Peter Gulia

While recognizing Brian Gilmore’s reasoning . . . . To extend the analysis, are there situations for which a health flexible spending account’s provisions could (perhaps especially for a salary-reduction-only FSA) result in an experience loss? Could an employer have an obligation to pay a benefit more than the “premiums” collected from or for the participant? If that could happen, might it be fair for such an employer to absorb experience losses and enjoy experience gains?

Yes, an agreement might undo community property. One would evaluate whether the agreement truly separates the property and, if so, whether the agreement is legally enforceable. In doing that analysis, one might consider the internal law, and conflict-of-laws law, of each jurisdiction that might have some connection to the situation, including: the State of company A’s organization or formation, the State in which the first community-property interest was created, each State in which there was (or might have been) an addition to community property, each State in which there was insufficient accounting between separate and community property, the domicile of each spouse, the residence of each spouse, the State in which each spouse signed the agreement, the State law the agreement specifies as governing the agreement, and the State law that governs the agreement. A practitioner would want to fact-check the situation with no less care than Circular 230 calls for. Before pursuing an agreement, each spouse should consider the consequences, including for property ownership, income taxes, estate planning, and estate and inheritance taxes. Under some States’ laws, an agreement might be invalid unless each spouse has separate counsel. Even when that’s not a State-law condition, S. Derrin Watson in Who’s the Employer? (1998) suggested: “Such an agreement should not even be considered unless husband and wife are separately represented by experienced counsel, even in a friendly situation.” The American College of Trust and Estate Counsel’s Commentaries on the Model Rules of Professional Conduct describes more nuanced views.

And to discern whether community property might affect some point, one might consider all States or other jurisdictions in which the spouses resided. That spouses now live in a State that does not ordinarily establish community property for those domiciled or resident in the State might not always undo a community-property interest established under the law of another State.

And for those employers that don't yet maintain a plan and might prefer not to be burdened by an automatic-contribution arrangement, should the salespeople say one needs to create a plan now or soon so it will be in effect as of the date of enactment?

Under ERISA’s title I, the command to file a yearly report is on the plan’s administrator. Under Internal Revenue Code § 6058, the command to file a yearly information return is on the employer. If the plan’s employer/administrator is a corporation, limited-liability company, registered partnership, or other organization, either agency will pursue any human they assert could have acted to file the Form 5500 report. If the plan’s trustee is a human who would have had knowledge of the employer/administrator’s breach, EBSA can pursue such a trustee for failing to meet a co-fiduciary’s duty under ERISA § 405(a)(3). Even if the corporation or other organization named as the plan’s administrator is legally dissolved, under many States’ laws a dissolved organization still has some powers as needed to wind up the organization’s duties and obligations. Likewise, a former shareholder or member, director or manager, or officer might still have powers to act for the organization. Even if one might lack a power, how would filing a Form 5500 report harm the organization or a third person? Sometimes, EBSA can be assertive. Among other abandoned-plans cases I handled, in one EBSA asserted that a former assistant vice-president who had ended all associations with the employer many years before EBSA’s contact (and also years before the employer/administrator’s business failure and abandoning of the plan) was responsible to administer her former employer’s plan. Even after we showed EBSA proof of her resignations from all possible roles with the former employer, EBSA persisted. They guessed (correctly) that their target would learn that the expense of paying me to fight the Labor department would be much more than the expense of paying me to work the final administration. The recordkeeper and the trustee, also motivated to get rid of the abandoned plan, never questioned that my client lacked authority to instruct them. About “no more money”: Fighting EBSA would chew up many hours of a lawyer’s time, and in many of these situations has little prospect for a successful defense. Many lawyers would want an advance retainer against the first $10,000-worth of time, and would stop work when the advance retainer isn’t replenished. Paying BG5150’s fees to prepare the needed Form 5500 reports might be much less expensive than trying to show EBSA or IRS why they lack a right against the individual.

JG-12: Is the limited-liability company a tax-exempt organization or a taxable business? Which person owns the LLC’s capital interests? Which person owns the LLC’s profits interests (if any)? Does any person have a guaranteed income interest? Which person owns the LLC’s loss interests (if any)?

Yesterday evening, the House Ways and Means Committee, by a 22-20 vote, approved the retirement provisions.

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.)