Peter Gulia

EBP, thank you for "cracking the code" for me.

Consider amending the documents governing the plan so they provide what the plan sponsor wants. Before writing an amendment, evaluate whether an otherwise desired provision might result in a tax-disqualifying discrimination in favor of highly-compensated employees. This is not advice to anyone.

Thank you! If the designer of the IRS-preapproved documents now or soon (before 2026 ends) offers a SECURE amendment: May a plan sponsor use such an amendment without defeating reliance on the IRS’s opinion letter on the IRS-preapproved documents? Is there a Revenue Procedure or some other IRS guidance that allows this?

I’m now reviewing a draft of a plan’s restatement. (The draft is not from the recordkeeper, nor my firm.) The IRS-preapproved documents lack items to specify which of SECURE 2022’s optional provisions the plan includes or omits. For whatever plan amendment ought to be done by December 31, 2026, the plan sponsor (following its internal business reasons) wants to do everything now. What’s an effective way to document the plan’s SECURE 2022 optional provisions (without defeating reliance on the IRS’s opinion letter on the IRS-preapproved documents)? Or is the plan sponsor’s preference to document now its SECURE 2022 provisions unwise?

If the IRS-preapproved documents are insufficient to express the plan sponsor’s desired provision, is it feasible to do a plan amendment that would state the desired provision?

For the annuity that began ten years ago, is it grounded on less than the whole of the participant’s (then undivided) benefit?

More outlooks and viewpoints?

Another point for my curiosity: If you knew for certain that the Regulations Governing Practice before the Internal Revenue Service do not apply to you—ever, or for the situation in which you’re evaluating your professional or business conduct, would that change your thinking? First, a worker who is not an attorney-at-law, certified public accountant, enrolled agent, enrolled actuary, or enrolled retirement plan agent has no right to practice before the Internal Revenue Service. Next, a worker who has a practice right might choose not to use it. (Some employee-benefits lawyers, and even tax lawyers, have rarely or never submitted a Form 2848 or otherwise appeared before the IRS.) Further, the Treasury department recognizes (after an appeals court’s unchallenged decisions) that Treasury’s power to impose conduct rules extends only to a representative, and only to the extent of the representation in a matter before the IRS. That recognition shows in the Treasury’s proposed § 10.34: § 10.34 Standards with respect to tax returns, and documents, affidavits, and other papers prepared or submitted while representing a client before the Internal Revenue Service. (a) Tax returns prepared or submitted while representing a client in a matter before the IRS. (1) A practitioner may not willfully, recklessly, or through gross incompetence— (i) Sign Prepare, while representing a client in a matter before the Internal Revenue Service or, for tax returns prepared by the practitioner prior to the representation, including returns already filed with the Internal Revenue Service, submit a tax return or claim for refund or a claim for a credit that the practitioner knows or reasonably should know contains a position that— . . . . (d) Relying on information furnished by clients. A practitioner advising a client to take a position on a tax return, document, affidavit{,} or other paper submitted to in a matter before the Internal Revenue Service, or preparing or signing a tax return as a preparer, generally may rely in good faith without verification upon information furnished by the client. The practitioner may not, hHowever, the practitioner may not ignore the implications of information furnished to, or actually known by, the practitioner, and must make reasonable inquiries if the information as furnished appears to be incorrect, inconsistent with an important fact or another factual assumption, or incomplete. Regulations Governing Practice Before the Internal Revenue Service [notice of proposed rulemaking], 89 Fed. Reg. 104915 (Dec. 26, 2024), https://www.govinfo.gov/content/pkg/FR-2024-12-26/pdf/2024-29371.pdf. See also https://www.reginfo.gov/public/do/eAgendaViewRule?pubId=202504&RIN=1545-BQ12. Even if the Treasury has some power to regulate written tax advice unconnected to a representation before the IRS, in the hypo described above a bad position does not result from the TPA’s tax advice. If you knew for certain that the Circular 230 rules do not apply to you, would you nonetheless follow those rules as a way to guide your conduct? (I ask about this for my university and other teaching on professional conduct. I’ll use any information I learn here only in an aggregate or anonymously.)

Now that we’ve responded to Jakyasar’s question: “Anything I am missing?”, let’s consider some conduct questions. Recall that the difficulty results from someone else’s, not Jakyasar’s, advice. Imagine a TPA tells her client (perhaps after politely telling her client’s accountant) about the issue-spotting we’ve described. Despite those conversations, imagine the client (and assume it is the retirement plan’s administrator) in writing instructs the TPA to treat the worker as an employee and to count the amount tax-reported on Form 1099-MISC or 1099-NEC as the worker’s compensation to be counted in the retirement plan’s definitions of compensation. And to perform the TPA’s services using those instructions. BenefitsLink neighbors, what do you think: Is it permissible to perform the TPA’s services as instructed? About whether to resign the engagement, is that a must, should, or need-not? What’s your reasoning for your outlook? Is your view affected or influenced by a professional-conduct rule? Is what to do based on a personal business choice?

Paul I, thank you for confirming my suspicion that, if ever a plan administrator beyond Stack-On Products Company did this, 30 years later it likely is no longer done.

I doubt you’re missing the essence. Assuming the employer or service recipient and the retirement plan’s administrator are, in essence, one person (whether a business organization or a human), and assuming the worker’s parent controls the business: Was the worker old enough that she could have made a nonvoidable contract? (Under most States’ laws, 18.) Even if old enough, is it believable that the worker was not subject to the service recipient’s control for the work done? Was the work done of a kind that would be done by nonemployees for a business of the kind the service recipient does? If the plan’s administrator interprets the plan’s governing document to treat a worker tax-reported as a nonemployee as an employee and to treat her nonemployee compensation as an employee’s wages, what is the administrator’s reasoning for that interpretation? Has anyone advised the employer/administrator about tax law’s duties of consistency? If your client tells you it has considered carefully and accepts all risks involved, how confident are you that you would not be seen to be involved in a breach or violation? Might it be effective to suggest to the certified public accountant—quietly, out of the view and hearing of your client—that the CPA reconsider one’s advice? And consider whether a Form 1099-MISC report was mistaken and should be undone and corrected with a Form W-2 report? This is not advice to anyone.

A PWBA interpretation suggests a fiduciary may override a participant’s last investment direction when the participant “can no longer be located” and the individual’s investment seems no longer prudent. ERISA Advisory Opinion No. 96-02A (Feb. 9, 1996) https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/our-activities/resource-center/advisory-opinions/1996-02A.pdf. BenefitsLink neighbors, are you aware of any plan that replaces a “missing” participant’s investment?

Paul I, thank you for sharing these investment perspectives.

A tax-qualified retirement plan might provide the plan’s payer’s tax-information reporting treating the plan’s participant as having been the beneficial owner of the life insurance death benefit (if the “P.S. 58” or other measure of each year’s value of death-benefit protection was tax-reported to the participant). This is not advice to anyone.

Four dozen views and no reply might suggest Fidelity’s Digital Assets Account might have relatively few fiduciaries’ approvals. Or, that take-ups were in Fidelity service platforms with little or no TPA involvement.

BG5150, the plan’s administrator ought to heed carefully a duty about tax-information reporting, and (often) a need to count excludable and taxable portions of the plan’s distribution. A life insurer might have or might lack information to support a reckoning of the death-benefit portion, the surrender-value portion, and previously-taxed amounts. Even when an insurer has all needed information, an insurer might have little or no duty or obligation regarding the retirement plan’s tax-information reporting of the plan’s distribution. The Treasury’s rule about the Federal income tax treatment of “Life insurance contracts purchased under qualified employee plans” is 26 C.F.R. § 1.72-16 https://www.ecfr.gov/current/title-26/section-1.72-16. This is not advice to anyone.

It’s not unusual for a life insurer to say its obligation ends with paying the death proceeds to its contract’s beneficiary. A retirement plan’s trustee, the trustee’s custodian, or either’s agent would receive the insurer’s payment, and the recordkeeper would (following the plan administrator’s express or implied instruction) credit an amount according to the retirement plan’s provisions. For an individual-account retirement plan, that’s typically crediting the amount to the deceased participant’s account. From there, a plan’s administrator would evaluate each claim that the claimant is the participant’s beneficiary according to the plan’s claims procedure. If no claim is submitted before the § 401(a)(9) beginning date nears, the plan’s administrator might initiate its finding about who is the participant’s beneficiary and prepare to pay an involuntary distribution. This is not advice to anyone.

Four years ago, Fidelity launched Digital Assets Accounts available to workplace retirement plans. Does anyone have a sense, however anecdotal, of how many plans allow this investment alternative? And of plans that have this, what is your guess on the percentage of participants with any allocation to this investment alternative?

I see the concern you’ve described, that a transfer deprives a former participant, now an annuitant, of an opportunity not to be vulnerable (when an annuity payment becomes due) to a State’s abandoned-property law. Yet, indulging that concern might make it impossible to terminate a pension plan (absent a turnover to the PBGC). A decision to terminate a pension plan and transfer its obligations to an annuity insurer is the plan sponsor’s nonfiduciary decision. While discretionary decisions to implement the plan termination the plan sponsor decided are burdened by fiduciary responsibility, a fiduciary selects within what’s available. I’m guessing no insurer offers a contract that would constrain the insurer’s right to use abandoned-property laws. And a contract could not limit an insurer’s public-law duty to obey abandoned-property laws. Fiduciary responsibility in selecting a plan-termination annuity contract is serious. But I doubt a fiduciary should be responsible because it fails to obtain a provision that’s at least practically unobtainable.

After a defined-benefit pension plan’s obligation is transferred to an annuity insurer, it is the insurer’s, not the plan’s, obligation. If the insurer and the annuity contract otherwise are prudently selected, I doubt that transferring the obligations and so allowing applications of States’ abandoned-property laws would (alone) breach a selecting fiduciary’s ERISA § 404(a) duty of loyalty or prudence. The act of transferring the obligations presumes the obligations exit an ERISA-governed regime and enter a regime governed by other laws, including States’ laws regulating insurance and governing abandoned property.

Has the charity, social club, trade association, or other tax-exempt organization considered whether a rabbi trust adds much value? Whatever investments are held to meet obligations under the unfunded plan must remain the employer’s property “without being restricted to the provision of benefits under the plan”, available to the claims of the employer’s creditors. If a participant’s worry is about the organization’s insolvency (rather than a solvent organization’s dishonest refusal to pay the deferred compensation it owes), a rabbi trust might not do enough—legally, or even practically—to protect a participant regarding other creditors’ claims. Consider making the organization the owner of each securities account, with the organization naming the participant as the person authorized to give investment instructions. At least some securities broker-dealers, likely including the two you mentioned, offer accounts to tax-exempt organizations. This is not advice to anyone.

Many questions have no one “right answer”. But if one seeks a mainstream answer, it’s what the Labor department published: “In the view of the Department, the monies which are to go to a section 401(k) plan by virtue of a partner’s election become plan assets at the earliest date they can reasonably be segregated from the partnership’s general assets after those monies would otherwise have been distributed [paid] to the partner[.]” Once one knows the partner’s payday: “[I]n the case of a plan with fewer than 100 participants at the beginning of the plan year, any amount deposited with such plan not later than . . . the 7th business day following the day on which such amount would otherwise have been payable to the participant in cash (in the case of amounts withheld by an employer [the partnership] from a participant’s wages [or self-employed compensation]), shall be deemed to be contributed . . . to such plan on the earliest date on which such contributions . . . can reasonably be segregated from the employer’s general assets.” 29 C.F.R. § 2510.3-102(a)(2)(i) https://www.ecfr.gov/current/title-29/part-2510/section-2510.3-102#p-2510.3-102(a)(2)(i). Simplified example: A partner of International Man of Mystery LP gets a monthly draw, paid on the 15th of each month (or the next day that is a regular business day for both the partnership and the bank it uses). Vanessa Kensington’s draw is $100,000 a month. For 2026, Vanessa specified an elective deferral of $3,000 a month through October, and $1,250 in each of November and December. On May 15, 2026, the partnership pays Vanessa $97,000. The $3,000 not paid to Vanessa is included in the money paid to the retirement plan’s trustee 12 days later on May 27, 2026. Applying the small-plan safe-harbor rule quoted above, that delay would be deemed reasonable. I confess that’s a simplified example in many ways, including that the date a partner’s self-employed compensation is paid might be ambiguous. Many might reason that a partner’s draw during a year is not pay (at least not in a sense of treating it as akin to an employee’s wages) because it might be an advance against anticipated self-employment income, not yet determined, which might not be realized.

A punctilious independent qualified public accountant auditing a plan’s financial statements might consider these points. If a partner’s participant contribution—even if timely enough for Federal income tax purposes—was not paid over to the plan’s trust or otherwise treated as plan assets until long after the specified amount was segregated (or reasonably could have been segregated) from the partnership’s assets AND the contribution lacked an adjustment for lost investment value, should the financial statements’ narrative (but not the displays) note a contingent gain, describing (but not putting an amount on) the restoration that belongs to the plan? Even if the narrative omits a note about a contingent gain, should the plan’s financial statements note a related-party transaction or a nonexempt prohibited transaction because the partnership had the use of what was plan assets? Under AICPA guidance, an IQPA must read the plan’s administrator’s Form 5500 report to consider whether it seems reasonably consistent with the audited financial statements. Some IQPAs read the response to the Schedule H query “Was there a failure to transmit to the plan any participant contributions within the time period described in 29 CFR 2510.3-102?” If the administrator’s response is No when the IQPA thinks a truthful answer ought to be Yes, the IQPA might not release its “clean” report. Further, some auditors might treat what the auditor finds is a less-than-truthful response as a reason to doubt management’s honesty or control, even about other information. I recognize these and other points are way beyond norms for small-business retirement plans. But you mentioned it’s an auditor who seeks your help. So I’m spinning out a little imagination about why an auditor might question when a partner’s participant contribution becomes plan assets.

So we learn something together (and only if you can describe a situation without revealing your client's identity or other confidence): For which task in a retirement plan's administration does one seek to discern when a working owner's amount withheld for a participant contribution becomes plan assets?

For ERISA Advisory Opinion 1999-04A, a multiemployer pension plan asked “individuals who own business enterprises, either wholly or in part[.]”