Peter Gulia

We might never know whether a court would treat a loss of the kind this discussion describes as a loss that resulted from a participant’s exercise of control over her account. Among other reasons, it’s unclear whether the participant would even get her day in court. The U.S. Constitution might preclude a Federal court from considering a case if the plaintiff does not show: (1) that she suffered a concrete injury-in-fact, (2) that the defendant caused the injury, and (3) that her injury would likely be redressed by the requested judicial relief. See, for example, Lujan v. Defenders of Wildlife, 504 U. S. 555, 560–561 (1992); see also Thole v. U.S. Bank N.A., No. 17-1712, 590 U.S. ___, slip op. at 4 (June 1, 2020) (“n order to claim ‘the interests of others [such as the employee-benefit plan], the litigants themselves still must have suffered an injury in fact, thus giving’ them “a sufficiently concrete interest in the outcome of the issue in dispute.’”). https://www.supremecourt.gov/opinions/19pdf/17-1712_0971.pdf (Thole is wrongly decided. But it is precedent.)

About the fiduciary risk MoJo mentions, what if the plan’s governing documents provide, and all summaries and forms explain, that a decision about whether to take a participant loan (and how much), and a decision about whether to collect an amount due under a loan’s repayment provisions is a participant’s investment direction. Would that set up an ERISA § 404(c) defense that a loss results from the participant’s exercise of control?

Jeff Hartmann and G8Rs, thank you for your further observations. You’re right that the essential failure is about not communicating promptly after the provision was adopted. (I deliberately put that in the hypo.) A challenge many lawyers face is that a client acted, or failed to act, with no lawyer’s or other advisor’s advice, and one spots a problem only after the harm already is done.

Luke Bailey, thank you for sharing your good sense.

The Labor department’s rule about an abandoned individual-account retirement plan defines a qualified termination administrator as a bank, trust company, insurance company, or other person eligible to serve as an IRA’s custodian that “holds assets of the plan that is considered abandoned[.]” 29 C.F.R. § 2578.1(g)(2). The rule does not say that a QTA must hold all, or even substantially all, of the plan’s assets. Imagine an abandoned plan for which no QTA-eligible company serves as a trustee. There are multiple custodians. Imagine one would volunteer to serve as a QTA, but only for the assets held by that custodian. Has anyone seen a situation in which the Employee Benefits Security Administration approved, or did not object to, a submission in which a QTA proposed to wind up a portion of a plan to the extent of the assets held by the QTA?

Some rules contemplate some (but not all) situations of the kind you mention. 26 C.F.R. § 1.410(b)-6(g): (g) Employees of certain governmental or tax-exempt entities— (1) Plans covered. For purposes of testing either a section 401(k) plan, or a section 401(m) plan that is provided under the same general arrangement as a section 401(k) plan, an employer may treat as excludable those employees described in paragraphs (g)(2) and (3) of this section. (2) Employees of governmental entities. Employees of governmental entities who are precluded from being eligible employees under a section 401(k) plan by reason of section 401(k)(4)(B)(ii) may be treated as excludable employees if more than 95 percent of the employees of the employer who are not precluded from being eligible employees by reason of section 401(k)(4)(B)(ii) benefit under the plan for the year. (3) Employees of tax-exempt entities. Employees of an organization described in section 403(b)(1)(A)(i) who are eligible to make salary reduction contributions under section 403(b) may be treated as excludable with respect to a section 401(k) plan, or a section 401(m) plan that is provided under the same general arrangement as a section 401(k) plan, if— (i) No employee of an organization described in section 403(b)(1)(A)(i) is eligible to participate in such section 401(k) plan or section 401(m) plan; and (ii) At least 95 percent of the employees who are neither employees of an organization described in section 403(b)(1)(A)(i) nor employees of a governmental entity who are precluded from being eligible employees under a section 401(k) plan by reason of section 401(k)(4)(B)(ii) are eligible to participate in such section 401(k) plan or section 401(m) plan. 26 C.F.R. § 1.410(b)-7(f): (f) Section 403(b) plans. In determining whether a plan satisfies section 410(b), a plan subject to section 403(b)(12)(A)(i) is disregarded. However, in determining whether a plan subject to section 403(b)(12)(A)(i) satisfied section 410(b), plans that are not subject to section 403(b)(12)(A)(i) may be taken into account.

ERISA § 104(b)(1) calls for a summary of a new or changed plan provision “not later than 210 days after the end of the plan year in which the change is adopted[.]” (Quotations from the statute and rule are in a recent BenefitsLink discussion. https://benefitslink.com/boards/index.php?/topic/66810-rmd-2020-waiver-and-sample-amendment/&tab=comments#comment-308944) For some provisions, taking that long time (and not communicating sooner) could result in describing a provision after every participant no longer has any decision she could make. Just to pick one example, if in March 2020 a retirement plan’s sponsor adopted a provision for a coronavirus-related distribution, a summary of material modifications furnished in July 2021 might describe a provision that expired a half-year ago. BenefitsLink mavens, what do you think: Should an SPD or SMM describe a provision even if the description is no more than history? Or is it better to describe the changed (and expired) provision, even if including the description confuses or otherwise burdens a reader? For this question, assume the plan’s sponsor/administrator has yet done nothing to communicate the new or changed (and now expired) provision.

ERISA § 105(a)(2)(D)(v) states: The requirement . . . shall apply to pension benefit statements furnished more than 12 months after the latest of the issuance by the Secretary of— (I) interim final rules under clause (i); (II) the model disclosure under clause (ii); or (III) the assumptions under clause (iii). The interim final rule was published in the Federal Register on September 18, 2020. The publication covered all three elements. The rule’s last paragraph [(i)] states both an effective date and an applicability date. This section shall be effective on the date that is one year after the date of publication of the interim final rule, and shall be applicable to pension benefit statements furnished after such date. The rule applies to statements furnished after September 18, 2021. What is less obvious is how that “applicability date” relates to ERISA’s § 105(a)(2)(B), which permits the lifetime-income disclosure “to be included in only one pension benefit statement during any one 12-month period”, even if the administrator must furnish quarter-yearly statements.

We're not worthy! This is much better evidence than I had hoped for.

How often does it happen that a cash-balance pension terminates with the Pension Benefit Guaranty Corporation topping-up benefits?

If the plan is ERISA-governed, here’s the statute: . . . . If there is a modification or change . . ., a summary description of such modification or change shall be furnished not later than 210 days after the end of the plan year in which the change is adopted to each participant, and to each beneficiary who is receiving benefits under the plan. ERISA § 104(b)(1), 29 U.S.C. § 1024(b)(1) https://uscode.house.gov/view.xhtml?req=granuleid:USC-prelim-title29-section1024&num=0&edition=prelim And here’s the rule: The administrator of an employee benefit plan subject to the provisions of part 1 of title I of the Act shall, in accordance with § 2520.104b-1(b), furnish a summary description of any material modification to the plan and any change in the information required by section 102(b) of the Act and § 2520.102-3 of these regulations to be included in the summary plan description to each participant covered under the plan and each beneficiary receiving benefits under the plan. [T]he plan administrator shall furnish this summary, written in a manner calculated to be understood by the average plan participant, not later than 210 days after the close of the plan year in which the modification or change was adopted. 29 C.F.R. § 2520.104b-3(a) https://www.ecfr.gov/cgi-bin/text-idx?SID=96555d37ef6921ab11a7509085f13758&mc=true&node=se29.9.2520_1104b_63&rgn=div8 But a fiduciary’s responsibility under ERISA § 404(a) might require communication, at least to those who might have some choice under the changed provision, much sooner than the time otherwise allowed for a summary plan description or summary of material modifications.

With other sources, consider these: 26 C.F.R. § 31.3405(c)-1 Q-9: If property other than cash, employer securities, or plan loans is distributed, how is the 20-percent income tax withholding required under section 3405(c) accomplished? A-9: When all or a portion of an eligible rollover distribution subject to 20-percent income tax withholding under section 3405(c) consists of property other than cash, employer securities, or plan loan offset amounts, the plan administrator or payor must apply § 35.3405-1, Q&A F-2 of this chapter and may apply § 35.3405-1, Q&A F-3 of this chapter in determining how to satisfy the withholding requirements. https://www.ecfr.gov/cgi-bin/text-idx?SID=09d0f249e07e4922fa5624172ffa413f&mc=true&node=se26.17.31_13405_2c_3_61&rgn=div8 26 C.F.R. § 35.3405-1T f-2. Q. How is withholding accomplished if a payee receives only property other than employer securities? A. A payor or plan administrator must satisfy the obligation to withhold on distributions of property other than employer securities even if this requires selling all or part of the property and distributing the cash remaining after Federal income tax is withheld. However, the payor or plan administrator may instead permit the payee to remit to the payor or plan administrator sufficient cash to satisfy the withholding obligation. Additionally, if a distribution of property other than cash includes property that is not includible in a designated distribution, such as the distribution of U.S. Savings Bonds or an annuity contract, such property need not be sold or redeemed to meet any withholding obligation. f-3. Q. If a designated distribution includes cash and property other than employer securities, is it permissible to satisfy the withholding obligation with respect to the entire distribution by using the cash distributed, provided the cash distributed is sufficient to satisfy the withholding obligation? A. Yes, as long as there is sufficient cash to satisfy the withholding obligation for the entire distribution. There is no requirement that tax be withheld from each type of property in portion to its value. https://www.ecfr.gov/cgi-bin/text-idx?SID=09d0f249e07e4922fa5624172ffa413f&mc=true&node=se26.17.35_13405_61t&rgn=div8

My experience is with the trustee accepting obligations to pay (when instructed) to the participant or beneficiary, tax-report, and withhold at least Federal and State income taxes from the deferred compensation. This requires a service provider with systems to differentiate a plan that requires wage reporting and withholding from those with a pension regime. That deferred compensation is paid in a year in which the employer also paid the same employee/participant regular wages does not always make impractical a trustee’s payment. If paying deferred compensation is distinct from paying regular wages, a payor might apply optional flat-rate withholding to the deferred compensation payments. 26 C.F.R. § 31.3402(g)-1(a); Rev. Rul. 82-46, 1982-1 C.B. 158. If I advise a nongovernmental tax-exempt organization’s executive, I might suggest not allowing the rabbi trustee a power to pay the employer merely because the employer instructed that it had paid a deferred compensation obligation. Such a provision readily can be used to defeat whatever limited set-aside a rabbi trust can provide.

Is the executive someone who, without the § 457(b) plan’s termination distribution, would lack enough regular compensation for the § 401(k) elective deferral she desires?

To balance a buyer’s desire not to merge-in a seller’s plan with some practical points (including some Luke Bailey describes), I remember a method that went like this: The seller, if it expects it will have no employee after the transaction date, terminates its retirement plan. The plan provides that the final distribution is a single-sum distribution. For that final distribution, a distributee’s choices are: a direct rollover to the buyer’s plan (unless the distributee is not eligible for that rollover); a direct rollover to another eligible retirement plan the distributee specifies; a payment of money. The revised summary plan description, notice about the plan’s termination and final distribution, and distribution form explain that the default, if the distributee does not specify her choice, is a direct rollover to the buyer’s plan (or, if the distributee is not eligible with the buyer, to an IRA). This resulted in about 95% of the seller plan’s assets going into the buyer’s plan. But my experience with this is more than a few years ago. (Among my clients, deals are stock deals, for business reasons unrelated to ERISA or tax law for retirement plans.) When a buyer won’t accept the seller’s plan, are people still doing the default direct rollover I remember?

With thanks for everyone helping me, here’s the LRM. Defined Contribution Listing of Required Modifications and Information Package (Oct. 2017) https://www.irs.gov/pub/irs-tege/dclrm1017redlined.pdf From LRMs #94 [pages 127-130]: The employer will specify in written instructions to the plan administrator or trustee, by no later than the due date of the employer’s tax return for the year to which the employer’s contribution relates, the portion of such contribution to be allocated to each participant allocation group. The employer contributions allocated to each participant allocation group will be allocated among the employees in that group in the ratio that each employee’s compensation, as defined in section n.nn of the plan, bears to the total compensation of all employees in the group. In the event that an eligible employee is included in more than one participant allocation group, the participant’s share of the employer contribution allocated to each such group will be based on the participant’s compensation for the part of the year the participant was in the group.

Thank you for the further help. What if there are 32,000 participants? Instead of a paper list of 32,000 names and amounts, could the schedule of discretionary contributions be a computer’s save of the employer’s accounting records that show, for each individual, her supervisor’s decision with a human resources officer’s approval?

Thank you for the nice help. If an allocation group has only one participant, an allocation formula results in the participant sharing in 100% of the discretionary contribution made for her allocation group. So, the practical control is deciding the discretionary contribution for each group-of-one. Is it enough that an employer decides a contribution by paying it? Or must an employer do some other written act before paying a contribution?

In another BenefitsLink discussion, the originating inquirer described a plan sponsor’s desire to change to a regime under which each participant is a distinct allocation group. Instead of asking about how to make such a change, I ask different questions: (Assume that no nonelective contribution will be a subterfuge for what really is an individual’s § 401(k) cash-or-deferred election.) Does ERISA’s title I or the Internal Revenue Code impose any constraints on a plan sponsor’s opportunity to specify that each participant is a distinct allocation group? For those plan sponsors that use IRS-preapproved documents to state the user’s documents, do the documents available from mainstream providers impose any constraints on a plan sponsor’s opportunity to specify that each participant is a distinct allocation group? Assume an employer has enough practical capacity to decide, allocate, and communicate a distinct contribution for each individual. Are there other reasons a plan sponsor would not want the flexibility to specify that each participant is a distinct allocation group?

About § 401(k)(15)(B)(iii), as added by SECURE § 112(a)(2): Congress might not have considered that their Act sometimes sets up an incentive for an employer to design work patterns so a long-term part-time employee never is credited with enough service to become eligible for any nonelective or matching contribution. For example, an employer might limit a worker to one day a week for no more than 49 weeks in any 12-month period. How few breaks in service a participant has (and so how much vesting service a participant has) might not meaningfully affect the employer’s financial position if the participant’s account has no subaccount attributable to any nonelective or matching contribution.

For long-term part-time employees who become eligible because of § 401(k)(2)(D)(ii), a plan need not provide nonelective or matching contributions. § 401(k)(15)(B)(i)(I). About long-term part-time employees who become eligible because of § 401(k)(2)(D)(ii), an employer may choose coverage and nondiscrimination relief similar to tax law for a plan that covers otherwise excludable employees. § 401(k)(15)(B)(i)(II). This might permit excluding long-term part-time employees from top-heavy vesting and contributions. § 401(k)(15)(B)(ii). But the special nondiscrimination relief ends for an employee who becomes a full-time employee. § 401(k)(15)(B)(iv). Internal Revenue Code § 401(k)(15) (B) Nondiscrimination and top-heavy rules not to apply (i) Nondiscrimination rules In the case of employees who are eligible to participate in the arrangement solely by reason of paragraph (2)(D)(ii)- (I) notwithstanding subsection (a)(4), an employer shall not be required to make nonelective or matching contributions on behalf of such employees even if such contributions are made on behalf of other employees eligible to participate in the arrangement, and (II) an employer may elect to exclude such employees from the application of subsection (a)(4), paragraphs (3), (12), and (13), subsection (m)(2), and section 410(b). (ii) Top-heavy rules An employer may elect to exclude all employees who are eligible to participate in a plan maintained by the employer solely by reason of paragraph (2)(D)(ii) from the application of the vesting and benefit requirements under subsections (b) and (c) of section 416. (iii) Vesting For purposes of determining whether an employee described in clause (i) has a nonforfeitable right to employer contributions (other than contributions described in paragraph (3)(D)(i)) under the arrangement, each 12-month period for which the employee has at least 500 hours of service shall be treated as a year of service, and section 411(a)(6) shall be applied by substituting "at least 500 hours of service" for "more than 500 hours of service" in subparagraph (A) thereof. (iv) Employees who become full-time employees This subparagraph (other than clause (iii)) shall cease to apply to any employee as of the first plan year beginning after the plan year in which the employee meets the requirements of section 410(a)(1)(A)(ii) without regard to paragraph (2)(D)(ii).

I often suggest to a partner or other business owner not having an owners-only plan, and deliberately including at least one employee beyond owners. That way, the plan will be ERISA-governed, which, among other consequences, gets stronger protection against creditors. But a factor pointing in another direction for some is that public availability of a Form 5500 report on a plan’s assets might indirectly reveal a business owner’s stake. For example, if a report shows only two participants, a reader might deduce that the business has only one owner and might infer that about 99% of the plan’s assets is the owner’s account.

If (when there is a long-term part-time employee who must be admitted for elective deferrals) a business owner prefers to maintain a non-ERISA owners-only plan, might it make sense to start a second (ERISA-governed) plan for employees?

457 Answer Book (Wolters Kluwer 8th ed. & Supp.) is updated for the laws you mention. Or call me. In early January, I revised my governmental § 457(b) clients’ plans to follow the “Setting Every Community Up for Retirement Enhancement Act of 2019”, the “Bipartisan American Miners Act of 2019”, and the “Taxpayer Certainty and Disaster Tax Relief Act of 2019”. Also, I then added a provision for future disasters, and it was enough to provide the Coronavirus Aid, Relief, and Economic Security Act’s coronavirus loans and distributions without touching the document again. The Bipartisan Budget Act of 2018’s addition to § 401(k) about hardship distributions does not affect, at least not directly, § 457(b)’s tolerance for an unforeseeable emergency. Section 457(b) does not have its own “remedial amendment” regime. Yet, the recent statutes might allow some delay for a governmental plan. But don’t assume everything is under SECURE’s remedial-amendment date; some provisions are under other divisions of the Further Consolidated Appropriations Act, 2020. For a governmental plan, a State’s law often requires a written plan’s revision much sooner than Federal tax law requires.

The inquiry seems to be not about a rollover but rather a within-IRAs transfer from a Roth IRA insurer to a Roth IRA custodian. I’ll leave for others questions about whether this is feasible under Federal tax law. Whether it is proper for an annuity contract’s insurer to require an insurer’s or custodian’s letter of acceptance for each transfer (rather than one blanket letter for a series of transfers) is governed by the terms of each annuity contract. Those terms might be interpreted under a State’s law of contracts generally, insurance law particularly, and, for a variable annuity contract, Federal and State securities laws.