Peter Gulia

In my view, the IRS has done a good job with the challenging task of explaining complex law in Standard English. But there are practical limits and resource constraints on meeting those challenges. So, I suggest one caution. Many unadvised people mistakenly assume one may rely on an explanation in an IRS publication. (Regrettably, some professionals, who should know better, fall into this mistaken assumption.) Nothing the Treasury department or its Internal Revenue Service has published says taxpayers may rely. The IRS instructs its employees that “Publications are nonbinding on the IRS[.]” Internal Revenue Manual 4.10.7.2.7 (IRS Publications) (Jan. 1, 2006). The U.S. Tax Court has remarked that taxpayers “rely on IRS guidance at their own peril.” Bobrow v. Comm’r of Internal Revenue (No. 7022-11), T.C. Memo 2014-21 (U.S. Tax Ct. Apr. 14, 2014) (order on motion for reconsideration, at 2) (by Judge Joseph W. Nega). See also Miller v. Comm’r of Internal Revenue, 114 T.C. 184, 195 (U.S. Tax Ct. 2000); Zimmerman v. Comm’r of Internal Revenue, 71 T.C. 367, 371 (U.S. Tax Ct. 1978). And a court has held taxpayers may not rely. Adler v. Comm’r of Internal Revenue, 330 F.2d 91, 93, 64-1 U.S. Tax Cas. (CCH) ¶ 9388 (9th Cir. Apr. 2, 1964) (Responding to a taxpayer’s argument that he relied on a statement in the IRS’s Publication 17, the court observed: “Nor can any interpretation by taxpayers of the language used in government pamphlets act as an estoppel against the government, nor change the meaning of taxing statutes[.]”). Each IRS Publication should include a warning: This Publication tries to explain law in plain language, but no one may rely on this as a statement of law. An IRS publication does not bind the Internal Revenue Service.

John Feldt: For a plan that’s not ERISA-governed, a State’s law governs whether there was a breach of the written plan or other contract. Likewise, a State’s law governs whether there was a fiduciary’s breach. For either, a State’s law govern what damages, restoration, and other equitable relief might be due. But—apart from whatever the employer might or might not owe the retirement plan—consider that, under the 1978 Reorganization Plan, the Labor department’s interpretation about when a participant contribution becomes a plan’s asset is relevant also for Internal Revenue Code § 4975 about tax-law prohibited transactions. 29 C.F.R. § 2510.3-102(a)(1), https://www.ecfr.gov/current/title-29/part-2510/section-2510.3-102#p-2510.3-102(a)(1). Jakyasar: About whether a disqualified person’s payment of an Internal Revenue Code § 4975 excise tax might be an ordinary and necessary business expense and otherwise not nondeductible, consider that a professional’s fee for reliable advice on that question might be greater than the value, in the circumstances you describe, of the deduction. This is not advice to anyone.

That the worker gets payments based on accounts receivable had me ask whether the physician is a self-employed individual rather than an employee. Is the date of the employee’s severance-from-employment determined? You’re already mindful of 26 C.F.R. § 1.415(c)-2(e)(3) (Compensation paid after severance from employment), https://www.ecfr.gov/current/title-26/part-1/section-1.415(c)-2#p-1.415(c)-2(e)(3). Even if the plan provides that the after-severance compensation counts for § 415 compensation, check whether it counts in benefit-accrual compensation—RTFD.

Now that inflation measures through August are released [https://www.bls.gov/news.release/cpi.nr0.htm], is anyone up to calculate an estimate of likely 2027 inflation-adjusted amounts for retirement plans?

Has the business organization yet filed its 2025 income tax returns? Has the individual yet filed her 2025 income tax returns? Or, is either planning toward a September 15 or October 15 due date? What does the written plan provide about when an elective-deferral contribution is due? Further, consider that, under the 1978 Reorganization Plan, the Labor department’s interpretation about when a participant contribution becomes a plan’s asset is relevant also for Internal Revenue Code § 4975 about tax-law prohibited transactions. 29 C.F.R. § 2510.3-102(a)(1) https://www.ecfr.gov/current/title-29/part-2510/section-2510.3-102#p-2510.3-102(a)(1). If there is a contract breach, fiduciary breach, or prohibited transaction to correct, a relevant State’s law might allow a reasonable measure of restoration. Or, the Internal Revenue Service might consider a use of EBSA’s calculator reasonable. This is not advice to anyone.

Is the retiring physician a self-employed individual rather than an employee? If so, might one count the physician’s compensation according to the plan’s provisions for a self-employed individual’s earned income as adjusted for the plan’s measures of compensation? Might a partner’s distribution allocable to his profits interests or income interests count in those measures? If a participant was a self-employed individual, the date of an end of deemed employment might be determined differently than for an employee’s severance-from-employment. I.R.C. (26 U.S.C.) § 401(c)(1)(B)(ii) (“The term ‘self-employed individual’ means, with respect to any taxable year, an individual who has earned income (as defined in paragraph (2)) for such taxable year. To the extent provided in regulations prescribed by the Secretary, such term also includes, for any taxable year— . . . (ii) an individual who has been a self-employed individual within the meaning of the preceding sentence for any prior taxable year.”). 26 C.F.R. § 1.401-10(b)(1) (“For purposes of section 401, a self-employed individual who receives earned income from an employer during a taxable year of such employer beginning after December 31, 1962, shall be considered an employee of such employer for such taxable year.”). 26 C.F.R. § 1.415(c)-2(b)(2) (“For purposes of applying the limitations of section 415, except as otherwise provided in this section, the term compensation means remuneration for services of the following types—In the case of [a self-employed individual] who is a[] [deemed] employee within the meaning of section 401(c)(1) and regulations promulgated under section 401(c)(1), the [self-employed individual’s] earned income (as described in section 401(c)(2) and regulations promulgated under section 401(c)(2))[.]” A retired partner might be a deemed employee (and perhaps not yet severed from deemed employment) for each year in which she has earned income. This is not advice to anyone.

Consider: Alfonso Gomar alfonso.gomar@dietrichannuity.com (610) 279-9455 https://www.dietrichannuity.com/contact-us/ https://www.dietrichannuity.com/group-annuity-products/pension-plan-terminations/

If a child-support agency (rather than the child or the child’s custodial parent) sought an order or gives a notice, a plan’s administrator might have extra reason to get its lawyers’ advice. Some fiduciaries might question the prudence of paying those lawyers’ fees from plan assets if, for one situation, both the amount involved and the risk exposure on a participant’s claim that one’s account was improperly alienated or assigned are slight. Yet, a fiduciary might find that the situation could be recurring. That might suggest needs for clarifying and strengthening the administrator’s QDRO and claims procedures to help the administrator manage claims efficiently and impartially. Those needs might be more important if a meaningful portion of the participating employers’ workers or retirement plan participants might not pay due child support. And more important if any of the plan’s administrator, trustee, or custodian is vulnerable to the jurisdiction of California, New York, or another State that tries to collect child support from retirement plans. The U.S. Labor department’s Employee Benefits Security Administration has unofficially published a view: “[I]f an alternate payee is a minor or is legally incompetent, [a QDRO] can require payment to someone with legal responsibility for the alternate payee (such as a guardian or a [person] acting in loco parentis in the case of a child, or a trustee [sic] acting as an agent [sic] for the alternate payee).” DOL-EBSA, QDROs, The Division of Retirement Benefits Through Qualified Domestic Relations Orders, Q&A 1-10, page 8 (2020), https://www.dol.gov/sites/dolgov/files/ebsa/about-ebsa/our-activities/resource-center/publications/qdros.pdf). See DOL-EBSA ERISA Adv. Op. 2002-03A (June 7, 2002) (on particular State law and assumptions, EBSA interpreted the Mississippi Department of Human Services Division of Child Support Enforcement as a child’s “agent”). Some suggest that those interpretations are contrary to law. (I’m unaware of a Federal court precedent that adopts or rejects EBSA’s interpretation.) Also: “It is the view of the [U.S. Labor] department that an income withholding notice issued by [New York State Office of Temporary and Disability Assistance, Division of Child Support Enforcement] or county child support enforcement agencies (as described in your submission) as part of [New York’s] [Social Security Act] IV-D program, is a domestic relations order as defined in section 206(d)(3)(B)(ii) of ERISA.” DOL-EBSA, ERISA Adv. Op. 2001-06A (June 1, 2001). Some suggest that an executive agency’s income-withholding notice is not an order. But even if a plan’s administrator recognizes a State agency’s notice as, within the meaning of ERISA § 206(d)(3), an order and a domestic-relations order, it would not result in a QDRO distribution unless the order meets the elements and conditions for a qualified domestic relations order. Some suggest that Social Security Act § 466 [42 U.S.C. § 666] sets up some authority, independent of ERISA’s QDRO regime, for a State to collect child support from a pension or retirement plan. I do not express my thinking for or against any of the interpretations. BenefitsLink neighbors might have observations about a State agency’s efforts to seek a QDRO distribution or other retirement plan distribution to collect child support. This is not advice to anyone.

As ERISA defines a “domestic relations order”, a DRO includes an order that “relates to the provision of child support.” ERISA § 206(d)(3)(B)(ii)(I), 29 U.S.C. § 1056(d)(3)(B)(ii)(I); see also I.R.C. (26 U.S.C.) § 414(p)(1)(B)(i). A carefully written DRO might meet the elements and conditions for a qualified domestic relations order. As ever, RTFD—Read The Fabulous Documents. Although ERISA § 206(d)(3) sets up some of what the plan must provide, there also are some QDRO-related provisions a plan may include or omit. For example, some plans allow a QDRO distribution even when the participant has no right to a distribution and has not reached ERISA § 206(d)(3)(E)(ii)’s earliest retirement age; but some plans preclude a QDRO distribution if the participant has not reached that earliest retirement age. A QDRO cannot “require a plan to provide any type or form of benefit, or any option, not otherwise provided under the plan[.]” ERISA § 206(d)(3)(D)(i). If a plan’s only form of distribution is a nonperiodic payment, an alternate payee would need a distinct court order for each payment, specifying the amount of the payment. But ERISA § 206(d)(3) doesn’t directly preclude a State’s or Native American Indian tribe’s court from issuing as many DROs as it takes to keep consuming the participant’s account balances, including balances that result from continuing contributions. An order that specifies a payment more than the participant’s account balance is not a QDRO. The plan’s administrator ought to follow its QDRO procedure and claims procedure (except to the extent a procedure would have the administrator do something contrary to the plan, or violating ERISA’s title I). If the plan’s administrator engaged a recordkeeper’s or other service provider’s DRO-review service, check whether the service includes or excludes an order designed to collect child support. If the court order names an alternate payee other than the participant’s spouse or former spouse, check whether the DRO-review includes or excludes such an order. Communications to the participant, to a would-be alternate payee, and to an attorney or other recognized representative of either should be as the QDRO and claims procedures call for. If the plan’s administrator finds that a submitted order is not a QDRO, the administrator might want to use extra care to make the denial communication procedurally perfect. None of this is advice to anyone.

The Form 5500-EZ instructions include this: “A one-participant plan means a retirement plan (that is, a defined benefit pension plan or a defined contribution profit-sharing or money purchase pension plan), other than an Employee Stock Ownership Plan (ESOP), which: 1. Covers only you (or you and your spouse) and you (or you and your spouse) own the entire business (which may be incorporated or unincorporated); or 2. Covers only one or more partners (or partners and their spouses) in a business partnership (treating [a] 2% shareholder of an S corporation, as defined in IRC § 1372(b), as a partner); and 3. Does not provide benefits for anyone except you (or you and your spouse) or one or more partners (or partners and their spouses).” Some might read that text’s mention of Internal Revenue Code § 1372(b) as relating only to finding whether an individual is a deemed partner because she is an actual shareholder or an attributed shareholder of a business organization that actually is a corporation. Others might read that text’s mention of I.R.C. § 1372(b) as also relating to a limited-liability company that, although not a corporation, elected to be treated as an S corporation for Federal income tax purposes. Nothing in the quoted instructions directly mentions Internal Revenue Code § 318. That section is brought in to the extent the instructions apply I.R.C. § 1372(b) regarding an S corporation. Nothing in the quoted instructions directly mentions a tax-law attribution concept regarding an employer that is a limited-liability company that for Federal income tax purposes is treated as a partnership, or as a disregarded entity. The Form 5500-EZ instructions attempt to follow an incomplete Labor department interpretation about who is not really an employee, for common law rather than tax law, because the worker is a business owner. In the Labor department’s rule about whether a plan covers an employee or covers only self-employed individuals, there is no direct mention of a deemed or attributed ownership for a family member beyond a proprietor’s or partner’s spouse. 29 C.F.R. § 2510.3-3 https://www.ecfr.gov/current/title-29/section-2510.3-3. More than one interpretation about which 5500 form to file might be a plausible interpretation. This is not advice to anyone.

If a measuring-from date is in late December, isn’t 2½ months after it a date in March?

There might be more than one plausible interpretation of the Form 5500 instructions. It might matter whether the particular limited-liability company is, for Federal income tax purposes, treated as a disregarded entity, a partnership, or an S corporation. But for a limited-liability company that is not actually a corporation, a classification for Federal income tax purposes might not matter. Have you considered asking EBSA’s Office of the Chief Accountant for a view about which interpretation EBSA might prefer? Whatever might be required or permitted Form 5500 reporting: If the owner’s mother (even if she might be an attributed owner for one or more purposes) is not an actual owner and is an employee within the meaning of and to apply ERISA § 3(2)(A), the retirement plan likely would be ERISA-governed. If so, and if the plan administrator’s interpretations of the Form 5500 instructions do not point in a clear direction, might the administrator prefer a form used widely for ERISA-governed plans over a form used most often for non-ERISA plans? This is not advice to anyone.

First, read the documents of the particular retirement plan. Some plan administrators and some advisers imagine that a plan’s exclusion is identical to an exclusion Internal Revenue Code § 410(b)(3)(C) states for some purposes about whether a plan meets a tax-qualification condition. While such an assumption might often be so, or nearly so, it is not necessarily so. A plan’s provision might set an exclusion less wide, or more wide, than I.R.C. § 410(b)(3)(C)’s exclusion. To the extent that a plan expresses an exclusion about nonresident aliens by reference to terms that have a meaning under Federal tax law, consider: resident alien I.R.C. § 7701(b)(1)(A) nonresident alien I.R.C. § 7701(b)(1)(B) lawful permanent resident I.R.C. § 7701(b)(6) presence in the United States I.R.C. § 7701(b)(7) earned income I.R.C. § 911(d)(2) income from sources within the United States I.R.C. § 861(a)(3). Also, an income tax treaty between the United States and a nation in which the alien is domiciled or resides might, depending on the governing plan documents’ text, affect whether the plan excludes an individual. In some circumstances, whether an alien’s services are performed for an office or place of business in a State of the United States, or in a possession of the United States, might matter. See I.R.C. § 861(a)(3)(C)(ii). This is not advice to anyone.

To find the soon-to-be-dumped micro-business plan sponsors and those of them who might welcome a TPA service, a practical approach likely is relationship-building with Edward Jones and Morgan Stanley brokers.

jsample’s query is a nice illustration of plan-administration duties or obligations a business owner might miss if she has no TPA or other adviser to provide tax, ERISA, and other legal advice. If the only service an investment house provides a micro-business plan sponsor is IRS-preapproved plan documents (and even pretending the business owner reads thoroughly the whole of all those documents): Would an unadvised plan sponsor know that hiring a part-time employee might soon make her eligible, at least for elective deferrals? (Many still-proper uses of IRS-preapproved documents do not yet state the LTPT provision.) Would an unadvised employer/administrator know that one employee’s eligibility changes required reporting from Form 5500-EZ to Form 5500-SF? About a non-ERISA plan for only one self-employed individual, would the owner know that her account surpassing $250,000 invokes a Form 5500 reporting requirement? (The IRS’s review for whether plan documents in form meet I.R.C. § 401(a) tax-qualification conditions does not require that IRS-preapproved documents explain Form 5500 reporting or tax-information duties.) How many of these and other past errors or potential mistakes are spotted only when the business owner engages a TPA? An investment house’s plan-document service exit might move some micro-business plan sponsors to find an improved service that includes a little related advice. About Jakyasar’s observations, consider that some service providers that furnished documents with a blank adoption-agreement form might have done all the provider promised. This semester I’m again teaching professional conduct. For advisers (whether lawyers, consultants, or TPAs), often the challenge is getting the advisee and the adviser to a real understanding about the scope of what service the advisee wants, and is ready to pay for. Many TPAs provide services with wider quality than some other businesses offer or provide.