An Ethical Person in Today’s Business Environment

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An Ethical Person in Today’s Business Environment

ILENE H. FERENCZY, Esq., Managing Partner

Ferenczy Benefits Law Center LLP

ILENE H. FERENCZY, Esq., Managing Partner Ferenczy Benefits Law Center LLP

Ilene Ferenczy is the managing partner of Ferenczy Benefits

Law Center LLP in Atlanta, Georgia. Ilene particularly

focuses her practice on qualified retirement plans, benefits

issues in mergers and acquisitions, and advising third-party

administrators of employee benefit programs on technical

and practice issues. Ilene became an attorney after more

than ten years as a third-party administrator, and she brings

a unique and practical approach to her advice to clients.

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ILENE H. FERENCZY, Esq., Managing Partner Ferenczy Benefits Law Center LLP

She is a member of the State Bars of Georgia and California, and

holds designations as a Certified Pension Consultant from the

American Society of Pension Professionals and Actuaries

(“ASPPA”) and Accredited Pension Administrator from the

National Institute of Pension Administrators. She is a nationally

known speaker on benefits issues and has authored more than 85

articles and five books. She is a member of ASPPA’s Leadership

Council, a former co-chair of ASPPA’s Government Affairs

Committee, the 2007 recipient of ASPPA’s Educator of the Year

Award, and is also a Fellow in the American College of Employee

Benefits Counsel, the highest honor awarded to ERISA lawyers.

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Agenda • Introduction

• What Are Ethics?

• Source of Ethics for TPAs

• NIPA ethics

• Other Considerations

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Ethics … What Is It?

• According to the dictionary: the discipline dealing

with what is good and bad and with moral duty and

obligation; a set of moral principles; a theory or

system of moral values

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Types of Ethics

• Ethics defined by a professional organization (like NIPA,

ASPPA, CEBS, AICPA, FINRA or the ABA) may

represent what you need to do to keep your designation

• Ethics defined by a governmental department may

represent what you need to do to keep your license to

practice before such department (e.g., Circular 230,

SEC) and may also involve criminal sanctions

• For Financial Advisors, the DOL’s fiduciary regulations, if

finalized, will provide a new set of ethical obligations that

control how you practice and how you are compensated

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Types of Ethics

• Ethics defined by law may represent what you need to

do to keep from getting sued

• Breach of Contract (did you do what you agreed to do?)

• Malpractice (did you do what is commonly done in your industry?)

• Fraud or Misrepresentation (did you lie?)

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Key Practice Issue

• The difference between the client’s expectations and

your performance may be the basis of the client’s belief

that you have committed malpractice

• How will the client define that expectation?

• Impressions of what a TPA does?

• Impressions of what his/her TPA does?

(Where did those impressions come from?)

• General ideas about what is involved in retirement plan

administration?

• What his/her friends with plans have said?

• Legal documentation, such as the TPA’s service agreement?

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NIPA ETHICAL OBLIGATIONS

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NIPA Code of Ethics

• Stated as Standards of Professional Conduct include:

1. Practice within laws and regulations

2. Continuing education to improve competency

3. Design and administer plans consistent with client goals

4. Practice only where competent and recommend other

professionals when appropriate

5. Maintain client confidence unless client gives permission or law

requires

6. Deliver “all documents and information essential to the

administration of a plan” to successor administrator

http://www.nipa.org/

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NIPA Code of Ethics

• Stated as Standards of Professional Conduct include

(continued):

7. Avoid conflicts of interest or resolve so that obligations to clients

can be met

8. Support professional integrity of NIPA

9. Exchange ideas and experiences to help improve or solve

problems of the profession

10. Promote pension administration profession and NIPA

11. No discriminatory conduct or practice

12. Truthful advertising and solicitation

13. No dishonest, deceitful, fraudulent or willfully illegal acts

14. Honor the integrity of the designation and respect limitations

placed on it

ERPA ETHICAL OBLIGATIONS

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ERPA Ethics

• Circular 230 contains ethical rules to which ERPAs, as

well as other tax professionals, are subject

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ERPA Ethics

• The IRS modified Circular 230 in June 2014:

• Eliminated “Covered Opinion” rules

• Strengthened “Written Advice” rules

• Created new definition of “Competence” (used to be included in

the “covered opinion” rules)

• We will discuss these as we come to them in this outline

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Circular 230, §10.20: Information to the IRS and §10.23: Promptness

• If you are asked to provide information to the IRS, you

must provide it promptly and not interfere with the IRS’s

efforts to get that information

• You must not unreasonably delay the

prompt disposition of any matter with

the IRS

• Exception: you believe in good faith and

on reasonable grounds that the information is subject to

privilege

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Example

• The 401(k) plan of your client, Sam, is being audited by

the IRS

• The IRS requests all information regarding plan assets

• Sam contacts his client who tells him that he commonly

invests in real estate in his plan. He buys the real estate

at county auctions. He commonly does not have a plan

check when he makes these purchases, so he buys the

property with a company check, in the

company name, and then repays the

company from plan assets. He is not

always careful about changing the recorded

owner of the property

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Example

• The client provides Sam with deeds of trust, showing the

company as the property owner.

• Rather than sending those documents to the IRS,

because he knows it will be a problem, Sam keeps

putting the IRS off with excuses.

• Ethical violation for Sam?

• What if it is the client that keeps dawdling in providing

documentation to Sam and Sam keeps “covering for” the

client with the IRS not knowing the reason why the client

is not cooperating?

Circular 230, §10.21: Knowledge of Client’s Omission

• If you know that the client has omitted material

information or made an error in any filing with the IRS,

must advise client:

• that you know of the omission

or error; and

• the potential consequences of

the omission or error

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Circular 230, §10.22: Due Diligence

• You must exercise due diligence in your practice

• You can rely on the work product of another person if you

exercised reasonable due diligence in engaging,

supervising, training, or evaluating the other person,

taking into account your relationship with the other

person

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Example

• A TPA owner, Francine, has historically sold and

administered plans all by herself. She meets with the

client, designs the plan, documents the plan, and

administers the plan personally.

• This year, she has a lot of success and needs to bring

someone in to help. Francine’s daughter, Margaret, has

an accounting degree from the state university and is

extremely bright and eager to get involved in pensions.

• Francine sends Margaret to a 2-day seminar to learn

ERISA and administrative basics, then sets her up with a

caseload, saying, “Follow my lead.”

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Example

• Francine has every intention of properly supervising and

training Margaret, but she’s juggling things as much as

she can. She asks Margaret if she feels confident that

her work is right, and Margaret assures her that, after the

training course she took, she is quite capable.

• 15 months later, one of Margaret’s plans is audited by the

IRS and multiple qualification errors are found. Some of

the errors were done by the client, some by Margaret.

• Ethical issue?

• Malpractice issue?

Circular 230, §10.27: Fees

• No unconscionable fees

• Can use contingent fees in limited circumstances only

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Question …

• If you take over a case from another TPA and find that

they charged twice as much as you do, should you report

the other TPA to the Office of Professional Responsibility

for charging an unconscionable fee?

Circular 230, §10.28: Return of Client Records

• Generally, must return all records

of client necessary for compliance

with tax obligations

• Effect of fee dispute

• Generally does not relieve obligation to return records, but

• If state law permits retention of records in case of fee dispute,

need only return records that must be attached to the taxpayer’s

return

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Circular 230, §10.28: Return of Client Records (cont’d)

• Client’s records include:

• Provided to practitioner in the course of representation that

preexisted practitioner’s work (i.e., prior records)

• Materials prepared by client or third party

• Returns, claims for refund, schedule, affidavit, appraisal, etc.

prepared by practitioner that were already presented to client (but

not those that are pending the client’s payment of fees with

respect to those documents)

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Circular 230, §10.28: Return of Client Records (cont’d)

• Note: compare Circular 230 rule to NIPA ethical

standard #6, which does not limit the obligation to give

the successor sufficient records to do the administration

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Circular 230, §10.29: Conflicts of Interest

• Cannot accept representation of a client if there is a

conflict of interest:

• Representation will be directly adverse to another client; or

• Significant risk that representation to one or more clients will be

materially limited by responsibilities to other clients or third parties

or practitioner’s own interests

• Exception to prohibition:

• You reasonably believe you can provide competent and diligent

representation, notwithstanding the conflict;

• Representation not prohibited by law;

• Each affected client is advised of and waives the conflict in

writing

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Question

• You do the retirement plan work for the largest car

dealership in the county.

• You are asked to do the retirement plan work for the

second largest car dealership in the county, your first

client’s largest rival.

• Can you do the work?

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Circular 230, §10.30: Solicitation

• No false, fraudulent, coercive statements

or claims

• Cannot use the term “certified” or imply

that you are an IRS employee

• If make uninvited solicitation, must clearly identify as

such and identify source of information used in choosing

the recipient

• Fee information cannot be misleading

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Circular 230, §10.33: Best Practices

• You should provide clients with highest quality

representation by adhering to best practices in providing

advice and preparing IRS submissions

• You must communicate clearly with clients regarding the

terms of your engagement

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Circular 230, §10.33: Best Practices (cont’d)

• You should:

• Establish facts

• Determine which facts are relevant

• Evaluate the reasonableness of any assumptions or

representations

• Relate the applicable law to the facts

• Arrive at a conclusion

• Advise clients regarding the import of conclusions reached

• Act fairly and with integrity vis-à-vis the IRS

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Circular 230, §10.33: Best Practices (cont’d)

• Owners/managers should “take reasonable steps” to

ensure that the firm’s procedures for all in the firm are

consistent with best practices

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Back to Francine and Margaret …

• Even more ethical problems with Francine’s behavior,

no?

• Would Francine have a better defense if she had written,

detailed procedures for all facets of plan administration in

her company?

• What if Francine had designed the absolute best TPA

software imaginable, which walks the administrator

through every step in administering a plan from A to Z?

“Even a monkey could do this work using my system!”

Francine brags to her retirement industry friends.

Circular 230, §10.34: Standards for Returns and Documents, Affidavits, Papers • You may not advise a client to take a position on a

document submitted to the IRS that is:

• Frivolous; or

• Meant to impede or delay the administration of the tax laws;

• Contains/omits information that demonstrates an intentional

disregard of a rule or regulation unless there is a good faith

challenge to the rule or reg;

• Or advise a client to submit a return that:

• Lacks a reasonable basis;

• Takes an unreasonable position

• Willfully understates tax or disregards tax rules and regs

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Circular 230, §10.34: Standards for Returns and Documents, Affidavits, Papers (cont’d)

• You must:

• Advise the client of any penalties that are likely to apply with

respect to a position taken on a tax return or document

submission; and

• Inform the client of any opportunity to avoid such penalty by

disclosure and the requirements of disclosure

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Question

• What is the difference between:

• An aggressive but permitted position; and

• A position that lacks a reasonable basis?

• Is the practitioner’s knowledge that the position is

“unreasonable” needed?

• Example: retirement plan administrator has a “great idea” about

how to design a retirement plan. He looks through the Code and

regulations and can find nothing that says his idea is

impermissible.

• However, there have been 5 cases litigated in the last 10 years

that are roughly similar to the administrator’s idea, and all have

been decided against the taxpayer. The administrator had no

idea of these cases … after all, he’s not a lawyer.

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Circular 230, §10.34: Standards for Returns and Documents, Affidavits, Papers (cont’d)

• You may:

• Rely in good faith on information provided by the client

• You may not:

• Ignore implications of information furnished, and must make

reasonable inquiries if the information appears to be incorrect,

inconsistent with facts, or incomplete

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Question

• Several TPAs get together every 6 months in a study

group to exchange ideas.

• One of the members of this group advises the others that

he attended the last NAFE and was chatting with an

actuary he knows who presented a terrific idea. He chats

with the others and they consider the idea.

• Although the group agrees that it is a creative idea, the

member of the group who is the “Codehead” (i.e., spends

the most time of all of them reading the law and

guidance) notes that there is some language in a

regulation that may indicate that the idea violates Section

401(a)(93).

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Question

• What ethical obligation do the group members have to:

• Avoid using the idea until it is better vetted; or

• Warn their clients that there could be a qualification problem with

using the idea?

New §10.35: Competence

• A practitioner must possess the necessary competence

to engage in practice before the Internal Revenue

Service

• Competent practice requires the appropriate level of knowledge,

skill, thoroughness, and preparation necessary for the matter for

which the practitioner is engaged

• A practitioner may become competent for the matter for which the

practitioner has been engaged through various methods, such as

consulting with experts in the relevant area or studying the

relevant law

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Circular 230, §10.35: Covered Opinions

• Old Rules:

• Covered opinion: Written advice

concerning federal tax issues arising from:

• Listed transactions

• Principal purpose to avoid or evade taxes

• Significant purpose to avoid or evade taxes if the advice is:

• A marketed opinion

• A reliance opinion

• Subject to conditions of confidentiality or

• Subject to contractual protection

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Circular 230, §10.35: Covered Opinions (cont’d)

• Remember this?

• IRS CIRCULAR 230 DISCLOSURE: ABC does not provide tax

or legal advice. To the extent this communication (including

attachments), mentions or discusses any tax matter, it is not

intended or written to be used, and cannot be used by the

recipient or any other person, for the purpose of (1) avoiding

penalties under the Internal Revenue Code, or (2) promoting,

marketing or recommending to another party the matter

addressed herein. Any taxpayer should seek advice based on the

taxpayer's particular circumstances from an independent tax

advisor.

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Circular 230, §10.37: Written Advice

• In Giving Written Advice, A Practitioner Must:

• Base the written advice on reasonable factual and legal assumptions;

• Reasonably consider all relevant facts and circumstances that the

practitioner knows or reasonably should know;

• Use reasonable efforts to identify and ascertain the facts relevant to

written advice on each Federal tax matter;

• Not rely upon representations, statements, findings, or agreements

(including projections, financial forecasts, or appraisals) of the

taxpayer or any other person if reliance on them would be

unreasonable;

• Relate applicable law and authorities to facts; and

• Not, in evaluating a Federal tax matter, take into account the

possibility that a tax return will not be audited or that a matter will not

be raised on audit

Circular 230, §10.37: Written Advice (Cont’d)

• What is a “Federal tax matter”?

• Any matter concerning the application or interpretation of -

• A revenue provision as defined in section 6110(i)(1)(B) of the

Internal Revenue Code;

• any existing or former internal revenue law, regulation, revenue

ruling, revenue procedure, other published or unpublished

guidance, or tax treaty, either in general or as applied to specific

taxpayers or groups of specific taxpayers

• Any provision of law impacting a person’s obligations under

the internal revenue laws and regulations, including but not

limited to the person’s liability to pay tax or obligation to file

returns; or

• Any other law or regulation administered by the Internal

Revenue Service

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Circular 230, §10.37: Written Advice (cont’d)

• Definition of reasonable reliance

• Reliance on representations, statements, findings, or

agreements is unreasonable if the practitioner knows or

reasonably should know that one or more representations or

assumptions on which any representation is based are incorrect,

incomplete, or inconsistent


• When Can You Reasonably Rely on Another?

• A practitioner may rely on the advice of another person only if the

advice is reasonable, and the reliance is in good faith considering

all the facts and circumstances

• Reliance is not reasonable when--

• The practitioner knows or reasonably should know that the opinion of

the other person should not be relied on;

• The practitioner knows or reasonably should know that the other

person is not competent or lacks the necessary qualifications to

provide the advice; or

• The practitioner knows or reasonably should know that the other

person has a conflict of interest in violation of the rules described in

this part

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• What is written advice?

• Includes electronic advice

• Doesn’t include comment letters to IRS

• Doesn’t include continuing education materials

• Unless marketing transactions or products

• Putting contact information in materials isn’t marketing


• What about disclaimers?

• Disclaimer doesn’t take you out of §10.37

• It could take you out of old §10.35

• “Treasury and the IRS expect that these amendments will

eliminate the use of a Circular 230 disclaimer in e-mail and other

writings”

• May want to have a disclaimer to indicate scope of opinion

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• Sample New Disclaimer:

• PLEASE NOTE: Any tax and legal advice provided in this

correspondence is for the exclusive use of the person to whom it

is directed and is dependent on the facts and circumstances

provided to us by such person (regardless of whether such facts

and circumstances are discussed in this correspondence). The

use of this information for any other situation and by any other

individual, regardless of how this correspondence was provided

to the other individual, may be inappropriate. Furthermore, if the

facts and circumstances communicated to us are not accurate

and complete, please contact us immediately, our advice may

change. Please also contact our office with any questions you

may have.

Circular 230, § 10.36 Office Procedures

• If you oversee a firm’s practice, you “must take

reasonable steps to ensure that the firm has

adequate procedures in effect for all members,

associates, and employees for purposes of complying

with” Circular 230

• IRS can discipline you if:

• you don’t take reasonable steps to establish procedures and see

that they are followed (and correct violations), and

• “one or more individuals who are members of, associated with, or

employed by, the firm are, or have, engaged in a pattern or

practice, in connection with their practice with the firm, of failing to

comply with” Circular 230

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Circular 230, § 10.31: Taxpayer Checks

• Can’t negotiate or endorse client

refund check, including electronically

Circular 230, §10.82: Expedited Suspension for Nonfiling of Tax Returns

• Applies to practitioners who fail to file Federal returns:

• 4 out of last 5 years for annually

• 5 out of last 7 periods for returns required more often than

annually

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OTHER CONSIDERATIONS

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Other Things to Consider

• Your reputation

• With your clients

• With other practitioners

• With your employees

• Your risk tolerance

• Your personal ethics

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A Good Ethical Rule of Thumb

• Do What’s Right … and don’t let anyone take away

your good name!

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A Good Ethical Plan

• Consider in advance the ethical “dilemmas” that most

commonly affect your area of practice and determine:

where is the line in the sand?

• Things clearly on the “okay” side are fine

• Things clearly on the “absolutely not” side are not

• Only the small issues in the gray area require additional thought

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Questions?

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Contact Information

Ilene H. Ferenczy Ferenczy Benefits Law Center LLP

2200 Century Parkway, Suite 560

Atlanta, Georgia 30345

(678) 399-6602 (V)

(866) 515-5140 (toll free)

(404) 320-1105 (F)

[email protected]

Follow us on Twitter: @ferenczylaw

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