Peter Gulia

If you’re explaining to a public-school employer a choice between a correction submission that might involve an IRS user fee and a representative’s fee and a self-correction that might involve neither, consider that a public-school employer often lacks a budget to pay, or even legal authority to incur, an expense beyond the incidental expense of determining employees’ elected contributions and remitting them to the § 403(b) insurers and custodians. This is not advice to anyone.

Maybe in a budget-reconciliation bill, perhaps in December 2025, when many expect Congress to deal with some 2017 tax law changes that otherwise would expire.

RatherBeGolfing, thank you for adding some helpful information. About the IRS telling document sponsors to remove text about a party to a civil union or a domestic partnership, was that only for provisions designed to meet a tax law condition that refers to a spouse? Or, did the IRS tell document sponsors to delete references to a domestic partner even for an optional provision that would not interfere with a tax-qualification condition? For example, for a participant who made no beneficiary designation and had no spouse, a plan might put a domestic partner somewhere in the order of default beneficiaries (and an adoption agreement might give a user a choice to specify that or a different default-beneficiary provision). Did the IRS object to a provision like that?

Read carefully all documents governing the plan AND all agreements between the worksite employer and the professional employer to discern whether they agreed that the worksite employer is responsible to deliver the summary annual report (and perhaps some other plan-administrator communications). This is not advice to anyone.

Here’s the statute, California Secure Choice Retirement Savings Trust Act, compiled as California Government Code §§ 100000 to 100050. https://leginfo.legislature.ca.gov/faces/codes_displayText.xhtml?lawCode=GOV&division=&title=21.&part=&chapter=&article= Section 100032(h)(1): “An employer that provides an employer-sponsored retirement plan, such as a defined benefit plan or a 401(k), Simplified Employee Pension (SEP) plan, or Savings Incentive Match Plan for Employees (SIMPLE) plan, or that offers an automatic enrollment payroll deduction IRA, shall be exempt from the requirements of the CalSavers Retirement Savings Program, if the plan or IRA qualifies for favorable federal income tax treatment under the federal Internal Revenue Code.” To interpret that paragraph, the board’s regulations state: “Tax-Qualified Retirement Plan” means a retirement plan that qualifies for favorable federal income tax treatment under Sections 401(a), 401(k), 403(a), 403(b), 408(k), or 408(p) of Title 26 of the United States Code. An employer-provided payroll deduction IRA program that does not provide for automatic enrollment is not a Tax-Qualified Retirement Plan.” Also: “Exempt Employer” means an Employer that . . . (ii) maintains or contributes to a Tax-Qualified Retirement Plan[.] https://www.treasurer.ca.gov/calsavers/regulations/final-regulations.pdf How confident are you that the plan, despite exclusions, meets all Internal Revenue Code conditions for tax-qualified treatment? This is not advice to anyone.

Congress seems unlikely this week to legislate anything for retirement plans. In the 1,547 pages of what might become this week’s appropriations, here’s what so far I see: 555 pages with provisions that affect health care or health plans: division E—the “Health Improvements, Extenders, and Reauthorizations Act”. That includes additions to, and amendments of, the Employee Retirement Income Security Act of 1974. Those include new and amended text in ERISA § 408(b)(2), some of which might affect how that prohibited-transaction exemption applies regarding retirement plans. Only eight amendments of the Internal Revenue Code, none of which refers to a retirement plan (unless a retirement plan engages a pharmacy benefit manager). An amendment of the Defense Production Act of 1950 would prohibit, and impose penalties on, a covered national security transaction in a prohibited technology. https://docs.house.gov/billsthisweek/20241216/CR.pdf The next government-shutdown threat would be March 14, 2025.

A rule to interpret ERISA § 3’s definition of an employee-benefit plan treats a plan as outside that defined term if the plan covers no employee. That rule includes these interpretations: “An individual and his or her spouse shall not be deemed to be employees with respect to a trade or business, whether incorporated or unincorporated, which is wholly owned by the individual or by the individual and his or her spouse[.]” “A partner in a partnership and his or her spouse shall not be deemed to be employees with respect to the partnership.” 29 C.F.R. § 2510.3-3(c) https://www.ecfr.gov/current/title-29/part-2510/section-2510.3-3#p-2510.3-3(c) For better or for worse, law sets up categories and classifications. For example, spouse or not; employee or not. IF the worker who is not the owner is not the owner’s spouse, one might be reluctant to assume that a plan that covers the worker is not an employee-benefit plan. While recognizing that TPAs that serve regarding retirement plans provide lots of legal advice, advising about whether two people are (or are not) spouses might be beyond a TPA’s scope. Likewise, advice about whether a person has an ownership interest because of the person’s relationship to a title-holding owner might be beyond a TPA’s scope. While the person who or that wants to consider not getting fidelity-bond insurance could consider getting a lawyer’s advice about these and related questions, a fee for that advice might be more expensive than the price of the insurance. Also, a retirement plan’s fiduciary might consider not treating the two people as spouses for not-ERISA purposes if either person files one’s Federal income tax return as a single person. This is not advice to anyone.

The recently released Fall 2024 regulatory agenda has no mention of a project on Internal Revenue Code § 401(k)(14)(C) or SECURE 2022 § 312. https://www.reginfo.gov/public/do/eAgendaMain?operation=OPERATION_GET_AGENCY_RULE_LIST&currentPubId=202410&showStage=active&agencyCd=1500 That’s another reason I suggest an opportunity for third-party administrators and recordkeepers—and the plan sponsors and plan administrator that follow those service providers—to form an interpretation, perhaps with some reasoned suspicion to restrain how much a participant can get with a false certification.

If a service credit or allocation regarding XYZ Inc for 2023 is mistaken: Does anything restrict counting 2024 if XYZ Inc. and ABC Inc. this month make documents providing for XYZ Inc.’s participation in ABC Inc.’s plan beginning with January 1, 2024?

I have not considered whether a church is or isn’t an eligible employer within the meaning of Internal Revenue Code of 1986 § 457(e)(1)(B). I have not advised a church about an unfunded deferred compensation plan. So, I have not thought about your income tax questions.

But even if that pledge is not a prohibited transaction, whether a retirement plan should allow the corporation to do the dealings described involves a distinct set of fiduciary-responsibility questions. Each fiduciary of the retirement plan should lawyer-up. And each of them might prefer a lawyer free from others’ interests.

Lou81, thank you for opening some thought-provoking topics. MoJo, thank you for sharing useful further information. Do you think there’s room for a recordkeeper to design a service for hardship claims that deliberately blends concepts from the 2017 guidance and the 2022 statute? For example: A plan’s “first-two” hardship claim form, whether paper or electronic, would state the § 401(k)(14)(C) certification. A participant would not be required, nor permitted, to submit supporting documents for the first two hardship claims in a year. A plan’s administrator could instruct the recordkeeper to treat such a claim as approved, subject only to a good-order review that the form was completed and signed. A hardship claim after the year’s first two would use a differently designed claim form and go to an evaluation—whether outsourced to the recordkeeper using a sufficiently nondiscretionary method the plan’s administrator instructed, or by the plan’s administrator. The knowledge standard in § 401(k)(14)(C) is actual knowledge. If one worries that the IRS might assert that § 401(k)(14)(C) actual knowledge includes knowledge of information that would lead a reasonable plan administrator facing the same or similar circumstances to inquire further, might multiple claims not set up such a duty of inquiry until the third claim? One can read the IRS’s 2017 guidance as suggesting that up to two hardships in a year (including, but not only, two semesters’ tuition payments, or two needs for medical care not 100% met by health coverage) is within a range for which one need not be on alert to suspect a false certification. MoJo and BenefitsLink neighbors, what do you think?

Consider also whether a company that has no employee prefers a plan governed by State law or an ERISA-governed plan.

I just learned from Empower that the recently announced service is not the § 401(k)(14)(C) self-certification, but rather the “summary” method the IRS set in February 23, 2017 guidance to the IRS’s examiners. Under that method, calling for a fuller evaluation of a hardship claim after the first two in a year is logically consistent with that IRS guidance.

Lou81, thank you for helping me learn about what Empower offers. It seems consistent with my point that a recordkeeper likely prefers its customers to fall in with one of the service regimes and available choices the recordkeeper designed. Conversely, a customer might need purchasing power to get a recordkeeper to apply a customer-specific service instruction that’s not one of the programmed choices.

The plan’s administrator ought to Read The Fabulous Document. First, a plan might not provide for a beneficiary to name a further beneficiary. A plan might provide that only a participant may name a beneficiary. On a participant’s beneficiary’s death (even if after the participant’s death), a plan might provide that a remaining benefit goes to the contingent beneficiaries the participant named, if any then is living or in existence, and otherwise to a default the plan specifies in relation to the participant. IF a beneficiary may name a further beneficiary, it’s unusual for a plan to restrict the kinds of persons who or that one may name as a beneficiary. In my experience, some participants name a charity for some or all of a participant’s death benefit. (I have no experience with an employment-based plan that allows a beneficiary to name a further beneficiary.)

Before considering whether the plan’s sponsor or administrator may make such a change, why would an employer want to? The statute provides: “The Secretary [of the Treasury] MAY provide by regulations for exceptions to the rule of the preceding sentence [permitting a plan’s administrator to rely on the employee’s written certification] in cases where the plan administrator has actual knowledge to the contrary of the employee’s certification[.]” I.R.C. (26 U.S.C.) § 401(k)(14)(C). The Treasury department has not yet published (or even proposed) any such rule or regulation. Even if one interprets the statute alone to find that an administrator does not “rely” on a certification if the administrator has actual knowledge to the contrary, merely suspecting a claimant submitted a false certification is not the same thing as having actual knowledge that the certification is false. Further, even if a plan’s sponsor or administrator might invent its dividing line between participants allowed to self-certify and others regarding whom the administrator evaluates a claim without relying on a certification, how likely is it that Voya’s or another recordkeeper’s computers would apply such a customer-specific service instruction? Does an employer that serves as its plan’s administrator want to increase its workload? Consider whether it’s better for an employer not to have too much information about its employee.

Here’s 4 U.S.C. § 114: http://uscode.house.gov/view.xhtml?req=(title:4 section:114 edition:prelim) OR (granuleid:USC-prelim-title4-section114)&f=treesort&edition=prelim&num=0&jumpTo=true Also, one might research the State’s income tax law. A State’s law might provide (or be interpreted to provide) an exclusion more generous than Federal law commands.

What Artie M describes likely, depending on the governing documents’ provisions, could fit within my explanation. An administrator might look to a State’s law, the Uniform Probate Code or another uniform or model law the Uniform Law Commission recommends, or common law as an aid in interpreting the plan.

Here’s 4 U.S.C. § 114: http://uscode.house.gov/view.xhtml?req=(title:4 section:114 edition:prelim) OR (granuleid:USC-prelim-title4-section114)&f=treesort&edition=prelim&num=0&jumpTo=true

CuseFan, I’m with you; if the plan is ERISA-governed and the plan’s governing documents state the administrator’s discretionary power to interpret the plan, the administrator may use that discretion. Consider whether the plan’s administrator or claims administrator should, preferably before deciding, write a memo to explain the legal reasoning for its interpretation. Courts defer to reasoning, but not to an absence of reasoning. If there is a claimant beyond the remaining named beneficiaries, be punctilious about following ERISA § 503 and the plan’s claims procedure. This is not advice to anyone.

For Internal Revenue Code of 1986 § 457, the focus might be on the employer rather than on whether the plan is ERISA-governed or a church plan. The statute defines an eligible employer to include “any other organization (other than a governmental unit) exempt from tax under [the income tax] subtitle [of the Internal Revenue Code].” I.R.C. (26 U.S.C.) § 457(e)(1)(B). Under the Treasury department’s interpretation, the specially defined terms include these: “Eligible employer means an entity that is a State that establishes a plan or a tax-exempt entity that establishes a plan. The performance of services as an independent contractor for a State or local government or a tax-exempt entity is treated as the performance of services for an eligible employer. The term eligible employer does not include a church as defined in section 3121(w)(3)(A), a qualified church-controlled organization as defined in section 3121(w)(3)(B), or the Federal government or any agency or instrumentality thereof. Thus, for example, a nursing home which is associated with a church, but which is not itself a church (as defined in section 3121(w)(3)(A)) or a qualified church-controlled organization as defined in section 3121(w)(3)(B)), would be an eligible employer if it is a tax-exempt entity as defined in paragraph (m) of this section.” 26 C.F.R. § 1.457-2(e) https://www.ecfr.gov/current/title-26/part-1/section-1.457-2#p-1.457-2(e) “Tax-exempt entity includes any organization exempt from tax under subtitle A [income tax] of the Internal Revenue Code, except that a governmental unit (including an international governmental organization) is not a tax-exempt entity.” 26 C.F.R. § 1.457-2(m) https://www.ecfr.gov/current/title-26/part-1/section-1.457-2#p-1.457-2(m) For more information, see chapters 2 and 6 in 457 Answer Book.

If the employer is a cooperative described in subchapter T [Internal Revenue Code §§ 1381-1388], consider how that might affect patronage and ownership stakes. Are you sure there is no owner beyond the employees? Are you sure the owners have equal stakes? If not already done, the plan’s administrator with your help might check relevant facts and assumptions with the lawyer who wrote the organizing documents and the accountants who do the cooperative’s financial-statements accounting and income-tax accounting. If it’s so that the employer has fourteen employee-owners with 7.1429% each, your premise about 5%-owners seems right to me; but I am not knowledgeable about the tax law conditions involved.

If a law firm was on the scene when the weak documenting happened, the law firm might be persuaded to write a memo the CPA firm relies on as a file-closer. Otherwise, the employer/administrator might be at the mercy of what the CPA firm observes and, if it observes, thinks.

For the two steps G8Rs describes—(1) a spinoff transfer followed by (2) the transferee plan’s termination and final distributions: Does a pooled employer plan’s provider offer as a separate service for a separate fee, implementing the creation and termination of the transferee plan? Is it feasible to pay the transferee plan’s final distributions as quickly as 30 days after the spinoff from the pooled employer plan?