Peter Gulia

To find the soon-to-be-dumped micro-business plan sponsors and those of them who might welcome a TPA service, a practical approach likely is relationship-building with Edward Jones and Morgan Stanley brokers.

jsample’s query is a nice illustration of plan-administration duties or obligations a business owner might miss if she has no TPA or other adviser to provide tax, ERISA, and other legal advice. If the only service an investment house provides a micro-business plan sponsor is IRS-preapproved plan documents (and even pretending the business owner reads thoroughly the whole of all those documents): Would an unadvised plan sponsor know that hiring a part-time employee might soon make her eligible, at least for elective deferrals? (Many still-proper uses of IRS-preapproved documents do not yet state the LTPT provision.) Would an unadvised employer/administrator know that one employee’s eligibility changes required reporting from Form 5500-EZ to Form 5500-SF? About a non-ERISA plan for only one self-employed individual, would the owner know that her account surpassing $250,000 invokes a Form 5500 reporting requirement? (The IRS’s review for whether plan documents in form meet I.R.C. § 401(a) tax-qualification conditions does not require that IRS-preapproved documents explain Form 5500 reporting or tax-information duties.) How many of these and other past errors or potential mistakes are spotted only when the business owner engages a TPA? An investment house’s plan-document service exit might move some micro-business plan sponsors to find an improved service that includes a little related advice. About Jakyasar’s observations, consider that some service providers that furnished documents with a blank adoption-agreement form might have done all the provider promised. This semester I’m again teaching professional conduct. For advisers (whether lawyers, consultants, or TPAs), often the challenge is getting the advisee and the adviser to a real understanding about the scope of what service the advisee wants, and is ready to pay for. Many TPAs provide services with wider quality than some other businesses offer or provide.

For those who are offering services, Morgan Stanley's exit seems not to present a path to Ascensus.

Others' observations?

For an existing plan already established: If a plan’s sponsor seeks to document whatever tax law calls a plan sponsor to document by December 31, 2026, does one sign a package as presented now (because one doesn’t expect a cycle 4 document to be available for use this December)?

In April 2024, Vanguard told customers it was ending recordkeeping and plan-document services for retirement plans served by Vanguard’s Individual 401(k) and other small-business lines. (Many followed Vanguard’s suggestion to transition to Ascensus.) In 2026, Edward Jones and Morgan Stanley each told customers it will no longer provide plan-document services for “Solo 401(k)” retirement plans. Do you think these service exits set up a business opportunity for a TPA? Or, are many micro-business plan sponsors not a good client for a TPA? What do you look for in evaluating whether you’d accept or decline a one-participant or micro-business plan as your client?

To count stock shares, other capital interests, profits interests, or other ownership rights a participant gets indirectly through a trust, one looks to the trust’s beneficiaries and each beneficiary’s beneficial interests. The many points of tax law one might apply or consider could include (at least): Internal Revenue Code § 1563 and Treasury’s interpretation; see 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). “[T]he actuarial interest of each beneficiary is determined by assuming the maximum exercise of discretion by the [the trust’s trustee or other] fiduciary in favor of such beneficiary[.]” Measuring some beneficial interests, especially those involving contingencies about when an interest begins or ends or regarding a person’s life or death, might call for estimated actuarial measures. Among ways, see 26 C.F.R. § 20.2031-7 https://www.ecfr.gov/current/title-26/section-20.2031-7. (Looking to each beneficiary’s percentage of the trust’s distributable net income shown on a Form 1041 income tax return or its K-1 tax-information reports often is not an accurate measure of beneficial interests to determine whether a retirement plan participant is a more-than-5%-owner.) A trustee might have a personal beneficial interest depending on what powers and how much discretion the trustee has. Property (including capital or profits interests in a business) of a grantor trust might be treated as the grantor’s property. A trust for an employee stock ownership plan is a different situation. To sort out these and other tax law points, the retirement plan’s administrator must consider all the terms of a trust, which will require reading the documents governing the trust and might require reading a State’s law governing trusts. This is not advice to anyone.

If a retirement plan has participating employers not under common control (and not otherwise one employer under Internal Revenue Code § 414(b)-(c)-(m)-(o)), the plan might be a multiple-employer plan. Beyond ERISA’s title I and the Internal Revenue Code, a multiple-employer plan might be burdened by some consequences under Federal and State securities laws.

Are the partnership and the proprietorship under common control?

The statute’s exception is for a plan “established and maintained by a professional service employer which does not at any time after September 2, 1974, have more than 25 active participants in the plan.” ERISA § 4021(b)(13), as unofficially compiled in 29 U.S.C. § 1321(b)(13) https://www.govinfo.gov/content/pkg/USCODE-2024-title29/html/USCODE-2024-title29-chap18-subchapIII-subtitleB-sec1321.htm. PBGC’s form to request a coverage determination paraphrases the same text. https://www.pbgc.gov/sites/default/files/coverage-determination-form.pdf. PBGC’s Comprehensive Premium Filing Instructions for 2026 Plan Years gives an example similar to the situation Jakyasar describes. See page 7 [pdf page 9] example 4 https://www.pbgc.gov/sites/default/files/documents/2026-premium-payment-instructions.pdf. Example 4 — A professional service employer maintains Plan D, a calendar plan year plan. From plan inception through August 31, 2026, Plan D never had more than 25 active Participants and was not a covered plan under ERISA section 4021. On September 1, 2026, a few employees were hired and became covered by the plan resulting in a total active Participant count of 26 and therefore, the plan became a covered plan on that date. Plan D will continue to be a covered plan regardless of how many active Participants the plan has in the future. Note that the Premium Payment Year begins on January 1, 2026, even though the plan did not become covered until after that date. The due date for the plan’s first premium filing is December 1, 2026 (the first business day on or after the 90th day after September 1, 2026) because this date is later than the Normal Premium Due Date (October 15, 2026).

If the plan’s sponsor and the to-be-added participating employer would do this using IRS-preapproved documents, what do those documents state or omit about how much retroactive effect might be had on a participating employer’s adoption? This might matter because a document’s tolerance could be narrower than what Internal Revenue Code § 401(b) otherwise might permit. Remember, for an ERISA-governed plan, one amends a plan according to the governing documents’ “procedure for amending such plan,” including its provisions “for identifying the persons who have authority to amend the plan[.]” ERISA § 402(b)(3), 29 U.S.C. § 1102(b)(3). The Treasury’s view of Internal Revenue Code § 401(b) is 26 C.F.R. § 1.401(b)-1 https://www.ecfr.gov/current/title-26/section-1.401(b)-1. Yet, one suspects a real-world answer to your question might be grounded in an IRS tolerance not expressed in a Treasury rule. This is not advice to anyone. BenefitsLink mavens likely know much more than the tiny bits I know.

Without remarking on a particular situation, and imagining only a future plan design: Could a professional-service employer divide its workers and potentially eligible participants into two plans—one for self-employed individuals, and another for employees? For a small-enough professional-service employer might that result in one or both of those plans being excepted from PBGC coverage under ERISA § 4021(b)(13)? Beyond anything about PBGC premiums, an employer might have other reasons for separating pension plans. For example, at least for individual-account retirement plans, some law firms prefer to separate plans between a non-ERISA plan for partners and an ERISA-governed plan for employees. But are there restrictions against, or disadvantages to, separating defined-benefit pension plans? If plans of one employer are separate, must or may they be tested together for however minimum-participation, coverage, nondiscrimination, and top-heavy rules might apply? I have no supposition; I ask out of ignorance.

A § 414(v)(7) must-be-Roth constraint applies to “an eligible participant whose wages (as defined in section 3121(a)) for the preceding calendar year from the employer sponsoring the plan exceed[s]” the specified amount. Internal Revenue Code of 1986 (26 U.S.C.) § 414(v)(7)(A) https://www.govinfo.gov/content/pkg/USCODE-2024-title26/html/USCODE-2024-title26-subtitleA-chap1-subchapD-partI-subpartB-sec414.htm. And here’s the statute’s cross-reference to I.R.C. § 3121(a) https://www.govinfo.gov/content/pkg/USCODE-2024-title26/html/USCODE-2024-title26-subtitleC-chap21-subchapC-sec3121.htm. Accord 26 C.F.R. § 1.414(v)-2(a)(2) (“For this purpose, wages taken into account are wages as defined in [Internal Revenue Code] section 3121(a) for purposes of the taxes imposed by sections 3101(a) and 3111(a) for the year the wages are required to be taken into account for purposes of chapter 21 of the Internal Revenue Code.”), https://www.ecfr.gov/current/title-26/part-1/section-1.414(v)-2#p-1.414(v)-2(a)(2). Further, it’s not necessarily all Form W-2 box 3 wages, but rather those from the employer that maintains the plan for which one applies a § 414(v)(7) constraint about the portion of elective deferrals that must be Roth contributions. For example, an individual might have three (unrelated) employers that pay her $400,000 in wages, but if no employer paid more than $150,000, a § 414(v)(7) constraint is not invoked.

Is the vendor saying that the vendor is unwilling to receive Roth contributions under that vendor’s contract? Or is the vendor suggesting that the charitable-organization employer somehow must not or should not allow Roth contributions, even if there is available under the employer’s nonplan program a § 403(b) contract that allows Roth contributions? If it’s the latter point, an employer might consider whether it could be unwise to rely on legal advice from a person that denies that it provides legal advice. In theory, a charitable organization might design a “written plan” that allows Roth contributions and meets Internal Revenue Code § 403(b) and § 414(v)(7) and yet does not, within the meaning of ERISA’s title I as interpreted in 29 C.F.R. § 2510.3-2(f) and EBSA’s guidance, let the employer “establish” or “maintain” any plan provision. To do so, the charity would need top-notch lawyering and an unusually capable payroll manager. And the employer would resist becoming a party to any annuity contract or custodial-account agreement, and resist every contractor’s requests for instructions. But before a charity considers such a course, the charity might reevaluate whether existing arrangements really do not establish a plan and do not maintain a plan. Further, a charity might want its lawyer’s explanation that 29 C.F.R. § 2510.3-2(f), if ever it was “safe” to rely on, is no longer conclusive. Although a judge may consider the Labor department’s reasoning expressed in its 1975 interpretative rule, a judge must not defer to it. Rather, a Federal court must interpret a statute—ERISA § 3(2) and ERISA’s title I—according to the court’s best interpretation of Congress’s statute. And even if a court otherwise is persuaded by an interpretive rule, a court might not be persuaded about how that interpretation applies regarding facts and circumstances that the agency’s rulemaking might not have then contemplated. A charity might want its lawyer’s advice about risks and opportunities, including perhaps some the organization might not yet have considered, or considered carefully. Or, considered in light of changed facts and circumstances. 30Rock, how confident are you that the charity’s existing written plan does not already allow Roth contributions to the extent a § 403(b) contract allows them? This is not advice to anyone.

Beyond whatever one might find about tax law, a plan’s administrator might consider the service agreement with the plan’s directed trustee, custodian, or other payer or tax-information reporter. Some agreements of those kinds do not obligate such a service provider to unprocess or reprocess a transaction that was done according to the plan administrator’s or its agent’s instruction. This is not advice to anyone.

If a charity prefers to do no more than make available voluntary-only purchases of individuals’ rights under § 403(b) contracts without “establishing” or “maintaining” a plan, each insurer or custodian that issues a § 403(b) annuity contract or § 403(b)(7) custodial-account agreement decides the contract’s provisions, including whether the contract offers or omits a Roth-contribution provision. If an individual’s wage-reduction/deduction agreement’s instructions directs her elective deferrals to a § 403(b) contract that does not allow Roth contributions, the employer would treat a § 414(v)(7)-constrained employee’s election that seeks non-Roth elective deferrals beyond those that can be allowed without using an age-based catch-up as ineffective. The employer would stop those contributions. The employer would report such an employee’s Federal income tax wages excluding only so much as was properly excluded without an attempted age-based catch-up that could not be a non-Roth contribution. Remember, the U.S. Labor department’s interpretation about how an employer avoids “establishing” or “maintaining” a plan includes a concept of not unnecessarily restraining § 403(b) “contractors who may approach employees” to less than a “reasonable choice” after considering (at least) six factors, including “[t]he terms of the available arrangements[.]” 29 C.F.R. § 2510.3-2(f)(3)(vii)(D). A charity cannot worsen its “hands off” noninvolvement position by tolerating more choice. So, if a § 403(b) insurer or custodian that would like to do business with the charity’s employees offers a contract that allows Roth contributions, the charity might add that vendor to what the charity allows for its employees’ voluntary choices. In evaluating whether an ostensible nonplan really is an ERISA-governed plan, some might find that narrowing employees’ choices to only contracts that refuse Roth contributions results in an unreasonable choice (if at least one contractor allowing Roth contributions presented itself as seeking to fit the employer’s program and meet the program’s reasonable conditions). Remember too that in forming the “written plan” Internal Revenue Code § 403(b) might require as a tax-qualification condition, an employer that prefers not to “establish” a plan as ERISA’s title I defines it does not set plan provisions. Rather, the charity collects, assembles, and re-expresses provisions that result from the recognized contracts of the recognized § 403(b) insurers and custodians together with Federal tax law. If the “written plan” does not already so state, a charity might write that a Roth contribution is recognized only if the contract the participant chose allows the contribution and only to the extent the Internal Revenue Code does not preclude recognizing the contribution. This is not advice to anyone.

Before either the business corporation or the charitable organization acts under an assumption that these together might be one I.R.C. § 414(b)-(c)-(m)-(o) employer, each might want its lawyer’s advice about whether that assumption is so. If HSB obtained the Internal Revenue Service’s recognition of HSB as a charity, the application might have represented to the IRS that HSB had and would have multiple directors, trustees, or other governors. Further, HSB might have represented that some governors would be not subordinates of, and would be otherwise independent of, a substantial donor. Among many sources of law, either lawyer might consider 26 C.F.R. § 1.414(c)-5 https://www.ecfr.gov/current/title-26/section-1.414(c)-5. Consider that paragraph (c)’s tolerance for permissive aggregation might apply only among exempt organizations. Are all or some of either GLP’s or HSB’s workers leased employees? Or arranged with a professional-employer organization? Or a payrolling company? If GLP and HSB are not parts of one employer, might HSB consider becoming a participating employer of a multiple-employer plan? These and many other questions might matter for the situation you describe. This is not advice to anyone.

rocknrolls2, one wishes every plan sponsor had the presence of mind to RTFD, or to engage you or another adviser. The sadnesses of a retirement plan’s sponsor not considering, and often not being usefully aware of, some of a plan’s provisions can result from an owner who signs documents with no advice and little reading. (In the matter I worked on recently, I was engaged, for one discrete point, only after the one owner/participant’s death and after it was too late to change troublesome provisions.) ErnieG, although I don’t doubt that you’re fairly describing documents you know, not all sets of IRS-preapproved documents have an adoption-agreement or appendix item for specifying a user’s choice of a governing State law. Further, not every basic plan document sets up a governing-law provision, whether default or nonvariable, by referring to something about a plan sponsor or employer. At least one widely used set of IRS-preapproved documents sets up for a plan’s governing law “the laws of the state in which the Pre-approved Document Provider is located[.]” States’ laws can differ on points that matter in how a retirement plan is administered, or even who gets a benefit. Whether a court might follow, might overlook or ignore, or might countermand a document’s choice of law also might suffer differences. And there might be difficulties about personal or property jurisdiction, and about legal or equitable remedies. I recognize this choice-of-law point might matter only for plans that are not ERISA-governed.

QDROphile, your intellectual rigor and keen powers of observation more than compensate for whatever experience you (or I) might lack with that subsegment of small-business retirement plans. While perhaps understandable, it’s sad that a plan’s choice-of-law comes from a person that is not a party to the plan, has no responsibility to administer the plan, and asserts that it provides no advice.

In a matter I advised on (now concluded): Pennsylvania law governs the plan. (That did not result from an adoption-agreement choice.) North Dakota law governs the trust agreement. New York law governs the recordkeeper’s service agreement. None of those choices of law resulted from anything about where the plan sponsor is or was organized or has or had a location. I’m not seeking help for a particular matter. Rather, I wonder how much small-business owners are aware of a choice of State law governing a retirement plan. And about circumstances in which a choice of State law can matter.

And as Bri's illustration suggests, a consequence might matter.

If you have a moment on a summer afternoon, I’d welcome your sharing of information and experiences. For a small-business retirement plan that is not ERISA-governed (because all participants, including eligibles, are self-employed individuals): Do you know which State’s law governs your client’s plan? Does your client know which State’s law governs one’s plan? How often is the governing law not an adoption-agreement choice? How often does a service provider cause the plan to specify a State law the service provider prefers? Have you ever seen a situation in which the State law governing the plan matters?

And consider making the documents governing the plan fit what the plan’s sponsor will allow.

If the seller, with its lawyers’ advice, lacks information about what must, should, should not, or must not happen with a retirement plan, recognize that a lawyer too might face gaps in information from her client and restrictions on the scope of her work. If the law firm representing the seller in a business deal lacks an employee-benefits practice, the standard recommendation is to bring in an employee-benefits lawyer. But many sellers decline to engage, or allow the business lawyer to engage, an employee-benefits lawyer. Or, even when an employee-benefits lawyer is available, a client might have instructed its lawyers not to consider employee-benefits issues, or to avoid negotiating anything that might slow a dealmaking. Failing to consider employee-benefits issues and consequences can happen even when every professional acted correctly, each considering the scope of her engagement. Consider that if 5½ weeks remain, there might be an opportunity, without upsetting the business deal, to resolve what ought to happen in ending the seller’s retirement plan. This is not advice to anyone.

Before you begin work, consider getting your lawyer’s advice about what your service agreement obligates, permits, or precludes. Unless you are the plan’s administrator or other fiduciary, consider that a decision about whether and when to discontinue or terminate an employee-benefit plan belongs to the plan’s sponsor, and decisions about how to implement a discontinuance or termination belong to the administrator or other fiduciary. If your client asks for your advice about what to do with the retirement plan (and you’re willing to provide advice), consider explaining that you’re not ready to provide advice until you’ve read all documents about the business sale and any related deals. Consider reassuring your client that you’ll keep all information confidential. And that you’d communicate only with your client, or, if so authorized, with your client’s lawyer. Deal documents often include a seller’s representation, warranty, and covenant that every employee-benefit plan was ended before the sale of the business (in whichever form). A seller’s delivery to the buyer of a further assurance of each plan’s termination often is a closing condition. 2) If 5½ weeks before the closing, a seller has not told its employees about a pending sale, that might be deliberate. 4) Consider that the buyer’s retirement plan might not accept a rollover-in contribution. Likely, you don’t yet know. 6) Although an intended safe-harbor plan design might control how the plan allocates one or more kinds of contributions, that might not by itself preclude a plan “termination” (really, a discontinuance) at a desired time before the closing of the business sale. Consider 26 C.F.R. § 1.401(k)-3(e)(4) https://www.ecfr.gov/current/title-26/part-1/section-1.401(k)-3#p-1.401(k)-3(e)(4). If safe-harbor treatment is not met, a plan’s administrator might apply a plan’s provisions for coverage, nondiscrimination, and top-heavy measures (and related reallocations and corrective distributions). Remind your client to get its lawyers’, including an employee-benefits lawyer’s, advice. This is not advice to anyone.