Peter Gulia

Without suggesting anything about what a contractholder might do (or refrain from doing): To meet the § 415 rule for treating an amount as restoration rather than an annual addition, it is enough that there is a reasonable risk of liability for a fiduciary breach. Restorative payments. A restorative payment that is allocated to a participant’s account does not give rise to an annual addition for any limitation year. For this purpose, restorative payments are payments made to restore losses to a plan resulting from actions by a fiduciary for which there is reasonable risk of liability for breach of a fiduciary duty under title I of the Employee Retirement Income Security Act of 1974 (88 Stat. 829), Public Law 93-406 (ERISA) or under other applicable federal or state law, where plan participants who are similarly situated are treated similarly with respect to the payments. Generally, payments to a defined contribution plan are restorative payments only if the payments are made in order to restore some or all of the plan’s losses due to an action (or a failure to act) that creates a reasonable risk of liability for such a breach of fiduciary duty (other than a breach of fiduciary duty arising from failure to remit contributions to the plan). This includes payments to a plan made pursuant to a Department of Labor order, the Department of Labor’s Voluntary Fiduciary Correction Program, or a court-approved settlement, to restore losses to a qualified defined contribution plan on account of the breach of fiduciary duty (other than a breach of fiduciary duty arising from failure to remit contributions to the plan). Payments made to a plan to make up for losses due merely to market fluctuations and other payments that are not made on account of a reasonable risk of liability for breach of a fiduciary duty under title I of ERISA are not restorative payments and generally constitute contributions that give rise to annual additions under paragraph (b)(4) of this section. 26 C.F.R. § 1.415(c)-1(b)(2)(ii)(C). A fiduciary might support such a finding with a memo that describes relevant facts and analyzes risks of liability. Unless the fiduciary’s conduct always was completely careful, skillful, prudent, and diligent (including before the selection of the contract, for all periodic reviews, and about how the contract affects decision-making about whether and when to change service providers), it might not be too difficult to find a risk of liability. If the fiduciary personally engages its lawyer for advice the fiduciary seeks for its own protection, the evidence-law privilege for lawyer-client communications applies without the fiduciary variation. The fiduciary need not reveal the memo, and likely would reveal it only if needed to persuade the Internal Revenue Service that the amount paid to make whole the annuity contract was a restorative payment. (In my experience, the IRS is unlikely to challenge a restorative-payment treatment unless a big portion of the payment benefitted a business owner.) Some other opportunities (each of which might be imprudent, depending on the facts and circumstances) might include: Evaluating whether there is a plausible claim about the insurer’s ERISA fiduciary breach, ERISA prohibited transaction, securities deception, insurance sales-practices violation, or something else that could motivate the insurer to adjust the contract. If the plan will buy another credited-interest contract, arranging with the next insurer an initial credit in the amount of the market-value adjustment the preceding insurer applied and contract terms by which the insurer is not at risk for the amount so credited. (A fiduciary should not consider this until it has found that it is prudent to include such a contract at least as an alternative for participant-directed investment and has prudently evaluated how the terms would affect the plan’s opportunities to exit the credited-interest contract and to change service providers.)

Has the plan’s administrator found a service provider to collect payments on the participants’ loan obligations? Or do you fear the administrator expects BG5150 to provide that service? About a fiduciary’s responsibility, a participant loan might be or become a nonexempt prohibited transaction “where the subsequent administration of the loan indicates that the parties to the loan agreement did not intend the loan to be repaid.” 29 C.F.R. § 2550.408b-1(b)(3).

The sponsor did not imagine a one-time election or anything else that would set an allocation condition for anything more than one nonelective contribution at a time. Again, I don't know what the sponsor will decide, and I might never know. (The sponsor is not my client.)

Luke Bailey, Bird, jpod, AKconsult, thank you for your further observations. I don't know which of the three paths the sponsor will take, but we sure had an interesting BenefitsLink discussion.

jpod, thank you for a new (or perhaps newly stated) point about whether an allocation condition might fail to meet 26 C.F.R. § 1.401-1(b)(1)(ii)’s condition that a profit-sharing plan “must provide a definite predetermined formula for allocating the contributions made to the plan among the participants[.]” Larry Starr, thank you for your further observations.

Thank you. It seems the § 501(c)(1) amount is not a subject of annual adjustment. https://www.ecfr.gov/cgi-bin/text-idx?SID=09b66825bfb139913a2cf2d9385c3489&mc=true&node=se29.9.2575_12&rgn=div8; see also https://www.govinfo.gov/content/pkg/FR-2019-01-23/pdf/2019-00089.pdf at its pages 221-222 [.pdf pages 9-10]

Luke Bailey, thank you for your further observations. (There's no risk that the employer would replace the non-allocation of a nonelective contribution with money wages.)

Which possible combinations of money wages, pension benefits, health benefits, and other welfare and fringe benefits might meet a prevailing-wage duty or obligation turns on which law or contract the employer wants to meet. Not only the United States government but also many State and local governments set prevailing-wage obligations.

A summary plan description's ERISA-rights notice states: “ In such a case, the court may require the Plan administrator to provide the [documents requested] and pay you up to $110 a day until . . . .’’ Has the amount referred to been adjusted? If so, is it $112 or some other amount?

Is your plan Pennsylvania's Public School Employees' Retirement System? If so, this linked-to unofficial publication might help your lawyer understand the System's view of some law. (I have not read the publication, and do not know whether it is an accurate explanation of the law the publication describes.) https://www.psers.pa.gov/FPP/Publications/General/Documents/DivorceGuidelines.pdf

Thank you, all, for helping me think about this. The sponsor hasn’t yet decided anything and is keenly aware its idea is unusual and seems harsh. That’s why the sponsor seeks advice. I expect the advice will include observations about how participants would perceive the provision, how EBSA and IRS might see it, what a court would decide, and how challengers or defenders might evaluate whether it’s worthwhile to assert one’s view. I recognize that whether an administrator could follow a provision or must disobey it as contrary to ERISA’s title I involves unsettled law and challenging questions. That an election to make an elective contribution must include a proper investment direction is in the plan’s governing document. Adding an investment-direction condition for a nonelective contribution would be new. There has been, so far, no participant who failed to direct investment promptly after she became entitled to a nonelective contribution. But the sponsor perceives a possibility that someone might not make an investment direction, and wants to prepare for that situation. The sponsor does not seek to be unfairly harsh. But it also doesn’t want a participant to escape responsibility for directing investment. And with the sponsor volunteering “free money” it has no other obligation to provide, it feels asking a recipient to direct investment of her account is not an unreasonable condition. The sponsor includes nonelective contributions because the sponsor wants to provide something for those who chose not to make elective contributions. The sponsor does not seek to exclude particular people. The purpose of an investment-direction allocation condition would be to make sure a participant’s refusal to direct investment does not burden the administrator or allow a participant to avoid responsibility. While the administrator recognizes its responsibility prudently to select a broad range of investment alternatives, the sponsor prefers that the administrator not be burdened with a responsibility to choose the investment mix for a participant’s individual account (even if that could be done simply through an asset-allocation fund such as a balanced fund or a target-year fund). Further, the sponsor believes an adult should not avoid decision-making responsibility. I’ll warn the sponsor about the risk that the IRS might assert a nonelective contribution was conditioned because the condition for an investment direction might be an indirectly implied condition about an election to make or not to make elective contributions. Thank you for the observation about § 415 limitation years. For the participants who might be affected, the contribution is not so big that a delay into another year would matter. Again, thank you, all, for helping me think about cautions to point out to the sponsor. And before any of us too hastily sees only harshness in the sponsor’s idea, consider that the sponsor could resolve, instead, to provide no nonelective contribution.

Thank you, duckthing and Bird, for helping me think about this. That an election to make an elective deferral must include a proper investment direction has been in the plan’s document for years, and the IRS issued a favorable determination on it. (Adding an investment-direction condition for a non-elective contribution would be new.) So far, there has been no participant who “g[a]ve up free money” by not making an investment direction when she became entitled to a nonelective contribution. But the employer is aware of the possibility that someone might not make an investment direction, and wants to prepare for that situation. The employer does not seek to be vindictive or unfairly harsh. But it also doesn’t want to allow a participant to escape responsibility for directing investment. And with the employer volunteering “free money” it has no other obligation to provide, it feels asking for an investment direction is not an unreasonable condition. Again, thank you for helping me think about cautions I should point out to the plan’s sponsor.

An individual-account retirement plan allows § 401(k) contributions, provides matching contributions, and allows (but does not mandate) a non-elective contribution. The plan provides that an election to make an elective deferral (whether non-Roth or Roth) that does not include a proper investment direction is invalid. But if a participant never made elective deferrals, she might not have made an investment direction. Rather than set a default investment, the plan’s sponsor would prefer to provide that a proper investment direction is a condition for a participant to share in a non-elective contribution. This would not be an exercise of a fiduciary’s discretion; rather, the plan’s sponsor would express the provision in the plan’s governing document. In this employer’s circumstances, excluding a few people from a non-elective contribution would not result in a failure under Internal Revenue Code § 410(b) or § 401(a)(4). Is there some other tax-qualification condition a plan might not meet because of this provision? Is there an ERISA mandate a plan might not meet because of this provision?

And if you seek information about law and enforcement beyond tax law, the second-best source (if you don't engage Carol Calhoun) is chapters 7-9 in her Governmental Plans Answer Book.

If the worry is that a distribution other than a hardship distribution might reduce a net payment (after withholding toward Federal, State, and local income taxes) to less than an amount the participant needs to meet an expense, wouldn't the participant claim a bigger amount (up to the available subaccount balance)?

Beyond considering what gets an employer some reliance under an IRS procedure, a TPA might consider which business practice protects the TPA. If I understand TPApril’s originating query, a TPA might draft an amendment using neither the predecessor TPA’s preapproved-documents set nor the successor TPA’s preapproved-documents set. If so (and assuming the TPA is not admitted to law practice, and would not present the amendment in any submission to the Internal Revenue Service), could drafting such an amendment be the unauthorized practice of law? Even if one assumes no prosecution, should a TPA worry that, under the TPA’s errors-and-omissions insurance contract, the unauthorized practice of law is not within the professional services insured or fits an exclusion (perhaps for a crime or another violation of law)? Conversely, if a TPA is an authorized representative of the sponsor of the preapproved-documents set the TPA works with, might proper use of that set be within the sponsor’s practice before the Internal Revenue Service? (Under the U.S. Constitution, a State cannot forbid what Federal law authorizes.) Might avoiding risks with the TPA’s insurance coverage be a reason not to draft an off-system amendment?

RatherBeGolfing, thank you for your profoundly helpful thinking!

Yes. Under the existing-law rule or the proposed rule, a fiduciary is at least permitted to attach a document to an e-mail. My query was about whether there are reasons not to do so. The existing-law rule allows sending communications to a work e-mail address the participant is expected to check as a part of her regular work. It allows also using a non-work e-mail address if there is a clear affirmative consent. What some like about the proposed regime is that an employer can give its employee an e-mail address that need not be about work. And a participant’s assent would be inferred from the absence of an opt-out after notice. Under the proposed rule, an e-mail would point to a website from which the participant can retrieve the communication. I think it would be better for an e-mail to have both the pointer to a website and an attachment of the communication. If I were a recipient, I’d welcome the convenience of opening a document with a mouse click or two, and being spared the bother of entering a username, password, and other identifiers to go to a website, especially if I have no other purpose for using the website.

If the participant’s loan agreement mandates payroll deductions: While I’ve never rendered advice on this issue (and don’t now), I’ve heard the analysis go something like this: Obey the participant’s loan agreement, without exception if the State wage-payment law that governs the employer’s payment of the participant/employee’s wages allows an irrevocable authorization or does not make taking a payroll deduction without the employee’s authorization a crime. but allow a deviation if the governing wage-payment does not allow an irrevocable authorization and taking a payroll deduction without the employee’s continued authorization is a crime. ERISA § 514(b)(4): “[ERISA § 514(a)’s preemption] shall not apply to any generally applicable criminal law of a State.” https://www.govinfo.gov/content/pkg/USCODE-2017-title29/html/USCODE-2017-title29-chap18-subchapI-subtitleB-part5-sec1144.htm

And if you use those and other ideas, consider that a cash-balance defined-benefit pension plan might express an account balance only once a year.

My query did assume the communication would not have in it any addressee's name or other personal information. So I'll try inviting comment again: Is there a reason why a plan’s fiduciary should not attach to the e-mail message a .pdf of the document to be furnished? Or am I right in my working assumption that there's no good reason not to attach a .pdf (assuming a reasonable size)?

But a plan's fiduciary might be reluctant to instruct such a distribution if the beneficiary had not requested a distribution and the plan's governing documents do not provide an involuntary distribution.

Assuming there was no document that called for a fiduciary to do what the auditor suggests, among prudent responses to such a communication a plan's administrator might increase the care, skill, prudence, and diligence the administrator uses in its selection of an independent qualified public accountant.

Dalai Pookah, the description “ERISA Attorney” beneath your screen name suggests you might be a lawyer. If so, you might consider relevant States’ lawyers’ Rules of Professional Conduct. I say States’, plural, because a few States’ rules might apply. For example, a State’s law might apply because it is a State that admitted you to law practice, because your conduct occurred in the State, because your conduct affected a person who or that resides in the State, or because your conduct affected property in the State. If you are a lawyer but about the situation you described did no work as a lawyer, you might read each State’s rules carefully to discern which rules (within the State’s set of rules) apply. Some rules refer to “representing” (including advising) a client. Other rules lack such a reference and might apply because one is (or was) a lawyer, even if she never represents, advises, or otherwise serves any client as a lawyer. If your client did not use your services to further your client’s crime or fraud, States’ rules differ about whether one must, may, or must not reveal confidential information, which often includes information you learned through your role, even if the information is not a secret. If a rule applies to your conduct and you’re considering how it applies to the facts of your situation, you would think carefully about which person is (or was) your client. Is it the pension plan?, the plan’s administrator?, the plan’s sponsor?, the owner of the plan’s sponsor? Different answers to those who’s-the-client questions can lead to different analyses of the lawyers’ professional-conduct rules. If you follow the American Retirement Association’s Code of Professional Conduct, it allows a member to obey law (including, for example, a licensee’s conduct rules) that applies to the member. Feel free to call me if you’d like more thinking than is appropriate for a public website’s display. -------------------- BenefitsLink mavens: For a university’s LL.M program, I teach a course, Professional Conduct in Tax Practice, for “the three As”—attorneys, accountants, and actuaries. For ASPPA members, I lead CE/CPE/CLE ethics sessions. I’d welcome your thoughts to help my teaching. If an ASPPA or ARA member governed only by that Code of Professional Conduct is an owner or employee of a TPA firm, sees facts like those described above, did nothing to facilitate the crime or fraud, and lacks responsibility as a retirement plan’s fiduciary: May the member, without the principal’s permission, reveal the information? Or must the member treat the information as confidential information, and so not reveal it until “required to do so by law”? And for either (or another) answer, why?

While none of us knows the surrounding facts and circumstances of the situations bveinger describes: Whoever perceives a duty or obligation to decide something about a § 403(b) plan or § 403(b) contract might want to read carefully all the documents and get its lawyer’s advice about whether the plan or contract requires a distribution. A § 403(b) contract must meet § 401(a)(9) minimum-distribution rules. But in applying those rules to § 403(b) contracts, the minimum-distribution rules for IRAs apply. 26 C.F.R. § 1.403(b)-6(e)(2). An individual need not take a minimum-distribution amount from a particular contract; it is enough that one gets her required amounts from whichever of her § 403(b) contracts she chooses. A beneficiary may aggregate all § 403(b) contracts she holds as a beneficiary of the same decedent. See 26 C.F.R. § 1.408-8, Q&A-9. Because a plan’s administrator might not know whether a participant or a beneficiary has § 403(b) contracts beyond those held under the plan, some plans might not compel an involuntary distribution to meet a § 403(b)(1)/§ 401(a)(9) condition. bveinger, none of this is advice to you or anyone.