Peter Gulia

The Employee Retirement Income Security Act of 1974 does not govern a governmental plan. If a governmental plan’s sponsor seeks the Federal income treatment of Internal Revenue Code § 401(a), § 401(k), § 403(b), or § 457(b), a condition about nonforfeiture varies with the particular subsection one seeks to meet. Those conditions often involve a different rule, transition rule, or variation for a governmental plan. Some Federal tax law conditions relate to law as in effect on September 1, 1974. Consider also that a governmental plan is governed by the State’s constitution, statutes, and other State law, which, under some States’ laws, might include a political subdivision’s law. For more information, read Governmental Plans Answer Book https://law-store.wolterskluwer.com/s/product/governmental-plans-answer-book-pension3-mo-subvitallaw-3r/01t0f00000J4aDTAAZ.

A Labor department rule describes some partial interpretations for some situations you mention. 29 C.F.R. § 2530.206 https://www.ecfr.gov/current/title-29/part-2530/section-2530.206#p-2530.206(a). But consider these cautions: Those interpretations are profoundly incomplete. Some of the interpretations might be contrary to the statute. Whatever deference this agency rule might get could become obsolete tomorrow or in the next few days. To the extent, if any, that Chevron deference continues, some of the rule’s interpretations might not be a permissible interpretation of the statute. As always, a court order that would call the plan to pay something the plan does not provide is not a qualified domestic relations order.

Consider whether the settlement agreement might be wholly or partly void, voidable (by one or more of its parties), legally enforceable, or unenforceable. Consider whether the settlement agreement might be effective or ineffective regarding the retirement plan. Consider whether the settlement agreement might be a plan amendment. (As one aspect of this, consider whether the settlement agreement’s signer also might have had authority under the plan’s governing documents to amend the plan.) Consider whether, if a safe-harbor contribution is not allocated to the participant’s account, a consequence might be that the plan loses whichever safe-harbor relief relates to that contribution. If you’re a service provider, consider how to get the plan administrator’s proper instruction that protects the service provider. This is not advice to anyone.

A Form 5500 report should factually state information according to what happened, or didn’t. To help someone discern what might (or might not) have changed, and how it might have changed, and when: Was the business purchase a purchase of assets from the company? Or a purchase of shares of the company? Recognize that documents governing the plan might include some that don’t look like what many employee-benefits practitioners call a plan document. Might the buyer corporation, limited-liability company, partnership, or other organization have adopted a resolution, written consent, or other act that changed the seller’s plan’s sponsor or administrator? While the instructions for line 3 are ambiguous, some practitioners assume one reports the administrator that is duly appointed and currently serving on the day each signer signs the Form 5500 report’s jurat, not the organization or other person that served as the plan’s administrator on or as of the last day of the reported-on period. The instructions for lines 1 to 4 [pages 16-19], include details about what to do if: ÿ the plan’s name changed, ÿ the plan’s sponsor changed, or ÿ the plan sponsor’s EIN changed. Again, some practitioners assume this refers to changes up to the day the administrator signs the Form 5500 report. It might be possible that nothing changed. This is not advice to anyone. To answer your query, I’ve seen situations that called for reporting short plan years that end and begin with or around the business transactions’ closing date. But that sometimes happens when the m&a deal teams for both seller and buyer include not only business lawyers but also employee-benefits lawyers, who think carefully about the provisions.

If the plan’s administrator seeks to use the IRA issuer regularly used for participants’ default rollovers, one might check whether the administrator’s or its recordkeeper’s contract with the IRA issuer obligates the issuer to accept a rollover of a beneficiary’s distribution. Also, if some portion of what otherwise might be a single-sum distribution is a § 401(a)(9) minimum distribution, that portion is not an eligible rollover distribution.

A small-balance involuntary distribution usually relates to a participant’s severance-from-employment. Even if a plan’s administrator interprets a plan’s governing document to treat a beneficiary as a participant (which I do not suggest), the administrator might doubt that an already-retired participant’s death is the beneficiary’s or the participant’s severance-from-employment. Of the two remaining beneficiaries, won’t each’s required beginning date come soon enough?

My point was this: If, instead of getting the plan administrator’s signatures each year, a service provider were allowed to rely on a standing-instruction authority that continues indefinitely until revoked, a service provider might lack records to prove that the plan’s administrator had read and approved each year’s report. Under ERISA § 3(21)(A)(iii), “a person is a fiduciary with respect to a plan to the extent . . . [the person] has any discretionary authority or discretionary responsibility in the administration of such plan.” Many interpretations of ERISA § 3(21) look past formal labels and consider whether a service provider had or used discretion. Even compiling a Form 5500 report might involve some arguably discretionary choices about how information is reported. If there were no record that the plan’s administrator reviewed and approved a particular year’s Form 5500 report and the available evidence suggests the TPA compiled the Form 5500 report, I can imagine an argument that the TPA was the plan’s fiduciary to the extent of its discretion had or used for that reporting. While I see that a standing-instruction authority is possible, a cautious service provider might prefer a showing that the plan’s administrator granted authority to file the particular year’s report. Consider, an email or fax (perhaps one that sends the manually signed Form 5500 page), if it includes the authorizing person’s name, can be an electronic record, and even an electronic signature. 15 U.S.C. § 7006. This is not advice to anyone.

Many plans provide an involuntary distribution on a participant’s small ($1,000, $5,000, or $7,000) balance. But many plans do not provide an involuntary distribution on a beneficiary’s account, except as needed to meet a § 401(a)(9) required beginning date or minimum distribution, including a continued minimum distribution that began before the participant’s death. For the situation you’re working on, what does the plan’s governing document provide? This is not advice to anyone.

Even if the Labor department might allow such a standing-instruction authority, what records would the TPA keep to prove that, each year, the plan’s administrator had read and approved the year’s report? If the available evidence suggests the TPA compiled the Form 5500 report and does not prove that the plan’s administrator reviewed and approved it, was the TPA the plan’s administrator and fiduciary to the extent of that reporting?

And provide the retirement distribution as nonannuity payments over 14 years?

justanotheradmin, thank you for helping me think thoroughly. “Based on all of the relevant facts and circumstances, the group of employees to whom a benefit, right, or feature is effectively available must not substantially favor HCEs [highly-compensated employees].” 26 C.F.R. § 1.401(a)(4)-4(c)(1) https://www.ecfr.gov/current/title-26/part-1/section-1.401(a)(4)-4#p-1.401(a)(4)-4(c)(1). But doesn’t that effective-availability concept refer to the right the plan provides? What the plan provides is a right to a distribution on having a severance-from-employment and having reached normal retirement age. That right is provided uniformly to highly- and nonhighly-compensated participants. Whatever expectation a participant had regarding before-amendment provisions is protected under the anti-cutback rule. I see that “the timing of a plan amendment . . . [could] ha[ve] the effect of discriminating significantly in favor of HCEs or former HCEs[.]” 26 C.F.R. § 1.401(a)(4)-5(a)(2) https://www.ecfr.gov/current/title-26/part-1/section-1.401(a)(4)-5#p-1.401(a)(4)-5(a)(2). Whether it so discriminates “is determined at the time the plan amendment first becomes effective for purposes of section 401(a), based on all of the relevant facts and circumstances.” CuseFan, that some former employees neglect to update email, postal-mail, and telephone addresses might not be too big a problem if, as the employer believes, few low-wage workers will elect deferrals under the after-amendment provisions. Also, when an individual turns 65, she’ll get the Social Security Administration’s you-may-have-a-benefit letter, which directs its addressee to the employer/administrator. About the many subaccounts, I know the employer/administrator would need to negotiate its recordkeeper’s services, and that it might lack enough bargaining power. I concur with everyone that the employer’s plan design challenges the plan administrator’s responsibility and the recordkeeper’s services. As I mentioned, I don’t advocate the design. But BenefitsLink neighbors’ cautions help me volunteer cautions beyond the two questions I was asked.

If the distributee is employed and perceives that Federal income tax withholding on the eligible rollover distribution might result in too much paid-in toward the year’s Federal income tax, the individual might evaluate whether to lower withholding from wages for the remainder of the year. While the plan’s administrator and its service providers might not present such a suggestion, the certified public accountant might consider it.

Except for a required distribution at 70-something, the plan has no involuntary distribution; there is no such cash-out (whether for $1,000 or another amount).

Yup, preserving the before-amendment rights is a pain-in-the-assets.

justanotheradmin, thank you for your helpful observation. The plan was established before 2022, so an automatic-contribution arrangement is not a tax-qualification condition. The evaluation now is about amending the plan to get rid of a hardship distribution, and a distribution on severance or age 59½. Lou S., the owners, and the few executives who are not also an owner, all are old enough and mature enough that being constrained until age 65 is no worry for them.

Paul I, thank you for noting some difficulties. The employer believes communicating that there is no payout until 65 will result in few of its low-wage workers choosing elective deferrals, so lowering the employer’s obligation for matching contributions. Yet, providing the safe-harbor allows each executive to save her $30,500. I’ve told the employer that the communications go to all eligibles, including those with no account balance. The employer knows that the business or the few with-balances participants will pay for the independent qualified public accountant. The plan would allow Roth contributions. I recognize that the employer’s plan design focuses on the employer’s business purposes, and dissuades workers who might save if the plan would allow some before-retirement access. I’ll advise considering more openness. But I also can be mindful that the employer, not me, bears the burdens of managing its challenging business.

Thanks. I don't advocate the design. My scope is about whether the design meets the two purposes I mentioned. And I'll advise about disadvantages.

An employer’s § 401(a)-(k) plan would have these provisions: Elective deferrals, up to § 402(g) and § 414(v) limits Safe-harbor matching contribution—100% on first 3% and 50% on next 2% Safe-harbor notices; no restraint on opportunity to elect a deferral from pay not yet available No participant loan; no hardship or other early-out distribution No small-balance ($7,000) involuntary distribution. No distribution until end of service and normal retirement age (65 or the latest permitted). Considering those plan-design elements: Does anything about the absence of ways to get money before normal retirement result in the plan losing a safe-harbor treatment for excuses from ADP and ACP tests? For States’ laws that call an employer to maintain a retirement plan or facilitate payroll contributions to Individual Retirement Accounts, is the plan described above sufficient to avoid the State’s arrangement?

If BenefitsLink neighbors have seen no experience, I’ll assume what I intuit: a fiduciary warranty might be nice sales stuff, but does not cover a real risk.

Consider thinking through your question from another direction: What provision in the plan’s governing document (or ERISA-mandated) would empower the plan’s administrator to deny or delay a benefit the plan provides?

Some service providers offer a “fiduciary warranty” that a customer plan’s menu of investment funds meets ERISA § 404(c)’s broad-range condition and is prudently selected. This warranty sometimes is, or is described as, an indemnity. Has any holder of a fiduciary warranty been sued or threatened? Has any service provider paid a loss or expense on its fiduciary warranty?

Or, if the participant and the spouse might still be spouses when the plan’s final distribution is to be paid or delivered, the plan’s administrator might want its lawyer’s advice about whether to obtain a qualified-joint-and-survivor annuity contract (for the portion of the participant’s account that is subject to the QJSA protection), interplead all claims and rights and petition for equitable relief in the Federal court for the district in which the plan is administered (or the Federal court the plan provides as the exclusive forum, if the plan so provides), and deliver the money (if any) and the annuity contract to that Federal court. But, as I imagine Kansas401k suspects, it might be simpler to help the divorcing persons get to conclusion and a QDRO before the plan’s final distribution. This is not advice to anyone.

This pension plan document might help you: https://www.wgaplans.org/pension/plan_doc/pension_index.html. Also, with your client entering her password, she might allow you to see her participant website: https://myplans.wgaplans.org/.

Even assuming all you describe and that the spouse assumes it’s not feasible to obtain a QDRO before the plan’s final distribution, there are opportunities for a spouse to ask the domestic-relations court for its orders to help guard the spouse against risks that the participant dissipates or hides money or other property before the spouse collects the spouse’s share. That’s the business of the domestic-relations court, not the plan’s administrator. Are you sure the plan (as amended) requires a qualified election with the spouse’s consent? Usually, an individual-account profit-sharing retirement plan’s final distribution is an involuntary single-sum distribution, and does not require a spouse’s consent or even a participant’s consent. (Else, how would the plan’s fiduciaries complete the plan’s termination?) If so, it would be unusual to provide that a participant without one’s spouse’s consent cannot instruct a direct rollover, and must get money paid to the participant. If the plan’s administrator furnished to the participant, the spouse, or either’s attorney or other representative the administrator’s QDRO procedures: If those QDRO procedures include a hold when the administrator receives notice that a domestic-relations order is anticipated, the administrator might consider, with its lawyers’ advice, amending the procedures and, if amended, furnishing the revised version. This is not advice to anyone.

Some retirement plans provide no claim for which finding the presence or absence of a participant’s or other claimant’s disability is relevant. And even for a plan under which disability sometimes might be relevant, a distribution might be provided for some other reason. Some payers interpret the Form 1099-R Instructions to suggest one need not report that a distributee is disabled if the plan’s administrator made no such finding. (Even when a plan’s administrator decided nothing about disability to approve the claim for a distribution, some administrators instruct a payer that a distributee is disabled, considering this a courtesy to support the distributee’s tax return.) Disability is one of several situations in which a fact or finding that need not, or even cannot, be shown in a Form 1099-R report can be relevant to a distributee’s Federal income tax treatment. A distributee decides how to state her tax returns.