Peter Gulia

When a plan’s administrator engages an independent qualified public accountant, the administrator decides whether to engage the IQPA for a full-scope examination, or to limit the IQPA’s scope by providing that the IQPA need not examine information certified by a regulated bank or insurance company. 29 C.F.R. § 2520.103-8 https://www.ecfr.gov/current/title-29/subtitle-B/chapter-XXV/subchapter-C/part-2520/subpart-C/section-2520.103-8#:~:text=ECFR%20CONTENT-,%C2%A7%202520.103%2D8,-Limitation%20on%20scope Unless the employer securities are publicly and regularly traded on a national securities exchange, it’s unlikely a bank will certify enough information about the employer securities. If the ESOP has bank-custodied investments beyond employer securities, an administrator might (if the rule’s conditions are met) limit an independent accountant’s scope regarding those other assets.

Bird, thanks. Anyone with a different view? And if, for 401(a)(9) purposes, someone is a 5%-owner if she had more than 5% in capital interests or in profits interests as at any date during the year, do employers furnishing information to a recordkeeper or third-party administrator know that this how to apply the rule?

If one applies the rule Kevin C cites, there is a remaining curiosity about exactly when in the referred-to year one determines whether a participant is a 5%-owner. One of the rule’s elements is simplified if the plan year is the calendar year. Thus: “For purposes of section 401(a)(9), a 5-percent owner is an employee who is a 5-percent owner (as defined in section 416) with respect to the . . . year in which the employee attains age 70½ [72].” 26 C.F.R. § 1.401(a)(9)-2/Q&A-2(c) https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR6f8c3724b50e44d/section-1.401(a)(9)-2. A 5%-owner is one who owns more than 5% of the capital or profits interest in the employer. But when in the year? The first day of the year? The last day of the year? Something else? For a partnership (or a limited-liability company treated as a partnership for Federal income tax purposes), a partner’s interests can change as often as the partnership accounts for its partners’ interests. BenefitsLink neighbors, what is your experience about how and when the “more than 5%” is counted? Or does a third-party administrator not know this because the TPA relies on the employer’s yes-or-no (or on-or-off) indicator about whether an individual is a 5%-owner?

QDROphile, thank you for your further thoughts, which again help me. As mentioned in the originating post, I recognize that whichever fiduciary decides the retirement plan’s menu of investment alternatives must evaluate, according to ERISA § 404(a)’s duties, whether it is prudent to consider the advisor’s advice. The without-fee advisor doesn’t lack experience or credentials. Before her recent retirement, she worked over 35 years in retirement investment consulting. She is a CFA® (Chartered Financial Analyst) charter-holder. The charity considered engaging a currently registered investment adviser, but the charity has no budget to pay anything for a retirement plan. It’s impractical to pay a fee from the plan’s assets, because the plan is a start-up with $0 now. I considered the named fiduciary’s capability to evaluate the advisor’s advice. I did so to evaluate whether anyone might assert plausibly that the advisor was, practically, the real decision-maker. (That finding might make even an uncompensated advisor a fiduciary.) The three members of the charity’s retirement plan committee have post-secondary degrees (A.B. M.A. / B.S. M.B.A. / A.B. J.D. LL.M.), and all have deep charitable-sector finance experience. None has investment experience beyond personal investment in mutual funds. (The charity’s § 403(b) plan will use only mutual funds.) An assertion that the advisor was the de facto decision-maker is a risk. In my written advice, I’ll explain this risk, and methods the advisor might use to guard against it. QDROphile, you are right to caution me not to let enthusiasm for helping a charity’s workers overtake clear-minded thinking about exposures and risks.

Thank you, QDROphile, Bird, and Belgarath, for your helpful thinking. While I dislike many lawyers’ use of pro bono to describe the category, many professionals consider a moral responsibility to volunteer one’s service, without fee, to those who would not be a paying client but need the service. Some investment advisors similarly volunteer uncompensated services. I had thought about whether an opportunity for referrals, or even good will, might be indirect compensation that invokes ERISA § 3(21)(A)(ii). First, the circumstances of the charity, its employees, those who serve on its governing board, and its donors are such that it’s unlikely any of them ever would become any advisor’s paying client. Further, the advisor is unregistered, and so cannot accept a paying client. (Because she is retired, she will remain unregistered.) This also makes recognition or good will something that won’t result in compensation. Thank you for helping me think this through. You have given me a Christmas present I value much more highly than others.

I hope BenefitsLink neighbors will help me provide without-fee legal advice to someone who would, without fee, provide her investment advice to a charitable organization’s ERISA-governed retirement plan. The advisor would render advice about (but not decide) investment alternatives for an individual-account plan that provides participant-directed investment. The advisor would have no authority, discretionary or even non-discretionary, to implement her advice. The advisor is not registered with the Securities and Exchange Commission or any State’s regulator because she is not, “for compensation, engage[d] in the business of advising others[.]” Investment Advisers Act of 1940 § 202(a)(11), 15 U.S.C. § 80b–2(a)(11) (emphasis added). Under ERISA § 3(21)(A)(ii), “a person is a fiduciary with respect to a plan to the extent . . . (ii) he renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan[.]” The Labor department’s and courts’ interpretations have set up the idea that a commission or other compensation paid or provided, however indirectly, by a third person can be compensation that invokes ERISA § 3(21)(A)(ii). But this advisor will get no fee, and cannot get a commission or other payment from a third person. Also, this advisor will get no fee or other compensation for any service beyond investment advice. How comfortable should I be in advising that the advisor is not the retirement plan’s fiduciary? Is there any gap or flaw in reasoning that, absent a fee, the advisor is not the plan’s fiduciary? I recognize that whichever fiduciary decides the retirement plan’s menu of investment alternatives must evaluate, according to ERISA § 404(a)’s duties, whether it is prudent to consider the advisor’s advice. I’ll appreciate any ideas from BenefitsLink neighbors.

Do the participant's circumstances support a hardship or unforeseeable-emergency distribution (whichever, if either, the plan provides)?

Even if the Internal Revenue Service wants to end or deactivate an electronic account the IRS suspects might no longer be used (and it’s not obvious why the IRS should want this), one wishes the IRS would at least give notice two or three months before the end.

The quoted text is an example of a provision designed to allow two or more plans, each with its separate plan trust, to invest together using a master or collective trust. That a trustee of a plan’s trust is empowered to use such a master or collective trust does not excuse any plan trust’s trustee from duties about separate accounting. Further, one would want service agreements with a recordkeeper, a third-party administrator, and other service providers to show separateness of the plans (and each plan’s trusts).

Internal Revenue Code of 1986 (26 U.S.C.) § 7701(a)(20) provides: “For the purpose of applying the provisions of section 79 with respect to group-term life insurance purchased for employees, for the purpose of applying the provisions of sections 104, 105, and 106 with respect to accident and health insurance or accident and health plans, and for the purpose of applying the provisions of subtitle A [income taxes] with respect to contributions to or under a stock bonus, pension, profit-sharing, or annuity plan, and with respect to distributions under such a plan, or by a trust forming part of such a plan, and for purposes of applying section 125 with respect to cafeteria plans, the term ‘employee’ shall include a full-time life insurance salesman who is considered an employee for the purpose of chapter 21 [FICA].” For FICA taxes, “a full-time life insurance salesman” is treated as if she were an employee. IRC § 3121(d)(3)(B). Following this, a service recipient is not precluded from including its nonemployee full-time life insurance salespersons from the service recipient’s IRC § 401(a) retirement plan. The Internal Revenue Manual recognizes this. IRM 4.23.5.7.4.1 (11-22-2017) https://www.irs.gov/irm/part4/irm_04-023-005r#idm139946602957840. For plan design, you might test whether excluding such a deemed employee from a plan’s nonelective contribution, matching contribution, or elective-deferral contribution would cause the plan to fail to meet one or more coverage or nondiscrimination conditions. In my experience, excluding them might not tax-disqualify a plan because life insurance salespersons tend to be highly-compensated employees.

That an employer or service recipient classifies insurance producers as statutory employees for reporting compensation on Form W-2 does not necessarily mean such a worker is eligible to participate under a particular retirement plan, or even that one is an employee as the plan defines it, or as ERISA § 3(6) defines it. If your question is about whether these workers are or could be participants, Read The Fabulous Document. If your question is about how excluding these workers might affect coverage, non-discrimination, and other conditions of tax-qualified treatment under Internal Revenue Code of 1986 § 401(a), one would look to those rules.

What default provision (if any) does the written plan state for a participant who has an opportunity to elect but does not? If there is such a provision, might the employer use plan-provided discretion about the plan’s administration to find that “2099” was no election? These are only questions, and I don’t suggest any conclusion. Get your lawyer’s advice.

Some plans’ administrators might use a disclosure regime conceptually like your description, but with different means, by following the Labor department’s rule for a participant’s, beneficiary’s, alternate payee’s, or other covered individual’s implied assent (by not generally opting-out) to notice-and-access electronic disclosures. Among many conditions, the regime requires that the individual furnished, or was assigned, an electronic address (which remains operable). https://www.ecfr.gov/current/title-29/subtitle-B/chapter-XXV/subchapter-C/part-2520/section-2520.104b-31 If you consider it, get your lawyer’s advice about meeting the rule’s conditions and requirements.

Has anyone explained to the broker that those who don't play well with others are less likely to get referrals?

Thank you for the helpful information I was looking for. (When I was inside counsel to a recordkeeper, an employer's payments seldom followed the loan-repayment schedule. Not satisfied with what the software did, the operations people asked me(!) to invent a rule for crediting the payments. I don't remember what we did.)

About #3, perhaps Brian Gilmore has seen what some employers are doing?

Without doubting the wisdom of BenefitsLink mavens’ yuck and double-yuck observations, I’d like to understand why something is impractical or difficult. (I have great respect for those who work in recordkeeping operations.) If one or more methods for refinancing a participant loan are described in the tax-law regulations, one might think mainstream recordkeeping software would be programmed so a user could use those methods. Am I ignorant about the software? Or if the software can do it, are there other reasons it’s impractical or difficult?

But only if the problems are uncovered before the employer gets rid of them.

The employer is exposed to potential liabilities, civil penalties, and expenses for: failures to tax-report wages; failures to withhold Federal, States’, and municipalities’ income taxes; failures to file Form 5500 reports; failures to deliver summary annual reports; failures to deliver other ERISA title I disclosures; deception under Federal and States’ securities laws; negligent misrepresentations under States’ common law of torts; and more problems an incautious employer faces. The employer should lawyer-up. Managing the situation calls for complete control of all communications. Even if some communications with a certified public accountant or other “Federally authorized tax practitioner” advising only within her proper scope might get a limited evidence-law privilege under Internal Revenue Code § 7525, that’s not good enough. That privilege never applies for anything about a State’s law, including a State or local tax law. For Federal law, it can apply only about tax law (and only civil, not criminal); not ERISA’s title I, and not securities law. Seeking a lawyer’s advice, the employer might protect information using evidence-law privileges for attorney-client communications, and for attorney work product, including fact work product and opinion work product. How to deal with the former executive might turn on discerning how much he knows about the employer’s weaknesses, and how skillfully or ineptly he might try to exploit them. One might consider also whether he is complicit in any of the failures, and how recognizing that the plan did not result in a deferral of compensation could affect his personal tax situation. There are opportunities to use a severance negotiation and, perhaps a settlement agreement with confidentiality provisions, to buy time and breathing room for an easier clean-up project.

Do health-reimbursement plans provide domestic-partner coverage? Imagine this not-so-hypothetical situation. An employer sponsors a health plan of the kind people call an “HRA” or health-reimbursement-arrangement plan. There is no participant contribution. Claims for reimbursement of a medical expense are paid by the employer from its assets. Presume the employer intends the plan to fit Internal Revenue Code § 105(b) and the Revenue Rulings interpreting § 105(b) regarding an HRA. The employer knows same-sex couples have no less right to marry than opposite-sex couples. But the employer, for its own business reasons, wants to provide its HRA benefit regarding the medical expenses of an employee’s non-spouse civil-union or domestic partner [26 C.F.R. § 301.7701-18(c)] equally to those of an employee’s spouse. The employer wants to provide this even if there is no support for treating an employee’s domestic partner as the employee’s spouse, dependent, or child. 1. Do plan-document vendors set up providing HRA coverage for a domestic partner as a check-the-box choice? 2. If it is a document choice, what (if anything) does a vendor explain about the Federal tax law implications of providing that the employer will reimburse the medical expenses of an employee’s non-spouse? 3. If an employer provides domestic-partner coverage, what methods does it use to add an amount for the value of the coverage, or of the reimbursements, to an employee’s wages for W-2 tax-reporting and withholding wage and income taxes?

You’re seeing the distinction I invited you to think about. Even if one is confident that nothing in ERISA’s title I or the Internal Revenue Code requires a provision, one might be reluctant to change a provision from an IRS-preapproved document if doing so might defeat the user’s reliance on the IRS’s opinion letter. As I understand the IRS’s preapproval regime, the IRS does not review, and an IRS letter does not opine on, beyond-the-plan procedure documents, such as a separate participant-loan procedure.

Is the provision limiting participant loan refinancing: in a procedure document? or in the IRS-preapproved document (whether in the basic plan document, or in the choices the adoption agreement presents)? If the provision is in the IRS-preapproved document, would a user’s change defeat the user’s reliance on the IRS’s opinion letter?

Internal Revenue Code of 1986 (26 U.S.C.) § 45E(e)(1) provides: “All persons treated as a single employer under subsection (a) or (b) of section 52, or subsection (m) or (o) of section 414, shall be treated as one person. All eligible employer plans shall be treated as 1 eligible employer plan.” http://uscode.house.gov/view.xhtml?req=(title:26%20section:45E%20edition:prelim)%20OR%20(granuleid:USC-prelim-title26-section45E)&f=treesort&edition=prelim&num=0&jumpTo=true § 52 Special rules (a) Controlled group of corporations For purposes of this subpart, all employees of all corporations which are members of the same controlled group of corporations shall be treated as employed by a single employer. In any such case, the credit (if any) determined under section 51(a) with respect to each such member shall be its proportionate share of the wages giving rise to such credit. For purposes of this subsection, the term “controlled group of corporations” has the meaning given to such term by section 1563(a), except that— (1) “more than 50 percent” shall be substituted for “at least 80 percent” each place it appears in section 1563(a)(1), and (2) the determination shall be made without regard to subsections (a)(4) and (e)(3)(C) of section 1563. (b) Employees of partnerships, proprietorships, etc., which are under common control For purposes of this subpart, under regulations prescribed by the Secretary— (1) all employees of trades or business (whether or not incorporated) which are under common control shall be treated as employed by a single employer, and (2) the credit (if any) determined under section 51(a) with respect to each trade or business shall be its proportionate share of the wages giving rise to such credit. The regulations prescribed under this subsection shall be based on principles similar to the principles which apply in the case of subsection (a). http://uscode.house.gov/view.xhtml?req=(title:26%20section:52%20edition:prelim)%20OR%20(granuleid:USC-prelim-title26-section52)&f=treesort&edition=prelim&num=0&jumpTo=true You’ll need the details on the partnership interests (or member interests, or shares) in the “old” firm, and in the “new” firm

Retirement plans’ fiduciaries and service providers have a wide range of responses to these situations. Yes, some have procedures for yearly and quarterly improvements in participants’ contact information. Some methods vary with the plan’s size, bargaining power, a fiduciary’s (or its lawyer’s or consultant’s) negotiating savvy, and a service provider’s business interests. The challenges are hardest when a plan lacks bargaining power to get anything beyond its recordkeeper’s standard service. It might help if recordkeepers build a standard service, available for extra fees, with those fees allocated to participants’ accounts. Like so much of what we do with retirement plans, a fiduciary can oversee a procedure but wants to make the work a contracted service function.

If a plan’s administration uses an implied-assent electronic disclosure regime based on 29 C.F.R. § 2520.104b-31, an administrator must design its system to detect an inoperable electronic address, whether an email address or a smartphone number. If there is a bounce-back and the administrator does not promptly cure it or replace it with another electronic address, one must treat the individual as if she opted out (and turn on paper delivery). https://www.ecfr.gov/current/title-29/subtitle-B/chapter-XXV/subchapter-C/part-2520/section-2520.104b-31