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Butterfield Schechter LLP

No California Creditor Protections For Section 529 Education Savings Plans
Posted: May 6, 2016 by Paul W. Woodard

In the case of bankruptcy, creditor protection for Section 529 Education Savings Plans is provided by federal law, with significant limitations, under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. This act excludes from property of the estate all contributions deposited toward a Section 529 Plan for a beneficiary who is the child, grandchild, stepchild, or step-grandchild of the debtor, and as long as the deposits were made at least two years before the bankruptcy was filed and they do not exceed the maximum amount permitted per beneficiary for the program. If the contributions were made between one and two years prior to the bankruptcy filing, Section 529 assets are protected up to $5,000 per beneficiary. These provisions apply to bankruptcy cases filed on or after October 17, 2005.

But what happens to Section 529 Plans if you are a California judgment debtor and have not filed for bankruptcy?

In addition to the federal bankruptcy protections described above, some states have passed statutes that protect Section 529 Plan assets from judgment creditors’ claims brought outside of bankruptcy proceedings. However, California is not one of the states that has passed legislation specifying that Section 529 Plans are protected from the creditors of the beneficiary, contributor, and/or the account owner.

In a recently decided appellate decision (April 21, 2016), the Second Appellate District of the State of California held, in a case brought by our firm, resulting in a decision in favor of our client, that Section 529 Plans are not exempt assets under California’s comprehensive judgment creditor statute (codified in Code of Civil Procedure sections 680.010 through 724.260). Specifically, in AMBS Diagnostics, LLC v. Timothy O’Brien, the Second Appellate District Court reversed a trial court ruling holding that a judgment creditor’s Section 529 Plans were exempt assets similar to private retirement plans.

The appeal, filed by attorneys Paul D. Woodard and Marc S. Schechter of Butterfield Schechter LLP and Thomas M. Monson of Miller, Monson, Peshel, Polacek & Hoshaw, asked the Court to determine (1) whether Section 529 Savings Accounts are exempt from levy under California’s enforcement of judgments law and (2) whether the trial court abused its discretion in exempting the full amount of the debtor’s IRA accounts.

The Second Appellate District ruled that the trial court erred in exempting the judgment creditor’s Section 529 Plans from execution of levy. This case was a matter of first impression and provides clear guidance to other California trial courts how to rule on a judgment creditor’s claim of exemption over Section 529 Plans.

The Court wrote:

Is money that a person sets aside for the “qualified higher education expenses” of his children under Internal Revenue Code section 529 (so-called “section 529 savings accounts”) exempt from the collection efforts under the California Enforcement of Judgments Law, Code of Civil Procedure section 680.010 et seq., of a creditor who has a valid judgment against that person? We conclude it is not.

Ultimately, the Court opined that the four Section 529 savings accounts were not exempt from levy under California’s enforcement of judgments law and, with respect to the trial court’s finding of full exemption for IRA accounts in a non-bankruptcy setting, that the trial court applied the wrong standard by failing to “weigh or take into consideration [the debtor’s] current wages given that the debtor was still many years from retirement, is in good health, and has earned a significant salary in the past.”

Plan Sponsors, Act Now – The Deadline to Submit the Updated Version of Your Pre-Approved Defined Contribution Plan Is Quickly Approaching
Posted: April 5, 2016 by Corey F. Schechter

Plan sponsors of defined contribution plans utilizing either a volume submitter (VS) or Master & Prototype (M&P) plan (i.e., “pre-approved plans”) may be surprised to learn that a restated (or “updated”) version of their plan document must be adopted no later than April 30, 2016. See Internal Revenue Bulletin: 2014-17, at https://www.irs.gov/irb/2014-17_IRB/ar08.html.

The purpose of restating the plan document is to incorporate all required legislative updates since the last restatement period. The Internal Revenue Service (IRS) has implemented a cycle program for tax qualification status in which pre-approved defined contribution plans must be amended by adopting a restatement of the entire plan by the plan sponsor every six years. The deadline by which to adopt a restated plan under the previous cycle was April 30, 2010. If your pre-approved plan has not been updated since that time to incorporate all legislative changes required under the current cycle, and if your updated plan is not timely adopted (i.e., on or before April 30, 2016), your plan faces substantial penalties imposed by the IRS, up to and including disqualification of the entire plan (and, therefore, revocation of the favorable tax treatment which the plan has enjoyed).

Now is a good time to confirm that your pre-approved defined contribution plan has already been, or will be, timely adopted prior to the April 30, 2016, deadline. Additionally, restatement of the plan presents a cost-effective opportunity to amend or add any optional provisions in your plan document which may better suit your purposes and objectives in adopting the defined contribution plan.

If your plan’s service provider has not yet reached out to you regarding the update and adoption of a newly restated pre-approved plan document for your defined contribution plan, be sure that you contact them as soon as possible in order to meet the April 30, 2016, deadline. Our firm also has drafted our own plan document which is qualified under the volume submitter program, and unlike plans made available by brokerage firms and insurance companies, you are free to select investment platforms with a financial advisor of your choice.

If you are seeking to adopt a new defined contribution plan, or alternatively need to now update your current defined contribution plan with a newly restated plan document, call Corey Schechter at (858) 444-2300.

Forgot To File Your Annual Form 5500? There's Still Hope For Avoiding Costly Penalties
Posted: January 15, 2016 by Corey F. Schechter

Plan sponsors of employee benefit plans subject to the requirements of the Employee Retirement Income Security Act (ERISA) are required to annually file a Form 5500 with the U.S. Department of Labor (DOL). The Form 5500 was developed by the DOL in cooperation with the Internal Revenue Service (IRS) and Pension Benefits Guarantee Corporation (PBGC) as a means of evaluating the economic stability and enforcing the operational compliance of these benefit plans, and according to the DOL is “part of ERISA’s overall reporting and disclosure framework, which is intended to assure that employee benefit plans are operated and managed in accordance with certain prescribed standards.”

Both the IRS and the DOL consider the information disclosed by these ERISA-governed benefit plans on the Form 5500 to be vital for effectively carrying-out the enforcement provisions of ERISA, and for that reason impose severe monetary penalties on benefit plans failing to file their required Form 5500 each year by the required due date as a tool for discouraging delinquent filings. The penalty imposed by the IRS is equal to $25 per day, but has a cap of $15,000. On the other hand, the penalty imposed by the DOL is $1,100 per day, with no cap on the penalty amount. Yes, you read that correctly – $1,100 per day, with no cap on the penalty! These can be potentially debilitating penalties to the continued success of an employee benefit plan.

With the above-noted potential sanctions, most would agree that timely filing your Form 5500 is a wise course of action. The deadline for filing your plan’s annual Form 5500 is the last day of the seventh month of the following plan year. Thus, plans operating on a calendar year basis for their plan year, for example, will want to make sure that their Form 5500 for the preceding year is filed no later than July 31. Extensions to file your plan’s Form 5500 are also available, provided they are timely filed.

But there is good news. Even if your plan missed the filing deadline and did not obtain the required extension, you are still able to significantly reduce the penalties noted above – so long as your plan has not yet received a notice of the delinquency from the IRS or the DOL. Basically, if you make the IRS and the DOL aware of your error before they catch you, by submitting an application under the Delinquent Filer Voluntary Compliance Program (DFVCP) created by the DOL, they will be much more lenient when imposing penalties on the plan.

Contact Butterfield Schechter LLP if you require assistance with the proper completion and filing of your employee benefit plan’s annual Form 5500 or requesting an extension to file. Additionally, if your plan has missed its Form 5500 filing deadline and has failed to seek an extension, contact one of our highly qualified attorneys today to assist you in the completion of a DFVCP application to the DOL in order to significantly reduce the potential monetary penalties to your benefit plan.

New DOL Fiduciary Rules Make Advice By A Financial Advisor To A Participant To Take A Lump Sum From A Qualified Plan A Fiduciary Matter, Even If You Are Not The Plan’s Advisor
Posted: May 27, 2015 by Rob Butterfield

To: Financial Advisors

New DOL fiduciary rules make advice by a financial advisor to a participant to take a lump sum from a Qualified Plan a fiduciary matter, even if you are not the Plan’s advisor.

Thus—caveat emptor as:

  1. It is a fiduciary matter you can be sued over and disciplined by regulators for
    1. (a) Arranging for a participant to sell existing Plan assets to roll over to an IRA you manage or benefit from. This means if the IRA does worse than the Plan would have done with the prior mix (in fees, performance or both) you can be subject to suit, discipline or both.
    2. (b) Same thing if fees in the IRA are higher than the Plan fees you charge to the Plan.
    3. (c) Same thing if you are not the advisor to the Plan and would benefit $ wise from the IRA, as ANY fees you get from the IRA are more than you’d get from the Plan.

So keep in mind that a simple recommendation to a participant to take a distribution is going to be a fiduciary matter fraught with peril for you if the participant later can demonstrate fees, investment performance, and transaction costs to sell and distribute and to reposition assets were more “in your interests” than the participant’s interests. A higher level of disclosure and planning might be necessary to cover yourself from regulators and suits.

After all, many times you may be dealing with participants who are in large Plans with low fees that you cannot benefit from at all—and you then advise the participant to distribute the account from the Plan and reposition assets in an IRA with fees that you benefit from. It might be hard to explain later to FINRA, SEC or a court. They might say you should have advised the participant to keep the $ in the Plan and you provide advice as to asset allocation in the Plan. Of course you would not be able to afford to give such free advice, making it important to make sure the participant understands they would pay higher fees with you, would pay transaction costs to reposition assets (possibly to sell assets too) and that they agree to the higher fees because they want YOU to be their advisor. But in reality no matter what you do, some participants will use hindsight to claim they did not understand the situation, did not fully realize that and that the advice you gave was not in their best interests. It’s a bit of a new world on that.

IRS Announces Increases for Dollar Limitations on Benefits and Contributions to Qualified Retirement Plans
Posted: November 25, 2014 by Corey F. Schechter

On October 23, 2014, the Internal Revenue Service announced cost-of-living adjustments which will be affecting dollar limitations for qualified pension plans for the 2015 tax year. Section 415 of the Internal Revenue Code provides for annual dollar limitations on benefits and contributions under qualified retirement plans. Pursuant to Section 415(d) of the Code, the Secretary of the Treasury must annually adjust these limitations for increases in the cost-of-living. An adjustment on these limitations will be made by the Secretary if the increase in the cost-of-living index meets the statutory threshold. Some pension plan limitations will remain the same as they were in the tax year 2014 because the increase in the index did not meet the statutory threshold to trigger an adjustment.

Most notably, participants in a 401(k) plan may contribute in 2015 up to $18,000 of their income. Moreover, participants in a 401(k) plan who have reached age 50 may make an additional catch-up contribution of $6,000 for the 2015 tax year. These figures represent an increase from the 2014 limitations on contributions to a 401(k) plan of $17,500 for an elective deferral, and a catch-up contribution of $5,500.

For a detailed list of dollar limitations for 2015, please visit the IRS’s website at: http://www.irs.gov/Retirement-Plans/COLA-Increases-for-Dollar-Limitations-on-Benefits-and-Contributions.

If you are thinking about adopting a qualified retirement plan for yourself or your employees, or have any questions regarding an existing plan, please contact the law firm of Butterfield Schechter LLP who will be pleased to assist you.

Same-Sex Marriages Will Be Recognized for Federal Tax Purposes
Posted: September 5, 2013 by Paul W. Woodard

In a recent joint press release, the Treasury Department and Internal Revenue Service (IRS) announced that same-sex married couples will be recognized as legally married for all federal tax purposes. The ruling applies regardless of where the couples reside so long as they were married in a jurisdiction that recognizes such marriages as legal. However, the ruling does not apply to registered domestic partnerships, civil unions, or similar formal relationships recognized under state law.

In conjunction with their announcement, the Treasury Department and IRS issued Revenue Ruling 2013-17 outlining their position on the matter. In the release, the IRS states, “The ruling implements federal tax aspects of the June 26th Supreme Court decision invalidating a key provision of the 1996 Defense of Marriage Act” (IR-2013-73).

Generally speaking, legally married same-sex couples must file their 2013 federal income tax returns using either the “married filing jointly” or “married filing separately” filing status, the IRS said.

In addition to the 2013 tax year, the recent ruling also impacts prior tax years for legally married same-sex couples who were married prior to the ruling. These taxpayers may choose to file original, amended, or adjusted returns to be treated as married for federal tax purposes for prior tax years still open under the statute of limitations. Couples may also file for claims for credit or refund for any overpayment of tax resulting from the holdings, “so long as the applicable limitations period for filing such claim under Tax Code Section 6511 has not expired,” the IRS said.

To read the Revenue Ruling, follow this link: http://www.irs.gov/pub/irs-drop/rr-13-17.pdf

October 1, 2013, Employer Notice of Exchange Disclosure Deadline
Posted: September 3, 2013 by by Robert K. Butterfield and Marc S. Schechter

As you may have heard in the news recently, the Patient Protection and Affordable Care Act (“PPACA”) requires employers to provide a notice to employees regarding the new health benefit exchange (“Exchange”) by October 1, 2013. This deadline is important for employers to avoid paying costly penalties.


Employers subject to the Fair Labor Standards Act (FLSA) are required to provide the Exchange notice. In general, the FLSA applies to employers whose annual sales total $500,000 or more or who employ one or more employees who are engaged in, or produce goods for, interstate commerce. For all practical purposes, this applies to all employers.


Employers must provide the notice of coverage options to all employees, regardless of the employee’s plan enrollment status (if applicable) or the employee’s part-time or full-time status. There is no requirement to provide notice to spouses, dependents, retirees, or any other individuals who are not employees.


In general, the Exchange notice must:

  • Inform employees about the existence of the Exchange;
  • Describe the services provided by the Exchange;
  • Inform employees how to contact the Exchange to request assistance;
  • Explain how employees may be eligible for a premium tax credit or a cost-sharing reduction if the employer plan does not meet certain requirements and the employee purchases a qualified health plan through the Exchange; and
  • Inform employees that if they purchase coverage through the Exchange, they may lose any employer contribution toward the cost of employer-provided coverage and that all or a portion of this employer contribution may be excludable for federal tax income purposes.


Current Employees

Employers must provide the notice by October 1, 2013 for all current employees and new employees hired before that date.

New Employees

Beginning October 1, 2013, employers must provide the notice to each new employee within 14 days of the employee’s start date.

The notice must be provided in writing in a manner calculated to be understood by the average employee. It may be provided by first-class mail. Alternatively, the notice may be provided electronically if the requirements of the DOL’s electronic disclosure safe harbor at 29 CFR 2520.104b-1© are met. The notice must be provided automatically and free of charge.


The Department of Labor (DOL) provided two model Exchange notices: one for employers that do not offer a health plan and another for employers that offer a health plan to some or all of their employees. A copy of the model notices may be found at the websites listed below. Employers may use one of these models, as applicable, or a modified version provided the notice meets the content requirements described above. We can help you if desired to create your own custom notice to employees.




The regulations do not identify a specific penalty for failing to comply with the notice requirement. However, the general PPACA noncompliance penalty would likely apply in this situation. This general penalty requires employers to correct compliance failures within 30 days of discovery. Employers also are required to self-report the violation on IRS Form 8928 and pay a civil penalty of $100 for each day the employer failed to comply with a PPACA mandate. In addition, the DOL or plan participants may bring a civil action against the employer for failure to comply.

Please contact us if you have any questions or concerns regarding the notice requirements.

Strong Internal Controls Mitigate Risks for ERISA Plan Audits
Posted: September 3, 2013 by Corey F. Schechter, Esq.
Contributing author Kristine M. Custodio, Advanced Certified Paralegal

On August 29, 2013, the Internal Revenue Service hosted a phone forum titled, How to Prepare for an IRS Employee Plans Audit.

IRS Director of Employee Plans Examinations, Monica Templeman, Esq., emphasized that strong internal controls related to a plan sponsor’s internal operations, such as the payroll department complying with the written plan provisions as they relate to compensation and determining eligible employees for plan participation, are crucial to reducing risk for common errors identified during the IRS examination process. Templeman listed the following common errors during IRS examinations:

  • Non-amenders
  • Definition of “compensation”
  • Excluding eligible employees/including ineligible employees
  • Plan loans (sponsor’s failure to withhold loan payments)
  • Hardship distributions

Further, the IRS recommends that plan sponsors improve compliance by implementing annual plan check-ups, especially if the plan has not been updated in the past few years. During a plan check-up, determining if a plan’s operations are based on the written terms of the plan may mitigate potential issues identified during an IRS examination and may also allow for use of the Employee Plans Compliance Resolution System (EPCRS) Self Correction Program.

For more information on IRS phone forums, visit http://www.irs.gov/Retirement-Plans/Phone-Forums-Retirement-Plans. Additional resources may be found on the IRS website at http://www.irs.gov/Retirement-Plans.

If you would like a plan check-up or have questions about ERISA plan compliance, please contact one of our attorneys to discuss further.

Summary Plan Description Language Insufficient to Grant Deference
Posted: May 15, 2013 by Paul Woodard

In Firestone v. Bruch, the Supreme Court established a de novo standard as the presumed judicial standard of review in benefit denial cases unless the benefit plan gives the administrator or fiduciary discretionary authority to determine the eligibility for benefits or to construe the terms of the plan. De novo review gives no weight to the decision of the administrator. This allows the court to substitute its decision for that of the administrator.

In a recent decision, the U.S. District Court for the District of Columbia held that a clause within a summary plan description (SPD) was insufficient to establish whether a plan administrator’s decision denying benefits to a health insurance plan participant was entitled to deference (Zalduondo v. Aetna Life Insurance Co., D.D.C., No. 1:10-cv-01685-RCL, 4/25/13.)

In the Aetna case, a participant filed a lawsuit after Aetna Life Insurance Co. denied the participant’s claim seeking coverage for her hip arthroscopy surgery at Aetna’s in-network rate. Aetna moved for summary judgment on the basis that its decision denying the in-network benefits to the participant was entitled to deference under the plan’s SPD.

In accordance with the Supreme Court’s decision in Cigna Corp. v. Amara, the court determined that the SPD’s terms did not constitute the terms of the plan. In its decision, the court examined the SPD and determined that the SPD’s disclaimer clarified that the plan’s terms controlled over the SPD. Although the terms of the SPD provided the plan administrator with the authority to construe plan terms and determine benefit eligibility, there was no indication that the plan also conferred discretion to Aetna. Accordingly, the court held that the language in the SPD was insufficient to give the plan administrator’s benefit denial decision deference.

Read the full text of the opinion.

ERISA Practitioners, Employee Benefit Plan Sponsors and Administrators: Beware of New Procedures and Guidelines Issued By the IRS Regarding Its Voluntary Correction Program Which Serves to Ameliorate Non-Compliant Employee Benefit Plans of Their Tax-Qualification Errors Under ERISA and the Internal Revenue Code
Posted: February 6, 2013 by Corey F. Schechter

Under the Internal Revenue Services’ (“IRS”) Voluntary Correction Program (“VCP”) plan sponsors of tax-qualified employee benefit plans are capable, at any time preceding an audit of the employee benefit plan by the IRS, to freely proclaim to the IRS tax-qualification failures detected in the plan. In doing so, the plan sponsor pays a minor fee and requests IRS-approval for correcting the plan’s failure(s) when the proper procedures are followed in accordance with the compliance statement.

Currently, the general requirements under the VCP established by the IRS will be fulfilled with acknowledgement of disclosed plan failures so long as the plan’s sponsor: (1) furnishes the compliance fee noted above (the value of which is determined according to a graduated range of fees based on the number of participants in the plan); and (2) implements the VCP procedures in accordance with the compliance statement. The compliance statement issued for a VCP submission identifies: (a) the plan’s failure(s); (b) the terms of correction, including any revision of administrative procedures; and © the time period within which proposed corrections must be implemented, including any change in administrative procedure(s).

On January 24, 2013, the IRS promulgated that standardized forms for current use in the IRS’ VCP for non-complaint employee benefit plans will be available for practitioners on the IRS’s website.

The updated revenue procedure for correction of the non-qualified status of employee benefit plans is projected to become effective April 1, 2013, but it may be used at the discretion of practitioners/plan sponsors prior to that date.

One rule surrounding the implementation of the new VCP procedures is that practitioners are precluded from altering the form or content of the VCP application submissions to the IRS. The forms are thus standardized and need not, nor are allowed, to include information the IRS has not announced it requires to make a determination on the tax-qualification of the employee benefit plan.

Although these forms are standardized and available on the IRS’s website for submission directly to the IRS, it is still recommended that any plan sponsor consult with an employee benefits practitioner to allow the practitioner to draft the VCP submission application in order to ensure the proper information and documentation have been provided to the IRS.

Butterfield Schechter LLP can help you if your plan has suffered qualification defects which may be corrected through the Voluntary Correction Program. If you have any questions, please contact us at (858) 444-2300.

IRS Publishes Update to Its Annual Revenue Procedure Requesting Determination of Employee Benefit Plans Tax Qualification Status
Posted: January 10, 2013 by Corey F. Schechter

Although not required, an employer has the option of seeking an advance determination as to the qualified status of its retirement plan by the Internal Revenue Service (“IRS”), rather than waiting for the IRS to review the plan in connection with an audit. This written advance determination is called a “determination letter.” A favorable determination letter from the IRS indicates that, in its opinion, the terms of the plan conform to the requirements of the Internal Revenue Code (“IRC”).

The advantage of obtaining a favorable determination letter is that the employer is afforded some assurance that its retirement plan is “qualified” (i.e., afforded favorable tax treatment for meeting certain requirements under the IRC). Receipt of a favorable determination letter allows the employer to make contributions to the retirement plan with the knowledge that its deductions for those contributions will most likely be allowed should the IRS audit its tax return.

On January 2, 2013, the IRS issued Rev. Proc. 2013-6, which revises procedures for issuing determination letters on the tax qualified status of employee retirement plans.

Going into effect on February 1, 2013, the newly updated Revenue Procedure appeared in Internal Revenue Bulletin 2013-1.

In Rev. Proc. 2013-6, the IRS updated the procedures in Rev. Proc. 2012-6 for issuing determination letters on the qualified status of pension, profit-sharing, annuity, stock bonus, and employee stock ownership plans (“ESOPs”) under IRC sections 401, 403(a), 409, and 4975(e)(7), and on the tax-exempt status of related trusts or custodial accounts under IRC Section 501(a).

For a complete copy of Rev. Proc. 2013-6, please visit the IRS’s website at: http://www.irs.gov/irb/2013-01_IRB/ar11.html

Conflicting Summary Plan Description Information
Posted: September 14, 2012 by Paul Woodard

An issue may arise when the terms of the plan document conflict with the terms of the summary plan description (“SPD”). In Cigna Corp. v. Amara, the Supreme Court recently held that SPD language does not become part of the terms of a plan document. The Court made it clear that “summary documents, important as they are, provide communication with beneficiaries about the plan, but that their statements do not themselves constitute the terms of the plan for purposes of § 502(a)(1)(B).” CIGNA Corp. v. Amara, 131 S. Ct. 1866 (2011). In holding, the Supreme Court overruled two Ninth Circuit cases which treated SPD language as if it were an enforceable part of the retirement plan.

The opinion is available at http://www.supremecourt.gov/opinions/10pdf/09-804.pdf.