Peter Gulia

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[.]”

Treasury Reg. (26 C.F.R.) § 1.401(k)-1(a)(6)(iv) allows § 401(k) elective deferrals from an advance on compensation not yet determined. The Treasury’s interpretation of Internal Revenue Code § 401(k) does not interpret ERISA § 3(42)’s definition of plan assets. ERISA Advisory Opinion 1999-04A (Feb. 4, 1999) expresses Labor’s Pension and Welfare Benefits Administration’s view “that there is nothing in the definitions of Title I of ERISA that would preclude a pension plan . . . from extending plan coverage to ‘working owners,’”, such as self-employed individuals Internal Revenue Code § 401(c) treats as deemed employees. This Opinion does not interpret when a working owner’s participant contribution becomes plan assets. Yet, those interpretations suggest treating a working owner as if she were an employee, as nearly as reasonable for the question of law involved, with some tolerances for differences about a self-employed individual’s compensation.

If for a nonelective contribution a plan provides no election against participation: A participant might refuse to direct investment, and the plan’s administrator could apply the plan’s default investment. A plan might not provide a small-balance involuntary distribution, or the individual’s account on severance-from-employment be more than $7,000. Or if an involuntary distribution is a rollover to a default IRA, an individual who does not want the benefit might become the IRA custodian’s responsibility. A plan might not mandate an involuntary distribution until the participant’s required beginning date following her applicable age (75 for many people). If a distributee neither deposits nor negotiates a minimum-distribution payment, a plan’s administrator might wait out a relevant State law’s abandonment period. A person who’s then nearing 80 might change her mind and accept a benefit. But if not, the abandoned property and any later claim to it becomes a State treasurer’s responsibility. Or if a participant’s death occurs before a distribution to the participant was paid, the plan might provide a benefit to a participant-named beneficiary or, if none, the plan’s default beneficiary. And if a distributee of a § 401(a)(9)-required involuntary distribution neither deposits nor negotiates that payment, repeat the abandoned-property administration. About a nonelective contribution, does anything require the participant’s cooperation?

The quoted rule states: “the assets of the plan include amounts . . . that a participant or beneficiary pays to an employer, or amounts that a participant has withheld from his wages by an employer, for contribution or repayment of a participant loan to the plan, as of the earliest date on which such contributions or repayments can reasonably be segregated from the employer’s general assets.” 29 C.F.R. § 2510.3-102(a)(1) (emphasis added) https://www.ecfr.gov/current/title-29/part-2510/section-2510.3-102#p-2510.3-102(a)(1) That something doesn’t perfectly fit the illustration’s description doesn’t mean it’s not plan assets. For how the rule applies regarding a participant who is self-employed, many interpretations of the text are possible, and some might be plausible. Perhaps a respectable interpretation is that the illustration describes a general concept about amounts withheld from a worker’s wages or other compensation. That was the Labor department’s explanation in one of the several rulemakings (1988, 1996, 1997, 2010): “[Two commenters] ask when the monies, which otherwise would be paid to a partner, but for the partner’s election, become plan assets, inasmuch as partners do not receive wages. 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 to the partner[.]” Regulation Relating to Definition of “Plan Assets”—Participant Contributions [final rule], 61 Federal Register 41220, 41226 [middle column] (explanation § 6(c) Partnerships) (August 7, 1996) https://www.govinfo.gov/content/pkg/FR-1996-08-07/pdf/96-19791.pdf. A court might be persuaded by the Labor department’s explanation of its rulemaking. Labor’s interpretation would not matter if the rulemaking is contrary to the Administrative Procedure Act or Congress’s delegation in ERISA § 3(42) is contrary to the U.S. Constitution article I section 1. About what’s published, I doubt a big law firm is eager to publish an interpretation that would counter the Labor department’s published interpretation, even if Labor’s interpretation might be incorrect or improper. This is not advice to anyone. If I were a partner in a law firm and the firm subtracted from my interim draw an amount I specified for a § 401(k) deferral but the firm didn’t promptly treat that amount as plan assets, I’d pursue my rights.

If all conditions are met, a pension contribution can be deductible “[i]n the taxable year when paid[.]” Internal Revenue Code of 1986 (26 U.S.C.) § 404(a)(1)(A). Accrual is not enough. “For purposes of [I.R.C. § 404(a)](1), (2), and (3), a taxpayer shall be deemed to have made a payment on the last day of the preceding taxable year if the payment is on account of such taxable year and is made not later than the time prescribed by law for filing the return for such taxable year (including extensions thereof).” Internal Revenue Code of 1986 (26 U.S.C.) § 404(a)(6). https://www.govinfo.gov/content/pkg/USCODE-2024-title26/html/USCODE-2024-title26-subtitleA-chap1-subchapD-partI-subpartA-sec404.htm. Consider that a Form 1120-S must be “true, correct, and complete” when the corporation’s officer signs “[u]nder penalties of perjury” the return.

If there is text in the IRS-preapproved documents, does the delivery of the IRS’s opinion letter suggest that the IRS viewed the text as not (at least not by itself) resulting in a plan’s failure to be tax-qualified in form?

To help me learn something: If an adoption agreement for IRS-preapproved documents presents a choice to include or omit a provision that allows a waiver of participation for a nonelective contribution, why do some plan sponsors include that provision?

That a plan might include a provision of a kind BG5150 describes is why I suggest RTFD. (A plan’s administrator also might consider whether the provision is valid.) Even if ERISA § 502(a) might allow a participant’s claim “to enforce his rights under the terms of the plan, or to clarify his rights to future benefits under the terms of the plan [perhaps including one’s right, if any, not to benefit]” or claim for equitable relief regarding a fiduciary’s failure to administer the plan according to the plan’s governing documents, a Federal court might find it lacks power to consider such a claim if the plaintiff lacks Article III constitutional standing because the plaintiff was not sufficiently injured. But a person’s inability to get a court to order a plan’s sponsor or administrator not to provide a benefit the person does not want might not resolve an Internal Revenue Code § 410(b) problem. If a person had, under an unambiguous plan provision, properly and irrevocably elected not to participate, I wonder whether tax law, for § 410(b) coverage, counts (or ignores) a supposed accrual, if it is contrary to the plan’s provisions, as a benefit provided to the nonhighly-compensated employee. This is not advice to anyone.

As ever, the plan’s administrator must RTFD—Read the Fabulous Documents governing the plan. And if the administrator has a doubt about what the plan provides (including provisions not expressed but implied by public law), a prudent administrator would get its lawyer’s advice. If those steps find no reason to follow a person’s preference not to be a participant, consider: A key feature of a nonelective contribution is that it does not require the participant’s election. This is not advice to anyone.

ErnieG, in this discussion I ask some open questions because I have not yet formed my view about what ERISA § 404 requires or permits. That includes thinking about ERISA § 404(a)’s expressed duties of loyalty and prudence, implied duty of impartiality, § 404(c)’s relief for a directing participant’s, beneficiary’s, or alternate payee’s exercise of control over her individual account, and lack of relief to the extent that a loss or harm results from a cause other than the individual’s control. Because the statute sets both duties and relief with roundly stated standards, there are questions that lack clear answers. I ask open questions about what BenefitsLink neighbors think or observe. Thank you for sharing your thoughts.

Brian Gilmore, I’d welcome your learning about a related question of law. Internal Revenue Code § 129(d)(8)(A) provides: “A plan meets the requirements of this paragraph if the average benefits provided to employees who are not highly compensated employees under all plans of the employer is at least 55 percent of the average benefits provided to highly compensated employees under all plans of the employer.” https://www.govinfo.gov/content/pkg/USCODE-2024-title26/html/USCODE-2024-title26-subtitleA-chap1-subchapB-partIII-sec129.htm. Imagine an employer has only one employee, and the employee is a highly-compensated employee. Could the employer provide a § 129(d) dependent care assistance program? Or is a § 129(d) plan impossible because there is no “employee[] who [is] not highly compensated”? Although Eddy’s question involves a self-employed individual treated as a deemed employee, a one-employee situation can happen with an employee who is a common-law employee and one who lacks control of, or even any ownership interest in, the employer. Does a distinction between self-employed deemed employee and a common-law employee matter? Could a § 501(c)(3) charitable organization provide a § 129(d) plan for its only employee, if the employee is highly-compensated?

It is difficult to discern participants’ functional literacy to comprehend disclosures that describe an investment. But some fiduciaries try—even if they guess using proxy measures, such as post-secondary degrees and knowledge-worker credentials. For example, imagine a fiduciary knows that all of the employer’s workers have at least five years’ post-secondary education. In those circumstances, a fiduciary might reason that participants can read a collective investment trust’s offering memorandum that describes a target-year fund. And can read its explanation that the fund’s trustee anticipates investing up to 20% of the fund’s portfolio in unregistered securities not traded on any exchange and not regularly traded, seeking a 70/30 split between private equity and private debt. A reader might not know enough to understand the consequences of that information, but might read enough to consider that she ought to ask some intelligent questions or get advice. A different workforce might be one for which the employer requires no more than that a worker be one lawful to employ and capable of understanding spoken work directions. In those circumstances, a fiduciary might wonder whether a typical participant can meaningfully assent to a kind of investment that, but for the interposition of a retirement plan, cannot lawfully be offered to the general public. The Labor department’s proposed rule to interpret prudence in selecting designated investment alternatives presumes the ERISA § 404(c) construct that a participant, if furnished sufficient information, is responsible for her choices within the plan’s menu (if its designated investment alternatives were prudently selected). I recognize that for many workers (including many higher-educated knowledge workers), the § 404(c) conceit might be too much, even for the simplest of publicly available investments. But if a plan provides participant-directed investment (which a plan sponsor may decide as a nonfiduciary), a fiduciary selecting investment alternatives indulges some assumptions about how participants might understand investment alternatives. My query asks whether a fiduciary selecting designated investment alternatives must, should, or need not consider whether participants can understand an investment alternative more complex than shares of an SEC-registered publicly available mutual fund. In the proposed rulemaking, the Labor department deliberately sets aside those questions. Yet, some fiduciaries, and their lawyers and investment advisers, ought to start thinking about this.

I have not followed, or even maintained awareness on, this point. I guess Congress has not amended the relevant parts of the Internal Revenue Code. I guess the Treasury department has not published interpretations that resolve the questions mentioned above. BenefitsLink neighbors, are those guesses right? 401kology, you’ll get much more help from practitioners with on-point experience. (In 41½ years working with retirement plans, I’ve never myself analyzed any application of I.R.C. § 416.)

“Notwithstanding foregoing [sic], the exclusive means for individuals who are not contemporaneously classified as an Employee of the Employer on the Employer’s payroll system to become eligible to participate in this Plan is through an amendment to this Plan, duly executed by the Employer, that specifically renders such individuals eligible for participation hereunder.” A plan’s sponsor might want its lawyer’s advice about whether it is wise or unwise to amend the plan’s governing documents to specify, whether by names or a description, the four participants.

About Fiduciary Duties In Selecting Designated Investment Alternatives, the Labor department’s proposed interpretation focuses on a fiduciary’s process and capabilities for evaluating the investment merits of something considered for a designated investment alternative. The explanation confirms this proposed rulemaking does not interpret a fiduciary’s other responsibilities in designing a menu of investment alternatives for participant-directed investment. Another BenefitsLink discussion asks: Must a fiduciary consider whether a participant can understand an investment alternative? https://benefitslink.com/boards/topic/81087-must-a-fiduciary-consider-whether-a-participant-can-understand-an-investment-alternative/. Even if a fiduciary has done a prudent-expert job in evaluating the investment merits of a designated investment alternative that is or includes private equity (or debt), a participant decides whether and how to use an investment alternative. In deciding whether to designate an investment alternative that is or includes private equity (or debt), must a fiduciary consider whether a participant is less able to evaluate that investment than she is able to evaluate a simpler investment, such as shares of an SEC-registered mutual fund? Assuming an investment alternative otherwise would be prudently selected, is a typical participant’s ability to understand the investment at least a factor a fiduciary must consider? Or, is it unnecessary to consider whether a participant can understand a more complex investment alternative because a typical participant cannot understand even the simpler alternative, shares of a publicly available mutual fund regulated by Federal securities laws. What do you think: Is an evaluation of participants’ capabilities in evaluating investment alternatives necessary? Or a useless distraction?

ErnieG suggests a fiduciary ought to consider the participants’ level of sophistication. Anyone with a different view or observation?

While Tom’s query used the word “waiver”, I guessed from context it’s about ERISA § 205 and a spouse’s consent to a participant’s election against a survivor annuity (if the plan provides or allows an annuity) or designation of a beneficiary other than the spouse. Or, a plan designed to meet Internal Revenue Code § 401(a)(11) and § 417. And from context I guessed Tom does not ask about different law or plan provisions that might apply regarding a governmental plan or a non-ERISA church plan.

If the plan's sponsor would use an IRS-preapproved document, what might it provide about recognizing leased employees as participants?

A plan’s administrator might want its lawyer’s advice. Here’s a background: A notary or plan representative must witness the spouse signing the consent. ERISA § 205(c)(2)(A)(iii) (“the spouse’s consent . . . is witnessed by a plan representative or a notary public”). In 2006, the Treasury department interpreted this to require physical presence. 26 C.F.R. § 1.401(a)-21(d)(6)(i) (“witnessed in the physical presence of a plan representative or a notary public.”), https://www.ecfr.gov/current/title-26/part-1/section-1.401(a)-21#p-1.401(a)-21(d)(6)(i). Under a 2022 proposed interpretation of the statute, a notary may witness the spouse’s signing by using live audio-video technology and meeting all requirements and conditions under the proposed rule and the State law that applies to the notary. Likewise, a plan representative may (if the plan permits a representative to witness a spouse’s consent) use live audio-video technology under controls specified in the proposed rule. Use of an Electronic Medium to Make Participant Elections and Spousal Consents [notice of proposed rulemaking], 87 Fed. Reg. 80501–80509 (Dec. 30, 2022). That notice states: “Prior to the applicability date of the final regulation, taxpayers may rely on the rules set forth in this notice of proposed rulemaking.” Id., at 80506. But it is unclear whether that statement restrains any executive agency. Further, a court deciding a dispute—for example, a spouse’s or surviving spouse’s challenge that an ostensible consent was ineffective—does not defer to an executive agency’s interpretation of a statute, even an interpretation stated by a final rule. An agency’s interpretation might not persuade a court. Loper Bright Enterprises v. Raimondo, 603 U.S. 369 (2024) (A federal court may consider, but must not defer to, an executive agency’s interpretation of a statute. For a question of law not already answered by a judicial precedent, a court must decide a dispute with the court’s interpretation of the statute.). About whether to accept or refuse a remote witnessing, a plan’s administrator might want its lawyer’s advice about how to form loyal, impartial, and prudent decisions. This is not advice to anyone.

Miles Leech, you mentioned a “solo” plan. If there is no eligible employee (or deemed employee) beyond the one who desires Roth treatment, consider that a provision for a nonelective contribution to be treated as Roth might be less difficult or burdensome than some fear. Yet, consider: If the plan is stated using IRS-preapproved documents Journey Retirement Plan Services, LLC provides, can the plan be amended by the relevant remedial-amendment date? Is the recordkeeper ready to provide the necessary separate-accounting service? Will the employer engage Journey RPS to do the tax-information reporting needed for a Roth nonelective contribution? For an incremental fee? For an increase in a general fee? This is not advice to anyone.

Yesterday’s proposed interpretation about selecting designated investment alternatives for an individual-account retirement plan that provides participant-directed investment seems to focus on a fiduciary’s decision-making about the investment merits of an investment alternative. A subpart about complexity speaks to whether the fiduciary knows enough, or with an adviser can know enough, to evaluate, thoughtfully, an investment’s risks and potential rewards related to the complexities. Some people think a fiduciary ought to consider whether a typical participant can understand the complexities and risks of a designated investment alternative. Even if a fiduciary has done a prudent-expert job in setting the menu, a participant decides whether and how to use an investment alternative. Others think it’s unnecessary to consider whether a participant can understand a more complex investment alternative because a typical participant cannot understand even the simpler alternative, shares of a publicly available mutual fund regulated by Federal securities laws. BenefitsLink neighbors, which is your view? And why?