Peter Gulia

Concur with QDROphile that an ESOP involves conflicting interests at every turn. Concur with ESOP Guy’s observation about considering a letter of intent and any other express or implied agreement for not revealing confidential information. Concur with ESOP Guy’s observation about considering a fiduciary’s duty of communication. Also, impartiality. Consider that some employees can be helped by disclosure, and some employees can be harmed by disclosure. Here are a few of many further questions one might suggest to help the fiduciaries get lawyers’, accountants’, appraisers’, and others’ advice and think through some of the many conflicting duties: When is the next day a participant can do (or choose not to do) something? Is that day before, on, or after the next regularly scheduled valuation date? Might there be a need for an earlier valuation? If the dealmaking with the might-be acquirer proceeds to a due-diligence phase, how many of the target’s employees would be involved in collecting information to furnish to those executives who communicate with the acquirer? Is it feasible to restrict the target’s communications from and to the might-be acquirer to only the CEO, CFO, and CLO? Might disclosing the acquirer’s interest harm the company’s value because some executives and some talented employees might leave before the acquirer delivers an offer and before the target gets stay agreements? Might not disclosing the might-be acquirer’s interest harm the company’s value because some executives and some talented employees suspect an acquisition and, not knowing the acquirer’s identity, might leave quickly? How much or how little protection does the company get from nondisclosure, nonsolicit, noncompete, and garden-leave agreements. Recognizing conflicts between the company’s interests and the ESOP’s interests, should those people who will negotiate or communicate with the acquirer resign, recuse, or be removed from the plan fiduciary committee? Recognizing conflicts between a human’s interests, including her interests regarding future employments or engagements and compensation, and the ESOP’s interests, should those people who are so conflicted resign, recuse, or be removed from the plan fiduciary committee? Does a lawyer or accountant who regularly advises the company have a personal-interest conflict regarding the circumstances of a might-be acquisition? Does a lawyer or accountant who regularly advises the ESOP have a personal-interest conflict regarding the circumstances of a might-be acquisition? If the ESOP owns the company, is it feasible, to distinguish between what otherwise might be settlor decisions (including those EBECatty invites) and fiduciary decisions. Every decision deals with the plan’s asset and management of it. This is not advice to anyone.

That the plan is discontinued or even ended, or that the employer dissolves, is not an excuse from ERISA § 103’s command for an audit of the plan’s financial statements. Consider whether a plan-accounting year ends when the plan pays or delivers the plan’s final distributions. For each plan, consider whether the employer or the plan needs a reserve of amounts to pay the independent qualified public accountant’s fee.

Even if one assumes a member of a cooperative might be a highly-compensated individual, an employer might ask its service provider what comparisons the software applies when all employees are highly-compensated and none is other than highly-compensated. This is not advice to anyone.

Is the plan a defined-benefit pension plan or an individual-account retirement plan?

Internal Revenue Code § 7503 refers to “the last day prescribed under authority of the internal revenue laws for performing any act[.]” There are many possible interpretations of the statute and the Treasury’s rule. See 26 C.F.R. § 301.7503-1 https://www.ecfr.gov/current/title-26/chapter-I/subchapter-F/part-301/subpart-ECFR94f366dd75fae71/subject-group-ECFRd06c5ed639eb8dd/section-301.7503-1. There was a BenefitsLink discussion about this in July 2022. https://benefitslink.com/boards/topic/69382-effective-date-of-cycle-3-restatement-1-day-after-deadline/ If I may summarize: No one expressed a conclusion about whether the holidays rule applies to signing a document amending a retirement plan. Practitioners suggested getting one’s client to sign before the specified date, without a Saturday-Sunday tolerance. I mentioned the holidays statute as a face-saving argument an advocate might research and might consider presenting. That the IRS might be called to explain or consider an interpretation sometimes helps avoid an issue or negotiate a closing agreement. Perhaps David Peckham’s client won’t need to argue a Saturday-Sunday tolerance if no one asserts that the 2022 amendment was not timely.

The Internal Revenue Code’s regimes and remedial-amendment periods about whether a plan is tax-qualified assume “the” written plan. ERISA § 404(a)(1)(D) recognizes that a plan’s provisions might be stated by “documents and instruments[.]” Imagine the plan’s sponsor/administrator sends its third-party administrator or recordkeeper an email to inform the service provider that the sponsor has changed the plan’s involuntary-distribution threshold from $5,000 to $7,000, and has changed the plan so a participant loan from a participant’s account less than the plan’s involuntary-distribution threshold does not require a qualified election with the spouse’s consent. Imagine the email’s sender is someone who has authority to amend the plan. Consider whether that email might be a “document[] . . . governing the plan” within ERISA § 404(a)(1)(D)’s meaning. This is not advice to anyone.

I’ve learned that some practitioners worry that some IRS examiners won’t follow the law. But if the IRS (including raising an issue to an examiner’s supervisor, and if that doesn’t work getting Chief Counsel advice) follows the law, the IRS would not assert that a plan is tax-disqualified because the plan allowed a distribution when the plan’s hardship standard was not met unless the evidence shows “the plan administrator ha[d] actual knowledge to the contrary of the employee’s certification[.]” Internal Revenue Code § 401(k)(14)(C) https://uscode.house.gov/view.xhtml?req=(title:26%20section:401%20edition:prelim)%20OR%20(granuleid:USC-prelim-title26-section401)&f=treesort&edition=prelim&num=0&jumpTo=true. If a plan’s sponsor or administrator adopts a self-certification claims procedure, one might design the form and procedure not to ask for any unnecessary information. And if one receives extra information, to act on it. I’m aware that plan sponsors and practitioners have a diversity of views about whether to provide self-certification for hardship claims.

Yes, self-certification removes an employer/administrator from judging a participant’s circumstances. That’s why I like it. But I suggest also repealing—for § 401(k), § 403(b), and governmental § 457(b)—the tax law restraints against a distribution before severance-from-employment or age 59½. Yet, not everything that happens in life calls for an exception from the § 72(t) tax on an early distribution. But I didn’t overcome, or even attempt, the rigors of being elected to Congress.

Consider that some lawyers who work with employee-benefits law or employment law advise an employer/administrator that it can be unwise and harmful to receive too much information about an employee. While outlooks vary, understanding why and how that can matter might influence an employer/administrator’s design of a claims procedure, and might influence whether one tries to help an employee (for example, by suggesting ways to improve her claim, or inviting one to reconsider a claim), or eschews getting involved. Before the 1986 Act, the extra income tax on a before-59½ payout was the regulator of whether the participant needs or wants a payout. Instead of making an employer/administrator or its service provider a judge of the participant’s circumstances, perhaps some might ask Congress for the simpler ways.

Of Internal Revenue Code § 414A and SECURE 2022 § 101, many interpretations are possible. Miscellaneous Changes Under the SECURE 2.0 Act of 2022, Notice 2024-2, 2024–2 I.R.B. 316 (Jan. 8, 2024), at its part II.A, describes some partial interpretations; but none that addresses your question. https://www.irs.gov/pub/irs-irbs/irb24-02.pdf While an employer might like C.B. Zeller’s reasoning, here’s the practical question: How much confidence does your client need or want? How much lack of confidence would your client tolerate? This is not advice to anyone.

If the plan does not yet provide that claims for a hardship distribution are decided by the participant’s self-certification: That the worker missed a student loan repayment suggests she might have used money she budgeted for that purpose on something else. If so, the something else might fit a hardship condition. This is not advice to anyone.

To simplify, let’s assume the Labor department’s rule, Definition of “plan assets”—participant contributions, is a legislative rule that sets a binding interpretation of the statute. Yet, that rule isn’t a bright-line rule. Consider the rule’s general rule: “[T]he assets of the plan include amounts . . . that a participant has withheld from his wages by an employer, for contribution or repayment of a participant loan to the plan, as of the earliest date on which such contributions or repayments can reasonably be segregated from the employer's general assets.” 29 C.F.R. § 2510.3-102(a)(1). [Not my formatting.] The subparagraph about the seventh business day is a safe-harbor way to show one met the general rule. Under this safe harbor, an amount so “deposited with [the] plan”—itself an ambiguous phrase—is “deemed to be contributed or repaid to such plan on the earliest date on which such contributions or participant loan repayments can reasonably be segregated from the employer’s general assets.” 29 C.F.R. § 2510.3-102(a)(2)(i). That safe harbor is not the only way to show adherence to the general rule. 29 C.F.R. § 2510.3-102(a)(2)(ii). Even for an amount not yet credited to participants’ individual accounts, or even not yet collected in a bank account of the plan’s trustee or its custodian, a fiduciary might loyally and prudently act in a way that treats the amount as plan assets segregated from the employer’s assets. The plan’s administrator might want advice about whether, considering the particular facts and surrounding circumstances, the participant-contribution amount was segregated from the employer’s assets as soon as that amount could reasonably be segregated from the employer's assets. That an employer usually pays over participant-contribution amounts promptly and encountered a difficulty when adapting to a newly engaged service provider might suggest why what the employer did to segregate the participant-contribution amount from the employer’s assets was reasonable in the circumstances. 29 C.F.R. § 2510.3-102 https://www.ecfr.gov/current/title-29/section-2510.3-102. The Form 550 Part V line 10a question is: “Was there a failure to transmit to the plan any participant contributions within the time period described in 29 CFR 2510.3-102?” If a plan’s administrator decides to answer No on that question, it might make a contemporaneous record of its reasoning, to help show a sincere and prudent effort to report truthfully. This is not advice to anyone.

For reasons other than tax law, a plan’s fiduciary might consider treating Susie no less favorably (yet also no more favorably) than other similarly situated participants. On your description, that might mean estimating investment changes as if Susie’s 5% contribution had been made on January 15 and as if contributions stopped following a § 401(a)(17) cutoff in late October. Likewise, for someone affected by a § 415 cutoff. If the employer/administrator has a good relationship with its recordkeeper, one might get the recordkeeper to run the as-if calculations. Some can do it as a routine function.

That’s why we like citations.

One imagines Nationwide’s 408b-2 disclosures to the employment-based plan’s responsible plan fiduciary described Nationwide’s float compensation. Even when a service provider pays all claims, taxes, and other expenses daily, float can be meaningful money.

For other participants who had a bonus (and had compensation smaller enough that counting the bonus would not exceed the § 401(a)(17) limit): Did the employer apply a participant’s specified percentage, whether for an elective deferral or an employee contribution, to the payroll that was or included the bonus? Or did the employer uniformly not take participant contributions from the bonus pay?

Employee Stock Ownership Plan Answer Book. The authors, with experience (Ballard Spahr and Vedder Price) setting up ESOPs, organize this pleasantly trim book, with the information easy to find in Q&A format. Most law firms buy this treatise in internet format, but Wolters Kluwer publishes also the hardbound book. You might like the internet version, with hyperlinks to the cited ERISA and Internal Revenue Code sections, regulations, agency interpretations, and other sources. While you wouldn't want those details for your first read, the hyperlinking (and functions for lifting and pasting citations) is handy when you're working on a task for a client. https://law-store.wolterskluwer.com/s/product/employee-stock-ownership-plan-esop-answer-book-3-mo-subvitallaw-3r/01t0f00000J3FC0AAN

Might a could-be defendant prefer a might-be plaintiff’s delay? Might a delay help time-bar some claims under a statute of limitations, statute of repose, or even laches?

An important starting point for an ERISA-governed plan’s administrator or other fiduciary is: “[A] fiduciary shall discharge his duties with respect to a plan . . . in accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with the provisions of this title [I] and title IV.” ERISA § 404(a)(1)(D), 29 U.S.C. § 1104(a)(1)(D). A plan’s governing document might grant the plan’s administrator some discretionary authority to construe or interpret ambiguities in the plan’s text. But that is not authority to deviate from what the plan provides. Further, if a governing document’s grant of discretionary authority to interpret the plan is, ostensibly, so wide that it would allow an administrator other fiduciary to ignore or vary a plan provision, a fiduciary is duty-bound not to apply that portion of the discretion that would be inconsistent with ERISA’s command: “Every employee benefit plan shall be established and maintained pursuant to a written instrument.” ERISA § 402(a)(1), 29 U.S.C. § 1102(a)(1). This is not advice to anyone.

If you use a service provider’s materials, apply your own sense to a classification of a provision as mandatory or optional. Some service providers classify a SECURE 2019 or SECURE 2022 tax law change as “mandatory” for the business to provide services most customers likely call for, or that are essential to how the provider’s systems operate. For example, about the tax law change that permits a plan to provide for a § 401(a)(9) required beginning date an applicable age of 73 or 75, at least one big recordkeeper classified this as mandatory. But a plan may provide, without failing to meet § 401(a)(9), an applicable age of 72, 71, 70½, 70, or even younger (if it doesn’t provide an involuntary distribution before normal retirement age). So, I might classify the change to 73/75 as optional. By contrast, a provision about whether some beneficiaries must complete a distribution within ten years from the participant’s death might, depending on the plan’s other provisions, be needed to tax-qualify. Also, some of the service providers’ outlines don’t show completely or conspicuously an exception or variation for a governmental plan. If your work is about a governmental plan, consider that the State’s laws might restrain which provisions must, may, or must not be included or omitted. Those laws might include an enabling statute that grants, and limits, powers to establish and maintain a § 403(b) or other retirement plan. And it might include laws about collective bargaining or discussion with associations of employees and retirees. Those laws might make required or obligated a provision that under Federal tax law is optional. Further, consider that some provisions might be stated by an annuity contract or a custodial account, rather than in “the” plan document.

Does anything preclude a PEP or other MEP from providing that assets and obligations attributable to a no-longer-participating employer remain with the plan?

For governmental plans, a top lawyer is Carol Calhoun, a lead author of Governmental Plans Answer Book. https://www.venable.com/professionals/c/carol-v-calhoun

If anyone might help, consider Connecticut attorney Linda Ursin. Among other reasons, her website mentions some opportunity to change a property settlement if a party can show fraud. https://www.ursinlaw.com/modification-of-property-settlement/ This is not advice to anyone.

austin3515’s query and RatherBeGolfing’s information suggest yet another awkwardness about administering a plan (on this point, starting as soon as January 1, 2025) according to one’s assumptions about the text of a document to be made years later. Imagine austin3515’s client in 2025 and 2026 allows age 50 catch-up, but does not allow age 60-63 catch-up. Imagine the plan sponsor later finds that, in the IRS-preapproved documents set, the adoption agreement form’s only choice for catch-ups is both or neither. Imagine it’s then too late and impractical for austin3515 and the client to switch to a different vendor’s IRS-preapproved documents that allow a user to specify age 50 catch-up without age 60-63 catch-up. Imagine the plan sponsor signs document that provide both kinds of catch-ups. Might someone say the plan’s administrator in 2025 and 2026 failed to administer the plan according to the remedially-amended written plan? Or might someone say the plan’s operation was within the administrator’s reasonable assumption about what the remedially-amended plan would provide? Or might someone say the provision for allowing both kinds of catch-ups is not retroactive? How many legal fictions does the remedial-amendment regime call for?

Many practitioners have advised there is little need for a plan to provide nonelective or matching contributions as Roth contributions if the plan lets a participant direct an in-plan rollover to Roth. And many dislike some complexities of Roth-ing nonelective or matching contributions. Yet, there are employers that, having heard those explanations, still want to provide the new Roth nonelective or matching contribution. The outcomes might not be exactly the same because of timing and investment markets’ differences. Those participants who direct an in-plan rollover to Roth might do it only once a year. The new feature lets a contribution be Roth-classified when the contribution is allocated. If the employer’s nonelective or matching contribution is allocated more often than once a year, the timing differences might matter. And even if timing and investment differences are meaningless, some employers feel strongly that participants want the convenience of Roth-ing from payroll, not needing to remember to instruct periodic rollovers. One lawyer advised a plan sponsor not to adopt Roth contributions (other than rollover contributions) beyond the currently provided elective deferrals until: The recordkeeper makes a service agreement obligation to credit the contributions according to what would become the plan’s provisions. The recordkeeper delivers to the employer and to the plan’s administrator an independent certified public accountant’s report explaining the recordkeeper’s procedures and controls for crediting those contributions. The employer has designed and tested its procedures and controls for allocating the nonelective and matching contributions between non-Roth and Roth contributions. The employer has designed and tested its procedures and controls for communicating to the recordkeeper the instructions for non-Roth and Roth nonelective and matching contributions. This is not advice to anyone.