Covered Service Provider Disclosures

Covered Service Provider Disclosures

by Harvey L. Frutkin, J.D. Partner: The Frutkin Law Firm, PLC, Phoenix, Arizona.

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The furnishing of goods, services, or facilities between a plan and a "party in interest" to the plan is generally prohibited under ERISA. [ERISA § 406(a)(1)(C)]. As a result, a service relationship between a plan and service provider would constitute a prohibited transaction, because any person providing services to the plan is, by definition, a party in interest. However, ERISA also provides relief from the prohibited transaction rules for service contracts between a plan and a party in interest, if (i) the contract or arrangement is reasonable, (ii) the services are necessary for the operation of the plan, and (iii) no more than reasonable compensation is paid for the services. [ERISA § 408(b)(2)]. In order for relief to apply, under current Labor Department regulations specified providers of services to a qualified plan are required to make comprehensive disclosures, primarily with respect to plan expenses. This duty applies to plan fiduciaries, as well as to those persons or organizations designated by a fiduciary to provide plan services.

In general, an important aspect of the duty of a plan trustee, or other fiduciary, is to defray the reasonable expenses of administering the plan. [ERISA § 404(a)(1)(A)]. In that connection, the fiduciary has an obligation not only with respect to its own charges for services to the plan, but also with regard to charges made to the plan by other service providers. Accordingly, the primary purpose and effect of the relevant Labor Department regulations is for the fiduciary to be informed as to the expense charges of all persons and organizations who perform services on behalf of the plan. If the fiduciary fails to obtain the information, or presumably fails to evaluate the information properly, he or she may be in violation of the duties imposed under ERISA.

The essence of the exercise is that no contract or arrangement for services between a covered plan and a covered service provider is deemed to be "reasonable," as required under ERISA [ERISA § 408(b)], absent compliance with the requirements of the regulations [DOL Reg § 2550-408b-2(c)(1)(i)]...

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Information referenced herein is provided for educational purposes only. For legal advice applicable to the facts of your particular situation, you should obtain the services of a qualified attorney licensed to practice law in your state.

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RELATED LINKS: For more information on covered service provider disclosures, see:

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