Peter Gulia

Thought experiment: For a retirement plan that allows a participant to direct investment beyond designated investment alternatives and brokerage windows, consider whether the plan might require, uniformly, that the directing participant at her personal expense deliver to the plan’s administrator the US Labor department’s prohibited-transaction exemption or a written opinion, addressed to the administrator, of a law firm acceptable to the administrator, that a proposed investment involves no nonexempt prohibited transaction. Reciting the idea reveals the risk about tax law’s nondiscrimination condition: The IRS or a court might perceive the uniform condition as favoring some highly-compensated employees, who might have or get money to spend on lawyering, when many nonhighly-compensated employees might lack that financial capability. But if the would-be directing participant doesn’t bear the expense, who does? Would getting advice that each proposed investment involves no nonexempt prohibited transaction be a loyal and prudent plan-administration expense for the plan’s exclusive purpose? If it is a proper expense, how would the administrator allocate the expense among individuals’ accounts? Would it be fair that an individual who directs investment only in designated fund shares is charged a portion of expenses incurred because others seek question-raising investments? Or, if the legal-advice expenses are charged only among individuals who requested question-raising investments, does that raise nondiscrimination issues (even if at a different layer)? Despite a participant’s otherwise proper direction, a plan’s fiduciary must not invest if she knows or, using an experienced fiduciary’s “care, skill, prudence, and diligence”, would know that the investment involves a nonexempt prohibited transaction. So, someone has to pay for the needed lawyering—whether that’s serving as an applicant’s representative in a submission to the Labor department, or researching law and analyzing facts to write a lawyer’s opinion. If a plan’s administrator, trustee, or other fiduciary doesn’t get some legal comfort, how would she show she acted prudently?

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?

There is much to like in Paul I's sense about avoiding an ordering regarding previously-taxed amounts if a corrective distribution would not be a Roth-qualified distribution.

Check the documents governing the plan to discern whether the plan allows or precludes a distribution made by delivering property rather than paying money. If need be, amend the plan to allow a distribution of property. Instruct the broker-dealer to redeem or sell the window account’s securities other than the one that’s untradeable. Apply the money raised as the plan ordinarily does. Instruct the broker-dealer to re-title the remaining securities account as the distributee’s individual “taxable” account, no longer held regarding the retirement plan. Report one or more Form 1099-Rs so a report includes the fair-market value of the untradeable security. That a security no longer trades on an exchange (or never traded on an exchange) does not by itself mean that the fair-market value is $0.00. Even a petition, involuntary or voluntary, of the issuer’s bankruptcy, even for a liquidation bankruptcy, does not necessarily make common stock shares worthless. The plan’s administration should not deprive the distributee of the value of the untradeable security. Even if untradeable now, it might later get an offer. This is not advice to anyone.

If the point you ask about isn’t in the IRS’s correction procedures, consider: Remove the excess from the elective-deferral non-Roth and Roth subaccounts in the same proportions that the participant contributions (including the incorrect amounts) had been directed to those non-Roth and Roth subaccounts. That way might approximate what would be the account had the incorrect amounts not been taken from the participant’s pay. And it might lessen a participant’s opportunity to make an after-the-fact tax-treatment choice. Yet, this might be merely one of a few ways to correct the failure. This is not advice to anyone.

A plan that tax law classifies as a profit-sharing plan, whether it includes or omits a § 401(k) cash-or-deferred arrangement, is a pension plan if one follows ERISA title I’s definitions. ERISA § 3(2)(A), 29 U.S.C. § 1002(2)(A) https://www.govinfo.gov/content/pkg/USCODE-2023-title29/pdf/USCODE-2023-title29-chap18-subchapI-subtitleA-sec1002.pdf. And while tax law might not distinguish between “solo-k” and some other plan with a § 401(k) arrangement, an investment or service provider’s business classifications can matter greatly to consumers and to their intermediaries and advisers. For example, Individual(k)Ô (Ascensus claims this as a trademark) gets a set of service agreement, trust agreement, plan documents, investment arrangements, and other provisions that’s distinct from other business lines. And differences between a “solo” and a “regular” 401(k) service arrangement can affect even a plan’s provisions. The plan-documents set Ascensus requires for an Individual(k)Ô omits some choices Ascensus allows for other business lines, and imposes some plan provisions Ascensus does not require for other business lines. The sales or business lingo might seem awkward to a tax practitioner, but might convey meaning to consumers, intermediaries, and advisers. For better or worse, “solo 401(k)” now has some trade-usage meaning to describe generally an arrangement a service provider designed for an individual-account (defined-contribution) retirement plan its sponsor intends as one not expected to cover any employee beyond a shareholder-employee or a self-employed deemed employee, or one’s spouse. And that trade-usage meaning includes a sense that investment and service providers offer constrained terms for those plans.

CAFA, is your question about health coverage that is insured or "self-insured" (that is, not provided by a health insurance contract)? Also, what method (if any) beyond a participant's statement would the employer/administrator use to discern whether a participant's spouse has an availability of coverage (other than Medicare) elsewhere?

To help the seller evaluate possibilities and probabilities of outcomes about a demand, an arbitration, or a court proceeding seeking a return of what the seller might assert was a mistaken contribution, the seller might want its lawyer’s evaluation. An important issue could be whether the seller’s ostensible belief or mistaken assumption was a mistake of fact. What fact was not known to the seller and would not have become known had the seller used reasonable diligence? Including (at least) reading all documents of the organization and of the transactions? If the seller might ground a claim on the receiving plan’s § 15.02(b), might such a claim be inchoate until the seller has filed an income tax return that claims a deduction for the contribution and the IRS has somehow “disallowed” the deduction? Or, might the receiving plan’s fiduciary be persuaded by a reasoning that the seller’s knowing that it must not file a tax return that would claim a deduction the taxpayer knows it is not entitled to is tantamount to the IRS’s disallowance. If, when the contribution was made, the seller was the or an employer regarding the participants (and their beneficiaries) who are the subject of the contribution, how confident are you that the contribution is not deductible? What consequences result from relevant acts having transpired in 2023? Although $250,000 might matter to the seller, might professionals’ fees and other expenses outweigh the probability-discounted recovery? This is not advice to anyone.

Recognizing the practical limits of language, there can be differences between a businessperson’s consumer-facing or intermediary-facing sales label and terms or expressions a practitioner might use. And even law-defined or technical terms can have aspects of imprecision, misdescription, or confusion. I remember wincing when lawyers used “profit-sharing” to describe a nonelective contribution of a charitable organization that by law cannot have a profit to share with anyone. Even if that usage might have followed relevant tax law, I wouldn’t use it with my client’s customers because it would only confuse them. Perhaps especially if the employer provided a contribution for a period in which the organization had negative income. Or imagine a retirement plan in which no employee is a participant and hundreds of partners are participants. According to the executive agencies’ Form 5500 instructions, that is a one-participant plan. For the arrangement many people call a “self-directed brokerage account”, why do we say self-directed? When a plan that provides participant-directed investment limits a directing participant’s, beneficiary’s, or alternate payee’s investment alternatives to designated investment alternatives is that not self-directed by the individual? And if what we mean is an antonym or other-than of a plan’s designated investment alternatives, should we call it a Nondesignated Investment Alternatives Account? BenefitsLink neighbors could go on with many illustrations about how difficult it is to invent a short phrase that perfectly describes what fits a concept, rule, or arrangement.

By quoting (and hyperlinking to) a paragraph from a Treasury rule, I don’t suggest it as support for or against any interpretation. Rather, I suggest only that an interpreter (perhaps one like the webinar speaker WCC described) might consider it in forming one’s interpretation. That said, few interpreters are ready to pursue an interpretation contrary to Treasury’s explanation in the rules’ preamble.

The employer and the plan’s administrator (whether these are the same person or distinct persons) might—after considering each’s lawyer’s, certified public accountant’s, or enrolled agent’s advice—consider whether to check the facts of what happened, including what deferral election the participant properly made, made invalidly, or made not at all. Might the “off-cycle” not have been compensation from which an actual and proper deferral could be made? Do the documents governing the plan grant the administrator authority to refuse a participant contribution because it would exceed a deferral limit? Does a salary-reduction agreement or other form state that the employer will or may interpret a deferral election as limited to the lesser of the amount specified or the largest amount that would not exceed an applicable deferral limit? Even if not expressly stated in any writing, might the plan administrator’s interpretation of that kind be a prudent interpretation of the documents governing the plan? To the extent a participant contribution was not sent to the plan’s trust and was not a proper deferral, might the employer make its Form W-2 wage report follow that truth? Is there time to find the law, plan provisions, and facts with time for the employer to do its wage report by next Monday? This is not advice to anyone.