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LegalGround >> ? about ERISA * looks squarely at steve72*


1/20/09 12:09 PM
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goku
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Employee receives $150K from his company's IRA which is more than the amount he was entitled to ($50K). Employee rolls the entire $150K into another IRA, along with his own personal funds. The IRA drops significantly in value from $300K to $150K. The Company wants to create a constructive trust to recover the wrongful distribution.

1. Can the constructive trust be placed on the entire IRA or only on that portion of the IRA that is traceable back to the amount he rolled over from the company's IRA.

2. Is the company limited to remedies under ERISA only? Can they sue, for example, under state tort law? ie do the ERISA remedies preempt state common law remedies?
1/20/09 4:29 PM
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Steve72
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 Snippity snap!


Wait....his company's IRA?  Is there sponsorship?  It's possible for a company to offer access to an IRA without sponsoring it (meaning that there are no ERISA complications, and all state and common law remedies are available).  See ERISA regs. §2510.3-2(d).  if you can clear this hurdle, then the world is your oyster.

 

If ERISA does apply, the Sereboff case is generally considered to have removed the traceability requirement (although that applied to a welfare plan, not a qualified plan).

1/20/09 5:41 PM
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goku
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Thanks for the reply. Let's assume it is sponsored and covered under ERISA.

My reading of Sereboff is that the traceability requirement is only removed with respect to an equitable lien that is created by agreement as opposed to an equitable lien for restitution.

e.g., there is no need to trace if the lien is based on someone promising you a certain % of funds in the future. In that case, tracing would be inapplicable because there is nothing to trace at the moment when the lien is created.

However I inferred from this by negative implication that it is likely that tracing still applies with respect to an equitable lien created on the basis of restitution, which I assume my scenario fits under.

If that is the case, then the next step for me would seem be to research old school equitable restitution/tracing rules to determine exactly how they operate.

thoughts?
1/20/09 5:46 PM
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Steve72
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 That's sort of what I was getting at with the disclaimer that Sereboff was in the welfare context, not qualified plan.  Because the case is so new, I don't know whether it's been tested whether it applied to restitution liens. I would be surprised if it had.  In the absence of specific authority to the contrary, I think an argument can be crafted that, because of Sereboff, you can go after the whole thing.

1/20/09 6:32 PM
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goku
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Thanks!
1/21/09 6:39 AM
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seg
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 Can you guys translate this into English?  On what basis did the dude take the withdrawal?

Did dude take a distribution (or a loan?) from an employer sponsored plan and the employer screwed up by distributing to him more than his plan balance (or amount he could borrow under the plan?), or did he somehow fraudulently get a larger distribution that he was entitled to?

DId they then figure it out and now want to have him put it back in the plan but his investments went to shit so he only wants to have to pay back to the plan the remaining amount of what he took out (after investment losses) instead of the whole original $150,000?
1/21/09 7:14 AM
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Steve72
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 A loan wouldn't be roll-overable, so I'm assuming it was a distribution. 

If it was an administrative error not caused by the participant, then the above analysis applies. If, however, he stole it through his actions, then he must have been a fiduciary (due to handling of plan assets) and ERISA provides other remedies.

Did he steal the money, goku?
1/21/09 8:52 AM
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seg
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 WTF ever happened to Finder's Keeper's.
1/21/09 9:40 AM
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Steve72
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seg -  WTF ever happened to Finder's Keeper's.

 Good point.  The fiduciary will just cite Pierson v. Post, and the case is over.

OVER!!!!!!!!
1/21/09 1:31 PM
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goku
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I believe it was a mistaken overpayment via a distribution. I don't know all the facts, just what the partner told me. Can you believe in his email to the client he was like " I need to talk to my ERISA guy and get back to you" and then he assigns this task to me? LOL....

"
DId they then figure it out and now want to have him put it back in the plan but his investments went to shit so he only wants to have to pay back to the plan the remaining amount of what he took out (after investment losses) instead of the whole original $150,000?"

yes.
1/21/09 1:46 PM
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seg
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72, I don't know much about this stuff, but isn't this an EPCRS (or whatever) plan operational failure that they need to look at that one Rev. Proc. as to how to correct.  My recollection (without doing ANY research) is that if you accidentally didn't credit someone enough in earnings under a 401(k) plan you had to show the IRS that you had properly corrected by paying them the amount of the undercrediting, plus some amount of earnings that they would have earned if the plan hadn't screwed up.

Is it possible that the principles of EPCRS would allow the guy to only have to pay back what would have been in the plan if he had left it there?  For example, he pulls out $150k, it shrinks to $50k in his IRA because he invests with my financial advisor.  If he had left it in the plan it would have shrank to $90k, so he would have had a loss in the plan, but the loss would not have been as extensive as the actual loss suffered.  Could it be that he only has to pay $90k as opposed to $150k?

That seems like the more logical answer (i.e., put him back in the place he would have been if the error had not occured).

Full disclosure:  I have no idea what I am talking about.
1/21/09 1:47 PM
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Steve72
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 Another tack to take is that the distribution itself, because it was in exwcess of the employee's account, is not an "eligible rollover distribution".  By retaining those amounts in an IRA, the employee risks blowing the IRA's tax status, and recognizing income of the full amount as of the date the money went in.

Wouldn't help you if he did, but it may be another way to pressure the employee and the IRA custodian into returning the money.
1/21/09 2:01 PM
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Steve72
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seg - 72, I don't know much about this stuff, but isn't this an EPCRS (or whatever) plan operational failure that they need to look at that one Rev. Proc. as to how to correct.  My recollection (without doing ANY research) is that if you accidentally didn't credit someone enough in earnings under a 401(k) plan you had to show the IRS that you had properly corrected by paying them the amount of the undercrediting, plus some amount of earnings that they would have earned if the plan hadn't screwed up.

Is it possible that the principles of EPCRS would allow the guy to only have to pay back what would have been in the plan if he had left it there?  For example, he pulls out $150k, it shrinks to $50k in his IRA because he invests with my financial advisor.  If he had left it in the plan it would have shrank to $90k, so he would have had a loss in the plan, but the loss would not have been as extensive as the actual loss suffered.  Could it be that he only has to pay $90k as opposed to $150k?

That seems like the more logical answer (i.e., put him back in the place he would have been if the error had not occured).

Full disclosure:  I have no idea what I am talking about.
I don't think EPCRS is applicable here.  You would use EPCRS if, for example, you couldn't collect the money and needed to put employer assets into the plan to make up for those participant accounts that were liquidated to give this guy his erroneous distribution.

They may need to do that if they can't collect, but EPCRS isn't going to protect the distributee here.  It's solely to correct an operational (or other) defect by the sponsor.  ERISA fiduciary law dictates that the administrator attempt to collect improperly distributed plan assets.
 
1/21/09 5:18 PM
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pm1964
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ZZZZZZzzzzzzzz.
1/21/09 6:39 PM
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goku
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uuhhh...yeah...i lost track somewhere in the middle of this thread

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