Peter Gulia

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.

Paul I, thank you. BenefitsLink neighbors, further thoughts on how to help an actuary?

Actuaries, for situations in which you must integrate or at least align your work with others’ work—or doing your work depends on information from another professional’s work—what can other professionals do to help, or at least not interfere with, your work? My law school courses for LLM and MST students include lessons on how professionals of all stripes should be respectful of another’s profession, and should do one’s own work in ways that support another professional’s work. I hope to fill out an explanation of how lawyers, accountants, and other professionals can work in ways that help an actuary do her work. This can be about an actuary’s work for health, disability, and other welfare benefit plans; pension and other retirement plans; or pricing any kind of insurance. What could someone else do to make your work as an actuary a little easier? And for a BenefitsLink neighbor who is not an actuary, what work steps improve your working relationship with an actuary?

Many charities and other tax-exempt organizations have an accounting year meant to measure a program year, and a year ended June 30 is a common choice. Some profit-seeking businesses have seasonal or business-cycle reasons to use an accounting year with an end other than December. In my experience, it’s often simpler to administer an individual-account (defined-contribution) retirement plan with a calendar plan year, rather than a plan sponsor’s or participating employer’s accounting year. But much depends on the plan’s provisions. And on how strong or weak is the employer’s need or interest in measuring an accrual for a nonelective or matching contribution on the employer’s accounting year. If there’s a reason to revisit a selection of either the employer’s accounting year or the plan’s accounting year or other plan year, consider involving both sets of decision-makers, including each’s lawyers and accountants.

The House bill you point to was introduced in the 118th (2023-2024) Congress, saw no action beyond the introduction, and died with the end of the 118th Congress. Even if similar legislation is introduced in the 119th Congress, enactment in 2025 or 2026 seems unlikely. Among other reasons, I doubt 50 Senators would vote to abolish or change the Senate’s unlimited-debate rule. Thus, unless support for the legislation is unanimous, proceeding to a Senate vote on a bill would require 60 Senators to vote for cloture. And because a bill might suffer multiple filibusters, even a bill supported by 60 or more Senators might be delayed. The States’ attorneys general February 6, 2025 letter: mentions that some officials of some States have suggested that a governmental plan divest from China; asserts that BlackRock and some other investment managers had not sufficiently disclosed information about some funds’ investments in China; asserts that some descriptions about a fund’s ESG, especially environmental, qualities are misleading; describes an ERISA-governed plan’s fiduciary’s responsibility to meet ERISA § 404(a)(1)(B)’s prudence in evaluating the fiduciary’s investment decision. Following this, the letter suggests that a fiduciary who too easily relies on a prospectus, offering statement, or other description with omitted or misleading information might not meet § 404(a)(1)(B)’s prudence. The letter does not state that any State’s constitution, statute, or other act that has the force of law precludes an investment in China or a foreign adversary. If there is such a State law, ERISA supersedes a State law that relates to an ERISA fiduciary’s responsibility. For a background on how courts have interpreted ERISA § 514, see “The Complex World of ERISA Preemption” [chapter 9] in ERISA: A Comprehensive Guide (Wolters Kluwer 10th ed. updated Dec. 18, 2024). If your firm isn’t a subscriber, see https://law-store.wolterskluwer.com/s/product/erisa-a-comprehensive-guide-10e-misb/01t4R00000PHIACQA5. (Although I’m a contributing author in that treatise, I get no $ for suggesting it and no royalty on sales.) ERISA might not preempt a State law that regulates banking, insurance, or securities. Yet, other Federal law often preempts a State law that would regulate banking or securities.

While Gadgetfreak is right to mention the 5%-owner variation, consider further that whether a participant is or was “a 5-percent owner (as defined in section 416)” for § 401(a)(9) is determined “with respect to the plan year ending in the calendar year in which the employee attains the applicable age[.]” Internal Revenue Code of 1986 (26 U.S.C.) § 401(a)(9)(C)(ii)(I). “For purposes of section 401(a)(9), a 5-percent owner is [a participant] who is a 5-percent owner (as defined in section 416) with respect to the plan year ending in the calendar year in which the [participant] attains the applicable age.” 26 C.F.R. § 1.401(a)(9)-2(b)(3)(ii) https://www.ecfr.gov/current/title-26/part-1/section-1.401(a)(9)-2#p-1.401(a)(9)-2(b)(3)(ii). Nancy’s query supposes that the lawyer “changed status . . . in 2021 when he attained age 70.” Many law firms’ partnership agreements provide age 70 as a mandatory or presumptive retirement age. Often, a retired partner continues working, but on a less active schedule. A change in classification from an active partner to an inactive or retired partner often involves adjusting or redeeming a partner’s capital interests, profits interests, or both. By 2024 or the other relevant year in which the participant reached age 73, he might no longer have been a 5% owner. For a participant not constrained by the 5%-owner variation, one’s required beginning date might follow from the later of one’s applicable age and “[t]he calendar year in which the [participant] retires from employment with the employer maintaining the plan.” 26 C.F.R. § 1.401(a)(9)-2(b)(1)(ii) https://www.ecfr.gov/current/title-26/part-1/section-1.401(a)(9)-2#p-1.401(a)(9)-2(b)(1)(ii). Again, a service provider might suggest that the plan’s administrator check carefully the facts and consider prudently how relevant law applies regarding the facts found.

In lawyers’ and law firms’ lingo, the label “of counsel” has no one settled meaning. It can relate to any of many kinds of relationships. It can, in context, refer to a current partner, a retired partner, an employee, or a nonemployee contractor. Does the of-counsel lawyer provide any service? Even having a lunch conversation with a client’s inside counsel or executive to help keep the client content with the relationship might be a valuable service. Don’t reflexively assume this person is retired. Suggest the plan’s administrator decide whether the participant is or isn’t retired (in the sense Internal Revenue Code § 401(a)(9) uses that word). If the law firm feels unready to interpret § 401(a)(9) and how it applies regarding the facts, you can suggest that the firm might get another lawyer’s advice.