Peter Gulia

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.

Beyond ERISA, if the advisor has possession of or control, even nondiscretionary control, over another person’s money, this might be unlawful or a violation: if the advisor is not a licensed bank or trust company; if the arrangement is contrary to the advisor’s securities broker-dealer’s procedures; if the advisor is an SEC-registered investment adviser and its custody is not sufficiently disclosed to the SEC and its client, and, for anything not held by a regulated bank or SEC-registered broker-dealer, surprise-audited by an independent public accountant. See, for example: 7 Pa. Stat. §§ 105, 106 https://govt.westlaw.com/pac/Document/N0F685EF06BE411E2B54299305CE1E81B?viewType=FullText&originationContext=documenttoc&transitionType=CategoryPageItem&contextData=(sc.Default) https://govt.westlaw.com/pac/Document/NDECBA6206BE411E28981FA740B828C88?viewType=FullText&originationContext=documenttoc&transitionType=CategoryPageItem&contextData=(sc.Default) 17 C.F.R. § 275.206(4)-2 https://ecfr.federalregister.gov/current/title-17/chapter-II/part-275/section-275.206(4)-2 Further, the employer and responsible plan fiduciary might want its lawyer’s advice about whether it would be liable for an uninsured theft loss.

If you administer both plans and they use the same recordkeeper, why not undo what is mistakenly credited to the 403(b) plan and credit it to the 401(k) plan?

403(b) Answer Book also is available in an Internet-accessed database. Most readers prefer the hyperlink navigation over thumbing through a book.

And my coauthors' work in 403(b) Answer Book (Wolters Kluwer). For guidance on how a church plan or retirement income account might use wider investment opportunities than are allowed for other 403(b)s, it's in my Investments chapter.

Beyond merely avoiding a nonexempt prohibited transaction, an ERISA-governed plan’s fiduciary must discharge its duties and obligations prudently. ERISA § 404(a)(1), 29 U.S.C. § 1104(a)(1). Would a person who acts with the care, skill, prudence, and diligence that would be used by a fiduciary who is experienced in administering a similar retirement plan find this arrangement prudent? One can imagine ways it might be imprudent, especially if more efficient services are available at a reasonable expense and without interfering with the plan’s exclusive purpose. But even if the arrangement might be imprudent: Is a currently-employed participant ready to sue one’s employer? Or is a former employee ready to sue for what happened in recent years? How many ERISA-competent plaintiffs’ attorneys are ready (facing real uncertainty about whether a Federal judge in her discretion would award attorneys’ fees) to sue a small business and its owner? In other ways, there might be a pressure point about whether the “financial advisor” met and meets its fiduciary responsibilities, not only under ERISA but also under Federal and State banking, insurance, and securities laws.

Without knowing or remarking on the particular situation you describe: The Internal Revenue Service allows a method for a claimant to self-certify her hardship without submitting source documents as a part of the claim. Instead, a plan’s administrator or claims administrator relies on the participant’s written statement (made under penalties of perjury). A claimant must pledge to keep her source documents, and to furnish them if asked. But a participant’s breach of that promise won’t tax-disqualify the plan if the plan’s procedure is correctly designed and administered. Internal Revenue Manual 4.72.2.7.5.1 (08-26-2020) https://www.irs.gov/irm/part4/irm_04-072-002#idm140377115475856 The IRS’s without-source-documents method can work if the plan’s administrator and its service providers carefully meet all conditions of the regulations and that method. Under that method, an IRS examiner must not ask for source documents unless: (1) the notice to participants or the claim “is incomplete or inconsistent on its face”; or (2) some participants received at least 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 further information. If a plan’s administrator and its service provider design the software correctly, #1 would never happen (except for a paper claim, and then only if the claims administrator is careless). About #2, a plan might limit hardship distributions to no more than two in a year, making #2 not happen. Even if the plan does not limit the number of hardship distributions, #2 might not happen unless abuses are bad enough that the examiner is motivated to do the extra work of getting her manager’s approval. Yet, there is a divergence of opinions about whether it’s wise to use what the IRS calls the summary-substantiation method described in the Internal Revenue Manual. A search in these BenefitsLink forums will turn up a few discussions that air different views.

About your question on nondiscrimination: Internal Revenue Code of 1986 (26 U.S.C.) § 403(b)(1)(D) sets § 403(b)(12) as a condition for § 403(b) tax treatment “except in the case of a contract purchased by a church[.]” https://uscode.house.gov/view.xhtml?req=(title:26%20section:403%20edition:prelim)%20OR%20(granuleid:USC-prelim-title26-section403)&f=treesort&edition=prelim&num=0&jumpTo=true The rule follows the statute. 26 C.F.R. § 1.403(b)-5(d): Church plans exception. This section [26 C.F.R. § 1.403(b)-5] does not apply to a section 403(b) contract purchased by a church (as defined in § 1.403(b)-2). https://ecfr.federalregister.gov/current/title-26/chapter-I/subchapter-A/part-1/section-1.403(b)-5

Here’s a link to class Prohibited Transaction Exemption 92-5: https://archives.federalregister.gov/issue_slice/1992/2/11/5018-5021.pdf#page=2 Among the conditions, the plan must pay no more than the insurance contract’s cash surrender value (or, if less, the participant’s accrued benefit under the plan).

In my experience: If an abandoned-plan investigation is open, EBSA people look at all years’ Form 5500 reports to find names of anyone who was described as acting for the plan’s administrator or sponsor, and anyone EBSA might assert had some role as an officer, quasi-officer, or some other control of the administrator or the sponsor. Sometimes, they also search public-records databases, and commercial databases. 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. That sad story told, one imagines EBSA is unlikely to open such an investigation if no participant or beneficiary has complained about being unable to get a distribution.

Without disagreeing with the several observations that the individual described likely is not responsible as the plan’s administrator (and without condoning the service provider’s conduct), it might not follow that the service provider has a responsibility. A service provider’s agreement might provide no obligation to file a Form 5500 report. Further, even if a service provider might volunteer, it might lack authority to file a Form 5500 report. And absent a Federal court proceeding, a service provider might be ineligible to obtain authority to file a Form 5500 report.

What do BenefitsLink mavens think about Lou S.’s idea about sending a bank’s cashier’s check? Would a terminating plan’s administrator succeed in finding a bank willing, in the described circumstances, to issue a cashier’s check? If the payee does not deposit or negotiate the check, is it the bank alone that would have duties under an abandoned-property law?

AbsolutelyOkayPossibly, thank you for your help. Any more observations: Do employers that are users of a preapproved document add provisions beyond those one may choose in an adoption agreement?

As service providers get more experience with choices users of IRS-preapproved documents make in using those documents, here’s two questions I’d like to crowd-source: What percentage of users add an “administrative” provision beyond what’s in the standard documents? What percentage of users add an arbitration provision?

Here are two public-law constraints to meet. 1. ERISA § 404(b) [29 U.S.C. § 1104(b)] commands “maintain[ing] the indicia of ownership of any assets of a plan [within] the jurisdiction of the district courts of the United States.” A rule allows holding securities through intermediaries if enough control is with a sufficiently regulated and capitalized U.S. bank, insurance company, or investment adviser. 29 C.F.R. § 2550.404b-1 https://ecfr.federalregister.gov/current/title-29/subtitle-B/chapter-XXV/subchapter-F/part-2550/section-2550.404b-1 It is common for a U.S. bank or trust company to use non-U.S. subcustodians, depositories, and clearing agencies. 2. Under the Internal Revenue Code of 1986, a tax-qualification condition calls for a domestic trust. A trust, including a § 401(a) retirement plan’s trust, can be a “United States person” trust if (i) a U.S. court can exercise primary supervision over the trust’s administration; and (ii) a United States person has authority to control all substantial decisions of the trust. 26 C.F.R. § 301.7701-7 https://ecfr.federalregister.gov/current/title-26/chapter-I/subchapter-F/part-301/subpart-ECFRbb5a653881cc2c0/section-301.7701-7 It’s feasible to meet that rule without undoing a participant’s power to direct investment, even if the participant is not a United States person. If the plan’s governing documents would provide that “each Doctor is Trustee for her/his account”, the plan’s sponsor and fiduciaries might adjust those provisions regarding a participant who is not a United States person.

But wouldn't a service provider design its software so a hardship claim that is incomplete, internally inconsistent, or logically inconsistent won't process (except for a denial notice)?

The March 2020 discussion describes what a plan might permit without offending ERISA § 408(b)(1) or Internal Revenue Code § 72(p). But a plan’s governing documents (whether a base plan, adoption agreement, trust agreement, or a procedure under a delegation or authority from a governing document or a fiduciary’s powers) might state provisions narrower than what the plan might allow under public law. A document might treat a plan administrator’s approval of a transaction as not final until the administrator’s instruction to its service provider is delivered to the service provider and by it determined to be in good order. That might help avoid a software constraint of the kind Pam Shoup describes (if the service provider processes an instruction on the same day the provider determined the instruction to be in good order).