Peter Gulia

If what the executive seeks to do is to release the charitable organization from all or some of the organization’s obligation to pay her deferred compensation, the charity should get advice from its lawyers and accountants and the individual should get advice from her lawyer and her accountant. They might consider: How to document the release? What accounting notes to put in the charity’s financial statements? How the release would affect the next IRS Form 990 information return? What tax information reporting is required or permitted? If tax reporting is by a service provider rather than by the employer directly, what notices and instructions must or should be given under the service agreement? How to value the release? (Consider whether the value of the release might be less than the amount of the obligation released because the value might be discounted by the probability that the organization would not pay the deferred compensation when and as due under the plan’s provisions.) This is not advice to anyone.

Internal Revenue Code § 401(a)(4) calls a plan to “not discriminate in favor of highly compensated employees[.]” Here is 26 C.F.R. § 1.401(a)(4)-4(e)(3) https://www.ecfr.gov/current/title-26/part-1/section-1.401(a)(4)-4#p-1.401(a)(4)-4(e)(3). Even if one assumes that the presence or absence of an automatic-contribution arrangement, because it involves “election rights” or for another reason, is an “optional form of benefit”, reasonable minds might differ about whether an automatic-contribution arrangement benefits or burdens the class of employees it applies to. Under either the presence or absence of an automatic-contribution arrangement, a participant has a right to choose between unreduced wages and elective deferrals. Likewise, a “right to make each rate of elective contributions” might be unimpaired by the presence or absence of an automatic-contribution arrangement. So, is an automatic-contribution arrangement a benefit, or a burden? Ignoring those participants who make an affirmative election (whichever, and whatever it is): Some might reason that an automatic-contribution arrangement benefits an affected class of employees because it cures a participant’s inattention by selecting what someone supposes is a usually better choice. Some might reason that an automatic-contribution arrangement burdens an affected class of employees because it imposes on an inattentive participant a choice she does not want. Some might reason that the presence or absence of an automatic-contribution arrangement is neutral because we cannot know what choice a participant would have made had she been attentive. And whether an automatic-contribution arrangement is a benefit or burden might vary between the classes of highly- and nonhighly-compensated employee. Some might reason that an automatic-contribution arrangement benefits the affected class of HCEs because many inattentive HCEs are likelier to have wanted to choose deferral over unreduced wages. Yet, some might reason that the same automatic-contribution arrangement burdens the affected class of NHCEs because many inattentive NHCEs are likelier to have wanted to choose unreduced wages over deferrals. And some might say the measure of a benefit focuses on a participant’s right, not on how she exercises (or fails to exercise) her right. This is not advice to anyone.

The key to this early out is that it’s an involuntary distribution that results because the plan’s sponsor or fiduciary has removed the insurance contract from the plan’s investment alternatives. Before SECURE, among the many challenges of including an in-plan annuity contract as a retirement plan’s investment alternative was what might have been the imprudence of allowing a participant to devote a portion of one’s retirement savings to a contract that might become stranded because the plan discontinues the contract as an investment alternative. And some worry that a desire not to discontinue an annuity contract might lead a fiduciary to continue service arrangements a prudent fiduciary ought to replace. Before SECURE, many fiduciaries worried that allowing an annuity alternative impedes opportunities to select investment and service providers. For example, selecting a new recordkeeper might mean annuity contracts, especially guaranteed-lifetime-withdrawal-benefit or “GLWB” contracts, placed by a preceding recordkeeper or its affiliate will be discontinued. Many participants whose contracts are discontinued might feel their plan accounts were charged for insurance rights they never had an opportunity to use. The 2019 Act coins a new term, a lifetime-income investment, and for it allows a way to get around a retirement plan’s restraints against a too-early payout or distribution. Congress’s hope is that the availability of these exit strategies might help persuade some plans’ sponsors to try allowing an annuity contract as a participant-directed investment alternative. If a lifetime-income investment no longer is a plan’s investment alternative, the plan could allow: a direct rollover of the annuity contract to another eligible retirement plan, which could include an Individual Retirement Annuity; or a distribution of that lifetime-income investment as a qualified plan distribution annuity contract—one that preserves benefits and restrictions. To get an exception from a plan’s restriction against a too-early distribution (or from an extra 10% tax on a too-early distribution), either kind of extraordinary distribution must be made within 90 days from when the lifetime-income investment no longer is allowed as the plan’s investment alternative. I.R.C. (26 U.S.C.) § 401(a)(38); § 401(k)(2)(B)(i)(VI); § 402(c)(8)(B)(iii)-(vi); § 403(b)(11)(D); § 457(d)(1)(A)(iv). This is not advice to anyone.

Here’s the rule jsample mentions: 26 C.F.R. § 1.410(b)-7(c)(1) https://www.ecfr.gov/current/title-26/part-1/section-1.410(b)-7#p-1.410(b)-7(c)(1).

EBSA’s Voluntary Fiduciary Correction Program states conditions under which one may obtain a no-action letter (or get an email recognizing a self-correction-component notice). That restrains only the Secretary of Labor from pursuing enforcement or civil penalties on the identified and corrected breach. Likewise, Prohibited Transaction Exemption 2002-51 restrains only the Treasury’s enforcement for some excise taxes. https://www.govinfo.gov/content/pkg/FR-2006-04-19/pdf/06-3674.pdf Outside those regimes, one might use EBSA’s calculator, but gets no reliance; one gets neither government agency’s assurance about what effect paying restoration in an amount estimated using the calculator might have. Further, about a claim of a person other than the government agencies (including a participant’s or beneficiary’s claim), the burden is on the fiduciary to show or prove that a correction was enough so that there no longer is any loss to the plan resulting from a breach nor any profit the fiduciary made through a use of the plan’s assets (including a contribution that became a plan’s asset but was not promptly paid into the plan’s trust). The online calculator’s result might not be enough restoration. Or an aggregate amount for the plan might be enough, but the allocation among participants’ and beneficiaries’ accounts might be insufficient. This is not advice to anyone.

If the employer’s circumstances seem likely to result in a voluntary or involuntary bankruptcy: About Lou S.’s step 2 (and some variations), if the organization that soon becomes a bankrupt paid an amount the organization need not have paid—because the plan at least permitted the plan to pay or reimburse the plan’s expenses, one risks that a bankruptcy judge might find the amount so paid was a preferential transfer, and might order the payee to restore the amount to the bankruptcy estate. Some service providers might skip from Lou S.’s step 1 to step 4. And, even if confident about full and prompt payment, some providers are unwilling to continue services if there is a change in the plan’s administration. Be careful about not discarding records earlier than the service provider’s proper records-retention plan requires or permits. And a service provider might get its own lawyer’s (not anyone else’s lawyer’s) advice about whether it might be unwise to deliver records, or even copies of records, to a breaching or doubtful fiduciary. This is not advice to anyone.

Although Internal Revenue Code § 414A’s condition for some § 401(k) arrangements to provide an automatic-contribution arrangement is recent, that many plans’ documents state provisions for an automatic-contribution arrangement has existed for many years. That might be especially so for a plan stated using IRS-preapproved documents. ERISA § 404(a)(1)(D) calls a plan’s administrator or other fiduciary to meet its responsibility “in accordance with the documents and instruments governing the plan[.]” What does this plan’s governing document provide about what is or isn’t a sufficient election? If the plan’s administrator finds an ambiguity in the plan’s documents, does the plan grant the administrator discretionary authority to interpret the plan? Further, what does the summary plan description tell a participant about what is or isn’t a sufficient election? If the plan’s administrator faces choices about what to require or permit, consider whether the administrator or employer would have a practical ability to keep records as ERISA’s title I and the Internal Revenue Code, including I.R.C. § 6001 and regulations under it, require. For example, one might find it’s impractical to preserve text messages for several years. Some might doubt an ability to preserve emails. And even those who are comfortable preserving records in such a format might prefer to control the form and content of a participant’s election. Although the Employee Benefits Security Administration may investigate whether a fiduciary administered a plan according to the plan’s governing documents, consider that whether a plan met Internal Revenue Code § 401(a), § 401(k), or § 414A might be the Internal Revenue Service’s examination. This is not advice to anyone.

A retirement plan’s trust may, unless the plan’s or trust’s governing documents provide otherwise, pay the portion of a service provider’s fee fairly allocated to “reasonable expenses of administering the plan[.]” ERISA § 404(a)(1)(A)(ii). This is not advice to anyone.

What does the to-be-ended agreement provide about how much notice, and what manner of notice, the service recipient must give the service provider to end the agreement? Further, what does the agreement provide for whether the service provider’s fee is earned on the beginning of a period, or is apportioned regarding a partial-performance period? Just as BenefitsLink neighbors often suggest to discern a retirement plan’s provisions Read The Fabulous Document, consider a similar step in dealing with a service provider. If there is a doubt about what the agreement provides or about whether the agreement's provision or condition is legally valid, a prudent fiduciary would get its lawyer's advice. This is not advice to anyone.

The statute’s provision with the heading “no tax on tips” is not an exclusion from income; it’s a deduction. Internal Revenue Code of 1986 § 224, added by Act § 70201 [attached]. Likewise, “qualified overtime compensation” is not an exclusion from income; it’s a deduction. Internal Revenue Code of 1986 § 226, added by Act § 70202 [attached]. A retirement plan might be unlikely to exclude from whatever otherwise would be within the plan’s measure of compensation, for whichever purpose, an amount the plan’s administrator and a participating employer might not know without obtaining information from the participant. Also, the Internal Revenue Service has sometimes interpreted 26 C.F.R. § 1.401(k)-1(a)(3)(iii)(A) and earlier interpretations to preclude a § 401(k) elective deferral from an amount “available” to the participant without handling through the employer—for example, a tip a diner paid, in currency, directly to the waiter. This is not advice to anyone. Internal Revenue Code 224.pdf Internal Revenue Code 226.pdf

If an employer prefers that an employee not read what benefits a plan provides for other classes of employees: The Labor department has interpreted ERISA §§ 102 & 104 to allow different summary plan descriptions for different classes of employees. 29 C.F.R. § 2520.102-4 https://www.ecfr.gov/current/title-29/section-2520.102-4.

The Treasury department’s interpretive rule does not specify how to determine when a plan “exists”. I imagine many of us might often suggest interpretations that not only follow reading the statute’s and the interpretive rule’s texts but also follow an assumed purpose of not allowing the employer’s new plan’s participants to make elective deferrals until 12 months after the last of the final distributions from the terminated plan. 26 C.F.R. § 1.401(k)-1(d)(4)(i) https://www.ecfr.gov/current/title-26/part-1/section-1.401(k)-1#p-1.401(k)-1(d)(4)(i). But if a decision-maker or adviser is considering possible interpretations and evaluating risks about when the next retirement plan “exists”, consider this: The consequence from an “alternative defined-contribution plan” that “exists” too soon falls on the terminated plan. It’s the terminated plan that will have provided a distribution without waiting for severance-from-employment, age 59½, or some other distribution-allowing condition because the plan’s administrator believed that the distribution was a § 401(k)(10) termination distribution. So, it’s the terminated plan that would have had a provision that resulted in ostensible elective deferrals that might not have tax-qualified as a § 401(k) cash-or-deferred arrangement (and further might have tax-disqualified the terminated plan). This is not advice to anyone.

Whatever would become required or permitted about coverage and nondiscrimination measures: Could the employer’s goal be met by providing one plan with as many benefit structures as are need for all the allocation differences?

The plan’s administrator, with its accountant’s and lawyer’s advice, might consider these possible interpretations: If the plan’s Form 5500 reports have been and remain on the cash-receipts-and-disbursements basis of accounting, an amount paid in on December 30, 2024 is a receipt in 2024. If the plan’s Form 5500 reports have been and remain on the accrual method of accounting: The Instructions tell a filer not to include a contribution designated for a year before the reported-on year. But the Instructions do not say to exclude a contribution designated for a year after the reported-on year. If the plan’s trust received in 2024 an amount the employer declared as a 2025 contribution, might this be a prepaid expense? This is not advice to anyone.

When I began in 1984, sales charges—whether front-end or back-end (or a combination of them)—were the norm, and a no-load share or contract was unusual. It was almost unknown for any participant-directed retirement plan.

Internal Revenue Code § 414A(b)(3)(A) does not command an initial default elective-deferral percentage of 10%; rather, it permits the initial percentage to be as high as 10%. This is not advice to anyone.

Consider also that some plan sponsors seek to meet § 414A’s tax-qualification condition (if it applies) by setting both the initial and the ending default elective-deferral percentage at 10%. I.R.C. (26 U.S.C.) § 414A(b)(3)(A) http://uscode.house.gov/view.xhtml?req=(title:26%20section:414A%20edition:prelim)%20OR%20(granuleid:USC-prelim-title26-section414A)&f=treesort&edition=prelim&num=0&jumpTo=true This is not advice to anyone.

Paul I and CuseFan, thank you. Are there still retirement plans that select investments with contingent deferred sales charges? Why would an ERISA-governed plan’s fiduciary select such an investment?

This question is about investments used for individual-account (defined-contribution) retirement plans. Leaving aside stable-value accounts and trusts, employer securities, and investments treated as nonqualifying assets for whether a plan’s financial statements need an independent audit: Are there investments that impose a delay or other restriction on a redemption or withdrawal? Or impose an exit charge?

Thank you for your kind words. The plan’s administrator might imagine it or he has reported as required, but that would not be so if one or more of the reported year-end values for the untraded shares is incorrect and not at least a good-faith estimate. As your discussion-opening post puts it: “There is no way to really know how much [an untraded share is] worth until it does actually sell.” If the plan’s administrator reported the untraded shares’ estimated value without support from an independent appraisal or other respectable valuation method, and one that measured the value as at each reporting date, the administrator might not have sufficiently reported. It might not be a prudent, or even good-faith, estimate to assume that an asset’s value is unchanged from a year’s end to the next year’s end. That might be especially so for an early-stage business. If a year-end value is off, assumptions about the proportions of different kinds of investments might be mistaken. And one or more disclosures about concentration risks might be incorrect. That the plan’s fiduciary does not expect an ERISA § 404(c) defense heightens the fiduciary’s responsibility regarding § 404(a)(1)(B) prudence and § 404(a)(1)(C) diversification.

Even if there might be no breach grounded on a prohibited transaction, the fiduciaries might want its and his lawyer’s advice about whether there might be a diversification or other prudence breach. ERISA § 404(a)(1)(C): “[A] fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and— . . . by diversifying the investments of the plan so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so[.]” http://uscode.house.gov/view.xhtml?req=(title:29%20section:1104%20edition:prelim)%20OR%20(granuleid:USC-prelim-title29-section1104)&f=treesort&edition=prelim&num=0&jumpTo=true Also, a fiduciary or a participant might want one’s lawyer’s advice about ERISA’s statute-of-repose- and statute-of-limitations periods. ERISA § 413: “No action may be commenced under this title with respect to a fiduciary’s breach of any responsibility, duty, or obligation under this part, or with respect to a violation of this part, after the earlier of— (1) six years after (A) the date of the last action which constituted a part of the breach or violation, or (B) in the case of an omission the latest date on which the fiduciary could have cured the breach or violation, or (2) three years after the earliest date on which the plaintiff had actual knowledge of the breach or violation; except that in the case of fraud or concealment, such action may be commenced not later than six years after the date of discovery of such breach or violation.” http://uscode.house.gov/view.xhtml?req=(title:29%20section:1113%20edition:prelim)%20OR%20(granuleid:USC-prelim-title29-section1113)&f=treesort&edition=prelim&num=0&jumpTo=true Did the 2019-2023 financial statements disclose the investment concentration? A service provider might want its lawyer’s advice about how to manage the service provider’s work (if any) so no one could plausibly assert that the service provider was involved in a fiduciary’s concealment (including by falsely reporting a value in a Form 5500 report) of a fiduciary’s breach. An independent qualified public accountant might want its lawyer’s advice about how best to protect the CPAs’ work on the 2019, 2020, 2021, 2022, and 2023 financial-statements reports, and about whether the firm must or should decline an engagement to audit the plan’s 2024 financial statements. Anyone might consider probabilities about whether a claim might be pursued. Even if the nine participants who are not the fiduciary, the fiduciary’s spouse, and the fiduciary’s child discern a breach and how it harmed them, their stakes might be too small to attract EBSA enforcement.

Some employers still have some employees hired long enough ago that United States public law generally did not require an employee to check a person’s eligibility to work in the U.S. And an organization might never have made an I-9 record if the worker never was hired as an employee (for example, because she was a partner or other self-employed individual). Consider too that if an I-9 record was made and had been kept, it might have been destroyed under a records-retention plan. See, for example, 8 C.F.R. § 274a.2 https://www.ecfr.gov/current/title-8/section-274a.2. This is not advice to anyone.

For questions about a transfer or rollover from an individual-account retirement plan to purchase service credit under a governmental defined-benefit pension plan, including how to tax-report such a transfer or rollover, the expert is Carol Calhoun. https://www.venable.com/professionals/c/carol-v-calhoun

What MoJo says: An examinee has no duty to furnish records the examinee does not have. And no inference should follow from an absence of a record the examinee was not required to keep. Likewise, no inference should follow from an absence of a record properly destroyed under a proper records-retention plan. Turning on the text of the information document request or the examiner’s less formal question, some incautious responses might be inapt if the employer/administrator has copies of workers’ identity documents. In those circumstances, the examinee might want its lawyer’s advice about how, exactly, to respond. This is not advice to anyone.

Empower’s offer aims at plan sponsors. A near-term aim is to get plan sponsors looking at Empower’s insurance company separate accounts. These enable retirement plans to get access to investment management one otherwise might have obtained through an SEC-registered mutual fund. A subaccount’s fee might be more than the fee Empower pays its subadviser, but less than a plan would pay for the least expensive shares of the same-strategy mutual fund. Another aim is setting up a sticking point for a plan not to change service providers. For example, if a request-for-proposals shows a competitor recordkeeper is a contender but not unquestionably better than the incumbent, a plan sponsor might think twice about moving if the competitor doesn’t offer a similar no-expense fund for an important US large-cap-blend slot. A mega plan has plenty of ways to get low-expense investment management. But for some other plans, even a one-basis-point difference might be meaningful. It also matters how closely a fund can follow its index.