Peter Gulia

And get your ERISA lawyer's advice about whether a fiduciary role, however limited, requires ERISA fidelity-bond insurance.

A method is using a separate (and unassociated) accounting firm to retrieve (including getting from the IRS the employer’s income tax returns and payroll tax returns), fill-in, and reconstruct the unreported years’ records. (A plan’s administrator wants its independent qualified public accountant to maintain independence.)

Even with a perfect allocation of responsibilities between or among the administrators, remember that ERISA § 405(a) imposes some co-fiduciary responsibilities regarding any other fiduciary’s breach. If a fiduciary “has knowledge” of another fiduciary’s breach, the observing fiduciary must “make[] reasonable efforts under the circumstances to remedy the breach.” ERISA § 405(a)(3). In doing so, the observing fiduciary must use no less care, skill, prudence, and diligence than an experienced fiduciary would use.

And one hopes BenefitsLink readers recognize that I merely furnished pointers to some (but not all) relevant sources, and did not state any conclusion.

This four-page article https://backend.fisherbroyles.com/wp-content/uploads/2020/05/Canna401k.pdf mentions [on page 2] treating some expenses for retirement contributions as a cost-of-goods-sold adjustment, and some as indirect costs that must be capitalized for an inventory. Unstated is what I heard from young lawyers who work in accounting or dual-practice firms: The accountants help a client develop bookkeeping and accounting methods that, within generally accepted accounting principles, push more expenses into those tax-recognized categories. Page 4 describes some (but not all) difficulties about finding investment and service providers.

Some IRS-preapproved documents include a subsection about what is required for a distribution following a TEFRA § 242(b) election. If so, the plan’s administrator or other fiduciary would follow those provisions, even if they constrain the distribution more than is otherwise necessary for the plan to tax-qualify. And you’d want to apply TEFRA’s transition rule: The method of distribution elected under TEFRA § 242(b) “would not have disqualified [the] trust under paragraph (9) of section 401(a) of [the Internal Revenue] Code as in effect before the amendment made by [TEFRA § 242](a).” Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. No. 97–248, § 242 (Sept. 3, 1982), 96 Statutes at Large 324, 521 (1982) [cited page attached]. TEFRA section 242.pdf

If the plan compels an involuntary distribution and you have the estate’s taxpayer identification number, pay the required distribution (as ESOP Guy suggests). If the plan compels an involuntary distribution and you lack information needed for tax-information reporting, consider suggesting that the personal representative seek his or her lawyer’s advice about the representative’s personal liability for the estate’s loss that results from a failure to collect an amount due the estate and for an excise tax that could have been avoided.

Whether a claimant must or need not submit source documents to substantiate her hardship expense is governed by the particular claims procedures and other documents governing the particular plan.

Some (but not all) relevant sources include: 26 C.F.R. § 1.72-16 https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR807fc2326e73cb3/section-1.72-16 including its (b)(1)(ii): “The proceeds of a contract described in subdivision (ii) of this subparagraph will be considered payable indirectly to a participant or beneficiary of such participant where they are payable to the trustee but under the terms of the plan the trustee is required to pay over all of such proceeds to the beneficiary.” and its (c)(2)(ii): “The portion of the proceeds paid upon the death of the insured employee which is equal to the cash value immediately before death is not excludable from gross income under section 101(a). The remaining portion, if any, of the proceeds paid to the beneficiary by reason of the death of the insured employee—that is, the amount in excess of the cash value—constitutes current insurance protection and is excludable under section 101(a).” IRC § 402(c) http://uscode.house.gov/view.xhtml?req=(title:26%20section:402%20edition:prelim)%20OR%20(granuleid:USC-prelim-title26-section402)&f=treesort&edition=prelim&num=0&jumpTo=true 26 C.F.R. § 1.402(c)-2 https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/section-1.402(c)-2 including its Q&A-3(b)(3): “An eligible rollover distribution does not include . . .: [t]he portion of any distribution that is not includible in gross income[.]”

After February 2017, some plans use for hardship-distribution claims a procedure in which a claimant does not submit source documents that show the safe-harbor hardship expense, but is informed of a distributee’s obligation “to preserve source documents and to make them available at any time, upon request, to the employer or administrator.” If a plan uses that procedure, the IRS instructs its examiner not to ask for source documents unless: some employees received three hardship distributions in a plan year; there is no adequate explanation for the multiple distributions; and the examiner’s manager approves the request for source documents. A plan might limit the number of hardship distributions in a year in ways designed to make it unlikely the plan’s administrator ever would get a request to obtain participants’ source documents. For example, a plan might limit a participant to two hardship distributions in a year.

Thank you for the quick and clear help. Lacking a § 414(w) “undo” distribution for those who had been inattentive makes an automatic-contribution arrangement a non-starter.

A plan’s sponsor wants to provide an automatic-contribution arrangement for some specified classes of non-highly-compensated employees, but not others. (All highly-compensated employees would be excluded.) May a plan provide this without tripping on a tax-qualification condition? Is it feasible to provide this using an IRS-preapproved document without losing reliance on its IRS letter?

For a service provider’s publication, especially on its website, one presents differently a response to a question of law that lacks an obvious spoon-fed answer. A service provider must pretend it does not furnish tax or legal advice. Yet, at the same time the service provider knows it is exposed to liability for (at least) a customer’s reliance on the service provider’s communication. And no matter how clear, conspicuous, and intense the not-advice warnings are, a service provider’s customers (and other readers) rely on the communications. Those concerns often lead a service provider to present an explanation closely supported by a public law source rather than something that calls for too much reasoning. And for many employee-benefits points, the liability might be a smaller exposure and a lower probability if the answer is one readily tolerated by the government agencies. An employer that gets no advice and follows such a communication might miss an opportunity, but is less likely to do something that causes a harm for which the tort of negligent communication (or, often more practically, a need to keep a customer) would provide a remedy. Recognizing the context, Brian Gilmore’s blog page for Newport is strong for what’s feasible in a communication of that kind.

MoJo, I’m glad your clients fall-in with your guidance. My limited experience is different. (I lack direct experience with employers that would face the question Belgarath described. I see them only indirectly through my work as counsel to other law firms.) No matter how carefully and thoroughly a lawyer explains the potential consequences and the “cheap insurance” sense, those firms’ clients won’t bite on paying anything for a VFC submission. That’s even when they say the work would be done by a nonlawyer assistant, with supervision and review not billed. And the question gets to a law firm only after a recordkeeper or TPA declined to work on a VFC submission. Do others have different experiences?

These situations often involve an awkward dance or standoff about whether the inquirer engages the lawyer. An inquirer is reluctant to engage the lawyer unless the inquirer believes the lawyer will render the conclusion the inquirer desires. But a lawyer is reluctant to accept a client unless the lawyer is confident the client will pay, even if the advice is not what the client wanted to hear. (Some of us would require an advance-retainer payment in an amount the lawyer estimates as more than enough to pay the likely full fee. And that security to aid collection is not, by itself, enough to overcome other burdens and risks about accepting a new client.) I no longer waste a half-hour consultation unless the inquirer is introduced by a lawyer or other professional who gives me comfort that the prospective client is a good fit (or who gets my professional courtesy). On the later side of these situations, I get plenty of clients who want me to guide the undo of a nonexempt prohibited transaction. I never have any trouble with those clients. And they usually remain continuing clients who bring a stream of good work.

But let’s ask Belgarath’s key question: If an employer does not take up EBSA’s suggestion (and the correction involves small amounts), how often does Labor pursue actual enforcement? Is the letter’s implied threat somewhat likely or highly improbable? What is the actual experience BenefitsLink people have seen? Is the cost-benefit analysis as simple as estimating the probability-discounted cost of what would result if EBSA both detects a fiduciary’s breach and vigorously pursues enforcement, and comparing it against the expenses (including professionals’ fees) of using the VFC program? Or do you advise a different analysis?

Beyond the practical concerns AKowalski mentions for considering whether and what to communicate to a potential beneficiary, here’s another. If the plan provides participant-directed investment, a fiduciary might welcome a claim in which someone seeks recognition as a beneficiary. A plan might provide that a power (and obligation) to direct investment passes to a beneficiary, for his or her separate-share subaccount, when the administrator decides the claimant is a beneficiary, even if the beneficiary does not request a distribution. A plan’s fiduciary can get ERISA § 404(c) protection for a beneficiary’s actual or treated-as investment direction. Otherwise, a plan’s fiduciary (if it knows the participant died) might have responsibility to consider the prudent investment of the participant’s account.

Whether a disclaimer must be acknowledged before a notary or other officer, must be recorded in a county’s or parish’s recorder-of-deeds office, must be filed in a court, or must meet other notice, authenticity, or procedure requirements are among the points for which Luke Bailey suggests the disclaimant get the advice, and perhaps other services, of the disclaimant’s lawyer. Whether a plan’s administrator prefers to impose some authenticity protection beyond what is required under a relevant State’s law (and the plan’s governing document) is a fiduciary decision.

If the participant’s distribution had not commenced and the plan’s provisions do no more than is needed to follow Internal Revenue Code § 401(a)(9), consider whether the plan might not command an involuntary distribution until the end of the tenth calendar year that follows the year of the participant’s death.

While I lack knowledge about the top-heavy rules, I suspect questions about who is a participant or is “covered by the plan” might be resolved using concepts similar to those discussed last week https://benefitslink.com/boards/index.php?/topic/68399-spd-provided-to-employees-eligible-to-participate-in-plan/. If so, an individual might become a participant when the individual has met the plan’s age, service, and other eligibility conditions. Further, the rule (at M-10) states: “A non-key employee may not fail to receive a defined contribution minimum because . . . the employee is excluded from participation (or accrues no benefit) merely because of a failure to make . . . elective contributions.” https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR686e4ad80b3ad70/section-1.416-1

If no one has filed a claim and the plan doesn’t yet command an involuntary distribution, there might be little or nothing the plan’s administrator need decide now. If you’re satisfying your or your client’s curiosity, Read The Fabulous Document. Although a document might make the participant’s children a default beneficiary, a document might set different provisions. If a default-beneficiary provision refers to children without further specifying who is included in or excluded from that class, the plan’s administrator might interpret the plan.

If other conditions for an ERISA § 404(c) defense are met, the key question is: Does the brokerage account “[p]rovide[] a participant or beneficiary an opportunity to choose, from a broad range of investment alternatives [as 29 C.F.R. § 2550.404c-1(b)(3) provides], the manner in which some or all of the assets in his account are invested”? https://www.ecfr.gov/current/title-29/subtitle-B/chapter-XXV/subchapter-F/part-2550/section-2550.404c-1 Whether a particular brokerage account meets that call might involve questions of law, questions of fact, and mixed questions of law and fact. Even if an ERISA § 404(c) defense applies, it does not relieve a fiduciary from liability to the extent that a loss results from a cause other than the directing person’s exercise of control. If a governing document grants a fiduciary a power to select investment alternatives, a fiduciary who selects only brokerage accounts might consider whether she could defend her reasoning for excluding other investment alternatives, and whether she could prove she acted “with the care, skill, prudence, and diligence” ERISA requires and for the exclusive purpose ERISA requires.

RatherBeGolfing, you’ve got the right idea. A plan’s administrator and payer want some comfort that a disclaimer not only changes the beneficial rights under the plan but also sufficiently changes rights (and does so in a way tax law recognizes) so the disclaimant no longer has anything that would be a subject of Form 1099-R tax-information reporting. That’s why many plans and administrators require a disclaimer that not only is valid under a relevant State’s law but also gets tax-law treatment as a qualified disclaimer. Internal Revenue Code § 2518 is about using a qualified disclaimer to get rid of property interests that otherwise might be counted regarding Federal estate and gift taxes. Yet, many practitioners assume that a property interest validly disclaimed to get § 2518(a) treatment also is no longer the disclaimant’s property in considering whether a property right results (or could result) in income for a Federal income tax purpose. The Treasury department might have impliedly assumed that concept in making the § 401(a)(9) rules. One determines designated beneficiaries “as of September 30 of the calendar year following the calendar year of the [participant’s] death”, and for that purpose may recognize a qualified disclaimer made within nine months after the date of the disclaimant became entitled to the property interest the disclaimer renounces. (The rule’s drafters, including Marjorie Hoffman, considered that some people die on December 31 of a year.) 26 C.F.R. § 1.401(a)(9)-4/Q&A-4 https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR6f8c3724b50e44d/section-1.401(a)(9)-4 Many requirements for a valid disclaimer overlap, with similar requirements in a State’s law and in Internal Revenue Code § 2518(b). But it’s possible that a disclaimer valid under a State’s law is not a qualified disclaimer that gets a plan’s administrator or payer enough comfort for one or more Federal tax-law purposes. Conversely, it’s possible a disclaimer meets IRC § 2518 conditions, but is invalid under a relevant State’s law. An ERISA-governed plan’s fiduciary might interpret the plan to allow such a disclaimer if, despite not conforming to a particular State’s law, the disclaimer conforms to common concepts for a disclaimer. But many administrators, considering that ERISA’s title I lacks rules for a disclaimer (and a plan’s provisions might not specify enough), prefer a disclaimer that would be valid under a relevant State’s law. (Further, the limited facts of BG5150’s query leave open a possibility that the plan is not ERISA-governed.) Applying both property-law and tax-law sets of requirements for a disclaimer helps protect a retirement plan’s administration and tax-reporting.

If a plan’s governing document has no provision for recognizing a disclaimer but also none to preclude a disclaimer, a fiduciary might (if the plan grants discretion) interpret the plan as allowing a disclaimer. A fiduciary might restrict a disclaimer to one that not only is valid under a relevant State’s law but also meets the conditions of Internal Revenue Code of 1986 § 2518 for a qualified disclaimer. 26 C.F.R. § 25.2518-1 https://www.ecfr.gov/current/title-26/chapter-I/subchapter-B/part-25/subject-group-ECFRac39af22636eabc/section-25.2518-1 26 C.F.R. § 25.2518-2 https://www.ecfr.gov/current/title-26/chapter-I/subchapter-B/part-25/subject-group-ECFRac39af22636eabc/section-25.2518-2 If a plan’s administrator accepts a disclaimer, the plan’s benefit is distributable as if the disclaimant had died before the participant’s death or before the creation of the benefit disclaimed. If the participant’s beneficiary designation names no one beyond the disclaimant, that means looking to the plan’s default provision. As Bill Presson suggests, a plan might make the participant/decedent’s children or her estate (or its residue’s takers) the default beneficiary. Before making a disclaimer, a would-be disclaimant might prefer to know exactly what beneficial rights would result. As always, Read The Fabulous Document.

Questions about a personal representative’s, trustee’s, business officer’s, or other fiduciary’s personal liability for penalties and other consequences regarding an unfiled Form 5500 information return are fact-sensitive. Among other factors, a fiduciary’s responsibility might turn on facts about whether the particular fiduciary: had or lacked a responsibility to administer or wind up the decedent’s business; knew (or, had she exercised the required care, ought to have known) about the unfiled return; could have obtained records. So far, I’ve never done an analysis because in every situation that might involve such a question my client recognized that paying someone to prepare and file returns would be less expensive than paying for my analysis about whether one is exposed to personal responsibility and liability. And, as you say, this is for you only a curiosity.