Peter Gulia

The Internal Revenue Manual describes a method for a plan’s administrator to decide a claim for a hardship distribution using only the participant’s written statements, including some that “summarize” an expense incurred. Under this method, the administrator need not read, nor even immediately collect, a source document that shows the claimed hardship expense. https://www.irs.gov/irm/part4/irm_04-072-002#idm140377115475856 How many of your clients use this method and do not ask for any source document? How many of your clients require a source document? Do your clients’ methods vary with the plan’s recordkeeper?

There is a completely different tax-reporting and tax-withholding regime about non-U.S. payees. The bank, trust company, or insurance company that serves as a directed trustee, custodian, or other payer might help with more information. Also, some recordkeepers have software with coding for these points.

That bigger and smaller plans are different markets, and perhaps in some ways different worlds, is often a reason I read BenefitsLink. My learning about small plans and services for them is indirect. A little bit is from volunteer work for charities. WCC and austin3515 and Bill Presson, thank you for your observations about why a recordkeeper might be reluctant to serve a plan that lacks an advisor.

Just curious, what about situations in which a small-business employer that is a retirement plan’s sponsor and administrator uses no § 3(38) manager, no § 3(21) advisor, and not even a non-fiduciary investment advisor. What if a plan’s sponsor/administrator selects the plan’s investment alternatives (within what’s available on a recordkeeper’s platform) with no guidance from anyone? Is a recordkeeper service for such a plan available in the small-plans markets? And if a recordkeeper is reluctant to offer its service to such a plan, what worries them?

ERISA § 402(b)(3) commands: “Every employee benefit plan shall—provide a procedure for amending such plan, and for identifying the persons who have authority to amend the plan[.]” Employee-benefits lawyers understand that compound sentence to allow opportunities for widening or narrowing which people can amend a plan, and what kind of writing is valid or ineffective. A plan’s amendment provision could be broad, such as: “The Plan may be amended by anything that is the act of the Plan Sponsor.” Or narrow, such as: “Only a non-electronic written instrument signed by the Plan Sponsor’s Executive Vice President for Human Capital and witnessed by the Plan Sponsor’s Deputy General Counsel for Employee Benefits can amend the Plan.” Here’s a few of courts’ decisions: Horn v. Berdon, Inc. Defined Benefit Pension Plan, 938 F2d 125, 127, 13 Empl. Benefits Cas. (BL) 2492, 2493 (9th Cir. July 1, 1991) (“[T]there is no requirement that documents claimed to collectively form the employee benefit plan be formally labelled as such.”). Curtiss-Wright Corp. v. Schoonejongen, 514 U.S. 73, 18 Empl. Benefits Cas. (BL) 2841 (Mar. 6, 1995) (Stating as little as “[t]he Company” may amend the plan is enough to meet ERISA § 402(b)(3)’s two requirements—that a plan “provide a procedure for amending [the] plan, and [a procedure] for identifying the persons who have authority to amend the plan[.]”). Cerasoli v. Xomed, Inc., 47 F. Supp. 2d 401 (W.D.N.Y. Apr. 30, 1999) (A written plan need not be a single, formal document.). Halbach v. Great-West Life & Annuity Ins. Co., 561 F.3d 872, 46 Empl. Benefits Cas. (BL) 2010 (8th Cir. Apr. 13, 2009) (A letter mailed to participants referred to a summary of material modifications. Those two writings formed an “instrument”. That instrument was sufficient to amend an employee-benefit plan.) Tatum v. R.J. Reynolds Tobacco Co., No. 1:02-cv-00373, 51 Empl. Benefits Cas. (BL) 2028, 2011 WL 2160893 (M.D.N.C. June 1, 2011) (An attempted amendment was void because it was not made according to the plan’s amendment procedure.), further proceedings on other grounds, No. 1:02CV00373, 61 Empl. Benefits Cas. (BL) 2860, Pens. Plan Guide (CCH) ¶ 24019B, 2016 WL 660902 (M.D.N.C. Feb. 18, 2016). To understand whether a writing beyond the thing called a “plan document” amends a plan, a starting point is to read the governing documents of the plan that might or might not have been amended.

Bill Presson, thank you for always teaching us so much. I’m hoping you’ll indulge us with one more lesson. Imagine a profit-sharing plan’s sponsor does not seek to change an allocation’s conditions but wants to change from having only one allocation group to providing an allocation group for each participant. If the plan’s sponsor is unwilling (for whatever reason) to use your new-plan method, what constraints affect the timing of an amendment to an allocation group for each participant? If a participant has accrued into the allocation formula for the current year, must one wait for the next year? Is there any other constraint or restraint on the change?

I am not aware of a specific rule about your question. But consider this reasoning: If, after the military service, the participant returns to work and qualifies for a makeup nonelective contribution, it is determined on the would-have-been as if she had been actively at work. The makeup contribution does not count against nondiscrimination measures for the year in which the makeup contribution is made. To allow relief also in the leaving-for-military year would count the same benefit accrual twice. I understand this introduces some distortion in measures for the leaving-for-military year. But perhaps that’s a cost of needing rules that can’t wait for knowing whether the participant completes the military service, returns to work, and qualifies for the makeup contribution. Consider what would be in the 2019 tests if the participant does not return after the military service.

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.