Peter Gulia

Consider this not-entirely-imaginary work setting: The employer has no retirement plan, and no payroll practice for retirement contributions. The employer wants to allow its employees to save for retirement, but will provide no nonelective or matching contribution. None of the employees, including the deemed-employee business owner, wants to save (and none can afford to save) more than an amount within the IRA contribution limit. The business owner is the only worker who would be treated as a highly-compensated employee. This small-business employer and its startup plan would have no purchasing power in negotiating fees for a retirement plan’s investments or services. So, assume a recordkeeper’s and other service providers’ rack rates. The employer is unwilling to pay any of the plan’s expenses; everything must be charged to participants’ accounts. The employer will not consider an employer-sponsored retirement plan unless the employer can arrange the maximum delegation of fiduciary responsibilities—a pooled-employer plan or, for a single-employer plan, using a § 3(16) administrator, a § 3(38) investment manager (to select the plan’s investment alternatives), and a trustee, with all those services paid from participants’ accounts. All employees live and work in a State that offers a State-run payroll-deduction program for IRA contributions. The program allows Roth and non-Roth contributions. The State’s arrangements cap the expenses of the State-run IRA program at 100 basis points (expressed yearly) of accounts’ assets. This employer asks for your unbiased advice about whether it should arrange a 401(k) plan, or join the State-run IRA program. Which do you advise, and what reasoning do you explain to support your advice?

The President vetoed the defense-authorization bill, which means Congress will continue at least for the override votes. If the appropriations bill is presented on December 24, the tenth day is January 5. If the President neither approves nor objects, this could call the 116th Congress to continue through at least January 6 if they want to prevent a pocket veto.

Several possibilities turn on, or relate to, when the appropriations bill becomes presented. If the appropriations bill does not become law before the most recent anti-deficiency resolution expires Monday December 28, a government shutdown could result (if Congress has not enacted another extension, which might be impractical without the President’s cooperation). Both bodies of Congress are ready for votes next week if the President vetoes the defense authorization bill or the appropriations bill (or both). Yet, if the President neither approves nor objects on the appropriations bill, he might use the Constitution’s ten days to pocket-veto the bill if the 116th Congress adjourns. Further, the political theater around these and other actions might affect the scheduling of Congress’s anticipated January 6, 2021 joint session to count votes cast by the Electoral College and certify that result.

President Trump has not signed H.R. 133, and made remarks that call into question whether he will sign. The bill passed both bodies of Congress with votes more than the two-thirds that would be needed to override a President’s veto. House: 327–85, 359-53; Senate 92-6. Yet, Members might vote differently in a different political context. If the President neither approves the bill nor returns it with his objections “within ten Days (Sundays excepted) after it shall have been presented to him, the [bill] shall be a Law, in like Manner as if he had signed it, unless the Congress by their Adjournment prevent its Return, in which Case it shall not be a Law.”

In 1985 and 1986, I worked in lobbying on what became the 1986 Act. After enactment, even skimming the enrolled bill to find the retirement plans’ provisions I’d explain in my book, I glanced over many provisions that stated narrow conditions to avoid using a name. Some were mentioned in 1987’s Showdown at Gucci Gulch. https://www.penguinrandomhouse.com/books/118994/showdown-at-gucci-gulch-by-jeffrey-birnbaum/ And a 1988 article about the practice won a Pulitzer Prize. Donald L. Bartlett & James B. Steele, How the Influential Win Billions in Special Tax Breaks, Philadelphia Inquirer, Apr. 10, 1988. That article counted “at least 650 exemptions—preferences, really, for the rich and powerful—through the legislation, most written in cryptic legal and tax jargon that conceals the identity of the beneficiaries.”

Yesterday evening, Roll Call reports this is about the St. Louis Carpenters’ Pension Plan. https://www.rollcall.com/2020/12/21/midwestern-carpenters-would-get-relief-in-year-end-tax-package/

Common sense; I did not base anything on a specific statute, agency rule, or other agency interpretation. My explanation about an investment adjustment is grounded on treatises describing courts’ decisions applying the common law of equity or chancery relief. If one needs citations, a lawyer might look to the American Law Institute’s Restatements. Also, the U.S. Labor department has described, but not in an agency rule, a similar framework for the equity concept of restoration to correct a prohibited transaction. You’re right to tell the employer to lawyer-up.

If the employer restores to each Health Savings Account the money not paid over to the HSA custodian (with an investment adjustment), might a 2019 W-2 become correct? Each investment adjustment should be the greater of (i) the investment returns the HSA would have obtained by promptly investing the missing amounts and (ii) the investment return the employer obtained using the money the employer wrongfully had or the interest value of that money, whichever is greater.

Yes, I selectively quoted the text (but attached the whole text), and selectively described the soon-to-be statute’s effect. I mentioned 2020 because I remembered a BenefitsLink discussion in which austin3515 described a plan administrator’s decision, long before 2020 ends, to treat a situation as a partial termination. A situation that otherwise might be a partial termination could happen in 2021 and might be relieved by this legislation. Yet, the ratio’s or fraction’s numerator refers to those covered on March 31, 2021.

The Consolidated Appropriations Act, 2021 (if enacted) amends, retroactively, the CARES Act to allow a § 401(a)-qualified money-purchase plan to provide a coronavirus-related distribution. Coronavirus-related distribution from money-purchase plan.pdf

Today’s Consolidated Appropriations Act, 2021 treats a situation in 2020 as not a partial termination “if the number of active participants covered by the plan on March 31, 2021 is at least 80 percent of the number of active participants covered by the plan on March 13, 2020.” Temporary rule preventing partial plan termination.pdf

Nice guess, but the focus is on the plan rather than an employer. Here’s a clue from the soon-to-be statute’s text. The heading for amended I.R.C. § 401(a)(36)(B) reads: “Certain employees in the building and construction industry.”

Here’s a brain-teaser for the super-smart BenefitsLink mavens. A section of today’s Consolidated Appropriations Act, 2021 amends Internal Revenue Code of 1986 § 401(a)(36) to allow a § 401(a)-qualified plan to provide a distribution to a worker not yet separated from employment as soon as age 55. But that change applies only for “a multiemployer plan . . . with respect to individuals who were participants in such plan on or before April 30, 2013, if—(i) the trust to which [the before-separation provision] applies was in existence before January 1, 1970, and (ii) before December 31, 2011, at a time when the plan provided that distributions may be made to an employee who has attained age 55 and who is not separated from employment at the time of such distribution, the plan received at least [one] written determination from the Internal Revenue Service that the trust to which [IRC § 401(a)(36)(A)-(B)] applies constituted a qualified trust under [IRC § 401].” Which unnamed plan gets this tax law?

To help you prepare to ask your lawyer for advice (or to ask the plan’s administrator to instruct you), you might read: ERISA Advisory Opinion 2013-03A (July 3, 2013) (Principal Life Insurance Company). https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/our-activities/resource-center/advisory-opinions/2013-03a.pdf That interpretation includes EBSA’s view that, even if an arrangement involves no set-aside, a contract right to have some amount “applied to plan expenses” could be the plan’s asset. A plan’s administrator should not rely on the investment or service provider’s description that an arrangement is not plan assets. (1) It can’t be prudent to rely on legal advice from a person that denies that it provides legal advice. (2) It is imprudent for a retirement plan’s fiduciary to rely, without further steps, on advice from a person that has an interest (other than the plan’s interest) about the subject for the advice. Further, if something is plan assets, the plan’s administrator might want its lawyer’s advice about how to allocate the plan trust’s assets. This might involve careful readings of the plan, its trust, and the plan-expenses arrangement. Not every plan-expenses arrangement has the same terms, and (even within IRS-preapproved documents) governing documents can state different provisions about how to account for and use an arrangement.

Concur. A corporation other than a 501(c)(3) charity or for public schools cannot maintain a 403(b) plan, unless the corporation is an employer of a minister, and then only for the minister.

https://ecfr.federalregister.gov/current/title-26/chapter-I/subchapter-A/part-1/section-1.403(b)-2

Thanks. Has anyone seen the Employee Benefits Security Administration or the Internal Revenue Service pursue enforcement for a too-low loan interest rate? If so, what was the agency’s explanation about why the rate was too low?

I don't know why the software shows in bold a text I hadn't set that way.

For a loan to a participant to meet an exemption from prohibited-transaction consequences (under both ERISA’s title I and Internal Revenue Code § 4975), the loan must “earn a reasonable rate of interest[.]” 29 C.F.R. § 2550.408b-1(a)(1)(iv). Further, the rule states: “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.” 29 C.F.R. § 2550.408b-1(a)(1)(iv). The rule includes three examples of facts and circumstances that do not result in a reasonable interest rate. Some fiduciaries adopt a procedure for setting a loan interest rate based on a “prime” interest rate, with an increase of zero, 100, or 200 basis points. This might be based on an IRS employee’s remarks that burden no one, not even the IRS. Without reopening that discussion, here’s my question: Has anyone seen the Employee Benefits Security Administration or the Internal Revenue Service pursue enforcement for a too-low loan interest rate? If so, what was the agency’s explanation about why the rate was too low?

If you’re hoping for comments about strengths and weaknesses in challenging the former employer’s decisions, BenefitsLink people might want to know whether the former employer is a government (for example, a public-schools district), a church or church-controlled, or a charitable organization that is neither governmental nor church-controlled. And recognizing some possibility that State law might matter, in which State does the former employer have its principal office? (That question is a proxy measure that might help uncover a law or choice about which State’s law might govern the former employer’s retirement plan.)

The current § 415 rules do not predate § 403(b)(7) accounts. Rather, the confusing text results from some legal drafters’ style or usage, often unfortunate, that assumes a reader’s awareness (sometimes with no signal) of all terms that have been specially defined. For agency rules to implement and interpret IRC § 415, the April 7, 2007 rules replaced the January 7, 1981 rules. https://www.govinfo.gov/content/pkg/FR-2007-04-05/pdf/E7-5750.pdf Congress enacted § 403(b)(7) on September 2, 1974, effective as of January 1, 1974. At least the 2007 revisors might have considered it unnecessary it to state explicitly that § 1.415(j)-1(e)’s reference to “a section 403(b) annuity contract” includes all the individual’s § 403(b) contracts. Internal Revenue Code § 403(b)(5) states: “If for any taxable year of the employee this subsection applies to 2 or more annuity contracts purchased by the employer, such contracts shall be treated as one contract.” And § 403(b)(7)(A) begins: “For purposes of this title, amounts paid by an employer described in paragraph (1)(A) to a custodial account which satisfies the requirements of section 401(f)(2) shall be treated as amounts contributed by him [the employer] for an annuity contract[.]” Likewise, the agency rules include this: “Section 403(b) and § 1.403(b)-3(a) only apply to amounts held in an annuity contract (as defined in § 1.403(b)-2), including a custodial account that is treated as an annuity contract under paragraph (d) of this section, or a retirement income account that is treated as an annuity contract under § 1.403(b)-9.” 26 C.F.R. § 1.403(b)-8(a). Some Treasury department lawyers worked on the § 415 rules (published April 7, 2007) and the § 403(b) rules (published July 26, 2007) around the same time. https://www.govinfo.gov/content/pkg/FR-2007-07-26/pdf/07-3649.pdf About the statement to be attached to the individual’s tax return, I don’t advise anyone; but a lawyer or certified public account might evaluate this: My limitation year for § 403(b) contracts is each year ended with August. A change must comply with 26 C.F.R. § 1.415(j)-1(d).

With no observation about what relevant law might provide: If the plan’s administrator considers furnishing a notice to less than all participants and other directing persons: Before the change date, is the to-be-replaced fund available to participants who have not yet invested in it, including those who do not yet use anything with the vendor that uses the to-be-replaced fund? After the change date, is the new fund available to participants who do not yet use anything with the vendor that uses the to-be-replaced fund?

Luke Bailey and BobbyV, thank you for your further observations.

An employer might elect, “subject to such terms and conditions as the Secretary may prescribe”, “to maintain the simplified employee pension on the basis of the employer’s taxable year.” Internal Revenue Code of 1986 (26 U.S.C.) § 408(k)(7)(C)(ii).

C.B. Zeller and Bird, thank you for your observations. Any others?