Peter Gulia

The authority is Internal Revenue Code of 1986 § 404(a)(6). http://uscode.house.gov/view.xhtml?req=(title:26%20section:404%20edition:prelim)%20OR%20(granuleid:USC-prelim-title26-section404)&f=treesort&edition=prelim&num=0&jumpTo=true A Treasury department rule is partially consistent with the statute. 26 C.F.R. § 1.404(a)-1(c) https://ecfr.federalregister.gov/current/title-26/chapter-I/subchapter-A/part-1/section-1.404(a)-1

It might work if the participant is subject to a Federal criminal restitution order under the Mandatory Victims Restitution Act of 1996. 18 U.S.C. § 3613 http://uscode.house.gov/view.xhtml?req=granuleid:USC-prelim-title18-section3613&num=0&edition=prelim Such a restitution order gets a payment only if the participant could get the payment. If the employer/administrator pursues this, lawyer-up.

For my learning, writing, and teaching about professional conduct, I’ve thought about how an advisor discerns whether it’s appropriate (or professionally irresponsible) to advise about the probabilities of detection and of enforcement. If my client asks (even in an implied request) for my sense about probabilities of detection and of enforcement, I render candid advice, even if doing so confirms that something is seldom or almost never enforced. But I also tell clients why it’s morally right, and usually business-smart, to obey law, especially if one can do so with little harm or expense to one’s activities. I’ve never had a plan’s administrator ask me about reporting a fidelity-bond coverage amount other than the actual amount. When I was inside counsel to a recordkeeper—one that processed tens of thousands of Form 5500 reports, I advised about internal logic and ordering rules for presenting draft answers on points for which a customer had not completed the recordkeeper’s information request. Doing no research on your question, I imagine it’s unlikely a plan’s administrator would face Federal criminal, EBSA, or IRS enforcement if the only violation is misreporting the fidelity-bond coverage amount. But I have seen EBSA investigations look into a service provider’s business methods for drafting its service recipients’ Form 5500 reports. That a Form 5500 report might show more fidelity-bond coverage than ERISA § 412 requires is not always idle information. There are situations in which the Labor department could use that information to consider whether and how to pursue action on fiduciary breaches and other violations.

Jakyasar, I don’t think you misunderstood. TPApril’s query supposes a situation in which the plan has more coverage than ERISA § 412 requires and more than $500,000 (or, as Belgarath mentions, $1 million for a plan with employer securities, or for a pooled-employer plan). If a fidelity-bond insurance contract provided, as at a relevant date, coverage of 10% of the plan’s first $5 million in plan assets, one would report that coverage amount.

Does this plan’s administration permit a participant to specify her within-a-year elective-deferral salary reductions as a percentage of each pay period’s actual wages, unconstrained by a § 401(a)(17) limit (but subject to stopping or lowering a periodic salary reduction so the sum remains within § 401(a)(17), § 402(g), and other limits and constraints)? For a correction, might one treat an election of 5.00% of $340,000 (if the plan allowed that) as an election of 5.96% of $285,000?

The Form 5500 Instructions tell a filer to “enter the aggregate amount of fidelity bond coverage for all claims.” Some fiduciaries consider it prudent to get more fidelity-bond insurance than ERISA § 412 alone commands. A person who signs a Form 5500 declares, under penalties of perjury and subject to other penalties, that the report “is true, correct, and complete.” A Form 5500 report should show the actual coverage amount.

Thank you, all, for the further observations. Among many challenges in interpreting the rule, we lack a statement of the rule’s purpose. It is not stated in the rule. And neither the August 23, 1977 final rulemaking nor the November 5, 1975 notice of proposed rulemaking states an explanation.

RatherBeGolfing, BG5150, and EBECatty, thank you for your further points. Would your outlook about the one-of-three example be different if the severance is involuntary (employer-initiated) and the employer has no intent to hire another employee?

Having concurred that the IRS’s suggestion didn’t fit the circumstances of C.B. Zeller’s client, let’s consider a related point. While many of us call to mind the IRS’s subregulatory presumption, here’s the actual rule: “Whether or not a partial termination of a qualified plan occurs (and the time of such event) shall be determined by the Commissioner with regard to all the facts and circumstances in a particular case. Such facts and circumstances include: the exclusion, by reason of a plan amendment or severance by the employer, of a group of employees who have previously been covered by the plan; and plan amendments which adversely affect the rights of employees to vest in benefits under the plan.” 26 C.F.R. § 1.411(d)-2(b)(1) https://ecfr.federalregister.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR686e4ad80b3ad70/section-1.411(d)-2] Have you ever argued with the IRS (or advised a client) that a situation was not a partial termination because the small number of participants made the 20% presumption inappropriate? To pick an extreme example, if a plan has three participants, does a severance-from-employment of one of them always result in a partial termination? Is the analysis meaningfully different if the severances are two of ten employees? What reasoning do you use for situations like this?

Thank you for the further information.

C.B. Zeller, thank you for sharing this information with us. Does the IRS letter demand anything? Or does the IRS letter suggest the plan’s administrator evaluate whether there was a partial termination? (Whichever, I recognize an employer/administrator bears frustration and expense in reacting to either kind of letter, and that some of that frustration and expense can burden a third-party administrator.)

Thank you, excellent! And leave it to the lead author of Governmental Plans Answer Book to have the answer.

Does anyone know whether Governor Andrew Cuomo is at risk of forfeiting his New York State pension?

I assume the plan’s administrator denied QDRO treatment for the December 2020 order. The plan’s administrator might ask its lawyer to read, carefully, the contract that transferred pension liabilities to discern how much of the problem from the 1998 domestic-relations order now is the annuity insurer’s headache or risk.

If the advisor is associated with a securities broker-dealer, consider whether you might politely invite the advisor to consider how a never-mind or undo could call into question the advisor’s conduct. (At many broker-dealers, an undo soon after setting up an account would trigger the compliance office’s investigation into whether the advisor had followed sales-practices and disclosure protocols.) About a different path, will the plan’s directed trustee or custodian allow a payment without a written direction or instruction that shows a satisfactory reason for the payment?

BG5150 reminds us of an important caution. If an employer anticipates a meaningful number of employees will become eligible because of § 401(k)(2)(D)(ii), one might—to facilitate efficient coverage and nondiscrimination testing, or for other plan-administration reasons—organize two distinct plans: (1) a plan for those who meet eligibility conditions without any to meet § 401(k)(2)(D)(ii), and (2) another plan for those who are eligible only by meeting eligibility conditions provided to meet § 401(k)(2)(D)(ii). One would design and administer the plans to meet required aggregations and disaggregations, and to rely on only permitted aggregations and disaggregations. Using two plans also might help avoid a need to engage an independent qualified public accountant. Without waiting, a plan’s administrator should consider its disclosure duties to part-time employees who could, with enough service, become eligible. In Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 10 Empl. Benefits Cas. (BL) 1873, 1880-1881 (Feb. 21, 1989), the Supreme Court, interpreting ERISA § 3(7), held that a participant—to whom ERISA § 104(b)(4) and other provisions set disclosure duties—includes an employee who could in the future fulfill the plan’s eligibility conditions.

Before one considers whether a conservator, guardian, custodian, agent, or other fiduciary has or lacks authority to act for the minor, one might consider whether the beneficiary has any power to name a beneficiary. A retirement plan’s governing document might control and restrict rights to name a beneficiary. Whatever right (if any) a participant has to name beneficiaries might end with the participant’s death. Likewise, a contingent beneficiary might be the person the participant’s beneficiary designation named or, to the extent the participant’s designation is invalid, ineffective, or unstated, the person who or that results from following the plan’s governing document.

If a plan’s final administration pays in 2021 each beneficiary a single sum of his or her separate-share account balance, none of that final distribution need count as a minimum-distribution amount. There is no need to use a life-expectancy factor to compute a minimum-distribution amount unless: (1) a designated beneficiary is an eligible designated beneficiary; (2) the plan permits an eligible designated beneficiary to elect a provision grounded on § 401(a)(9)(B)(iii); and (3) the beneficiary elected to apply that provision. Those circumstances are unlikely, especially for a discontinued plan in its final administration.

Unless your client’s plan’s provisions are more restrictive than IRC § 401(a)(9) requires, consider whether a beneficiary might delay until 2030.

We don’t know the provisions of your client’s plan, what distribution (if any) began before the participant’s death, and, if such a distribution began, what form it is or was. Further: Is your client’s plan a defined-benefit plan or an individual-account (defined-contribution) plan? Is it a governmental plan? A church plan? A collectively-bargained plan? Might the plan (considering the particular plan’s provisions in the particular circumstances) not require a distribution in 2021? Might it be enough that a deceased participant’s remaining benefit is distributed by the end of the tenth calendar year that follows the year of the participant’s death? If none of the designated beneficiaries is an eligible designated beneficiary, might it be unnecessary to apply a rule about a life expectancy, and so unnecessary to use a beneficiary’s date of birth? If the plan and the circumstances make it relevant, consider Internal Revenue Code of 1986 (26 U.S.C.) § 401(a)(9)(H). https://uscode.house.gov/view.xhtml?req=(title:26%20section:401%20edition:prelim)%20OR%20(granuleid:USC-prelim-title26-section401)&f=treesort&edition=prelim&num=0&jumpTo=tru

What does your retirement plan’s governing document provide? As many BenefitsLink mavens say, RTFD—Read The Fabulous Document. A plan might exclude “employees who are nonresident aliens and who receive no earned income . . . from the employer which constitutes income from sources within the United States[.]” See Internal Revenue Code of 1986 (26 U.S.C.) § 410(b)(3)(C). If your plan provides such an exclusion, the plan’s administrator might consider—for each otherwise eligible employee—the answers to three questions: Is this employee a U.S. citizen? (One who resides in the Republic of the Philippines might be a U.S. citizen.) Is this alien a U.S. resident? (Even one who resides elsewhere might also be a U.S. resident.) Is this non-resident alien’s wages from the employer U.S.-source income? The United States’ Federal tax law, some of which refers to U.S. nationality and immigration law, provides plenty of details on these and related questions.

There are many modes and canons of interpretation a lawyer might consider. Among these, consider the whole-text canon and the presumption of consistent usage within a text, especially for a public-law statute. If different sections within a statute (or in rules interpreting or implementing different portions of a statute) use a common word and use it, at least partially, without reference to a special definition, one might presume the word ought to have some logically consistent meaning across the whole of the statute. If C’s shares in corporation X had been C’s capital asset, does anything in the Internal Revenue Code of 1986 (unofficially compiled as title 26 of the United States Code), or a rule or regulation under it, require C somehow in her tax return to report or treat the redemption as a disposition of the capital asset? Does C have a capital gain, or a capital loss? If X was (in 2020) a subchapter S corporation, did anything in its tax-information reporting show the change in shareholders? If X is (in 2021) a subchapter S corporation, how will it apportion the income passed through to the remaining shareholders—to A and B 50/50? If an unrelated purchaser buys X (not as purchases of assets from X, but rather as a purchase of all X corporation shares), would A and B (but not C) get the price the purchaser pays for the shares? Following out possible consequences of X’s redemption of C’s shares might show that, whatever the legal form, the redemption might have been, economically, C’s disposition (and perhaps, in some senses, A’s and B’s acquisitions). A presumption of consistent usage might be persuasive if other aspects about possible interpretations are in equipoise (or if this presumption outweighs other aids to interpretation).

MoJo, thank you for your kind words. And yes, while he did no tax dodge, the compensations were worlds better than money.

Five years old is when I began support work in my father’s accounting practice. He taught me numbers, from 000001 to 999999, before the elementary school taught me any. Alas, neither 401(k) nor any IRA then existed; and my wages was $0.00.

shERPA, thank you for your helpful observations. BenefitsLink mavens, I imagine many TPAs think "it's not my place"; but does this issue ever get to "if you see something, say something"?