Peter Gulia

Mike Preston, I agree with your observation that changing a 401(k) plan's hardship provision might require a revised safe-harbor notice.

Here’s some nonrule IRS explanations: https://www.irs.gov/retirement-plans/notice-requirement-for-a-safe-harbor-401k-or-401m-plan https://www.irs.gov/retirement-plans/mid-year-changes-to-safe-harbor-plans-or-safe-harbor-notices These explanations don’t mention how to apply a rule, or even a Revenue Procedure’s tolerance, for a situation in which one administers a plan according to a “change” the sponsor and the administrator anticipate will later be expressed in a plan amendment. Perhaps one way to interpret the Treasury department’s rule and the IRS’s nonrule guidance is to treat the date a sponsor or administrator decided to administer a plan according to an in-operation change as the date of the plan’s “amendment”. If that decision date is before the change’s effective date, the plan’s administrator might furnish advance notice (as much as is “practicable”). If an in-operation change’s effective date is immediate or less than 30 days after the decision date, the plan’s administrator might use a little flexibility in the times for the revised notice and the election opportunity. This is NOT tax or legal advice to anyone. And this does NOT reflect the advice I would give a client.

New York provides an exclusion for up to $20,000 a year in pension income. Periodic distributions from a 403(b) contract or a governmental 457(b) plan can count as pension income. See page 18 in the Instructions: https://www.tax.ny.gov/pdf/current_forms/it/it201i.pdf For Pennsylvania's personal income tax, a retirement benefit does not count in compensation, and so does not count in income. But not every distribution from a 403(b) or 457(b) is a retirement benefit. Pennsylvania law looks to whether the distributee met a retirement-age or service condition. A distribution after separation-from-service to a 60-something can be a retirement benefit.

RatherBeGolfing, thank you for your excellent help.

In considering whether tax legislation has a realistic possibility in the lame-duck remainder of the current Congress, do we know whether Congress can use budget reconciliation to act on a simple-majority vote? Or is once-a-year reconciliation used up (so that action in the Senate would require the cloture-granting supermajority)?

There might also be a practical reason for not including nonemployee contractors under a State or local government employer’s § 457(b) plan. Many of these plans restrict contributions (not considering rollovers and transfers) to wage-reduction elective contributions. Many States’ laws governing these plans preclude an employer’s nonelective or matching contribution. For many governmental payers, paying employees and paying nonemployee contractors are at least separate functions and sometimes separate departments. In my experience, a typical accounts-payable operation has no software logic to process a contractor’s direction to reduce the amount otherwise payable to the contractor. Nor is that operation set up to account for such reductions and remit a payment to a retirement plan’s recordkeeper.

We're concurring about clients' interests. And not a single client has asked me to do anything. So is your observation really about Congress not providing enough time for a change?

austin3515, this IS a giant mess. And I think you’re right that some participants will have read something about what might be allowed, and some employers and some service providers will get questions. The challenge, as ever, is about what services are provided for a plan that bought only a recordkeeper’s services when the employer doesn’t want to spend money on others. The problems you anticipate are of kinds a smart lawyer can resolve (if the plan has enough negotiating leverage with its service providers, or the employer/administrator has enough internal capacity). But few will pay for this extra attention.

It seems unlikely that a big recordkeeper would now state specific commitments about what services it will provide. Many recordkeepers depend on licensing deals for plan-documents software (and sometimes plan-administration forms), and for recordkeeping software. Those publishers often don’t state specific commitments to a licensee until (at least) proposed regulations become adopted regulations. Further, how those contracts state warranties or other obligations differs between required and optional provisions.

And aren't some of the possible changes clear enough that there's little risk of getting it wrong?

Mike Preston, my estimate of over 10,000 is for all kinds of beneficiary disputes, not just small-estate issues. I’ve been in retirement services over 34 years. My first 21¼ years were inside a big recordkeeper, which served thousands of plans and over 10 million participants. In those years, I ran a weekly meeting to review beneficiary claims, reviewing only those that called for special handling. Those meetings often presented a dozen (sometimes two dozen) new disputes.

$100,000. For example, Illinois law allows a maker of a small-estate affidavit to claim an estate up to $100,000. California allows up to $150,000. Some of my clients think that's not a trivial amount for a retirement plan to pay with nothing more than a claimant's self-serving statement no one tested.

I've seen situations in which a plan paid a distribution to a taker named in a small-estate affidavit, and later other claimants asserted that the State law did not relieve the plan's obligation and did not excuse a duty to administer the retirement plan. The attorneys' fees and other expenses of responding to those claims burdened participants other than the decedent. (Even if a claim is wholly groundless, a motion to remove a case from State to Federal court, and briefing a motion to dismiss for failure to state a claim on which the court can grant relief costs $$.) Some small-estate-affidavit laws allow claims up to $50,000 or even $100,000. Some potential claimants might see an amount as worth fighting about. Some plan administrators are reluctant to insist that a default-beneficiary claimant get personal-representative powers from a probate court. But some feel that burdens that follow from an uncompleted beneficiary designation ought to be borne by those who take from the participant. I've advised on over ten thousand disputed beneficiary claims. I've seen that a combination of thoughtful plan provisions, plan-administration procedures, and claims procedures can help manage some of the expenses. Sometimes it makes sense to fall-in with a small-estate-affidavit law, but not always.

Related discussion: If a plan's sponsor has not amended its plan, there might be little or nothing for the plan's administrator to explain to the plan's participants.

I’m less confident that a plan always lacks a choice about whether to pay on a small-estate affidavit. Much turns on the governing documents’ provisions. Especially on exactly how a document describes a “default” beneficiary. It’s one thing if a plan’s administrator considers a State law in resolving a status question that otherwise might not be resolved under ERISA and the Federal common law of ERISA. Or a plan’s administrator might, in its exercise of its discretion, volunteer to consider a relevant State law as an aid to the administrator’s interpretation of the plan. But if applying a State’s law would call for an outcome different than the administrator’s finding about what the plan provides, an administrator or trustee might assume that ERISA preempts State law. (And if even a fiduciary might be content with State law, one might worry that a later claimant could argue that following a preempted law was a breach of the fiduciary’s duties.) Consider too the effect of plan-granted discretion and Firestone deference. If a governing document specifies that the “default” beneficiary is “the participant’s estate”, an administrator might decide (perhaps on grounds of the kind Luke Bailey suggests) that a claimant named in a small-estate affidavit sufficiently represents the estate. But what if a plan’s governing documents specify that the “default” beneficiary is not ‘the estate’ but rather “the personal representative of the participant’s estate”? Could a plan’s administrator decide that the State law referred to in the small-estate affidavit does not make a claimant a personal representative (within the plan’s meaning)? And wouldn’t a court defer to such a decision (if it’s not an abuse of discretion)?

If this plan is not ERISA-governed, one might think mostly about tax treatment (but also at least some about avoiding a self-dealing transaction under a relevant State’s trust law and IRC § 4975). 26 C.F.R. § 1.72(p)-1 begins with an assumption that a participant loan treated as not a distribution must have an interest rate and repayment terms that are “commercially reasonable”. One doubts a tax practitioner should advise a client that zero interest fits the rule’s meaning. On questions about what interest is enough (and not too much), is it mostly a question about how much risk the one participant is comfortable with?

Belgarath, thank you for making clear that an employer/administrator's outlook on what amount to risk without further review doesn't necessarily relate to a State's limit on what can be claimed under a small-estate affidavit.

jpod, thank you for sharing your observations. BenefitsLink mavens, for a plan's administrator to treat relying on a small-estate-affidavit law as low-risk, does it matter what amount is claimed? For example, if a claim is for $100,000 and that amount is within the relevant State's law for a disposition following a small-estate affidavit, does a plan fiduciary treat such a claim as low risk?

Luke Bailey, thank you for your observations, especially about the interaction of Federal law and State law. BenefitsLink neighbors, my query is not about sorting out the law. Rather, my curiosity is about what plans actually do.

ESOP Guy, thank you for this very useful information. On those situations in which a lawyer was asked for advice, about how many ended with the plan acting on a small-estate affidavit? And about how often did a plan refuse to follow a small-estate affidavit?

Some 403(b) plans are governmental plans not governed by ERISA. Some 403(b) plans are church plans that have not elected to be governed by ERISA.

To allow a convenience in collecting the assets of a small estate, some States’ laws permit an affidavit in which one claims she is entitled to the decedent’s property. Under a typical law of this kind, one might collect up to $50,000 without any court-supervised proceeding. If a participant dies with no surviving spouse and no other designated beneficiary, some retirement plans provide that the participant’s estate is the “default” beneficiary. If a plan you administer or serve is in this situation, is the plan willing to pay a taker based on a small-estate affidavit? If a plan is willing, does the administrator use any extra steps to manage the risk that an affidavit is false (or even innocently incorrect), leaving the plan exposed to claims of the estate’s beneficiaries or heirs? Or does a plan refuse to pay on a small-estate affidavit? BenefitsLink people, what are your experiences?

XTitan, thank you for posting this pointer.

And while it is your client's decision, imagine the possibilities that an employer/administrator might prefer to file a report because it might help on one or more statute-of-limitations defenses under ERISA, the Internal Revenue Code, and other law.

RBG, thank you for your observation; it helps me.