Peter Gulia

To help me learn something: If an adoption agreement for IRS-preapproved documents presents a choice to include or omit a provision that allows a waiver of participation for a nonelective contribution, why do some plan sponsors include that provision?

That a plan might include a provision of a kind BG5150 describes is why I suggest RTFD. (A plan’s administrator also might consider whether the provision is valid.) Even if ERISA § 502(a) might allow a participant’s claim “to enforce his rights under the terms of the plan, or to clarify his rights to future benefits under the terms of the plan [perhaps including one’s right, if any, not to benefit]” or claim for equitable relief regarding a fiduciary’s failure to administer the plan according to the plan’s governing documents, a Federal court might find it lacks power to consider such a claim if the plaintiff lacks Article III constitutional standing because the plaintiff was not sufficiently injured. But a person’s inability to get a court to order a plan’s sponsor or administrator not to provide a benefit the person does not want might not resolve an Internal Revenue Code § 410(b) problem. If a person had, under an unambiguous plan provision, properly and irrevocably elected not to participate, I wonder whether tax law, for § 410(b) coverage, counts (or ignores) a supposed accrual, if it is contrary to the plan’s provisions, as a benefit provided to the nonhighly-compensated employee. This is not advice to anyone.

As ever, the plan’s administrator must RTFD—Read the Fabulous Documents governing the plan. And if the administrator has a doubt about what the plan provides (including provisions not expressed but implied by public law), a prudent administrator would get its lawyer’s advice. If those steps find no reason to follow a person’s preference not to be a participant, consider: A key feature of a nonelective contribution is that it does not require the participant’s election. This is not advice to anyone.

ErnieG, in this discussion I ask some open questions because I have not yet formed my view about what ERISA § 404 requires or permits. That includes thinking about ERISA § 404(a)’s expressed duties of loyalty and prudence, implied duty of impartiality, § 404(c)’s relief for a directing participant’s, beneficiary’s, or alternate payee’s exercise of control over her individual account, and lack of relief to the extent that a loss or harm results from a cause other than the individual’s control. Because the statute sets both duties and relief with roundly stated standards, there are questions that lack clear answers. I ask open questions about what BenefitsLink neighbors think or observe. Thank you for sharing your thoughts.

Brian Gilmore, I’d welcome your learning about a related question of law. Internal Revenue Code § 129(d)(8)(A) provides: “A plan meets the requirements of this paragraph if the average benefits provided to employees who are not highly compensated employees under all plans of the employer is at least 55 percent of the average benefits provided to highly compensated employees under all plans of the employer.” https://www.govinfo.gov/content/pkg/USCODE-2024-title26/html/USCODE-2024-title26-subtitleA-chap1-subchapB-partIII-sec129.htm. Imagine an employer has only one employee, and the employee is a highly-compensated employee. Could the employer provide a § 129(d) dependent care assistance program? Or is a § 129(d) plan impossible because there is no “employee[] who [is] not highly compensated”? Although Eddy’s question involves a self-employed individual treated as a deemed employee, a one-employee situation can happen with an employee who is a common-law employee and one who lacks control of, or even any ownership interest in, the employer. Does a distinction between self-employed deemed employee and a common-law employee matter? Could a § 501(c)(3) charitable organization provide a § 129(d) plan for its only employee, if the employee is highly-compensated?

It is difficult to discern participants’ functional literacy to comprehend disclosures that describe an investment. But some fiduciaries try—even if they guess using proxy measures, such as post-secondary degrees and knowledge-worker credentials. For example, imagine a fiduciary knows that all of the employer’s workers have at least five years’ post-secondary education. In those circumstances, a fiduciary might reason that participants can read a collective investment trust’s offering memorandum that describes a target-year fund. And can read its explanation that the fund’s trustee anticipates investing up to 20% of the fund’s portfolio in unregistered securities not traded on any exchange and not regularly traded, seeking a 70/30 split between private equity and private debt. A reader might not know enough to understand the consequences of that information, but might read enough to consider that she ought to ask some intelligent questions or get advice. A different workforce might be one for which the employer requires no more than that a worker be one lawful to employ and capable of understanding spoken work directions. In those circumstances, a fiduciary might wonder whether a typical participant can meaningfully assent to a kind of investment that, but for the interposition of a retirement plan, cannot lawfully be offered to the general public. The Labor department’s proposed rule to interpret prudence in selecting designated investment alternatives presumes the ERISA § 404(c) construct that a participant, if furnished sufficient information, is responsible for her choices within the plan’s menu (if its designated investment alternatives were prudently selected). I recognize that for many workers (including many higher-educated knowledge workers), the § 404(c) conceit might be too much, even for the simplest of publicly available investments. But if a plan provides participant-directed investment (which a plan sponsor may decide as a nonfiduciary), a fiduciary selecting investment alternatives indulges some assumptions about how participants might understand investment alternatives. My query asks whether a fiduciary selecting designated investment alternatives must, should, or need not consider whether participants can understand an investment alternative more complex than shares of an SEC-registered publicly available mutual fund. In the proposed rulemaking, the Labor department deliberately sets aside those questions. Yet, some fiduciaries, and their lawyers and investment advisers, ought to start thinking about this.

I have not followed, or even maintained awareness on, this point. I guess Congress has not amended the relevant parts of the Internal Revenue Code. I guess the Treasury department has not published interpretations that resolve the questions mentioned above. BenefitsLink neighbors, are those guesses right? 401kology, you’ll get much more help from practitioners with on-point experience. (In 41½ years working with retirement plans, I’ve never myself analyzed any application of I.R.C. § 416.)

“Notwithstanding foregoing [sic], the exclusive means for individuals who are not contemporaneously classified as an Employee of the Employer on the Employer’s payroll system to become eligible to participate in this Plan is through an amendment to this Plan, duly executed by the Employer, that specifically renders such individuals eligible for participation hereunder.” A plan’s sponsor might want its lawyer’s advice about whether it is wise or unwise to amend the plan’s governing documents to specify, whether by names or a description, the four participants.

About Fiduciary Duties In Selecting Designated Investment Alternatives, the Labor department’s proposed interpretation focuses on a fiduciary’s process and capabilities for evaluating the investment merits of something considered for a designated investment alternative. The explanation confirms this proposed rulemaking does not interpret a fiduciary’s other responsibilities in designing a menu of investment alternatives for participant-directed investment. Another BenefitsLink discussion asks: Must a fiduciary consider whether a participant can understand an investment alternative? https://benefitslink.com/boards/topic/81087-must-a-fiduciary-consider-whether-a-participant-can-understand-an-investment-alternative/. Even if a fiduciary has done a prudent-expert job in evaluating the investment merits of a designated investment alternative that is or includes private equity (or debt), a participant decides whether and how to use an investment alternative. In deciding whether to designate an investment alternative that is or includes private equity (or debt), must a fiduciary consider whether a participant is less able to evaluate that investment than she is able to evaluate a simpler investment, such as shares of an SEC-registered mutual fund? Assuming an investment alternative otherwise would be prudently selected, is a typical participant’s ability to understand the investment at least a factor a fiduciary must consider? Or, is it unnecessary to consider whether a participant can understand a more complex investment alternative because a typical participant cannot understand even the simpler alternative, shares of a publicly available mutual fund regulated by Federal securities laws. What do you think: Is an evaluation of participants’ capabilities in evaluating investment alternatives necessary? Or a useless distraction?

ErnieG suggests a fiduciary ought to consider the participants’ level of sophistication. Anyone with a different view or observation?

While Tom’s query used the word “waiver”, I guessed from context it’s about ERISA § 205 and a spouse’s consent to a participant’s election against a survivor annuity (if the plan provides or allows an annuity) or designation of a beneficiary other than the spouse. Or, a plan designed to meet Internal Revenue Code § 401(a)(11) and § 417. And from context I guessed Tom does not ask about different law or plan provisions that might apply regarding a governmental plan or a non-ERISA church plan.

If the plan's sponsor would use an IRS-preapproved document, what might it provide about recognizing leased employees as participants?

A plan’s administrator might want its lawyer’s advice. Here’s a background: A notary or plan representative must witness the spouse signing the consent. ERISA § 205(c)(2)(A)(iii) (“the spouse’s consent . . . is witnessed by a plan representative or a notary public”). In 2006, the Treasury department interpreted this to require physical presence. 26 C.F.R. § 1.401(a)-21(d)(6)(i) (“witnessed in the physical presence of a plan representative or a notary public.”), https://www.ecfr.gov/current/title-26/part-1/section-1.401(a)-21#p-1.401(a)-21(d)(6)(i). Under a 2022 proposed interpretation of the statute, a notary may witness the spouse’s signing by using live audio-video technology and meeting all requirements and conditions under the proposed rule and the State law that applies to the notary. Likewise, a plan representative may (if the plan permits a representative to witness a spouse’s consent) use live audio-video technology under controls specified in the proposed rule. Use of an Electronic Medium to Make Participant Elections and Spousal Consents [notice of proposed rulemaking], 87 Fed. Reg. 80501–80509 (Dec. 30, 2022). That notice states: “Prior to the applicability date of the final regulation, taxpayers may rely on the rules set forth in this notice of proposed rulemaking.” Id., at 80506. But it is unclear whether that statement restrains any executive agency. Further, a court deciding a dispute—for example, a spouse’s or surviving spouse’s challenge that an ostensible consent was ineffective—does not defer to an executive agency’s interpretation of a statute, even an interpretation stated by a final rule. An agency’s interpretation might not persuade a court. Loper Bright Enterprises v. Raimondo, 603 U.S. 369 (2024) (A federal court may consider, but must not defer to, an executive agency’s interpretation of a statute. For a question of law not already answered by a judicial precedent, a court must decide a dispute with the court’s interpretation of the statute.). About whether to accept or refuse a remote witnessing, a plan’s administrator might want its lawyer’s advice about how to form loyal, impartial, and prudent decisions. This is not advice to anyone.

Miles Leech, you mentioned a “solo” plan. If there is no eligible employee (or deemed employee) beyond the one who desires Roth treatment, consider that a provision for a nonelective contribution to be treated as Roth might be less difficult or burdensome than some fear. Yet, consider: If the plan is stated using IRS-preapproved documents Journey Retirement Plan Services, LLC provides, can the plan be amended by the relevant remedial-amendment date? Is the recordkeeper ready to provide the necessary separate-accounting service? Will the employer engage Journey RPS to do the tax-information reporting needed for a Roth nonelective contribution? For an incremental fee? For an increase in a general fee? This is not advice to anyone.

Yesterday’s proposed interpretation about selecting designated investment alternatives for an individual-account retirement plan that provides participant-directed investment seems to focus on a fiduciary’s decision-making about the investment merits of an investment alternative. A subpart about complexity speaks to whether the fiduciary knows enough, or with an adviser can know enough, to evaluate, thoughtfully, an investment’s risks and potential rewards related to the complexities. Some people think a fiduciary ought to consider whether a typical participant can understand the complexities and risks of a designated investment alternative. Even if a fiduciary has done a prudent-expert job in setting the menu, a participant decides whether and how to use an investment alternative. Others think it’s unnecessary to consider whether a participant can understand a more complex investment alternative because a typical participant cannot understand even the simpler alternative, shares of a publicly available mutual fund regulated by Federal securities laws. BenefitsLink neighbors, which is your view? And why?

If help from a practitioner doesn’t get what you seek, consider whether you have a friend at Morgan Stanley who would search its files.

The Supreme Court overruled Chevron deference. For a question of law not already answered by a judicial precedent, a court must decide a dispute with the court’s interpretation of the statute. A Federal court may consider, but must not defer to, an executive agency’s interpretation of a statute. Loper Bright Enterprises v. Raimondo, 603 U.S. 369 (June 28, 2024). Consider, too, that a Federal district court’s decision is not a precedent, not even within the same district, and a Federal appeals court’s decision is a precedent only for courts in that circuit’s geographic territory.

For an interpretive, not legislative, rule, I don’t see how there can be a “safe harbor”. Rather, a Federal court interprets a statute, and does not defer to, and might not be persuaded by, an executive agency’s interpretation.

Empower has been on the train since early 2025. Empower expects to include private investments within Empower collective trust funds. https://www.empower.com/press-center/empower-offer-private-markets-investments-retirement-plans Empower has supported making it feasible to include private-equity and alternative investments. https://www.empower.com/press-center/empower-responds-senator-elizabeth-warrens-inquiry https://www.empower.com/press-center/empower-applauds-executive-order-supporting-broader-investment-access-401k-plans Yesterday, Empower’s news release praised the proposed rulemaking. https://www.empower.com/press-center/empower-applauds-dol-proposal-supporting-responsible-flexibility-investment-choices

I’ll answer a part of one of my questions: For § 129, “[t]he term ‘employee’ includes, for any year, an individual who is an employee within the meaning of section 401(c)(1) (relating to self-employed individuals).” I.R.C. (26 U.S.C.) § 129(e)(3) https://www.govinfo.gov/content/pkg/USCODE-2024-title26/html/USCODE-2024-title26-subtitleA-chap1-subchapB-partIII-sec129.htm. About Eddy’s question: Because there is no Treasury rule to implement or interpret Internal Revenue Code § 128 or § 129, a reasoned interpretation of § 128(c), including its reference to “paragraphs (2), (3), (6), (7), and (8) of section 129(d)”, might be a substantial-authority tax position. See 26 C.F.R. § 1.6662-4(d)(3). This is not advice to anyone.

The shareholder might want his lawyer’s, accountant’s, and actuary’s collaborative advice about whether it makes sense for the shareholder to loan money to the corporation, or contribute new capital to the corporation. If either transaction makes sense, the corporation then might have money to pay a contribution to the pension plan. This is not advice to anyone.

If the court’s order names as the garnishee the § 403(b)(7) account’s custodian, isn’t it that trust company that might want its lawyer’s advice about whether and how to respond? And if the order does not name the plan or its administrator, might the plan’s administrator want its lawyer’s advice about whether it must or should do something, or need not (and perhaps should not) do anything?

If the accountant is a member of the American Institute of Certified Public Accountants or is a licensee of a State that adopts the AICPA professional-conduct rules and standards as the State’s rules: “[A] member [or a licensee] should not advise a taxpayer to take a tax position unless the [CPA] has a good-faith belief that the position has at least a realistic possibility of being sustained administratively or judicially on its merits, if challenged.” The standard is not about whether the IRS would fail to detect the pushy position. Rather, the standard looks toward the merits (and pretends the decision-maker would find facts and law fairly and justly). If a shareholder-employee is 49 or older and has two decades’ (or more) business or professional experience, how likely could she defend that the fair-market value of her personal services was only $150,000? This is not advice to anyone.

Are you certain about the exact fund—whether SEC-registered mutual funds or a trust company’s collective investment trust, and of the exact class of shares or units? Vanguard states November 13, 2000 for VFIAX’s inception. Consider that the plan’s investment alternative for at least some, and maybe much or all, of 1997-2003 might have been another fund or class of shares. That a retirement plan’s statement for a period after 2003 shows a holding in VFIAX does not mean the plan had the same investment in earlier periods. Given that the participant and the might-be alternate payee might agree on ways to approximate hypothetical returns, values, and amounts, might they tolerate another simplification? Instead of looking for any Vanguard fund’s returns, get the S&P 500 Index numbers, and assume the retirement plan’s investment alternative’s returns were, yearly, five basis points lower. There are other ways to collect or use real information. But the expense might be disproportionate to whatever value your client might obtain by using a more careful estimate. This is not advice to anyone.

It is sad that New Jersey’s legislature in 1984 changed the law to provide an exclusion for elective deferrals made under a profit-seeking employer’s plan but not for those made by employees of a charity, a public school, or another governmental employer.