Peter Gulia

If the payer tax-reports a normal distribution on Form 1099-R and the distributee does not put the income (or a rollover) on her Form 1040, does the IRS's matching catch the inconsistency?

I wish a plan’s sponsor would ask me to help design and document its plan. Nowadays, that happens with governmental plans and plans for select-group executives, but on plans that could fit the IRS’s § 401(a) and § 403(b) “preapproved” regimes only for mega plans. Luke Bailey, thank you for your idea of writing (or interpreting) a plan to treat a partner as meeting a last-day allocation condition if she then was available to perform services.

BetterCallSaul's originating post doesn't specify whether the health plan was insured or "self-funded".

jpod, thank you for the observation about how an administrator might use its discretion to avoid a question about non-discrimination (if it can do so while also meeting ERISA's fiduciary duties, including impartiality). Bird, thank you for weighing in with your respected view.

jpod, thank you for helping me think. Being a partner isn't enough to make one a deemed employee for a retirement plan; there must be at least some personal services. Unlike a law firm, this partnership has some partners who do not provide (and never had provided) any personal service. Yet some of the partners who have provided personal services also made other contributions of money or other property (or both) in exchange for his or her partnership interests. How does an HR employee who acts for the employer/administrator determine that a partner who previously performed personal services has stopped performing them if distributions to the partner are computed on factors other than work? Is a partner who previously performed personal services a deemed employee until he or she is deadmitted from the partnership? Or is something more than having been a partner on the last day of a year needed for one to be treated as having been "employed" on that day?

A profit-sharing retirement plan has a last-day condition on who shares in an allocation of a discretionary contribution. The employer is a partnership, and many of the employer’s workers are partners rather than employees. For the last-day condition, the plan’s governing document refers only to whether the participant is “employed” on the last day. The partnership keeps no records of a partner’s time worked. How does one determine whether a partner was employed on the last day? Was a partner “employed” on the last day of a year if she had not been deadmitted from the partnership (and had for the year earned income more than zero)? What rules should I worry about?

Kristina, thank you for that idea. Direct conversation, when feasible, often is productive. For some plans and employers, direct conversation might be impractical. Also, the longer ago that a participant left the employer, the more likely it is that neither the recordkeeper nor human resources has a good telephone number.

By the way, I used the word "recalcitrant" the way the ERISA Industry Committee used it in a recent comment letter--as a coined term to distinguish between those who are missing or unlocated and those for whom the plan's administrator has a good address but the participant, beneficiary, or alternate payee doesn't communicate (often in circumstances for which there is no obligation to communicate). ERIC letter to Assistant Secretary Rutledge rmissing participants July 2018.pdf

CuseFan, I like your idea very much. If, by a year or more after the distribution, the distributee has borne tax on the payment, one hopes she'd then decide to request (and deposit) a reissued payment.

Kevin C and Madison71, thank you for the good ideas about a default rollover. The plan’s governing document lacks such a provision. I suspect the sponsor would not want to add the provision because the administrator would not want fiduciary responsibility for selecting a distributee’s IRA. The safe-harbor protection under 29 C.F.R. § 2550.404a-2 can apply only if the benefit is no more than the maximum amount under IRC § 401(a)(31)(B). The amount declined is much more. Other suggestions? What else are people doing?

Much has been said and written about missing or unlocated participants. But much less has been discussed about what some describe as recalcitrant participants—those who decline to deposit or negotiate the check that pays a distribution. Imagine this situation. A profit-sharing plan (with no 401(k) arrangement) permits a distribution after a participant has severed from employment and attained age 60. The plan requires a distribution after a participant has severed from employment and attained normal retirement age. After the participant severed from employment, about 40 mailings—including disclosure notices, revised summary plan descriptions, summary annual reports, and benefit statements—were sent to the participant’s address, and nothing came back as undelivered. After this participant’s normal retirement age, the plan’s administrator mailed the participant a check for her required distribution. The participant is not missing; rather, the administrator has solid proof that the distributee accepted delivery of the plan’s mailing. After eight months, the payee has not deposited or negotiated the check. What steps should the plan’s administrator take next? What are the big recordkeepers doing with problems of this kind?

Whether and how ERISA’s blackout-notice provision applies might turn on the “plan year”. ERISA § 101(i)(8)(A) defines an individual-account plan for ERISA § 101(i). That definition excludes a one-participant retirement plan. ERISA § 101(i)(8)(B) defines for ERISA § 101(i)(8)(A) a “one-participant retirement plan” as a plan “that on the first day of the plan year (i) covered only one individual (or the individual and the individual’s spouse) and the individual (or the individual and the individual’s spouse) owned 100 percent of the plan sponsor (whether or not incorporated), or (ii) covered only one or more partners (or partners and their spouses) in the plan sponsor.” The interpretive rule restates those definitions. 29 C.F.R. § 2520.101-3(d)(2)-(3). If those definitions alone do not remove a situation from ERISA’s blackout-notice provision (which might be so if the relevant plan year begins on August 1 or later), consider also whether there is a blackout and, if there is, who it affects. ERISA § 101(i)(1) states: “In advance of the commencement of any blackout period with respect to an individual[-]account plan, the plan administrator shall notify the plan participants and beneficiaries who are affected by such action in accordance with this subsection.” The interpretive rule somewhat similarly states: “In accordance with section 101(i) of [ERISA], the administrator of an individual[-]account plan, within the meaning of paragraph (d)(2) of this section, shall provide notice of any blackout period, within the meaning of paragraph (d)(1) of this section, to all participants and beneficiaries whose rights under the plan will be temporarily suspended, limited, or restricted by the blackout period (the “affected participants and beneficiaries”) . . . in accordance with this section.” 29 C.F.R. § 2520.101-3(a). If, based on the relevant plan year, the plan is not a one-participant retirement plan AND the service change results in a blackout (which might be uncertain on the few facts described above), the plan’s administrator might deliver a notice to the affected participant. ERISA § 101(i) is not the only part of ERISA that might call for a blackout notice or similar communication. For example, an administrator, trustee, or other fiduciary might use a communication to meet a responsibility under ERISA § 404(a). Yet the situation 401(k)athryn describes suggests that the plan’s administrator, operated by the employer’s owner, might find that the affected participant already has information about how the change affects his rights under the plan.

Based on my experiences (most often as counsel to the decision-maker) with several situations in which a designated beneficiary killed the participant, I’ll tell you that a plan’s fiduciaries often don’t recognize fully how their decisions and communications can get scrutiny from many directions, including not only the named primary beneficiary, a named contingent beneficiary, a default beneficiary, and the personal representative of the participant’s estate, but also the alleged killing’s prosecution and defense lawyers (because either “side” might perceive strategic advantages or disadvantages that turn on whether a defendant has or lacks a right to get money). Even if the plan’s sponsor/administrator has excellent written claims procedures and long experience with flawless claims-handling, a slayer situation might put them to the test. Also, the plan’s administrator should not assume (at least not without its lawyer’s advice) that even a proven slaying would undo the slayer’s benefit. Unless the plan’s governing document states a provision, there might be no clear rule.

To help show that the plan’s administrator acts not in the employer’s self-interest in getting the use of forfeitures but instead to prudently administer the plan, the administrator might ask a good lawyer like Luke Bailey to provide written advice.

Many practitioners observe that few recipients read a summary annual report. But some courts might find that, without reading or even opening the SAR, a recipient is deemed to know the information stated in the SAR. And some might find further that an SAR's recipient is deemed to know the information stated in the whole annual report the SAR refers to. In some cases, that knowledge might invoke ERISA section 413(2)'s three-year statute of limitations to bar a fiduciary-breach claim. I don't know anything about the hypothetical plan administration 30Rock describes, but an administrator (particularly if it fears exposure to a former participant's fiduciary-breach claim, even the expense of persuading a court to dismiss an ungrounded claim) might want its lawyer's advice about what protection the plan's fiduciaries might gain by "over-delivering" a final summary annual report. If the plan's assets are not used to meet that expense, an employer might decide in its nonfiduciary business judgment whether the expense is worthwhile. For one illustration (with a different context) about how knowledge can start the clock to time-bar a fiduciary-breach claim, I attach a recent court decision. Bernaola v Checksmart Financial LLC corrected opinion.pdf

While I don't here give legal advice, I would post at least the Form 5500, its Schedule SB or MB, and the attachments to that Schedule. I would not rely on a summary annual report's explanation about how to get further information. And once a plan's administrator is posting to a website any portion of its annual report, why not post the whole annual report?

I apologize for the unintended italicization, which BenefitsLink software added, perhaps because I opened a quotation with brackets around the lower-cased letter i.

If a plan sponsor or plan administrator for its intranet website records data on which document was downloaded or viewed and which user's credentials were used to do so, consider whether a defendant might use that data to support an argument for the shorter statute of limitations under ERISA section 413(2) [ 29 U.S.C.1112(2)]. And even if an intranet posting would gain no such defense, a plan's administrator might consider that posting more information than the Pension Protection Act of 2006 requires might be consistent with a fiduciary's duty of communication. Tom Poje, I guess you had considerably more imagination than did the 109th U.S. Congress, and have much more imagination than does the 115th Congress. Gilmore, the Pension Protection Act of 2006's section 504 refers to "dentification and basic plan information and actuarial information included in the annual report"; an individual-account or defined-contribution plan's annual report might not include any actuarial information.

If the beneficiary you describe prefers that the retirement plan be treated as an IRC 401-qualified plan for one or more Federal, State, and local income tax purposes, consider whether the plan's provisions to follow 401(a)(9) minimum-distribution rule might affect how long the plan's administrator is willing to allow the beneficiary to delay beginning a distribution.

Are the circumstances that this beneficiary would be better off because she anticipates that the asset is likely to increase in value? Does the other beneficiary share a desire not to take a distribution? Who now serves as the plan's administrator?

If there is an undistributed benefit, doesn't the plan continue until all distributions are completed?

RBG, thank you for this helpful information.

RBG and others in this conversation, I hope you can answer a point of my curiosity: When a plan’s fiduciary is reluctant to open a separate bank account for the plan’s trust, does that happen because the fiduciary perceives that the employer would bear the fees of the plan’s account?

Counts VIII and IX in the second amended complaint in Cassell v. Vanderbilt University assert fiduciary breaches and prohibited transactions based on allegations that the plan’s fiduciaries allowed TIAA to use participants’ information for purposes beyond performing or providing TIAA’s recordkeeper services. But what if the retirement plan’s fiduciary: evaluates the communications and disclosures about the budgeting service, and finds they fairly describe the service, its fees, and its risks; evaluates the budgeting service, finds it is not inherently dangerous, and finds that an unknowledgeable person can make his or her own evaluation of the service; negotiates a recordkeeping fee that reflects an expert’s report on the value of allowing access to the participants for cross-selling; and discloses to participants that the fiduciary made this deal to lower participants’ expenses, and communicates to them that they must carefully evaluate the budgeting service for themselves. Could facts like these set up an explanation that a fiduciary acted loyally and prudently?

TaxLawyer1978, while I don’t give you or anyone advice, consider whether there might be some arguments in another direction. A Federal income tax rule suggests arguments that a self-employed individual is an employee for a year in which she has any earned income, and also for a year in which she rendered some personal services (even if her business provided her no earned income): (b) Treatment of a self-employed individual as an employee. (1) For purposes of section 401, a self-employed individual who receives earned income from an employer during a taxable year of such employer beginning after December 31, 1962, shall be considered an employee of such employer for such taxable year. Moreover, such an individual will be considered an employee for a taxable year if he would otherwise be treated as an employee but for the fact that the employer did not have net profits for that taxable year. Accordingly, the employer may cover such an individual under a qualified plan during years of the plan beginning with or within a taxable year of the employer beginning after December 31, 1962. 26 C.F.R. § 1.401-10(b)(1) https://www.ecfr.gov/cgi-bin/text-idx?SID=2ed955aaf30998b5f81b0ccb8bd185b9&mc=true&node=se26.6.1_1401_610&rgn=div8 And the rule doesn’t say ‘for IRC § 401(c)’; it says ‘for IRC § 401, which includes § 401(a)(9). The decision-maker would want to get into the details of the partnership agreement and the partnership accounting to discern whether the 70-something really is a partner. And did he render some personal services? Did he at least make a few courtesy calls to placate clients? If we were debating whether an employee has a severance-from-employment to permit a distribution a plan otherwise would not provide, some (perhaps including the IRS) might argue that part-time work—even a substantial reduction “in the number of hours that an employee works”—is not a severance. See, by analogy, 26 C.F.R. § 1.401(a)-1(b)(3). I don’t suggest these arguments resolve all questions or even lead to a sound conclusion. But a plan’s administrator might get its lawyer’s advice and find there’s enough to support an interpretation that the plan doesn’t compel a minimum distribution.