Peter Gulia

I didn’t suggest that an ERISA-governed plan’s administrator has a duty or obligation to consider a State’s law (other than a court’s domestic-relations order submitted to the plan’s administrator). Rather: “ERISA’s supersedure of States’ laws makes it unnecessary for an employee-benefit plan’s administrator to know, or even consider, any State’s law.” And “Section 514(b)(7)’s limited exception regarding a qualified domestic relations order or qualified medical child support order might call a plan’s administrator to read an order’s text, but one need not know the State’s or Tribe’s law underlying the order.”

Here’s a hyperlink to the Treasury’s rule: 26 C.F.R. § 1.401(a)(9)-8(d)(2) https://www.ecfr.gov/current/title-26/part-1/section-1.401(a)(9)-8#p-1.401(a)(9)-8(d)(2). The rule was published on July 19, 2024. This is not advice to anyone.

Except for provisions like protecting a surviving spouse’s rights or meeting tax-law conditions about a minimum distribution, a plan’s sponsor has a wide range for setting an individual-account retirement plan’s provisions for whether a participant may make a beneficiary designation, which terms a participant may or cannot specify, how a participant may divide beneficiaries’ shares, and in what form a participant must make a beneficiary designation the administrator would follow. The starting point is RTFD—Read The Fabulous Document. Many IRS-preapproved documents don’t state the details. Some refer to a “form satisfactory to the Administrator.” Some call the plan’s administrator to set a procedure.

About your description of the facts: You mention that the corporation’s president and secretary are trust beneficiaries. But are they the only trust beneficiaries? Are the two beneficiaries spouses? Are the two beneficiaries otherwise related? Is either of the two beneficiaries also a creator or grantor of the trust? Are both? Is the trust irrevocable or revocable? What rights (if any) does the trust’s creator or grantor have? Is the trust a grantor trust for Federal income tax purposes? Does a beneficiary have a withdrawal right? Does a beneficiary have a right to a current distribution from any portion of the trust’s income? Does a beneficiary have a right to a current distribution from any portion of the trust’s principal? Does a trustee have a discretionary power to distribute any income, or any principal, to a beneficiary? Do any of the trustee’s powers differ regarding the S corporation shares and the trust’s other investments? Do any of a beneficiary’s rights or beneficial interests differ regarding the S corporation shares and the trust’s other investments? Those and other facts might matter in how one translates trust powers and beneficial interests into deemed ownership of the corporation the trust holds. Consider 26 C.F.R. § 1.1563-3(b)(3)(i) https://www.ecfr.gov/current/title-26/part-1/section-1.1563-3#p-1.1563-3(b)(3)(i). This is not advice to anyone.

Whether a plan’s administrator would follow such a beneficiary designation might turn on the plan’s governing documents and the administrator’s application or interpretation of the plan’s governing documents. Some plans state that a beneficiary designation must specify shares of beneficiaries only by percentages. Other plans might let a participant specify her beneficiaries’ shares by a formula, if it can be applied using only simple arithmetic and without using information beyond the plan’s records. Many plans’ documents are ambiguous about what is allowed or precluded. Some plans’ document call for the plan’s administrator to set a procedure. If your client is the plan’s sponsor or administrator, discuss with it what it prefers to allow or preclude. Further, if the plan’s administration makes and keeps beneficiary-designation records in a service provider’s system, consider that the software might constrain an entry to a percentage. If your client is the participant who would make the beneficiary designation, consider suggesting that the participant ask the administrator whether it would follow the beneficiary designation. If an employment-based plan doesn’t support what the individual wants, consider a rollover to an Individual Retirement Account trust (not a custodial account) with a trust company that regularly works with estate-planning and other not-simple beneficiary designations. This is not advice to anyone.

Evaluate the trust’s governing documents and relevant law to discern each individual’s beneficial interests (and creator’s rights, if any) under the trust. Assume the trustee and each other fiduciary would exercise its discretion in the beneficiary’s favor. Consider whether the trust is a grantor trust. Consider at least Internal Revenue Code sections 671-678, 1563, and 2031, and the Treasury’s rules and the IRS’s guidance interpreting those sections. Consider rules for a trust that can be an eligible shareholder of subchapter S corporation. Consider how the trust’s income tax returns have described and will describe each beneficiary’s proportionate share of the trust’s income. This is not advice to anyone.

The small-business exception provides: “[Internal Revenue Code § 414A](a) shall not apply to any qualified cash or deferred arrangement . . . earlier than 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.” I.R.C. (26 U.S.C.) § 414A(c)(4)(B). Some might interpret that sentence’s use of the word “employee” to include nonemployees classified as statutory employees if those workers are not excluded from a § 410(b) count of which employees, leased employees, and self-employed individuals are treated as employees. Yet, there is a further element about whether an employer (or a service recipient treated as an employer) “normally employed” those workers. That phrase might be imprecise or ambiguous. This is not advice to anyone. BenefitsLink neighbors, has the IRS published guidance on this?

Does this mean the 2025 elective-deferral limit for a participant age 60 to 63 is $34,750?

So, if a TPA mostly doesn’t charge for responding to an executive agency’s processing errors, that cost is borne commonly by the TPA’s clients. Perhaps that’s somewhat fair if most clients don’t much differ in the probability of being a victim of such an error the client didn’t cause. If anyone is wondering, some lawyers similarly use judgment in not billing work needed to respond to an executive agency’s wrong application of law. Those situations often demand big blocks of time, and often for work that cannot be delegated, instead requiring the personal attention and wasted time of the most experienced lawyer. That expense gets subsidized by all the lawyer’s paying clients, including those that bring little or no risk of being a victim of an executive agency’s errors.

Thanks. If a TPA doesn’t charge distinctly for responding to an executive agency’s processing errors, is some estimate for those errors figured into the costs on which the TPA sets its regular fees?

I’m curious: When responding to these problems, does a TPA bill the time? At a professional’s rate? At an assistant’s rate? At each worker’s rate for her time worked?

I’ve seen some business practices that vary with surrounding circumstances: If a TPA got its client with a referral from an insurance intermediary, the TPA might refer the plan’s fiduciary to that insurance intermediary. If a TPA is an affiliate of an insurance intermediary or an insurer, the TPA might refer the plan’s fiduciary to the TPA’s sister (unless the TPA knows about its client’s relationship with another insurance intermediary). If a TPA is not licensed to solicit casualty insurance (and it has no affiliate so licensed), a TPA might nonetheless maintain a relationship or awareness with an insurer so a client that lacks an insurance intermediary might apply directly. A TPA might put a yes-or-no checkoff for buying fidelity-bond insurance in one’s service-agreement onboarding forms. A TPA’s service agreement might provide that the TPA has no obligation to provide any service until the TPA has received proof that fidelity-bond insurance covers the plan. A TPA might push clients to get fidelity-bond insurance. If a plan is uncovered, that can increase the TPA’s expenses. No matter how carefully a TPA has designed and operated its business to support fact-finding that the TPA is not a plan’s fiduciary, defeating or dismissing claims that the TPA ought to have done something to prevent the theft might incur attorneys’ fees and related expenses, which one might not recover from the victimized participants nor from the (perhaps insolvent) client. This is not advice to anyone.

RatherBeGolfing, thank you for correcting my lack of information. For other early-out distributions, the statute conditions the reliance only on an absence of knowledge to the contrary. For example, I.R.C. (26 U.S.C.) § 401(k)(14)(C). For a qualified disaster recovery distribution, the IRS guidance conditions the reliance not only on an absence of knowledge to the contrary but also on some finding that the participant’s representations are “reasonable.” That leaves ambiguities about the circumstances in which a claim’s statement might be reasonable or unreasonable. And about how a plan’s administrator or its service provider discerns what is or isn’t reasonable. For example, must one at least consider whether a claim’s statement that the participant’s “principal place of abode at any time during the incident period of [the] qualified disaster is [or was] located in the qualified disaster area” seems supported by the plan’s records of the participant’s address (whether at the time of processing the claim, and back to the onset of the incident period)? If so, one needs answers to RBG’s opening questions about defining and determining a qualified disaster and a qualified disaster area. And if a plan’s administrator finds it unnecessary to ask anything about the “principal place of abode” element, what else does one check for whether the participant’s claim seems reasonable? Or is a claim reasonable with no more finding than that the plan’s administrator lacks “actual knowledge to the contrary”?

I’ll keep a good thought for those in the hurricanes’ paths. On RatherBeGolfing’s practical query, and Craig Hoffman’s pointer, about discerning whether a disaster qualifies: Consider that getting the details right might matter because for a qualified disaster recovery distribution a plan’s administrator gets no special reliance on a claimant’s self-certification.

Many employers like a self-certification regime when the consequence of a false statement is only that a participant uses one’s own resources. But an employer might dislike a self-certification regime when the consequence of a false statement is that a worker gets the employer’s money. And for employers that prefer a matching contribution over a nonelective contribution, letting a worker get a matching contribution without meeting its conditions might partly defeat one or more purposes about why the employer prefers a matching contribution. That might be why some employers are considering using intermediaries or software to get some comfort that a worker likely made student-loan payments.

If the participant’s yearly $700,000 pay is divided approximately evenly over the year’s pay periods, she might have been paid her first $345,000 by late June or early July (and perhaps before the August 1 change). One can imagine the participant might expect the year’s matching contribution of $17,250 (5% x $345,000). If that’s not the administrator’s interpretation of the plan’s governing documents, the administrator might want to be ready with a careful explanation. This is not advice to anyone.

If the plan is ERISA-governed, consider that even if one otherwise could end a plan by delivering an individual annuity contract or certificate (or delivering a similar contract right regarding a custodial account) doing so might not end the plan for one or more purposes of ERISA’s title I. That’s especially so if the individual contract lacks adequate provisions to preserve the participant’s spouse’s (possibly including a future spouse’s) ERISA § 205 survivor-annuity or death-benefit rights. Consider also that there are many ERISA title I provisions for which the Labor department, not the Treasury department, has interpretation powers. If discerning whether the plan is fully ended turns on questions beyond those the IRS guidance answers, the plan’s administrator should lawyer-up. This is not advice to anyone.

A 2023 BenefitsLink discussion aired some observations about whether an employment classification of intern is or isn’t a classification sufficiently distinct from an age or service condition that a plan may exclude an intern who met age and service conditions for treatment as a long-term-part-time employee. https://benefitslink.com/boards/topic/71384-ltpt-interns/. Interpreting ERISA § 202(c) for a situation that might involve some similarities, the IRS states: “The student employee exclusion in section 403(b)(12)(A) of the [Internal Revenue] Code is a statutory exclusion based on a classification (students performing services described in [I.R.C.] section 3121(b)(10)), rather than on service.” And: “Although [26 C.F.R.] § 31.3121(b)(10)-2(d) provides that hours worked is a factor in determining whether an employee is a student, as well as providing an unsafe harbor if an employee normally works at least 40 hours per week (which is equivalent to 2,000 hours a year), the statutory student exclusion is not based principally on service.” Additional Guidance with Respect to Long-Term, Part-Time Employees, Including Guidance Regarding Application of Section 403(b)(12) to Long-Term, Part-Time Employees under Section 403(b) Plans, Notice 2024-73, 2024-41 or 2024-42 I.R.B. --- (to be published Oct. 7 or 15, 2024), available at https://www.irs.gov/pub/irs-drop/n-24-73.pdf, at A-5 & footnote 7 (emphasis added). Does this change our thinking about whether a for-profit employer’s plan may exclude an intern from elective deferrals?

The Internal Revenue Service FOIA-released a Notice to state IRS and anticipated Treasury interpretations of Internal Revenue Code § 403(b)(12) and § 410(b), and of ERISA §§ 202-203. Additional Guidance with Respect to Long-Term, Part-Time Employees, Including Guidance Regarding Application of Section 403(b)(12) to Long-Term, Part-Time Employees under Section 403(b) Plans, Notice 2024-73, 2024-41 or 2024-42 I.R.B. --- (to be published Oct. 7 or 15, 2024), available at https://www.irs.gov/pub/irs-drop/n-24-73.pdf. For an ERISA-governed § 403(b) plan, these interpretation distinguish between a 20-hours exclusion and a student exclusion. The IRS suggests: “The student employee exclusion . . . is . . . based on a classification . . . , rather than on service.” Under that interpretation, ERISA § 202(c) does not command a plan to make an I.R.C. § 3121(b)(10) student eligible to elect deferrals. The Notice remarks: “The Secretary of the Treasury has interpretive authority over sections 202 and 203 of ERISA pursuant to Reorganization Plan No. 4 of 1978[.]”

About the situation you describe, I don’t assume anything. Even more so about a plan stated, in whole or in part, using an IRS-preapproved document. Is the § 457(b) plan stated using a form of document Empower furnished? Does the plan intended as a § 401(a) plan state expressly that the matching contribution is conditioned on a deferral under the employer’s § 457(b) plan? If so, is that expression within the base document or adoption-agreement form the IRS issued the opinion letter on? To help the plan sponsor’s lawyer or other practitioner evaluate the provisions’ effect, consider asking Empower to explain why the documents are stated as they are. But recognize that Empower does not give tax or other legal advice, so a practitioner must independently take responsibility. I see your doubt about whether a provision of the employer’s § 457(b) plan so negates a provision of the § 401(a) plan as to call into question whether a user may rely on the IRS’s opinion letter, or whether the § 401(a) plan truly is administered according to that written plan.

If these are governmental plans, which coverage or nondiscrimination rule worries you?

“Is she [potentially] eligible due to being the wife of [an] owner . . . ?” Consider whether the wife and the other spouse now reside, or ever resided, in (or have another jurisdictional tie to) a State that provides or permits a community-property regime. Even if all contacts are with separate-property States, consider whether a contribution to the business—which might be a little startup money, or either spouse’s services—was made under a law that recognizes a tenancy-by-the-entirety. States’ laws vary in whether that tenancy (if recognized at all) can apply to personal, rather than real, property, and about whether and how a tenancy-by-the-entirety might be created. For example, a State’s law might recognize spouses’ ownership of investment and business interests can be a tenancy-by-the-entirety. And a State’s law might treat a creation or acquisition during a marriage as presumed a tenancy-by-the-entirety, unless a related document specifies otherwise. For either of these, a client might want a lawyer’s advice about exactly what property rights the wife has or lacks, and whether the wife’s interest could make her a self-employed individual. Also, one would consider whether tax law calls for determining a status or fact without regard to community-property law. (I have not looked at whether § 401(a), § 415, § 1402, and other Internal Revenue Code provisions include or omit an expression about that point.) If the wife might be an owner and a self-employed individual, consider that allocating self-employment income between the other spouse and the wife might lower a nonelective or matching contribution allocable to the other spouse’s account. This is not advice to anyone.

Sorry if my description was elliptical or confusing. I too think the distribution’s amount is after applying the distribution-processing fee. That the service providers’ systems tax-report a 1099-R to show a gross distribution of $0.00 isn’t my idea. People at recordkeepers and trust companies have told me that’s what their systems do. (And some have said programming a system to omit a 1099-R for a distribution smaller than the threshold on which tax law requires reporting is more trouble than it’s worth.) Also, some welcome having a 1099-R record as convenient evidence for when a former participant gets a Social Security Administration “may” letter. If not a 1099-R, I suggest a plan’s administrator make and keep some record that the distribution was done.

If the question is may an employer restore a participant’s account for a loss that resulted from what might have been a fiduciary’s breach in planning or implementing a plan-administration change, a Treasury rule allows, as not an annual addition, such a restorative payment. “A restorative payment that is allocated to a participant’s account does not give rise to an annual addition for any limitation year. For this purpose, restorative payments are payments made to restore losses to a plan resulting from actions by a fiduciary for which there is reasonable risk of liability for breach of a fiduciary duty under title I of the Employee Retirement Income Security Act of 1974 . . . (ERISA) or under other applicable federal or state law, where plan participants who are similarly situated are treated similarly with respect to the payments. Generally, payments to a defined contribution plan are restorative payments only if the payments are made in order to restore some or all of the plan’s losses due to an action (or a failure to act) that creates a reasonable risk of liability for such a breach of fiduciary duty[.]” 26 C.F.R. § 1.415(c)-1(b)(2)(ii)(C) https://www.ecfr.gov/current/title-26/part-1/section-1.415(c)-1#p-1.415(c)-1(b)(2)(ii)(C). An employer need not concede that there was a fiduciary breach; it’s enough to find there is a reasonable risk. The amount added to an account as restoration must not exceed the loss caused by the fiduciary’s arguable breach. This is not advice to anyone.

A plan’s administrator or its service provider would not “zero out” a participant’s account unless (among other conditions): the plan provides an involuntary distribution; the administrator applies that provision regularly; the distribution-processing fee is within the service provider’s reasonable compensation the responsible plan fiduciary, after ERISA § 408(b)(2) disclosures, approved; the distribution-processing is a reasonable charge against the participant’s account; the distribution-processing fee was sufficiently disclosed to the participant; the distribution, even if it pays $0.00, is tax-reported; and the administrator keeps records to prove the distribution was delivered. This is not advice to anyone.