Peter Gulia

In some recent years, practitioners have had a few successes in presenting an issue with enough time for IRS people to work on it with a view to an announcement during a late February Joint TE/GE Council Employee Plans meeting. https://tegecouncil.org/ Although it’s likely too late for an issue presented now to get an announcement in 2021’s meeting on February 25-26, you might get some “seminar law” remarks, and perhaps some attention for something more formal in early 2022.

ACK, thank you for sharing the information. I’ve never been faced with that choice. But if I were, I suspect I’d likely recommend against providing the one-year-marriage condition. It seems a plan-administration complexity. An exception might be if the plan’s sponsor is owner-dominated and the owner herself wants the condition.

While far from a scientific sample, I checked an IRS-preapproved document a client uses. That set’s adoption-agreement form has nothing to specify that a one-year-marriage condition is provided or omitted. The basic plan document has no mention of a one-year-marriage condition. Has anyone seen a § 401(k)/profit-sharing document that: allows a user to specify a one-year-marriage condition? provides a one-year-marriage condition, without giving the user a choice to omit it?

Here’s a link to the notice: https://www.govinfo.gov/content/pkg/FR-2011-11-08/pdf/2011-28853.pdf.

If one assumes the plan is ERISA-governed: The plan’s administrator might consider whether the plan provides or omits a one-year-marriage condition for a spouse to get whichever ERISA § 205 right—qualified preretirement survivor annuity, or whole account—the plan provides. ERISA § 205(f)(1) states: “[A] plan may provide that a qualified joint and survivor annuity (or a qualified preretirement survivor annuity) will not be provided unless the participant and spouse had been married throughout the 1-year period ending on the earlier of— (A) the participant’s annuity starting date, or (B) the date of the participant’s death.” The statute does not state, at least not directly, that a plan may provide such a one-year-marriage condition to limit a spouse’s ERISA § 205(b)(1)(C) right to get the participant’s account. But consider this rule: Q-26: In the case of a defined contribution plan not subject to section 412, does the requirement that a participant’s nonforfeitable accrued benefit be payable in full to a surviving spouse apply to a spouse who has been married to the participant for less than one year? A-26: A plan may provide that a spouse who has not been married to a participant throughout the one-year period ending on the earlier of (a) the participant’s annuity starting date or (b) the date of the participant’s death is not treated as a surviving spouse and is not required to receive the participant’s account balance. The special exception described in section 417(d)(2) and Q&A-25 of this section does not apply. 26 C.F.R. § 1.401(a)-20/Q&A-26 https://ecfr.federalregister.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFRa9e579304da97df/section-1.401(a)-20. The Treasury department’s rule interprets not only the Internal Revenue Code of 1986 but also ERISA § 205. Reorganization Plan No. 4 of 1978 (Aug. 10, 1978), 43 Fed. Reg. 47,713 (Oct. 17, 1978), 92 Stat. 3790 (1978), § 101. See also 5 U.S.C. App. 237. But a court defers to an agency’s rule only if the statute is ambiguous and the rule is a permissible interpretation of the statute. For a situation of the kind Santo Gold describes, a plan’s administrator might consider these steps (with others): 1. Does a governing document state a one-year-marriage condition? 2. If so, does the document’s provision comport with ERISA § 205? Or must the administrator ignore the purported provision because it is contrary to ERISA’s title I? 3. If the plan provides a one-year-marriage condition, how does it apply to the participant’s and the spouses’ facts? BenefitsLink neighbors, do the designers of IRS-preapproved documents give a user a choice about whether to state or omit a one-year-marriage condition?

The point Former Esq. describes might be in ERISA Advisory Opinion 89-06A: “The Department of Labor . . . would consider a member of a controlled group which establishes a benefit plan for its employees and/or the employees of other members of the controlled group to be an employer within the meaning of section 3(5) of ERISA.”

Under Reorganization Plan No. 4 of 1978, the Labor department’s rule to interpret ERISA § 408(b)(1) also controls the interpretation of Internal Revenue Code of 1986 § 4975(d)(1). And until the Supreme Court changes the Chevron precedent, a Federal court must defer to the rule if it is a permissible interpretation of the statute. If a participant loan is a non-exempt prohibited transaction, the § 4975 excise tax is imposed only on a disqualified person, such as the participant. The excise tax never is imposed on a plan, and is not imposed on a fiduciary that acted only as a fiduciary. The IRS could show that a loan with too-generous interest is a deemed distribution, with whatever consequences that brings. Also, the IRS might, in some circumstances, show that a loan with too-generous interest allowed the participant to evade deferral or contribution limits, or otherwise get more tax deferral than was proper. Executive agencies make difficult choices about how much law enforcement to pursue. The IRS is no stranger to those choices (and often describes them in government reports).

A general principle for a prohibited-transaction exemption is that an employee-benefit plan should pay no more, or get no less, than what would result from even-handed dealing. Under the rule to interpret and implement the ERISA § 408(b)(1) exemption [hyperlink above], “[a] loan will be considered to bear a reasonable rate of interest if such loan provides the plan with a return commensurate with the interest rates charged by persons in the business of lending money for loans which would be made under similar circumstances.” While this requires that a lender plan get no less than an imaginary bank lender would get, some might read this text not to preclude a plan getting more interest. Beyond the rule’s text, the Labor department’s explanation of its rulemaking supports such a reading. Loans to Plan Participants and Beneficiaries Who Are Parties in Interest With Respect to the Plan, 54 Federal Register 30520, 30524-30525 (July 20, 1989). Tax law might treat a loan with more interest than is “commercially reasonable” as a deemed distribution. See 26 C.F.R. § 1.72(p)-1 (flush language before the Q&As). https://ecfr.federalregister.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFRac15f73ecf59a99/section-1.72(p)-1 But I have never seen the Internal Revenue Service assert this. And my experience includes working inside what then was the #2 recordkeeper with tens of thousands of plans, many of which had situations of the kind MoJo describes. 485073054_participantloanexemptionexplanation30515-30531.pdf

Bird, thank you for your helpful information. About ownership percentages, people get it wrong if they don’t carefully distinguish a partner’s or member’s capital interests, profits interests, and loss interests. And a count of a self-employed partner’s or member’s deemed compensation often is wrong if someone fails to account for the relation between guaranteed-payment rights and other elements.

While I’ve advised regarding a VEBA, I haven’t faced a situation of the kind you describe. In other situations, I’ve seen reasoning that a trustee may act through an agent. But a good agent segregates her principal’s assets from her personal assets. Before using the workaround, the VEBA trustees might consider how they would prove: that the employer/agent could not use the VEBA trust’s money for anything beyond the VEBA’s purpose; or that there were prudent controls for the trustees to detect the employer/agent’s bad act, and fidelity-bond insurance or other ready means to recover what’s stolen or misused. Might it be quicker for the VEBA trustees to select a bank with the needed wire-transfer services? Or to select a TPA that accepts the trustees’ check?

BenefitsLink mavens, please help me fill-in a gap in my experience. In collecting information to sort which workers are or were a 5%-owner or a 1%-owner (whether to find highly-compensated employees, key employees, those who must get a minimum distribution while still working, or something else), does a third-party administrator: rely exclusively on the employer/customer’s information on a questionnaire or spreadsheet? check information for logical consistency with the employer/organization’s tax return? ask the employer/organization’s accountant to specify the ownership percentages? do something else?

C.B. Zeller brings us an important point. If not everything about the loan is participant-directed, a fiduciary must consider prudence. If a provision not to allow prepayment is only in a procedure that is not a governing document, a fiduciary must do what is prudent. And if the no-prepayment provision is in the plan’s governing documents, ERISA § 404(a)(1)(D) might call a fiduciary to consider whether, in the particular circumstances, obeying the documents is imprudent.

If the plan’s governing document, summary plan description, 404a-5/404c-1 information, and loan agreement were carefully written (and the administrator has evidence that the disclosures were delivered), a claim that a fiduciary breached its responsibility by allowing a participant loan that was an imprudent investment might be negated by the fiduciary’s ERISA § 404(c) defense that the loan, including the lack of a right to prepay, resulted from the participant’s investment direction and exercise of control. If a loan was a non-exempt prohibited transaction, the plan’s equitable relief might include that the borrower disgorges the ill-gotten proceeds (with any profits made from using the proceeds) and restores the plan to no less than the result the plan would have obtained by keeping the loaned amount and prudently or properly investing the amount. But it’s unclear whether the participant loan Belgarath inquires about was or would be a prohibited transaction. Although 29 C.F.R. § 2550.408b-1 might preclude some participant loan terms that are less favorable to the plan than terms that would obtained “by persons in the business of lending money”, I don’t read the rule to preclude terms that might be more favorable than terms a commercial lender would get. https://ecfr.federalregister.gov/current/title-29/subtitle-B/chapter-XXV/subchapter-F/part-2550/section-2550.408b-1 And unless the plan itself is in the business of banking (or the plan is not the lender), ERISA ought to preempt States’ laws.

On your two questions: 1. The paraphrase and quotation are from the rule cited, 29 C.F.R. § 2550.408b-2, which interprets ERISA § 408(b)(2). The hyperlink points to the government’s Electronic Code of Federal Regulations rendering of that rule. 2. The focus is on whether the fiduciary that engages a service provider makes a fully independent decision. Even if neither the service provider nor its owner-operator is the engaging plan’s fiduciary, one might consider whether a desire to please the owner-operator, perhaps because she is company B’s minority shareholder, could tempt a decision-maker to use less than her best judgment for the retirement plan’s exclusive purpose. These are sensitive questions, and each party to the would-be service agreement should want its own lawyer’s advice.

Under the Labor department’s view (since 1975), the § 408(b)(2) exemption applies only to a § 406(a) prohibited transaction, and not to a § 406(b) self-dealing prohibited transaction. As a part of that view, a fiduciary must not cause a plan to pay or provide—even indirectly, but involving plan assets—compensation “to a person in which such fiduciary has an interest which may affect the exercise of such fiduciary's best judgment as a fiduciary[.]” 29 C.F.R. § 2550.408b-2(e)(1) https://ecfr.federalregister.gov/current/title-29/subtitle-B/chapter-XXV/subchapter-F/part-2550/section-2550.408b-2 “A person in which a fiduciary has an interest which may affect the exercise of such fiduciary’s best judgment as a fiduciary includes, for example, a person who is a party in interest by reason of a relationship to such fiduciary described in [ERISA] section 3(14)(E), (F), (G), (H), or (I).” 29 C.F.R. § 2550.408b-2(e)(1) (emphasis added). But the concept is not limited to those relationships. So, one might ask this question: Does the plan’s fiduciary or its decision-maker desire to please company B’s minority shareholder, A? If so, could that desire tempt one to use less than her best judgment for the retirement plan’s exclusive purpose?

I didn't express any view, or even mode of reasoning. Rather, my post was about pointing to a rule. It is not the only source of law on the questions raised.

If an employer/administrator sent a communication about coronavirus special provisions, such a communication ought to have explained the limited duration of those provisions. Even if it did, are you or your clients doing a follow-up communication to remind people that the special provisions no longer apply? Or is it good enough that the earlier communication explained the limited duration?

Ilene, I suspect almost every retirement-plans practitioner or service provider who regularly talks with small-business employers shares your thoughts.

In the IRS Notice extending some relief through June 30, 2021, the Treasury department invites comments on whether to make a permanent change. https://www.irs.gov/pub/irs-drop/n-21-03.pdf

To evaluate a range of potential answers to the questions raised above, one might read carefully the Labor department’s rule. 29 C.F.R. § 2510.3-55 Definition of employer—Association Retirement Plans and other multiple employer pension benefit plans. https://ecfr.federalregister.gov/current/title-29/subtitle-B/chapter-XXV/subchapter-B/part-2510/section-2510.3-55

The reference is to § 280 under subtitle B “COVID-related Tax Relief Act of 2020”, which is under title II “Assistance to Individuals, Families, and Businesses”, which is under Division N “Additional Coronavirus Response and Relief”. In the linked-to enrolled bill, that § 280 is on page 801.

In the Consolidated Appropriations Act, 2021 (enacted December 27, 2020), § 280 amends CARES Act § 2202(a)(6)(B) to treat a money-purchase plan as not failing to meet an Internal Revenue Code of 1986 § 401(a) distribution rule because the plan provides a coronavirus-related distribution, even if it is an “inservice withdrawal”. That change “shall apply as if included in the enactment of section 2202 of the CARES Act.” https://www.govinfo.gov/content/pkg/BILLS-116hr133enr/pdf/BILLS-116hr133enr.pdf

QDROphile, Bill Presson, Pam Shoup, thank you for contributing your good thinking. QDROphile, I like your logic path and reasoning. To it, I’ll add this bit of law: For an employer to offer the convenience of payroll-deduction IRA contributions without establishing or maintaining a plan, it can be burdensome to send money to many IRA providers. But it’s a risk to limit employees’ choice of IRA providers. See 29 C.F.R. § 2510.3-2(d)(1)(iii). Interpretive Bulletin 99-1 tries to give some succor to limiting employees’ choice of payroll-contribution payees, perhaps even to as few as one. But the Bulletin is not a rule or regulation. That means a court need not defer to it. Falling in with a State-run IRA program lets an employer limit its payee to just one. Yet, an employer’s risk of fiduciary liability might be slight. A court held that an employer that does no more than obey California’s law for its CalSavers program, including its implied-election provision, does not establish or maintain a plan. Howard Jarvis Taxpayers Ass’n v. Cal. Secure Choice Retirement Savings Program, 443 F. Supp. 3d 1152 (E.D. Cal. Mar. 10, 2020), appeal filed, No. 20-15591 (Apr. 3, 2020). The appeals court might reverse that decision. Or an employer not in the Ninth Circuit might face a court’s decision that a State-run IRA program is an ERISA-governed plan. But even with such a finding, a mere participating employer doesn’t face liability unless a court further finds (i) that the employer is a fiduciary for some particular function, (ii) the employer breached its fiduciary responsibility in performing that function; and (iii) that breach resulted in harm to the plaintiff’s IRA. That conclusion follows from applying ERISA § 409’s statement of a fiduciary’s personal liability and ERISA § 3(21)’s definition, which makes a person a fiduciary only to the extent of its discretionary decision-making. A court might not make the employer liable for an IRA’s investment result caused by using the IRA custodian and investment funds the State selected, which the individual affirmed by not opting out of payroll contributions and not periodically transferring amounts to another IRA. Bill Presson and Pam Shoup, my thought exercise is about what, if anything, one might suggest to an employer that does not become a client. And if an employer not ready to administer a retirement plan is subject to a State’s play-or-pay excise tax, falling in with a State’s program might avoid the tax while taking on a relatively lighter work burden and narrower risk. A State-facilitated IRA might be a starter kit for those we haven’t yet persuaded.

Yesterday, the President signed the appropriations bill.

QDROphile, thank you for giving me your time to think about this. And thank you for asking smart follow-up questions to describe further my imaginary employer. The charge of 100 basis points is distinct from, and in addition to, a fund’s expenses. But the expense ratios of the funds in the State-run program range from 2½ basis points [0.025%] for a bond fund to nine basis points [0.09%] for target-year funds. The employer would not analyze anything about investment alternatives, because it would delegate those decisions to a § 3(38) investment manager. A plan sponsored by the employer would not qualify for collective trust fund units or for mutual funds’ institutional-class shares. The workers have four-year college degrees, but are service workers, not knowledge workers. The employer’s preference is to allow (passively) retirement savings, but providing employees the convenience of payroll deduction.