Peter Gulia

Even without the mistaken withholding instruction you describe, an employer/administrator often might encounter the problem of lacking enough pay for all the things an employee might do with it. For example, consider a paymaster who must withhold for FICA taxes, three income taxes (Federal, State, and city or county), two or more unemployment and disability taxes, and might apply salary reductions for the employee’s portion for health coverage, a health flexible spending account, a dependent-care account, and a 401(k)/403(b)/457(b) elective deferral. Some employers develop an internal hierarchy—sometimes written, often not—to sort out these and other competing demands on an employee’s pay. Most concur that withholding taxes comes before any of the health, other welfare, and retirement benefits. And within employee benefits, most prioritize maintaining health coverage over voluntary retirement savings. While I’ve never seen the Treasury or its IRS publish anything on this point, it should be unseemly for the IRS to assert as a tax-disqualifying operational defect an employer/administrator’s failure to apply perfectly an employee’s elective-deferral election if the reason was properly withholding taxes, especially any Federal tax. About coordinating wage reductions across the many employee benefits and providing it in or under the plans’ governing documents, that’s possible when one law firm works on all plans of the employer. It’s hard to do using IRS-preapproved and other documents that come from the plans’ service providers. And even employers that use custom documents for all or most of the plans often don’t want to pay for the time it would take to do this right.

The statute sets up authority for the Secretary of the Treasury to use credits and adjustments beyond the OASDI-HI and other wage tax credits the statute sets up as the first go-to. One must look for “[t]he Secretary [to] issue such regulations, or other guidance, forms, instructions, and publications, as may be necessary or appropriate to carry out [the continuation subsidy].” Won’t the news be all over the web about an hour after the IRS’s release?

After recognizing a surviving spouse’s rights (whether ERISA-mandated or otherwise plan-provided), practitioners and plan sponsors have a range of views about what default-beneficiary provisions make sense. And even those answers can vary with circumstances about a plan’s administration. ESOP Guy is right that someone who understands difficulties that can result from the absence of a designation is much less likely to neglect making a designation. A default of the participant’s children also can burden a claimant. For example, if a plan’s claims administrator receives a claim from someone who proves she is the participant’s daughter and says she is her mother’s only child, must the administrator require some further evidence to prove the claimant is the participant’s only child? How does one prove the non-existence of more children than the claim names? And if a whole account balance is paid out but the administrator later receives a claim from the participant’s second child, what is the plan’s obligation to the participant’s children beyond the one who was paid?

Are you thinking about a risk beyond the business risks of the fund's portfolio companies?

The text of New York City’s legislation includes this: Covered employer. The term “covered employer” means any employer as defined in subdivision 3 of section 190 of the labor law that (i) employs no fewer than five employees whose regular duties occur in the city, consistent with any rules promulgated by the retirement savings board pursuant to section 20-1408; (ii) has employed no fewer than five such employees without interruption for the previous calendar year; (iii) has been in continuous operation for at least two years; and (iv) has not offered or maintained in the preceding two years a retirement plan, provided that an entity described in clauses (i) through (iv) in the definition of “participating employer” shall not constitute a covered employer. https://legistar.council.nyc.gov/LegislationDetail.aspx?From=RSS&ID=3498476&GUID=6E78D2BB-A4BA-4FD8-8C03-ABA62C914AEB An employer would want its lawyers’ advice about how to interpret this.

If the employer is sure it has no one living or working in NYC, it would consider New York State’s law, which you found is voluntary—that is, the State law imposes no punishment on an employer that does not facilitate the program.

SSRRS, it’s unclear whether your query is about New York State or New York City. There are differences between the State’s and the City’s law.

Would the plan would get no less interest than a bank would get for the same loan to that borrower? Practically, the retirement plan would need to get more interest so the extra covers the plan’s expenses of doing the deal, including fees for a lawyer to render an opinion that the transaction meets the conditions of a prohibited-transaction exemption and fees for an independent fiduciary to find that the transaction is fair to, and prudent for, the plan. And why would the borrower incur that extra if it can borrow from a bank (in a deal that would lack those incremental transaction expenses)?

Bird, thank you. I apologize for being unnecessarily sensitive. Some BenefitsLink people think some of my queries are too fanciful, and I do sometimes anticipate issues. I wanted the group to know this query is grounded on a real and current client request. MoJo, thank you for your further explanation that your reasoning would not change if you were unconstrained and directly advising a plan’s administrator. RatherBeGolfing, thank you for your further suggestions about ways to consider potential pitfalls.

My query wasn’t about a hypothetical situation. I have a client that, besides the plan’s website and whatever paper communication the recordkeeper sends when a participant or other individual is entered in the system, is considering whether to put an explanation in the summary plan description. (I am one of several lawyers advising the plan’s sponsor/administrator/trustee.) Infrequency is no impediment because this administrator continually revises its custom SPD, and every November redelivers the restated SPD to all participants. Also, the administrator puts the SPD, 404a-5/404c-1 information, and SAR in the same delivery. I recognize this client’s circumstances are not others’ norm. I haven’t yet formed my advice. BenefitsLink neighbors have given me plenty to think about.

With its lawyer’s advice, a plan’s administrator (or claims administrator) might consider this decision path (not only regarding the Consolidated Appropriations Act, 2021 but also for future disaster distributions): 1. If the statute that provides the disaster distribution includes a provision allowing the administrator to rely on the claimant’s written statement, follow what the statute allows. A claim form might include a warning that making a false statement certified to the administrator or kept as a part of the plan’s records is a Federal crime, the punishment for which is a fine and up to five years’ imprisonment. Some administrators put this on all claim forms. 2. If the plan’s administration regularly uses for hardship distributions a claims procedure that meets conditions so an IRS examiner could not properly demand from the employer/administrator source documents [IRM 4.72.2.7.5.1 (08-26-2020) https://www.irs.gov/irm/part4/irm_04-072-002#idm140377115475856], design a similar procedure with similar warnings and protective conditions for a disaster distribution. Although the recent qualified disaster distribution ends soon (180 days after enactment), a plan’s fiduciary or service provider might anticipate that Congress will enact more disaster provisions or some authority for defining and recognizing disasters generally. If so, it might be worthwhile to put some effort in designing the procedure. 3. If neither #1 nor #2 fits, use a claim form and get further substantiation evidence for the administrator to decide whether the claimant’s facts and circumstances meet the plan’s provision. (If the plan’s provision is unstated in “the” plan document, the provision might be the employer’s decision to do what Congress’s statute allows.)

Thank you, all, for your further help. You really help me fill in gaps in my experiences.

Thank you, all, for your helpful observations. MoJo, I’m not thinking an SPD would communicate anything about what the plan’s administrator, trustee, or any service provider does. Rather, I’m wondering whether an SPD should include participant-level pointers—perhaps simple ones such as taking control of the individual’s electronic account, even if one expects never to use it; not sharing a password; and checking postal mail and email (if any) for a message that suggests an identity was hacked. And if a plan has obtained a service provider’s promise to make whole an account, might an SPD communicate what a participant, beneficiary, or alternate payee must do, or not do, to meet the conditions for that promise? BG5150 and Bird, would your view be different if you were not dependent on someone else’s document-assembly software and the plan had budgeted two hours a year for custom-editing the SPD? Belgarath, what if a plan’s administration has no communication beyond the SPD? EBECatty, you’re right that an in-context communication is great, for those who see it. But what communication would be effective with a participant who has never used the plan’s electronic services and intends never to use it? Such a participant is vulnerable to identity-theft risks, in some ways more so. And everyone, understand that I’m not advocating any view or outlook. Rather, I’m openly seeking your excellent thinking.

I’m wondering whether a 401(k) or other individual-account retirement plan’s summary plan description ought to include a part that explains risks about an individual’s data security, and ways for the individual to help manage those risks? Is it a good idea? Is it a bad idea? What are your reasons for including or omitting such an explanation?

Here’s the rule: https://ecfr.federalregister.gov/current/title-29/subtitle-B/chapter-XXV/subchapter-C/part-2520/section-2520.104-46. Unless there is a reason other than that rule to audit the retirement plan’s financial statements, might the plan’s administrator revisit the prudence of its selection of the independent qualified public accountant? If not, the plan’s administrator might face a practical task of persuading the audit firm. Often, some evidence that the plan’s administrator considered a lawyer’s advice closes a point of this kind. Even if both the plan and its administrator lack its own counsel, a bank typically has counsel readily available. For example, Federal law requires a national bank that acts in a fiduciary capacity (in its business, rather than regarding employee-benefits plans for the bank’s employees) to retain “legal counsel who is readily available to advise the bank and its fiduciary officers and employees on fiduciary matters[.]” See 12 C.F.R. § 9.5(d). Some States have similar law.

To focus on just the one ruling: http://www.legalbitstream.com/scripts/isyswebext.dll?op=get&uri=/isysquery/irl4f94/1/doc But check it carefully against the government source Lois Baker furnished. If you have Gary S. Lesser & Lawrence C. Starr, Life Insurance Answer Book (Wolters Kluwer 3d ed. 2002), Revenue Ruling 74-307 is discussed in Qs 4:3, 7:6, and 7:11.

Yes, the earlier discussion was about a terminated plan, and I saw your question is about continuing plans. The rule is ambiguous in either situation. Even for a continuing plan, there are at least three interpretations. To resolve the ambiguity in particular circumstances, a plan’s administrator should use no less care, skill, prudence, and diligence than would be used by a prudent person experienced in managing an employee-benefit plan of the same kind for the exclusive purpose of providing the plan’s benefits. In considering whether to deliver a summary annual report to someone who no longer is a participant but was at some possibly relevant time, a fiduciary might consider whether the plan is or isn’t burdened by an incremental expense for the delivery. And if a plan’s administrator has contracted a service provider to deliver a summary annual report, the administrator might consider what’s feasible within the contracted services.

Here’s an earlier discussion: After, the Supreme Court decided Intel Corp. Investment Policy Committee v. Sulyma, No. 18-1116, 589 U.S. ___, 140 S. Ct. 768, 2020 Empl. Benefits Cas. (BL) 69188, 2020 U.S. LEXIS 1367, 2020 WL 908881 (Feb. 26, 2020). The Court held that merely receiving a communication does not mean the recipient has knowledge of the information in it. Rather, to get ERISA § 413(2)’s shorter statute of limitations, a defendant must prove the plaintiff’s actual knowledge. The protection a plan’s fiduciaries might get by “over-delivering” a summary annual report is now much less. Here’s the ambiguous rule: https://www.ecfr.gov/cgi-bin/text-idx?SID=0ef9bcffad94c1b0a2d036c698113b2f&mc=true&node=se29.9.2520_1104b_610&rgn=div8

C.B. Zeller, thank you for reminding us about another discussion, and for your answers. Larry Starr’s observations might have been influenced by the unusual situation presented. And if his view was general, it might reflect his clients’ plans, which typically do not provide participant-directed investment, and his firm’s services. 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. Others’ thoughts? Is there a downside to limiting hardship distributions to no more than two in a year?

Adding to Pam Shoup’s questions: Why would a plan’s administrator not use the IRS’s method for not receiving source documents and instead relying on the participant’s written statement (made under penalties of perjury)? The hardship self-certification method now is in the Internal Revenue Manual. IRM 4.72.2.7.5.1 (08-26-2020) https://www.irs.gov/irm/part4/irm_04-072-002#idm140377115475856 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 recordkeeper or TPA design the software correctly, #1 would never happen (except for a paper claim, and then only if the claims administrator is careless). And #2 seems unlikely unless abuses are bad enough that the examiner is motivated to do the extra work of getting her manager’s approval. Further, may a plan limit hardship distributions to no more than two in a year?

And if the plan administrator's or claims administrator's interpretation treats a previously incurred medical expense as no longer deemed immediate and heavy because the expense was incurred some months ago, is that something a summary plan description must or should describe?

I’d welcome BenefitsLink commenters’ thoughts about these questions: If a plan limits a hardship to an expense incurred no earlier than the past six (or other number of) months, is such a limit a provision a summary plan description must describe? If not, is it a restriction on a benefit that an SPD must describe? How practical would it be to do this disclosure if the plan’s administrator uses a summary plan description computer-generated by the recordkeeper’s plan-documents software?

If there is an ambiguity: An employer might consider also checking with some others: · the COBRA administrator, if the plan’s administrator engaged one; · the health insurer, to the extent (if any) the continuation coverage would be provided through health insurance; · the stop-loss insurer if, regarding a self-funded plan, the employer bought that insurance. Not checking with them could leave an employer exposed to financial consequences that result from offering continuation coverage to someone another decision-maker considers ineligible. Likewise, an employer might consider informing a continuee that the continuee is responsible to pay whatever portion of the continuation premium the U.S. Treasury does not provide.

austin3515, what you describe is mainstream: an employer puts withholding taxes before any other wage reduction or deduction; and within employee benefits, many employers put health before retirement. My example showed enough employer-paid wages to allow, after withholding taxes, health and retirement reductions. But a mix with less in payment-card tips and more in currency tips could make a wage reduction for a 401(k) elective deferral impossible (at least from that paycheck), and perhaps impractical (even if an employer would accrue a wage reduction until a paycheck supports it, if that ever happens). (I suspect you’re right about what seems practical.) If (whether to pursue your prospective client, or sate your curiosity) you want to learn the real-world practicalities, ask someone who manages payroll for a big restaurant group or for an employer similar to your prospective client.

A § 401(k) deferral measured on the reported wages is feasible if the portion paid by the employer is enough. Imagine a tipped employee’s workweek is five shifts of six hours each. Imagine tips in the week is $400 on payment cards and $600 in currency. Imagine the employer allocates none of the credit or payment processing fees to the server. The employer-paid wage is ($2.13 x 30) + $400 = $463.90 Imagine the tipped employee reports to the employer $300 from the $600 in currency tips. Following this, assume the wages the employer will report to tax authorities is $763.90. Employer-paid wages $463.90 FICA taxes - 58.44 7.65% Federal income tax - 88.13 15% (for illustration) of $587.51 State and local income taxes - 29.38 5% (for illustration) of $587.51 Unemployment taxes - 53.47 7% (for illustration) Health insurance - 75.00 to show RBG’s point 401(k) elective deferral - 76.39 10% of reported wages Net pay $ 83.09 While someone who knows hospitality businesses can explain how these overly simplified assumptions depart from reality, the key is that withholding for taxes is based on a wage more than (if there are tips beyond payment-card tips) the employer-paid wages. The mix of payment-card and currency tips changes over time and by particular work settings.