Legal Exposures for Medical Practices with 401K plans

This week we take a look at a commonly overlooked exposure: management of employee benefit plans organized as a 401K.

We’ve covered a variety of medical, non-medical, and general business exposures in this forum as we explore asset protection issues for doctors in all their many required forms. This week we take a look at a commonly overlooked exposure: management of employee benefit plans organized as a 401K. Below is our first look at the basic fiduciary responsibilities applicable to retirement plans under the law based on the U.S. Department of Labor’s own website.

Administering a plan and managing its assets requires certain actions and involves specific responsibilities. To meet their responsibilities as plan sponsors, employers need to understand some basic rules, specifically the Employee Retirement Income Security Act (ERISA). ERISA sets standards of conduct for those who manage an employee benefit plan and its assets (called fiduciaries).

What Are the Essential Elements of a Plan?

Each plan has certain key elements. These include:

•  A written plan that describes the benefit structure and guides day-to-day operations;

A trust fund to hold the plan's assets;

A recordkeeping system to track the flow of monies going to and from the retirement plan; and

Documents to provide plan information to employees participating in the plan and to the government.

Employers often hire outside professionals (sometimes called third-party service providers) or, if applicable, use an internal administrative committee or human resources department to manage some or all of a plan’s day-to-day operations. Indeed, there may be one or a number of officials with discretion over the plan. These are some of the plan’s fiduciaries.

Who is a Fiduciary?

Many of the actions involved in operating a plan make the person or entity performing them a fiduciary. Using discretion in administering and managing a plan or controlling the plan’s assets makes that person a fiduciary to the extent of that discretion or control. Thus, fiduciary status is based on the functions performed for the plan, not just a person’s title.

A plan must have at least one fiduciary (a person or entity) named in the written plan, or through a process described in the plan, as having control over the plan’s operation. The named fiduciary can be identified by office or by name. For some plans, it may be an administrative committee or a company’s board of directors.**

A plan’s fiduciaries will ordinarily include the trustee, investment advisers, all individuals exercising discretion in the administration of the plan, all members of a plan’s administrative committee (if it has such a committee), and those who select committee officials. Attorneys, accountants, and actuaries generally are not fiduciaries when acting solely in their professional capacities. The key to determining whether an individual or an entity is a fiduciary is whether they are exercising discretion or control over the plan.

Tips for Employers with Retirement Plans

Understanding fiduciary responsibilities is important for the security of a retirement plan and compliance with the law. The following tips may be a helpful starting point:

Have you identified your plan fiduciaries, and are they clear about the extent of their fiduciary responsibilities?

If participants make their own investment decisions, have you provided the plan and investment related information participants need to make informed decisions about the management of their individual accounts? Have you provided sufficient information for them to exercise control in making investment decisions?

Are you aware of the schedule to deposit participants’ contributions in the plan, and have you made sure it complies with the law?

If you are hiring third-party service providers, have you looked at a number of providers, given each potential provider the same information, and considered whether the fees are reasonable for the services provided?

Have you documented the hiring process?

Are you prepared to monitor your plan’s service providers?

Have you identified parties in interest to the plan and taken steps to monitor transactions with them?

Are you aware of the major exemptions under ERISA that permit transactions with parties-in-interest, especially those key for plan operations (such as hiring service providers and making plan loans to participants)?

Have you reviewed your plan document in light of current plan operations and made necessary updates? After amending the plan, have you provided participants with an updated SPD or SMM?

Do those individuals handling plan funds or other plan property have a fidelity bond?

This is a very brief introduction to the basic issues all practice owners and managers with employee 401K plans must understand. We will provide additional details in our next discussion including tips from a 401K expert.


** See our previous look at executive liability issues for doctors

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