Academic journal article Journal of Accountancy

ERISA Liability for CPAs

Academic journal article Journal of Accountancy

ERISA Liability for CPAs

Article excerpt

EXECUTIVE SUMMARY

* CPAs WHO PROVIDE PROFESSIONAL SERVICES TO employee benefit plans face potential liability exposure under ERISA. A June U.S. Supreme Court case made it clear that CPAs and other service providers are at risk even though in many instances their actions may seem innocuous.

* ERISA IMPOSES CERTAIN DUTIES ON PLAN FIDUCIARIES, such as acting exclusively in the interest of plan beneficiaries, acting prudently and diversifying plan investments. A CPA who provides investment advice to a plan or serves as the plan administrator may be a fiduciary for ERISA purposes. CPAs generally are fiduciaries for their own pension plans.

* ERISA PROHIBITS A FIDUCIARY FROM ENGAGING in certain transactions with a party in interest. A CPA who audits a plan's assets is a party in interest. The remedies for prohibited transactions are harsh. The transaction must be undone and the plan put in the position it would have been in had the transaction not taken place. A qualified plan pays a 15% excise tax every year until it corrects the transaction.

* IN HARRIS TRUST V. SALOMON BROTHERS, the U.S. Supreme Court made it clear that a nonfiduciary party in interest (such as a CPA) can be held liable under ERISA for participating in a prohibited transaction. Under some circumstances, even a CPA's fees could violate the prohibited transaction rules.

* THE FIRST STEP TO AVOIDING LIABILITY IS TO REALIZE there is always a risk in any dealings with an ERISA-covered plan. CPAs should avoid transactions with a potential conflict between their own interests and those of plan participants.

A little caution goes a long way.

The strict legal requirements of ERISA can rise up to bite an unsuspecting CPA at any time. A June 2000 U.S. Supreme Court case, Harris Trust v. Salomon Brothers, makes clear that CPAs and other service providers may face exposure under ERISA for various transactions with employee benefit plans, even though, in many cases, their actions seem innocuous. A transaction that appears to benefit a plan may, for example, be prohibited under ERISA.

CPAs provide a variety of professional services to pension and other employee benefit plans--auditing the plans, advising clients on applicable tax rules and even providing investment advice. In some cases, CPAs administer the plans for smaller clients, collecting contributions, choosing how to invest plan assets, processing participant distribution requests and making all required IRS filings. Providing such services requires a CPA to be familiar with the often complex requirements of ERISA. This article outlines the potential liability exposure of CPAs and other professionals who provide services to ERISA plans, and discusses ways to reduce it.

ERISA's FIDUCIARY RULES

After it went through nearly a decade of development, President Ford signed ERISA into law on Labor Day in 1974. A key to its passage was the belief that employers and other parties with control of pension plan funds used them for their own benefit rather than for that of employees. For example, employers used pension plan funds to purchase their own stock at inflated prices or paid service providers excessive fees.

In enacting ERISA, Congress sought to end these abuses in two ways. First, section 404 of ERISA imposes on fiduciaries the duties of

* Acting exclusively in the interests of plan participants and beneficiaries.

* Acting prudently (under a "reasonable person" standard).

* Diversifying plan investments.

ERISA broadly defines the term "fiduciary" to include people with discretionary authority or control over plan assets or plan administration and people who render investment advice for a fee. A CPA who provides investment advice to a plan or serves as the plan administrator may be a fiduciary for ERISA purposes. In addition, CPAs usually are fiduciaries for their own pension plans. …

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