Why I hate FAB 2010-01

The portions of FAB 2010-01 dealing with hiring a TPA are very poorly written and belie any knowledge of the real world.

The employer, in the plan document, is assumed to appoint a plan administrator of some sort. in the quoted language from FAB 2007-02. Reading the language narrowly, a problem arises only where the employer appoints a third party to make discretionary determinations. It is entirely possible, under the rubric of "administrative functions, including those related to tax compliance," to designate a TPA as plan administrator either in the plan document or otherwise. As to limitations on the TPA's authority:

1-As to loans, there are discretionary determinations only where there is discretion. If the eligibility and amount rules in the plan document are mechanical (i.e., amount, duration, etc. are formulaic), it is hard to see any discretion.

2-As to hardship, again there can be circumstances where no discretion is exercisable. E.g., the amount is deemed both an immediate and heavy financial need and necessary to satisfy financial need. However, there also can be circumstances under which there is discretion, as the DOL understands that term.

On the flip side, where a participant has more than one product vendor, it is possible for the participant to request loans/hardship distributions independently from each. This could easily result in excess loans or hardship amounts. Under the 403(b) regs. (i.e., the second sentence of Regs.1.403(b)-3(b)(3)(ii)), there must be someone performing those limitation functions.

The cautious approach would provide that the TPA simply collect and transmit information to the product vendors, giving the participant a single location for loan and hardship applications, coordinating so that maximum limits are not exceeded. and forwarding the results to the product vendors for discretionary determination. This much is not only permitted, but required.

In theory, there could be a less cautious approach that would attempt to draw a line, as to loans and hardship, between mechanistic determinations and discretionary ones. For example, a safe harbor/safe harbor hardship determination might be permitted, but others referred to the product vendors. Functionally, this runs into two problems. First, having ordinary TPA employees draw those sorts of lines will (not may) result in errors. Second, the product vendor has to make its own determination, under the terms of its own contract, as to whether or not the loan/hardship is permitted, and will not rely on the TPA unless the venodr has selected the TPA.

A third theoretical option is available. The plan document can designate a plan administrator (say, a corporate officer/nonparticpant) that can retain the services of a TPA. Unfortunately, this runs into the "what caused the big bang" problem. That is, appointing someone to appoint someone else to exercise discretion is, in the eyes of the DOL, a discretionary decision. So, probably a no-go here as well.

I am no philosopher or logician, but DOL seems to be unaware of two basic logical/linguistic fallacies.

First, they take the position that the kinds of factual determinations underlying loans and hardships are discretionary. Clearly, in the real world, this is not true all the time. And, even where there are factual issues, they are, in fact, factual. Thus, such determinations are inherently unlike decision such as whether or not to have a 403(b) plan. DOL appears to be confused by the routine language inserted in plans (broadest discretion, etc.) to get an abuse of discretion review of plan decisions into believing that all actions are discretionary. Is the determination as to whether an employer is of the sort that can offer the 403(b) catch-up any less discretionary than the determination that a person's house has burned down?

There is a pretty clear argument that this source of discretion can be eliminated simply by stating that the standard of decision for plan determinations other than as to tax compliance issues is nondiscretionary and the standard of review is de novo. And, in the kind of plan we are talking about (loosely connected products to which the employer makes no contribution), the kind of exposure to costs that motivates the seeking for an abuse of discretion standard of review is either reduced or absent. To the extent that the participant gets money, it is, after all, the employee's money. This is the fourth theoretical option.

The second fallacy is the illogic of infinite regression. Anything that is a necessary, or "but for," logical or sequential precondition to the determination of a discretionary determination can be caught under this fallacy. If the employer allows or requires a product vendor to make a determination, is that employer decision discretionary? Yes. If the plan permits or requires vendor determinations, is the employer's adoption discretionary? Yes. Once on this path, there is no place to stop.