Peter Gulia

A nonfiduciary service provider’s contract with its service recipient ought to provide (at least) nonliability, indemnity, and defense, including advances for reasonably incurred attorneys’ fees and other expenses, against a third person’s claims if the service provider followed the plan administrator’s or other fiduciary’s procedures and other instructions. Also, a service provider might want each responsible plan fiduciary and each directing fiduciary to maintain ERISA fiduciary liability insurance. (I recognize this might be a business challenge about some kinds of plans and service recipients.) This is not advice to anyone.

Here’s the text G8Rs refers to: “Subsection [414A](a) shall not apply to any qualified cash or deferred arrangement, or any annuity contract purchased under a plan, while the employer maintaining such plan (and any predecessor employer) has been in existence for less than 3 years.” Internal Revenue Code of 1986 (26 U.S.C.) § 414A(c)(4)(A) http://uscode.house.gov/view.xhtml?req=(title:26 section:414A edition:prelim) OR (granuleid:USC-prelim-title26-section414A)&f=treesort&edition=prelim&num=0&jumpTo=true

Beyond your question: If the employer that is the obligor on the unfunded deferred compensation engaged the rabbi/grantor trust’s trustee or another service provider to pay and tax-report the deferred-wage payments, an EIN (distinct from the EIN the employer uses to pay regular wages) might be wanted for tax-reporting and withholding.

For the statute that allows a retirement plan’s administrator to rely on a participant’s written statement: Internal Revenue Code of 1986 (26 U.S.C.) § 401(k)(14)(C): “In determining whether a distribution is upon the hardship of an employee, the administrator of the plan may rely on a written certification by the employee that the distribution is— (i) on account of a financial need of a type which is deemed in regulations prescribed by the Secretary to be an immediate and heavy financial need, and (ii) not in excess of the amount required to satisfy such financial need, and [iii] that the employee has no alternative means reasonably available to satisfy such financial need. The Secretary may provide by regulations for exceptions to the rule of the preceding sentence in cases where the plan administrator has actual knowledge to the contrary of the employee’s certification, and for procedures for addressing cases of employee misrepresentation.” http://uscode.house.gov/view.xhtml?req=(title:26 section:401 edition:prelim) OR (granuleid:USC-prelim-title26-section401)&f=treesort&edition=prelim&num=0&jumpTo=true

If an individual owns the entire interest in her unincorporated trade or business and is its only employee, an elective deferral under a retroactively established plan is treated as having been made before the end of the plan’s first plan year if the proprietor makes her elective-deferral election before the time for filing her Federal income tax return (without any extension) for her tax year that ends after or with the end of the plan’s first plan year. This tolerance can apply only to the plan’s FIRST plan year. Internal Revenue Code of 1986 (26 U.S.C.) § 401(b)(2) http://uscode.house.gov/view.xhtml?req=(title:26 section:401 edition:prelim) OR (granuleid:USC-prelim-title26-section401)&f=treesort&edition=prelim&num=0&jumpTo=true. This is not advice to anyone.

Consider also whether the TPA has or lacks ERISA § 412 fidelity-bond insurance or ERISA fiduciary-liability insurance (or both). If a TPA has either kind of insurance, consider whether the TPA’s procedures follow, or at least are not contrary to, what the TPA and anyone acting for it said in the application for the insurance. A false or misleading statement can result in lacking insurance coverage. Likewise, follow anything represented to the TPA’s errors-and-omissions insurer. If a TPA prefers to be a nonfiduciary, one might write its service agreement to avoid anything that could involve discretion, instead doing only what the plan’s administrator specified and engaged, and doing it with clear on-off rules with no discretion. If a situation calls for judgment or discretion, a nonfiduciary TPA might put the matter to the plan’s administrator. This is not advice to anyone.

Thank you for the information. I confess my experience isn’t recent because it’s rare to see a group health plan use a group health insurance contract. The last time I saw a group health insurance contract it had plan eligibility and participation conditions AND provisions designed to restrain the employer from doing anything that would help an employee use any health coverage other than the employer’s group contract. It was obvious that the underwriting wanted to balance the stuck-with bad risks by keeping as many good risks as the insurer could prevent from going elsewhere.

Brian Gilmore, do you concur that an incentive for an opt-out could be against an insurer’s underwriting conditions?

If the group health plan uses a group health insurance contract, consider whether offering the opt-out incentive is a breach of the group contract holder’s obligations under the contract, or is a failure of a condition of the insurer’s obligation to provide the insurance. This is not advice to anyone.

Does anything now in the plan’s governing documents restrict the way the plan’s administrator decides a claim for a hardship distribution?

In my experience, software for payroll and retirement-services systems to apply § 402(g) and § 414(v) limits and opportunities is coded assuming every individual’s tax year is the December 31 year (and not attempting to ask whether an individual has a different tax year). Yet, it can be useful to have some way to allow a variation for the rare situation in which an individual has a noncalendar tax year.

Here’s IRS Publication 538 with some explanations about Accounting Periods. https://www.irs.gov/pub/irs-pdf/p538.pdf Example: Although Jack is a W-2 employee with no business interests, he follows his wife’s taxable year so he can fit their joint income tax returns. Jill owns a farm and its businesses. Based on when Jill’s businesses harvest and sell the crops, the businesses and Jill end their accounting years as at October 31. Example: Mary is an employee of a charity, and participates in its § 403(b) plan. Yet, almost all of the income that supports Mary’s life comes from a trust her great-grandfather created. That trust’s accounting year ends with February 28 or 29. Mary chooses to align her taxable year with that of the trust that is her primary source of income. Example: Charlie is the chief executive of a business that ends its accounting year with June 30, issues its financial statements by late July, and pays Charlie’s bonus in early August. Charlie established August 31 as the end of her tax-accounting year.

The § 402(g) elective-deferral limit, and the § 414(v) age-based catch-ups relate to the INDIVIDUAL’s tax year, which can be a year other than the calendar year. Under Federal income tax law, a taxpayer computes one’s taxable income “on the basis of the taxpayer’s taxable year.” I.R.C. § 441(a). Ordinarily, a taxable year is a yearly accounting period. I.R.C. § 441(b). Most (but not all) people use a calendar year. See I.R.C. § 441(c). A “calendar year” is “a period of 12 months ending on December 31.” I.R.C. § 441(d). Further, the Internal Revenue Code’s general definitions include “taxable year” and “fiscal year”: “The term ‘taxable year’ means the calendar year, or the fiscal year [defined in the next paragraph] ending during such calendar year, upon the basis of which the taxable income is computed under subtitle A. ‘Taxable year’ means, in the case of a return made for a fractional part of a year under the provisions of subtitle A or under regulations prescribed by the Secretary, the period for which such return is made.” I.R.C. § 7701(a)(23). “The term ‘fiscal year’ means an accounting period of 12 months ending on the last day of any month other than December.” I.R.C. § 7701(a)(24). For § 402(g), “the elective deferrals of any individual for any taxable year shall be included in such individual’s gross income to the extent the amount of such deferrals for the taxable year exceeds the applicable dollar amount.” I.R.C. § 402(g)(1)(A). For an age-based catch-up deferral amount that might be permitted because the participant is age 50 or older, the Internal Revenue Code defines an “eligible participant” as “a participant in a plan who would attain age 50 by the end of the taxable year[.]” I.R.C. § 414(v)(5)(A). A Treasury rule confirms this: “An employee is a catch-up eligible participant for a taxable year if [t]he employee’s 50th or higher birthday would occur before the end of the employee’s taxable year.” 26 C.F.R. § 1.414(v)-1(g)(3)(ii). For a greater age-based catch-up deferral amount that might be permitted because the participant is age 60, 61, 62, or 63, the Internal Revenue Code refers to “an eligible participant who would attain age 60 but would not attain age 64 before the close of the taxable year[.]”I.R.C. § 414(v)(2)(B)(i). While unusual, I’ve seen situations in which an individual’s taxable year is not the calendar year. This is not advice to anyone.

Does anything in this health plan’s governing documents make an otherwise eligible employee not covered because she is a minor or has not attained a specified age? BenefitsLink neighbors often say, Read The Fabulous Document. Because ERISA § 404(a)(1)(D) calls a fiduciary to administer an employee-benefit plan according to the plan’s governing documents, RTFD can be a useful work method for a group health plan too, perhaps even more so than for a retirement plan. This is not advice to anyone.

Consider that it might not matter much whether the Biden administration’s or the Trump I (or Trump II) administration’s investment-advice fiduciary rule is (or isn’t) in effect because, following the Supreme Court’s Loper Bright Enterprises opinion, a Federal court decides the court’s interpretation of ERISA § 3(21)(A)(ii) or Internal Revenue Code § 4975(e)(3)(B) without deference to an executive agency’s interpretation.

An employment-based retirement plan might have provisions about what the plan provides as the plan’s distribution. A plan might provide, after normal retirement age, an involuntary distribution larger than an amount needed to meet Internal Revenue Code § 401(a)(9). AZinsser posted a query in BenefitsLink’s forum for Individual Retirement Accounts. For IRAs, the individual is responsible for determining the individual’s minimum. Federal income tax law permits an individual to take more than she needs to meet her § 401(a)(9) minimum. Yet, an individual might prefer to take no more than is needed to meet her § 401(a)(9) minimum.

A caution: Employers, retirement plans’ administrators, and their service providers (and their software) tend to presume a participant’s tax year is the calendar year. And that might be right for about 99.99% of a plan’s participants. But one might want an off-system override for a participant who has a different tax year. This is not advice to anyone.

The rule for determining an individual-account (defined-contribution) plan’s § 401(a)(9) “account balance” is 26 C.F.R. § 1.401(a)(9)-5(b) https://www.ecfr.gov/current/title-26/part-1/section-1.401(a)(9)-5#p-1.401(a)(9)-5(b). 26 C.F.R. § 1.408-8(a)(1) applies that rule for an IRA. 26 C.F.R. § 1.401(a)(9)-5(b) mentions: “The account balance is increased by the amount of any contributions or forfeitures allocated to the account balance as of dates in the valuation calendar year after the valuation date.” “The account balance is decreased by distributions made in the valuation calendar year after the valuation date.” I see no mention of counting a dividend receivable or interest receivable. Other BenefitsLink neighbors might describe IRA custodians’ (banks’, trust companies’, and securities broker-dealers’) customary practices. This is not advice to anyone.

A plan’s administrator may volunteer to submit information to the Labor department’s database. The Announcement states “the Department’s [nonrule] view [that] the reasonable cost of voluntarily reporting the data under the revised [Information Collection Request] is a permissible use of plan assets[.]” But nothing protects a plan’s fiduciary from a participant’s, beneficiary’s, or alternate payee’s claim, or the plan’s claim, that an expense for voluntarily furnishing information is not a proper plan-administration expense.

Other BenefitsLink neighbors, especially austin3515, have described circumstances in which applying a § 414A automatic-contribution arrangement might be unhappy for the workforce and unwelcome for the employer. Even facing the eventual, those plan sponsors might have wanted to delay as long as allowed. Also, the idea of adopting an automatic-contribution arrangement before § 414A requires it because § 414A soon will require it might be inapt for some employers with few employees. A plan’s sponsor might not yet know or even anticipate “the date that is 1 year after the close of the first taxable year with respect to which the employer maintaining the plan normally employed more than 10 employees.” Some employers that established or establish a § 401(k) arrangement after December 28, 2022 might never need to meet § 414A(a)’s condition.

If the plan provides a nonelective contribution determined more often than yearly, consider also how and when within or regarding a year the plan’s provisions (and an employer’s and a plan administrator’s practical operations) apply a § 401(a)(17) limit. For example, if one seeks to apply quarter-yearly 2025’s $350,000 limit to that year’s wages of $500,000: Some might determine the 5% nonelective contributions as $4,375 for each of the four quarter-years [($350,000 / 4) = $87,500 x 5% = $4,375]. Others might determine: 2025q1 $6,250 [$125,000 x 5%] 2025q2 $6,250 [$125,000 x 5%] 2025q3 $5,000 [$100,000 x 5%] 2025q4 $0 [$0 x 5%] sum $17,500 (Or if a nonelective contribution is determined monthly, the nonelective contribution might be full for the first eight months, partial for September, and none for the last three months.) 26 C.F.R. § 1.401(a)(17)-1(b)(3)(iii)(B) https://www.ecfr.gov/current/title-26/part-1/section-1.401(a)(17)-1#p-1.401(a)(17)-1(b)(3)(iii)(B). I merely describe what some employers do, perhaps unwisely; not what’s correct or incorrect. And as always, RTFD—Read The Fabulous Document (even if the document is gibberish). In my experience, a charity’s executive generally prefers not applying the § 401(a)(17) limit until that much compensation has been paid. That’s especially so if one recognizes any possibility that her employment might end, whether by the executive’s doing or the charity’s doing, before the year ends. This is not advice to anyone.

Again, not suggesting any view of the merits or weaknesses: The most recent docket entry [#110, Nov. 13, 2024] shows the United States’ reply brief. That suggests some possibility the appeals court might schedule an oral argument in 2025. A Fifth Circuit decision might be a precedent that might affect an employer that resides in Louisiana, Mississippi, or Texas. https://www.uscourts.gov/sites/default/files/u.s._federal_courts_circuit_map_1.pdf I don’t here state any prediction.

The Labor department’s rule states: “A loan will be considered to bear a reasonable rate of interest if [the] loan provides the plan with a return commensurate with the interest rates charged by persons in the business of lending money for loans which would be made under similar circumstances.” 29 C.F.R. § 2550.408b-1(e) https://www.ecfr.gov/current/title-29/part-2550/section-2550.408b-1#p-2550.408b-1(e). And that might be a nonexclusive way to meet the statutory prohibited-transaction exemption’s condition that a participant loan “[b]ear a reasonable rate of interest[.]” 29 C.F.R. § 2550.408b-1(a)(1)(iv) https://www.ecfr.gov/current/title-29/part-2550/section-2550.408b-1#p-2550.408b-1(a)(1)(iv). But even if ERISA § 408(b)(1) tolerates an adjustable-rate participant loan, is the administrator’s service provider capable of accounting for it?

To help us with this, Lois Baker assembled from BenefitsLink news a list of 22 rules published during 2024. And I add one from FinCEN. Four rules that refer to the Employee Retirement Income Security Act of 1974, the Internal Revenue Code of 1986, or the Investment Advisers Act of 1940 have an applicability date later than January 20, 2025: A Financial Crimes Enforcement Network rule, Anti-Money Laundering/Countering the Financing of Terrorism Program and Suspicious Activity Report Filing Requirements for Registered Investment Advisers and Exempt Reporting Advisers, has a compliance date of January 1, 2026. The Trump administration might direct a review of the rulemaking. And FinCEN’s rule relates to a rulemaking proposed by the Securities and Exchange Commission. We expect changes in the SEC’s chairperson and a membership in early 2025. The rule for tax Withholding on Certain Distributions Under Section 3405(a) and (b) applies for payments and distributions made on or after January 1, 2026. The Trump administration might direct a review of the rulemaking. Some parts of the Requirements Related to the Mental Health Parity and Addiction Equity Act rule have an applicability date of the first day of the first plan year that begins on or after January 1, 2026. The Trump administration might direct a review of those parts. One section, 45 C.F.R. § 164.520, of the HIPAA Privacy Rule To Support Reproductive Health Care Privacy rule has a compliance date of February 16, 2026. The Trump administration might direct a review of that section. For a rule challenged in a Federal court, the United States might attempt to confess error, withdraw an appeal, or otherwise decline to defend a rule against the plaintiffs’ challenge. (Even when opposing litigants are united about the correct disposition of a case, a Federal court might not accept a confession of error, or other litigation step.) One might imagine changes in the offices of Attorney General, Solicitor General, and Secretary of Labor leading to an end of the United States’ defense of the Labor department’s Retirement Security Rule: Definition of an Investment Advice Fiduciary and the amendments to related prohibited-transaction exemptions. (BenefitsLink readers might recall that the United States did not ask the Supreme Court to review the Fifth Circuit’s judgment to vacate the 2016 investment-advice fiduciary rule.)

Beyond your inquiry into what might be enough so a plan’s governing documents are treated as tax-qualified in form: If the business transaction is a merger of the employer organization into another business organization, rather than a buyer’s purchase of a seller’s assets: The employer should want its lawyers’ advice about what corrections would make truthful the employer’s representations, warranties, covenants, and other promises stated by the merger agreement. That might require something more than what makes the plan tax-qualified in form. This is not advice to anyone.