Peter Gulia

Some lawyers like provisions by which nonobjection to an account statement or confirmation accepts or ratifies what it reports. Especially when the plan’s governing documents support those provisions.

SECURE 2019 includes ERISA § 404(e)’s “safe harbor” for selecting an annuity insurer, and Internal Revenue Code § 401(a)(38)’s way to get rid of a no-longer-welcome annuity investment alternative. I guessed that David Goldberg’s query considered some possibility of increased availability and selections of in-plan annuities. Over the past five years, I’ve seen no demand for in-plan annuities. (That doesn’t mean there wasn’t any, only that I didn’t see it.) I have responded to plan sponsors’ and plan fiduciaries’ questions about getting rid of annuities. Even if few participants choose an annuity and yet fewer have it in circumstances that might affect the negotiation of a domestic-relations order, a thought experiment in answering a what-if query helps me refresh my recollection of the QDRO statute’s fundamentals.

David Goldberg, if we limit your query to individual-account (defined-contribution) retirement plans governed by ERISA § 206(d) (unofficially compiled as 29 U.S.C. § 1056(d)), § 206(d)(3) shows us the boundary. A QDRO may specify an alternate payee’s share as a specified amount, or as a specified percentage, within the participant’s rights. Among the conditions: A QDRO can’t direct a benefit the plan does not provide. For example, a QDRO can’t direct a single-sum payment if the plan does not provide that form of payout. (Some individual-account retirement plans do not provide a single-sum payout, and some that provide it limit the conditions under which a single-sum payout is available.) A QDRO can’t direct shares that would add up to more than what the plan otherwise is obligated to pay or deliver to the participant (and others). Let’s imagine a participant, before the participant’s death or divorce (or other end of the participant’s marriage), annuitized half the participant’s account as an annuity on the participant’s life, and left the other half as an account balance. (Let’s leave aside that under many plans choosing a life annuity, rather than a qualified joint-and-survivor annuity, might require the participant’s qualified election with the spouse’s consent—see ERISA § 205.) If we assume only one alternate payee—the participant’s soon-to-be former spouse—and no other person who could be treated as a current, former, or surviving spouse, the alternate payee’s QDRO share could be: an amount or percentage of that part of the participant’s rights that remains an account balance (not to exceed all of it). AND an amount or percentage of each annuity payment as it becomes due (with the alternate payee’s share of each payment not exceeding the amount the annuity obligor is obligated to pay). Even if an individual-account retirement plan includes among the plan’s payout options a single sum, a plan does not provide that payout to the extent of the portion of the participant’s rights that is no longer an account balance because the participant had exchanged an amount for a right to annuity payments. But, if the annuity contract provides that the obligor MUST commute or adjust an annuity obligation on the holder’s request, a plan’s administrator might consider that contract provision in finding what a QDRO may direct be paid or delivered to an alternate payee without failing the § 206(d)(3)(D) conditions. Remember a general principle: A QDRO divides rights the participant has. David Goldberg, as you observe, a might-be alternate payee or one’s lawyer might seek to: classify the employment-based retirement plan to which a domestic-relations order might be directed as governmental (Federal), governmental (State or local), church, ERISA-governed with § 206, ERISA-governed but not § 206, or something else; classify the plan as defined-benefit or individual-account; discern the plan’s provisions, including those designed to meet ERISA § 205 (if applicable), or those (if any) designed to provide a participant’s spouse some interest in the participant’s rights; and discern the annuity obligor’s obligation, and the annuity holder’s rights. As BenefitsLink neighbors remind us, RTFD—Read The Fabulous Documents. This is not advice to anyone. Although there might be only a slight increase in individual-account plans’ participants choosing annuities, consider adding these points to your CLE teaching.

While that’s possible, don’t assume the plan’s design was the predecessor recordkeeper’s doing. Plan design is the plan sponsor’s choice. If you have doubts about whether the plan’s design is truly what the sponsor intends or desires, consider asking the government agency or instrumentality that administers the plan.

Some of us remember when many retirement plans, of nongovernmental employers too, and not only defined-benefit pensions but also individual-account (defined-contribution) plans, were designed so no form of benefit would be what now we call an eligible rollover distribution. Under some plans, the only forms of benefit were life-contingent annuities. Under a few, there was no choice at all.

A plan might have several distinct definitions of compensation measured for different purposes. Are you asking about: benefit-accrual compensation? nondiscrimination-testing compensation? annual-additions-limit compensation? Among some of many questions one might need to answer to develop relevant facts: Which of the three partnerships is or are participating employers? For which of the three partnerships did the partner perform personal services? For which of those was the partner’s services a material income-producing factor? Regarding each partnership, how much of the net income from it is attributable to capital, and how much to the partner’s personal services? Regarding each partnership, does the partner own more than 10% of the capital interests, or of the profits interests? Does each partnership have the same tax year as the others? Is the plan’s limitation year the same as or different than a partnership’s tax year? Is the plan’s limitation year the same as or different than the partner’s tax year? Is one or more of the partnerships not a US organization Consider Internal Revenue Code of 1986 § 401(d): “A trust forming part of a pension or profit-sharing plan which provides contributions or benefits for employees some or all of whom are owner-employees shall constitute a qualified trust under this section only if, in addition to meeting the requirements of subsection (a), the plan provides that contributions on behalf of any owner-employee may be made only with respect to the earned income of such owner-employee which is derived from the trade or business with respect to which such plan is established. And consider this rule: “If a self-employed individual is engaged in more than one trade or business, each such trade or business shall be considered a separate employer for purposes of applying the provisions of sections 401 through 404 to such individual. Thus, if a qualified plan is established for one trade or business but not the others, the individual will be considered an employee only if he received earned income with respect to such trade or business and only the amount of such earned income derived from that trade or business shall be taken into account for purposes of the qualified plan.” 26 C.F.R. § 1.401-10(b)(2) https://www.ecfr.gov/current/title-26/part-1/section-1.401-10#p-1.401-10(b)(2). As always, Read The Fabulous Document. This is not advice to anyone.

Internal Revenue Code of 1986 § 72(t)(2)(A)(iii) provides a nonapplication of the too-early tax for a “[d]istribution[] which [is] attributable to the employee’s [the participant’s] being disabled within the meaning of subsection [72](m)(7)[.]” Although Basically’s story suggests some possibility that the participant’s father might be disabled, the story makes no mention of the participant’s disability.

If the participant’s father is the participant’s dependent, the participant might want his lawyer’s or certified public accountant’s advice about whether some expense gets the Internal Revenue Code § 72(t)(2)(B) exception for medical expenses. And even if the participant’s father is not the participant’s dependent, the participant might want advice about whether up to $1,000 might get a § 72(t)(2)(I) exception as an emergency personal expense distribution. http://uscode.house.gov/view.xhtml?req=(title:26 section:72 edition:prelim) OR (granuleid:USC-prelim-title26-section72)&f=treesort&edition=prelim&num=0&jumpTo=true This is not advice to anyone.

Many academics and some lawyers preserve websites using https://perma.cc/, operated by Harvard College.

Might a bank’s loan (perhaps supported by a mortgage or second mortgage on the house) be more efficient than drawing on retirement savings?

If no bank or trust company is available to serve and the employer is reluctant to leave a broker-dealer that requires a trustee, the employer sets up a rabbi trust and finds an individual (or a few) willing to accept the trusteeship. And those involved hope no trouble happens. Further, austin3515 to protect oneself might decline to provide tax advice. Or, might explain the tax risks.

If the employer gets recordkeeping from one of the big providers, ask the recordkeeper whether its captive or affiliated trust company (or the unaffiliated trust company the recordkeeper usually arranges for customers’ § 401(a)-(k) plans’ trusts) is available to serve as a rabbi trustee. If that service is available, don’t be surprised if the trustee’s fee is more than for a funded plan’s otherwise similar trust. A rabbi trustee budgets for its expenses in responding to, and sometime incurring litigation expenses regarding, other creditors’ claims, including claims asserting that the trustee ought to have stopped payments to deferred compensation participants and beneficiaries and instead preserved the rabbi trust’s assets for all creditors. If not appointing a bank or trust company, an employer evaluating whether to use a rabbi trust for the employer’s assets might consider whether such a set-aside does much to protect participants and beneficiaries (or the organization). An individual trustee might have too much information about the deferred compensation obligor’s financial condition, possibly triggering conditions under which the trustee must act to preserve the interests of all creditors. And if the chief purpose of a rabbi trust is to protect deferred compensation obligees from the obligor’s dishonest refusal (while the obligor is solvent) to pay an entitled claim, how likely is it that the organization’s executive will act differently because she is a rabbi trustee than she would act if she were only the organization’s executive? If an individual asked to serve as a rabbi trustee is an executive of the obligor or has a friendship with some of the people who might have a claim to deferred compensation, one might carefully consider whether conflicting interests could put her in an untenable, or at least unwelcome, situation. For an unfunded deferred compensation plan, investments (if any) remain the employer’s property. If so, might it be simpler, in some circumstances, for the employer to hold its property without a set-aside?

Whether it’s an investigation or an inquiry, a service provider ordinarily cooperates, including furnishing records, to the extent that doing so does not breach one’s service agreement. An interviewee should avoid unnecessarily saying anything that could suggest the service provider ever did, or had any power to do, anything discretionary. Although EBSA also presents information requests and before-enforcement demands to plan fiduciaries, EBSA often turns to service providers. The reasons are many, including: EBSA can’t find a fiduciary. A fiduciary does not respond, and EBSA lacks resources to compel a response. A fiduciary asserts that she is not, and never was, a fiduciary, and EBSA prefers not to spend resources fighting the denying fiduciary. A fiduciary did not keep records. A fiduciary no longer has access to records. A fiduciary’s records were discarded. (This often happens with a failing business.) EBSA seeks a distinct source of information because EBSA suspects a target fiduciary’s information is false.

About an employment-based retirement plan, a reader of the plan’s governing documents might discern whether the plan provides a surviving spouse 100% of a death benefit or, if the plan provides a qualified preretirement survivor annuity, whether the participant may limit the QPSA to a 50% QPSA. If a surviving spouse’s benefit is only a 50% QPSA, a beneficiary designation might be effective for the other half of the death benefit. A participant might want information to consider choices about whether and how to seek one’s spouse’s consent.

In responding to EBSA inquiries, a recordkeeper or third-party administrator wants to be clear, yet tactful. If, after a good explanation, an examiner persists (inaptly), consider: “I’d really prefer not to need to call your supervisor, but . . . .” But don’t do that if you guess the supervisor might be behind the repeated inquiry. If other efforts fail, lawyer-up. Clients of lawyers I referred have told me that EBSA’s conduct got much better after a lawyer was on the scene. Sometimes, a lawyer’s mere mention that she represents the TPA ended all inquiries. While not budging from reminding an inquirer about what a nonfiduciary service provider must not do, it sometimes helps to show a little empathy. A tiny handful of EBSA people are fighting a vast scourge of thefts and abandonments. This is not advice to anyone.

An unfunded deferred compensation plan is a contract. Some obligors facing a situation like the one waid10 describes might decide that the obligee is unlikely to pursue enforcement of his right to be paid $0.02 plus interest. Absent an obligee’s release, some obligors meet one’s obligations, even when an expense to do so seems disproportionate to the value of the obligee’s right. Which reputation does this employer prefer? (A processing charge on an individual’s account is inapt unless the deferred-compensation contract provides the charge, or at least granted the obligor a power to decide the charge.) As Paul I suggests, the obligor might simply ask the obligee whether he wants the two or three cents, or releases the obligor from its obligation. The obligee might be gracious.

A plan a nongovernmental employer or its employee intends as a § 457(b) eligible deferred compensation plan is a contract between the employer and an employee. If an employee received a payment more than the plan provided, the employer should pursue its legal and equitable rights to get a return of the mistakenly paid amount. If an employer does not pursue its rights to a return of a mistaken payment, that calls into question whether the parties intend or intended the plan’s provisions to meet § 457(b)(6) and to be an unfunded plan for part 2, 3, and 4 of subtitle B of title I of ERISA. Whether a payee was entitled to some payment following her severance from employment (if there was one) turns on the plan’s provisions. As BenefitsLink neighbors say, Read The Fabulous Document, to discern the contract rights and obligations, and conditions about them. Under the facts you describe, it seems unlikely that the plan provided a before-severance payment of deferred compensation attributable to the reemployment (if there was one). For the amount the payee returns to the employer, the employer should want its lawyer’s advice about its legal and equitable rights to interest or investment gain on the mistakenly paid amount. This is not advice to anyone.

Consider using a plan-termination amendment (which usually is needed for other reasons) to specify how the forfeitures account is used. Using forfeitures to meet plan-administration expenses might help a plan pay service providers—recordkeeper, third-party administrator, trustee, custodian, lawyer, independent qualified public accountant. (Else, would participants’ accounts be charged?) In my experience, the forfeitures balance often is much less than what is owing to service providers.

What youngbenefitslawyer seeks is the § 414(v)(7) amount for 2025 wages that set whether 2026’s age-based catch-up deferrals must be Roth contributions. We presume that adjustment won’t be IRS-announced until next October’s or early November’s notice. (Some BenefitsLink mavens form estimates.) A retirement plan I advise communicates the plan’s § 414(v)(7) provision to employees with a yearly salary more than $120,000. The idea is to allow some room for changes that might put an employee’s § 3121(a) wages over the applicable § 414(v)(7) amount.

Internal Revenue Code of 1986 § 414(v)(7)(E) provides: 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 [§] 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. http://uscode.house.gov/view.xhtml?req=(title:26 section:414 edition:prelim) OR (granuleid:USC-prelim-title26-section414)&f=treesort&edition=prelim&num=0&jumpTo=true

Consider also that an employer’s payment on a participant’s obligation might be the employee’s compensation for one or more tax purposes, and within the meaning of one or more of the retirement plan’s defined terms for compensation.

Internal Revenue Code § 401(k) does not preclude a plan from providing a hardship distribution grossed-up for reasonably anticipated income taxes, even if the distributee instructs zero withholding.

In many aspects of life, logic does not always persuade. Consider that highly-compensated employees often includes people who decide, directly or practically, whether to retain an employee-benefits service provider. Here’s a Brian Gilmore webpage that explains the measure, and suggests what to do. https://www.newfront.com/blog/the-dependent-care-fsa-average-benefits-test

The Labor department’s Employee Benefits Security Administration released a temporary nonenforcement policy. https://www.dol.gov/sites/dolgov/files/EBSA/employers-and-advisers/guidance/field-assistance-bulletins/2025-01.pdf That nonrule instruction to government employees does not change the law. But many people guess that a fiduciary’s turnover of no more than $1,000, in the circumstances and under the conditions the FAB recognizes, is unlikely to attract a participant’s, beneficiary’s, or alternate payee’s lawsuit. For situations in which: an involuntary distribution was not rollover-eligible, is not collected, has been tax-reported, the facts meet the relevant State law’s definition of abandonment, and the plan’s fiduciary has decided not to keep an account for the distributee, I wonder whether some fiduciaries might consider a turnover to abandoned-property administration, evaluating whether it might be less harmful than what else the fiduciary might do.

A few questions the US retirement plan’s administrator might consider: For a worker from Korea, is she an employee of the same corporation that maintains the plan, or is she an employee of something else and detailed to the US operation? If the worker from Korea is employed by a something else, is it a part of the same § 414(b)-(c)-(m)-(n)-(o) employer as the organization that maintains the US plan? Regarding the US, is the worker from Korea a resident or a nonresident? (That a worker lives in the US now does not by itself mean she is a resident.) Is the worker’s compensation earned income from sources within the United States? (That a worker is paid in US$ does not necessarily mean the pay is from a US source.) How does the parent corporation classify the worker from Korea? Is there an income tax treaty that affects anything about this situation? This is not advice to anyone.