Providing plan administrative services results in potential liability.
David P. Coldesina, a dentist, served as trustee of his practice's long-established profit-sharing plan. In 1992, his friend Gregg Simper became the plan's investment adviser. Simper was also a general agent for Kansas City Life Insurance Company (KCL) and a broker-dealer for Sunset Financial Services, Inc., a KCL affiliate. He also operated his own company, Greystone Marketing, Inc. (GMI).
Simper recommended that Ted Madsen, sole owner of Flexible Benefits Administrators, Inc. (FB), replace the plan's third-party administrator. FB prepared the plan's returns, tracked participant loans, accepted plan contributions and remitted them on the plan's behalf as directed.
Initially, Coldesina wrote checks from the plan payable to FB, which deposited them into an account for which Madsen was the sole signatory. This was done to make it easier for FB to track plan contributions. The dentist had little contact with Madsen; rather, Simper issued directions to FB.
Madsen remitted checks from FB's account payable to KCL, to purchase insurance products. Later, Simper directed Madsen to write the checks payable to GMI, which would remit the funds to KCL. Simper maintained that this was to allow him to track his commissions earned. Coldesina never authorized writing plan checks to Simper or GMI, and was not aware of this change. Further, Madsen relied on Simper for the information needed to prepare the plan's returns and annual participant statements, and never verified the information Simper provided.
In 1999, Coldesina decided to redirect the plan's assets and asked Simper for the appropriate papers to effect the change. Simper committed suicide and left a note stating that he had misappropriated plan assets. It was later determined that Simper had stolen more than $600,000 from the plan. The plan filed suit against all the parties involved.
A district court dismissed the plan's claim against FB and Madsen. The plan appealed to the Tenth Circuit. Although there were many parties involved, the discussion below focuses only on FB and Madsen, its sole owner.
The court first looked at whether FB had discretionary authority or control over plan administration as a fiduciary, under Employee Retirement Income Security Act of 1974 (ERISA) Section 1002(21)(A). It concluded that preparing financial documents, including tax forms, is typically a ministerial, administrative function. Although FB charged a fee for its services and was alleged to be involved in "plan administration," the court concluded it did not have the necessary discretionary authority or control over plan administration to be a plan fiduciary.
Next, the court considered whether FB had sufficient control over plan assets to confer fiduciary status. FB held plan assets in an account over which Madsen had sole signature authority. The court, citing IT Corp. v. Gen. Am. Life Ins. Co., 107 F3d 1415, 1421 (9th Cir. 1997), noted:
The words of the ERISA statute, and its purpose of assuring that people who have practical control over an ERISA plan's money have fiduciary responsibility to the plan's beneficiaries, require that a person with the authority to direct payment of a plan's money be deemed a fiduciary. (Emphasis added.)
In fact, the account that received the funds from the plan was owned by FB, not by the plan; thus, the plan depended on FB and Madsen to ensure proper handling of funds.
The court also noted that Madsen exercised judgment when issuing checks payable to GMI on the plan's behalf. There were no express plan policies directing FB's checkwriting. Coldesina was not aware that funds were being transferred to Simper's company from FB. Even though Madsen had few choices when issuing checks on the plan's behalf, he nevertheless exercised authority. The plan--not Simper--hired FB and Madsen; FB and Madsen were entrusted with the plan's funds, not Simper's funds.
Thus, the court concluded that FB and Madsen could be included in the suit brought by Coldesina and remanded the case to the district court for further consideration.
FROM JOHN W. LINDBLOOM, CPA/PFS, HUBER, RING, HELM & CO., P.C., ST. LOUIS, MO
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|Author:||Lindbloom, John W.|
|Publication:||The Tax Adviser|
|Date:||Oct 1, 2005|
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