Peter Gulia

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?

austin3515, yes this. A plan’s sponsor/administrator wants its service provider to keep the software running continually, checking each pay period’s amounts when received to test each participant’s cumulative (YTD) deferrals and her to-be-processed deferral for whether any applicable limit would be exceeded, and to apply the plan administrator’s standing instruction—whether a deemed election, a mistaken-contribution presumption, or something else—to adjust what otherwise would exceed a limit. Each year begins anew. And the logic works for several kinds of limits.

Consider thinking about it this way: If the employer were seeking the Internal Revenue Service’s letter ruling that the change in the employer’s obligation to pay deferred compensation is not an acceleration but rather is no more than a reformation of the written plan to state what was both parties’ actual intent when they made their contract, what “clear and convincing evidence” would you show to prove what had been the parties’ true intent? Would that evidence persuade an IRS reviewer? If the evidence wouldn’t persuade an IRS reviewer, or doesn’t persuade you, that tells you some useful information about how to shape your advice. This is not advice to anyone.

WCC, you nailed it! Thank you!

A related practical question: Proposed 26 C.F.R. § 1.401(k)–1(f)(5)(iii) states: “[A] plan that satisfies the requirements of paragraph (f)(5)(iv) of this section [that an affected participant have an “effective opportunity” to make an election different than the deemed election] may provide that an employee who is subject to the requirement under [Internal Revenue Code] section 414(v)(7) to make any catch-up contributions as designated Roth contributions is deemed to have irrevocably designated any elective deferrals that are catch-up contributions as designated Roth contributions in accordance with paragraph (f)(1)(i) of this section.” Usually, “may provide” used in a context like this refers to something that, eventually, must be stated (or omitted) by the written plan. One presumes documenting (in what the IRS regards as “the” written plan) what a plan had provided might wait until the end of the applicable remedial-amendment period. In theory, a plan sponsor keeps records of what provisions were put in operation so a later plan amendment or restatement can state retroactive provisions that remember how the plan was administered during the remedial-amendment period. In practice, some service providers contract or volunteer to keep these records for a plan’s sponsor/administrator. Further, even without keeping records to support a written-plan regime, many service providers keep records of a customer’s instructions to the service provider. Is a choice about whether a plan provides or omits a deemed election about § 414(v)(7) a choice for which a recordkeeper or third-party administrator will seek its customer’s service instructions? If so, is a plan sponsor’s choice between providing or omitting a deemed election a choice for which a recordkeeper will set its default that applies if the customer, after a notice period, has failed to specify its instruction? Will a service provider record the plan sponsor/administrator’s choice so an assembler of the later plan amendment or restatement can use that information?

Paul I alludes to an important point: An IRS opinion or determination letter does not provide an assurance that the written plan comports with an ERISA title I provision, even regarding an ERISA section for which the 1978 Reorganization Plan transferred interpretive authority to the Secretary of the Treasury. PensionPete, thank you for your helpful information about some EBSA workers’ perceptions. Did the EBSA people say anything about how a plan’s administrator would estimate an after-forfeiture investment gain of a forfeiture amount that is not invested? Or did your client assume that a claim is so unlikely that one need not prepare for how to administer a restored forfeiture? If there is a later claim, what evidence would a prudent plan administrator want to satisfy itself that the claimant is the same person as the participant for whom the account was accumulated? About whether an forfeiture should be only for small balances—whether < $1,000, < $7,000, or under some other some other measure, what if the unlocatable-participant has (following the birthdate in the plan’s records) reached age 75 and also the plan’s required beginning date? What if the plan’s only form of distribution is a single-sum payment of the whole account? May the plan forfeit a $70,000 account? Or is it better to leave the unlocated participant’s balance, undistributed and unforfeited, still in the plan?

MoJo, I too dislike door number one for reasons aligned with your reasons.

RatherBeGolfing, thank you for the information about the rulemaking. WCC and Paul I, thank you for sharing your helpful, smart thinking. WCC, would any element of your reasoning change if the employer takes wage reductions for elective deferrals never as a percentage of any measure of compensation but always as a specified amount? (Some employers will continue to do that no matter what anyone resolves about restraining some participants’ choices for catch-up deferrals.) Taking deferrals as specified amounts would seem to make knowable a year’s apportionment between non-Roth and Roth deferrals. For example, if the relevant year’s limit for a 60-something, hypothetically, is $34,750, of which $23,500 may be non-Roth and $11,250 must not be non-Roth and there are 26 pay periods in the year, the employer could set a pay period’s non-Roth amount as $903.84 and the Roth amount as $432.69. The trouble about a participant’s employment ending (or deferrals otherwise ending) before the year ends seems relatively constant with either a percentage of compensation or a specified amount as the mode for wage reductions. I apologize for not specifying that my imaginary plan has no matching contribution. For an employer that calls a participant to specify, distinctly, each pay period’s non-Roth and Roth amounts, could door number two work? Once a participant’s amounts deferred under her non-Roth election have filled the year’s without-catch-up limit, the amount that otherwise would be the participant’s per-pay non-Roth amount is added to her per-pay Roth amount (unless the participant elects, properly, otherwise)? Bill Presson, § 414(v)(7) has many harmful aspects, and one might vent a little. Paul I, I recognize that, at least initially, a recordkeeper records an amount as non-Roth or Roth following the paymaster’s instructions, which convey (one hopes) the participant’s instructions. Imagine the plan’s governing document provides that, once a § 414(v)(7)-affected participant’s non-Roth deferrals within a year have filled her without-catch-up limit, the participant’s non-Roth election is superseded and replaced with a deemed election for Roth deferrals. Could an employer/administrator and its recordkeeper agree, between them, that the recordkeeper’s service obligation is to track when non-Roth deferrals must stop? And, if the plan so provides, become Roth deferrals? With these points, could a service contract provide that the recordkeeper tells the paymaster what non-Roth and Roth deferral amounts to report on a § 414(v)(7) affected participant’s Form W-2 wage report? Or, even without a distinct information feed from the recordkeeper to the paymaster, might it be good-faith reporting for a paymaster to presume the recordkeeper performed according to its service contract? BenefitsLink neighbors, are there other challenges I ought to think about?

RatherBeGolfing, thank you for the information about the rulemaking. BenefitsLink neighbors, any help on whether an employer ought to prefer door number one or door number two [above]?

If you’re reviewing a draft amendment, consider too distinctions between whether the provision commands or permits a forfeiture of an unlocated participant’s account. Some plan sponsors like to provide discretion so the plan’s administrator has choices. But some plan sponsors, increasingly, prefer to deny or negate discretion—so the fiduciary always has a uniform course of action. That might help avoid exposure to a claim that the fiduciary didn’t exercise its discretion with the right thinking. When a fiduciary has discretion, the fiduciary must exercise that discretion loyally, prudently, and impartially according to ERISA’s or other fiduciary law’s duties and standard of care. When a fiduciary lacks discretion, it’s protected in doing what the plan’s governing documents provide (except to the extent that a written provision is contrary to ERISA’s title I). This is not advice to anyone.

Soon (unless Congress changes the law, or the IRS publishes another nonenforcement), for a participant whose FICA wages from the employer in the preceding calendar year was more than $145,000 (or the inflation-indexed amount), an age-based catch-up deferral must be made only as Roth deferrals. For those participants, non-Roth deferrals are allowed only up to the without-catchup elective-deferral limit (or the plan’s constraint, including a constraint that follows a nondiscrimination measure). On January 13, 2025, the Treasury published a proposed rule stating interpretations of Internal Revenue Code § 414(v)(7) and related tax law. That notice includes some ways an employer might treat an affected participant’s election to make non-Roth deferrals as, to the extent of what would be beyond the without-catchup elective-deferral limit, a deemed election to make Roth deferrals. I’ve heard about (at least) two ways an employer and its recordkeeper might use such a deemed election: 1. Starting with the first pay period of 2026, adjust a § 414(v)-affected participant’s per-pay amounts or percentages between non-Roth and Roth deferrals so they would result in fitting amounts for 2026 if one assumes a participant remains employed throughout the year and makes deferrals in every pay period of the year. 2. During 2026, apply a participant’s election for non-Roth deferrals until the sum of those deferrals reaches the year’s without-catchup elective-deferral limit. Then, treat any further deferral as Roth deferrals, until the year ends. Are both those ways logically consistent with the Treasury’s proposed rule? If not, which way does not fall in with the proposed rule? If there is a choice, which way would you suggest? And why? If you like way 1 (starting with the first pay period), what adjustment would you allow if the participant’s employment ended before the year ended and this would result—without an adjustment or reclassification—in not filling-up with non-Roth deferrals all that may be done within the year’s without-catchup elective-deferral limit? In thinking through your suggestion and reasoning, assume: your client is the employer; the plan has hundreds or thousands of § 414(v)-affected participants; the plan gets services from a big recordkeeper; and your advice is needed now because a half-year is a short time for software and systems changes. Also, assume the proposed rule, although it does not apply for 2026, is the available Treasury interpretation, which a plan may apply regarding a participant’s tax year after 2023.

Bill Presson, are you imagining a participant might perceive an unfunded deferred compensation plan, whether § 457(f) or § 457(b), as if it were an eligible retirement plan? Although a nongovernmental, and nonchurch, tax-exempt organization’s unfunded plan ought to be “for a select group of management or highly compensated employees”, I’ve heard about participants who perceive an unfunded plan as just one more funded retirement plan. And I’ve heard about participants misperceiving that a qualified charitable distribution could be made not only from an IRA but also from an employment-based retirement plan, or even from a plan one misperceives as similar to an eligible retirement plan. Belgarath, if the circumstances are those I imagined, one hopes the executive can release the charitable organization from its obligation before the to-be-released deferred compensation is due.

For rocknrolls2’s question, merely reading the plan’s governing documents might be too facile. If rocknrolls2’s client’s document reads like many I’ve seen, it doesn’t unambiguously answer this question. In my view, the statutes don’t unambiguously answer this question about what a plan must provide to state provisions not contrary to ERISA’s part 2, or ought to provide to get treatment as a tax-qualified plan. ERISA § 203 [29 U.S.C. § 1053]; I.R.C. (26 U.S.C.) § 411 [hyperlinks below]. And the Treasury’s interpretation doesn’t unambiguously answer either question. 26 C.F.R. § 1.411(a)-4(b)(6) [hyperlink below]. When, decades ago, I looked into this question, I found no useful answer. BenefitsLink mavens, is there some IRS guidance I didn’t find? Or, did the law or the IRS’s interpretation change after I looked? ERISA § 203, 29 U.S.C. § 1053 http://uscode.house.gov/view.xhtml?hl=false&edition=prelim&req=granuleid%3AUSC-prelim-title29-section1053&f=treesort&num=0&saved=%7CKHRpdGxlOjI5IHNlY3Rpb246MTA1MiBlZGl0aW9uOnByZWxpbSkgT1IgKGdyYW51bGVpZDpVU0MtcHJlbGltLXRpdGxlMjktc2VjdGlvbjEwNTIp%7CdHJlZXNvcnQ%3D%7C%7C0%7Cfalse%7Cprelim; I.R.C. (26 U.S.C.) § 411 http://uscode.house.gov/view.xhtml?req=(title:26%20section:411%20edition:prelim)%20OR%20(granuleid:USC-prelim-title26-section411)&f=treesort&edition=prelim&num=0&jumpTo=true; 26 C.F.R. § 1.411(a)-4(b)(6) https://www.ecfr.gov/current/title-26/part-1/section-1.411(a)-4#p-1.411(a)-4(b)(6).

Consider also whether the plan’s administrator might have a duty to consider a claim fairly. That might mean the administrator should not deny a claim if the claimant is severed from employment, meets any further conditions for the distribution claimed, and no plan provision impedes or delays the distribution. This is not advice to anyone.

Belgarath’s query is about a nonqualified plan—an unfunded deferred compensation plan for select-group employees of a nongovernmental tax-exempt organization. A nongovernmental tax-exempt organization’s § 457(b) plan is not a § 402(c) eligible retirement plan, and so can’t be the “from” source of a rollover. For an unfunded deferred compensation plan, a participant has no more than a contract right to be paid the deferred wages when and as the plan specifies. So, much might be accomplished by working with the law of contract rights, releases, amendments, and novations.

And here are some earlier BenefitsLink conversations: https://benefitslink.com/boards/topic/63408-does-a-plan-pay-on-a-small-estate-affidavit/ https://benefitslink.com/boards/topic/70685-california-small-estate-affidavit/ https://benefitslink.com/boards/topic/72981-death-benefit-missouri/.

Consider that who is a beneficiary to get a distribution and who is a designated beneficiary as § 401(a)(9) rules use that specially defined term to drive how minimum-distribution rules apply can be distinct concepts. For an account balance less than $1,000 and given the circumstances TPApril describes, one suspects the plan’s administrator won’t worry about measuring a minimum distribution. If the default beneficiary, after exhausting those with a higher priority, is the participant’s estate, some claimants say it might be a pain-in-the-assets to open an estate administration (or reopen a closed administration) if otherwise that would not be done. Some plans’ administrators might interpret that paying according to a small-estate affidavit made according to the relevant State’s law (when the administrator lacks knowledge that the affidavit is false), is a satisfaction of the plan’s obligation to pay the participant’s estate as the last-stop default beneficiary. I’m not saying that’s my view, only that I’m aware others use it. Or a plan’s administrator might deny a claim of a claimant who does not deliver satisfactory evidence that she is the duly appointed executor, administrator, or other personal representative of the participant’s estate. Again, I don’t say whether that’s right or wrong. This is not advice to anyone.