Peter Gulia

I'm aware of a non-precedent authority that could, with the right contract terms (including separate accounting) and other facts and circumstances, be argued to support a position that using one group annuity contract as the funding means for an employer's 403(b) plan and the same employer's 401(a) plan is not necessarily an Internal Revenue Code violation. Read IRS Letter Ruling 9422053. Please understand that I don't suggest using an annuity contract as a retirement plan's primary preretirement investment. And among many other decisions, each plan's fiduciary must find that the arrangement does not improperly subsidize another plan or otherwise breach ERISA's or State law's exclusive-purpose duty. But if the plans' fiduciaries already made those decisions, using one annuity contract might be possible.

What ordering rules apply concerning an employer that maintains a health plan that has never specified a plan year? (The plan I'm thinking has fewer than 100 participants, and never has filed a Form 5500 report. Also, the plan doesn't measure coverage by annual periods.)

Just so that I learn something from Belgarath's observation: If a TPA delivered its advice in writing (which might be an e-mail) and what the plan's accounts show is something other than what the TPA advised, wouldn't the combination of those facts be enough to prove that the TPA is not responsible for the plan administrator's decision? Or is there (as I suspect) something about relationships between a plan's administrator and its TPA that make it sensible for a TPA to protect itself with not only proof of what advice the TPA delivered but also of the plan administrator's deliberate decision not to follow the advice?

There's another logic gap involved with the text of the rule that the originating post refers to. This fees-and-expenses comparison is between the default-rollover IRA and non-default IRAs of the same IRA provider. But some custodians or "providers" of default-rollover IRAs offer only those IRAs, and so don't have any non-default IRA to compare to. The 29 C.F.R. 2550.404a-2©(iv) condition is about the fees and expenses of the default-rollover IRA. It's not about expenses of administering the employment-based plan. Other law governs those expenses, and governs what might be allocated to such a participant's plan account.

Was the mistake setting both portions to 3% of pay, or was it setting one portion (but the wrong one) to 3%?

Thank you, Tom Poje, QDROphile, masteff, Bird, and Kevin C. for your great help. Not only did I learn something today, for the first time in my 29 years of employee-benefits practice I found a use for a determination letter.

Tom Poje, thank you for the super help!!! The LRM says “forfeitures cannot be used as … Elective Deferrals.” But can the BenefitsLink mavens help me understand why the IRS so interprets the Internal Revenue Code? (If it matters, this plan does not provide and never received any qualified nonelective contribution or qualified matching contribution, nor any kind of safe-harbor contribution.)

An employer/plan administrator and its recordkeeper have a difference in views about whether the employer may use forfeitures to reduce the employer’s obligation to pay 401(k) salary-reduction contributions. The recordkeeper says the employer may use forfeitures only against matching or non-elective contributions. The employer might prefer to use forfeitures against any contribution that the employer otherwise would be obliged to pay. The plan, which has not only a volume-submitter letter but also an individual IRS determination, states: “Forfeitures … will be … used to reduce any Employer contribution (e.g., matching, profit sharing[,] or ADP test safe harbor contribution).” Even if the c in contribution were capitalized, the plan does not set up “Employer Contribution” as a defined term. And the exempli gratia (for example) signal that leads the parenthetical phrase means that the phrase is a non-restrictive illustration of less than all of the possible kinds of employer contribution. Perhaps a convention suggests using forfeitures only against matching or nonelective contributions. But is this a hard constraint? Isn’t a 401(k) contribution an employer contribution? (An employee agrees to a salary reduction in exchange for her employer’s contribution to the plan.) If so, isn’t it within what the plan’s text says about using forfeitures to reduce any employer contribution? Or is there some other reason forfeitures must not be used against salary-reduction contributions?

Could a recordkeeper seek a fee for processing an individual-account closing? Would a prudent fiduciary approve such a fee?

A retirement plan must provide that a vested benefit that exceeds $5,000 may not be distributed without the participant’s consent. Interpreting both this ERISA provision and a related tax-qualified-plan condition, a Treasury department interpretation provides that a participant’s “consent” to a distribution isn’t valid if the plan imposed a “significant detriment” on a participant who doesn’t consent (and thus leaves his or her account invested under the plan.) To interpret this significant-detriment interpretation, the Treasury department stated its view that a plan may charge the accounts of former employees (even while not charging current employees) as long as the expense otherwise is proper and a severed participant’s account bears no more than its “fair share” of the plan’s expense. (However, the reasoning of the ruling suggests some possibility that an expense allocation that’s more than the “analogous fee[] [that] would be imposed in the marketplace … for a comparable investment outside the plan” might be a precluded “significant detriment”.) To illustrate the “fair-share” idea, the Treasury department’s ruling expressly cautions that former employees’ accounts must not subsidize current employees’ accounts: “[A]llocating the expenses of active employees pro rata to all accounts, including the accounts of both active and former employees, while allocating the expenses of former employees only to their accounts” would be an improper allocation. Following this, the Treasury department said that a plan doesn’t impose a “significant detriment” because it charges beneficiaries’, alternate payees’, and severed participants’ accounts “on a pro rata basis”. The Treasury department ruling’s reference to “a pro rata basis” doesn’t mean that a plan can’t allocate expenses among accounts under what the Labor department calls a “per capita” method. The Labor department’s Bulletin uses “per capita” to express the idea of charging an account an amount that’s the same for each account in the class and that doesn’t vary based on the account balance, and uses “pro rata” to express the idea of charging an account a percentage of an account (or subaccount) balance. The Treasury department’s ruling doesn’t draw this distinction, and instead uses “pro rata” only to express the idea of allocating to accounts of former employees (or persons other than current employees) no more than those accounts’ proportionate share. Nothing in the Treasury department’s ruling says that these proportionate shares could not be computed regarding all accounts by dividing the expense by the number of accounts or allocating the expense as a percentage of plan account balances. Rev. Rul. 2004-10, 2004-7 I.R.B. 484-485 (Feb. 17, 2004).

How much is the user fee? Is the user fee measured on the number of adoption-agreement forms?

Milgram 10-1862_opn.pdf In the attached Second Circuit decision, the court held that a participant’s claim against a plan itself (rather than the plan’s administrator) is valid, even if enforcing that claim means subtracting amounts from the individual accounts of all participants. (The plan had paid an alternate payee more than a QDRO specified, and the participant demanded restoration of what belonged to him.) A plan's administrator (and other fiduciaries) might think about this before too hastily giving up on pursuing the plan's legal and equitable remedies to get a return of the overpaid amount.

TPA Guy, each plan's administrator might consider instructing the recordkeeper to turn off computer access to each account that is a subject of a records mismatch, at least until some reasonable time after the records are adjusted.

For those who might like to comment on this query, Nebraska's statute (with surrounding context) is at http://nebraskalegislature.gov/laws/statutes.php?statute=42-372.01

jpod, thank you for your observation. You likely know much more than I do about the relevant practice. Retirement plan fiduciaries ask for my advice about non-tax fiduciary questions; and almost never ask me to think about tax-qualification issues.

Mike Preston, by suggesting that practitioners relearn the rule, I didn't mean to suggest that anyone or anything is incorrect. Rather, I suggest that being prepared to do the analysis, for the kind of planning you describe a demand for, is a way that one might get a little fee-paying biz.

One way for a defined-contribution plan (if its investment is not participant-directed) to buy another plan's asset is using an independent fiduciary. Among many other conditions and circumstances, it could work only if it's feasible for the dc plan to take on the asset without impairing the dc plan's liquidity needs (or anything else in the dc plan's interests). Likewise, the dc plan's independent fiduciary must satisfy herself that the price the dc plan would pay to buy the asset reflects a sufficient valuation discount for the lack of liquidity. As always, every person should get the advice of his, her, or its expert lawyer.

On Mike Preston's point, now might be an opportune time for eb practitioners to relearn the rules of Internal Revenue Code section 414(b), ©, (m), and (o). IRC section 4980H©(2)©(i) applies those rules to determine the employer on which to count whether there are or were 50 FTE employees.

Smart points awarded to rcline 46 and david rigby! Let's see who can come up with more ways in which the Affordable Care Act affects the administration of a 401(k) plan.

I'm making a list of the ways in which the Affordable Care Act affects the administration of a 401(k) plan. I'll bet that BenefitsLink mavens can explain things that I wasn't smart enough to see. Let's see who has the most ideas.

When a financial institution (including a broker-dealer or an investment company) designs its customer identification program, the program must include something to check the identity of the natural persons who act for a non-natural person (including a corporation, trust, or employee-benefit plan). See 31 C.F.R. Parts 1020 to 1029 http://www.gpo.gov/fdsys/browse/collectionCfr.action?collectionCode=CFR&searchPath=Title+31%2FSubtitle+B%2FChapter+X&oldPath=Title+31%2FSubtitle+B%2FChapter+X&isCollapsed=true&selectedYearFrom=2012&ycord=1238 Even if not expressly specified in those rules, some programs call for a natural person's taxpayer identification number, which for a U.S. citizen is the Social Security Number. Many request also a copy of an identity document that includes a photograph of the natural person's face. A strange use when one considers that almost never does an operations employee at the investment house see the face of the natural person. Belgarath, if your client's natural persons do furnish Social Security Numbers, consider suggesting that they inquire about the institution's procedure for destroying the identity-checking records after the uses of them (including internal and external audits of the identity checker's work) are completed. Some financial institutions might not watch their employees and contractors closely enough to prevent, or even detect, identify theft by those employees or contractors.

Let me ask my fiduciary question, once more, using an example: Before the end of February, the plan mails every participant a notice that on April 1 the XYZ Foreign Stock Fund will replace the ABC Foreign Stock Fund. When Sue receives her first-quarter account statement, she sees a $1.20 charge for receiving a mailing about a fund she has no interest in. On August 31, the plan sends every participant an annual redo of ERISA 404a-5 information. Again, the third-quarter statements show that every participant was charged (this time $1.80) for the expenses of assembling and mailing that communication. After this, Sue ($3 poorer) wonders whether the plan's fiduciary could have made the slight change in managers for a foreign stock fund effective on October 1 (so that it could be announced in the 404a-5 mailing) instead of April 1. Does six-months'-worth of investment improvement in a fund in which only 2% of the plan's assets is invested outweigh the incremental $1.20 multiplied by the number of participants? Or expressed in terms of fiduciary responsibility: When the fiduciary decided that XYZ is a better manager ABC is, could the fiduciary properly have considered that XYZ isn't so obviously better that the improvement must be implemented right away?

cbclark, thank you for your helpful thinking. It makes sense to do an investment change quickly if it has become obviously imprudent to continue the to-be-replaced fund. But what if the recently selected fund is better, but only somewhat better, than the to-be-replaced fund? What if the plan has 25,000 participants, and the plan’s expenses to do an off-cycle mailing is about $30,000. Could a fiduciary consider that the anticipated investment performance improvement between the to-be-replaced fund and the recently selected fund might not get to $30,000 in the few months between a quick implementation and waiting for an on-cycle implementation? And would it matter if the investment category of these funds is one that only a minority of participants use, while the expenses are charged (proportionately by account balances) against all participants’ accounts. (For my hypothetical plan, the employer pays none of the plan-administration expenses.) ERISA’s exclusive-purpose command has two clauses: (i) “providing benefits”; (ii) “reasonable expenses”. [ERISA § 404(a)(1)(A)(i)-(ii)] Can a fiduciary properly balance a “providing benefits” goal of seeking an opportunity for better investment performance with a goal of not incurring expenses that burden participants’ accounts in the opposite direction? If, so what methods should a fiduciary use to evaluate how quickly the anticipated investment performance outweighs the incremental expense of announcing the new investment alternative?

Can you think of anything that would make it improper for an employer/plan administrator (for a calendar-year plan that routinely files its Form 5500 report in the second week of October) to combine ALL of the following notices to be sent in mid- to late November? Summary annual report + 404a-5 information + qualified default investment alternative + notice of safe-harbor matching or nonelective contribution / QACA EACA + notice of a change in investment alternatives + restated summary plan description Does any of these communications involve a requirement that it be separate and not "buried" with other communications?

GBurns, thank you for reminding us about this Office of Tax Analysis paper. While it describes some methods that the IRS could use to track from a business to one of its owners, and to find all businesses that tie to the same one owner, the paper doesn't really describe how the IRS would discover that two or more business organizations that don't have a majority owner in common nonetheless have sufficient common ownership among five or fewer persons that the organizations count as one employer. One wonders how recently a government agency has done a study on the number of organizations that have fewer than 50 employees. Even harder would be guessing how many of those organizations are part of an employer group that has 50 employees.