[105] keep and render clear and accurate accounts, take and keep control of the plan property, protect the plan property from loss and damage, enforce claims of the plan and defend actions against the plan (unless it is reasonable not to do so), and keep plan property separate from other property. It is intended that the investment standard that must be met by a fiduciary is to be the standard established by the prohibited transaction rule discussed above which prohibits investments that jeopardize the income or assets of a trust.

The bill also prohibits a person who has been convicted of a number of specified crimes from acting as a manager, fiduciary, employee, or consultant to an employee benefit plan for 5 years after conviction or after imprisonment. Any willful violation of this prohibition is subject to a penalty of $10,000 and 1 year imprisonment; the same penalty is applicable to anyone who knowingly permits another person to violate this prohibition. Upon an administrative hearing and after giving notice to prosecuting officials, the Board of Parole of the Department of Justice may remove the restriction on serving with a plan if the Board finds that this would not be contrary to the purpose of the bill. The Board's determination will be final.

Under the bill, the Secretary of Labor and participants and beneficiaries of a plan may bring civil actions for any appropriate legal or equitable relief to redress or restrain a violation of fiduciary duties. The bill specifically makes a fiduciary who breaches any of the specified duties personally liable; the fiduciary must make good any losses which the plan sustained from the breach and must restore to the plan any profits which he made using plan assets. However, a fiduciary is only personally liable where he knew, or would have known if he exercised reasonable diligence, that his act or failure to act constituted a breach of his responsibility. The bill also provides that fiduciaries have a duty to prevent their co-fiduciaries from breaching a fiduciary responsibility and must compel a redress of a breach. However, if the co-fiduciary objects in writing to the specific action and files a copy of the objection with the Secretary of Labor, he will not be liable for any act (or failure to act) of another fiduciary. Furthermore, the bill specifically prohibits exculpatory clauses.

The bill also makes a party in interest who participates in a prohibited transaction (or a transaction which would have been a prohibited transaction if the plan were qualified under the tax laws) personally liable for any losses sustained by the plan and for any profits made through using plan assets. A party in interest is so liable only if he knew that the transaction was prohibited or would have known after exercising reasonable diligence. This liability is appropriate because in these situations often the party in interest is a major beneficiary of a fiduciary breach; in addition, this liability is in accord with the excise tax liability discussed above regarding prohibited transactions. Fiduciaries and parties in interest who are liable on account of a breach of duty in which they both participated are to be jointly and severally liable.

Appropriate equitable relief may be granted in a civil action. For example, injunctions may be granted to prevent a violation of fiduciary duty, and a constructive trust may be imposed on the plan assets, if needed to protect the participants and beneficiaries. Also, the bill

[106] specifically provides that a fiduciary may be removed through civil action brought by the Secretary or participants or beneficiaries if he has violated any of the specified fiduciary obligations, or is serving in violation of the criminal conviction provisions. (The Attorney General also may bring an action to remove in the latter case.) It is expected that a fiduciary (other than one serving in violation of the criminal conviction provisions) may be removed for repeated or substantial violations of his responsibilities, and that upon removal the court may, in its discretion, appoint someone to serve until a fiduciary is properly chosen in accordance with the plan.

The bill provides that participants and beneficiaries may bring civil actions to redress a breach of fiduciary responsibility in any State or Federal court of competent jurisdiction. Actions by participants and beneficiaries brought in Federal district court are subject to the $10.000 jurisdictional requirements (28 U.S.C. sec. 1331). (However, the $10,000 limit does not apply to actions brought by the Secretary of Labor or the Attorney General.) Where participants and beneficiaries bring a civil action, the Secretary of Labor must be served with a copy of the complaint or petition, and the Secretary may intervene in the action and remove an action from a State court to a Federal district court. Removal is available only when the Secretary could have brought the action initially.

The bill provides that participants or beneficiaries may bring class actions under certain circumstances. Further, in an action by participants or beneficiaries, a court may allow reasonable attorney's fees and costs and may require the plaintiff to post security for payment of these fees and costs. Liberal venue and service provisions are established for actions brought in Federal district court.

If the fiduciary breach is disclosed in a report filed with the Secretary of Labor, civil action may be brought no later than 3 years after the report is filed. In other cases, an action may be brought within 3 years after the plaintiff knows or has reason to know of the violation, but no action may be brought more than 10 years after the transaction occurred. Additionally, where there is a willfully false or fraudulent statement, misrepresentation, concealment or failure to disclose a material fact to the Secretary of Labor, action may be brought within 10 years of the violation.

Effective date

The effective date of the fiduciary responsibility provision is January 1, 1975.

Revenue effect

The fiduciary responsibility provisions are not expected to have any significant effect on the revenues.

H. Administration and Enforcement

(Secs. 101 and 102, 601, 602, and 641 of the bill, and secs. 4974, 7476, 7477, and 7802 of the Code)

The committee bill relies heavily on the tax laws in order to secure compliance with the new requirements that it imposes on employee

[107] pension, profit-sharing and stock bonus plans. The bill, in providing new standards of coverage, vesting, funding and fiduciary responsibility, continues the administration of these provisions in the Internal Revenue Service.

Many aspects of compliance have been discussed in conjunction with the various substantative provisions described in the bill. This includes, for example, the new excise taxes imposed with respect to underfunding and those imposed in connection with transactions which are prohibited to qualified plans.

In a number of other ways, however, efforts have been made to improve the provisions of existing law. The provisions of this type discussed here are the new office set up in the Internal Revenue Service to administer the new standards in this bill as well as those of existing law, together with the audit fee tax designed to provide for this administration. In addition, the bill deals with the problem raised as to the absence under existing law of a judicial review for letters of determination as to the qualification status of plans. Procedures are also set out whereby employees can question the qualification of plans. Finally, the bill establishes procedures in the Department of Labor for an administrative review of employee claims as to their rights under qualified plans.

1. INTERNAL REVENUE SERVICE

Present law

Under present law, the national office of the Internal Revenue Service is organized on a general activity basis rather than a tax or subject basis. At the present time, there are six Assistant Commissioners of Internal Revenue in the national office whose activities are broken into the following categories: collection and taxpayer service, compliance (including auditing), inspection (internal security), planning and research, technical (rulings) and administration housekeeping). Similarly, the field offices of the Service are organized on a similar line. Within each of these broad categories there are Service units whose jurisdictional breakdown is by subject matter under examination. For example, the Miscellaneous and Special Provisions Tax Division under the Office of Assistant Commissioner (Technical) contains a Pension Trust Branch and an Exempt Organization Branch. However, various other aspects of national office employee benefit plan and tax exempt organization administration are under the Office of Assistant Commissioner, Accounts Collection and Taxpayer Service and the Office of Assistant Commissioner, Compliance.

General reasons for change

Concern has been expressed in the case of the administration of employee benefit plans (and also tax exempt organizations) as to whether the Internal Revenue Service with its primary concern with the collection of revenues is giving sufficient consideration to the purposes for which these organizations are exempt. Many believe that the

1 Reorganization Plan No. 1 of 1952 which went into effect on March 15, 1952. For a description of the present organization of the Internal Revenue Service, see Statement of Organization and Functions (C.B. 1970-1, 442).

[108] present organization of the Service causes it to subordinate concern for the protection of the interests of plan participants (or the educational, charitable, etc., purposes for which the exemptions are provided).

On the other hand, the enormous growth in retirement plans during the last third of a century has proceeded largely under the tax regulations of the Internal Revenue Service. Moreover, clearly the greatest single protection for rank and file employees during this time has been the Internal Revenue Service's administration of the provision denying any special tax treatment for contributions or benefits discriminating in favor of employees who are office. shareholders, supervisors, or highly compensated employees. The thrust of this provision is to require broader substantial participation in the plans than would be provided but for the Service's administration of the statute.

At the same time, it must be recognized that the natural tendency is for the Service to emphasize those areas that produce revenue rather than those areas primarily concerned with maintaining the integrity and carrying out the purposes of exemption provisions. Similar concern has been expressed in the past over the Service's administration of the provisions of the tax law relating to exempt. organizations.

The committee believes that in the employee benefit plan and tax exempt organization area it should be easier to emphasize the basic objectives involved if the activities relating to these plans and exempt organizations were more closely coordinated, if the activities in these areas relating to auditing, rulings, etc. whether in the field or in the national office are brought together and if the top direction for these activities also has specialized in them. For the reasons outlined, the bill establishes a separate office in the Internal Revenue Service, headed by an Assistant Commissioner for Employee Plans and Exempt Organizations to deal primarily with plans that are (or claim to be) qualified under section 401 of the code and organizations that are (or claim to be) exempt from income taxes under section 501 (a) of the code. This includes pension, profit-sharing and stock bonus trusts and plans, religious, educational, charitable, organizations and foundations as well as the various other exempt. organizations described in section 501 (c) of the code. Similar units are to be established in the various regional and district offices. In addition, the committee has decided to earmark half of the 4-percent private foundations excise tax on investment income as well as the proceeds from a new audit-fee excise tax for the funding of these new offices.

Explanation of provisions

Office of Assistant Commissioner, Employee Plans and Exempt Organizations.-The bill establishes within the Internal Revenue Service a new office of Assistant Commissioner to be known as the Office of Assistant Commissioner, Employee Plans and Exempt Organizations. This office is to have the supervision and direction of the basic activities of the Internal Revenue Service in connection with pensions, etc. plans (governed by secs. 401 through 414 of the code) and tax exempt organizations (exempt from tax under

[109] sec. 501 (a) of the code). The bill authorizes the prescribing of the activities this office is to be responsible for in connection with organizations exempt from tax (under sec. 501 (a) of the code) and plans to which the special tax benefits of the deferred compensation provisions of the tax laws (secs. 401 through 414 of the code). In connection with deferred compensation plans it is intended that this office will be made responsible for, among other things, the question as to the qualification of the plan and the related trust and the exemption from tax of the trust. It also is intended that questions as to the deductibility of contributions to a plan, the taxability of a beneficiary of an employees' trust and the taxation of employee annuities be included in the jurisdiction of this office. In addition, it is planned that this office would have responsibility over the minimum standards relating to funding of the plan and the excise tax for underfunding, including the enrollment and reports of actuaries. The new rules relating to prohibited transactions also come within the activities it is intended should be administered by this office.

In connection with organizations exempt from tax (under sec. 501 (a) of the code) it is intended that this office have the responsibilities as to an organization's exempt qualification, the taxes on unrelated business income of an organization exempt from tax, and the rules relating to the private foundation provisions of the Internal Revenue Code.

To carry out the provisions of this bill, it is intended that the principal activities referred to above will be transferred from the various Assistant Commissioners' offices to the new Office of the Assistant Commissioner (Employee Plans and Exempt Organizations). With these transfers it is intended that the Assistant Commissioner (Employee Plans and Exempt Organizations), under the direction and supervision of the Secretary, or his delegate, will have the authority to direct national and field office policy in connection with the basic activities of the Service relating to employee plans and exempt organizations.

Salaries.-The bill provides that the Assistant Commissioner (Employees Plans and Exempt Organizations) is to be classified at a GS-18 level and is in addition to the number of positions authorized by present law (sec. 5109 of Title 5 of the U.S. Code). Present law also is amended (sec. 5108 of Title 5 of the U.S. Code) to provide that in addition to any positions already provided (and without regard to any other restriction of present law) there are to be a total of 20 new positions in the Internal Revenue Service in levels. GS-16 and GS-17. Those increases are to become effective on the date of the enactment of the bill.

Authorization of appropriations.-The responsibilities and functions allocated to this new office are to be funded by separate appropriations, authorization for which is made in this bill. For this purpose, the bill authorizes that the revenue from the annual $1 auditfee tax imposed on the employer for each plan participant (sec. 4974) plus one-half of the revenues from the 4 percent excise tax on foundation investment income (sec. 4940) is authorized to be appropriated to this office for purposes of carrying out the functions of the office.