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?

BenefitsLink neighbors, what do you think about this: I have sometimes considered whether a plan administrator’s domestic-relations-order procedure might include these points: If a submission includes any document beyond the court order someone asks the administrator to recognize as a QDRO, return those documents to the submitter. Do that with a letter to both litigants and each’s representative (if any) stating that the other documents were not read, and are ignored. If the court order someone asks the administrator to recognize as a QDRO “incorporates by reference” a divorce decree, settlement agreement, or other document, state the administrator’s finding that the order is not a QDRO because the order does not “clearly specify” its instruction to the plan’s administrator. Is this a good idea, or a bad idea? Why? What are the potential disadvantages?

If you’re asking about a 404a-5 disclosure (and someone assumes the plan’s administrator chose to follow that interpretation): Even when a plan has no designated investment alternative, the administrator might have plan-related information to disclose (if not sufficiently explained in the summary plan description). See 29 C.F.R. § 2550.404a-5(c)(1)(i)(A)-(B)-(F), -5(c)(2)-(4) https://www.ecfr.gov/current/title-29/part-2550/section-2550.404a-5#p-2550.404a-5(c). Or, if the truth is that the plan’s administrator never delivered a 404a-5 disclosure, the administrator might tell the new platform that truth. A service change might be an opportunity for a plan’s administrator to begin a disclosure. This is not advice to anyone.

Apart from other observations one might consider: If the plan is ERISA-governed, the plan’s administrator (or its service provider, if it speaks for the administrator) might inform the inquiring domestic-relations lawyer: A State-law construction aid that the absence of an expression means a measure includes gains and losses is useless for an order one wants treated as QDRO. ERISA alone governs how an ERISA-governed plan reacts to a State court’s order. An order that does not “clearly specify” its instruction cannot be a QDRO. This is not advice to anyone.

If the might-be plan sponsor would consider, seriously, correcting document and other defects: Engaging an admitted lawyer (or a Federally authorized tax practitioner) could set up an evidence-law privilege for confidential communications made to seek the lawyer’s or other practitioner’s legal advice. That might help set up a more comfortable environment for discovering what happened and discerning choices about whether and how to correct defects. Adding that bit of information to a call-your-lawyer suggestion might be a nice courtesy, even if the approached service provider is completely unwilling to accept the prospective client.

Some § 403(b) plans provide a participant’s contribution that, although made by salary reduction, is not an elective deferral because the contribution is made as a condition of employment. (Some IRS-preapproved documents set up a specially defined term for such a Mandatory Contribution.) Internal Revenue Code § 414(v)(7)’s constraint that a higher-wage participant’s “additional elective deferrals” must be non-Roth contributions applies only regarding elective deferrals. If an employer’s information feed to a recordkeeper carefully shows distinct amounts for each of Mandatory Contributions and elective deferrals, does a recordkeeper record these in distinct subaccounts? Or, should an employer worry that a recordkeeper might flag as § 414(v)(7)-burdened many participants whose elective deferrals did not exceed the without-catch-up limit? About this, are some recordkeepers better than others? For example, does TIAA—because of its wide experience with higher-education employers, many of which provide these condition-of-employment contributions—handle this more capably than other big recordkeepers?

It might help to distinguish between when an amount becomes forfeit and when the amount is segregated from the participant’s individual account. If the participant did not yet receive a distribution, might the plan’s administrator now segregate the forfeited amounts and credit those amounts to the forfeiture account? Whether slowness in segregating forfeitures affects other participants might turn on the plan’s provisions, especially if nondiscretionary, about using forfeited amounts. Imagine the documents governing the plan provide that the order is: first, a forfeiture amount sets off the employer’s obligation to pay a nonelective or matching contribution; next, a remaining forfeiture amount (if any) is used to pay plan-administration expenses (or to reimburse the employer for its advance on expenses the employer was not obligated to pay); last, a remaining forfeiture amount (if any) is allocated to participants’ accounts. For many plans, the use of forfeiture amounts regularly stops at step one. So, a delay in segregating a forfeiture might burden only the employer. But I concur with Bri that a delay in segregating a forfeiture matters more if the amount would or might have been used for allocations to participants’ account. This is not advice to anyone.

In the facts of my OP, the decedent’s limited-liability company is the plan’s sponsor and the plan’s administrator. The human who has become the company’s successor manager knows the participant died. Although the plan sponsor could end the plan, the plan sponsor—and the decedent’s beneficiary—might have reasons to continue the plan, perhaps over the next ten years, or even more. After we discerned that a plan’s administrator might not, if no one has submitted a claim, always need to act right away, I imagined another situation, much different from my OP, in which a plan’s administrator doesn’t which participants have died. I regret confusing any reader with my undescribed thinking-out-loud journey, and thank you for taking the thought exercise with me.

Beyond anything about imposing a plan’s involuntary § 401(a)(9) distribution, a plan’s administrator might, after a participant’s death, turn on the beneficiaries’ investment-direction powers and disclosure communications. But that’s if the plan’s administration knows the death happened. If no communication addressed to the participant gets a bounce-back or not-delivered, the plan’s administration might have no reason to classify the participant as “missing” or not located. If no one submits a claim for a death benefit, the plan’s administration might not know that a participant died. It might be unwise to try to determine a participant’s beneficiaries if the plan’s administrator has not first found that the participant died. Although a plan I advise might run a yearly or quarter-yearly sweep on participants’ identifying information, the findings often are inconclusive. And some efforts to confirm that a participant is alive and still receiving the plan’s account statements and other communications can risk identity thefts and other frauds. Some efforts might be helped a little if some participants don’t opt out of a once-a-year paper communication.

For lawyers less knowledgeable than fmsinc, here’s a point some trusts-and-estates or domestic-relations lawyers might miss: For some plans, ERISA supersedes and preempts every State’s law (except a QDRO that ERISA § 206(d)(3) commands a plan governed by that section to follow). Even when State law is not preempted, a plan often specifies the law of a State other than one in which the participant resides or is domiciled. (In the situation that moved me to ask my question, the decedent was an Iowa domiciliary and the estate administration is governed by Iowa law; the retirement plan sponsor is an Iowa company; the decedent’s former spouse is an Iowa resident; and the people who might have claims to the plan’s death benefit are Iowa residents. Yet, the retirement plan is governed by Pennsylvania’s internal law, without regard to any law of conflicts. RTFD.) In the situation I’m advising about, the plan’s administrator need not consider any State’s statute about whether a divorce might revoke a beneficiary designation. Because the divorce was final before the participant’s death, the former spouse no longer was “the person I am married to at the time of my death[.]”) This is not advice to anyone.

For an individual-account retirement plan that provides participant loans, a plan’s loan receivable is the plan’s asset, and typically is allocated to the individual account of the borrower participant (especially so if the plan provides participant-directed investment). Yet, how to account for, and how to value, such a loan receivable for each of several differing purposes involves other layers of questions. For just one example about only two of the purposes, a value shown in an element of a plan’s financial statements might differ from a value (if any) shown on a participant’s account statement. If the only security for a participant loan is a set-off or charge against the elective-deferral subaccount of the participant’s individual account, questions about whether a benefit right is not yet nonforfeitable might be inapplicable. Consider that a retirement plan’s documents might state or describe a benefit right in a way that, while perhaps logically fitting the Internal Revenue Code and ERISA’s title I, has little or no relevance for some practical uses of the benefit right. A negotiator for a nonparticipant spouse might argue that such an alternate payee’s share ought to be determined or negotiated by assuming as the starting point what the participant’s account would be, and what the marital-property portion of it would be, had the participant not taken the loan. That might make sense if only the participant would benefit from repaying the loan. Likewise, domestic-relations negotiators might focus on what amounts could be payable in tomorrow’s QDRO division and distribution. This is not advice to anyone.