SF Law Firm Wins Round 1 in 401(k) Consulting Suit

May 8, 2009 (PLANSPONSOR.com) - A federal judge in California has rebuffed demands from JP Morgan Chase and Co. that it dismiss a lawsuit alleging mistakes that could imperil the tax-favored status of a San Francisco law firm's profit sharing/401(k) plan.

U.S. District Judge Samuel Conti of the U.S. District Court for the Northern District of California said he was not convinced the statuatory time limits for moving forward with the claims from Shartsis Friese LLP had expired by the time the January 2008 case was filed. The law firm’s allegations against Chicago-based benefits consulting firm CCA Strategies carry a two or three-year statute of limitations under California law, according to the court.

The crux of the law firm’s allegation is that CCA consultant Tim Mahannah made mistakes in the amounts he determined would be allowable for plan participants to defer into the plan. The firm hired CCA in 2001 to get advice about “the optimum manner in which (the firm) could maximize its partners’ contributions to the plan, minimize costs to (the firm) and remain in compliance with applicable laws,” according to the court.

Shartsis Friese severed its relationship with CCA before JP Morgan acquired CCA in November 2006 but didn’t discover the error until early 2007.

Different Formulas

Rather than base his calculations on a single-tiered contribution formula, the law firm alleged Mahannah used a three-tiered formula. However, Mahannah applied a different formula for partners, “of counsel” lawyers, and staff, the suit alleged.

Now, unless the firm corrects the situation, its plan could be declared to be non-compliant by the Internal Revenue Service (IRS), the law firm said.

“Loss of the Plan’s tax-favored status may have significant financial implications for (the firm) and all of the Plan participants, and may result in substantial loss of retirement benefits for partners and other Plan participants,” Conti observed.

In arguing the suit should be dismissed because it was filed too late, JP Morgan argued that the firm “should have known” of the errors sooner than it did because the firm was designated as the Plan Administrator. The underlying issues and supporting data were not complex enough to be indecipherable to the law firm, JP Morgan claimed.

However, “The Court is unwilling to conclude on the current record,” Conti wrote, “that these errors were so obvious to a reasonable fiduciary that (the firm’s) reliance (on CCA’s advice) was unjustified as a matter of law, or that SF was not entitled to rely on CCA’s advice.”

The ruling is available  here .