Peter Gulia

Internal Revenue Code § 45E provides a tax credit for a portion of a small employer’s (up to 100 employees) qualifying expenses to establish or administer a new retirement plan. About what’s new: An employer cannot qualify for this credit if, during the three-taxable-year period that immediately precedes the first taxable year for which the credit otherwise could be allowed, the employer or any member of any controlled group that includes the employer (or any predecessor of either) established or maintained a qualified employer plan for which contributions were made, or benefits were accrued, for substantially the same employees as are in the qualified employer plan for which the credit otherwise could be allowed. How does this work with a multiple-employer plan—whether an association retirement plan, some other “closed” MEP, an “open” MEP, or a pooled-employer plan? For this credit, does it matter that the plan is not a startup? Or is it enough that the employer’s participation under the plan is the first time the employer provided any retirement plan for its employees?

Thank you for the kind words. Using our skills to put a sensible interpretation on an ambiguous statute is why clients pay us.

I have no sample form of agreement to offer you. For such a § 302(c)(9) trust, I imagine one might look to § 5(b) of the Labor Management Cooperation Act of 1978, at least to consider the trust’s proper purposes. And if ERISA does not govern the trust (and so does not preempt State law), one might look to a relevant State’s trust code and other law to consider which provisions are mandatory, and which default provisions a trust agreement may negate or change—after considering provisions labor-relations law commands or otherwise requires.

An administrator of an ERISA-governed plan must obey the plan’s provisions (unless the plan states a provision ERISA’s title I forbids, or fails to state a provision ERISA’s title I commands). In doing so, an administrator ignores a participant’s separation agreement, even if made a part of a court’s order, unless the order is a qualified domestic relations order. Even if a plan might provide that a separation agreement undoes a participant’s beneficiary designation, a separation agreement without a divorce does not change a person’s status as a spouse, who later might have a surviving spouse’s survivor-annuity or other rights under the plan’s provision that meet ERISA § 205. For what happens after an ERISA-governed plan has paid its benefit, some courts’ decisions recognize a disappointed person’s remedies under State law. But the plan’s administrator need not be involved in those disputes.

Thanks. And for a participant whose benefit became non-forfeitable long before normal retirement age, how many plans do not allow a distribution, even after severance-from-employment or age 59½ (or both), until the participant attains normal retirement age?

From my experiences with many individual-account retirement plans, I remember no situation in which attaining the plan’s normal retirement age entitled a participant to vesting or a distribution to which she was not otherwise entitled under the plan. But such a situation is possible. How often does it happen? In what kinds of circumstances? Are there kinds of employers or occupations for which it’s more likely to happen? Are there kinds of plan designs in which it’s more likely to happen?

And beyond others’ suggestions and observations: Has anyone submitted a claim for a benefit? If not and the plan’s terms do not compel an involuntary distribution (whether because of a small account balance, for a required minimum distribution, or under another provision), the plan’s administrator might prefer not to solve a question that is not yet raised. And when it is time to decide, did the marriage end before the decedent’s death, or is the husband the decedent’s surviving spouse? If he is a surviving spouse, what rights does the plan provide?

Thank you for the kind words. And know that some of the authors take questions from subscribers. If I can do so without stepping on a client conflict, I help an inquirer meet her immediate client-facing need. Later, Gary Lesser and I sort out what ought to make its way into the book.

As I mentioned, using fewer plans, investment arrangements, or service agreements depends on working with service providers that know enough and have legal and practical capabilities to make distinct each organization’s obligations and each organization’s assets. The arrangements I alluded to not only involve separate accounting but also legal and contractual segregation of each organization’s property rights. Whether it’s effective and enforceable goes beyond the work of tax lawyers and involves the work of banking, securities, debtor-creditor, and bankruptcy lawyers. I’m unaware of any court (or bankruptcy court) decision that tests whether contractual segregations were enough that creditors of one organization could not reach another organization’s assets. (If any BenefitsLink reader knows of such a decision, whether recognizing or ignoring an attempted segregation, please let me know; I’d suggest my 457 Answer Book coauthors explain it in our next update.) If it’s impractical to use enough legal and operational efforts to be confident in the segregations, a participant might prefer that her employing tax-exempt organization’s assets are separated by the several-plans approach BTG describes. Different clients see the tradeoffs differently.

If ERISA governs the retirement plan, “[t]he Secretary [of Labor] may prescribe regulations which would establish minimum standards that . . . an [automatic-contribution] arrangement would be required to satisfy in order for [ERISA § 514(e), preempting States’ laws] to apply in the case of such arrangement.” But the rule is 29 C.F.R. § 2550.404c-5, which sets conditions for notices and for a qualified default investment alternative, but does not otherwise specify “minimum standards”. Two practical points: EBECatty suggests a too-high implied-assent rate might lack a participant’s consent and attract an opt-out. Beyond that, another practical point is considering all possible wage reductions and deductions. For example, a retirement plan’s sponsor might set the highest implied-assent contribution so it would not interfere with withholding for Social Security taxes and Federal, State, and municipal income taxes and also would not interfere with participant contributions for health coverage, a health flexible spending account, a dependent care account, and other welfare benefits. For a lower-wage worker, the amounts for some of those arrangements might be relatively big percentages of pay, and so might leave smaller portions of pay available for retirement contributions.

I suspect a written explanation of the kind austin3515 describes might help some participants make an informed choice, and so might lessen a highly-compensated employee’s displeasure about receiving a corrective distribution. But I suspect also that many recordkeepers and third-party administrators don’t do this communication (even if one would put in the work to write a careful explanation) because it might “step on the toes” of an investment adviser’s or a broker-dealer’s representative, who prefers to be the source for that financial-planning guidance. A communication of this kind might work if the recordkeeper’s or TPA’s computer system is automated to know and use information about the identity and contact points of each participant’s advisor.

Is the plan a defined-benefit pension plan? Or is the plan an individual-account (defined-contribution) retirement plan? That distinction might matter for how a § 401(a)(17) limit applies regarding an accrual or a contribution. If the plan is a defined-benefit plan, what is the promised benefit? Which State's law applies?

Florida imposes a tax that Florida’s Revenue department describes as a “documentary stamp tax”. But each of its tax rates refers to the transaction and its amounts involved. https://floridarevenue.com/Forms_library/current/gt800014.pdf Discussions in BenefitsLink have considered whether and how Florida’s tax might apply to an individual-account retirement plan’s participant loan.

The modest effort a few State bars put on seeking to restrain some business practices about documenting employee-benefit plans was mostly a 1980s thing. (And efforts from voluntary bar associations were even fewer and more modest.) In 1990, Florida’s Supreme Court decided The Florida Bar re Advisory Opinion—Nonlawyer Preparation of Pension Plans, 571 So. 2d 430, 15 Fla. L. Weekly S617 (Fla. Nov. 29, 1990). It rejected the Florida Bar’s proposed advisory opinion, and recognized that a State lacks power to forbid a practice authorized by Federal law. After that decision and especially after developments in the IRS’s procedures about forms of documents, States’ efforts to restrain much of anything have almost vanished. If anyone was wondering, for decades I’ve published my view that any person should be free to give legal advice (and to bear responsibility for her or its advice).

MoJo, thank you for the helpful information. I remember when a Corbel document was obtainable only if an attorney-at-law or certified public accountant signed the assembly questionnaire. Corbel did that to set up a defense against an assertion of unauthorized practice of law. Am I right in guessing Relius, FTWilliam, and others no longer require anything like that? (Please understand, I don’t advocate for or against any way of doing things. Rather, I’m seeking to learn about what’s available.)

Just a curiosity: Does a publisher of IRS-preapproved documents (which I imagine gets most of its revenue from licenses with retirement-services providers and other intermediaries) also allow purchases directly by an employer or plan sponsor?

Best wishes for whatever you choose to do next.

Purplemandinga, no worries. You recognized the idea I observed. I wasn’t offended by your follow-up query to discern the reasoning of the idea. But you also saw I didn’t express a view about whether the idea is legally sufficient. My post was merely an effort to describe one possibility about what someone might have perceived as a “forced” rollover.

Consider asking (quietly) a few accounting firms (preferably with a partner who’s your friend) what provisions the firm would seek in its engagement letter. Doing so might help follow some EBSA guidance: “At a minimum, compliance with [ERISA § 404(a)(1) and § 408(b)(2)] would require that a fiduciary assess the plan’s ability to obtain comparable services at comparable costs either from service providers without having to agree to such [limitations of liability and indemnification] provisions, or from service providers who have provisions that provide greater protection to the plan.” ERISA Advisory Opinion 2002-08A (Aug. 20, 2002), available at https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/advisory-opinions/2002-08a. Although that opinion is about engaging an actuary, the reasoning should apply similarly for engaging another non-fiduciary professional-services provider. But don’t be surprised if a survey finds many accounting firms seek mediation, arbitration, an exclusive venue, a liability cap, a short time bar on claims, and indemnity (at least if someone furnished incorrect or misleading information to the IQPA). Depending on the client’s bargaining power, some points are negotiable. Also, the plan’s administrator and each individual fiduciary might want its or her lawyer’s advice about the legal effect of each provision.

I don’t know enough to consider what’s believable. Those of my regular clients that are plan sponsors employ tens of thousands of employees, and have capabilities to count a part-time employee’s hours of service. I’ll leave it to others, especially the TPAs who asked for my help, to consider whether there are some 401(k) plan sponsors with some employees on whom the employer doesn’t count hours. Even besides questions about which part-time employees to allow in a 401(k) plan, I remain curious about how much is feasible in charging plan-administration expenses against participants’ and beneficiaries’ accounts.

Not exactly what you describe, but I have seen plan provisions and communications by which a terminating plan’s final distribution results in a default direct rollover to the next employer’s plan if the participant has not by a specified due date after a reasonable time delivered her instruction to be paid money or for a direct rollover to another eligible retirement plan.

Friends, thank you for your thoughts. I see the worries about plan-administration expenses. Those might include per-plan fees, perhaps incurred because an employer divides its workforce into two or more plans so each’s count is small enough that the administrator need not engage an independent qualified public accountant. And it might include per-head fees charged for each individual’s account, no matter how small. Is it feasible to charge those and other plan-administration expenses, including those for notices and other communications, against participants’ and beneficiaries’ accounts? Or am I too unknowledgeable about what services most retirement-services providers offer to small- and mid-size plans? I ask because I’ve heard from other practitioners that some employers lack a practical capability to count hours of service, and might find it easier to allow all employees to make elective deferrals.

Kevin C and EBECatty, thank you for your help. More points to consider?

When the time comes and with some exceptions, a non-governmental § 401(k) plan must (to tax-qualify) permit an employee to make elective deferrals if the employee has at least 500 hours of service a year in at least three consecutive years and has met the plan’s age requirement (for example, 21) by the end of the three-consecutive-year period. A plan need not provide nonelective or matching contributions for such a long-term part-time employee. Relief from nondiscrimination and top-heavy rules applies only regarding “employees who are eligible to participate in the [§ 401(k)] arrangement solely by reason of [§ 401(k)](2)(D)(ii)[.]” I.R.C. (26 U.S.C.) § 401(k)(15)(B)(i); accord § 401(k)(15)(B)(ii). Some employers are considering simplifying a new provision by making all employees, with no age or service condition, eligible for elective deferrals (without providing a nonelective or matching contribution). If an employer in its particular circumstances is not worried about coverage, nondiscrimination, and top-heavy rules: Is there some other reason an employer should consider not extending elective deferrals to all employees?

Luke Bailey, thank you for this helpful information. Since 1994, my Beneficiary Designations chapters in Wolters Kluwer’s Answer Book have included explanations about community property. In this year’s update, I’m adding a Q&A on how much a custodian requires or warns about community-property rights of the spouse who is not the participant or IRA holder.