Peter Gulia

Artie M, now I see your observation. An organization that otherwise might tolerate some risk about a tax treatment of an employee’s compensation might be more cautious about a director’s compensation, because the directors govern the organization. Likewise, the organization’s C-suite executives, including the general counsel, might seek to maintain the directors’ respect, trust, and good graces, and might find that doing so is in the organization’s proper interests. Also, an organization’s caution regarding a director’s risk might be influenced by knowing that some, many, or all the directors each engages one’s personal counsel, independent of the organization’s inside and outside counsel. Further, many law firms could face positional or issue conflicts (even if not conduct-violating, at least practically) if they would provide arguably inconsistent advice even to differently situated clients.

Many plan sponsors design one’s plan to follow this: 26 C.F.R. § 1.401(k)-1(d)(3)(ii)(B) https://www.ecfr.gov/current/title-26/part-1/section-1.401(k)-1#p-1.401(k)-1(d)(3)(ii)(B). Of the seven situations deemed an immediate and heavy financial need, EBP’s paraphrases are of –(B)(2) and –(B)(4).

Although a nonexecutive director of an organization is not its employee, one is a service provider. Much in the § 409A rules is conceptually similar whether the relationship is employee-employer or service provider and service recipient.

Thoughts about other ways: If the plan allows participant loans, might this participant prefer to borrow a needed amount, with an opportunity to repay over five years? If the plan provides (or might be amended to provide) a § 72(t)(2)(I) emergency personal expense distribution, might that be a partial fit for the participant’s needs? A distribution can be “for purposes of meeting . . . immediate financial needs relating to necessary personal or family emergency expenses.” I.R.C. (26 U.S.C.) § 72(t)(2)(I)(iv). Practically, this distribution is almost standardless, especially if the plan provides it on a participant’s self-certifying claim. Although $1,000 might be much less than the participant needs, it might be better than nothing. I.R.C. (26 U.S.C.) § 72(t)(2)(I) https://www.govinfo.gov/content/pkg/USCODE-2023-title26/html/USCODE-2023-title26-subtitleA-chap1-subchapB-partII-sec72.htm. This is not advice to anyone.

Here’s another way to think about this: Which adviser advises which advisee? How confident must a conclusion be to serve one’s advisee’s purposes? How much must an adviser explain to steer clear of malpractice and negligent-communication risks? Recognize that tax law consequences for an employee or service provider might not be entirely aligned with consequences for an employer or service recipient. Recognize that an employee or service provider often does not get the employer’s or service recipient’s indemnity if a plan does not get a desired tax treatment.

Those rules to interpret § 401(k), § 414(v) generally, and § 414(v)(7) particularly presume a reader has at least awareness of many other tax law conditions for eligible retirement plans. The Treasury department did what they could with what Congress enacted.

For a reader who might explore the uses, here’s Internal Revenue Code § 401(b)(3) (as compiled in the United States Code): (3) Retroactive plan amendments that increase benefit accruals If— (A) an employer amends a stock bonus, pension, profit-sharing, or annuity plan to increase benefits accrued under the plan effective as of any date during the immediately preceding plan year (other than increasing the amount of matching contributions (as defined in subsection (m)(4)(A))), (B) such amendment would not otherwise cause the plan to fail to meet any of the requirements of this subchapter, and (C) such amendment is adopted before the time prescribed by law for filing the return of the employer for the taxable year (including extensions thereof) which includes the date described in subparagraph (A), the employer may elect to treat such amendment as having been adopted as of the last day of the plan year in which the amendment is effective. I.R.C. (26 U.S.C.) § 401(b)(3) https://www.govinfo.gov/content/pkg/USCODE-2023-title26/html/USCODE-2023-title26-subtitleA-chap1-subchapD-partI-subpartA-sec401.htm.

When I do a recordkeeper selection, I design the timeline so there’s eight months from the decision to the turn date. (Even if all needed tasks can be done in one month, there’s value in helping people feel comfortable with a change.) Timelines vary with a plan’s size and complexity, and with an employer’s size and complexity. Timelines also can vary with the conversion-out and conversion-in recordkeepers’ motives and how much they differ or align, or overlap.

Oops, no more than half . . . . , or just half.

On Santo Gold’s hypo, isn’t the account balance after the first loan is made still $50,000—that is, $25,000 participant loan receivable + $25,000 other investments? But wouldn’t ERISA § 408(b)(1) and Internal Revenue Code § 72(p)(2)(A) limit the amount for a second loan? Consider 29 C.F.R. § 2550.408b-1(f)(2)(i) https://www.ecfr.gov/current/title-29/section-2550.408b-1. Consider 26 C.F.R. § 1.72(p)-1/Q&A-20 https://www.ecfr.gov/current/title-26/section-1.72(p)-1. Even before applying the tax Code limits, ERISA § 408(b)(1) limits the outstanding balance of all loans to the participant to more than half the participant’s vested account (measured after the origination of each loan). On Santo Gold’s hypo, if the participant when applying for a second loan has not yet repaid anything on the first loan, isn’t the second loan $0?

The time to negotiate provisions about a recordkeeper’s conversion-out is before the plan’s responsible plan fiduciary makes a service agreement with the recordkeeper the plan later might want to leave. The time to negotiate provisions about a recordkeeper’s conversion-in is before the plan’s responsible plan fiduciary makes the service agreement with the recordkeeper that would, if engaged, process the conversion-in. For many plans, either observation is impractical because a plan might lack bargaining power. Beyond whatever service obligations a plan might get, a transition from one recordkeeper to another calls for not only caring work from every service provider but also strong and sustained oversight and supervision from the plan’s responsible plan fiduciary. Each recordkeeper might, to supplement the plan fiduciary’s attention, appeal to the other recordkeeper’s sense of business decency and fair dealing. A mature recordkeeper might work to get and keep a good reputation as both a graceful loser and an accommodating winner. Bill Presson is right that—at least regarding mutual fund shares, collective trust fund units, and insurance company separate account units (forms of investment designed for redemptions)—a transfer of property other than a payment of money is unusual.

A few further observations: A service provider’s agreement might provide the accounting method the service provider uses in assembling information into a draft Form 5500 report for the plan administrator’s review. If the agreement specifies cash accounting, a service provider might decline to provide service on a different method. Or, a service provider might offer accrual accounting for an extra fee. Paul I describes a mainstream outlook about a relationship between an adviser and an advisee. But some professionals have a more nuanced outlook, recognizing that one’s client might have its own sensible reason for not following advice. Some don’t object to a client’s informed choice, if the resulting act or failure to act is not a crime. If a service provider’s relationship with a referral source is more important than the relationship with the plan’s sponsor/administrator, a service provider might suggest alternative accounting treatments as a way to appease a referral source. A payer’s Form 1099-R report is on what was paid in the year reported on. Even if Plan 2’s administrator assumes a distribution payable in Plan 2’s Form 5500 report on 2025, Plan 2’s payer would report the $3,500.00 on a 2026 Form 1099-R report. This is not advice to anyone.

CAFA, are you asking about an incentive to elect against covering one's spouse (what Chaz describes), or about making an employee's spouse ineligible if the spouse is eligible for other health coverage? If it's about making a spouse ineligible, one guesses that Medicare might be treated differently than employment-based group health plan coverage.

The Instructions for a Form 5500 report generally allow a plan’s administrator (see I.R.C. § 414(g)) to report financial information on a cash, modified-cash, or accrual basis of accounting for recognition of transactions (if the administrator uses one method consistently). If an administrator reports with accruals, it might recognize a dividend receivable (for the amount, if any, not paid to the plan’s trust by December 31) and a distribution payable as at December 31, 2025 (for the follow-on increment of the final distribution not paid until January). Consider that a plan’s administrator, not a nondiscretionary service provider, decides the method of accounting. Likewise, the administrator decides how accounting principles apply to a set of facts. Even if an administrator made all preceding years’ reports on the cash-receipts-and-disbursements method of accounting, an administrator in its discretion might find that accrual accounting fits for an intended plan-termination year and facts like those you describe. If an administrator lacks enough knowledge about generally accepted accounting principles, it might seek a certified public accountant’s advice (even if that professional will not audit, review, compile, or assemble any financial statements or other report). This is not advice to anyone.

But are there some participants who might perceive a retroactive amendment as unfair because they obeyed the then-stated 10% limit and might have desired to do more?