Peter Gulia

Patricia Neal Jensen, thank you for the information. Recently, I saw an accumulation annuity contract (and one that no one ever will take an annuity from) with a guaranteed rate of 1%. I was surprised the guaranteed rate was that high. Having worked through the insolvencies of Baldwin United, Executive Life, Mutual Benefit Life, Confederation Life, and others, I’ve seen the wreckage that can result from incautious promises. Even at 0% interest, the insurer still is taking on risk.

Thank you for helping. But no, I'm asking about interest crediting rates (and a guaranteed rate) on an annuity contract that is still in accumulation mode.

For an insurance company’s fixed annuity contract (or fixed-interest element under an otherwise variable annuity contract), what is a typical credited interest rate? And for such a contract issued recently, what is a contract-guaranteed rate?

For an employee subject to FICA taxes, how likely is it that elective deferrals (without an age 50 catch-up) alone could use up a § 415(c) 100% of compensation limit? Example: Martha’s salary is $19,500, and she makes an elective deferral of $19,500. This is feasible because Martha’s employer pays all FICA taxes with no wage withholding for the employee’s portions of the FICA taxes. According to the IRS, Martha’s wages is, at least for W-2 reporting, $21,115.32. See on page 22 “Employee’s Portion of Taxes Paid by Employer”. Does that measure of compensation fit within 26 C.F.R.§ 1.415(c)-2? https://www.ecfr.gov/cgi-bin/text-idx?SID=fba8f2934bd2449a6ac33a375dd44f91&mc=true&node=se26.7.1_1415_2c_3_62&rgn=div8 If so, isn’t the $19,500 elective deferral only 92.35% of $21,115.32? Does this leave $1,615.32 for other annual additions?

Not Labor department agency action, but there is litigation in Federal courts. For example: Davidowitz v. Delta Dental Plan of Cal., Inc., 946 F.2d 1476, 1481 (9th Cir. 1991) (plan’s anti-assignment provision precludes a participant from assigning her rights). Quaresma v. BC Life & Health Ins. Co., 623 F. Supp. 2d 1110, 1128-29 (E.D. Cal. 2007) (following the plan’s anti-assignment provision, the purported assignee lacked standing). Ward v. The Retirement Board of Bert Bell/Pete Rozelle NFL Player Retirement Plan, 643 F.3d 1331 (11th Cir. 2011) (A plan’s provision that any “benefit under the plan” will not be assigned or reached by creditors through legal process is valid and enforceable. The court gave no effect to a State court’s order that a benefit be paid to a participant’s lawyer’s client trust account.) Neurological Surgery Associates, P.A. v. Aetna Life Insurance Co., No. 2:12-cv-05600-SRC-CLW, 59 Empl. Benefits Cas. (BL) 1075, 2014 BL 154982, 2014 U.S. Dist. Lexis 75906, 2014 WL 2510555 (D.N.J. June 4, 2014) (health plan’s anti-assignment provision enforceable). Aviation West Charters, LLC v. UnitedHealthcare Ins. Co., No. 2:16-cv-00436-WBS-AC (E.D. Cal. Aug. 23, 2017) (plan’s provision precluded assignment; plan not bound by its administrator’s nonobjection to an attempted assignment). Am. Orthopedic & Sports Med. v. Independence Blue Cross, 890 F.3d 445, 2018 Empl. Benefits Cas. (BL) 173478, 2018 U.S. App. LEXIS 12637 (3d Cir. May 16, 2018) (health plan’s anti-assignment provision enforceable; yet participant might grant a power of attorney). Med. Soc’y of N.Y. v. UnitedHealth Grp. Inc., No. 15-cv-5265, 2019 WL 1409806 (S.D.N.Y. Mar. 28, 2019) (That a plan provided discretion to pay a healthcare provider does not negate the plan’s anti-assignment provision. And a payer’s practices were within the discretion and not a waiver.) University Spine Center v. Aetna, Inc., No. 18-2842 (3d Cir. May 16, 2019) (declining a proposed interpretation that an anti-assignment provision must limit not only one’s right to assign but also one’s power to assign). With little success in overcoming a health plan’s anti-assignment provisions, some healthcare providers ask a patient to appoint the provider as the claimant’s representative for the health plan’s claims procedure. Next, we’ll see health plans’ defenses against that practice.

It is not “$10,000 more than” the otherwise provided IRC § 415(c) limit; it is up to $10,000, even if that is more than 100% of the participant’s compensation. The IRC § 415(c)(7)(A) election is the participant’s election. (The document provider’s mention of “an employer election” perhaps describes something about how a user specifies a choice in, or interprets the effect of, the user’s document.) The $40,000 all-years limit is a limit on the portions of annual additions that, but for using IRC § 415(c)(7)(A), would have exceeded a year’s IRC § 415(c) limit. In my experience, many church paymasters administer IRC § 415(c)(7)(A) by relying on the participant’s written or implied statement, unless the employer knows (looking only to the employer’s records) that the participant’s statement is false. Consider also that a participant’s § 415(c) excess might affect the individual’s Federal income tax treatment, including the tax treatment of her contracts and accounts she otherwise intended as § 403(b) contracts and accounts, without affecting the tax treatment of other participants. About what to state in a plan’s governing document, I have never attempted to use any IRS-preapproved document to state a § 415(c) limit that could be affected by § 415(c)(7)(A). Sources: Internal Revenue Code of 1986 (26 U.S.C.) § 415(c)(7)(A) https://uscode.house.gov/view.xhtml?req=(title:26%20section:415%20edition:prelim)%20OR%20(granuleid:USC-prelim-title26-section415)&f=treesort&edition=prelim&num=0&jumpTo=true 26 C.F.R. § 1.415(c)-1(d)(1) https://www.ecfr.gov/cgi-bin/text-idx?SID=425f2e3cbe3d69842827c8207e7cb627&mc=true&node=se26.7.1_1415_2c_3_61&rgn=div8

Belgarath, sorry for my miscue; I didn't see that a State might provide the money to non-governmental employers.

The kind of plan that allows most State and local government employees an opportunity for elective deferrals is a § 457(b) eligible deferred compensation plan. (Public-school employees might use a § 403(b) plan. And some governmental employers might have a § 401(k) arrangement under a transition rule in the Tax Reform Act of 1986.) This explanation assumes a § 457(b) plan’s provisions are no more restrictive than is necessary to get § 457(b) tax treatment. Under I.R.C. § 457(b), a participant’s yearly deferral limit ordinarily is the lesser of an amount and “100 percent of the participant's includible compensation for the taxable year.” 26 C.F.R. § 1.457-4(c)(1)(B) “Includible compensation of a participant means, with respect to a taxable year, the participant's compensation, as defined in [Internal Revenue Code of 1986] section 415(c)(3), for services performed for the eligible employer.” 26 C.F.R. § 1.457-2(g). No matter which way a governmental employer finds the money, I might assume the hazard pay you describe fits that definition. In my experience, few employees have compensation so modest that the 100% prong controls the deferral limit for the sum of elective-deferral contributions and, if provided, matching and non-elective contributions under a governmental § 457(b) plan. If an employer’s matching or non-elective contribution, if any, is provided under a plan other than the § 457(b) plan, it is even less likely that § 457(b)’s 100% prong practically controls a participant’s deferral limit. If one of your questions is about the measure of compensation on which an employer provides a matching or non-elective contribution, that’s governed by the plan’s terms. For a governmental plan, consider that a plan might have terms not stated in the thing practitioners call a plan document; State (and local) public law controls.

Ilene, thank you for contributing your good idea. It puts some partial independence on the review or appeal stage. And it might help show the responsible plan fiduciary does something to monitor the service provider’s work. One can use a review of a denied claim to look into the service provider’s methods for evaluating claims of that kind. Beyond ERISA-governed plans, this is an approach I use with governmental § 457(b) plans. We provide the review beyond the recordkeeper to assure due process under Federal and State constitutions. And the reviews give us another window into the recordkeeper’s work methods.

Pam Shoup, thank you for your observation. There are some employer/administrators that believe (perhaps unwisely) there can be value in having the 3(16) provider handle claims, while preserving an opportunity to override a decision. Thinking about that situation and a 3(16) provider’s § 405(a)(3) co-fiduciary responsibility about an override is among the reasons I asked my questions.

Bill Presson, thank you for the further thinking.

ratherbereading, thank you. Any different views?

With those recordkeepers and third-party administrators that offer a § 3(16) service for the service provider to decide claims for a distribution, including a hardship distribution: (1) Does an employer/administrator want a power to override the service provider’s decision? (2) Does a § 3(16) service provider want the employer/administrator to have such a power (even if the employer/administrator doesn’t want the power)? BenefitsLink mavens, what’s your experience about what’s happening?

For tax law, an “H.R. 10” plan describes a plan that happens to include as a participant a self-employed individual that Internal Revenue Code of 1986 § 401(c) treats as if she were an employee. For example, a retirement plan of PricewaterhouseCoopers LLP might include thousands of workers who are not PwC’s employees but rather are self-employed individuals. For some securities laws, that a retirement plan includes a self-employed individual might affect whether an issuer or offeror meets an exemption that excuses registering a security, or whether a person is one or more of several kinds eligible to buy an unregistered or restricted security. The rule I describe above soon will simplify ensuring that a trustee of a collective trust fund can meet conditions to be a qualified institutional buyer, even if the collective’s participating trusts include some held for a retirement plan that includes a self-employed individual. The new rule is a big deal. To assure treatment as a qualified institutional buyer, some banks and trust companies administering some collective trusts denied admission to a retirement plan that includes a self-employed individual, even if the plan’s fiduciary met conditions that would allow a participation within exemptions from securities registration. Soon, that restraint will no longer be necessary.

The Securities and Exchange Commission on August 26 voted (3-to-2) to adopt amendments to several rules, including Rule 144A and its defined term, qualified institutional buyer. Here’s the prepublication text: https://www.sec.gov/rules/final/2020/33-10824.pdf The amendments add a new 17 C.F.R. § 230.144A(a)(1)(i)(J). It includes as a qualified institutional buyer (with the $100 million threshold) “[a]ny institutional accredited investor, as defined in rule 501(a) under the Act (17 CFR 230.501(a)), of a type not listed in paragraphs (a)(1)(i)(A) through (I) or paragraphs (a)(1)(ii) through (vi).” Page 159 (emphasis added). That cross-referenced defined term includes a bank. The SEC’s explanation of the final rule states: “The scope of Rule 144A(a)(1)(i)(J) encompasses . . . bank-maintained collective investment trusts.” Page 91. And it does so even if the collective trust admits “H.R. 10” plans. Page 89. The final rule becomes effective 60 days after publication in the Federal Register (which has not yet happened).

One of the great challenges of employee benefits is that it’s a variation from money wages. Imagine two employees with equal skills, work, and salaries. One has no spouse and no child. The other has a spouse and children, and covers them in the employer’s health plan. The employee’s salary reduction for the health coverage doesn’t meet the employer’s expense. The result is different all-in compensation. Is this fair between employees with equal skills and work? Imagine another two employees with equal skills, work, and salaries. One has no debt. The other has student-loan obligations. The debt-free employee makes elective deferrals and gets the employer’s matching contribution. The other employee, after meeting modest living expenses and the required payments on her student loans, can’t afford an elective deferral and so gets no matching contribution. The result is different all-in compensation. Is this fair between employees with equal skills and work? We could describe many more situations that some might perceive as involving an inequality or other unfairness. Intelligent people could have a wide range of views about what’s fair or unfair. Some might say life’s not fair. Also, people can have a wide range of views about what serves an employer’s interests. I don’t express a view, but I understand why some employers choose to provide something to meet a perceived fairness issue, or even because it attracts some desired workers. https://www.abbott.com/corpnewsroom/leadership/tackling-student-debt-for-our-employees.html Not every employer will have the circumstances that led Abbott Laboratories to provide a nonelective contribution related to student-loan repayment. But if a client asks me to implement this, I’d like to have thought about whether one could do it within an IRS-preapproved document.

If a client asked me to construe and interpret the document, I would not assume that silence about whether to recognize a disclaimer necessarily precludes recognizing one. Rather, I’d consider the whole document. Also, I might, depending on what one finds in the document, consider Federal common law. Depending on the plan’s text, in considering who is or is not a beneficiary, one might read carefully the document’s definitions and usages to consider the extent to which any of them incorporates by reference 26 C.F.R. § 1.401(a)(9)-4 and, if so, what effect that has. That rule section’s Q&A-4 recognizes a possibility that a disclaimer might affect who is or is not a designated beneficiary, which might matter in how the plan’s provisions apply.

Nothing in ERISA’s title I requires a plan to include a provision for recognizing a disclaimer. In my experience, the IRS’s tax-qualification reviewers express no objection to a document’s detailed provisions for recognizing a beneficiary’s disclaimer and setting conditions on a disclaimer the plan’s administrator will follow. An IRS-preapproved document might lack those provisions. It is unclear whether one could add those provisions without defeating a user’s anticipated reliance on the Internal Revenue Service opinion letter on the preapproved document. A plan’s administrator must obey the plan’s governing document. ERISA § 404(a)(1)(D). Although a document might grant the administrator some power to interpret the document, it is a power to interpret ambiguous provisions, not to rewrite the document. An administrator might disobey the plan’s governing document, perhaps considering that the disclaimant is unlikely to sue on the fiduciary’s breach. If an administrator allows a disclaimer, the administrator might recognize only a document that meets conditions under Internal Revenue Code § 2518. Although that section is in an Internal Revenue Code chapter about gift tax, the Treasury department treats a disclaimer that meets the § 2518 conditions as also effective to remove the refused property from the disclaimant’s income for Federal income tax purposes. Without that, a payer might face difficult questions about whether to tax-report a distribution paid to someone else as a distribution to the disclaimant. The logic path above assumes neither A nor B is (or is deemed) a surviving spouse.

And that's what I ask: could an employer do this within an IRS-preapproved document's tolerance for a discretionary nonelective contribution?

An employer that provides a nonelective contribution for a participant who’s repaying a student loan might do so as a recognition that the worker can’t afford to make the elective deferral that would earn the retirement plan’s matching contribution. This has the desired employee-relations effect only if the employer communicates the provision. If the idea of an allocation group of one for every participant really works, imagine a summary plan description and other participant communications with something like this: Beyond participant contributions and matching contributions, your retirement plan allows us to decide nonmatching contributions (if any) in our business discretion. About each participant (including one who makes no participant contribution), we may decide whether to make a nonmatching contribution, and its amount (if any). We decide this as our business choice. We might consider, among many factors, information we have about whether your financial obligations—including those for a student loan, mortgage, or birth-or-adoption expenses—and payments you made on all or some of those obligations made it unreasonable for you to make participant contributions. We might decide a nonmatching contribution somewhat similar in amount to the matching contribution you could have gotten had you made participant contributions. We need not make these business choices uniformly. What do BenefitsLink mavens think about whether this is practical? Does it vary with the size of the employee population? Is it feasible to implement this using an IRS-preapproved document?

How one reasons a finding about whether a person remains, or is no longer, a participant might turn on the purpose for which a plan’s administrator makes such a finding. Just to pick two of the many purposes that might call for a finding: If the purpose is a count of participants for a Form 5500 annual report, the Instructions state: “An individual is not a participant covered under an employee welfare plan on the earliest date on which the individual (a) is ineligible to receive any benefit under the plan even if the contingency for which [the] benefit is provided should occur, and (b) is not designated by the plan as a participant.” If the purpose is discerning whether someone is a participant with information rights under ERISA § 104(b)(4), one would use the statute’s definition of participant. ERISA § 3(7) defines a “participant” to include someone “who is or may become eligible to receive a benefit[.]” The U.S. Supreme Court held this includes an employee with “a colorable claim that” she will “in the future” fulfill eligibility requirements. Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 10 Empl. Benefits Cas. (BL) 1873, 1881 (Feb. 21, 1989). Justice Scalia’s concurring opinion would include “those who (by reason of current or former employment) have some potential to receive the vesting of benefits in the future[.]”

The Treasury department, acting alone, lacks power to change the Labor department’s rule. The turning point about 100 participants is in ERISA § 104(a)(2)(A): “With respect to annual reports required to be filed with the Secretary under this part, he may by regulation prescribe simplified annual reports for any pension plan which covers less than 100 participants.” ERISA § 3(7) defines a “participant” to include someone “who is or may become eligible to receive a benefit[.]” The U.S. Supreme Court held this includes an employee with “a colorable claim that” she will “in the future” fulfill eligibility requirements. Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 10 Empl. Benefits Cas. (BL) 1873, 1881 (Feb. 21, 1989). Justice Scalia’s concurring opinion would include “those who (by reason of current or former employment) have some potential to receive the vesting of benefits in the future[.]” In Firestone, the Court interpreted “participant” to discern who has a right to information under ERISA § 104(b)(4). That’s in the same part 1 that commands a Form 5500 annual report. And ERISA § 104(b)(4) commands a plan’s administrator to furnish an annual report on a participant’s request. With this background, I doubt an agency could permissibly interpret ERISA to not regard as a participant someone who already met a plan’s age and service conditions designed to meet Internal Revenue Code § 401(k)(2)(D)(ii). There might be room to interpret the verb “covers”. But whatever agency interpretation one might imagine requires (at least) the Labor department’s act. Don’t we guess that 2024 will arrive first?

Gilmore's observations involve policy points for Congress to consider. But until they do, do BenefitsLink mavens think a two-plans solution is less expensive than an independent qualified public accountant's audit?

Some practitioners have suggested: If an employer anticipates a meaningful number of employees will become eligible because of § 401(k)(2)(D)(ii), one might—to facilitate efficient coverage and nondiscrimination testing (including with the relief § 401(k)(15)(B)(i)(II) permits), or for other plan-administration reasons—organize two distinct plans: a plan for those who meet eligibility conditions without any to meet § 401(k)(2)(D)(ii), and another plan for those who are eligible only by meeting eligibility conditions provided to meet § 401(k)(2)(D)(ii). One would design and administer the plans to meet required aggregations and disaggregations, and to rely on only permitted aggregations and disaggregations. Further, each plan might bear its proper share of plan-administration expenses. What do BenefitsLink mavens think about that suggestion?

Although the Notice is not a proposed rule, the Notice's part III expressly invites comments.