Peter Gulia

In my experience, the IRS is reluctant to pursue tax-disqualifying a plan that paid its final distributions. That’s so if the business organization that sponsored and administered the plan has been dissolved and the legal procedures that would raise money from that organization or its former owners or executives would take more time than the IRS wants to use. Also, the § 6652(i) penalty becomes payable only “on notice and demand by the Secretary[.]”

No. But a professionally behaving lawyer must not fail to render advice a client asked for. Further, 10 C.F.R. § 10.21 sometimes arguably requires a practitioner to render advice a client has not asked for, might not need, and might not want. In this situation (and for reasons beyond the current issue), the bigger risk is an EBSA investigation about ERISA fiduciary breaches.

C.B. Zeller, thank you!!!!! You uncovered a lurking issue I didn’t have time to find. And you explain it so neatly. I’ll advise the administrator about how impairing a distributee’s direct-rollover opportunity tax-disqualifies the plan. And this will intensify my advice about a fiduciary’s obedience and prudence breaches.

Thank you, justanotheradmin, for helping me think this through. The § 402(f) notice was delivered, but not 30 days before the anticipated involuntary distribution. Some participants, perhaps many of those still employed, will waive the 30 days. But the administrator anticipates some others, especially retirees, won’t respond in any way. After estimating this (and not counting those with a balance under $200), the number of § 402(f) failures would be few enough that the administrator easily can pay the penalty. But the administrator prefers not to risk tax-disqualifying the plan. Is it so that an administrator’s compliance with § 402(f) is not a § 401(a) condition for a plan’s tax-qualified treatment?

The Treasury department’s rule under Internal Revenue Code § 402(f) calls for an administrator to deliver a § 402(f) written explanation “no less than 30 days . . . before the date of [the] distribution.” Internal Revenue Code § 6652(i) imposes a penalty of $100 on each failure to deliver a § 402(f) written explanation. To speed up a plan termination’s final distribution, an administrator is considering deliberately incurring that penalty. In the circumstances, that amount is much less than the business harm that would result from not completing the plan’s termination by December 30. I’ve already analyzed ERISA title I consequences, including about the fiduciary’s potential obedience and prudence breaches. Is it so that an administrator’s compliance with § 402(f) is not a § 401(a) condition for a plan’s tax-qualified treatment? (The plan’s governing document does not state any provision or command based on § 402(f).) Am I missing something?

Is the UK company under common control with, or otherwise a part of the same IRC § 414 employer as, the employer that sponsors or participates in the retirement plan your query is about? And if not, how much compensation does the worker have from employers for the US plan?

Black’s Law Dictionary defines situs as “[t]he location or position (of something) for legal purposes[.]” Titles I, III, and IV of the Employee Retirement Income Security Act of 1974 do not use the word situs. Nothing in the United States Code’s title 29 (Labor) uses the word situs. Further, the whole United States Code has only 16 uses of the word situs, and none of these is about a health plan. Consider asking the statement’s maker to explain whether the business assumes a health plan has a location less wide than the United States, and why it might matter that the plan’s administrator’s address have some relation to such a location. Or might the statement refer, if the health plan uses a health insurance contract, to some insurance law or an insurer’s underwriting factor?

Does the employer have distinct documents for the management and staff plans? An employer/administrator might want its lawyer’s advice about whether the documents and other facts and circumstances result in only one plan, or more than one plan. In the American Bar Association’s 2009 Q&A session, I presented a question with hypothetical facts and a proposed answer designed to make obvious that an employer had arranged two employee-benefit plans with no purpose beyond avoiding a reporting requirement. Despite a legal reason for ignoring the ostensible separateness of the plans, the Labor department staff answered that the plans could be separate plans. “t would be reasonable for a fiduciary to look to the instruments governing the [plans] to determine whether the benefits are being provided under separate plans and to treat the [plans] for annual reporting purposes as separate plans to the extent the instruments establish them as separate plans and they are operated consistent with the terms of such instruments.” https://www.americanbar.org/content/dam/aba/migrated/2011_build/employee_benefits/dol_2009.pdf

Does the absence of a restriction about bankruptcy suggest the administrator should approve the loan if the administrator would approve it for a similarly situated non-bankrupt participant?

Leaving aside questions about whether the plan required a distribution: If the payer paid an amount without the plan administrator’s particular instruction and not under the terms of the administrator’s standing instruction, might such an act have been the payer’s breach of the payer’s service agreement?

Santo Gold, I'm curious: Does the plan's governing document or a written participant-loan procedure say anything about whether the administrator should allow or disallow a participant loan when the participant applies for the loan AFTER filing a bankruptcy petition?

The provisions and conditions in the 1992 Revenue Procedures set some boundaries for what the IRS would issue a written determination on. But those conditions do not necessarily set the outer limit for what can be done while getting the desired tax treatment. I’ve seen from big law firms rabbi-trust documents that set up an officer of the employer as the trustee. But it’s unwise unless the employer or executive has your or another tax practitioner’s advice. Many States’ laws restrict which persons can be in the business of serving as a fiduciary, often limiting it (mostly) to a licensed bank or trust company. But few of these laws preclude a human from serving as a trustee not as a business and without compensation. I think you’re right to worry about whether a human’s powers as a trustee might give her practical control that defeats an intended deferral. Which issues are raised, and how strong or weak they are, turns on the particular facts and circumstances.

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?