Peter Gulia

Even if you’re confident that the documents governing the plan state no provision that could tax-disqualify the plan (and do not omit a provision needed for the plan to tax-qualify): Consider that an IRS opinion letter on preapproved documents warns that it provides no assurance about ERISA’s title I. If the plan is ERISA-governed, the plan’s administrator might consider whether its reading of the plan comports with all commands of ERISA’s part 2 of subtitle B of title I (ERISA §§ 201-211). Treasury rules to interpret similar provisions of the Internal Revenue Code might be persuasive authority to support interpretations of some (not all) provisions of ERISA’s part 2. But, strictly speaking, there is no reliance on IRS-preapproved documents. This is not advice to anyone.

In 26 C.F.R. § 1.401(k)-1, none of the four uses of the phrase “principal residence”, including the one that sets up a deemed immediate and heavy financial need, refers to a definition. 26 C.F.R. § 1.401(k)-1(d)(3)(ii)(B)(2) https://www.ecfr.gov/current/title-26/part-1/section-1.401(k)-1#p-1.401(k)-1(d)(3)(ii)(B)(2). If a plan’s administrator does not rely on a participant’s § 401(k)(14) self-certifying claim, the administrator may use its discretionary authority to interpret the plan to discern the meaning of a principal residence. Further, an interpretation about excluding from income a gain from one’s sale of her principal residence includes this: “Whether property is used by the taxpayer as the taxpayer’s residence depends upon all the facts and circumstances. A property used by the taxpayer as the taxpayer’s residence may include a houseboat [or] a house trailer[.]” 26 C.F.R. § 1.121-1(b)(1) https://www.ecfr.gov/current/title-26/part-1/section-1.121-1#p-1.121-1(b)(1). Whether a trailer is someone’s primary residence or another residence is a distinct question. This is not advice to anyone.

For a § 457(b) plan to provide an I.R.C. § 402(c)(4) “eligible rollover distribution”, wouldn’t the plan need to be a governmental employer’s § 457(b) plan? Internal Revenue Code (26 U.S.C.) § 402(c)(8)(B)(v) https://www.govinfo.gov/content/pkg/USCODE-2024-title26/html/USCODE-2024-title26-subtitleA-chap1-subchapD-partI-subpartA-sec402.htm.

Thank you for catching my word-processing error. Yes, a participant's 2026 Social Security wages from the employer drives whether one is § 414(v)(7)-affected for 2027.

rocknrolls2, the comments suggest that the pension plan’s fiduciaries might have acted incorrectly by commencing the participant’s annuity based on less than the benefit the plan then provided (if no ERISA § 206(d)(3)(H)(i) segregation then was in effect because the plan’s administrator had not received a DRO, or a segregation had ended). How the plan’s administrator mops up the mess calls for some lawyering. This is not advice to anyone.

Jakyasar’s illustration suggests the shareholder-employee’s compensation was $0 for 2025, the measure for whether a participant is § 414(v)(7)-affected for 2026. For 2026, the corporation might not have decided yet how much compensation to pay this shareholder-employee. If a participant’s 2025 Social Security wages from the employer was $0 (and so no more than $150,000), the participant’s 2026 age-based catch-up deferrals elections may be non-Roth. Likewise, if 2026 Social Security wages is no more than $155,000 (est.) for 2026, the participant’s 2026 age-based catch-up deferrals elections may be non-Roth.

From the facts described above, it looks like a delay in beginning payments to the might-become alternate payee does not result from the plan administrator’s breach of its responsibility to administer the plan. Unlike an individual-account (defined-contribution) plan that provides no assurance of the amount of a benefit, a defined-benefit plan promises a specified benefit. A participant (including alternate payees when one or more shares in the participant’s benefit) is entitled to no more than the benefit promised, applying the documents governing the plan. The plan’s administrator might want its lawyer’s advice about whether the court order now submitted is a DRO and, if it is a DRO, whether it is a QDRO. Prudence might suggest getting that advice from a lawyer who is independent of anyone involved in previous advice or decision-making. Further, the plan’s administrator might, in some circumstances, want two distinct lawyers—one to advise the administrator about how to administer the plan now; another for advice about the administrator’s past conduct. Under a doctrine some label the “fiduciary exception”, communications about how a fiduciary administers the plan will lack a useful evidence-law privilege for lawyer-client communications. But confidential communications to advise the administrator personally about how one defends against claims grounded on the fiduciary’s past conduct might get the lawyer-client communications privilege. And even if the administrator wants no evidence-law privilege, it might be imprudent for a fiduciary to rely on advice from a lawyer who faces conflicting, or even potentially conflicting, interests. Does the court order specify that its alternate payee gets interest on what would have been her payments had a QDRO been approved before the annuity starting date? If not, why would the pension plan’s administrator provide something beyond what the relevant court order calls for? Does the plan provide interest or another time-value-of-money adjustment on a missed payment? If not, wouldn’t a DRO that specifies interest be not a QDRO because it attempts to specify a benefit the plan does not provide? In what other ways might the court order be consistent with, or contrary to, the construct that a QDRO cannot specify a benefit not otherwise provided under the plan? Consider, a QDRO specifies an alternate payee’s portion as an amount or as a percentage of the participant’s benefit. ERISA § 206(d)(3)(C)(ii). Consider, ERISA § 206(d)(3)(H)(i) segregates amounts only during a period that begins when the plan’s administrator has received a DRO and ends when the administrator decides whether the DRO is (or is not) a QDRO. And § 206(d)(3)(H)(ii) provides interest on an alternate payee’s portion only to the extent of the amounts segregated during that period. Congress specified a situation for which interest is provided. Does that mean interest is not provided for other situations? At least not if the plan doesn’t provide it? ERISA § 206 (29 U.S.C. § 1056), https://www.govinfo.gov/content/pkg/USCODE-2024-title29/html/USCODE-2024-title29-chap18-subchapI-subtitleB-part2-sec1056.htm. This is not advice to anyone.

To determine whether a participant is § 414(v)(7)-affected, a retirement plan’s administrator looks to the employer’s Form W-2 wage report of the participant’s wages in the preceding year. 26 C.F.R. § 1.414(v)-2(c)(3)(ii), https://www.ecfr.gov/current/title-26/part-1/section-1.414(v)-2#p-1.414(v)-2(c)(3)(ii). I suspect no one yet has thought much about what retirement plan adjustments might become needed if an IRS examination asserts that a shareholder-employee did not pay herself reasonable compensation. What if a settlement or a proceeding results in redetermining the shareholder-employee’s wages for one or more back years? Could that make a participant § 414(v)(7)-affected for some years? Must or should a retirement plan’s administrator adjust the individual’s account between non-Roth and Roth deferrals? BenefitsLink neighbors, do we concur on these points: ? A nonfiduciary service provider ought not to be responsible for relying on information the plan’s administrator (typically, closely aligned with the employer) furnished or instructed. ? A plan’s administrator ought not to be responsible for relying on the employer’s Form W-2 wage reports unless the administrator knows the employer’s report is false.

Artie M, your experience shows why it matters that a plan’s fiduciary, with its lawyer’s advice, decides how strict or friendly to set hardship standards and fact-finding. Now, a plan’s sponsor or administrator may set § 401(k)(14)’s self-certifying claim as the plan’s claims procedure. https://benefitslink.com/boards/topic/81251-which-recordkeepers-have-implemented-self-certifying-hardship-claims/#comment-356756

In 2007, the Treasury department elevated the restorative-payment construct from nonrule guidance to a Treasury rule. And (adopting my comment) widened the circumstances in which the construct applies. 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). There need not be an actual or even threatened liability; it’s enough that there is a “reasonable risk of liability”. Also, the restoration may be paid or provided by a person other than the fiduciary that arguably breached its responsibility. Allocating a return of investment-advisory fees to the account or accounts the fees had been charged against should meet the rule’s condition that “participants who are similarly situated are treated similarly with respect to the [restorative] payments.” This is not advice to anyone.

Thank you for your thought-provoking pointer to some opportunities. Among them, a plan sponsor’s settlor plan provision might leave the plan’s administrator no or little discretion. That might help defeat a claim of a kind fmsinc alludes to—a spouse’s or former spouse’s claim that the plan’s administrator exercised a discretion in a way that made it too easy for a participant to get an approval of a false claim. Whatever might be a fiduciary’s responsibility, it applies only to the extent of the fiduciary’s discretionary choices. And ERISA § 404(a)(1)(D) calls a fiduciary to obey the plan’s governing documents. This is not advice to anyone.

A retirement plan’s fiduciary typically negotiates a service provider’s compensation in the aggregate, not regarding any particular participant, beneficiary, or alternate payee. To the extent that a plan’s governing documents do not specify an allocation of plan-administration expenses, a retirement plan’s fiduciary allocates a plan’s expenses among accounts considering, widely, all the plan’s people or classes of them, but not a particular individual circumstance. A distribution-processing fee could in some circumstances be an element of a service provider’s reasonable compensation. And charging a distribution-processing fee against the individual accounts of distributees could in some circumstances be an aspect of prudent ways to allocate expenses among a plan’s participants, beneficiaries, and alternate payees. An allocation of distribution-processing fees that does not omit involuntary distributions is used with many plans. I’m unaware of any court opinion that considers the point. EBSA’s bulletin does not state, at least not expressly, that charging a distribution-processing fee is improper. Or that charging it without regard to the amount of the distributee’s account balance or distribution is improper. And the bulletin includes this example or illustration: “Benefit Distributions. Some plans provide for the imposition of benefit-distribution charges on the participant to whom the distribution is being made. These charges may be assessed for benefit distributions paid on a periodic basis ({for example}, monthly check-writing expenses). ERISA does not specifically preclude the allocation of reasonable expenses attendant to the distribution of benefits to the account of the participant or beneficiary seeking the distribution.” Department of Labor Employee Benefits Security Administration, Allocation of Expenses in a Defined Contribution Plan, Field Assistance Bulletin 2003-3 (May 19, 2003), https://www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/field-assistance-bulletins/2003-03. (I express no view about whether the bulletin is a sound interpretation of the statute or any law.) It might seem awkward to charge a fee to process a distribution that results in no money payable to the distributee. For a participant with a $200 balance, is it meaningfully less awkward to charge a $100 fee that results in a net distribution of $100 and, perhaps, after withholding toward Federal and State income taxes, a net payment of about $75? Even if the involuntary distribution is as much as $7,000, is it fair to charge someone who had not asked for a distribution? Or might a fiduciary’s duty of impartiality call in some circumstances for not letting some distributees escape a charge imposed on others? In a typical arrangement, a responsible plan fiduciary decides whether fees are reasonable, and decides how to charge fees among individuals’ accounts. The fiduciary is responsible for its exercises of discretion.

A plan fiduciary might be reluctant to send money back to the investment-advisory firm because that firm might change its mind about the adjustment it provided. For that or another reason, a plan fiduciary might prefer getting the money from the plan-sponsor company. The company might add to the mistakenly deposited amount an amount that follows a good-faith estimate of interest or the time value of money for the use of the money that did not belong to the company. If the company and the plan fiduciaries are agreed on a correction, they might do one write-up to document the correction. If there is a nonexempt prohibited transaction, a disqualified person, never the plan, owes the excise tax. So, the company might decide whether it files or omits an excise tax return. This is not advice to anyone.

Thank you! When the plan’s sponsor/administrator has specified self-certifying: Does a recordkeeper process the hardship claims without bothering the plan’s administrator? Is an approve-or-deny decision as binary as the form (whether electronic or paper) is good-order completed and signed, or isn’t?

Which recordkeepers have implemented self-certifying hardship claims? Which have not? What’s the deal with: Ascensus? ADP? Paychex? Empower? Voya? John Hancock? Principal? Fidelity? Vanguard? TIAA? Others? If there is a choice, does a recordkeeper suggest a default norm? If so, is the default self-certifying, review by the recordkeeper, or review by the plan’s administrator.

Artie M.’s explanation that an expense already paid might no longer be an immediate need likely is a mainstream interpretation of a plan’s provision that follows the Treasury’s rule. But some deciders of hardship claims are not so strict. Some reason an employee might have paid a recognized expense without foreseeing how it would affect the employee’s ability to meet other expenses. A financial controller thinks about which expense to pay in what order, including considering expenses to be paid from particular budgets. Many working people don’t think that way, and some administrators reason they shouldn’t be expected to. An ordinary person might pay an emergency expense using money that normally would go to recurring expenses, letting some go past due while waiting for an insurance recovery or a hardship reimbursement. I’ve seen claims procedures under which an expense already paid is recognized for a hardship if it was paid in a recent few months. Some of those procedures were designed by lawyers who knew one’s client’s procedure is certain to be examined by the Internal Revenue Service. A fiduciary designing a claims procedure might balance a need to be reasonably confident that decisions on hardship claims do not tax-disqualify the plan with being reasonably responsive to participants’ claims for a hardship that meets the plan’s provision. A fiduciary that otherwise would lack expertise should want its lawyer’s advice. This is not advice to anyone.

If a plan sponsor wants its plan to provide that a hardship is determined by relying on the claimant’s certification (to the extent I.R.C. § 401(k)(14) or § 403(b)(7)(D) permits): Must or should that provision be stated in the plan documents? Or is it enough that the plan’s administrator’s claims procedure, distinct from the plan documents, states the self-certification regime? Also, even if a procedure would be enough, is there any disadvantage to putting the provision in the plan documents’ adoption agreement? I welcome all BenefitsLink neighbors’ views.

If the participant not only owns it but also lives in it as his principal residence: If the plan provides this hardship need, the participant might consider: “Expenses for the repair of damage to the employee’s principal residence that would qualify for the casualty deduction under [Internal Revenue Code] section 165 (determined without regard to section 165(h)(5) and whether the loss exceeds 10% of adjusted gross income)[.]” 26 C.F.R. § 1.401(k)-1(d)(3)(ii)(B)(6) https://www.ecfr.gov/current/title-26/part-1/section-1.401(k)-1#p-1.401(k)-1(d)(3)(ii)(B)(6).

Is the grandmother's residence also the participant's principal residence?

What amount does the participant seek? What expense does the participant claim as his (perhaps including his grandmother's) hardship need? A conservatorship by itself might not make the incapacitated person the conservator's dependent. If the plan provides the Treasury regulations' deemed hardship needs, some of them might apply regarding the participant's primary beneficiary's expenses. This is not advice to anyone.

Looks like I might have guessed wrong in classifying the situation asked about. As BG5150, RatherBeGolfing, CuseFan, and I suggest, a benefit is not forfeitable because the accrued benefit is small. But many plans do what ratherbereading mentions. If the plan provides a small-balance involuntary distribution, the participant is severed from employment, and her account balance is no more than the cash-out level the plan specifies (whether $7,000, $5,000, $1,000, or $200), the administrator obeys the plan and instructs the involuntary distribution. If the account balance is $199 and the distribution-processing fee charged against the individual’s account is $75, that results in a net payment (before withholding for taxes) of $124. To follow TPApril’s example, if the distribution-processing fee to be charged is $100, but the account balance is $90, that might result in a net payment of $0.00. But it is a distribution, even if the distributee sees no money. (Some recordkeepers abate a fee so, as applied regarding a particular distributee, the fee is no more than distributee’s before-charge account balance. Also, some recordkeepers set the charge, if not the fee, so a net payment for the involuntary distribution never is less than $1, $5, or $10. Some do this so routine processing will make records showing that the distribution was paid.) If the plan’s administrator has segregated a forfeiture merely because an accrued benefit is small, each of the plan’s fiduciaries might want its or her lawyer’s advice.

I guessed TPApril didn’t intend to describe a forfeiture, at least not in the legal sense that ERISA § 203 (or Internal Revenue Code § 411) uses the constructs of nonforfeitable and forfeitable benefits. If what’s asked is about a situation in which a benefit is treated as forfeitable because the accrued benefit is small, I too would share BG5150’s question about what the documents governing the plan provide. And that includes interpreting a plan not to provide a forfeiture of a benefit ERISA § 203 commands to be nonforfeitable. Let’s hope TPApril clarifies which situation is asked about—a forfeiture, or an involuntary small-balance “cash-out” distribution.

BG5150, I guess the situation TPApril describes is about a small-balance (< $7,000) involuntary distribution after a participant is severed from employment. If so, TPApril asks about situations in which an account might be so small that a charge for a distribution-processing fee depletes the account, resulting in no net payment. As my note suggests, a plan’s fiduciary (or a service provider helping a plan’s fiduciary) might consider what communication could inform a distributee that the involuntary distribution was made.

If the employer paid the plan’s obligations before documenting an interest-free loan to the plan (and meeting all conditions of the prohibited-transaction exemption), the plan might have no obligation to repay the employer. About whether to reimburse an employer, a prudent fiduciary might want one’s lawyer’s advice about whether paying money when the plan has no obligation would be an exclusive-purpose breach. Each of the plan’s trustee and, if a different person, the plan’s administrator might want its or her lawyer’s advice about whether a fiduciary must or should decline to reimburse the employer until there is a solution that protects the plan’s fiduciaries. The employer might want its lawyer’s advice about whether the employer engaged in a nonexempt prohibited transaction, and whether the employer must or should file an excise-tax return (even if the PT has been corrected). Likewise, the employer might want its lawyer’s or certified public accountant’s advice about how to determine the “amount involved” in a prohibited transaction. There might be a pull toward not getting a lawyer’s help and informally resolving the situation. But recall some TPAs’ saying: “Don’t let the client’s problem become your problem.” Be ready to show that you did not give tax or other legal advice (unless you’re licensed and engaged to provide advice). And to prove that your services were only as instructed by the plan’s administrator and trustee. This is not advice to anyone.

Assuming the plan provides an involuntary distribution (and assuming a plan fiduciary had decided to allocate the distribution-processing fee uniformly to accounts involuntarily distributed): The plan’s administrator might consider no less communication than for a similar distribution that results in a net payment. That might include a § 402(f) explanation, even if the net amount of an eligible rollover distribution is $0.00. (Some service providers and plan administrators do not set up a $0.00 net payment as a reason to suppress a § 402(f) explanation that otherwise is called for.) (Be mindful that the IRS’s 2026 text, unedited, could confuse a reader. The awkwardness begins with the opening sentences: “You are receiving this notice because you are eligible to receive a payment from the [INSERT NAME OF PLAN] (the “Plan”) that you can transfer (roll over) to an IRA or another employer plan. This notice is intended to help you decide whether to roll over the payment (or some portion of it).”) After the quarter-year closes, an account statement ought to show the charge against the individual’s account and the resulting $0.00 balance. Beyond statute-prescribed communications, an administrator or its service provider might deliver—before the distribution is made—a one-paragraph explanation that the distribution-processing charge lowers the distributable account balance to $0.00. Will the payer deliver a Form 1099-R that shows the $0.00 distribution? To protect fiduciaries regarding later claims, one might consider how to preserve evidence that the involuntary distribution was made, and that it resulted in the distributee receiving the benefit she was entitled to. This is not advice to anyone. Have service providers developed a regime I’m unaware of?