing that somehow something is too good to be true. One starts to see people constructing arguments - the government's arguments - against whatever the government is trying to give us. Dare I say, "Looking a gift horse in the mouth." Let's look at some examples:
1. Do You Really Have to Comply with the QDIA Rules?
We all know that you need to comply with the QDIA rules when you want some fiduciary protection in the context of setting up default investment alternatives. These are investment alternatives where the participant has not made an affirmative investment election.
But what if the plan sponsor simply says in its enrollment form something like, "In the absence of a contrary affirmative election below, I hereby expressly elect that 100% of my account balance be invested in the X Fund"? And let's say that the plan sponsor, along with that, gives a sufficient amount of disclosure in connection with the making of an affirmative election (here, in the X Fund). And now maybe I'll go ahead and take the position that the X Fund doesn't need to be a QDIA, because there's no lack of affirmative election. That is to say, the participant has indeed affirmatively elected to invest in the X Fund.
"Pish-posh" (as my friend Karen K. might intone), you say? "Too good to be true", you say? Well, in response to such naysaying, I direct you to the little nugget, nay the gem, at the end of Section IV of the preamble to 1992's final 404(c) regs., 57 Fed. Reg. 46,906 (Oct. 13, 1992), which states:
Two commentators suggested that a participant or beneficiary should be considered to have made an affirmative [investment] instruction where the [SPD] discloses the investment alternative which [sic] is used when no affirmative instruction is received and where the participant or beneficiary signs an instruction form which [sic] notifies him of what will be done with money contributed to the plan if no instruction is received. The Department notes that a participant or beneficiary will not be considered to have given an affirmative instruction merely as a result of being apprised that certain investments will be made on his behalf in the absence of instructions to the contrary. On the other hand, a participant or beneficiary will be considered to have given affirmative instruction where the participant or beneficiary signs an instruction form specifying how assets in his account will be invested if he has exercised ["independent control" for these purposes] with respect to such signature.
There really aren't two ways to read that. If things are done correctly, an express investment selection contained in a form signed by the participant is respected as an affirmative investment selection. So - (i) draft your forms right, (ii) satisfy the disclosure and other rules that validate the participant's/beneficiary's exercise of "independent control" over the investment of the account (that's important!)* and then (iii) kiss your (ahem) QDIA goodbye. Since you now have an express investment election (or, stated in reverse, you don't have a failure to make a selection that calls out for the need for a default), there's no "default" regime (i.e., no QDIA requirements) to activate. And, by the way, that is the right, and utterly unabusive, answer. There shouldn't be a distinction between a signed form specifying in pretyped language that a particular investment has been selected, on the one hand, and a signed form on which the participant has manually penciled (or even penned) in that very same selection, on the other.
Ne'ertheless, my experience, when you show the above-quoted passage to practitioners, is that they often say, "Oh, c'mon, can't be", or "They can't have meant that", or something like that. But they did say it and, given that they said it, they presumably did mean it. Why the anxiousness to do the DOL's job for the DOL and be more conservative than even the DOL would have us be?
2. Cross-Trading Between Affiliates - an Oxymoron?
Company A owns Company B. Or maybe Company X owns Company A and Company B. Company A manages Plan M and Company B manages Plan N. Company A directs Plan M to buy or sell securities or other property from or to Plan N, and Company B directly Plan N to accept and consummate the transaction. Do you have a cross-trade?
As a general matter, I don't think so. At the beginning of Section B(6) of the preamble to the final 408(b)(19) regs., 73 Fed. Reg. 58,450 (Oct. 7, 2008), the DOL stated:
[T]he Department notes that an investment manager‘s exercise of discretionary authority, on behalf of an account it manages, to effect a purchase or sale of a security with another account over which an affiliate of the manager exercises discretionary authority would not, in itself, constitute a violation of 406(b)(2) . . . .
Under that reasoning, the notion of cross-trading by affiliates is essentially an oxymoronic contradiction in terms. That is, where affiliates are on the opposite sides, there's just simpy is no crossing.
My experience, when you show the above-quoted passage to someone, is that they often say, "Oh, but I'm not really sure you can rely on what they said there" or something like that. I get that it's a preamble statement rather than an operative regulatory provision, but do we really think that a court, on something so technical would substitute its judgment for the DOL's? Again, there seems to be an inclination to be more conservative than the regulators themselves.
The DOL did go on to caution that a PT violation "could arise in operation if, in fact, there was an agreement or understanding between the affiliated entities to favor one managed account at the expense of the other account in connection with the transaction." Thus, for example, 406(b)(1) considerations should be carefilly reviewed, although I would note that it will by no means always be so that there is always a 406(b)(1) violation in such a case. Clearly, though, the possibility of 406(b)(1) and other issues on any given facts and circumstances should not detract from the significance of being able to be outside of "the prohibitions embodied in section 406(b)(2) . . . [, which] are per se in nature," 63 Fed. Reg. 13,696 (Mar. 20, 1998).
3. 457A and Substantial Risks of Forfeiture; 457A and Stock (and Similar) Rights
Under 457A, generally speaking, you can't defer compensation if 457A applies. It's not like it is under 409A, where if you comply with the rules you can defer. Under 457A, where it applies, once you have deferred comp., you have a problem. So it becomes critical to determine whether you have "deferred compensation".
And, in turn, as under 409A, critical to the question of whether there's "deferred compensation" is the question of whether the compensation has vested before it's paid. If the compensation is paid sufficiently near in time to the vesting event and under the 457A rules you've thereby got a "short-term deferral", then you don't have deferred comp. for these purposes.
The 457A vesting rules naturally draw heavily on those under Section 83, and a number of possible planning opportunities arise around the possibility of attempting to make compensation not be considered nonforfeitable (be considered forfeitable) under traditional 83 concepts, particularly where the service provider is a bona fide entity rather than an individual.
I remember sitting on a panel with other private practitioners and a Treasury official back around the time that 457A was enacted, and the question of whether 83 principles informed the basic 457A nonforfeitability analysis. Without necessarily commenting on the possible planning opportunities referred to above, the Treasury official indicated that, surely, the basic 83 nonforfeitability rules applied for purposes of 457A, other than to the extent expressly altered by 457A or the authority thereunder. Some of the panelists starting challenging her and making the contrary arguments, both policy and technical, but she held firm. What we had here was practitioners fighting Treasury on a view that was pro-taxpayer. Hmm . . .
B. Stock Rights
Another 457A issue on which practitioners seem unwilling to take what they're given also arises under Section 457A. In Q&A 2(b) of Notice 2009-8, 2009-1 C.B. 347, the IRS told us that equity appreciation rights payable that must be settled in stock do no constitute deferred compensation for these purposes. And yet the market pretty much en masse refused to entertain the possibility of the issuance by a fund of appreciation rights as OK under 457A.
It took the issuance of Revenue Ruling 2014-18, 2014-26 I.R.B. 1104 to get the market even to consider this compensation technique. Ruling 2014-18, which clearly was issued against the backdrop of fund compensation in terms of the way the issue got onto the IRS's radar, is among the more "and we mean it"-type of rulings you'll see. It breaks no real new ground, but was issued in light of a perception that, for whatever reason, the market wasn't willing to proceed based on the pretty clear authority of Notice 2009-8.*** Thus, it has become a pretty important ruling, at least in terms of getting managers and investors alike to take a look at fund-based appreciation rights as a technique that would avoid 457A.
Now I take the point that relying on nonbinding authority in one's own favor is not steel-trap. Two sobering examples come to mind.
First, there was the IRS's successful pursuit in litigation, in the case of Bobrow v. Comm'r, T.C. Memo 2014-21, of a position that was flatly inconsistent with clear statements in its own publications. I'm not sure how the IRS made piece with pursuing a taxpayer who had done nothing other than proceed in accordance with what the IRS said was OK, but the litigation was pursued and, further, was pursued successfully. Ultimately, Announcement 2014-15, 2014-16 I.R.B. 973, was issued, confirming the general reversal of the prior IRS position, thankfully with prospective effect.**
My other sobering example is the dust-up over the ability to accelerate the payment of performance-based compensation intended to qualify for the 162(m) exception therefor in the case of termination without cause. PLRs 199949014 and 200613012 permitted that approach, see also PLR 200724011, and so, naturally, many (most? all?) in the market felt comfortable with it, notwithstanding the non-binding nature of the rulings. Then, in PLR 200804004, the IRS reversed field, and, since the companies at issue were public companies, and particularly since difficult public accounting issues quickly arose, the IRS change in position, as manifested by the later ruling, was really quite the gotcha. Eventually, a published ruling, Revenue Ruling 2008-13, 2008-1 C.B. 518, disposed of the issue, and included transition relief; but the whole situation was admittedly nerve-racking for those who had no binding authority on which to rely.
But should these examples make us gun-shy at every turn? The flip side of that "we should learn from our experiences" is that "we shouldn't be victimized by our experiences." When the regulators give us something that seems at first blush to be too good to be true, maybe it isn't. Maybe it's really just simply, as Alanis Morrisette might say, fine fine fine. ****
* The DOL went on to note expressly that "the form and manner in which investment alternatives are presented to participants and beneficiaries of a plan would be facts taken into consideration in determining whether a participant or beneficiary, in fact, exercised independent control in giving investment instructions."
** Presumably, absent there having been a settlement in the Bobrow case, Announcement 2014-15 is of no help to the taxpayer there.
*** Indeed, I have it on pretty good authority that the reason there was initial resistance to issuing 2014-18 is that the result therein was so obvious that the IRS didn't need to issue new authority to confirm it.
**** I've described above what to me are some pretty straightforward gift horses that tend to be looked in the mouth. I've previously written about arguably unnecessary conservative approaches to the question of whether managed money needs to be excluded under the 25% "plan assets" exception and about whether a five-year limitation is always needed under the shadow-equity exception in the regulations under 409A. But I take the point that those issues may be more analytically complex and nuanced, and, even to me, are not as straightforward as those addressed hereinabove. And, while we're on the topic of arguable over-conservatism, don't get me started on the question of whether a six-month delay is necessary under 409A in the case of severance payments where the separation from service also constitutes the applicable vesting event (my answer - NO).
Conversely, there are situations in which the regulators concede a point because they think they just have no choice but to do so, even though some may think there are ample arguments that they could've easily come out the other way. Take, for example, Notice 2007-49, 2007-1 C.B. 1429, under which 162(m) now grabs only three rather than the statutory four non-CEO NEOs and the CFO is somewhat perversely always excluded. But see CCA 2001643003 (under which certain CFOs may NEOs to whom 162(m) does apply). Some feel the approach in Notice 2007-49 really is militated by the way the various relevant rules fit together, but I'm still surprised they gave this one away. And I also remain surprised that, when they overhauled the 401(a)(4) rules some years ago, they ultimately allowed cross-testing of DBs and DCs, at least in a way that allows some pretty arguably counterintuitive results. Again, I know they felt that the controlling statutory language left them no choice, but I'm not so sure I agree. I guess that's what makes the world go 'round: someone's "that's so obvious!" is someone else's "no way!"