Peter Gulia

Observe that the rule’s applicability dates refer to “taxable years”—a participant’s tax year.

How much of what the plan sponsor seeks might be accomplished by setting as allocation conditions for a nonelective or matching contribution 1,000 hours of service in the year and employed on the last day of the year? (I ask this as an open-ended question; I don't know the workforce Connor describes or why the plan sponsor seeks to restrict reentry.)

Artie M. and Paul I, thank you for helping me. That a person is highly educated or is a knowledge worker (or is both) doesn’t always mean one knows how to select investments. Or, someone who does know might choose, whether rationally or otherwise, not to put one’s time on that activity. Moreover, even if 99% of the participants deliver affirmative investment directions, a plan’s fiduciary might set a default for the 1% who don’t. And should have a reasoning for the default one sets. In my not-so-hypothetical, the fiduciary that selected the menu of designated investment alternatives also is the fiduciary that must decide the default investment. The target-year funds’ investment strategy described above is from a disclosure for the Vanguard Target Retirement Trust funds. Those funds’ disclosures don’t say ‘this fund is for someone who will turn 65 (or some other age Vanguard assumed) in or near the target year.” Rather, Vanguard says: ‘The fund invests according to an asset-allocation strategy designed for investors planning to retire and leave the workforce in or within a few years of 20yy (the target year).’ If an individual affirmatively directs investment, the individual may decide her guess of when she expects to leave the workforce. But for a default-invested participant, the plan’s fiduciary must form its estimate or assumption. If the fiduciary that decides which target-year fund in the set is a participant’s default assumes that the collective trustee’s description of the funds is truthful, I’m imagining it might be prudent to follow that description’s logic. While that way is not the only way to meet 29 C.F.R. § 2550.404c-5, it at least has an explainable logic. And all it asks of the default-deciding fiduciary is to form a reasoned guess about when a typical default-invested participant leaves the workforce.

Paul I, thank you. In my hypo, the fiduciary has selected which manager’s set of target-year funds are included in the plan’s designated investment alternatives. The fiduciary’s remaining decision is about how to sort a default-invested participant into a target year. I’m imagining a fiduciary might find it’s prudent to use a target-year fund as the fund was designed to be used. (My hypo’s invented quotation about a fund’s investment strategy is adapted from a disclosure of the collective investment trusts of the investment manager with the biggest market share for target-year funds.) Many fiduciaries’ defaults seem to aim at age 65 as a presumed normal retirement age. But for many individual-account retirement plans, ERISA § 3(24)’s construct of a normal retirement age has almost no practical effect. BenefitsLink neighbors, even if 65 might approximate a retirement age for the U.S. general population, would you use a different assumption if you know the workforce you’re planning for all are highly educated knowledge workers? If so, what age would you assume for the target?

The fiduciary is considering setting which target year applies to a default-invested participant by assuming a few might plan to leave the workforce or otherwise begin a payout as young as 73 (even if most people work a few years longer). Thus, a participant born in 1997 (now 28) would be defaulted into the 2070 fund. A participant born in 1962 (now 63) would be defaulted into the 2035 fund. Can anyone suggest a reason why the fiduciary should not decide that?

It might be too hard even to think about a question like this. The expense for even a short bit of a professional’s time to consider even a partially reasoned course of action might be horribly disproportionate to the probability-discounted risk exposure. This is not advice to anyone.

Imagine the responsible fiduciary of an individual-account retirement plan with participant-directed investment decides to use a set of target-year funds for the plan’s qualified default investment alternative. Each of those funds describes its investment strategy with this: “The fund invests according to an asset-allocation strategy designed for investors planning to retire and leave the workforce in or within a few years of 20yy (the target year).” How should a fiduciary select the age at which a default-invested participant is assumed to leave the workforce? 60? 62? 65? 67? 70? 73? Assume the fiduciary does not know when the plan’s participants leave the workforce because almost all people who leave the employer go to work for another employer. If the fiduciary knows that the plan’s participants all are knowledge workers, does that suggest anything about what leaving-work age the fiduciary ought to assume? Whatever else a fiduciary might consider, is there some advantage to falling in with a recordkeeper’s norm? Do recordkeepers have a norm? Am I imagining a choice a plan’s fiduciary doesn’t practically have because a recordkeeper will require its customer to use the recordkeeper’s regime for sorting default-invested participants?

Consider also which plan pays a corrective distribution. Your client might have a preference.

And read carefully (if completed), or negotiate, the business-deal documents’ provisions about employee-benefit plans. For example, even if nothing in ERISA or the Internal Revenue Code precludes merging an acquiree’s plan into an acquirer’s plan, an acquirer might be unwilling to allow a merger of plans.

About 3½ years after this discussion left off, have tools for computing the required lifetime-income illustrations developed?

Might a fiduciary-decided investment portfolio be “invested in accordance with the requirements of [29 C.F.R. §] 2550.404c-5”? (Observe that the statute’s text does not use the term qualified default investment alternative.) The referred-to rule allows: “An investment fund product [sic] or model portfolio that applies generally accepted investment theories, is diversified so as to minimize the risk of large losses[,] and that is designed to provide long-term appreciation and capital preservation through a mix of equity and fixed income exposures consistent with a target level of risk appropriate for participants of the plan as a whole. For purposes of this paragraph (e)(4)(ii), asset allocation decisions for such products and portfolios are not required to take into account the age, risk tolerances, investments or other preferences of an individual participant. An example of such a fund or portfolio may be a “balanced” fund.” 29 C.F.R. § 2550.404c-5(e)(4)(ii) https://www.ecfr.gov/current/title-29/part-2550/section-2550.404c-5#p-2550.404c-5(e)(4)(ii). If a plan does not provide participant-directed investment and instead provides a common investment for all participants, beneficiaries, and alternate payees, wouldn’t a fiduciary seeking to meet its responsibility under ERISA § 404(a)(1)(B)-(C), including diversification and impartiality, invest for a similar balance? The statute provides: “An eligible automatic contribution arrangement meets the requirements of this paragraph if amounts contributed pursuant to such arrangement, and for which no investment is elected by the participant, are invested in accordance with the requirements of section 2550.404c-5 of title 29, Code of Federal Regulations (or any successor regulations).” Internal Revenue Code of 1986 (26 U.S.C.) § 414A(b)(4). The Treasury’s proposed interpretation states: “An eligible automatic contribution arrangement satisfies the requirements of this paragraph (c)(4) only if amounts contributed pursuant to the arrangement, and for which no investment is elected by the employee, are invested in accordance with the requirements of 29 CFR 2550.404c-5 (or any successor regulations).” Proposed 26 C.F.R. § 1.414A-1(c)(4). Neither text limits the phrase “no investment is elected by the participant”. And neither text describes, at least not expressly, a context in which such a fact condition might occur. Couldn’t the fact condition the phrase describes result because the plan does not provide for a participant’s investment direction? And in that situation, would Internal Revenue Code § 414A(b)(4) be met if the fiduciary-decided portfolio is sufficiently balanced? This is not advice to anyone.

RatherBeGolfing, thank you for the information about identifying a distributee. For a participant’s, beneficiary’s, or alternate payee’s address change that would be instructed by a person other than the plan’s administrator, what identity controls does a service provider use to find that the change is requested by the individual whose address would be changed? Is it only about entry to the recordkeeper’s or third-party administrator’s computer system? Or are there other steps? If an individual seeks an address change by paper rather than in a computer system, what steps?

If the employer affiliates with the Colorado Public Employees’ Retirement Association’s PERAPlus § 457(b) plan, PERA has set the plan’s provisions. If State law grants the employer a power to establish and maintain a distinct plan, the employer must follow the restrictions of the Colorado statutes that so enable the employer and Colorado laws that burden the employer. Consider that Colorado law differs based on the exact local, county, municipal, special-district, or other government, or its agency or instrumentality. A State or local government employer’s § 457(b) plan typically sets no eligibility conditions beyond being an employee. Typically, entry is the next pay date after the employer has processed the employee’s wage-reduction agreement. If State law authorizes and the employer provides a nonelective or matching deferral, those eligibility and entry provisions might differ from those for wage-reduction deferrals. Whether a governmental § 457(b) plan must allow long-term-part-time employees to make elective deferrals turns on State law. Even if State law does not preclude an exclusion of part-time employees, many governmental employers find little reason to set an exclusion for wage-reduction deferrals that do not affect the employer’s budget. This is not advice to anyone.

A hyperlink above points to the statute’s text. BenefitsLink neighbors, am I right in guessing there is no Treasury rule to interpret that paragraph of the statute? Likewise, is there an absence of IRS guidance. If so, a taxpayer might follow its interpretation of the statute.

Every plan I’ve seen turns off distributions for a period after an address change. An ERISA rule allows a plan’s administrator to treat this as not a blackout if the plan’s regular restriction had been disclosed to possibly affected participants, beneficiaries, and alternate payees. 29 C.F.R. § 2520.101-3(d)(1)(ii)(B) https://www.ecfr.gov/current/title-29/part-2520/section-2520.101-3#p-2520.101-3(d)(1)(ii)(B). This is not advice to anyone.

Thank you again, especially for the wider observation. At least since World War II, tax law has favored specified kinds of pension, health, other welfare, education, and fringe benefits over money wages. And that has resulted in distortions in how businesses and other employers compensate (and even hire) workers.

Internal Revenue Code of 1986 (26 U.S.C.) § 410(b)(3) http://uscode.house.gov/view.xhtml?req=(title:26%20section:401%20edition:prelim)%20OR%20(granuleid:USC-prelim-title26-section401)&f=treesort&edition=prelim&num=0&jumpTo=true If the employer’s tax year and the retirement plan’s plan year both ended December 31, 2024 and the employer’s tax-return due date is September 15, the plan sponsor might have 4½ business days to adopt the amendment. If October 15, there might be more time. This is not advice to anyone.

Brian Gilmore, thank you for your gifts to our learning. I was not imagining a possibility of an employee’s wage-reduction contribution to a Trump account. Rather, I imagined a use of amounts an employer provides. With your explanation, I see tax treatment difficulties. If not under a cafeteria plan with credits a worker may apply to one’s choice of benefits, is there a slight awkwardness in an employer providing a contribution to a Trump account? For example, if an employer provides a $1,000 contribution to the Trump account for an employee’s newborn and provides nothing for the worker in the same job in the adjacent cubicle, might some people perceive a mild unfairness in that?

Consider that a working partner (or member of a limited-liability company treated as a partnership) might be a self-employed individual who has no FICA wages and so is not § 414(v)(7)-affected.

The exclusion from income for an employer’s contribution to a Trump account is Internal Revenue Code § 128. Internal Revenue Code of 1986 (26 U.S.C.) § 125(f)(1) defines, generally, a “qualified benefit” as “any benefit which, with the application of subsection (a), is not includible in the gross income of the employee by reason of an express provision of this chapter [§§ 1®1400Z-2] (other than section 106(b), 117, 127, or 132).” After § 128’s effective date and assuming fitting timing regarding all plan and tax years, Could an employer’s contribution to a Trump account be a qualified benefit under a § 125 plan?

Even if a service provider might persuade a Federal court about the service provider’s injury to be redressed by the court’s order that the Commissioner of Internal Revenue withdraw a guidance document that describes a nonenforcement policy or an enforcement delay: How likely is it that a service provider would ask a court to order the withdrawal of IRS guidance many customers consider welcome? While Notice 2023-62’s “administrative transition period” was lawless and a further delay would be yet more lawless, our society needs other ways for Congress to make laws and to cause an executive agency not to negate an enacted law by announcing a universal nonenforcement.

Thanks. And employee-benefits lawyers too are telling clients to defend one’s administration or service by following the proposed rule. Here’s a caution one might suggest to a plan’s administrator: Don’t decide until it’s necessary to decide. For example, a plan’s administrator might not decide how to count a participant’s years of vesting service until the participant becomes entitled to a distribution, claims it (or is subject to an involuntary distribution), and the count matters to determine whether to segregate a forfeiture and how much is forfeitable. Likewise, even if one accepts that an eligibility condition must not be “a proxy for” an age or service condition beyond ERISA § 202(c), a plan’s administrator might not decide what that means until someone attained age 21, completed two years each with 500 hours of service, and still is an employee. This is not advice to anyone.

I have not heard any gossip about Congress or Treasury considering a change about ERISA § 203(b)(4) and Internal Revenue Code § 401(k)(15)(B)(iii). To the extent that a provision one dislikes is the Treasury’s interpretation of a statute, consider that it now is no more than a proposed interpretation. https://www.govinfo.gov/content/pkg/FR-2023-11-27/pdf/2023-25987.pdf And even if it becomes a final rule, effective, applicable, and not vacated or stayed, a court might not defer to the Treasury’s interpretation. (Also, some comment letters noted that the proposed applicability date would be contrary to the Administrative Procedure Act.) To the extent that a provision one dislikes results from ERISA § 203(b)(4), Internal Revenue Code § 401(k)(15)(B)(iii), or another statute, consider whether it’s wise to ask anything of Congress. Except for a statute that otherwise would contravene the Constitution of the United States of America, law does not require that an Act of Congress be reasonable. There might be interpretations, perhaps even substantial-authority interpretations, of ERISA § 203(b)(4) and Internal Revenue Code § 401(k)(15)(B)(iii) that differ from Treasury’s proposed interpretation. But am I right in presuming that many service providers are reluctant to suggest a plan’s administrator now interpret the statute differently than Treasury’s proposed interpretation?

In my view, the “administrative transition period” the IRS stated in Notice 2023-62 was lawless. But no one challenged the IRS. And I doubt anyone could. For Article III standing, a plaintiff must show her concrete injury that results from the defendant’s act (and that the court could do something about it). A taxpayer is not injured by being allowed more choice than applicable law provides. Currently, the IRS’s management is unitary; the Secretary of the Treasury serves also as acting Commissioner of Internal Revenue. (Within the Executive branch, the only higher power is the President.) Whatever delegated authority the “Commissioner” for Tax Exempt and Government Entities otherwise might have does not now matter because the position is vacant. austin3515 is right that uncertainty about whether and when to apply law is expensive.

Even if one thinks it’s bad public policy to announce a nonenforcement or, especially, a repeated nonenforcement, it’s not beyond possibility. If the Treasury or its IRS announces another nonenforcement, what person would have Article III constitutional standing to petition a Federal court to order the IRS to enforce the law? I state no prediction, in either direction.