Fiduciary Duties of Pension Plans

Do pension plans have a duty to warn of the tax consequences of withdrawing funds?

Church Law and Tax 1994-05-01 Recent Developments

Retirement Plans

Key point: Pension plans should carefully review the representations and assurances set forth in their plan documents and informational brochures, since they may be legally accountable to employees if such representations are not honored.

Do pension plans have a fiduciary duty to warn participants of the tax consequences of a decision to withdraw their funds? That was the question addressed by a federal court in Michigan. An employee received a lump sum distribution from his pension plan in the amount of nearly $120,000 and promptly rolled it over into an individual retirement account (IRA). By investing in an IRA within 60 days of the distribution, the employee avoided income taxes on the funds. However, the employee later removed the funds from his IRA and used them to buy real estate, assuming that he would still not need to pay income taxes on the funds since they had been properly rolled over into his IRA. The employee was wrong in assuming that the funds did not become taxable when he withdrew them from his IRA to buy real estate. The IRS determined that he owed taxes of $33,000 on the transaction. The employee sued his pension fund, claiming that it had breached a “fiduciary duty” to him by not warning him of the tax consequences of withdrawing his funds from the IRA. A federal court rejected the employee’s position and dismissed the lawsuit. The court acknowledged that federal law requires some types of pension plans to inform employees of the tax treatment of distributions they request from their retirement account. However, the court pointed out that the pension plan in this case had provided the employee with a brochure at the time he received the lump sum distribution of his account. The brochure explained that lump sum distributions are taxable unless they are rolled over into an IRA (or other eligible plan) within 60 days. The employee admitted that he received this brochure, but complained that the pension fund did not inform him that once the lump sum distribution was invested in an IRA it could not be removed to buy real estate without becoming taxable. The court disagreed, noting that federal law “does not require that a plan administrator inform a distribution recipient of every possible investment option and tax consequence.” It added that the employee’s tax liability “arose not from the fact that he did not know that he must invest in an IRA within two months of receiving the distribution, but rather because he did not know the consequences of thereafter removing that money from the IRA and investing it in real estate.” The court cautioned that a pension plan may be liable for failing to provide information promised in its promotional or informational literature. However, there were no promises in the pension plan or in any of its promotional materials to provide participants with “information regarding the tax consequences of the various types of distributions.” The lesson of this case is clear—church and denominational pension plans should carefully review the assurances they make in their plan documents and informational brochures, and be certain that they are honoring such assurances. One final point—the court in this case rejected the employee’s argument that he was not bound by the pension plan’s informational brochure because he had not read it. The court observed that the pension plan did “not have a duty to ensure that beneficiaries actually read the material and act upon it. It appears [that the employee] simply did not take the time to read over the material because he was eager to receive the money …. {his] assertion that he did not have ample time to read the material is irrelevant.” Bouteiller v. Vulcan Iron Works, Inc., 94-1 USTC 50,157 (S.D. Mich. 1994).

See Also: Personal Liability of Officers, Directors, and Trustees

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