Peter Gulia

Among some practical ways to evaluate whether a business’s facts would meet conditions for a credit is to use Form 8881 and its Instructions. https://www.irs.gov/pub/irs-pdf/f8881.pdf; https://www.irs.gov/retirement-plans/retirement-plans-startup-costs-tax-credit Instead of waiting to prepare a tax return on the facts of a concluded tax year, some accounting firms can run a projection on a set of assumed facts.

Federal income tax law does not preclude a governmental § 457(b) plan from accepting a rollover contribution if: the distributed-from plan is a § 402(c)(8)(B) eligible retirement plan; the distribution is a § 402(c)(4) eligible rollover distribution; the governmental § 457(b) plan provides that the plan accepts rollover contributions; and the § 457(b) plan separately accounts for rollover contributions, including separately accounting for those not from another governmental § 457(b) plan. See 26 C.F.R. § 1.457-10(e) https://www.ecfr.gov/current/title-26/part-1/section-1.457-10#p-1.457-10(e). Beyond this, a governmental employer should get its lawyer’s advice about State and other local laws. This is not advice to anyone.

A few thoughts (none of which is advice): Before a plan’s sponsor or administrator considers whether ERISA title I’s anti-cutback command might negate a change, one might consider what benefit the plan provides. That might call for a thorough and careful reading of “the documents and instruments governing the plan”, which might include or exclude all, some, or none of an employer’s collective-bargaining agreements, and might involve surrounding labor-relations law. This might involve thorough interpretations using several modes of reasoning. One doubts a lawyer advised that ERISA title I’s anti-cutback command doesn’t apply; rather, the whole of the documents might have defined the benefit not to be cut back. (For example, a seeming accrual might be subject to what results under labor-relations law.) If some of “the documents and instruments governing the plan” are stated using IRS-preapproved documents, some plans’ administrators interpret documents considering the difficulties and ambiguities that might result the format’s constraints. Some consider scrivener’s error, mistake, or other reasons for reforming a document. An individual-account (defined-contribution) plan meant to fit Internal Revenue Code § 403(b) might bear some interpretations different than for other plans. A plan’s sponsor or administrator might consider which Treasury interpretations of Internal Revenue Code § 411 might (or might not) be relevant authority regarding part 2 of subtitle B of ERISA’s title I. Consider the 1978 Reorganization Plan. But recognize also that a court does not defer to, and might not be persuaded by, an interpretive rule or regulation. Although many nonlawyer consultants are knowledgeable about the Internal Revenue Code and ERISA’s title I, and are comfortable providing advice about those laws, fewer feel comfortable advising on situations that suggest a possible application or relevance of other law. All that observed, it’s smart to flag the issue.

And, beyond tax-law corrections, an eligible correction under Labor/EBSA’s Voluntary Fiduciary Correction Program (because the Treasury/IRS lacks authority regarding ERISA title I fiduciary breaches). Expenses for a correction should be the personal responsibility of the breaching fiduciaries.

If ERISA § 204(h) calls for a notice, the plan’s administrator provides the notice. ERISA § 104(h)(1). Some plans’ administrators engage a service provider’s help in delivering a notice. Whether ERISA § 204(h) calls for a notice turns on whether the plan is an “applicable pension plan”, including an individual-account plan “subject to the funding standards of [Internal Revenue Code §] 412[.]” ERISA § 104(h)(8)(B)(ii). Also, whether the plan amendment would “provide for a significant reduction in the rate of future benefit accrual[.]” ERISA § 104(h)(1). ERISA § 104(h)(2) calls for a § 204(h) notice to “be written in a manner calculated to be understood by the average plan participant and [to] provide sufficient information . . . to allow applicable individuals to understand the effect of the plan amendment.” A plan’s administrator might want its lawyer’s advice about whether a communication about other aspects of a plan’s discontinuance, final distribution, a distributee’s right to direct a rollover if the distribution is an eligible rollover distribution, and the plan’s termination might include enough information to meet ERISA § 204(h). (Some administrators hope to get everything done in one delivery, and even one writing.) ERISA § 204, unofficially compiled as 29 U.S.C. § 1054 https://www.govinfo.gov/content/pkg/USCODE-2023-title29/html/USCODE-2023-title29-chap18-subchapI-subtitleB-part2-sec1054.htm. This is not advice to anyone.

Consider also that only communications with one’s lawyer for the purpose of getting the lawyer’s legal advice can get that evidence-law privilege.

Whether the plan is governmental or ERISA-governed; which State laws might not be superseded, even if the plan is ERISA-governed, because the particular State law does not “relate” to the plan; which subjects are within or beyond collective discussion with one or more labor organizations; who, if anyone, has discretionary authority to interpret the employer’s obligation; which persons are required to obey a government lawyer’s advice; which persons are permitted to rely on a government lawyer’s advice; which persons might enjoy or lack sovereign, governmental, or public-officer immunity; which persons might be entitled to a defense at the government’s expense; which persons might be entitled to a defense at the plan trust’s expense; which actuarial standards might apply; which assumptions might apply; all these and more might affect how one or more of the persons involved might consider the error. And consider that each person involved might have interests that differ from others' interests.

I assumed 22% because it is a default Federal income tax withholding rate for a supplemental wage payment. Whatever the withholding for Federal income tax, the key to the solution is recognizing that the $765 withheld for OASDI and HI taxes counts in the employee’s Federal income tax wages, and so might bear some withholding for Federal income tax. Whatever the tax withholding is constrains the remaining net pay available for an elective deferral. A regular pay likely would involve more complexities. And a Roth deferral would add another layer of complexities. Some employers set ordering rules to (1) account for all required or instructed tax withholdings; (2) account for garnishments; (3) order the kinds of amounts taken from pay (for example, taking a payment for health coverage before a contribution to a retirement plan); and (4) not allowing a period’s or supplemental wage payment’s net pay be less than $0.00 (or $1.00). If an employer engages a payroll service provider, some have rules and controls of these kinds in the software. This is not advice to anyone.

Your mention of “the City” suggests a governmental plan. If so, ERISA’s titles I (including ERISA § 403), III, and IV do not apply. If the “HSA Trust” is a governmental plan, likely there is an interplay of the State’s laws beyond the plan’s and trust’s governing documents. The City might want the advice of its lawyer. And a trustee, if serving other than as an ex-officio appointment because of one’s City office, might want his or her lawyer’s advice. Further, the City might consider whether it must seek, prefers to seek, or deliberately would not seek the State’s attorney general’s advice. The City or the trustees, or each distinctly, might want an actuary’s advice about how the mistaken contribution might affect the next actuarially determined amount. The City might want a certified public accountant’s advice about effects on the City’s financial statements. The trustees might want a certified public accountant’s advice about effects on the trust’s financial statements. This is not advice to anyone.

What do the documents governing the plan provide as the measure of the employer's obligation to pay contributions into the trust?

If a participant specifies a 100%-of-pay elective deferral, many employers and plan administrators interpret a plan to restrain such a deferral to what’s available after required withholding. Here’s a simplified illustration, assuming no tax beyond Federal taxes, and assuming nothing else taken from the worker’s pay: Pay before any withholding $10,000 Withholding for OASDI tax $620 Withholding for HI tax $145 Net pay after withholding for wage taxes $9,235 Federal income tax withholding (22% x $765) $168.30 Pay available for elective deferral $9,066.70 Elective deferral $9,066.70 Net pay $0.00 I’m not aware of a particular statutory authority. Some might follow a principle that what otherwise would be a contract promise or obligation that would require a person to disobey applicable public law is legally unenforceable. This is not advice to anyone.

“Data before dollars.” When I was in recordkeeping, that’s what the operations people said. The idea was that we should refuse any payment not preceded by complete instructions on how to apply that money.

Paul I, thank you for your political and business observations. Based on the statute, I presume it’s the US Treasury that calculates, following the individual’s Federal income tax return, the amount of a saver’s-match contribution. Am I right in thinking a plan administrator’s recordkeeper might have little or no reason to know an individual’s § 6433 amount until the recordkeeper is asked to process the Treasury’s payment and credit individuals’ accounts? Or is there something I’m overlooking? The statute provides “such [saver’s-match] contribution shall not be taken into account with respect to any applicable limitation under sections 402(g)(1), 403(b), 408(a)(1), 408(b)(2)(B), 408A(c)(2), 414(v)(2), 415(c), or 457(b)(2), and shall be disregarded for purposes of sections 401(a)(4), 401(k)(3), 401(k)(11)(B)(i)(III), and 416[.]” Rather, the essential condition is that this subaccount is not “distributable to the participant under section 401(k)(2)(B)(i)(IV), 403(b)(7)(A)(i)(V), or 457(d)(1)(A)(iii).” The statute does not preclude other in-service distributions. I’m aware there are many other difficulties, including some mentioned in SPARK’s November 4, 2024 comment letter https://www.sparkinstitute.org/wp-content/uploads/2024/11/Comment-Letter-on-Savers-Match-RFI-Final-11.4.24-.pdf.

Is this example permissible? Wheelwright Inc. has 24 pay periods in 2026. The corporation’s tax year, the § 401(a) retirement plan’s plan year, the retirement plan’s limitation year, and every participant’s tax year is the calendar year. Pam’s yearly base pay is $1.2 million, so $50,000 each pay period. Pam is too young for an age-based catch-up. Pam’s § 401(k) election is 90% of each pay period’s base pay, but not to exceed, cumulatively in a year, the year’s elective-deferral limit. Pam’s January 15 § 401(k) deferral is $24,500 (only 49% of base pay). Wheelwright’s matching contribution is 100% of the participant’s elective deferral for the pay period, but not to exceed, cumulatively in a year, 7% of the year’s § 401(a)(17) compensation. With the January 15 pay, Wheelwright credits a $24,500 matching contribution. If Pam works through the whole of 2026, that matching contribution is less than 7% of Pam’s § 401(a)(17) compensation. (It's a smidge over 2% of base pay.) Pam’s year’s-worth of elective-deferral and matching contributions is exhausted with 2026’s first pay period.

As the plan’s administrator evaluates risks and opportunities, it might consider: which directions the plan’s directed trustee would accept or refuse; which instructions the plan trustee’s custodian would accept or refuse; which instructions the plan trustee’s or custodian’s paying agent would accept or refuse; which services the plan administrator’s recordkeeper would provide or decline. This is not advice to anyone.

For tax years that begin on or after January 1, 2027, SECURE 2022 replaces the saver’s credit with the saver’s match. An eligible individual claims this “match” in her Federal income tax return. The US Treasury pays this as a contribution to the eligible individual’s applicable retirement savings vehicle, which the individual specifies (in her tax return, we guess). A plan that receives this Treasury contribution may be a § 401(k) plan, a § 403(b) plan, a governmental § 457(b) plan, or an IRA. For any of those, the Treasury’s contribution must be credited only to a non-Roth account. A US Treasury contribution is made to a retirement plan only if the plan will accept these contributions, and segregate a separate subaccount for, appropriately credit, and tax-report regarding these Treasury contributions. The US Treasury’s contribution is treated as the participant’s elective-deferral or individual’s IRA contribution, not as a matching or nonelective contribution. But the Treasury’s contribution is not available for a hardship or unforeseeable-emergency distribution. Internal Revenue Code (26 U.S.C.) § 6433, 31 U.S.C. § 1324(b)(2). For an employment-based plan: Is there any big recordkeeper that might be unwilling to provide services to receive and distinctly recordkeep these contributions? Or will all of them fall in?

The plan’s administrator might want its lawyer’s advice about whether the plan might be willing to make a direct payment to the participant’s surviving spouse if the duly appointed and properly serving personal representative of the decedent’s estate signs and delivers a written release that the plan’s payment to the surviving spouse is a satisfaction of the plan’s and all plan fiduciaries’ obligations with promises to defend, exonerate, and indemnify all plan fiduciaries and service providers against any other claim. (No matter how strong the release, satisfaction, and indemnities, that way still takes on risks. For example, bypassing the decedent’s estate risks at least some risk regarding the decedent’s creditors. But the plan’s administrator, with its lawyer’s advice, might decide the risks are worthwhile in the circumstances.) The plan’s administrator might want its lawyer’s advice about whether it makes legal and practical sense (or doesn’t) to pay nothing until there is a proper claim submitted by the proper distributee. (That way, too, bears risks.) To evaluate the strengths and weaknesses of imaginable risks and opportunities, the plan’s administrator might prefer its lawyer’s careful and thorough reading of the documents governing the plan. Among several points, the administrator might want its lawyer’s advice about whether a court would defer to the administrator’s incorrect but plausible interpretation about what the plan provides. If a lawyering expense would be paid from or reimbursed by the plan’s assets (whether allocated among all individuals’ accounts or only to the participant/distributee’s account), the administrator might have a responsibility to incur no more than a prudent expense. Yet, a plan’s administrator might design claims procedures and responses to challenging claims that can be applied efficiently and with reasoned logical consistency and uniformity. Consider a fiduciary’s duty of impartiality. This is not advice to anyone.

I assume your question is about an employer that made what it says was a mistaken contribution. For a multiemployer plan, the plan sponsor is, typically, the plan trust’s joint board of trustees. ERISA § 3(16)(B)(iii), 29 U.S.C. § 1002(16)(B)(iii). Likewise, a multiemployer plan’s administrator is, typically, the joint board of trustees. ERISA § 3(16)(A)(ii), 29 U.S.C. § 1002(16)(A)(ii). Here’s the statute’s text: “(ii) if such contribution or payment is made by an employer to a multiemployer plan by a mistake of fact or law (. . .), paragraph (1) [noninurement and exclusive purpose] shall not prohibit the return of such contribution or payment to the employer within 6 months after the plan administrator determines that the contribution was made by such a mistake.” ERISA § 403(c)(2)(A)(ii), 29 U.S.C. § 1103(c)(2)(A)(ii) (emphasis added), https://www.govinfo.gov/content/pkg/USCODE-2023-title29/html/USCODE-2023-title29-chap18-subchapI-subtitleB-part4-sec1103.htm. Consider that a multiemployer plan’s joint board of trustees might not determine that what an employer asserts was an ERISA § 403(c)(2)(A)(ii) mistake of fact or law was such a mistake. Further, a joint board might find that, even if there was such a mistake, the employer is for other reasons not entitled to a return of all or some of the mistaken contributions. Yet, courts have sometimes atextually interpreted or applied the statute. See, for example: Teamsters Local 639-Employers Health Trust v. Cassidy Trucking, Inc., 646 F.2d 865, 2 Empl. Benefits Cas. (BL) 1217 (4th Cir. Apr. 22, 1981) (analyzing legislative history and common law about what is a mistake of fact for ERISA § 403(c), and what remedy applies) (treating as not obviously wrong the trial court’s finding that the employer’s belief that a contract existed could be a mistake of fact) (ignoring that a multiemployer plan’s administrator determines whether a contribution is mistaken) (ignoring the period for a return of a mistaken contribution to a multiemployer plan) (that the statute permits a return of a contribution made under a mistake of fact does not by itself mean the payer is entitled to restitution). Ethridge v. Masonry Contractors, Inc., 536 F. Supp. 365, 368 (N.D. Ga. Mar. 25, 1982) (interpreting ERISA § 403(c)(2)(A)(ii) to permit a return of an overpayment without the plan’s administrator’s determination that the contribution was made by mistake of law or fact, or impliedly countermanding, with a de novo rather than deferential review, the administrator’s finding) (interpreting the six-month limit to apply from an employer’s discovery of the mistake, rather than from when the contribution was made or when the plan’s administrator determined the contribution was made under a mistake of law or fact). This is not advice to anyone.

Brian Gilmore, so we might learn a little more from your generous teaching: If an employer has some choices about corrections and tax-information reporting, is there a duty of consistency? Must an employer treat all similarly situated participants the same way?

ERISA § 404(a)(1)(D)’s “insofar” phrase calls a plan’s administrator (and other fiduciaries) to ignore a document provision that’s inconsistent with an ERISA title I command. Instead, one administers the plan as though it provides what ERISA’s title I commands. ERISA § 202 begins with “No pension plan may require . . . .” ERISA § 203 begins with “Each pension plan shall provide . . . .” For a plan governed by part 2 of subtitle B of title I of ERISA, for minimum participation or nonforfeitability an administrator would determine a break in service as no more restrictive than ERISA § 203(b)(3)(A) permits—that is, a year “during which the participant has not completed more than 500 hours of service.” This is not advice to anyone.

Is the plan a governmental plan? A church plan that has not elected to be ERISA-governed? A plan that covers no employee? Or an ERISA-governed plan?

Your story sets up a reminder: An employer evaluating a pooled-employer plan or other multiple-employer plan might read carefully (or engage its lawyer to read) all documents governing the plan and its trust, and related arrangements, to evaluate a participating employer’s information rights and exit rights (or lack of exits). Even if some might interpret ERISA’s title I to set up some implied information rights for a participating employer, an employer that uses a PEP or other MEP might find it impractical to enforce those implied rights. Further, asserting those rights could harm an employer’s personal interest in avoiding liability for its own fiduciary breaches. This is not advice to anyone.

Beyond Artie M’s suggested cautions: Under the Treasury department’s rule, the exception from the safe-harbor regime’s full-year condition is “[t]he plan termination is in connection with a transaction described in [Internal Revenue Code §] 410(b)(6)(C)[.]” 26 C.F.R. § 1.401(k)-3(e)(4)(ii) https://www.ecfr.gov/current/title-26/part-1/section-1.401(k)-3#p-1.401(k)-3(e)(4)(ii). Ending the target’s plan sooner than the § 410(b)(6)(C) transaction requires might call into question whether the termination is sufficiently “in connection with” that transaction. In my experience, it’s typical for employee-benefit plans’ changes to be conditioned on the closing, and aligned in time with the business transactions’ effective time. This is not advice to anyone.

As always, much turns on the plan’s definition of benefit compensation. Does the plan’s definition include the employer’s payment for health insurance? If so, is compensation $116,293.22 [$99,999.90 + $16,293.32]? The difference between the $20,150 § 401(k) non-Roth elective deferral and a $16,293.32 income recognition for the employer’s payment for health insurance seems to be the $3,856.68 difference between box 3&5 wages [$99,999.90] and box 1 Federal income tax wages [$96,143.22].

khn, assuming your description of the deal agreement, your client might not know what set or series of retirement plan transactions would satisfy the business deal until there is communication involving (at least) the seller and the buyer, perhaps each plan’s administrator (if either plan’s administrator is distinct from, respectively, the seller or the buyer), and maybe each’s lawyers and accountants. For example, a spin-off, even if otherwise a nice idea, might be a nonstarter if the acquirer’s plan won’t accept it. If the deal teams didn’t communicate about these points more fully and sooner, that’s disappointing. Deal work often happens that way. Even if it’s now only days until a closing, your client might want to surface some remaining retirement plan questions.