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AGO Opinion 98042

Authority of the Public Employees Retirement Board to Suspend Retirement Benefit Payments; Internal Revenue Service Qualification Requirements for Retirement Plans
Opinion 98042

DATE: October 8, 1998

SUBJECT: Authority of the Public Employees Retirement Board to Suspend Retirement Benefit Payments; Internal Revenue Service Qualification Requirements for Retirement Plans




REQUESTED BY: Anna J. Sullivan, Acting Director Nebraska Public Employees Retirement Systems




WRITTEN BY: Don Stenberg, Attorney General

Fredrick F. Neid, Assistant Attorney General




You have requested the opinion of the Attorney General

regarding the authority of the Public Employees Retirement Board to

cancel outstanding warrants and concerning qualification

requirements for retirement plans under the Internal Revenue Code.

Three questions are asked relating to suspension of benefits

including the stop payment of state warrants issued for payment of

benefits and the implication of these actions under Internal

Revenue Code provisions.




The factual background you briefly describe is that the state

warrants issued have not been negotiated (cashed) and the Public

Employees Retirement Systems has no "information that the member or

beneficiary has died or that the payment is improper." It is

further related that the "State Auditor suggested that NPERS

initiate procedures to cancel outstanding warrants before the one

year period expires so that the funds could be credited to the

retirement funds rather than the general fund."




Our conclusions with respect to each of the three questions

you have posed are set forth separately below.

I.

WHAT AUTHORITY DOES NPERS HAVE TO SUSPEND RETIREMENT

BENEFIT PAYMENTS AND CANCEL OUTSTANDING WARRANTS MADE

PAYABLE TO A MEMBER OR BENEFICIARY IN THE ABSENCE OF

INFORMATION THAT THE MEMBER OR BENEFICIARY HAS DIED OR

THAT THE PAYMENT IS IMPROPER?




The Public Employees Retirement Systems has general and

specific statutory authority as well as the obligation to suspend

benefit payments and cancel outstanding warrants for any valid

reason.




The authority of the Public Employees Retirement Board to

suspend benefit payments and stop payment of state warrants derives

from the authority vested in the Retirement Board for administering

the retirement systems and in the exercise of the Board's fiduciary

responsibilities. The duties of the Retirement Board are

partially enumerated in Neb. Rev. Stat. § 84-1503 (Cum Supp. 1996)

which in substantive part states:




(1) It shall be the duty of the Public Employees Retirement

Board:

(a) To administer the retirement systems provided for in the

County Employees Retirement Act, the Judges Retirement Act,

the Nebraska State Patrol Retirement Act, the School Employees

Retirement Act, and the State Employees Retirement Act. The

agency for the administration of the retirement systems and

under the direction of the board shall be known and may be

cited as the Nebraska Public Employees Retirement

Systems; . . .




The suspension of benefit payments and stop payment of

outstanding warrants would achieve the purposes of the various

retirement acts establishing the retirement systems and insure that

retirement funds are used for the exclusive benefit of members and

their beneficiaries. It is well established that administrative

bodies and agencies have only that authority specifically conferred

upon them by statute or by construction necessary to achieve the

purpose of the relevant act. Jolly v. State, 252 Neb. 289, 562

N.W.2d 61 (1997); Centra, Inc. v. Chandler Ins. Co., Ltd., 248 Neb.

844, 540 N.W.2d 318 (1995), cert. denied 116 S.Ct. 168, 517 U.S.

1191, 134 L.Ed.2d 786. The actions of suspending benefit payments

and cancelling outstanding warrants are actions that would fall

with the scope of duty and authority of the Retirement Board to

administer the retirement systems.




Further, specific authority exists for the stop payment of

outstanding state warrants. Neb. Rev. Stat. § 77-2215 (1996) in

particular part states:




(2) Whenever it shall have come to the attention of the

Director of Administrative Services that an outstanding

warrant has not been presented for payment, the Director of

Administrative Services shall immediately issue a stop-payment

order and notify the State Treasurer, by letter, of the

issuance of such order. After the expiration of seven working

days from the issuance of such order, if in the meantime such

outstanding warrant has not been presented for payment, the

Director of Administrative Services shall have authority to

issue a duplicate thereof, numbered the same as the original,

with the word duplicate written or printed in red ink across

the face thereof. In an emergency, the Director of

Administrative Services may immediately issue such duplicate

warrant.




We believe that § 77-2215 serves as authority for the Retirement

Board for stop payment of any outstanding warrants and the

statutory process is appropriately used for any valid purpose. It

is not necessary that standards which guide administrative agencies

be embodied in one statute, but may be found in others. See In re

Application U-2, 226 Neb. 594, 413 N.W.2d 290 (1987). Thus, the

provisions of § 77-2215 serve to provide a statutorily authorized

mechanism which may be used by the Retirement Board to cancel or

stop payment on state warrants.




The suspension of benefit payments (stop payment) only upon

the information that warrants issued to beneficiaries have not been

cashed for a period of several months seems to us to be a

reasonable business practice in keeping with the fiduciary

responsibilities of the Retirement Board. Members of the Board

have fiduciary duties to administer the retirement systems for the

exclusive use and benefit of members and their beneficiaries. Neb.

Rev. Stat. § 1503.02 (Cum. Supp. 1996) states:




(1) The appointed members of the Public Employees Retirement

Board shall have the responsibility for the administration of

the retirement systems pursuant to subdivision (1)(a) of

section 84-1503, shall be deemed fiduciaries with respect to

the administration of the retirement systems, and shall be

held to the standard of conduct of a fiduciary specified in

subsection (2) of this section. The nonvoting, ex officio

member of the board shall not be deemed a fiduciary.

(2) As fiduciaries, the appointed members of the board shall

discharge their duties with respect to the retirement systems

solely in the interests of the members and beneficiaries of

the retirement systems for the exclusive purposes of providing

benefits to members and members' beneficiaries and defraying

reasonable expenses incurred within the limitations and

according to the powers, duties, and purposes prescribed by

law. The appointed members of the board shall act with the

care, skill, prudence, and diligence under the circumstances

then prevailing that a prudent person acting in like capacity

and familiar with such matters would use in the conduct of an

enterprise of a like character and with like aims.




(Emphasis added.)




Consistent with the statutory requirements, our Nebraska

Supreme Court, in Karpf v. Karpf, 240 Neb. 302, 481 N.W.2d 891

(1992), has held that a trustee owes the beneficiary an equitable

obligation to keep or use the assets of the trust for the exclusive

benefit of the beneficiary. And, every violation by a trustee of

a duty required of him by law, whether wilful or fraudulent, or

done through negligence, or arising from mere oversight or

forgetfulness, is a breach of trust. See Rettinger v. Pierpont,

145 Neb. 161, 15 N.W.2d 393 (1944); Whaley v. Matthews, 134 Neb.

875, 280 N.W. 159 (1938). Consequently, it is the duty of the

Retirement Board to administer the retirement systems entrusted to

its care in a manner that all funds and monies are used exclusively

for providing benefits to members and members' beneficiaries.




We note that any warrants that are not negotiated within one

year after their issuance cease to be an obligation of the State of

Nebraska and are to be charged off upon the books by the State

Treasurer under the provisions of Neb. Rev. Stat. § 77-2205 (1996).

This statute also provides that, "[e]xcept as otherwise provided by

law, the amount stated on such warrant shall be credited to the

General Fund." Of course, the law requires that any funds or

monies of the retirement systems are to be used exclusively for

providing members' benefits. Accordingly, amounts from uncashed

warrants issued to pay retirement benefits are not properly

credited to the General Fund.




II.




IF THE AUTHORITY TO CANCEL WARRANTS EXISTS, DOES THE

CREDITING OF THE FUNDS TO THE RETIREMENT FUNDS VIOLATE

THE EXCLUSIVE BENEFIT RULES AND THE MINIMUM DISTRIBUTION

RULES IMPOSED UPON QUALIFIED RETIREMENT PLANS BY INTERNAL

REVENUE CODE SECTIONS 401 (a)(2) AND 401(a)(9)? THESE

RULES GENERALLY PROHIBIT REVERSION OF PLAN ASSETS TO THE

EMPLOYER UNTIL ALL PLAN LIABILITIES HAVE BEEN SATISFIED,

PROHIBIT THE DIVERSION OF PLAN ASSETS TO PURPOSES OTHER

THAN THE EXCLUSIVE BENEFIT OF PLAN MEMBERS AND

BENEFICIARIES, AND REQUIRE THAT A MEMBER'S INTEREST IN

THE PLAN BE DISTRIBUTED TO THE MEMBER AND THE MEMBER'S

BENEFICIARY OVER THE LIFE OR LIFE EXPECTANCY OF THE

MEMBER AND THE MEMBER'S DESIGNATED BENEFICIARY.




Cancellation or stop payment of warrants and crediting these

amounts to retirement funds is consistent with and in furtherance

of Internal Revenue Code provisions relating to plan qualification

requirements.




Initially, we point out that the provisions of 26 U.S.C.A.

§ 401(a) of the Internal Revenue code are applicable to the Public

Employees Retirement Systems because the retirement plans

administered by the Retirement Board are governmental plans as that

term is defined in 26 U.S.C.A. § 414(d). As such, Internal

Revenue Code requirements must be adhered to in order to maintain

the "qualified" status of the retirement plans. See Foil v.

C.I.R., 920 F.2d 1196 (5th Cir. 1990), Howell v. United States, 775

F.2d 887 (7th Cir. 1985). (Addressing the issue whether certin

governmental plans are "qualified" plans under the Internal Revenue

Code).




Section 401 in material part states:




(a) Requirements for qualification. A trust created or

organized in the United States and performing part of a stock

bonus, pension, or profit-sharing plan of an employer for the

exclusive benefit of his employee or their beneficiaries shall

constitute a qualified trust under this section--

(2) if under the trust instrument it is impossible, at any

time prior to the satisfaction of all liabilities with respect

to employees and their beneficiaries under the trust, for any

part of the corpus or income to be (within the taxable year or

thereafter) used for, or diverted to, purposes other than the

exclusive benefit of his employees or their

beneficiaries . . .




(Emphasis added).




The suspension of benefit payments or the stop payment of

warrants are not actions that would in some fashion violate the

exclusive benefit requirements of § 401(a). Rather, these actions

would assure that benefit payments would be used only for their

intended purposes and that benefit amounts would not be used for

any purpose other than the exclusive benefit of employees and

beneficiaries.




As we understand, benefit payments would not be suspended nor

payment stopped unless it were determined that warrants issued are

outstanding after a certain period of time. Amounts from cancelled

warrants would be credited to retirement funds rather than the

General Fund. These actions would be consistent in every respect

with IRC requirements since benefit amounts would be paid as

provided for once the reasons for not negotiating the warrants were

determined. Obviously, a warrant may not be negotiated for any

number of reasons, i.e., oversight, lost in the mail, change of

residence, etc. We believe that suspension of benefit amounts and

the stop payment of outstanding warrants would serve to comply with

the "exclusive benefit" requirements since retirement amounts,

would be used only for purposes of the funding and payment of

employee benefits.




Similarly, the "required distribution" provisions of

§ 401(a)(9) would not be offended by administrative practices

suspending payment of benefit amounts if warrants were outstanding

for a certain time period. We necessarily assume that eligible

amounts would be paid or remitted to the beneficiaries upon

learning of the reasons for the outstanding warrants. Suspension

of benefit amounts or the stop payment of warrants until

information is obtained as to the beneficiary's status would assure

that retirement funds are being used only for the benefit of plan

members and their beneficiaries. As the courts have noted,

§ 401(a) requires that plan documents definitely and affirmatively

make it impossible for funds to be used for any purpose outside the

retirement plan. See Pension Benefit Guaranty Corporation v. Artra

Group, Inc., 972 F.2d 771 (7th Cir. 1992). Of course, plan

provisions of the retirement systems administered by the Retirement

Board are reposed in statute. As we have noted above, the members

of the Retirement Board have the fiduciary obligation to administer

the retirement systems for the exclusive use and benefit of members

and beneficiaries under the provisions of § 84-1503.02 and the

distribution provisions of the individual retirement acts

establishing the retirement systems.




III.




IN THE ALTERNATIVE, IF THE AUTHORITY TO CANCEL

WARRANTS DOES NOT EXIST, DOES THE CREDITING OF FUNDS TO

THE GENERAL FUND VIOLATE THE EXCLUSIVE BENEFIT RULES AND

THE MINIMUM DISTRIBUTION RULES IMPOSED UPON QUALIFIED

PLANS BY INTERNAL REVENUE CODE SECTIONS 401 (A)(Z) AND

401 (A)(9)?




We have concluded above that the Retirement Board possesses

general and specific authority for cancelling or stopping payment

of warrants prior to one year of their issuance. And, it is our

view that the crediting of funds to the General Fund would be

contrary to Nebraska law and also violative of the "exclusive

benefit" rules of the Internal Revenue Code. Amounts of warrants

cancelled after one year may not be credited to the General Fund if

otherwise provided by law under the provisions of § 77-2205. We

have previously pointed out that § 84-1503.02 requires that the

retirement systems be administered exclusively for the use and

benefit of employees and their beneficiaries. Crediting amounts to

retirement funds fulfills § 401(a) qualification requirements and

precludes the possibility that retirement fund amounts may be

utilized for any purpose other than the exclusive benefit of

retired employees and their beneficiaries.




CONCLUSION




It is our opinion that the Nebraska Public Employees

Retirement Board has the authority and the duty to suspend

retirement benefits for any valid reason. Further, information

that warrants issued for benefit payments are outstanding

constitutes a valid basis for stop payment of the outstanding

warrants. State and federal statutes mandate that retirement funds

be used for the exclusive benefit of retired members and their

beneficiaries. The administrative practice of suspending payments

and cancelling outstanding warrants recommended by the Auditor of

Public Accounts would assure compliance with statutory requirements

in keeping with the fiduciary duties of the Retirement Board.




Sincerely,




DON STENBERG

Attorney General






Fredrick F. Neid

Assistant Attorney General