Peter Gulia

If this might be about "Waiting for Green Cards", Amy Peck offers some suggestions: https://www.natlawreview.com/article/waiting-green-cards

This discussion is a nice illustration about why an employer/administrator might prefer to keep its own records, independently from the recordkeepers’ and custodians’ records. Don’t just leave those quarter-yearly transaction reports posted to the recordkeeper’s “sponsor service center” internet site. At least copy each digital file onto the plan administrator’s computer drives and further storage. And use considered file-naming and other methods so you can remember and retrieve what you’ve kept. In the 1980s, it wasn’t easy. But now, we can help lead clients to relatively inexpensive protections.

S Derrin Watson, thank you for your excellent help.

That is a logical view. But I’ve learned enough about the realm of IRS-approved documents to recognize that often logic doesn’t control the answers. So, I’m interested in all observations, but especially would like to learn from those who have experience in the making of IRS-approved documents.

S Derrin Watson, thank you for your excellent explanation. Just curious (and mindful that your thinking doesn’t speak for FIS or another business): Considering the effects and trade-off you describe, could a user’s adoption agreement specify both a “rigid discretionary match” and a “flexible discretionary match”? Would that allow not needing the notice whenever the “flexible” matching contribution is zero?

ESOP Guy gives us good guidance: A plan administrator’s careful reporting to the Social Security Administration lowers how many “MAY be entitled” letters go out. Communication with an inquirer gets rid of most inquiries from those letters. Admittedly, my experiences mostly are about situations in which employers and administrators exhausted, or no longer can use, those opportunities.

While we don’t know your situation’s particular facts, the plan’s administrator might consider asking for its lawyer’s advice about using 29 C.F.R. § 2560.503-1 and the plan’s claims procedure. https://www.ecfr.gov/cgi-bin/text-idx?SID=a4695688324f5ce300c2ed273609e32f&mc=true&node=se29.9.2560_1503_61&rgn=div8 If using it, one might follow the many points a carefully designed procedure ought to provide, including: Furnish, and explain, the claims procedure. Invite the claimant to submit evidence showing that a benefit is owing. Search the plan fiduciaries’ records for evidence about the probability (good or bad) that a benefit was paid. That might include evidence showing whether the administrator followed its procedures to direct payment of involuntary distributions, including on-severance cash-outs and minimum distributions. On a denial: Explain carefully the reasoning. Explain that the claimant must exhaust the plan’s claims procedure. Explain the claimant’s opportunities for further review and appeal under the claims procedure. Explain all time limits in the claims procedure. Explain (again, because it should be in the summary plan description), the plan-imposed “statute of limitations” on claims. There are several advantages to following the claims procedure. They include: If the denied claimant complains to the Employee Benefits Security Administration and EBSA opens an inquiry, the plan administrator’s records should show it acted at least in good faith. (In my experience, EBSA closes an inquiry—even if EBSA dislikes the administrator’s decision—if the record shows that the claimant was afforded her procedural rights.) If there is a lawsuit, the defendants might use the plan-administration record to show that the plaintiff’s assertion is so implausible that the judge dismisses the complaint for failure to state a claim. A court should limit its review to the plan administrator’s claims file. A court defers to the plan administrator’s decision unless it could not have resulted from reasoning.

Are you asking about a § 457(b) eligible plan or a § 457(f) ineligible plan? (Your mention of three years before a normal retirement age suggests § 457(b), but it is not the only possibility.) And if § 457(b), are you asking about a governmental plan or a non-governmental plan?

IRS Notice 2020-68 includes guidance about the tax-qualification condition that a § 401(k) plan (but not any § 403(b) or § 457(b) plan) permit an employee to make elective deferrals if the employee has at least 500 hours of service a year in at least three consecutive years and has met the plan’s age requirement (for example, 21) by the end of the three-consecutive-year period. The guidance includes vesting questions mentioned in this thread. https://benefitslink.com/src/irs/n-20-68.pdf See pages 9-12. Thank you to BenefitsLink for always posting these sources so quickly.

Thank you for your kind words. Lois and David Baker provide a super-useful service. Advertising supports it. If BenefitsLink helps you: Consider advertising for your business. https://benefitslink.com/advertise/ When you’re selecting a product or service to use in your business, get information from those that advertise on BenefitsLink.

ERISA preempts many State laws, but preempts no Federal law. ERISA § 514(a), 29 U.S.C. § 1144(a). If there otherwise might have been some doubt, ERISA provides: “Nothing in this title shall be construed to alter, amend, modify, invalidate, impair, or supersede any law of the United States (except as provided in sections 111 and 507(b)) or any rule or regulation issued under any such law.” ERISA § 514(d), 29 U.S.C. § 1144(d). {My quotation is to the statute, not the compilation in the United States Code. That compilation is rebuttable evidence of the law, but the statute controls.} Internal Revenue Code of 1986 (26 U.S.C.) § 6334(c) provides: “Notwithstanding any other law of the United States (including section 207 of the Social Security Act), no property or rights to property shall be exempt from levy other than the property specifically made exempt by subsection (a).” Following those two quoted statute sections, courts have interpreted ERISA § 206(d) as not precluding an IRS levy, lien, or garnishment on a participant’s, beneficiary’s, or alternate payee’s rights under an ERISA-governed retirement plan. For example, United States v. Sawaf, 74 F.3d 119, 123-24 (6th Cir. Jan. 26, 1996); Shanbaum v. United States, 32 F.3d 180, 182-183, 18 Employee Benefits Cas. (BL) 1929, 74 A.F.T.R.2d (RIA) 94-6292, 94-2 U.S. Tax Cases (CCH) ¶ 50,512 (5th Cir. Sept. 16, 1994).

If the Internal Revenue Service’s levy is legally and procedurally proper, that the property the levy reaches is a right under an annuity contract or custodial account held under an IRC § 403(b) plan does not impair the levy. For some background information, read these two parts of the Internal Revenue Manual: IRM 5.11.5 Levy on Wages, Salary, and Other Income https://www.irs.gov/irm/part5/irm_05-011-005 IRM 5.11.6.2 Retirement Income https://www.irs.gov/irm/part5/irm_05-011-006 When income other than “salary or wages” is levied, “the levy reaches a payment the taxpayer has a fixed and determinable right to.” That’s so even if the payment will be in the future. If a proper levy is made when the taxpayer has no right to an immediate distribution, the levy can remain in effect (unless released) while the IRS waits for the taxpayer’s entitlement.

Do the documents governing the plan and its trust provide for, or at least not preclude, a delivery of property (rather than a payment of money)?

One guesses the recordkeeper assembled the report you describe using facts from its records. That reporting might be designed to report facts with little or no attempt to characterize them beyond instructions the plan administrator had furnished. A service provider might do this for reasons of business efficiency. And a service provider might do this so it avoids discretion that could be argued as suggesting that the provider was a fiduciary, or practiced accounting or law. A Form 5500 annual report is the plan administrator’s report. It should report correctly and fairly. Depending on all the facts and circumstances, that might include reporting on Schedule C the reimbursed amount as the plan’s payments, naming each investment adviser and each other service provider, and showing appropriate service and compensation codes for each.

MoJo, thank you for your information and observations. I appreciate your help in filling-in gaps in my experiences. Bird, thank you for your observations about different kinds of recordkeeping conversions. About situations in which the directed trustee or custodian that comes with a recordkeeper is unwilling to hold money not yet allocated to individuals’ accounts, I assume it is the plan’s sponsor/administrator, acting as an agent of a trustee—perhaps an additional trustee beyond a bank or trust company trustee, that would open a bank account to hold unallocated amounts. Whether that account should be credited interest (or use what would be interest against bank fees) is a fiduciary decision. Likewise, whether gross or net interest (if any) should be allocated among participants’ accounts or used for plan-administration expenses is a fiduciary decision. I recognize that the range of practical choices is fewer with smaller plans. While it might seem a nuisance to set up a bank account for a few days or weeks, segregating amounts from the employer’s assets is an important purpose. austin3515, thank you for helping us see a weakness in the ways small plans arrange services.

austin3515, thank you (!) for this helpful information. I remember the difficulties and issues from my experiences, inside 1984-2005, and outside counsel to a few recordkeepers from 2006. My experiences working for a plan's sponsor/administrator are with plans big enough that, if a blackout isn't done within a weekend, the recordkeeper/custodian would hold the money for not-yet-processed contributions and loan repayments in some temporary account, and allocate the amounts later. Have other BenefitsLink people seen different experiences?

My three questions are open-ended, and I don’t presume or predict a conclusion. I really would like to see what BenefitsLink people say, particularly about questions 1 and 3. About the problem austin3515 described, I don’t know what service is (or isn’t) offered to a plan without purchasing power. A plan’s size does not remove the plan’s fiduciary from ERISA’s commands, but might sometimes affect what a prudent fiduciary would do in reacting to a situation. Consider ERISA § 404(a)(1)(B): [A] fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and— . . . (B) with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims[.] Imagine, for discussion, circumstances in which even a prudent-expert fiduciary, even if she did an exhaustive search, would find for a micro plan no recordkeeper willing to accept a pending-blackout deposit. That information might affect how a fiduciary reacts to having participant contributions and loan repayments that need to be segregated from the employer’s assets. Sometimes, it might lead to transferring those amounts into a bank account under a plan trustee’s, rather than the employer’s, control. Let me ask again: Are there recordkeeper/custodians that don’t accept a pending-blackout deposit?

What do BenefitsLink people think about these questions: 1. Which recordkeeper/custodians accept a pending-blackout deposit? Which don’t? 2. How much about this point should a plan’s fiduciary check before selecting a recordkeeper? 3. Is there a plan size so small that even a prudent fiduciary would be unlikely to find a recordkeeper willing to accept the pending-blackout deposits?

Treating an amount as plan assets does not necessarily mean the amount must be immediately invested in its ultimate-destination investment. Would an experienced fiduciary considering “the circumstances then prevailing”—including the blackout (if that decision was not a breach)—find it prudent to hold the pent-up amounts in a temporary account? Is it feasible to pay the amounts from the employer’s account and into an account the plan’s trustee holds (whether directly or through its agent)? After the blackout clears, the plan’s fiduciaries would allocate the temporary-holding amounts to investments as the participants directed (or as the plan otherwise provides).

To follow the statute, a plan’s administrator (if it uses the safe-harbor explanation) should have rewritten its § 402(f) notice as soon as the preceding safe-harbor explanation no longer met the commands of § 402(f)(1)(A)-(E). Whatever reliance Notice 2018-74 afforded, one gets no reliance to the extent that an explanation is no longer accurate because of a law change after September 18, 2018. (A caution of that kind has been in successive IRS Notices with revised safe-harbor explanations.) Yet many service providers wait for the IRS’s release of a revised safe-harbor explanation. Some businesspeople imagine the Internal Revenue Service might be reluctant to assess a penalty against an administrator if it delivered an otherwise proper notice grounded on the preceding safe-harbor explanation and the only defect is incorrect or incomplete content while waiting for the IRS’s revised safe-harbor explanation. Likewise, some administrators estimate (whether expressly or impliedly) a modest exposure to liability for a distributee’s reliance on incomplete, incorrect, or misleading information. For an administrator or service provider that waits for the IRS’s revision of a safe-harbor explanation, it seems wise to implement a new version promptly after the IRS publishes it.

A fee-collection power might make one a plan’s fiduciary. A service provider might argue it lacks discretion because an independent fiduciary approved the service agreement’s terms, including the fee and the power to collect it from the plan. Further, a service provider might argue it lacks even non-discretionary “authority or control respecting management or disposition of [the plan’s] assets” because the bank, trust company, or insurance company decides whether to pay a requested amount from trust or quasi-trust assets. (A weakness is that the service provider might carry the administrator’s power to direct a payment.) A fee-collection power might involve an agency, which the common law treats as a fiduciary relationship. One can imagine a court deciding whether a service provider was a fiduciary using different reasoning or analysis, or applying a different finding of the facts. Remember, treatment as an ERISA-governed plan’s fiduciary is “to the extent” of what makes one a fiduciary. Some service providers, even if the services are non-fiduciary, don’t fear treatment as a fiduciary.

What Luke Bailey said. And on the IRS’s side of the negotiation is the penalty for each incorrect W-2 wage report and taxes and interest due from each failure to withhold income tax from wages for which § 401(k), § 403(b), or § 457(b) provided no exclusion. ****** Further, consider that some certified public accountants decline to be associated with a business organization’s income tax return if the return would include a position that depends on the retirement plan having been tax-qualified and the CPA knows the plan was not tax-qualified. Of those, many will proceed on receiving satisfactory assurances that the employer/administrator has engaged a lawyer or other practitioner for a correction that will be effective, retroactively, for the period of the tax return.

Many agreements include provisions for the retirement plan to pay the service provider’s fee—some in the first instance, and many after another anticipated payer did not pay after some specified period. (In my experience, a provision of this kind is common with recordkeepers. I suspect it is less common with TPAs. For investment managers and investment advisers, paying a fee from the assets managed or advised is common.) Some design factors include these: Make the retirement plan a party to the service agreement, or at least an intended third-person beneficiary of the service agreement. Make distinct a fee for a service that is a settlor (rather than plan-administration) expense. Collect from the plan only a proper plan-administration expense. Don’t collect a fee from the plan if the service recipient or the responsible plan fiduciary disputes whether the fee is owing. Design the timeline and method for collecting a fee so the service provider lacks discretion. Even if the service provider does not fear being a fiduciary, it should avoid self-dealing regarding its own compensation. In the agreement, specify the method for allocating the expense among participants’, beneficiaries’, and alternate payees’ accounts so the plan’s administrator will have instructed the service providers on the allocation. Recognize that collecting a fee might require a trustee’s, custodian’s, or insurer’s cooperation. Specify the administrator’s grant of the service provider’s power to collect its fee with enough clarity that the asset holder will accept the service’s provider’s instruction as binding the administrator and protecting the asset holder.

Belgarath, I think you’re right to see a risk; but the required analysis is not different from everything a fiduciary must consider. Following 29 C.F.R. § 2520.104b-31 treats a retirement plan’s administrator as having furnished the covered document. It does not excuse or relieve anything else. ERISA requires a fiduciary to use at least as much care, skill, caution, and diligence as would be used by someone who is “familiar”—that is, experienced—with the needs of a similar retirement plan and with the fiduciary’s role in serving such a plan. If a prudent-expert fiduciary would consider the risks you mention, an administrator must consider those risks. Yet, a fiduciary may (and often must) consider many factors, which might include managing plan-administration expenses. A fiduciary might find the potential advantages of a default-electronic-disclosure regime outweigh the potential harms. In some circumstances, nudging use of electronic systems might help improve security. Some service providers use records about when, from which internet service provider and connection, and which computer equipment an individual has accessed the plan’s website. A lack of such a baseline about what’s expected from the individual might make it easier for an impostor to get through with fewer challenges and weaker controls. An individual who has never used the computer system might suffer the weakest controls. If an administrator starts a default-electronic-disclosure regime, it might in the initial notice (which must include the individual’s specified electronic address the administrator will use) explain security risks so the individual has that information before she decides whether to allow the electronic regime. Beyond risks from the individuals, a fiduciary must consider the controls and security of the recordkeeper’s and other service providers’ systems, again using at least as much care, skill, caution, and diligence as would be used by someone who is experienced in managing the needs of a similar retirement plan.

Before even the earliest of the IRS’s fix-it procedures, I remember lawyers and other practitioners saying that most plans are tax-disqualified—it’s just that the IRS hasn’t yet made that determination. Although many of those remarks were merely flippant, some considered questions about an employer’s or payer’s duty in tax-reporting wages or a plan’s distribution. For example: 1. Imagine a plan’s administrator administered the retirement plan contrary to its governing documents (and contrary to a tax-qualification condition). Is the plan tax-disqualified? If the employer knows this happened, must the employer’s Form W-2 reporting treat amounts intended as non-Roth elective deferrals and matching contributions (if 100% vested and nonforfeitable) as not excluded from wages? 2. Imagine an insurance company, even if neither a trustee nor an administrator, is responsible for Form 1099-R reporting. Imagine it has full knowledge of the defect (perhaps because the bank or insurance company is the plan’s recordkeeper or its affiliate). Consider a single-sum distribution that, if the plan were a tax-qualified plan, would be an eligible rollover distribution. Must the insurance company code the distribution as not rollover-eligible? Must the payer decline to process a direct-rollover payment? (For both situations, assume the employer/administrator told the service providers the employer will not pursue any IRS correction, nor even self-correction. Assume also that nothing about the defect involves a § 401(a)(26) or § 410(b) failure. Assume the plan’s governing documents have nothing beyond an IRS-approved document and the employer is up-to-date for all amendments, including interim amendments.) If you were advising the employer or the payer, how would you analyze what it must (or need not) do?