Peter Gulia

The Internal Revenue Service FOIA-released a Notice to state IRS and anticipated Treasury interpretations of Internal Revenue Code § 403(b)(12) and § 410(b), and of ERISA §§ 202-203. Additional Guidance with Respect to Long-Term, Part-Time Employees, Including Guidance Regarding Application of Section 403(b)(12) to Long-Term, Part-Time Employees under Section 403(b) Plans, Notice 2024-73, 2024-41 or 2024-42 I.R.B. --- (to be published Oct. 7 or 15, 2024), available at https://www.irs.gov/pub/irs-drop/n-24-73.pdf. For an ERISA-governed § 403(b) plan, these interpretation distinguish between a 20-hours exclusion and a student exclusion. The IRS suggests: “The student employee exclusion . . . is . . . based on a classification . . . , rather than on service.” Under that interpretation, ERISA § 202(c) does not command a plan to make an I.R.C. § 3121(b)(10) student eligible to elect deferrals. The Notice remarks: “The Secretary of the Treasury has interpretive authority over sections 202 and 203 of ERISA pursuant to Reorganization Plan No. 4 of 1978[.]”

About the situation you describe, I don’t assume anything. Even more so about a plan stated, in whole or in part, using an IRS-preapproved document. Is the § 457(b) plan stated using a form of document Empower furnished? Does the plan intended as a § 401(a) plan state expressly that the matching contribution is conditioned on a deferral under the employer’s § 457(b) plan? If so, is that expression within the base document or adoption-agreement form the IRS issued the opinion letter on? To help the plan sponsor’s lawyer or other practitioner evaluate the provisions’ effect, consider asking Empower to explain why the documents are stated as they are. But recognize that Empower does not give tax or other legal advice, so a practitioner must independently take responsibility. I see your doubt about whether a provision of the employer’s § 457(b) plan so negates a provision of the § 401(a) plan as to call into question whether a user may rely on the IRS’s opinion letter, or whether the § 401(a) plan truly is administered according to that written plan.

If these are governmental plans, which coverage or nondiscrimination rule worries you?

“Is she [potentially] eligible due to being the wife of [an] owner . . . ?” Consider whether the wife and the other spouse now reside, or ever resided, in (or have another jurisdictional tie to) a State that provides or permits a community-property regime. Even if all contacts are with separate-property States, consider whether a contribution to the business—which might be a little startup money, or either spouse’s services—was made under a law that recognizes a tenancy-by-the-entirety. States’ laws vary in whether that tenancy (if recognized at all) can apply to personal, rather than real, property, and about whether and how a tenancy-by-the-entirety might be created. For example, a State’s law might recognize spouses’ ownership of investment and business interests can be a tenancy-by-the-entirety. And a State’s law might treat a creation or acquisition during a marriage as presumed a tenancy-by-the-entirety, unless a related document specifies otherwise. For either of these, a client might want a lawyer’s advice about exactly what property rights the wife has or lacks, and whether the wife’s interest could make her a self-employed individual. Also, one would consider whether tax law calls for determining a status or fact without regard to community-property law. (I have not looked at whether § 401(a), § 415, § 1402, and other Internal Revenue Code provisions include or omit an expression about that point.) If the wife might be an owner and a self-employed individual, consider that allocating self-employment income between the other spouse and the wife might lower a nonelective or matching contribution allocable to the other spouse’s account. This is not advice to anyone.

Sorry if my description was elliptical or confusing. I too think the distribution’s amount is after applying the distribution-processing fee. That the service providers’ systems tax-report a 1099-R to show a gross distribution of $0.00 isn’t my idea. People at recordkeepers and trust companies have told me that’s what their systems do. (And some have said programming a system to omit a 1099-R for a distribution smaller than the threshold on which tax law requires reporting is more trouble than it’s worth.) Also, some welcome having a 1099-R record as convenient evidence for when a former participant gets a Social Security Administration “may” letter. If not a 1099-R, I suggest a plan’s administrator make and keep some record that the distribution was done.

If the question is may an employer restore a participant’s account for a loss that resulted from what might have been a fiduciary’s breach in planning or implementing a plan-administration change, a Treasury rule allows, as not an annual addition, such a restorative payment. “A restorative payment that is allocated to a participant’s account does not give rise to an annual addition for any limitation year. For this purpose, restorative payments are payments made to restore losses to a plan resulting from actions by a fiduciary for which there is reasonable risk of liability for breach of a fiduciary duty under title I of the Employee Retirement Income Security Act of 1974 . . . (ERISA) or under other applicable federal or state law, where plan participants who are similarly situated are treated similarly with respect to the payments. Generally, payments to a defined contribution plan are restorative payments only if the payments are made in order to restore some or all of the plan’s losses due to an action (or a failure to act) that creates a reasonable risk of liability for such a breach of fiduciary duty[.]” 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). An employer need not concede that there was a fiduciary breach; it’s enough to find there is a reasonable risk. The amount added to an account as restoration must not exceed the loss caused by the fiduciary’s arguable breach. This is not advice to anyone.

A plan’s administrator or its service provider would not “zero out” a participant’s account unless (among other conditions): the plan provides an involuntary distribution; the administrator applies that provision regularly; the distribution-processing fee is within the service provider’s reasonable compensation the responsible plan fiduciary, after ERISA § 408(b)(2) disclosures, approved; the distribution-processing is a reasonable charge against the participant’s account; the distribution-processing fee was sufficiently disclosed to the participant; the distribution, even if it pays $0.00, is tax-reported; and the administrator keeps records to prove the distribution was delivered. This is not advice to anyone.

MoJo, thank you for sharing your great information. BenefitsLink neighbors, how about other recordkeepers? Do they inform plan sponsors (even if somewhat less diligently than MoJo describes)? Or are there some that are less helpful in meeting an unadvised plan sponsor’s information needs?

Tax law’s remedial-amendment regime often involves a few years’ lags between when a plan’s administrator implements a provision “in operation” and when the provision is expressed in the plan’s document, often an IRS-preapproved document. For optional changes, recordkeepers seem to get a sponsor/administrator’s instructions—yes or no, this-way or that-way, even if many of these are obtained using implied-assent presumptions. But what about a required change? If there is yet no document for a plan’s sponsor/administrator to sign or accept (and no choice that need be made), does a recordkeeper inform its customer about a plan provision that changes because ERISA commands it or tax law requires it as a condition of the plan’s tax-qualified treatment? Imagine a plan sponsor has no lawyer, no third-party administrator, no adviser; only the recordkeeper. Would such a sponsor/administrator know that it must ignore an exclusion the plan document states (and typically the summary plan description explains) to make eligible for elective deferrals those of its employees who meet the long-term-part-time conditions? What have recordkeepers been doing? Does a recordkeeper inform plan sponsors? If so, how much does a recordkeeper explain about the long-term-part-time provision?

See these BenefitsLink discussions: https://benefitslink.com/boards/topic/71721-secure-20-60-63-catch-ups-optional-or-mandatory/ https://benefitslink.com/boards/topic/70655-increased-catch-up-limit-for-ages-60-63-mandatory/ https://benefitslink.com/boards/topic/72570-60-63-catch-ups-automatically-incorporated-relius-documents/.

And some multiemployer plans suspend a pension if the retiree works for a nonunion employer in work of a kind the same as similar to the work covered by the plan.

As many Philadelphia people say it, I'll keep a good thought for you and your neighbors.

And consider which person has a duty or obligation for wage and income tax reporting, and whether that person will have enough information and sufficient systems.

EBECatty, consider whether to suggest your client not amend the plan until applicable law becomes clearer or tax law’s remedial-amendment period soon will end, whichever happens first. (Alternatively, one might write a provision that the plan’s student exclusion does not apply to the extent that ERISA § 202(c) commands that the exclusion not apply.) Before an amendment, a plan’s administrator might interpret the plan to include (only) the provision ERISA § 202(c) commands. See, for example, Lefkowitz v. Arcadia Trading Co. Ltd. Benefit Pension Plan, 996 F.2d 600, 604 (2d Cir. 1993) (for a defined-benefit pension plan that omitted to provide for a qualified preretirement survivor annuity, the court interpreted the plan as providing a QPSA); Gallagher v. Park West Bank & Tr. Co., 921 F. Supp. 867 (D. Mass. 1996) (for an individual-account retirement plan that omitted to state any qualified preretirement survivor annuity or other survivor provision, the court interpreted the plan as providing a 50% QPSA); see also, by analogy, Laurent v. PricewaterhouseCoopers LLP, 945 F.3d 739 (2d Cir. 2019) (If a plan’s document states a provision contrary to ERISA’s title I, a court may reform the plan.) Remember, ERISA § 404(a)(1)(D)’s charge to administer a plan “in accordance with the documents and instruments governing the plan” applies only “insofar as such documents and instruments are consistent with the provisions of [ERISA] title [I][.]” While one administers the plan by interpolating ERISA § 202(c), that fiduciary would form prudent interpretations about what ERISA § 202(c) commands (or doesn’t). The potential exclusion would apply only for “a student who is enrolled and regularly attending classes at [the] school, college, or university[.]” I.R.C. (26 U.S.C.) § 3121(b)(10). So, if you’re seeking to compare your potential interpretations (several interpretations might be within an administrator’s discretion) to other lawyers’ interpretations, you might prefer them from one who has at least one college or university that employs students (and before 2025 excludes them elective deferrals). This is not advice to anyone.

Two further thoughts: When there is no Federal court decision, Treasury rule (final, temporary, or proposed), IRS guidance, Tax Court opinion, or other authority, “a taxpayer may have substantial authority for a position that is supported only by a well-reasoned construction of the applicable statutory provision.” 26 C.F.R. § 1.6662-4(d)(3)(ii) https://www.ecfr.gov/current/title-26/part-1/section-1.6662-4#p-1.6662-4(d)(3)(ii). If there is no Treasury rule, a substantial-authority position is one a tax return need not disclose, and it gets a reasonable-cause excuse from an understatement penalty. That might matter to a taxpayer, or a tax preparer. Also, it might matter for the professional conduct of a practitioner who practices before the Internal Revenue Service. See 31 C.F.R. §§ 10.33, 10.37. When there is no authority beyond the statute itself, a well-reasoned interpretation of the statute might be a “more likely than not” position. See Financial Accounting Standards Board, Accounting Standards Compilation Topic 740, Income Taxes [compiling Statement No. 109, Accounting for Income Taxes (Feb. 1992), Interpretation No. 48, Accounting for Uncertainty in Income Taxes (June 2006), and many Accounting Standards Updates]. That might matter if the plan has GAAP financial statements, or if the employer has GAAP financial statements and something depends on the plan’s or § 401(k) arrangement’s tax-qualified treatment.

If the document that established the cash-or-deferred arrangement was not made before December 29, 2022, consider also: The statute’s “small businesses” exception refers to ten employees. An employer might have “normally employed more than 10 employees[,]” yet have fewer than ten participants eligible to elect deferrals. About that exception, there is a lag: “[Internal Revenue Code § 414A](a) shall not apply to any qualified cash or deferred arrangement . . . earlier than the date that is [one] year after the close of the first taxable year with respect to which the employer maintaining the plan normally employed more than 10 employees.” I.R.C. (26 U.S.C.) § 414A(c)(4)(B) (emphasis added). If all relevant tax years are calendar years and December 31, 2026 is the close of the first year in which the employer “normally employed” more than ten employees, does § 414A(c)(4)(B) mean that the plan’s eligible automatic-contribution arrangement need not begin until 2028? Or must the EACA begin by December 31, 2027? This is not advice to anyone.

These hyperlinks point to some BenefitsLink discussions about whether an employment classification is or isn’t a proxy for an age or service condition. https://benefitslink.com/boards/topic/71371-ltpt-proposed-regs-issued-by-irs/#comment-334692 https://benefitslink.com/boards/topic/71384-ltpt-interns/ I can’t yet share a reasoning; here’s why: Not all plans are burdened by a command or condition to let a long-term part-time employee defer. Some plans allow every employee to defer. A plan’s administrator might not decide whether a particular employment classification’s exclusion is permissible until it becomes necessary to decide. Whether “[a] condition is not a proxy for imposing an age or service condition that requires” more than what meets the LTPT condition (if the plan’s administrator considers that reasoning) is highly fact-sensitive. Different clients have different appetites for risk or caution. Different clients have different aptitudes and interests about whether it’s important to maintain an exclusion for an employment classification.

If you hope for or fear tax and ERISA legislation nearing the end of the 118th Congress, watch in mid-December. Based on Congress’s continuing resolution many expect they will enact by September 30, the next end of appropriations would be December 20. That’s the Friday before Christmas Day. In the remaining session after 2024 elections, look for Congress to turn to the National Defense Authorization Act for fiscal year 2025, and to some effort to avoid or invoke a government shutdown. Those efforts might include an appropriations or budget-reconciliation bill, which could include law changes the Senate could not vote on under a regular-order procedure.

I’m curious, which do you, or employers, fear more: That an IRS examination might look into an employer’s administration of an automatic-contribution arrangement, find errors or weaknesses, and threaten to tax-disqualify the § 401(k) arrangement? Or That employees who did not opt out will feel frustrated that one’s pay was lowered, and will blame the employer (rather than public law)?

Its fine to ask in an efficient and effective way for the employee’s choice, even if the invitation presumes the likely choice is the opt-out. What I suggest you and your clients consider is that the IRS might worry that the last sentence: “If no election is made above [that is, in the HRIS system], you will be automatically enrolled in the Plan as described in the Automatic Contribution Arrangement Notice.” Could be read to suggest that the only way an employee specifies her choice is in the HRIS system (and that she may not deliver her election by other means). Could be read to suggest that the employee, if onboarding, specifies her choice as an element of the onboarding (and lacks other ways to deliver her election). Could be read to suggest that the only choices are an election for no deferral or for the default deferral. Could be read to suggest that the new employee’s choice is concluded now, rather than by the end of the notice period. Even if the preceding EACA notice is perfect and even if there might be good arguments about why the HRIS screen does not interfere with anyone’s notice or election opportunities, one can imagine some IRS people evaluating the facts and circumstances differently. As I understand the purpose you described, it’s to use an available opportunity to capture a no-deferral election because the employer fears an employee who prefers no deferral might, without being prompted by the HRIS system, neglect to do an opt-out. To meet that purpose, the system’s collection of a no-deferral or opt-out election need not be irrevocable. An employee who in the HRIS system specifies an opt-out is unlikely, during the notice period, to change her election from an opt-out to an affirmative election specifying her (nonzero) elective-deferral percentage. And if an employee changes her mind, the employer can deal with it then. Your idea is good. Rather, it calls for a little attention to what the words say, possible meanings a reasonable reader could perceive, and how IRS people might assert possible reasons a particular notice and election regime didn’t exactly meet what tax law calls for. A little editing might make your way one that meets its purpose and helps avoid an IRS challenge. This is not advice to anyone.

Many computer systems have no function for something that looks like an old-fashioned signature. Many require typing one’s name, or just one’s name’s initials, as the electronic signature. (For example, for something Temple University asks me to sign, the system instructs me to enter the two characters “PG”, and would refuse to process anything else.) Or if an individual is already identified to the system, it might ask only for a click on an “I accept” or “I confirm” button. Likewise, the system often records the date a keystroke or click was entered or a function was processed.

Among the conditions for an eligible automatic contribution arrangement, Internal Revenue Code § 414(w)(4)(B)(ii) requires: “the employee has a reasonable period of time after receipt of the notice[.]” Also, an EACA notice must mention the range of choices. One can imagine the Treasury or its IRS interpreting those concepts to say an employer ought not suggest that a participant must complete her choice any sooner than the end of the notice period. Likewise, an employer ought not to suggest that making a cash-or-deferred choice is a necessary element of completing the onboarding that confirms an employment. So, a plan’s administrator might rewrite your idea: {Your expression of a choice against elective deferrals.} If by {specify a date}, our retirement plan’s administrator has received none of: (i) your choice permitted above, (ii) your other choice to have nothing taken from your pay for retirement savings, and (iii) your choice of the percentage of your pay (no less than 1%, and no more than 92%) you want to not receive in money and defer under our retirement plan, we will take nn% from your pay each pay period and treat those amounts as your elective contributions to our retirement plan, as further explained in the preceding notice. This is not advice to anyone.

Thanks, Gina Alsdorf and justanotheradmin. I’m aware that a “cash” position or a money-market fund or account is a broker-dealer’s typical default for uninstructed amounts under a securities account. But if the plan’s administrator or trustee wants ERISA § 404(c)(5) relief for a defaulted-in participant’s deemed investment direction, wouldn’t the plan’s trustee instruct the broker-dealer to invest the account in a target-year fund or balanced fund so it can be a continuing qualified default investment alternative? Although a principal-preservation investment might be a QDIA for a first 120 days, might a fiduciary prefer a default investment that remains a QDIA if the participant continues in not communicating her affirmative investment direction? 29 C.F.R. § 2550.404c-5(e)(4)(iv)(B) https://www.ecfr.gov/current/title-29/part-2550/section-2550.404c-5#p-2550.404c-5(e)(4)(iv)(B).

Consider that an answer might vary with whether the plan’s sponsor and administrator seek to meet only Internal Revenue Code § 403(b)(12)(A)(ii) or also seek to obey ERISA sections 202(c) and 203(b)(4). Applicable or relevant law is ambiguous. Forty comments on the Treasury’s proposed rule are available at https://www.regulations.gov/document/IRS-2023-0058-0001/comment. Some comments flag your question as an open issue the Treasury’s proposed rule does not resolve. Likewise, some comments flag a coordination between tax law conditions and ERISA’s minimum-participation and minimum-vesting provisions as an open issue the Treasury’s proposed rule does not resolve. Although some might guess the Treasury lacks power to interpret ERISA § 202(c) and 203(b)(4), the 1978 Reorganization Plan transfers that authority to the Treasury. https://www.dol.gov/agencies/ebsa/laws-and-regulations/laws/executive-orders/4. But even if the Treasury publishes a final rule and no court vacates the rule, a Federal court does not defer to an executive agency’s interpretation of the statute. An ERISA-governed plan’s administrator must administer the plan according to the plan’s governing documents or, to the extent a document is inconsistent with ERISA’s title I, ERISA’s title I. That might call for an administrator’s prudent interpretations of ERISA sections 202 and 203. Different law applies for a governmental plan or for a church plan that did not elect to be ERISA-governed.

ERISA’s supersedure of States’ laws makes it unnecessary for an employee-benefit plan’s administrator to know, or even consider, any State’s law. Section 514(b)(7)’s limited exception regarding a qualified domestic relations order or qualified medical child support order might call a plan’s administrator to read an order’s text, but one need not know the State’s or Tribe’s law underlying the order. ERISA § 206(d)(3) calls a plan’s administrator to follow only a QDRO that “clearly specifies” the necessary information and instructions. An order does not “clearly specify” if the plan’s administrator cannot determine the amount to pay to, or set aside for, the alternate payee from the order’s text alone.