Peter Gulia

If the health plan is “self-funded”, an employer that offers more than the plan (including applicable law) provides does so at the employer’s financial risk. A stop-loss insurance contract typically responds only to claims that not only are beyond the attachment point but also are within the plan’s coverage, typically limiting continuation coverage to no more than applicable law commands. This is not advice to anyone.

Beyond QDROphile’s good teaching: Consider also that an ERISA-governed plan’s fiduciary must act as a prudent and experienced fiduciary would act in deciding what expenses to incur, and how to allocate them among the plan’s participants and beneficiaries. Interpleader is not without expense, sometimes substantial, because a court may require the interpleader plaintiff to develop fully the entire factual record, and to brief every issue, despite an assertion that the plan is a mere stakeholder. If a judge finds that the administrator pursued the interpleader without first diligently following the plan’s claims procedure and carefully and thoroughly evaluating the claims, the court might deny the interpleader petition’s request that the administrator’s attorneys’ fees and expenses be charged against the interpleaded account. And if a court finds an expense was unreasonable, what reasoning would support a fiduciary’s finding that the expense was prudent to incur and is prudent to charge against other participants’ and beneficiaries’ accounts? This is not advice to anyone.

What text in the beneficiary designation makes it ambiguous about whether one brother or both gets a benefit?

The basic plan document text you quote seems similar to the IRS-preapproved document I mentioned. I had read that document (in my client’s situation, not yours) as omitting a plan-imposed involuntary distribution. If the plan does not impose an involuntary distribution, a need for an ERISA § 205 qualified election against a qualified joint and survivor annuity might not arise until a participant voluntarily claims a distribution other than a QJSA when, absent a qualified election, the plan and the § 403(b) annuity contract would provide a QJSA. Alternatively, if a participant claims a distribution from a contract that has no QJSA payout option, there might be nothing the participant need elect against. Consider this too: If a § 401(a)-(k) plan requires an involuntary § 401(a)(9) distribution but the plan has no annuity payout option, there would be no QJSA for a participant to elect against. What drives whether a qualified election against a QJSA is called for or excused is not whether the distribution is a minimum distribution, it’s whether the distribution is or isn’t a qualified joint and survivor annuity. This is not advice to anyone.

I have not read the particular plan you seek to apply or interpret. Consider these preliminary questions and thoughts (to prepare to get your lawyer’s advice): Does the plan allow or preclude an annuity payout option? Does the plan provide or omit a qualified joint and survivor annuity? What is the plan’s normal form of distribution? Does the particular annuity contract or custodial account allow or preclude an annuity payout option? Does the particular annuity contract or custodial account provide or omit a qualified joint and survivor annuity? Whatever ways to have designed a plan ERISA § 205 might permit, consider the particular plan’s actual provisions. Read The Fabulous Document. Consider: A plan designed to meet Internal Revenue Code § 403(b)(10), which refers to § 401(a)(9), need not impose an involuntary distribution on and after a participant’s required beginning date. For § 403(b) contracts, some minimum-distribution rules apply as if the § 403(b) contracts were IRAs. 26 C.F.R. § 1.403(b)-6(e)(2) https://www.ecfr.gov/current/title-26/part-1/section-1.403(b)-6#p-1.403(b)-6(e)(2). Although a required minimum is determined separately for each § 403(b) contract, a participant may take the sum of a year’s § 401(a)(9) minimum from any contract or contracts. 26 C.F.R. § 1.403(b)-6(e)(7) https://www.ecfr.gov/current/title-26/part-1/section-1.403(b)-6#p-1.403(b)-6(e)(7). So, a plan sponsor might have designed a plan that does not impose an involuntary distribution from a § 403(b) contract held under the plan. (At least one IRS-preapproved document I’ve seen recognizes the rule cited above.) An ERISA-governed plan’s administrator or other fiduciary might be reluctant to impose an involuntary distribution if the plan does not provide it. “[A] fiduciary shall discharge his duties with respect to a plan . . . ; and in accordance with the documents and instruments governing the plan[.]” ERISA § 404(a)(1)(D), 29 U.S.C. § 1104(a)(1)(D). The recordkeeper’s service might be useful if a plan provides an involuntary distribution to meet I.R.C. § 401(a)(9). Otherwise, one might allow a service a participant voluntarily invokes. This is not advice to anyone.

We recognize one might design a plan that does not provide pension-like deferred compensation or retirement income. Or, a compensation arrangement that is not even a plan. But is it feasible to do either for what Internal Revenue Code § 457(b) calls an eligible deferred compensation plan? A plan that, except for an unforeseeable emergency, allows no distribution until age 70½ or severance-from-employment? My explanation above about a § 457(b)(6) tax-law need to fit ERISA § 401(a)(1)’s select-group exception is limited to a nongovernmental (and not church) § 457(b) plan. Further, I was mindful that an arrangement not designed for a group or class and rather individually negotiated with one particular employee might not be an “employee benefit plan” within ERISA § 3(1)-(3)’s meaning. But I imagined that a tax-exempt organization with only one employee (the OP’s hypo) might lack resources to pursue or defend that idea as a reason ERISA’s title I does not govern the arrangement.

If a plan is ERISA-governed, part 4 of subtitle B of title I of ERISA would require an exclusive-purpose trust unless the plan is “a plan which is unfunded and is maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees[.]” ERISA § 401(a)(1), 29 U.S.C. § 1101(a)(1) https://www.govinfo.gov/content/pkg/USCODE-2024-title29/html/USCODE-2024-title29-chap18-subchapI-subtitleB-part4-sec1101.htm. But if an ERISA-governed plan does not that ERISA § 401(a)(1) select-group exception and so is funded with an exclusive-purpose trust, the plan would not meet Internal Revenue Code § 457(b)(6)’s tax-treatment condition that a nongovernmental organization’s plan must be unfunded. I.R.C. (26 U.S.C.) § 457(b)(6) https://www.govinfo.gov/content/pkg/USCODE-2024-title26/html/USCODE-2024-title26-subtitleA-chap1-subchapE-partII-subpartB-sec457.htm. If a tax-exempt organization’s plan is neither a governmental plan nor a church plan, a plan get a § 457(b) tax treatment only if the plan is unfunded and fits ERISA § 401(a)(1)’s select-group exception.

Among many ambiguities: Is the worker is a management employee. Is the worker “highly compensated”? Might an ostensible income deferral be unreal because the organization and its employee did not truly agree that the deferred compensation is unfunded? Which person bears which risks? This is not advice to anyone.

The more careful private-equity shops consider what you mention, and more. Some use lawyering to evaluate risk exposures. Most use lawyering to design investment structures that lessen risks of a finding that investing is a trade or business. Beyond the cases about withdrawal liability to a multiemployer pension plan, maybe not much has seen full litigation. Among other reasons, the Internal Revenue Service might not detect, and might not pursue, potentially taxable situations as vigorously as some multiemployer pension plans pursue withdrawal liability. Or, maybe the facts often show that investing is not a trade or business. This is not advice to anyone.

Beyond other aspects, this might be an occasion for RTFDs—all of them. Consider (at least) each plan’s plan documents; each plan’s trust documents; the employer’s participation agreement for each employee-benefit plan; each relevant collective-bargaining agreement, and each project-labor agreement; and anything else that touches either employee benefits or labor relations. ERISA § 3(6)’s definition for an employee is “any individual employed by an employer.” That definition does not by itself exclude a worker because the employer’s employment of the worker is (or was) unlawful. Before beginning your work, consider carefully exactly who is and who isn’t your client. That can affect how you approach the situation. This is not advice to anyone.

QDROphile, your teaching in BenefitsLink is most generous. And your one-sentence explanation (two with your nice illustration) of why, understandably, you’re not writing a response on my question just told me what I was seeking.

EBP, thank you; I had not even imagined a possibility of an involuntary distribution at the employer’s discretion. While the IRS-preapproved documents are obtuse, the fair reading of them is that the small-balance involuntary distribution is not at the employer’s discretion. That’s fine, because I wouldn’t advise a plan sponsor to set a plan provision that allows discretion about whether a participant is or isn’t burdened by an involuntary distribution.

HRagain, thank you. Anyone with a different view? Or with information that might make an employer more comfortable?

Paul I, thank you for adding your voice. About the idea of informing the domestic-relations lawyers that the plan's administrator does not consider, and does not read, documents beyond the court order itself, what do you think--wise, or unwise?

A nongovernmental, nonchurch higher-education employer established, and maintains, a § 403(b) plan. The plan always has provided nonelective contributions. In the beginning, the only vendor was TIAA-CREF. Later, the plan allowed Fidelity and Vanguard. More recently, the employer discontinued contributions to anything beyond TIAA-CREF. But participants with a Fidelity or Vanguard contract may keep it. The plan administrator’s Form 5500 report and audited financial statements for every year have consistently included the Fidelity and Vanguard amounts in reported-on plan assets. For a plan restatement this year, someone instructed a plan-documents technician, who is not associated with me, to add a mainstream small-balance cash-out provision. The employer/administrator has only a fraction of one employee looking in on all employee benefits, with little attention on the retirement plan. Unless they can rely on TIAA, they’ll be unable to administer the cash-out provision. Whatever service TIAA might offer to help implement a cash-out provision, I worry that TIAA would apply it looking only to TIAA-CREF’s records, without records of account balances at Fidelity or Vanguard. If it matters, the plan now is on TIAA’s RetirePlus Pro service. Am I right to worry? If my hunch is right, following TIAA’s cues on who gets a cash-out would result in some involuntary distributions contrary to the documents governing the plan and contrary to ERISA. Although my scope excludes plan design, I feel I should warn my client that it’s unwise to adopt an optional plan provision if the employer/administrator is not confident about its ability to administer the provision. Am I on the right track? Or is there some bit of legal or practical knowledge I’m missing?