Peter Gulia

About one of the two different topics now in this discussion: Many investment funds impose identity-control conditions on an investor’s right to her redemption. For example, many funds require a bank’s or broker-dealer’s signature guarantee for a redemption more than a specified amount, often $100,000. (Getting such a guarantee is more demanding than getting a notary’s certificate because the guarantor has its money at stake on the assurance.) SEC-registered mutual funds have done this for decades. I’m unaware of any challenge about whether such a signature-guarantee condition interferes with a redemption right, which the Investment Company Act of 1940 regulates. (I assume the condition, or at least the issuer’s power to impose it, had been disclosed). While an identity control of this kind might not yet be customary for individual-account retirement plans, perhaps some sponsors and administrators will consider it.

Thanks. C.B. Zeller starts us with, for an individual-account (defined-contribution) retirement plan with participant-directed investment, about eight or nine items. I add a 404a-5 notice, making it nine or ten. What have we missed?

BenefitsLink mavens, here’s a question that follows from Pam Shoup’s pointer to Read the Fabulous Document. Imagine a plan’s governing document states as the only needs recognized for a hardship distribution the deemed needs as the Treasury’s rule specified them before September 23, 2019. Does this mean the plan’s administrator must deny a claim for a hardship distribution that would be grounded on a FEMA-declared disaster?

Does anyone have a count of how many notices, statements, reports, and other disclosure items an individual-account retirement plan furnishes (or ought to have furnished) in a typical year?

Without considering whether the Treasury department’s rule makes sense, it turns on whether the participant’s principal residence or principal place of employment was in a place FEMA designated for FEMA to provide individual assistance. The needs a plan recognizes for a hardship distribution might be wider than those of the § 401(k) rule’s seven deemed-need situations. Further, a plan might provide a coronavirus-related distribution.

The seventh of the rule’s deemed-need situations is: (7) Expenses and losses (including loss of income) incurred by the employee on account of a disaster declared by the Federal Emergency Management Agency (FEMA) under the Robert T. Stafford Disaster Relief and Emergency Assistance Act, Public Law 100-707, provided that the employee’s principal residence or principal place of employment at the time of the disaster was located in an area designated by FEMA for individual assistance with respect to the disaster. https://www.ecfr.gov/cgi-bin/text-idx?SID=763b40b3d060d08c9089fee171f405d7&mc=true&node=se26.6.1_1401_2k_3_61&rgn=div8 It refers to “an area designated by FEMA for individual assistance[.]”

Although the then motivating issue was medical-loss-ratio distributions, EBSA’s Technical Release No. 2011-04 can apply to any distribution from a health insurer, “including refunds, dividends, demutualization payments, rebates, and excess surplus distributions.” https://www.dol.gov/sites/dolgov/files/EBSA/employers-and-advisers/guidance/technical-releases/11-04.pdf https://www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/technical-releases/11-04 For the portion (if any) of a distribution that is a health plan’s assets (rather than an employer’s assets), a fiduciary might consider the alternatives described in the subregulatory guidance.

Thank you for indulging my curiosity. (On the underlying tax-law issue, I don’t state any view or argument.) Because Notice 2020-32 was published in the Internal Revenue Bulletin [2020-21 I.R.B. 837-838 (May 18, 2020)], Forms 8275 and 8275-R are in play. If a taxpayer finds its tax return must disclose a position contrary to the IRS’s notice, would that dissuade a taxpayer from taking the deduction?

Just for intellectual curiosity, imagine Congress enacts no more change to the statutes. Would a business organization that believes the deduction is proper take that tax-return position? I guess the Treasury department has not published a final or temporary regulation on the issue. Is there a revenue ruling or notice published in the Internal Revenue Bulletin? A business organization may on its tax return assert a reasonable-basis position. And, if not contrary to such a rule-or-regulation authority, may do so without a Form 8275-R disclosure. (If a corporation does not issue and is not included in audited financial statements, Schedule UTP, Uncertain Tax Position Statement, is not required.) A reasonable-basis position can be one with no more support than a “well-reasoned construction of an applicable statutory provision[.]” Even under the stricter standard of AICPA Statement on Standards for Tax Services No. 1—Tax Return Positions, a CPA may recommend a tax-return position, and may prepare or sign a tax return taking a position, if 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. In finding whether that standard is met, a CPA “may consider a well-reasoned construction of the applicable statute[.]” If a business organization takes the deduction position (whether for itself, or to pass through to its shareholders, members, or partners), doesn’t that practically end the point for all but the few examined?

Thanks.

Several BenefitsLink discussions describe uncertainties about how to interpret the Paycheck Protection Program. Now that the Paycheck Protection Program Flexibility Act of 2020 seems soon to be enacted, which issues does it solve, and which does it leave behind? https://www.congress.gov/116/bills/hr7010/BILLS-116hr7010eh.pdf

For a penalty assessed after January 15, 2020, the civil penalty is inflation-adjusted to $141. https://www.govinfo.gov/content/pkg/FR-2020-01-15/pdf/2020-00486.pdf If a blackout notice failure affected 100 individuals for 40 days, that penalty is $564,000.

Our BenefitsLink hosts helpfully posted an IRS notice that relaxes some of the “physical presence” condition for witnessing a spouse’s consent. https://benefitslink.com/news/index.cgi https://www.irs.gov/pub/irs-drop/n-20-42.pdf Under Reorganization Plan No. 4 of 1978, authority to issue regulations, rulings, opinions, variances, and waivers under part 2 of subtitle B of title I of ERISA is transferred to the Secretary of the Treasury. A plan’s administrator might want its lawyer’s advice about whether it may rely on the IRS notice as an interpretation of ERISA § 205.

Unless the plan’s administrator is confident that ERISA does not govern the plan (and that Internal Revenue Code § 6058 does not call for an information return), it seems filing Form 5500 reports makes sense. If the plan’s sponsor wants the annuity contracts and custodial accounts to continue § 403(b) tax treatment, restating the plan (if its governing document does not yet meet all tax-treatment conditions) seems sensible.

Or: If an employer paid amounts to a plan by a mistake of fact, ERISA’s anti-inurement provision might not preclude a return of an amount to the employer. ERISA § 403(c)(2)(i). A plan’s governing document might permit, or at least not preclude, such a return. Under a typical provision, the plan returns to the employer the lesser of the mistaken payments or the account that results from the investment of the mistaken payments. Beyond whatever correction someone might want about a retirement plan, the employer might want to pay the past-due wages. Under many States’ laws, a failure to pay wages might be not only a civil violation but also a crime. ERISA might preempt a State’s law for what is properly done under an ERISA-governed plan’s automatic-contribution arrangement. ERISA § 514(e). But an employer should not rely on that idea to legitimate an unauthorized reduction of the wages of someone who was not a participant. If a return is allowed, perhaps making up the loss that resulted from investing the missing wages is not too big a price to pay toward corrections on both fronts. This discussion is not advice to anyone. Ask your lawyer.

There’s at least a reasoned argument that the new rule allows continuation of an employer-provided electronic address that previously met the condition for some employment-related purpose beyond retirement plans’ communications. (We understand the idea that someone might ignore, overlook, or forget an unrequested address. But the rule’s condition that the address be provided by the employer, not the administrator or a service provider, and have some employment-related purpose beyond retirement plans’ communications is what the Labor department explains as overcoming that objection. I think we all concur that whether there really is another employment-related purpose is facts-and-circumstances, and that an employer might require its employees’ not-too-infrequent check-in.) The new rule includes this: “Special rule for severance from employment. At the time a covered individual who is an employee, and for whom an electronic address assigned by an employer pursuant to paragraph (b) of this section is used to furnish covered documents, severs from employment with the employer, the administrator must take measures reasonably calculated to ensure the continued accuracy and availability of such electronic address or to obtain a new electronic address that enables receipt of covered documents following the individual's severance from employment.” 29 C.F.R. § 2520.104b-31(h) (GPO e-CFR as of May 27, 2020). That text applies for an employer-provided address, but not for an address the participant provided. See Federal Register pages 31902-31903. A widely recognized interpretation principle prefers an interpretation that does not result in any portion of a text duplicating another portion or having no consequence. If lacking an employment-related purpose beyond retirement plans’ communications would by itself make an employer-provided address no longer valid for a former employee, what purpose would the quoted text serve? And remember, this is a safe-harbor rule, and one made following notice-and-comment procedures. At least until the Supreme Court overrules or reinterprets Chevron, a court must defer to the Labor department’s interpretation about what’s enough for an administrator to be treated as having “furnished” a communication. (We recognize that whether a fiduciary met ERISA § 404(a) duties, including communications duties, is a separate point.)

Mojo and RatherBeGolfing, I’m imagining that an employer uses the email addresses for something that fits the new rule’s call for an employment-related purpose other than communicating about the retirement plan. Here’s an example I suggested in the other discussion: Imagine an employer tells its employees that human-resources and safety announcements will be sent to employees’ employer-provided email addresses. Do you think that’s enough?

Thanks. What about keeping the email address constant, but managing which blast distribution lists and system privileges the address is included in?

I don't doubt that it's possible for a computer alone to detect the issue by looking at tax-return data. We might learn how carefully the IRS designs the new forms, and how adept the IRS's processing is.

Another BenefitsLink discussion includes some observations about how much or how little help the new Default Electronic Disclosure rule offers if an employer/administrator lacks email addresses for the portion of participants who are severed from employment. A 2002 rule allows electronic delivery if, with other conditions, the employee/participant can access the communications using an email system the employee uses as “an integral part” of the employee’s work for the employer. Under Wednesday’s new rule, there is no such “integral part” condition and an employer-provided electronic address can be enough to invoke the new regime if the employer assigns the address for some employment-related purpose beyond the retirement plan’s communications. A retirement plan’s administrator may continue to rely on such an address (if there is no bounce-back or other operability defect) after a participant’s severance from employment. If an employer/administrator seeks to grow the population of (future) former employees who can remain in the new electronic regime, should an employer assign an email address for every employee? (Imagine an employer tells its employees that human-resources and safety announcements will be sent to employees’ employer-provided email addresses.) What do BenefitsLink people think about whether that way is practical or impractical?

As a partial answer to RBG’s recent question, one doubts the IRS has software to screen for these issues by looking at tax-return data. One imagines the IRS would not spot these issues until a return is called out for a human’s reading.

About what would have been the agency’s best or better interpretation of ERISA, people might (and, in comments on the proposed rule, did) disagree. The final rule is clear that a notice of internet availability cannot be on paper. To be codified 29 C.F.R. § 2520.104b-31(d)(4)(i) (“A notice of internet availability must: Be furnished electronically[.]”), 85 Federal Register 31884, 31923 (May 27, 2020). The preamble states the Assistant Secretary’s reasoning: “The Department did not, however, adopt certain commenters’ suggestion that plan administrators should be able to furnish the [notice of internet availability] in paper form. One of the goals in adopting this safe harbor is to advance the use of electronic tools to enhance the effectiveness of, and reduce the costs associated with, ERISA disclosures. The Department maintains that it is important for covered individuals to receive an initial notice, on paper, alerting them that disclosures will be furnished using different procedures. But after that, the safe harbor will create consistency by requiring plan administrators to communicate electronically. As to ensuring the receipt of notices, the rule includes a specific provision in paragraph (f)(4) requiring that action be taken in response to invalid or inoperable electronic addresses. Accordingly, paragraph (d)(4)(i) of the final rule adopts the proposal’s requirement that an NOIA must be furnished electronically to the address referred to in paragraph (b) of the safe harbor.” 85 Federal Register 31884, 31894 (May 27, 2020). The new rule’s preamble, on its first page, describes the 2002 and 2020 safe-harbor rules as not the “exclusive means” of furnishing something. A plan’s administrator might defend other methods as “measures reasonably calculated to ensure actual receipt of the material by plan participants, beneficiaries and other specified individuals.” 29 C.F.R. § 2520.104b-1(b)(1).

If this is an unfunded § 457(b) plan for a select-group employee of a non-governmental non-church tax-exempt organization, the plan likely is governed by ERISA’s title I, but without subtitle B’s part 4 (Fiduciary Responsibility)—ERISA §§ 401-414, 29 U.S.C. §§ 1101-1114. The employer’s unfunded obligation to its employee is as provided by the contract between them. If there is ambiguity in what that contract (including a plan document, if it governs), one construes and interprets the contract according to the common law of contracts. That law includes reasoning for interpreting ambiguous texts. If ERISA governs, it preempts States’ laws. However, if the plan document or contract itself includes a choice-of-law provision, such a provision might have some effect, at least for what interpretation methods a court would use for a dispute about an ambiguous text. As your query observes, for an unfunded plan a bookkeeping account is no more than a measure of the employer’s obligation to pay deferred wages to its employee or former employee. It seems your client’s question is primarily about contract interpretation. I have negotiated both sides of these questions, depending on whether my client was the employer or the employee.

In the Labor department’s design, that the notice of internet availability is electronic supports the administrator’s responsibility in testing that a participant’s electronic address remains valid and operable. If there is a bounce-back and the administrator does not promptly cure it or replace it with another electronic address, one must treat the individual as if she opted out. Tomorrow, not every former employee will have an email address an administrator may use. But in time it’s feasible to set things up so most will. The new rule’s big give is an administrator’s opportunity to rely on an electronic address the participant never asked anything to be sent to. An employer may provide an electronic address for its employee. An employer-provided electronic address can be enough to invoke the electronic regime if the employer assigns the address for some employment-related purpose beyond the retirement plan’s communications. (Imagine an employer tells its employees that human-resources and safety announcements will be sent to employees’ employer-provided email addresses.) Once such an employer-provided address is set up, a retirement plan’s administrator may use the address even after the employment ends. After a participant’s severance from employment, an administrator must check that an employer-provided electronic address still enables receipt of the plan’s communications. For the Labor department to find that something posted to a website is “furnished” to a particular individual, the rulemaking needed something to make it reasonable to believe the individual is an internet user. If one could send a paper notice of the availability of a website disclosure to someone not known to have a functioning electronic address, an administrator might lack evidence that the individual can practically see a website. While this law change might be more incremental than some might like, it’s a big step.

Even if there is a dodge in this rollover and income spread, is it something the IRS should put resources on? A taxpayer could get an income spread by conversions to Roth over a few years. Is the difference between a $33,333 conversion in each of 2020, 2021, and 2022, and one $100,000 rollover in 2020 with income recognized over three years a big deal? (Yes, I see it enables a taxpayer to buy some securities’ shares while prices are lower than they were or later might be.) Is this difference so wide that the IRS should pursue it?