Peter Gulia

Just to give you a way to think about this as you prepare to get your lawyer’s advice: Relying on the plan administrator’s and trustee’s instructions about the service you’re asked to do might be enough if : you’re a nonfiduciary service provider; your service agreement releases you from liability for following instructions; your service agreement indemnifies you from liabilities and expenses from your having followed instructions; and your indemnitors have enough money to make good their promises. But if you are or your affiliate is a fiduciary (of whatever kind), one might consider a cofiduciary’s responsibility regarding what another fiduciary does or fails to do. Beyond whatever the plan’s administrator considers about its responsibility to the plan, the surviving spouse might want her lawyer’s advice about whether it’s unwise to be too quick to pay medical expenses from the accident. (Who caused the car accident: the decedent, or someone else?) This is not advice to anyone.

Consider that there might be a few years’ grace before the employer no longer may maintain a SIMPLE. For details, see Gary Lesser’s and Denise Appleby’s SIMPLE, SEP, and SARSEP Answer Book. Also, does the employer have workers in a State with a play-or-pay law that calls an employer to allow retirement savings? If so, a plan with a § 401(k) automatic-contribution arrangement might not burden an employer much more than would recording and paying over automatic-contribution wage-deduction contributions to IRAs the State arranged. If no State’s play-or-pay law applies, much might depend on what the business owner prefers to do for herself.

For the IRS’s view of tax law’s remedial-amendment period, see Miscellaneous Changes Under the SECURE 2.0 Act of 2022, Notice 2024-2, 2024-2 I.R.B. 316, 333 (Jan. 8, 2024), at Q&A-J1, available at https://www.irs.gov/pub/irs-irbs/irb24-02.pdf. Do we imagine the IRS might further delay the December 31, 2026 due date for a plan amendment? Further, do we imagine the IRS might again delay the year for enforcing Internal Revenue Code § 414(v)(7)? Even if one follows tax law’s remedial-amendment legal fiction, a sponsor/employer/administrator might need to decide at least one plan-design or plan-administration choice. For example: If a participant’s extant deferral election for the first payday in which her non-Roth deferral would exceed her tax year’s without-catchup limit: some might treat an affected participant’s deferral election to the extent a non-Roth amount is precluded as invalid, limiting such a participant to her without-catchup deferral limit. some might, after repeated notices, treat an affected participant as having impliedly assented to treat her catchup deferrals as Roth contributions.

Brian Gilmore, thank you for helping us learn about health plans. If you’re willing to help us learn a few points more: Imagine the health plan’s benefits are the employer’s “self-funded” obligation, with no health insurance contract. Imagine no claim reached any attachment point of a stop-loss insurance contract. Imagine there was some time in the past when the child was not the participant’s dependent (as the health plan defines the term), but the participant had told the employer/administrator that the child is the participant’s dependent. Assume the plan paid a claim for a healthcare service the child received, but that service was had when the child was not the participant’s dependent. May the employer demand that the participant/employee return the amount the employer paid? If so, are there legal reasons that might influence an employer’s decision-making about whether to demand the participant/employee return the money? If the employer is not reimbursed and the child was not the participant’s dependent not only for the health plan’s terms but also for Federal income tax purposes, should the employer’s W-2 wage report on its employee’s wage include an amount for the coverage provided when the child was not the participant’s dependent? And, despite whatever the legal answers might be, do many employers simply make practical business choices?

What do the documents governing the plan provide? Or, if not yet amended to provide that a participant may elect that a nonelective contribution be treated as a Roth contribution, what does the plan’s sponsor want the remedial amendment to provide? And if the plan’s sponsor expects to use IRS-preapproved documents, which choices will those documents allow?

A Form 1099-R tax-information report should be true when the reporter signs or otherwise adopts the report. One might be reluctant to code a report assuming a fact that has not yet happened.

Will the payer tax-report the distribution soon after it is paid? Or will the payer wait to tax-report until after the calendar year has ended?

Saying nothing about the US government employees’ retirement plans: If other conditions are met, ERISA § 206(d)(3) does not preclude a domestic-relations order that provides alimony or marital property to the participant’s current spouse, even with no divorce or annulment, and no separation. But the order must have been “made pursuant to a State or Tribal domestic relations law (including a community property law).” At least two States’ courts found that because neither of two spouses had asked the court for a divorce, annulment, separation, or other domestic-relations relief, there was no matter that could call for an order a plan might treat as a QDRO. Wallace v. Wildensee, 990 N.W.2d 637, 2023 Empl. Benefits Cas. (BL) ¶ 154,219 (Iowa 2023) (When there is no divorce or separate-maintenance proceeding, a court lacks power to issue a domestic-relations order.); Jago v. Jago, 2019 Pa. Super. 246, 217 A.3d 289, 297 (Pa. Super. 2019) (“[A] QDRO is a procedural right derivative of or adjunct to a domestic relations matter, but outside the context of a domestic relations matter, a QDRO is not a distinct, discrete legal claim[.]  [W]e hold that absent a divorce or other domestic relations matter pending between spouses, they cannot obtain a QDRO for the sole purpose of moving funds in the participant/spouse’s [retirement] plan out of the plan to the non-participating spouse[’s IRA].”). A current spouse has a right to a survivor annuity or death benefit, to the extent the plan provides (or ERISA § 205 commands the plan to provide). Does Maryland law empower a domestic-relations court to allocate property between current spouses?

Here’s a hyperlink to Nevada Revised Statutes chapter 353D—Nevada Employee Savings Trust. https://www.leg.state.nv.us/nrs/NRS-353D.html#NRS353DSec070 Nev. Rev. Stat. § 353D.070 “Covered employer” means an employer that: 1. Employs more than five persons in this State; 2. Has been in business for at least 36 months; and 3. Has not maintained a tax-favored retirement plan for its employees or has not done so in an effective form and operation at any time within the current calendar year or 3 immediately preceding calendar years. Nev. Rev. Stat. § 353D.150 “Tax-favored retirement plan” means a retirement plan that is tax-qualified under or is described in and satisfies the requirements of section 401(a), 401(k), 403(a), 403(b), 408(k) or 408(p) of the Internal Revenue Code[.]

The Form 5500 Instructions state: Page 1: “Each Form 5500 must accurately reflect the characteristics and operations that applied during the reporting year of the plan or arrangement.” Page 19: “In the boxes for line 8a and 8b, as appropriate, enter all applicable two-character plan characteristics codes that applied during the reporting year[.]” Page 36 [part V line 8]: “Enter all applicable pension plan characteristics codes that applied during the reporting year[.]” https://www.dol.gov/sites/dolgov/files/ebsa/employers-and-advisers/plan-administration-and-compliance/reporting-and-filing/form-5500/2024-instructions.pdf While the word during has meanings that depend on the context, the sentences quoted above do not mention the beginning or end of a year. With its lawyer's advice, the plan’s administrator might consider reporting every code that describes the plan on any day of the reported-on year. But an edit in the Form 5500 software, especially if it’s from the Labor department rather than the software designer, might point in another direction. This is not advice to anyone.

I see three frames for thinking about these questions: For a year that ended: The plan’s administrator must read the documents governing the plan. If this leads to one clear finding about whether the plan provides not only a true-up but also a true-down, so be it. If the documents are ambiguous, the administrator must—with “the care, skill, prudence, and diligence” ERISA § 404(a)(1)(B) requires—interpret the documents to discern the plan’s provision. If on text interpretation alone, none of the plausible interpretations is readily better than others, the administrator might interpret the documents considering the “exclusive purpose of . . . providing benefits to participants and their beneficiaries[.]” ERISA § 404(a)(1)(A)(i), 29 U.S.C. § 1104(a)(1)(A)(i). And if there is written evidence that the plan’s sponsor intended that the plan would tax-qualify under Internal Revenue Code § 401(a), the administrator might favor an interpretation that supports tax-qualified treatment over an interpretation that risks not meeting all tax-qualification conditions. (Listen to Bill Presson’s question.) For a year that has begun: If the plan’s sponsor considers amending the documents, it would consider whether a midyear amendment could contravene ERISA § 203 [29 U.S.C. § 1053]. In doing so, one might consider that Treasury rules interpreting Internal Revenue Code § 411 also are, to the extent Reorganization Plan No. 4 of 1978 provides, interpretations of ERISA § 203, except for § 203(a)(3)(B). Before a year has begun: The plan’s sponsor might consider amending the documents to apply its desired provision to years not yet begun. Might the sponsor prefer providing a true-up, but no true-down? None of this is advice to anyone.

Prohibited Transaction Exemption 80-26, a class exemption, sets conditions for a service provider’s interest-free loan to a plan. https://www.dol.gov/agencies/ebsa/laws-and-regulations/rules-and-regulations/exemptions/class

DSG, do you include telephone numbers and email addresses in the court’s order? Or, do you put that sensitive information in some kind of supplement for the plan’s administrator, but not on the court’s public record?

Paul I, thank you for widening my thinking. BenefitsLink neighbors, do you have other observations or thoughts?

In a BenefitsLink discussion yesterday, neighbors asked which service others like to search for a participant with an inoperable address. If a search result includes what the search suggests now is a likely current address (postal or email, or even both) for the individual, what does a plan administrator or its service provider do with that information? (Assume an account not yet nearing a § 401(a)(9) required beginning date and not subject to a small-balance involuntary distribution.) Whether the found address is postal or email, an administrator might be reluctant to send a written communication there, fearing that a person other than the participant might receive the communication. That would invade the participant’s privacy. And a shrewd person might see that the retirement plan lacks enough control about the participant’s identity to detect a false claim. Could efforts to find an inoperable-address participant help an impostor steal the participant’s account? Are there ways of communicating to the found address without revealing anything about the name or identity of the retirement plan? Or might the communication omit the participant's name? If so, would either such a communication, if it reaches the participant, be effective in getting a response from the participant? What steps would a plan’s administrator use to guard against a theft of an inoperable-address participant’s account?

Paul I, thank you for your further thinking with smart logic. In this situation, the reasons the plan’s fiduciary might consider moving funds from the main menu to the brokerage window don’t relate to either of those you describe. I’m deliberately not describing the reasons because doing so could reveal my client’s identity and confidential communications. Again, thank you both for helping me.

The rule Belgarath points you to is for counting employees and fractions of employees, and their work periods (counted in workweeks or workdays), to determine whether an employer’s health plan must or not need not offer Federal COBRA continuation coverage. Consider that the referred-to rule does not count nonemployee contractors and does not self-employed individuals. For example, if a limited-liability company (that elects Federal income tax treatment as a partnership) has, for all work periods in a measurement year, ten full-time workers but two of them are members (partners) of the LLC, the company has eight employees. https://www.ecfr.gov/current/title-26/chapter-I/subchapter-D/part-54/section-54.4980B-2 In this note, I say nothing about whether anyone must, may, or must not rely on the Treasury’s proposed interpretation of Internal Revenue Code § 414A.

RatherBeGolfing, thank you for helping me with your further thinking. While recognizing complexities and risks about a brokerage window: This plan’s sponsor+administrator faces circumstances in which removing some funds from the plan’s designated investment alternatives and instead allowing participants who want those funds to get them under a brokerage window could lessen fiduciary tensions. Further, the plan’s administrator might welcome an opportunity to report investments made through the brokerage window as one asset on Schedule H’s line 1c(15) and line 2c, and so as one asset held for investment for that line 4i schedule. And participants who use the brokerage window might welcome that the schedules do not reveal any participant’s investment choices, or even an aggregate of participants’ investment choices, under the window. My scope is to provide the decision-makers a detached explanation of potential advantages and disadvantages. And you both have helped me.

Paul I, thank you for the further helpful information.

Consider also whether each partner did or didn't provide services to the company. For any of a capital interest, a profits interest, or a payments interest that does not vary with either capital or profit, it's possible for a partner to get a payment even if she provided no service during the year, or even never provided a service to the company.

If the plan’s small-balance (for example, <= $7,000) provision does not apply and the participant has not yet reached her normal retirement age, how would the plan provide an involuntary distribution?

RatherBeGolfing and Paul I, thank you for helping me. Schwab offers recordkeepers two formats for Personal Choice accounts; one of those is mutual-funds-only. In my experience with others, a recordkeeper calls a plan’s administrator to specify which version is selected. I’m guessing Ascensus lets its customer specify mutual-funds-only. RBG, thank you for your note about the plan’s administrator not seeing transactions within a brokerage account. Paul I, thank you for your suggestion that a plan or its administrator might forbid or limit an agent using a participant’s power to direct investment. The plan’s administrator uses an accounting firm to test coverage and nondiscrimination, and a different accounting firm to audit Form 5500 reports and financial statements. That auditor firm has a distinct work group who do only employee-benefit-plan audits and lots of them, including many that require information from Ascensus. Also, the employer uses, beyond its internal accountants, three accounting firms for the employer’s financial statements and allocations, and a separate accounting firm for tax accounting. Some of these services involve checking another’s work. For ERISA disclosures and related advice, the plan’s administrator uses Fiduciary Guidance Counsel. My information for the decision-makers to consider will include EBSA lawyers’ and officials’ distaste for brokerage windows. Do you think a plan’s fiduciary must monitor what happens inside participants’ brokerage accounts? And if so, why? (I ask because I respect your views.) Or is the plan fiduciary’s duty only to find that Schwab is a reputable broker-dealer, that Schwab and Ascensus deliver information needed for the plan’s auditing, and that participants can get information to direct one’s own investments? Am I right in guessing that a Form 5500 report shows the beginning-of-year and end-of-year balances held in the participant-directed brokerage accounts, but need not show details on which mutual funds the plan’s trust holds, except for those that are a 5% concentration (or involve a nonexempt prohibited transaction)?

For an individual-account retirement plan with participant-directed investment that gets Ascensus’ recordkeeping services, the plan’s sponsor (which also is the plan’s administrator and trustee) is considering adding a Schwab Personal Choice brokerage window, restricted to mutual-funds-only. Unlike other employee populations in which only a relatively few participants use a brokerage window, almost all participants would use the mutual-funds window. The employer pays Ascensus’ fees for all still-employed participants, and likewise would pay Ascensus’ incremental fees for pulling the brokerage accounts into the recordkeeping. The counts of participants, all of whom have a plan account balance, are such that the plan every year will require an independent qualified public accountant’s audit of the plan’s financial statements. An Ascensus-aligned trust company is the plan trustee’s custodian. The plan does not use Ascensus or a TPA to test coverage, nondiscrimination, or top-heavy measures. BenefitsLink neighbors, what difficulties should I advise this plan sponsor to consider in its decision-making about whether to add the brokerage window?

David Rigby, thank you for those fine examples of another profession's task that one can do more efficiently or effectively with an actuary's help.