Peter Gulia

If an ERISA-governed retirement plan has access to a recordkeeper’s or third-party administrator’s IRS-preapproved plan documents, what plan provisions or other circumstances would lead a plan’s sponsor to state the plan using an individually-designed document? (I have no stake in this because my law practice is not, and won’t become, available to write a plan document for an ERISA-governed retirement plan.)

Am I right in guessing that most plans facing a meaningful risk that the plan might be top-heavy seldom engage a lawyer? And seldom engage an independent qualified public accountant? Leaving only a TPA to consider whether a top-heavy measure is counted correctly? If my surmise is right, are there variations for kinds of businesses? For example, if the employer has few nonkey employees, a disproportion of key employees, and is a small professional-services partnership, does it engage help beyond the TPA?

I express no view about what is or isn’t a related rollover. The CFR section cited above includes this: “[T.D. 7997, 49 FR 50646, Dec. 31, 1984, as amended by T.D. 8357, 56 FR 40550, Aug. 15, 1991; T.D. 9319, 72 FR 16929, Apr. 5, 2007; T.D. 9849, 84 FR 9234, Mar. 14, 2019]”. According to that note of the Federal Register history, the rule was published just months after the August 23 enactment of the Retirement Equity Act of 1984, which added ERISA commands and tax law recognizing a qualified domestic relations order. The 2019 amendment was in a Trump I cleanup of obsolete rules. Could the Treasury’s interpreters have thought about how QDROs relate to top-heavy measures when considering the 1991 amendment or the 2007 amendment? What, if anything, should an interpreter infer from what wasn’t revised? Is there a logic for suggesting that the amount moved from the originating participant’s account to the alternate payee/other participant’s account ought to count for top-heavy measures in one of those individual accounts (I don’t know which), but not both?

Remember how often BenefitsLink neighbors incant RTFD. Consider all documents governing the plan and its trusts. What does each document say about what ends a trusteeship? What does each document say about how a named fiduciary appoints a successor trustee, or an additional trustee? Was all that done? Consider all agreements and other documents with each investment provider. And with each service provider. What does each document say about an obligation to give a party, and perhaps third persons, notice of a change in a trusteeship? Was all that done? If careful readings don’t resolve all questions, consider ERISA (if ERISA governs the plan). If there is a question unanswered by the documents and the statute’s text, consider the Federal common law of ERISA. If the Federal common law of ERISA applies or is relevant to help interpret the statute, consider the American Law Institute’s Restatement of Trusts as an expression of common law. Evaluate carefully whether the recent appointment was of a successor trustee, or of an additional trustee. Consider whether the successor or additional trustee should request that the deceased trustee's personal representative submit an accounting for whatever the decedent did since his most recent accounting. Consider whether the successor or additional trustee should request that the deceased trustee’s personal representative deliver all trust records the personal representative possesses or could possess. Consider whether the successor or additional trustee should request that the deceased trustee’s personal representative confirm in writing that the representation has not done anything to administer the trust. Even if all of what was done was correct under the plan’s and its trust’s governing documents and applicable law, consider redocumenting the changes in the trusteeships. Why? An investment or service provider’s employee might lack discretion to allow anything beyond what a checklist tells the employee to do. This is not advice to anyone.

Paul I, thank you for thoughtful information. Your observations about payroll operations, and about coordinations among a plan’s participating employers, each’s paymaster, each paymaster’s service provider or software supplier, the retirement plan’s administrator, and its service providers are helpful. For a big-enough plan (or for a good relationship), some services with a recordkeeper are negotiable. For actual administration in 2026 and later years, my clients will feed, each year, the recordkeeper’s § 414(v)(7) indicator. But for communications before that indicator is usable, I welcome RatherBeGolfing’s idea if an employer prefers to pay someone else to do a sort about which workers get a communication suggesting one consider changing her deferral elections before December ends.

Here’s the Treasury’s rule: T-32 Q. How are rollovers and plan-to-plan transfers treated in testing whether a plan is top-heavy? A. The rules for handling rollovers and transfers depend upon whether they are unrelated (both initiated by the employee and made from a plan maintained by one employer to a plan maintained by another employer) or related (a rollover or transfer either not initiated by the employee or made to a plan maintained by the same employer). Generally, a rollover or transfer made incident to a merger or consolidation of two or more plans or the division of a single plan into two or more plans will not be treated as being initiated by the employee. The fact that the employer initiated the distribution does not mean that the rollover was not initiated by the employee. For purposes of determining whether two employers are to be treated as the same employer, all employers aggregated under section 414(b), (c) or (m) are treated as the same employer. In the case of unrelated rollovers and transfers, (1) the plan making the distribution or transfer is to count the distribution as a distribution under section 416(g)(3), and (2) the plan accepting the rollover or transfer is not to consider the rollover or transfer as part of the accrued benefit if such rollover or transfer was accepted after December 31, 1983, but is to consider it as part of the accrued benefit if such rollover or transfer was accepted prior to January 1, 1984. In the case of related rollovers and transfers, the plan making the distribution or transfer is not to count the distribution or transfer under section 416(g)(3) and the plan accepting the rollover or transfer counts the rollover or transfer in the present value of the accrued benefits. Rules for related rollovers and transfers do not depend on whether the rollover or transfer was accepted prior to January 1, 1984. 26 C.F.R. § 1.416-1 https://www.ecfr.gov/current/title-26/section-1.416-1. BenefitsLink mavens, interpret away!

RatherBeGolfing, thank you; that's helpful information about another way.

For anyone who or that seeks to rely on ERISA § 408(b)(17) to exempt a § 406(a)(1)(A), § 406(a)(1)(B), or § 406(a)(1)(D) (not –(C) nor –(E)) party-in-interest transaction, it’s essential to get a lawyer’s written advice. Even when a directed trustee’s responsibility is as sharply limited as lawyers can imagine, consider that a trustee decides whether the directing fiduciary’s direction is a “proper direction[] . . . and which [is] not contrary to [ERISA][.]” ERISA § 403(a)(1). Interpreting that paragraph and ERISA § 406(a)(1), some might say a directed trustee ought not to follow a direction to do something one “knows or should know”—exercising “the care, skill, prudence, and diligence” ERISA § 404(a)(1)(B) requires—would result in a nonexempt prohibited transaction. If a transaction’s counterparty is the trustee’s affiliate, consider whether it might be self-interested for the trustee to be a judge of whether § 408(b)(17)’s conditions are met. Even if the directing fiduciary affirms that it finds the transaction meets § 408(b)(17)’s conditions, a directed trustee might not abdicate its own responsibility to decide whether the direction is “proper” and “not contrary to” ERISA. If that’s a concern, there might be ways to rearrange trusteeships so assets involved in a to-be-exempted transaction are not under any trusteeship of any interested person. This is not advice to anyone.

WCC, thank you for your reminder that recordkeepers are building an indicator that’s particular to § 414(v)(7) treatment. (None of the recordkeepers I’ve talked with has yet completed its build of that indicator, even to receive a preliminary data feed.) My query isn’t about applying the provision for 2026 and later years; it’s about sorting, now, for which participants get September 2025 and follow-up communications informing one about choices that might be required for next year’s deferrals. (And about a default election to be applied when the without-catch-up limit is exhausted, which could be as soon as January for some § 414(v)(7)-affected employees.) The employer seeks a sort for participants who might be § 414(v)(7)-affected, and hopes the recordkeeper could do that work without any effort from the employer. For example, a sort for participants with regular compensation > $120,000 and an indicator showing not self-employed. I see that their hope is too much. The employer will need to sort and drive the communications.

Of the many tax-qualification conditions and other rules a recordkeeper’s system hopes to help a retirement plan’s administrator apply, a few might turn on whether a participant is an employee or is a self-employed individual (who might be treated as a deemed employee). Among these, a § 414(v)(7) restriction against non-Roth catch-up deferrals does not apply to a participant who is a self-employed individual (who has no FICA wages). I’ve seen in recordkeepers’ systems Yes-or-No indicators for whether a participant is: union-represented, treated as an insider for trading in employer securities, an officer of the employer, or a super-officer. Does a recordkeeper have an indicator for whether a participant is an employee or is a self-employed individual? (I recognize a use of this depends on the census information furnished to the recordkeeper.) A sort for participants who might be § 414(v)(7)-affected might look for those with compensation that suggests that FICA wages for a relevant year might exceed $145,000/$150,000. But without a further sort, that might result in “false positives” by including deemed employees who have compensation but no FICA wages. (Imagine a professional-services business in which hundreds of workers are partners.) Could an employee-or-self indicator sort out this out? If a recordkeeper lacks such an indicator but has a field for ownership percentage, might one use that as a way to classify a self-employed individual? For example, if a worker’s ownership percentage is less than 1% (so it doesn’t trigger other rules) and perhaps as little as 0.0001, could that classify the participant as one who can’t be § 414(v)(7)-affected? (I’m mindful that an employer has the facts, and could control the plan administrator’s communications. But I seek to learn about what communications a recordkeeper can do without the employer/administrator’s effort.)

A document available in the website display of the Federal Register includes a table of contents, with hyperlinks. Clicking on a table-of-contents hyperlink navigates to the particular bit of text in the explanation for the proposal, or on the last bits, to the text of the proposed rule. https://www.federalregister.gov/documents/2025/01/13/2025-00350/catch-up-contributions#sectno-citation-1.414(v)-1 Also, a document is available with these formats: JSON: Normalized attributes and metadata; XML: Original full text XML; MODS: Government Publishing Office metadata. But to see an integration of what a rule would become if the proposal is adopted, one needs CCH/Wolters Kluwer or another commercial publisher.

Some employers (those with relatively few to-be-affected employees) now are estimating which people will no longer have a non-Roth choice for a portion of one’s elective deferrals. Here’s the statute subsection I.R.C. § 414(v)(7)(E) refers to: Internal Revenue Code of 1986 § 415(d) Cost-of-living adjustments. (1) In general. The Secretary shall adjust annually— (A) the $160,000 amount in subsection (b)(1)(A), (B) in the case of a participant who separated from service, the amount taken into account under subsection (b)(1)(B), and (C) the $40,000 amount in subsection (c)(1)(A), for increases in the cost-of-living in accordance with regulations prescribed by the Secretary. (2) Method. The regulations prescribed under paragraph (1) shall provide for— (A) an adjustment with respect to any calendar year based on the increase in the applicable index for the calendar quarter ending September 30 of the preceding calendar year over such index for the base period, and (B) adjustment procedures which are similar to the procedures used to adjust benefit amounts under section 215(i)(2)(A) of the Social Security Act. (3) Base period. For purposes of paragraph (2)-- (A) $160,000 amount. The base period taken into account for purposes of paragraph (1)(A) is the calendar quarter beginning July 1, 2001. (B) Separations after December 31, 1994. The base period taken into account for purposes of paragraph (1)(B) with respect to individuals separating from service with the employer after December 31, 1994, is the calendar quarter beginning July 1 of the calendar year preceding the calendar year in which such separation occurs. (C) Separations before January 1, 1995. The base period taken into account for purposes of paragraph (1)(B) with respect to individuals separating from service with the employer before January 1, 1995, is the calendar quarter beginning October 1 of the calendar year preceding the calendar year in which such separation occurs. (D) $40,000 amount. The base period taken into account for purposes of paragraph (1)(C) is the calendar quarter beginning July 1, 2001. (4) Rounding. (A) $160,000 amount. Any increase under subparagraph (A) of paragraph (1) which is not a multiple of $5,000 shall be rounded to the next lowest multiple of $5,000. This subparagraph shall also apply for purposes of any provision of this title that provides for adjustments in accordance with the method contained in this subsection, except to the extent provided in such provision. (B) $40,000 amount. Any increase under subparagraph (C) of paragraph (1) which is not a multiple of $1,000 shall be rounded to the next lowest multiple of $1,000. https://www.taxnotes.com/research/federal/usc26/415?highlight=415. And here’s the Treasury’s implementing rule: 26 C.F.R. § 1.415(d)-1 https://www.ecfr.gov/current/title-26/section-1.415(d)-1. Here’s a convenient table of the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W): https://www.ssa.gov/oact/STATS/cpiw.html. In last November’s notice, the IRS told us the indexing didn’t reach the $5,000 rounding interval. It seems next November the IRS’s notice will say $145,000 adjusts to $150,000 (as the measure of 2025 FICA wages that drives whether 2026 age-based-catch-up elective deferrals must not be non-Roth contributions).

Internal Revenue Code § 414(v)(7)(A) sets $145,000 (inflation-adjusted) as the limit on a preceding year’s FICA wages for a participant not to be constrained to make age-based-catch-up elective deferrals as Roth contributions. Here’s the “Cost of living adjustment” provision: “In the case of a year beginning after December 31, 2024, the Secretary shall adjust annually the $145,000 amount in subparagraph (A) for increases in the cost-of-living at the same time and in the same manner as adjustments under [I.R.C. §] 415(d); except that the base period taken into account shall be the calendar quarter beginning July 1, 2023, and any increase under this subparagraph which is not a multiple of $5,000 shall be rounded to the next lower multiple of $5,000.” I.R.C. § 414(v)(7)(E) https://www.taxnotes.com/research/federal/usc26/414?highlight=414. Assuming all relevant years are calendar years: I estimate that, for 2025 FICA wages to drive how § 414(v)(7) applies for 2026, the $145,000 will become $150,000. BenefitsLink neighbors, is this likely? Or would a § 415(d)-method calculation come out differently?

And a click on the in-context hyperlink also calls up an amendment history and an effective-date note.

Here’s the source of the $250,000 tolerance: Pension Protection Act of 2006, Pub. L. No. 109–280 § 1103(a) (Aug. 17, 2006), 120 Stat. 780, 1057 (2006), available at https://www.govinfo.gov/content/pkg/PLAW-109publ280/pdf/PLAW-109publ280.pdf. One of the five elements of the statute’s defined term one-participant retirement plan is that “the plan does not cover a business that is a member of an affiliated service group, a controlled group of corporations, or a group of businesses under common control[.]” PPA § 1103(a)(2)(D). Also, consider PPA § 1103(a)(3): OTHER DEFINITIONS.—Terms used in paragraph (2) which are also used in section 414 of the Internal Revenue Code of 1986 shall have the respective meanings given such terms by such section. I don’t know whether the IRS applies Congress’s statute as written. Considering nondetection or nonenforcement is beyond what I say in this post. This is not advice to anyone.

Remember that there might be two bodies of law to meet, not only tax law but also ERISA’s title I. Under tax law, there might be an I.R.C. § 72(p) failure, a § 4975 nonexempt prohibited transaction, and a § 401(a) failure to administer the plan according to the written plan. Under ERISA, there might be a § 406(a) nonexempt prohibited transaction, and a § 404(a)(1)(D) breach of not administering the plan according to the documents governing the plan. Read EBSA’s 2025 Voluntary Fiduciary Correction Program to consider whether there might be an opportunity to coordinate tax law and ERISA corrections. https://www.govinfo.gov/content/pkg/FR-2025-01-15/pdf/2025-00327.pdf Consider whether a failure was an “eligible inadvertent failure” and, if so, what opportunities SECURE 2022 § 305(b) might allow. Get the advice of a lawyer who’s independent of the recordkeeper. Although ordinarily a lawyer doesn’t accept a fee from a payer other than the lawyer’s client, one of the recognized variations is payments under an indemnity obligation. This is not advice to anyone.

For Bloomberg’s free edition of the Internal Revenue Code, it seems Bloomberg might no longer maintain the detailed formatting we liked. For rules, regulations, and even some nonrule interpretations, the Government Publishing Office’s electronic Code of Federal Regulations (ecfr.gov) is formatted and edited for detailed citations and hyperlinks. And one can use an in-context tool (right-click) to paste into your word-processing or other file a particular bit’s citation, hyperlink, or both. For example, for the ERISA 404a-5 rule’s subparagraph that defines how to count a designated investment alternative’s total annual operating expenses if the investment is not registered under the Investment Company Act of 1940, the tool renders these: 29 CFR 2550.404a-5(h)(5)(ii) https://www.ecfr.gov/current/title-29/part-2550/section-2550.404a-5#p-2550.404a-5(h)(5)(ii) The eCFR and many other U.S. government resources can be found from https://www.govinfo.gov/. (In most internet locators, typing as little as “govinfo.gov” calls up this webpage.)

About the $250,000 tolerance, I see in the instructions no guidance about what “the employer” means. https://www.irs.gov/pub/irs-pdf/i5500ez.pdf Following how Internal Revenue Code § 414(b)-(c)-(m)-(n)-(o) combine organizations and businesses might be a reasonable interpretation. Yet, that interpretation might be more cautious than the IRS’s interpretation. Consider also that, even if neither ERISA’s title I nor tax law requires a filing, an employer or a plan’s administrator might voluntarily file. Even when no other organization or business need be counted together with the distinct organization or business that maintains the particular plan, some prefer a filing to get a statute-of-limitations period running. This is not advice to anyone.

For unfunded deferred compensation (other than a length-of-service award to a volunteer) with a nongovernmental employer, deferrals count in FICA and FUTA wages as of the later of (i) when the services creating the right are performed, or (ii) when there is no substantial risk of forfeiture (determined following Internal Revenue Code § 83) of the right to the amount. FICA I.R.C. (26 U.S.C.) § 3121(a)(5), 3121(v)(2) http://uscode.house.gov/view.xhtml?req=(title:26%20section:3121%20edition:prelim)%20OR%20(granuleid:USC-prelim-title26-section3121)&f=treesort&edition=prelim&num=0&jumpTo=true; 26 C.F.R. § 31.3121(v)(2)-1(a)(2)(ii) https://www.ecfr.gov/current/title-26/part-31/section-31.3121(v)(2)-1#p-31.3121(v)(2)-1(a)(2)(ii); IRS, Eligible Deferred Compensation Plans Under Section 457, Notice 2003–20, 2003-19 I.R.B. 894(May 12, 2003), at § VI, 896-897 (explaining FICA and FUTA taxes for unfunded deferred compensation with a nongovernmental tax-exempt organization). FUTA I.R.C. (26 U.S.C.) § 3306(b), 3306(r)(2) http://uscode.house.gov/view.xhtml?req=(title:26%20section:3306%20edition:prelim)%20OR%20(granuleid:USC-prelim-title26-section3306)&f=treesort&edition=prelim&num=0&jumpTo=true; 26 C.F.R. § 31.3306(r)(2)-1(a) https://www.ecfr.gov/current/title-26/part-31/section-31.3306(r)(2)-1#p-31.3306(r)(2)-1(a). This is not advice to anyone.

Consider also: Internal Revenue Code § 411(a)(11)(A) states a condition for treating a plan as a tax-qualified plan. Whatever relief one might obtain under tax law does not cure an ERISA title I failure to administer the plan according to its provisions. ERISA § 203(e)(1) states a command: “the plan shall provide[.]” If a plan’s administrator violates that provision, the participant may pursue ERISA § 502 legal and equitable relief. But if there was an unconsented-to distribution, might the plan simply let the distributee put the money back into the plan? Or if the distributee wants to keep the money where it is, treat that communication as a ratification of, and consent to, the distribution that was paid? This is not advice to anyone.

For BenefitsLink neighbors thinking about rocknrolls2’s question, here’s the statutes: ERISA § 203(e)(1): Consent for distribution; present value; covered distributions.—If the present value of any nonforfeitable benefit with respect to a participant in a plan exceeds $7,000, the plan shall provide that such benefit may not be immediately distributed without the consent of the participant. Internal Revenue Code § 411(a)(11)(A): If the present value of any nonforfeitable accrued benefit exceeds $7,000, a plan meets the requirements of this paragraph only if such plan provides that such benefit may not be immediately distributed without the consent of the participant.

I recognize the need for required and desired notices (and for some time before and after the notice period). But: Can the plan administrator’s instruction to its service provider be “Process the involuntary distribution if, on the scheduled date, the participant’s account is no more than $7,000.”? Likewise, can a notice to a participant say an involuntary distribution will be paid as a rollover to the default IRA if the account is no more than $7,000.”?

And even if the plan permits a severed-from-employment participant to claim a distribution, does this plan in this participant's circumstances mandate an involuntary distribution?

This invites a question about why there was a long delay between the plan administrator’s instruction and the distribution. If a distribution is processed promptly after the measure of whether an account balance is within or beyond the cashout threshold, there should not be a wide increase in the investment value. Also, if the distribution was an involuntary distribution, did the distributee choose receiving it in money? Or, ought the distribution to have been a rollover contribution into an IRA? BenefitsLink neighbors, what do you think about this potential correction: The plan’s administrator invites the distributee to restore $5,644 (or the net paid after tax withholdings)? The employer/administrator (or a breaching service provider) restores to the participant’s account the amounts withheld for taxes? If the distributee declines to restore the net amount, treat this as a ratification of what was done? This is not advice to anyone.

Paul I, thank you for this insight. In your experience: How many plans’ sponsor/administrators understand the details of what a plan may provide or allow, and make a considered choice about what ordering a distributee may elect (or is precluded from choosing)? And how many fall in with the service provider’s norms and system choices, unaware of how those specs might affect a distributee’s income tax treatments?