Tuesday, January 17, 2012

An Oldie but a Goodie - Criminal Rule, listen up Bank Lenders!

This is an oldie but a goodie. The story goes like this, Plan Sponsor of a 401(k) Plan receives a call from their Bank. Specifically, it is from their lender. The Loan Officer, subtley or maybe not so subtley, tells the client that their credit is at risk if they don't put more assets with the bank. Subsequently, a broker (bank registered rep) is introduced and a few short months later the 401(k) Plan is moved to the bank or a different spin where the credit isn't at risk, instead the client is told that their rate will be reduced in exchange for the plan.

For those of us practicing in the ERISA Qualified Plan arena, this story or one like it is very familiar. We all competed against this type of scenario and we all know that it isn't legal. I've often cited that this is a Prohited Transaction (PT) and violates several different ones. Well, thanks to a linked in post that led me to this blog post from the Business of Benefits (nice one Mr. Toth) we can all now specifically cite the US Criminal code when this scenario presents itself. http://www.businessofbenefits.com/2010/06/articles/complex-prohibited-transaction/erisa-plans-ultimateand-criminalprohibited-transaction-rule-of-18-usc-1954/

To summarize the post, this behavior violates ERISA's Prohibited Transaction rules, but it also violates the US Criminal Code, specifically, 18 USC §1954. It specifically is an Anti-Kickback rule and is broad in nature although it does specify ERISA plans that

Whoever being—
(1) an administrator, officer, trustee, custodian, counsel, agent, or employee of any employee welfare benefit plan or employee pension benefit plan; or
(2) an officer, counsel, agent, or employee of an employer or an employer any of whose employees are covered by such plan; or
(3) an officer, counsel, agent, or employee of an employee organization any of whose members are covered by such plan; or
(4) a person who, or an officer, counsel, agent, or employee of an organization which provides benefit plan services to such plan

receives or agrees to receive or solicits any fee, kickback, commission, gift, loan, money, or thing of value because of or with intent to be influenced with respect to, any of the actions, decisions, or other duties relating to any question or matter concerning such plan or any person who directly or indirectly gives or offers, or promises to give or offer, any fee, kickback, commission, gift, loan, money, or thing of value prohibited by this section, shall be fined under this title or imprisoned not more than three years, or both.

Many scenarios could fall under this, but specifically, the act of Tying a company loan to the 401(k) Plan would fall under this. So, sometimes we need to look past ERISA to the Criminal Code itself to find something specific. I wonder if the banks have contemplated that this, technically, should be disclosed as compensation under 408(b)-2.......

Thanks Linked-In and thanks Mr. Toth for the good intelligence.

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