Peter Gulia

Here’s IRS Publication 538 with some explanations about Accounting Periods. https://www.irs.gov/pub/irs-pdf/p538.pdf Example: Although Jack is a W-2 employee with no business interests, he follows his wife’s taxable year so he can fit their joint income tax returns. Jill owns a farm and its businesses. Based on when Jill’s businesses harvest and sell the crops, the businesses and Jill end their accounting years as at October 31. Example: Mary is an employee of a charity, and participates in its § 403(b) plan. Yet, almost all of the income that supports Mary’s life comes from a trust her great-grandfather created. That trust’s accounting year ends with February 28 or 29. Mary chooses to align her taxable year with that of the trust that is her primary source of income. Example: Charlie is the chief executive of a business that ends its accounting year with June 30, issues its financial statements by late July, and pays Charlie’s bonus in early August. Charlie established August 31 as the end of her tax-accounting year.

The § 402(g) elective-deferral limit, and the § 414(v) age-based catch-ups relate to the INDIVIDUAL’s tax year, which can be a year other than the calendar year. Under Federal income tax law, a taxpayer computes one’s taxable income “on the basis of the taxpayer’s taxable year.” I.R.C. § 441(a). Ordinarily, a taxable year is a yearly accounting period. I.R.C. § 441(b). Most (but not all) people use a calendar year. See I.R.C. § 441(c). A “calendar year” is “a period of 12 months ending on December 31.” I.R.C. § 441(d). Further, the Internal Revenue Code’s general definitions include “taxable year” and “fiscal year”: “The term ‘taxable year’ means the calendar year, or the fiscal year [defined in the next paragraph] ending during such calendar year, upon the basis of which the taxable income is computed under subtitle A. ‘Taxable year’ means, in the case of a return made for a fractional part of a year under the provisions of subtitle A or under regulations prescribed by the Secretary, the period for which such return is made.” I.R.C. § 7701(a)(23). “The term ‘fiscal year’ means an accounting period of 12 months ending on the last day of any month other than December.” I.R.C. § 7701(a)(24). For § 402(g), “the elective deferrals of any individual for any taxable year shall be included in such individual’s gross income to the extent the amount of such deferrals for the taxable year exceeds the applicable dollar amount.” I.R.C. § 402(g)(1)(A). For an age-based catch-up deferral amount that might be permitted because the participant is age 50 or older, the Internal Revenue Code defines an “eligible participant” as “a participant in a plan who would attain age 50 by the end of the taxable year[.]” I.R.C. § 414(v)(5)(A). A Treasury rule confirms this: “An employee is a catch-up eligible participant for a taxable year if [t]he employee’s 50th or higher birthday would occur before the end of the employee’s taxable year.” 26 C.F.R. § 1.414(v)-1(g)(3)(ii). For a greater age-based catch-up deferral amount that might be permitted because the participant is age 60, 61, 62, or 63, the Internal Revenue Code refers to “an eligible participant who would attain age 60 but would not attain age 64 before the close of the taxable year[.]”I.R.C. § 414(v)(2)(B)(i). While unusual, I’ve seen situations in which an individual’s taxable year is not the calendar year. This is not advice to anyone.

Does anything in this health plan’s governing documents make an otherwise eligible employee not covered because she is a minor or has not attained a specified age? BenefitsLink neighbors often say, Read The Fabulous Document. Because ERISA § 404(a)(1)(D) calls a fiduciary to administer an employee-benefit plan according to the plan’s governing documents, RTFD can be a useful work method for a group health plan too, perhaps even more so than for a retirement plan. This is not advice to anyone.

Consider that it might not matter much whether the Biden administration’s or the Trump I (or Trump II) administration’s investment-advice fiduciary rule is (or isn’t) in effect because, following the Supreme Court’s Loper Bright Enterprises opinion, a Federal court decides the court’s interpretation of ERISA § 3(21)(A)(ii) or Internal Revenue Code § 4975(e)(3)(B) without deference to an executive agency’s interpretation.

An employment-based retirement plan might have provisions about what the plan provides as the plan’s distribution. A plan might provide, after normal retirement age, an involuntary distribution larger than an amount needed to meet Internal Revenue Code § 401(a)(9). AZinsser posted a query in BenefitsLink’s forum for Individual Retirement Accounts. For IRAs, the individual is responsible for determining the individual’s minimum. Federal income tax law permits an individual to take more than she needs to meet her § 401(a)(9) minimum. Yet, an individual might prefer to take no more than is needed to meet her § 401(a)(9) minimum.

A caution: Employers, retirement plans’ administrators, and their service providers (and their software) tend to presume a participant’s tax year is the calendar year. And that might be right for about 99.99% of a plan’s participants. But one might want an off-system override for a participant who has a different tax year. This is not advice to anyone.

The rule for determining an individual-account (defined-contribution) plan’s § 401(a)(9) “account balance” is 26 C.F.R. § 1.401(a)(9)-5(b) https://www.ecfr.gov/current/title-26/part-1/section-1.401(a)(9)-5#p-1.401(a)(9)-5(b). 26 C.F.R. § 1.408-8(a)(1) applies that rule for an IRA. 26 C.F.R. § 1.401(a)(9)-5(b) mentions: “The account balance is increased by the amount of any contributions or forfeitures allocated to the account balance as of dates in the valuation calendar year after the valuation date.” “The account balance is decreased by distributions made in the valuation calendar year after the valuation date.” I see no mention of counting a dividend receivable or interest receivable. Other BenefitsLink neighbors might describe IRA custodians’ (banks’, trust companies’, and securities broker-dealers’) customary practices. This is not advice to anyone.

A plan’s administrator may volunteer to submit information to the Labor department’s database. The Announcement states “the Department’s [nonrule] view [that] the reasonable cost of voluntarily reporting the data under the revised [Information Collection Request] is a permissible use of plan assets[.]” But nothing protects a plan’s fiduciary from a participant’s, beneficiary’s, or alternate payee’s claim, or the plan’s claim, that an expense for voluntarily furnishing information is not a proper plan-administration expense.

Other BenefitsLink neighbors, especially austin3515, have described circumstances in which applying a § 414A automatic-contribution arrangement might be unhappy for the workforce and unwelcome for the employer. Even facing the eventual, those plan sponsors might have wanted to delay as long as allowed. Also, the idea of adopting an automatic-contribution arrangement before § 414A requires it because § 414A soon will require it might be inapt for some employers with few employees. A plan’s sponsor might not yet know or even anticipate “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.” Some employers that established or establish a § 401(k) arrangement after December 28, 2022 might never need to meet § 414A(a)’s condition.

If the plan provides a nonelective contribution determined more often than yearly, consider also how and when within or regarding a year the plan’s provisions (and an employer’s and a plan administrator’s practical operations) apply a § 401(a)(17) limit. For example, if one seeks to apply quarter-yearly 2025’s $350,000 limit to that year’s wages of $500,000: Some might determine the 5% nonelective contributions as $4,375 for each of the four quarter-years [($350,000 / 4) = $87,500 x 5% = $4,375]. Others might determine: 2025q1 $6,250 [$125,000 x 5%] 2025q2 $6,250 [$125,000 x 5%] 2025q3 $5,000 [$100,000 x 5%] 2025q4 $0 [$0 x 5%] sum $17,500 (Or if a nonelective contribution is determined monthly, the nonelective contribution might be full for the first eight months, partial for September, and none for the last three months.) 26 C.F.R. § 1.401(a)(17)-1(b)(3)(iii)(B) https://www.ecfr.gov/current/title-26/part-1/section-1.401(a)(17)-1#p-1.401(a)(17)-1(b)(3)(iii)(B). I merely describe what some employers do, perhaps unwisely; not what’s correct or incorrect. And as always, RTFD—Read The Fabulous Document (even if the document is gibberish). In my experience, a charity’s executive generally prefers not applying the § 401(a)(17) limit until that much compensation has been paid. That’s especially so if one recognizes any possibility that her employment might end, whether by the executive’s doing or the charity’s doing, before the year ends. This is not advice to anyone.

Again, not suggesting any view of the merits or weaknesses: The most recent docket entry [#110, Nov. 13, 2024] shows the United States’ reply brief. That suggests some possibility the appeals court might schedule an oral argument in 2025. A Fifth Circuit decision might be a precedent that might affect an employer that resides in Louisiana, Mississippi, or Texas. https://www.uscourts.gov/sites/default/files/u.s._federal_courts_circuit_map_1.pdf I don’t here state any prediction.

The Labor department’s rule states: “A loan will be considered to bear a reasonable rate of interest if [the] loan provides the plan with a return commensurate with the interest rates charged by persons in the business of lending money for loans which would be made under similar circumstances.” 29 C.F.R. § 2550.408b-1(e) https://www.ecfr.gov/current/title-29/part-2550/section-2550.408b-1#p-2550.408b-1(e). And that might be a nonexclusive way to meet the statutory prohibited-transaction exemption’s condition that a participant loan “[b]ear a reasonable rate of interest[.]” 29 C.F.R. § 2550.408b-1(a)(1)(iv) https://www.ecfr.gov/current/title-29/part-2550/section-2550.408b-1#p-2550.408b-1(a)(1)(iv). But even if ERISA § 408(b)(1) tolerates an adjustable-rate participant loan, is the administrator’s service provider capable of accounting for it?

To help us with this, Lois Baker assembled from BenefitsLink news a list of 22 rules published during 2024. And I add one from FinCEN. Four rules that refer to the Employee Retirement Income Security Act of 1974, the Internal Revenue Code of 1986, or the Investment Advisers Act of 1940 have an applicability date later than January 20, 2025: A Financial Crimes Enforcement Network rule, Anti-Money Laundering/Countering the Financing of Terrorism Program and Suspicious Activity Report Filing Requirements for Registered Investment Advisers and Exempt Reporting Advisers, has a compliance date of January 1, 2026. The Trump administration might direct a review of the rulemaking. And FinCEN’s rule relates to a rulemaking proposed by the Securities and Exchange Commission. We expect changes in the SEC’s chairperson and a membership in early 2025. The rule for tax Withholding on Certain Distributions Under Section 3405(a) and (b) applies for payments and distributions made on or after January 1, 2026. The Trump administration might direct a review of the rulemaking. Some parts of the Requirements Related to the Mental Health Parity and Addiction Equity Act rule have an applicability date of the first day of the first plan year that begins on or after January 1, 2026. The Trump administration might direct a review of those parts. One section, 45 C.F.R. § 164.520, of the HIPAA Privacy Rule To Support Reproductive Health Care Privacy rule has a compliance date of February 16, 2026. The Trump administration might direct a review of that section. For a rule challenged in a Federal court, the United States might attempt to confess error, withdraw an appeal, or otherwise decline to defend a rule against the plaintiffs’ challenge. (Even when opposing litigants are united about the correct disposition of a case, a Federal court might not accept a confession of error, or other litigation step.) One might imagine changes in the offices of Attorney General, Solicitor General, and Secretary of Labor leading to an end of the United States’ defense of the Labor department’s Retirement Security Rule: Definition of an Investment Advice Fiduciary and the amendments to related prohibited-transaction exemptions. (BenefitsLink readers might recall that the United States did not ask the Supreme Court to review the Fifth Circuit’s judgment to vacate the 2016 investment-advice fiduciary rule.)

Beyond your inquiry into what might be enough so a plan’s governing documents are treated as tax-qualified in form: If the business transaction is a merger of the employer organization into another business organization, rather than a buyer’s purchase of a seller’s assets: The employer should want its lawyers’ advice about what corrections would make truthful the employer’s representations, warranties, covenants, and other promises stated by the merger agreement. That might require something more than what makes the plan tax-qualified in form. This is not advice to anyone.

It would be a somewhat productive target only if, among other conditions, the IRS could build software to use the data that would find likely examination targets.

Paul I, thank you for your always thoughtful observation. Yet, you might be describing service practices of a quality third-party administrator or focused recordkeeper, but not necessarily the service of some big recordkeepers, perhaps especially some that serve tens of thousands of plans. Some recordkeepers might not look up a plan’s Form 5500 information. That might be so for an automated email assembled using software that might not read the Form 5500 data. Also, isn’t it possible that a big recordkeeper’s system record of a plan’s provisions (including the plan sponsor’s confirmations of provisions not yet stated by “the” plan document) shows that the plan in 2023 and 2024 has no automatic-contribution arrangement, yet a relevant question is whether the plan needs or wants to change to an automatic-contribution arrangement beginning with 2025 (when I.R.C. § 414A first applies as a tax-qualification condition)? I’m guessing (i) there are some § 401(k) arrangements first established after 2022; (ii) some of those do not now provide an automatic-contribution arrangement; and (iii) some, but not all, of those might need, beginning with 2025, an automatic-contribution arrangement to meet the soon-applicable tax-qualification condition of Internal Revenue Code § 414A. Or is my lack of recent experience with services for micro plans causing me to miss something that makes my question not really a question?

Based on your description, one guesses the employer is a § 501(c)(3) charitable organization. And we assume the employer considers using the employer’s, not the plan’s, money. Beyond considering whether the incentive might violate an ERISA command, breach a fiduciary responsibility, or break a tax-qualification condition, the employer might consider whether the incentive would be an appropriate use of the charity’s resources. Or, an expense of about $1,500 might be so trivial than an expense for finding correct answers might be disproportionate to the risks of a wrong answer.

For many SECURE 2019 and SECURE 2022 tax law points, recordkeepers set presumptions about which provisions a customer plan sponsor ought to want or is deemed, absent an opt-out, to have instructed the recordkeeper to assume in providing the recordkeeper’s services. Imagine a recordkeeper chooses to do this about whether a plan provides or omits an Internal Revenue Code § 414A eligible automatic contribution arrangement. Imagine the recordkeeper practically must set the defaults using only the information the recordkeeper’s computer systems know. Imagine the system doesn’t know whether the employer “has been in existence for less than 3 years.” Imagine the system doesn’t know whether the employer “normally employed more than 10 employees.” If the system doesn’t show that the plan’s § 401(k) arrangement was established before December 29, 2022: Am I right in guessing a recordkeeper in these circumstance would set a default that an eligible automatic contribution arrangement is on (until the plan sponsor tells the recordkeeper it’s off)?

BenefitsLink neighbors, what do you think about this: Should an ERISA-governed pension plan’s (whether defined-benefit or individual-account) administrator make and keep a record of every receipt of a court order? Would an evidence-law presumption of regularity help show that an absence of such a record means there is no order that could impair or impede what the plan otherwise provides?

Of the Labor department’s, the Treasury department’s, and the Pension Benefit Guaranty Corporation’s rules and regulations published as final on or after January 20, 2021, which of them—even with an effective date before 2025—do not become applicable before January 20, 2025? (In a convention used by Republican and Democrat Presidents over the past 44 years, a newly inaugurated President’s chief of staff directs executive agency heads to review rules that, even if final and effective, have not yet become applicable.) Has anyone yet written that list? If not, can you help us crowdsource which rulemakings won’t be applicable before January 20, 2025?

Corey B. Zeller, thank you for the excellent reference. About the awkwardness you remark on, it seems the Treasury recognizes there’s no practical way to provide a distribution right to apply for a time that ended.

Just curious, how does that proposed fee compare to an experienced third-party administrator’s time, whether billable or nonbillable, for evaluating whether a client’s governmental plan can be accurately stated within an IRS-preapproved document? Or, might the time it takes to amend a plan without using any IRS-preapproved document be less than the time it takes to work with an IRS-preapproved document?

Here’s a related point, about nondiscrimination: If a right to claim a kind of distribution is a § 411(d)(6)-protected benefit, is it also “a benefit, right, or feature” that must be “made available in a nondiscriminatory manner”? 26 C.F.R. § 1.401(a)(4)-4 https://www.ecfr.gov/current/title-26/section-1.401(a)(4)-4. Imagine one § 414(b)-(c)-(m)-(n)-(o) employer maintains many § 401(a)-(k) plans, each sponsored and administered by one subsidiary or affiliate (and each with a separate recordkeeper, independently chosen by only the particular plan’s named fiduciary). That’s not a far-fetched situation; I have a client in circumstances for which the § 414 employer’s independently managed subsidiaries maintain a few dozen distinct plans. (None could be a qualified separate line of business.) Many employee-benefits lawyers have clients like that. If some of an employer’s plans provide, for example, a domestic-abuse distribution and other plans omit it, must one test whether what’s available does not discriminate in favor of highly-compensated employees? And if one tests this, how does one correct a failure? If, for a year that ended, a kind of distribution was disproportionately available to highly-compensated employees, is there a correction? I ask these questions only as a curiosity. (The client I described solved nondiscrimination exposures of this kind by other means.)

Just curious, do you like or dislike that the Internal Revenue Service announced two years' nonenforcement?

ERISA § 206(d)(3) [29 U.S.C. § 1056(d)(3)] suggests a plan administrator’s responsibility to do something other than or beyond what the plan’s administration otherwise calls for when the administrator has not received a court order does not begin until the administrator has received a court order. ERISA § 206(d)(3)(H)’s command to separately account for what could become payable to an alternate payee if an order is a qualified order does not begin until the plan receives a domestic-relations order. http://uscode.house.gov/view.xhtml?req=(title:29 section:1056 edition:prelim) OR (granuleid:USC-prelim-title29-section1056)&f=treesort&edition=prelim&num=0&jumpTo=true Yet, in considering what to do in a particular situation, an administrator might read, interpret, and consider carefully, including with the administrator’s lawyers’ advice, the plan’s governing documents, the written QDRO procedures, and alternatives for risk-management steps. Also, one might carefully search the plan’s and maybe the employer’s records to confirm not only that no court order was received, but also that no plan fiduciary communicated anything a could-be alternate payee might allege one relied on. When I advise a plan’s administrator about a beneficiary or domestic-relations situation, I sometimes suggest some protections against the possibility that other actors, including courts, often misapply the law. This is not advice to anyone.