Peter Gulia

When I was inside counsel to a big recordkeeper, I saw this problem often, especially with healthcare employers. If the § 403(b) and § 401(k) plans’ investment alternatives are identical (or nearly so) and one recordkeeper serves both plans, there might be a straightforward correction. Even if the facts allow an ERISA § 403(c)(2) mistake-of-fact return to the employer, it can be unhappy because it’s work—often four layers of computations and reprocessing—and the employer can be exposed to restoring investment breakages that resulted from the employer’s mistake. Instead, the recordkeeper corrects both plans’ records (including for each affected individual account) so every account and subaccount shows the correct number of investment fund shares. There is no payment of money, only corrections of records of beneficial ownership of investment fund shares. (I assume neither plan had shareholder-of-record ownership.) Done methodically and thoroughly, all records will remain in perfect balance. Employers instructed these records changes without seeking any IRS approval. Of those that later attracted attention (in the 1990s there was a wave of IRS audits of big healthcare systems), the IRS accepted what was done. For most, the IRS examiner without hesitation accepted what was done. For a few, I persuaded the examiner or supervisor that an employee could not have an elective deferral under a plan to the extent she was ineligible to so participate, and that the employer could not have made a contribution allocable to what could not have been an elective deferral. Under equity law, a person or entity does not keep property if it in good conscience belongs to another.

A university maintains an ERISA-governed § 403(b) plan, and is the plan’s administrator. The plan allows a choice of three investment vendors—TIAA-CREF, Fidelity, and Vanguard. The plan has no common recordkeeper; each vendor keeps records to the extent a participant uses the vendor’s annuity contract or custodial account. The plan provides hardship distributions, using only the Treasury rule’s deemed needs. The university asked me to write a form on which a participant would specify which of the deemed needs is the claimant’s reason for the requested hardship distribution. The university knows a vendor has its forms, yet asks for this form besides the vendors’ forms. Completing this form would not relieve a participant from completing her vendor’s form. Is a plan-level hardship form a good idea or a bad idea?

Although it won't help for what was done in the past, government agency requests of the kind nancy describes are another reason plan administrators might consider the new electronic disclosure opportunities, including with employees who become former employees. The computers make lots of records.

Yes; but it fits the assumptions embedded in Ellie's query.

That a distribution is attributable to a subaccount other than the distributee’s elective-deferral subaccount does not make it one a distributee could not on her tax return treat as a coronavirus-related distribution if it otherwise meets those conditions.

What is the plan’s definition for an hour of service? Does it include an hour for which an employee is paid (or entitled to payment) “on account of a period of time during which no duties are performed” because of a layoff? 29 C.F.R. § 2530.200b-2(a)(2) https://www.ecfr.gov/cgi-bin/text-idx?SID=41f0127c8a6a1ed75938128d32b82deb&mc=true&node=se29.9.2530_1200b_62&rgn=div8

If a plan provides any coronavirus-related distribution, whether the plan restricts it to an elective-deferrals subaccount or allows it from other subaccounts is the plan sponsor's decision.

If the plan’s administrator that erred is the employer (and it would pay into the plan the mistaken-payment amount): Are the economic consequence for the employer of retroactively making the benefit nonforfeitable and of not getting restoration from the distributees who received an unentitled benefit not much different (over time)?

Thank you, everyone, for crowd-sourcing these lists. To answer Erik Read’s query: A retirement plan’s administrator may, beginning July 27, furnish routine* ERISA-required disclosures under the Labor department’s Default Electronic Disclosure rule. (There are distinctions between which can be included in a yearly notice of internet availability, and which require a distinct pointer or delivery.) Further, some guess the Treasury might publish a rule or subregulatory guidance to say Labor’s regime is good enough for notices tax law requires (for whatever Treasury’s guidance doesn’t yet allow). * The ERISA rule does not provide its safe-harbor treatment for furnishing on-request items. However, some consider it reasonable to respond to an emailed request with an email response. A response might state the administrator’s presumption that it need not send a paper copy for a document furnished as a .pdf attached to an email.

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.)