Peter Gulia

Many small-business 401(k) plans allow an owner’s young children as participants. To support contributions, the child must be capable of, and actually perform, real work that is useful to the business. Likewise, the business must pay no more than reasonable compensation for that work. Sometimes, the facts call into question how real the child’s job or pay is. For example, some might wonder whether a six-year-old (who presumably attends school during about 80% of a year) does enough work to earn $24,000, or even $20,000, in a year’s wages. Which facts are bad enough that you would suggest a client needs advice about whether the IRS would see the child’s wages as a sham? If the business does no advertising (or uses none in which a model’s image would appear), is there an age that is too young for an owner’s child to be a worker?

An ERISA § 502(c)(7) penalty [$141 for 2020 or $143 for 2021] is one the Secretary of Labor might assess. Perhaps the failure you describe might never come to the Labor department’s attention. Consider advising the plan’s administrator to use extra care in responding to anything any participant asks for. An EBSA investigation or inquiry is much less likely if no one is unhappy or displeased. Failing to furnish a required blackout notice breaches a plan administrator’s fiduciary responsibility. A fiduciary is personally liable to make good losses that result from the fiduciary's breach. Some lawyers believe a participant, beneficiary, or alternate payee could assert he or she would have made different investment directions had he or she received the proper notice. See, by analogy, King v. National Human Res. Comm., 218 F.3d 719 (7th Cir. 2000). Even if a complaint plausibly states such a claim, it might be difficult to prove causation, and to show the amount to be restored to the plan. Further, ERISA § 413’s statute of repose or statute of limitations might end such an exposure.

Problems about a worker lacking enough wages to support all contributions are challenging. Often, the health, welfare, retirement, other employee-benefits, and fringe-benefits plans’ documents don’t tell an employer/administrator what to do. Here’s a link to an earlier BenefitsLink discussion https://benefitslink.com/boards/index.php?/topic/38395-401k-elective-deferral-hierarchy/

Or if the situation Sue B describes is a subchapter S corporation and its shareholder-employee, a retirement plan contribution might be a percentage of the employee’s W-2 wages, even if the corporation has (and passes through to its shareholder) a loss for the year.

https://ecfr.federalregister.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR686e4ad80b3ad70/section-1.410(a)-7

This certified public accountant might want his lawyer’s advice about whether he is a filer of a tax return he transmitted as an agent of his client, the person who makes the tax return.

If the plan is ERISA-governed: ERISA § 404 [29 U.S.C. § 1104] Fiduciary duties (a) Prudent man standard of care (1) {A} fiduciary shall discharge his duties with respect to a plan . . . . . .; and (D) in accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with the provisions of this title {I} and title IV. Whenever the plan’s administrator must decide which portion of a participant’s benefit is nonforfeitable, the administrator might first apply the document’s provisions. If that finds a nonforfeitable percentage less than 100%, the administrator would alternatively count vesting service and a nonforfeitable percentage under the minimum provisions ERISA §§ 201-210 require.

An earlier BenefitsLink discussion: https://benefitslink.com/boards/index.php?/topic/64990-stop-my-loan-payments/

Without seeing the whole of the governing document, one might only guess at how pieces of the puzzle fit (or don’t). For example, how many months of vesting service are needed to get one year of vesting service? Even if the plan’s provisions count neither hours nor elapsed time, might the plan’s provisions have some logic related to the equivalency provided by 29 C.F.R. § 2530.200b-3(e)(1)(iv)? https://ecfr.federalregister.gov/current/title-29/subtitle-B/chapter-XXV/subchapter-D/part-2530/subpart-A/section-2530.200b-3 That equivalency credits 190 hours of service for each month for which the employee would be credited with as little as one hour of service. Perhaps the quoted provision might work if six months of vesting service is enough to get one year of vesting service?

Not in the July 26 Bulletin No. 2021-30.

Sometimes, it’s an employer/administrator’s strategic choice, especially if the circumstances involve an uncertain tax position or uncertainty about how relevant facts support a tax treatment. In some circumstances, filing a Schedule A could affect the application of a statute of limitations. And in some circumstances, having filed a Schedule A might support an argument or defense that a taxpayer had acted in good faith, or that a relevant fact had been disclosed to the IRS.

The instructions state: “Filers of Form 5500-EZ are not required to file schedules or attachments related to Form 5500 with the 2020 Form 5500-EZ.” https://www.irs.gov/pub/irs-pdf/i5500ez.pdf The instructions leave open that a filer is permitted to file Schedule A.

Beyond EBECatty’s apt caution: Even if no law requires furnishing the requested information, the plan’s administrator might want its lawyer’s advice about whether there are strategic advantages to furnishing the information.

What does your plan's governing document say about what kind of writing or signature is sufficient? What does your plan-administration procedure say about what kind of writing or signature is sufficient?

Friday's release was too late to be edited and published in yesterday's Bulletin No. 2021-29. Check next week.

Thanks again. That’s true not only about services offered but also legal positions. A business organization might, across its subsidiaries, have three or more answers—with differences that cannot be explained away—on the same question of law. Even within one subsidiary, there might be differing answers by several lines of business.

austin3515, thank you for your excellent information and thinking.

MoJo, thank you for this useful information. Do others offer a service of delivering the 404a-5 notice (whether the service is included in a general fee, or is available for a separate fee)? If so, can it be a notice not prepared by the provider of the delivery service? (I'm aware it's an unusual sponsor/administrator that would question the recordkeeper's standard assembly of the 404a-5 notice.)

An ERISA rule—29 C.F.R. § 2550.404a-5—calls an administrator of an individual-account retirement plan that provides participant-directed investment (even if no fiduciary seeks ERISA § 404(c) relief) to furnish regularly a disclosure document that meets several requirements specified in the rule. Although the rule’s command applies to a plan’s administrator, for most plans a recordkeeper or other service provider does the work—not only in delivering the notice but also in assembling the notice’s investment-related information and other disclosures. What happens if a plan’s administrator wants the delivery service but not the assembly service? Imagine that a plan’s sponsor/administrator is unwilling to adopt its recordkeeper’s standard 404a-5 notice. And using the part the recordkeeper allows its customer to customize won’t fix the problem. The customer is willing, at its effort and expense, to write its own 404a-5 notice, retrieve and insert the investment information, and deliver to the recordkeeper by a sharp cut-off date two days after each quarter-close, the print-display file of the 404a-5 notice to be delivered. The page count and other technical points conform to what the recordkeeper does normally. The plan’s administrator accepts responsibility for its communication, and the sponsor/administrator exonerates and indemnifies the recordkeeper for relying on the administrator’s instruction. In your experience, does a recordkeeper: deliver the customer-prepared notice? refuse to deliver an outside-prepared 404a-5 notice because doing so would be too much disruption to the recordkeeper’s work methods? Does the response vary with the size of the customer? If so, how big must a plan be to get this delivery service?

Look for it here next Monday. https://www.irs.gov/irb

As you’ve reasoned, the key is having clear provisions in your service agreement. (And if a client’s agreement lacks those provisions, amend or restate the agreement.) A few of the many points one might consider: nn.nn Records after the end of this Agreement For records XYZ did not deliver to you (or, as you Instructed, to a Service Provider), XYZ will use commercially reasonable efforts to keep XYZ’s records about the Plan for {number} years after the end of this Agreement. During that period, you may Instruct XYZ to deliver records to you (or to the Service Provider you Instruct). XYZ will deliver XYZ’s records you request if you have paid the amount XYZ estimates as XYZ’s expenses for reproducing and delivering the records. A service agreement might promise how long the service provider keeps something. But unless a service agreement also obligates the service provider to destroy records, how long one keeps and when one destroys records would be set by the service provider’s internal records-retention-and-destruction procedure. As always, this is not advice to anyone, and you’ll want your lawyer’s advice.

If the investment gain on the mistaken contributions goes not to the employee, not to the participant, and not to the employer, what do BenefitsLink people think about crediting that investment gain to the retirement plan trust’s plan-expenses account?

When (before 2006) I was inside counsel for a retirement-services provider, my client suffered many investigations about abandoned plans. The volume was enough to require internal business reporting and monitoring systems. Not once did EBSA question or criticize that the service provider had not filed a Form 5500 report. Not once did EBSA suggest that the service provider was responsible to cause someone to file a Form 5500 report.

No worries. Ordinarily, I don’t mention my books. I feel the publishers ought to pay the Bakers for advertising. But once other sources were mentioned, it seemed helpful to mention 403(b) Answer Book, which includes a chapter dedicated on church plans.

Among those projects, EBSA sometimes investigates service providers. Why look one plan at a time when a service provider might have hundreds or thousands of abandoned plans? EBSA has investigation powers regarding a service provider even if the service provider is no target in the investigation. Even if a service provider carefully arranged all its services to be perfectly nondiscretionary and nonfiduciary, EBSA might assert that a service provider’s receipt of compensation, even indirect compensation, could not have been proper (and instead was a nonexempt prohibited transaction) if the service provider knew the plan’s administrator or other responsible plan fiduciary was not acting. But those potential pressures do not, by themselves, impose on a service provider a duty or obligation to administer an abandoned plan. A service provider might want written procedures for how it provides or ends services, and keeps records about, an abandoned plan.