Peter Gulia

If a plan permits a participant (or other directing individual) to specify different investment directions for non-Roth and Roth subaccounts, some will use that opportunity. Some advisors and authors suggest ordering one’s investment allocations to take advantage of the different tax treatments. Here’s my related question: Which recordkeepers and service arrangements facilitate separate investment directions for non-Roth and Roth amounts?

Leaving aside church plans and governmental plans, an annuity under or from an individual-account (defined-contribution) retirement plan—whether a qualified joint and survivor annuity, qualified optional survivor annuity, qualified preretirement survivor annuity, or something else—is what results from using the distributee’s account balance (or the portion of it the distributee uses to get an annuity). A typical individual-account plan does not provide a benefit subsidized by the employer, or that invades others’ individual accounts.

Further, an individual-account plan might provide that, beyond a choice to take an annuity rather than a single sum or other payout, the selections of the insurer and of a particular contract among those an insurer offers (and not contrary to the plan) are the participant’s or other distributee’s decisions (unless obeying the distributee’s direction would be inconsistent with ERISA’s title I). Opinions might differ on whether such a provision could cause a plan not to meet the condition of proposed Internal Revenue Code § 414(aa)(7): “A plan or arrangement shall be treated as meeting the lifetime[-]income requirement described in this paragraph if the plan or arrangement permits participants to elect to receive at least 50 percent of their [sic] vested account balance in a form of distribution described in section 401(a)(38)(B)(iii).”

Consider the statute, Internal Revenue Code of 1986 § 401(a)(9)(C)(ii)(I): Subclause (II) of clause (i) [“the calendar year in which the employee retires”] shall not apply—except as provided in section 409(d), in the case of an employee who is a 5-percent owner (as defined in section 416) with respect to the plan year ending in the calendar year in which the employee attains age 72[.] And the rule, 26 C.F.R. § 1.401(a)(9)-2/Q&A-2: (c) For purposes of section 401(a)(9), a 5-percent owner is an employee [or deemed employee] who is a 5-percent owner (as defined in section 416) with respect to the plan year ending in the calendar year in which the employee attains age 70½ [72]. Even if applying these law sources yields a clear answer, a plan’s administrator might read the plan’s governing documents to consider whether the plan provides an involuntary distribution earlier than is needed for the plan to tax-qualify. Further, a plan’s administrator might evaluate whether a “winding down” partner who perhaps has “flexibility” about how little he works might be retired within the meaning of § 401(a)(9)(C)(i)(II). In doing so, one might read the partnership agreement to consider the obligations it provides or omits.

Thanks. I’ve seen service providers use door #2: the service agreement states that the service provider may perform its services according to the default in a request for instructions (if the plan’s administrator did not respond timely with a different instruction). Do others have different experiences?

ESOP Guy, Bird, and BG5150, thank you for your helpful observations. This call for a “lifetime income” provision would be neither an ERISA title I command nor a condition for a plan’s tax treatment. Rather, a participant’s opportunity to get an annuity would be one of six elements of an “automatic contribution plan or arrangement” an employer (of more than five employees) would maintain if it prefers an excise tax not to apply. https://waysandmeans.house.gov/sites/democrats.waysandmeans.house.gov/files/documents/Subtitle%20B%20Retirement%20Committee%20Print.pdf The excise tax “on any failure with respect to an employee [would] be $10 for each day in the non-compliance period with respect to such failure.” For example, if there are 100 affected employees and not maintaining a satisfactory arrangement persists for a whole year, the excise tax would be $365,000. At least Insured Retirement Institute has announced support for the provision. Some lobbying positions might be somewhat muddled because some organizations that otherwise might oppose a requirement for a “lifetime income” provision might tolerate it to support the push that an employer should make facilitate a retirement-savings opportunity.

A situation like this might result if a service provider treats a sponsor/administrator’s non-response to a notice as a plan amendment or as a service instruction. I’m wondering which source grants a service provider such a power or right. Is it: a power in an IRS-preapproved document to amend a user’s plan? a right under a service agreement to treat the sponsor/administrator’s non-objection to a requested service instruction as the administrator’s instruction? neither (a service provider just did it without authority)?

Most of us can describe evidence, some anecdotal and some with more rigor, that few participants in employment-based individual-account retirement plans (besides those of charities, schools, and governments) choose an annuity payout. The legislative idea says that a participant ought to have an opportunity to get an annuity, and to get it from one’s employment-based plan. (Those who want an annuity can get it by first directing a rollover into an IRA. Many insurance companies would gladly sell a § 408(b) Individual Retirement Annuity.) About the plan-administration expense of illustrating annuity choices and getting a spouse’s consent, would that expense be lessened somewhat by not allowing choice for the larger number of participants who lack a $200,000 balance?

According to Pensions & Investments, the House Ways and Means Committee this week will consider legislation that would “require plans to offer participants with more than $200,000 in their accounts an option to take a distribution of at least 50% of their vested account balance in the form of a protected lifetime income solution.” House Committee to consider requiring employer-sponsored retirement plans | Pensions & Investments (pionline.com) What do BenefitsLink mavens think about this?

I don’t know the answer to BG5150’s further question. But even if a change might have been a cutback, that wouldn’t excuse having the plan’s governing document truthfully state what the plan provided.

The originating post’s description of the facts is that the plan’s sponsor “did not want to allow CRDs”, and might have provided something until it revoked whatever implied assent might have been set up by not promptly reacting to its recordkeeper’s notice. If the plan’s sponsor ended its plan’s provision for a coronavirus-related distribution before tax law’s allowance for such a provision expired, the eventual plan amendment might truthfully state what had been provided.

I vote for your idea. If one uses IRS-preapproved documents and falls into the IRS’s remedial-amendment regime, eventually some document states what the plan’s sponsor and administrator (typically, the employer) treated the plan as having provided. And that document should follow what was assumed to have been provided. So: From {the date the implied assent became effective} to {the date the plan’s sponsor revoked the implied assent}, . . . .

A plan’s governing document might be good-enough without a change. I’ve seen plan documents from as long ago as the 1970s that did not restrict the word spouse. If the plan needs no restatement or amendment for any other point, the plan’s sponsor or its advisor might read the current governing document. If nothing in it improperly narrows the meaning of spouse, there might be nothing that needs a change.

If the worker can find or borrow enough money to pay the initial payment the landlord calls for, might she fail to pay rent until the landlord delivers an or-else eviction notice? Would that set up a recognized need for “[p]ayments necessary to prevent the eviction of the employee from the employee’s principal residence”? I do not recommend this. Rather, it illustrates one of the many absurdities in this bit of tax law.

One imagines the corporate-communications writers thought carefully about how to not use the five-letter word that is the airline's business name.

"Delta Takes Tough But Legal Stance in Vaccine Plan, Lawyers Say" Delta Takes Tough But Legal Stance in Vaccine Plan, Lawyers Say (bloomberglaw.com)

I too say don't appease, at least not for the Form 5500 processing mentioned. My observation was much more general about how defects in government forms and systems push lawyers and other advisors to advise clients about the bad consequences of correct reporting. While a decent advisor doesn't advise a client to make a false or misleading statement, one may give full-picture advice about consequences. It's sad that an advisor sometimes is pushed to render that kind of advice. It's even worse that sometimes a client is pushed to consider incorrect reporting as a way to not suffer bad consequences from a government's broken systems.

I hate (much more than most practitioners) giving in to the weaknesses of governments’ systems. But the problem of government forms and systems being unable to handle correct reporting of proper information has become severe. And it’s a problem of national, State, and local government functions. Some of these problems have real consequences. (But I'll end my rant here.)

Assuming the discontinued plan otherwise is one for which the plan’s administrator must file a Form 5500 report, I’m unaware of an exception that would apply because the count of participants is few, even as few as one. A plan isn’t ended until all counts and amounts are zeroes.

Yes. Thank you very much!

JonC, thank you for your excellent information. If I may ask a little more: Does the wideness or narrowness of a guarantee vary with how much the recordkeeper wants to get or keep the customer? For example, does a mega or large plan get a wide guarantee, while a micro plan is offered only a narrower guarantee (or none)? For a lockout after an address change or other risk-introducing event, how many days elapse or what fact or condition must change to end the lockout?

What does one report on Form 5500 if—with no merger of a plan into another plan—a business acquirer assumes obligations to maintain a plan that had been sponsored and administered by the acquired business? Is it anything more than what thepensionmaven describes, including about item 4? (I’m aware that with most acquisitions the acquirer does not assume the acquiree’s plan. But there must be at least some.) Even if one accepts the chore of tricking the IRS’s defective computer systems, one might be reluctant to do a or b alone because either makes an untruthful statement (and does so under penalties of perjury). If a client chooses to appease the IRS with b, one might add an attachment to explain that the plan is not a new plan and the report is not the first report.

TommyGunn13, thank you for adding your helpful information.

MoJo, thank you for your good and helpful information. I am less confident that recordkeepers’ standard service agreements differ. Many refer to taking “commercially reasonable” steps; but that does little more than invite an expensive argument about what that phrase meant. A few refer to one or more of SPARK’s Industry Best Practices, but those are so wide and conceptual that almost anything could be argued to meet them. I haven’t seen any standard service agreement state obligations in a way that would support independent testing of whether the recordkeeper met or breached its obligation. Perhaps that’s because there is no set of generally recognized standards. And revealing too much about methods weakens their security and control. Although one might want fiduciaries to seek more than EBSA suggests, I suspect many fiduciaries (at least those with smaller plans) can’t meaningfully do even as little as EBSA suggests. Do others have different or further observations?

Plenty of advisors are preaching to retirement plans’ fiduciaries (mostly, employers) that they ought to do something about cybersecurity. Imagine an employer takes heed, and tries to follow EBSA’s Tips for Hiring a Service Provider with Strong Cybersecurity Practices. https://www.dol.gov/sites/dolgov/files/ebsa/key-topics/retirement-benefits/cybersecurity/tips-for-hiring-a-service-provider-with-strong-security-practices.pdf Step 6 is about what a fiduciary should seek to include in (or delete from) a service provider’s contract. It includes a list of five or six provisions a fiduciary should seek. But is this realistic? Imagine a plan’s size limits its negotiation with a recordkeeper to engaging it (on its standard terms) or not. For the points the EBSA guidance mentions, are there meaningful differences in what recordkeepers offer? Or are recordkeepers’ provisions so much in a common mainstream that there’s nothing much an employer would compare?