Peter Gulia

A § 414(v)(7) must-be-Roth constraint applies to “an eligible participant whose wages (as defined in section 3121(a)) for the preceding calendar year from the employer sponsoring the plan exceed[s]” the specified amount. Internal Revenue Code of 1986 (26 U.S.C.) § 414(v)(7)(A) https://www.govinfo.gov/content/pkg/USCODE-2024-title26/html/USCODE-2024-title26-subtitleA-chap1-subchapD-partI-subpartB-sec414.htm. And here’s the statute’s cross-reference to I.R.C. § 3121(a) https://www.govinfo.gov/content/pkg/USCODE-2024-title26/html/USCODE-2024-title26-subtitleC-chap21-subchapC-sec3121.htm. Accord 26 C.F.R. § 1.414(v)-2(a)(2) (“For this purpose, wages taken into account are wages as defined in [Internal Revenue Code] section 3121(a) for purposes of the taxes imposed by sections 3101(a) and 3111(a) for the year the wages are required to be taken into account for purposes of chapter 21 of the Internal Revenue Code.”), https://www.ecfr.gov/current/title-26/part-1/section-1.414(v)-2#p-1.414(v)-2(a)(2). Further, it’s not necessarily all Form W-2 box 3 wages, but rather those from the employer that maintains the plan for which one applies a § 414(v)(7) constraint about the portion of elective deferrals that must be Roth contributions. For example, an individual might have three (unrelated) employers that pay her $400,000 in wages, but if no employer paid more than $150,000, a § 414(v)(7) constraint is not invoked.

Is the vendor saying that the vendor is unwilling to receive Roth contributions under that vendor’s contract? Or is the vendor suggesting that the charitable-organization employer somehow must not or should not allow Roth contributions, even if there is available under the employer’s nonplan program a § 403(b) contract that allows Roth contributions? If it’s the latter point, an employer might consider whether it could be unwise to rely on legal advice from a person that denies that it provides legal advice. In theory, a charitable organization might design a “written plan” that allows Roth contributions and meets Internal Revenue Code § 403(b) and § 414(v)(7) and yet does not, within the meaning of ERISA’s title I as interpreted in 29 C.F.R. § 2510.3-2(f) and EBSA’s guidance, let the employer “establish” or “maintain” any plan provision. To do so, the charity would need top-notch lawyering and an unusually capable payroll manager. And the employer would resist becoming a party to any annuity contract or custodial-account agreement, and resist every contractor’s requests for instructions. But before a charity considers such a course, the charity might reevaluate whether existing arrangements really do not establish a plan and do not maintain a plan. Further, a charity might want its lawyer’s explanation that 29 C.F.R. § 2510.3-2(f), if ever it was “safe” to rely on, is no longer conclusive. Although a judge may consider the Labor department’s reasoning expressed in its 1975 interpretative rule, a judge must not defer to it. Rather, a Federal court must interpret a statute—ERISA § 3(2) and ERISA’s title I—according to the court’s best interpretation of Congress’s statute. And even if a court otherwise is persuaded by an interpretive rule, a court might not be persuaded about how that interpretation applies regarding facts and circumstances that the agency’s rulemaking might not have then contemplated. A charity might want its lawyer’s advice about risks and opportunities, including perhaps some the organization might not yet have considered, or considered carefully. Or, considered in light of changed facts and circumstances. 30Rock, how confident are you that the charity’s existing written plan does not already allow Roth contributions to the extent a § 403(b) contract allows them? This is not advice to anyone.

Beyond whatever one might find about tax law, a plan’s administrator might consider the service agreement with the plan’s directed trustee, custodian, or other payer or tax-information reporter. Some agreements of those kinds do not obligate such a service provider to unprocess or reprocess a transaction that was done according to the plan administrator’s or its agent’s instruction. This is not advice to anyone.

If a charity prefers to do no more than make available voluntary-only purchases of individuals’ rights under § 403(b) contracts without “establishing” or “maintaining” a plan, each insurer or custodian that issues a § 403(b) annuity contract or § 403(b)(7) custodial-account agreement decides the contract’s provisions, including whether the contract offers or omits a Roth-contribution provision. If an individual’s wage-reduction/deduction agreement’s instructions directs her elective deferrals to a § 403(b) contract that does not allow Roth contributions, the employer would treat a § 414(v)(7)-constrained employee’s election that seeks non-Roth elective deferrals beyond those that can be allowed without using an age-based catch-up as ineffective. The employer would stop those contributions. The employer would report such an employee’s Federal income tax wages excluding only so much as was properly excluded without an attempted age-based catch-up that could not be a non-Roth contribution. Remember, the U.S. Labor department’s interpretation about how an employer avoids “establishing” or “maintaining” a plan includes a concept of not unnecessarily restraining § 403(b) “contractors who may approach employees” to less than a “reasonable choice” after considering (at least) six factors, including “[t]he terms of the available arrangements[.]” 29 C.F.R. § 2510.3-2(f)(3)(vii)(D). A charity cannot worsen its “hands off” noninvolvement position by tolerating more choice. So, if a § 403(b) insurer or custodian that would like to do business with the charity’s employees offers a contract that allows Roth contributions, the charity might add that vendor to what the charity allows for its employees’ voluntary choices. In evaluating whether an ostensible nonplan really is an ERISA-governed plan, some might find that narrowing employees’ choices to only contracts that refuse Roth contributions results in an unreasonable choice (if at least one contractor allowing Roth contributions presented itself as seeking to fit the employer’s program and meet the program’s reasonable conditions). Remember too that in forming the “written plan” Internal Revenue Code § 403(b) might require as a tax-qualification condition, an employer that prefers not to “establish” a plan as ERISA’s title I defines it does not set plan provisions. Rather, the charity collects, assembles, and re-expresses provisions that result from the recognized contracts of the recognized § 403(b) insurers and custodians together with Federal tax law. If the “written plan” does not already so state, a charity might write that a Roth contribution is recognized only if the contract the participant chose allows the contribution and only to the extent the Internal Revenue Code does not preclude recognizing the contribution. This is not advice to anyone.

Before either the business corporation or the charitable organization acts under an assumption that these together might be one I.R.C. § 414(b)-(c)-(m)-(o) employer, each might want its lawyer’s advice about whether that assumption is so. If HSB obtained the Internal Revenue Service’s recognition of HSB as a charity, the application might have represented to the IRS that HSB had and would have multiple directors, trustees, or other governors. Further, HSB might have represented that some governors would be not subordinates of, and would be otherwise independent of, a substantial donor. Among many sources of law, either lawyer might consider 26 C.F.R. § 1.414(c)-5 https://www.ecfr.gov/current/title-26/section-1.414(c)-5. Consider that paragraph (c)’s tolerance for permissive aggregation might apply only among exempt organizations. Are all or some of either GLP’s or HSB’s workers leased employees? Or arranged with a professional-employer organization? Or a payrolling company? If GLP and HSB are not parts of one employer, might HSB consider becoming a participating employer of a multiple-employer plan? These and many other questions might matter for the situation you describe. This is not advice to anyone.

rocknrolls2, one wishes every plan sponsor had the presence of mind to RTFD, or to engage you or another adviser. The sadnesses of a retirement plan’s sponsor not considering, and often not being usefully aware of, some of a plan’s provisions can result from an owner who signs documents with no advice and little reading. (In the matter I worked on recently, I was engaged, for one discrete point, only after the one owner/participant’s death and after it was too late to change troublesome provisions.) ErnieG, although I don’t doubt that you’re fairly describing documents you know, not all sets of IRS-preapproved documents have an adoption-agreement or appendix item for specifying a user’s choice of a governing State law. Further, not every basic plan document sets up a governing-law provision, whether default or nonvariable, by referring to something about a plan sponsor or employer. At least one widely used set of IRS-preapproved documents sets up for a plan’s governing law “the laws of the state in which the Pre-approved Document Provider is located[.]” States’ laws can differ on points that matter in how a retirement plan is administered, or even who gets a benefit. Whether a court might follow, might overlook or ignore, or might countermand a document’s choice of law also might suffer differences. And there might be difficulties about personal or property jurisdiction, and about legal or equitable remedies. I recognize this choice-of-law point might matter only for plans that are not ERISA-governed.

QDROphile, your intellectual rigor and keen powers of observation more than compensate for whatever experience you (or I) might lack with that subsegment of small-business retirement plans. While perhaps understandable, it’s sad that a plan’s choice-of-law comes from a person that is not a party to the plan, has no responsibility to administer the plan, and asserts that it provides no advice.

In a matter I advised on (now concluded): Pennsylvania law governs the plan. (That did not result from an adoption-agreement choice.) North Dakota law governs the trust agreement. New York law governs the recordkeeper’s service agreement. None of those choices of law resulted from anything about where the plan sponsor is or was organized or has or had a location. I’m not seeking help for a particular matter. Rather, I wonder how much small-business owners are aware of a choice of State law governing a retirement plan. And about circumstances in which a choice of State law can matter.

And as Bri's illustration suggests, a consequence might matter.

If you have a moment on a summer afternoon, I’d welcome your sharing of information and experiences. For a small-business retirement plan that is not ERISA-governed (because all participants, including eligibles, are self-employed individuals): Do you know which State’s law governs your client’s plan? Does your client know which State’s law governs one’s plan? How often is the governing law not an adoption-agreement choice? How often does a service provider cause the plan to specify a State law the service provider prefers? Have you ever seen a situation in which the State law governing the plan matters?

And consider making the documents governing the plan fit what the plan’s sponsor will allow.

If the seller, with its lawyers’ advice, lacks information about what must, should, should not, or must not happen with a retirement plan, recognize that a lawyer too might face gaps in information from her client and restrictions on the scope of her work. If the law firm representing the seller in a business deal lacks an employee-benefits practice, the standard recommendation is to bring in an employee-benefits lawyer. But many sellers decline to engage, or allow the business lawyer to engage, an employee-benefits lawyer. Or, even when an employee-benefits lawyer is available, a client might have instructed its lawyers not to consider employee-benefits issues, or to avoid negotiating anything that might slow a dealmaking. Failing to consider employee-benefits issues and consequences can happen even when every professional acted correctly, each considering the scope of her engagement. Consider that if 5½ weeks remain, there might be an opportunity, without upsetting the business deal, to resolve what ought to happen in ending the seller’s retirement plan. This is not advice to anyone.

Before you begin work, consider getting your lawyer’s advice about what your service agreement obligates, permits, or precludes. Unless you are the plan’s administrator or other fiduciary, consider that a decision about whether and when to discontinue or terminate an employee-benefit plan belongs to the plan’s sponsor, and decisions about how to implement a discontinuance or termination belong to the administrator or other fiduciary. If your client asks for your advice about what to do with the retirement plan (and you’re willing to provide advice), consider explaining that you’re not ready to provide advice until you’ve read all documents about the business sale and any related deals. Consider reassuring your client that you’ll keep all information confidential. And that you’d communicate only with your client, or, if so authorized, with your client’s lawyer. Deal documents often include a seller’s representation, warranty, and covenant that every employee-benefit plan was ended before the sale of the business (in whichever form). A seller’s delivery to the buyer of a further assurance of each plan’s termination often is a closing condition. 2) If 5½ weeks before the closing, a seller has not told its employees about a pending sale, that might be deliberate. 4) Consider that the buyer’s retirement plan might not accept a rollover-in contribution. Likely, you don’t yet know. 6) Although an intended safe-harbor plan design might control how the plan allocates one or more kinds of contributions, that might not by itself preclude a plan “termination” (really, a discontinuance) at a desired time before the closing of the business sale. Consider 26 C.F.R. § 1.401(k)-3(e)(4) https://www.ecfr.gov/current/title-26/part-1/section-1.401(k)-3#p-1.401(k)-3(e)(4). If safe-harbor treatment is not met, a plan’s administrator might apply a plan’s provisions for coverage, nondiscrimination, and top-heavy measures (and related reallocations and corrective distributions). Remind your client to get its lawyers’, including an employee-benefits lawyer’s, advice. This is not advice to anyone.

I see in Notice 2026-49 nothing that undoes Revenue Ruling 2014-9’s interpretation that a receiving plan’s administrator looking to a distributing plan’s most recent Form 5500 report or return (if there is one) and finding the absence of a code showing that the plan is not intended to be tax-qualified can be a good-enough effort to presume that the distributing plan likely is intended to be tax-qualified. It seems odd that an IRS-suggested form would call a distributing plan’s administrator to state that the plan is tax-qualified when the Treasury’s rule calls it enough for a receiving plan to get the distributing plan’s statement “that Plan O is intended to satisfy the requirements of section 401(a) and that the administrator of Plan O is not aware of any Plan O provision or operation that would result in the disqualification of Plan O[.]” 26 C.F.R. § 1.401(a)(31)-1/Q&A-14(c) Example 2 https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR6f8c3724b50e44d/section-1.401(a)(31)-1.

Paul I and G8Rs, thank you, each and both, for your excellent teaching!

Today, a client sent me a package of what its recordkeeper labels “your SECURE 2.0 Act Interim Amendment.” The package describes this as “changes from your Cycle 3 qualified retirement plan.” BenefitsLink neighbors, I’d welcome your help so I learn some contours about a plan sponsor’s uses of documents of this kind. Am I right in guessing that an interim amendment does not get an IRS imprimatur like the IRS opinion letter that results from an on-cycle review of IRS-preapproved documents? Am I right in guessing that an interim amendment—even if the documents’ designer built it from the IRS’s Listing of Required Modifications—does not get any IRS assurance? A user may not rely on the IRS opinion letter that accompanies an IRS-preapproved document unless the user makes no change beyond those expressly allowed within the document or by an IRS Revenue Procedure about preapproved documents. But what if an interim amendment states a provision on a point nowhere even mentioned in the preceding cycle’s IRS-preapproved documents? Without defeating reliance on the most recent IRS opinion letter, may a user change a provision the IRS never vetted? I don’t yet know whether anything might call for even considering a change. But here’s why understanding the rules matters. If a change would defeat reliance, I might narrow the scope of my review and spend less of my client’s money and attention. Or if a change would not defeat reliance, I can, before I start work, ask my client how much or how little it wants me to review. And knowing the rules I might have better knowledge to form my advice about whether a change might be worthwhile. I know many plan sponsors never seek a lawyer’s review of what a recordkeeper or other service provider has presented. But for those of us who are asked, the client and the lawyer together need to define what the lawyer is looking for, and, often more important, what not to consider. I understand that I alone am responsible for any advice to my client.

If a distributing plan refuses to sign a statement that the plan is tax-qualified, how does a receiving plan react to that? Does a receiving plan accept a statement that the distributing plan is intended to be tax-qualified?

Pam Shoup, thank you for your useful catalog of some difficulties. (I know from experience that there are many more.) The frustrations you mention might be a meaningful part of why someone asked Congress to legislate that the Internal Revenue Service publish guidance. “A notice is a public pronouncement by the IRS that may contain guidance that involves substantive interpretations of the IRC or other provisions of the law. Notices may be used in circumstances in which a revenue ruling or revenue procedure would not be appropriate. In addition, notices may be used to solicit public comments on issues under consideration, in connection with non-regulatory guidance, such as a proposed revenue procedure.” Internal Revenue Manual 4.10.7.2.4.1(1)(b)[3] (Sep. 12, 2022). I suspect retirement plans’ administrators and their service providers might need much more persuasion than whatever exhortation IRS Notice 2026-49 might suggest.

Globalization Partners’ advertising suggests that an aspect of their service is guidance about “international norms and practices[.]” https://www.globalization-partners.com/book-demo-lp/?utm_keyword=globalization%20partners&utm_device=c&utm_matchtype=e&msclkid=15028c2078481df198eee65f20427130&utm_source=bing&utm_medium=cpc&utm_campaign=usa__search__branded__%5Ben%5D&utm_term=globalization%20partners&utm_content=branded. One imagines its competitors too offer suggestions about balancing business goals, including: obeying each set of national and subnational requirements, meeting any contract requirements the employer-of-record imposes, setting compensation (including benefits) to attract the workers the service recipient wants, and setting compensation (including benefits) to meet the service recipient’s budget. Whether one seeks or eschews reasonable parity across nations might relate to one or more of those factors. While my former and current clients have workers in many nations, none has used an employer-of-record service, so I lack the experience you’re seeking.

Let’s imagine the one-participant plan is not governed by ERISA’s title I but is described in Internal Revenue Code § 4975(e)(1)(A). So, a prohibited transaction (if any) might be a § 4975(c)(1)(D) prohibited transaction. The Labor department’s rule, Definition of “plan assets”—participant contributions, states that it applies “[f]or purposes of . . . section 4975 of the Internal Revenue Code[.]” 29 C.F.R. § 2510.3-102(a)(1) https://www.ecfr.gov/current/title-29/part-2510/section-2510.3-102#p-2510.3-102(a)(1). That’s logically consistent with President Carter’s 1978 Reorganization Plan. A disqualified person might look to that rule’s interpretation to support a tax-return position. Under that interpretation, an amount to be treated as a participant contribution need not be treated as plan assets until “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 from a participant’s [self-employment income or] wages[.]” 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). If one treats Wednesday, December 31, 2025 as both the segregation date and the payday, a participant-contribution amount might not have become plan assets until January 12, 2026. I do not say this reasoning is correct. I suggest only that some might reason this to support a nonfrivolous tax-return position. As always, a disqualified person should get its lawyer’s advice. This is not advice to anyone.

The steps and forms the IRS suggests involve a “certification” some plans’ administrators might be reluctant or unwilling to state. Form 2: Receiving Plan’s Request to Distributing Plan would state: “To the best of my knowledge, . . . the Receiving Plan is tax-qualified[.]” Form 3: Distributing Plan’s Rollover Certification would state: “To the best of my knowledge, . . . the Distributing Plan is tax-qualified[.]” I recall when many people were unwilling to sign such a statement; is that still a problem?

Bri, thank you. I get the difficulty about a distributing plan that still has a spouse’s-consent condition. So I learn something: About trustee-directed pooled assets, is the difficulty that such a plan often lacks daily valuation and might impose monthly, quarter-yearly, or yearly intervals and valuation dates to measure a distribution? Or is it something else? BenefitsLink neighbors, what other hang-ups happen in dealing with rollovers?

Can we simplify rollovers between retirement plans? Here’s yesterday’s prepublication release of IRS Guidance on Section 324 of the SECURE 2.0 Act with Respect to Rollovers, Notice 2026-49, 2026- -- I.R.B. --- (---, 2026), https://www.irs.gov/pub/irs-drop/n-26-49.pdf The Notice suggests a step-by-step way for a receiving plan to get information and money from a distributing plan. The Notice includes sample forms. Will this work?

I checked the definition of highly-compensated employee in the basic plan document of a widely used recordkeeper’s set of IRS-preapproved document. It states expressly that compensation to determine who is a highly-compensated is not according to the plan’s definition of compensation but rather according to Internal Revenue Code § 414(q). That subsection states “‘compensation’ has the meaning given such term by section 415(c)(3).” I.R.C. § 415(q)(4). Your mileage may vary.

BenefitsLink neighbors, I don’t read metsfan026’s inquiry as asking about what nonelective contributions and opportunities to restore elective and matching contributions the participant gets regarding one’s absence for military service. Rather, I read the inquiry to ask whether determining highly-compensated status for 2025 by looking to 2024 compensation looks to the amount the participant received during 2024 or considers an amount for as-if compensation approximated under USERRA’s provisions for counting deemed compensation on which to determine USERRA benefits and opportunities. The Treasury’s temporary interpretation suggests the I.R.C. § 414(q) measure looks to the compensation the participant received (without USERRA-deemed compensation). 26 C.F.R. § 1.414(q)-1T https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR686e4ad80b3ad70/section-1.414(q)-1T. Does anyone read that rule or the statute it interprets differently? A plan’s administration might need two or more measures of compensation, distinguishing compensation to measure required or permitted contributions and compensation to determine who is or isn’t treated as highly-compensated in the next year. This is not advice to anyone.