Peter Gulia

RatherBeGolfing is right. I wasn't thinking, and misdescribed the accounting. (The $100,000 in fund shares would be redeemed to pay the loan proceeds.) It remains that the unpaid $101,000 loan is income.

Even if a plan provides participant-directed investment and a loan does not affect the account of anyone beyond the participant who takes the loan, there might be reasons a plan’s sponsor could be reluctant to allow a 100% loan. Imagine this hypothetical illustration: Pat is 45. Pat’s spouse is positive for coronavirus. Just before taking a loan, Pat’s account balance (all non-Roth) in fund shares was $100,000. Pat’s 100% loan is $100,000 for 72 months. The monthly repayment is $1,657.29; but Pat takes the CARES Act delay. About eight weeks or two months later, Pat is severed from employment. Pat’s loan receivable then is about $101,000. The plan’s administrator gives Pat an opportunity to repay the loan, but Pat lacks money. Meanwhile, Pat’s fund shares dropped to $75,000. What amounts will the plan’s trustee tax-report as a set-off distribution and as a deemed distribution? How much in income taxes will Pat owe? I do not suggest it is a bad thing for a plan’s sponsor to allow choices, including difficult choices. But some sponsors might prefer to moderate the range of those choices. ERISA § 408(b)(1)(E)’s adequate-security condition partially protects “the plan” against some potential consequences of a borrower’s default on a loan. For a participant-directed plan, the condition might protect an individual’s account. Even if no one fears any enforcement on a nonexempt prohibited transaction or on a fiduciary’s breach in allowing the transaction, a plan’s sponsor as a non-fiduciary might consider security for a loan in deciding what a plan should provide.

What FPGuy describes is one of many ways to do what some lawyers and notaries call a window-separated signing. Some notaries will officiate if the notary can see and hear the signer, handle documents safely, and use sensible ways to guard against a forgery or alteration. Nat’l Notary Ass’n, Important Coronavirus Guidance For Signing Agents And Mobile Notaries, https://www.nationalnotary.org/notary-bulletin/blog/2020/03/notaries-precautions-coronavirus

For those plans served by a recordkeeper that uses Relius software, would it be simpler to ask FIS Relius what they think the rules are?

Even if a practitioner is not a member of the American Institute of Certified Public Accountants, many States’ laws impose the AICPA’s standards or similar standards. AICPA Statement on Standards for Tax Services No. 1, Tax Return Positions: ¶ 5(a) A [CPA] should not recommend a tax return position or prepare or sign a tax return taking a position unless 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. ¶ 5(b) Notwithstanding paragraph 5(a), a [CPA] may recommend a tax return position if the [CPA] (i) concludes that there is a reasonable basis for the position and (ii) advises the taxpayer to appropriately disclose that position. Notwithstanding paragraph 5(a), a [CPA] may prepare or sign a tax return that reflects a position if (i) the [CPA] concludes there is a reasonable basis for the position and (ii) the position is appropriately disclosed. Few taxpayers are eager to file an audit-me Form 8275 (or 8275-R), so the standard often is whether the practitioner believes the tax-return position has a realistic possibility. I express no view about the underlying tax-law question.

A related discussion:

If Congress’s delegation to the Secretary of the Treasury is not contrary to law, he (or his delegate) has some power to “determine[]” “other factors[.]” CARES Act § 2202(a)(4)(A)(ii)(III). A question arises only if an administrator or other decision-maker does not accept the claimant’s certification (or a claimant does not sign a certification).

There might be little (or no) difference between a summary of material modifications and some other writing that describes new or changed provisions. Also, if a plan’s sponsor somehow adopts new or changed provisions without amending the plan’s governing document, a written description of the new or changed provisions might be useful evidence to help show the plan was “operated as if [the retroactive] plan or contract amendment were in effect[.]” CARES Act § 2202(c)(2)(B)(i).

Courts have interpreted ERISA § 404(a)’s commands that a fiduciary meet its responsibility loyally and prudently to require a fiduciary in some circumstances to furnish information beyond what the statute specifies (or describes). Those court decisions say a fiduciary must furnish further information that a prudent fiduciary should know the individual needs to protect his or her interests in the plan. Courts have applied that idea to find that a fiduciary was duty-bound to inform a participant about a potential plan amendment an employer had seriously considered. For example, an employee might need to know that her employer is considering an early-retirement provision (and perhaps the proposal’s essential terms) because the information might matter in her decision-making about whether to quit her job now or wait a few months so as not to lose the opportunity to get the potential early-retirement provision. If there can be some duty to communicate about a potential provision, there might be no less duty to communicate about an adopted provision. Yet the responsibility courts have found turns on whether a lack of the information affects a person’s opportunity in using her employee-benefit rights. Whether a plan’s fiduciary must (before the SPD/SMM due date) inform all or a class of participants about the coronavirus amendments might turn on how much the fiduciary knows (or how much the fiduciary would know had it used the required care, skill, prudence, and diligence) about how likely it is that some need or want to use the relaxed provisions. Some plans’ fiduciaries find that workers have enough awareness about the possibility that a retirement plan might have coronavirus loans and distributions that it’s okay to wait for a participant’s inquiry about whether the plan falls in with what Congress allows. Even if a plan’s fiduciary is persuaded that it need not advance the information, some find it’s straightforward to furnish the information now, if the plan can do so without incurring an imprudent expense.

Thank you, Belgarath, RatherBeGolfing, duckthing, and Bob the Swimmer for sharing this useful information.

Internal Revenue Code of 1986 § 402(c)(4) (flush language), as amended by CARES Act § 2203(b): If all or any portion of a distribution during 2020 is treated as an eligible rollover distribution but would not be so treated if the minimum distribution requirements under section 401(a)(9) had applied during 2020, such distribution shall not be treated as an eligible rollover distribution for purposes of section 401(a)(31) or 3405(c) or subsection (f) of this section.

Belgarath, thank you for your quick response. It works when the plan’s employer/sponsor/administrator has had a continuing relationship with a quality TPA. But what if a recordkeeper never did any testing? A service agreement might have omitted testing if the employer believed, assuming a safe harbor, there was no need for it. If the starting point is no preceding information, is it feasible for a TPA to turn around tests in a couple of business days after getting data? (We recognize the quality will be GIGO.)

When a retirement plan has always used a safe-harbor regime (or has used one for many years), the plan’s sponsor might lack information to predict what coverage, non-discrimination, and top-heavy test would show absent the safe-harbor treatment. Consider, while a good-enough sense of this information might be obvious to those with the data, it might be almost an unknown to the plan’s sponsor, and might be a complete unknown to the plan sponsor’s lawyer. If a plan’s sponsor wants information to help the sponsor decide whether to discontinue a safe-harbor contribution, how quickly does a recordkeeper or third-party administrator turn around that testing? (While I know it’s often not a realistic assumption, assume complete and clean data. And assume the service provider’s fee is paid in advance.)

The statute allows, and some plans allow, witnessing by a plan representative. But which kind of person witnesses a spouse’s consent might not change a need to do it “in the physical presence”. The statute’s text is “witnessed by a plan representative[.]” One might interpret “witnessed” to include something without physical presence. But a court must defer to an agency’s interpretation of a statute expressed in a rule or regulation made in compliance with the Administrative Procedure Act. A court defers unless the agency’s rule is really not an interpretation. A plan’s administrator might prefer not to risk exposure to, or even defending against, a later claim that a consent did not meet the requirements of ERISA § 205 and the plan.

Here’s last week’s discussion: Even if a notarial act is proper under the State law that governs the notary, a plan’s administrator should evaluate (and might want its lawyer’s advice about) whether the notarial act meets the plan’s provision and ERISA § 205. Under ERISA § 205 a spouse’s consent must be “witnessed by . . . a notary public[.]” A regulation allows a notary’s certificate to be furnished by electronic means, but requires that the spouse’s consent was signed in the notary’s physical presence. 26 C.F.R. § 1.401(a)-21(d)(6)(i)-(ii). Although the classification in title 26 of the Code of Federal Regulations suggests the rule is about tax-qualification conditions, Reorganization Plan No. 4 of 1978 § 101 makes the Treasury Secretary’s rule authority for ERISA § 205.

That's how I read it. CARES 2202(a)(1) states: "Section 72(t) . . . shall not apply to any coronavirus-related distribution." Subsection (t) includes its paragraph (6), the 25% tax on a too-soon distribution from a SIMPLE.

Further, IRC § 401(a)(9) does not preclude a plan’s provision that compels a distribution. There might be another provision—for example, one designed or implied to meet ERISA §§ 202-204, or other Federal law—that constrains an involuntary distribution. But a plan might provide an involuntary distribution after the participant has reached the later of age 62 or normal retirement age and other facts permit the distribution without unlawful age discrimination. That might include an involuntary distribution even if it is not a 401(a)(9)-required distribution. Admittedly, those circumstances are not the mainstream. Yet it can matter for some plans.

Internal Revenue Code of 1986 § 401(a) sets a list of conditions a plan must meet if one wants tax-qualified treatment. Paragraph (9) sets the minimum-distribution condition. IRC § 401(a)(9)(I) [added by CARES § 2203(a)] varies the § 401(a)(9) condition. But the § 401(a)(9) condition doesn’t preclude a plan provision that pays out more than the minimum.

Here's some reporting on what American Retirement Association said. https://www.pionline.com/defined-contribution/small-dc-plans-risk-termination-amid-coronavirus-outbreak-ara

Is American Retirement Association seeking: (1) revised subregulatory guidance (which can't change the rule); (2) a revised rule (which likely could not be completed before 2020 ends unless the Treasury makes a sufficient finding of an emergency need, and still would be impractical recognizing that Treasury and IRS lawyers are needed to work on other projects); (3) a revised statute (which Congress readily can do)? If the IRS would publish subregulatory guidance saying the 20% presumption does not apply regarding the coronavirus emergency, would that be enough help?

I too have not considered those cutback questions. But a general sense that it’s often harder, not only legally but also practically, to take something away, is among the reasons some plans decide not to add such an optional provision until, at least, there is someone who would use it.

Belgarath, thank you for reminding me about how recordkeepers call the tune for many plans. Could a plan’s sponsor preserve its choices by responding to such an implied-assent notice by specifying “otherwise”, knowing that if the sponsor changes its mind one can flip that yes-or-no switch later? Or is there a practical reason not to do so?

To help consider together Bird’s and Belgarath’s recent points: Some plan sponsors already have decided not to decide whether the plan provides a coronavirus distribution or coronavirus loan until the plan’s administrator receives the first claim requesting one. Then, the plan’s administrator will ask the plan’s sponsor whether the plan includes or omits the provision. Do BenefitsLink mavens think such a wait-and-see is a good idea? Or a bad idea?

A BenefitsLink discussion about what TPAs now are doing suggests some key points for a business-continuity plan. https://benefitslink.com/boards/index.php?/topic/65755-are-tpa-firms-essential/&tab=comments#comment-302161

Yes, it is section 2203.