Peter Gulia

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.

And consider that the Secretary of the Treasury has no authority to interpret ERISA §§ 401-414.

To be a qualified domestic relations order (as ERISA § 206(d)(3) or Internal Revenue Code § 414(p) defines it), a court’s order must be “made pursuant to a [US] State or Tribal domestic relations law[.]” (Under both those Federal statutes, “State” is a defined term.) If the could-be alternate payee wants to pursue a QDRO, one might proceed in a US State’s court that has subject-matter jurisdiction, and can exercise personal jurisdiction over both former spouses. Thinking of ways to solve those jurisdiction points and other issues might be beyond the ordinary work of some domestic-relations lawyers. To search for lawyers who might have the needed aptitudes and skills, consider https://www.aaml.org/find-a-lawyer/. This is not advice to anyone. This is not a referral, and I have not evaluated any of these lawyers.

Along with considering what might be feasible plan designs under Federal tax law, research what powers the employer has or lacks under State law. A State’s agency, instrumentality, or political subdivision has no more power than State law provides. With State and local government employers, it often happens that an employee-benefit plan’s design might be feasible under Federal tax law but precluded under State law.

Consider that a writing (even a little email) stating or describing a nonelective contribution might be among the “documents and instruments governing the plan[.]” Consider too that what the plan’s governing documents provide is only one of several lanes a claimant might drive in. Among others, a disappointed participant might pursue one or more of the other legal and equitable remedies ERISA’s title I provides. Those can include remedies for miscommunication. The plan sponsor, the plan’s administrator, and other plan fiduciaries each will decide how much risk one wants to assume. If the employer wants to evaluate how relevant law applies and which risks to assume or manage, it might call in a lawyer. This is not advice to anyone.

An employer or a plan's administrator might prefer not to provide guidance on this question. Unless one has extraordinary expertise, an answer in either direction has a potential to harm one or more of an individual’s interests. Beyond knowing the law, an adviser would need to know everything about the individual’s other and surrounding circumstances. Under the part 416 rules of the Supplemental Security Income for the Aged, Blind, and Disabled program, the subpart L rules on “Resources and Exclusions” are at 20 C.F.R. §§ 416.1201 to 416.1266. These rules begin at 20 C.F.R. § 416.1201(a) https://www.ecfr.gov/current/title-20/part-416/section-416.1201#p-416.1201(a). Those rules are only a few of many that could relate to the SSI beneficiary’s situation. And one would research too the rulings and other nonrule guidance. And the guidance the Social Security Administration provides for SSA’s employees. For example: https://secure.ssa.gov/apps10/poms.nsf/lnx/0501120210. One also might consider that some SSI provisions might allow SSA to not count some elements of a beneficiary’s income or resources. In my experience, it’s impractical to advise an SSI beneficiary unless one volunteers an uncompensated engagement and can afford to put in substantial time and attention. This is not advice to anyone.

To avoid a command to provide a qualified joint and survivor annuity, it can be enough (if all other conditions are met) that the participant does not elect an annuity. ERISA § 205(b)(1)(C)(ii) https://uscode.house.gov/view.xhtml?req=(title:29%20section:1055%20edition:prelim)%20OR%20(granuleid:USC-prelim-title29-section1055)&f=treesort&edition=prelim&num=0&jumpTo=true; Accord 26 C.F.R. § 1.401(a)-20 https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR6f8c3724b50e44d/section-1.401(a)-20. As austin3515 notes, many individual-account profit-sharing plans preclude a choice of an annuity. Further, many plans have no form of distribution beyond a single sum.

David Rigby, Albert F, and CuseFan, thank you for helping me think this through. According to both Vanguard and Ascensus, the new fees are, for Ascensus’s directed trusteeship, $20 a year for each participant, and for “Ascensus’s annual account service fee”, $20 a year for each fund. (None of Ascensus’s fees relates to assets under recordkeeping, and the fees are not subsidized by indirect compensation other than float income.) My friend invests in only one target-year fund for each of her two subaccounts. So, she counts her Ascensus yearly fees as $20 + $20 + $20 = $60. She qualifies for no account fee on Vanguard IRAs. While $60 is a higher proportion (300 basis points) of $2,000 than it is of $1 or $2 million, I’m not seeing a less expensive path to getting recordkeeping for her § 401(a)-(k) plan. I fear Ascensus after 2024 might add a distribution-processing fee, even on rollovers. (That’s among the reasons my friend wants to do rollovers now before the transition to Ascensus.) If a processing fee comes, it might influence how often she moves amounts from her Ascensus-recordkept § 401(a)-(k) plan into her IRAs. Ascensus provides the plan-document service. I’ll edit the adoption-agreement choices. And I’ll edit even base provisions as much as can be without defeating the IRS preapproval or causing Ascensus to resign. About creditor protection: A reason for keeping each IRA clean with no contribution beyond the rollovers from the § 401(a)-(k) plan is to get the 11 U.S.C. § 522(b) exemption from the bankruptcy estate without limit. I have not researched other bankruptcy law, nor a creditor’s rights outside bankruptcy. But lacking an ERISA protection or preemption on even the employment-based plan, I’m hoping she doesn’t lose a useful protection by moving to the IRAs. We can check with a debtor’s-rights lawyer. Other points I should think about?

On September 6, 2000, the Treasury department published a final rule to amend the 1988 rule. Under that amendment, a plan sponsor may amend its plan to remove an optional form of benefit (including an optional annuity) if the plan provides a single-sum distribution form otherwise identical to the optional form of benefit eliminated. Such an amendment must not apply to a participant with an “annuity starting date” earlier than the 90th day after “the participant has been furnished a summary that reflects the amendment and that satisfies the requirements of 29 CFR [§] 2520.104b–3[.]” (I’ve simplified those explanations, and omitted some conditions.) For the details: Special Rules Regarding Optional Forms of Benefit Under Qualified Retirement Plans [final rule], 65 Federal Register 53901-53909 (Sept. 6, 2000), https://www.govinfo.gov/content/pkg/FR-2000-09-06/pdf/00-22668.pdf. Also, the Treasury department published further amendments in 2004, 2005, and 2006. https://www.govinfo.gov/content/pkg/FR-2004-03-24/pdf/04-6220.pdf https://www.govinfo.gov/content/pkg/FR-2005-08-12/pdf/05-15960.pdf https://www.govinfo.gov/content/pkg/FR-2005-09-13/pdf/05-17959.pdf https://www.govinfo.gov/content/pkg/FR-2005-09-27/pdf/05-19222.pdf https://www.govinfo.gov/content/pkg/FR-2006-08-09/pdf/E6-12885.pdf

Here’s my friend’s situation: She is her S corporation’s 100% shareholder. She is, and always has been, the corporation’s only employee. For many years, her § 401(a)-(k) plan has every year received her maximum (including age 50 catchup) elective deferrals as Roth contributions. Every year, she provided herself a nonelective contribution of 25% of compensation. These two subaccounts are a seven-figure sum. She received Vanguard’s letter “Your small-business retirement account is moving to Ascensus[.]” She would prefer to keep her § 401(a)-(k) plan at Vanguard, but that’s impractical. She would prefer no more than small accounts at Ascensus. Why? According to Vanguard, the Ascensus accounts will not be displayed in her Vanguard website. All her investments are with Vanguard. She likes using Vanguard’s website as a one-stop. To get the desired display, she is considering a rollover (she’s distribution-eligible) of all but about $1,000 of her nonelective contributions subaccount to a new non-Roth IRA, and a rollover of all but about $1,000 of her elective-deferrals subaccount to a new Roth IRA. She would do this before the mid-July transition to Ascensus. The reason for leaving non-zero balances in her two § 401(a)-(k) subaccounts is so she’ll get recordkeeping on the terms Vanguard arranged with Ascensus. She intends to continue her business, and to continue the maximum elective-deferral and nonelective contributions. After each year’s contributions, she would direct two partial rollovers into the two Vanguard IRAs, which would never get any contribution beyond rollovers from the § 401(a)-(k) plan. She would leave in the § 401(a)-(k) plan enough to pay Ascensus’ fees. BenefitsLink neighbors, does this work? Any reason my friend shouldn’t do this? Any caution I should explain?

26 C.F.R. § 1.411(d)-4/Q&A-2(e)(3) https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR686e4ad80b3ad70/section-1.411(d)-4 Under Reorganization Plan No. 4 of 1978, the Treasury department’s rule also is both agencies’ interpretation for part 2 of subtitle B of title I of ERISA.

The statute provides: “The Secretary may provide by regulations for exceptions to the rule of the preceding sentence [allowing the administrator to rely on the claimant’s certification] in cases where the plan administrator has actual knowledge to the contrary of the employee’s certification, and for procedures for addressing cases of employee misrepresentation.” Internal Revenue Code of 1986 (26 U.S.C.) § 401(k)(14)(C). The Treasury department has not yet made, nor even proposed, such a rule or regulation. Even if “actual knowledge to the contrary” becomes or is relevant, it is the administrator’s knowledge, which might not be the same as the employer’s knowledge. For example, if several organizations that comprise an IRC § 414(b)-(c)-(m)-(n)-(o) employer are a plan’s participating employers, the Plan Administrator (as specified in the documents governing the plan) might refer only to the one organization that is the plan sponsor. Further, that administrator does not necessarily know everything that any of the plan sponsor’s employees knows; rather, the administrator’s knowledge might be only that of the few people who work on administering the plan. (I’m mindful that the possibility of knowledge about an employee’s circumstances is greater with some small businesses.) Consider further: If the plan’s records are the self-certification forms with nothing else, how would an IRS examiner collect evidence that the recordkeeper processed a hardship claim when the plan’s administrator then possessed “actual knowledge to the contrary”? As I said last summer after MoJo’s observations: “Still, I hope recordkeepers will build a self-certifying method available to at least big-enough plans so they, with advice and thinking independent of the recordkeeper, can decide their resolutions of the policy and risk questions.” https://benefitslink.com/boards/topic/70898-form-for-relying-on-a-participant%E2%80%99s-written-statement-that-she-has-a-hardship/#comment-332319 And for those who prefer to deter “leakage”, a sponsor/administrator might decide not to rely on certifications and instead evaluate the hardship claims.

A value of deciding claims using only a § 401(k)(14)(C) certification is that the plan’s administrator is removed—and its service provider too is removed—from discretionary decision-making about questions of the kind Ilene Ferenczy and Paul I describe. Instead, a plan’s administrator designs (or approves its service provider’s design of) the claim form to state each of the available deemed hardships, and not ask for any supporting information. Likewise, a service provider designs the participant website’s software to not receive any information beyond the online claim form. The claims procedure can be simplified (mostly) to approving a claim if the form is completed “in good order” and signed under penalties of perjury. Or NIGOing a form not filled-out or not signed. But shouldn’t an employer that serves as its plan’s administrator (and service providers too) welcome a procedure that gets rid of discretionary decisions?

Turning on the business sale’s terms, there might be issues way beyond whether the ESOP’s documents are tax-qualified in form. But to consider your question, an ESOP that seeks § 401(a) tax treatment has no less need on discontinuance and termination for current (without a remedial-amendment delay) provisions than does a § 401(a) profit-sharing plan. Yet, consider too that an ESOP’s in-operation provisions implemented in reliance on a to-be-done-later remedial amendment might have used few or none of the optional provisions SECURE 2019, CARES, or SECURE 2022 permits. Just to pick one example, an ESOP might not have changed its applicable age for a § 401(a)(9) required beginning date.

If claims for a hardship distribution are processed under a § 401(k)(14)(C) certification, a claimant might believe, in her circumstances, that buying out the former spouse’s interest in the participant’s principal residence fits one (or more) of those deemed-hardship situations. And a plan’s administrator might not “ha[ve] actual knowledge to the contrary of the employee’s certification[.]”

Some court decisions describe a beneficiary designation as a part of “the documents and instruments governing the plan[.]” Others have described it as a record maintained under the plan. I don’t remember a case in which either description is a precedent or even a holding, rather than dicta. If “the” plan document is, after considering all textual interpretation methods, ambiguous, an interpreter might consider a summary plan description—a plan administrator’s attempt to explain the plan’s provisions—as possibly some secondary information about the plan administrator’s perception of the plan sponsor’s intent. (More so if the administrator is the same person as, or a committee or officer of, the sponsor.) Likewise, one might consider a beneficiary-designation form as information that might favor or disfavor one or more of the possible interpretations. If a plan’s sponsor/administrator uses documents, SPDs, and forms from a service provider without carefully reading and editing those writings, all interpretations might be weakened. But a plan’s administrator must do what’s loyal, obedient, and prudent in the circumstances. Sometimes, that’s a least-wrong interpretation. Two related points: For interpretations, a fiduciary’s duty of impartiality might call for maintaining over time logically consistent interpretations for similar situations. A plan amendment to change the default for an absence of a beneficiary designation might be an amendment one could apply with little worry about a prohibited cutback of a benefit. Why not clean up the whole set of writings so the provisions make sense, are internally logical, and are accurately described? Or if the plan sponsor isn’t ready (perhaps for expense or another reason) to do that, pursue carefully a least-wrong interpretation. This is not advice to anyone.

The Instructions state: “File Form 1099-R . . . for each person to whom you have made a designated distribution[,] or are treated as having made a distribution[,] of $10 or more[.]” Bri, it seems right that the $10 refers to the sum of all payments and deliveries made to the distributee during the reported-on year. Let’s consider a situation Basically describes, but applying ratherbereading’s mention of a fee resulting in a distribution of $0.00. A participant’s account is $20.03. The plan’s fiduciary had approved the service provider’s $25 distribution-processing fee. On receiving the plan administrator’s instruction to process a distribution, the service provider collects $20.03, leaving $0.00 available to pay the distributee. Is a 1099-R showing a gross distribution of $0.00 permitted?

Is buying out the former spouse “[c]osts directly related to the purchase of a principal residence for the [participant]”? 26 C.F.R. § 1.401(k)-1(d)(3)(ii)(B)(2) https://www.ecfr.gov/current/title-26/part-1/section-1.401(k)-1#p-1.401(k)-1(d)(3)(ii)(B)(2). Is buying out the former spouse “necessary to prevent the eviction of the [participant] from the [participant’s] principal residence”? Is buying out the former spouse “necessary to prevent . . . foreclosure on the mortgage on [the participant’s principal] residence”? 26 C.F.R. § 1.401(k)-1(d)(3)(ii)(B)(4) https://www.ecfr.gov/current/title-26/part-1/section-1.401(k)-1#p-1.401(k)-1(d)(3)(ii)(B)(4).

If you’re a law student (as your May 25 post mentions) and not an admitted attorney-at-law, you should seek the guidance and supervision of the faculty person responsible for your law school’s clinic or other program.

What Bill Presson said. Unless the trustee is ready to: resign or recuse, spend the time and lawyers’ fees to get an individual prohibited-transaction exemption, spend the fees for independent fiduciaries to make all decisions (which might include that the real property is not a prudent investment for the plan’s trust), spend the fees for independent appraisers—to estimate each fair-market value for the initial purchase price, each year’s valuation, and the price at which the plan may sell the property, pay the plan’s successor or separate trustee the fair-market rent the independent persons set, and meet other conditions the Labor department likely would require, isn’t this a nonstarter?

Let’s assume that whatever survivor annuity or other death benefit the plan provides a surviving spouse to meet ERISA § 205 is inapplicable or exhausted. And let’s assume that, in the circumstances, the plan provides a benefit for which it might matter to identify a beneficiary. An ERISA-governed plan’s administrator must administer the plan “in accordance with the documents and instruments governing the plan[.]” ERISA § 404(a)(1)(D). That means the governing documents, not the summary plan description (unless the plan sponsor specified the SPD is a governing document). See CIGNA Corp. v. Amara, 563 U.S. 421, 50 Empl. Benefits Cas. (BL) 2569 (May 16, 2011). But let’s imagine the plan’s governing documents too might be ambiguous. (The ways plan sponsors make plan documents, especially when using IRS-preapproved documents, often result in provisions that do not make sense using only textual interpretation.) Plan documents typically grant the plan’s administrator broad discretion to interpret a governing document and the plan’s provisions. Many BenefitsLink mavens use the shorthand RTFD for Read The F . . . abulous Document (as RatherBeGolfing recently explained it). I propose a new shorthand: ITFD for Interpret The Fouled-up Document. If the plan’s documents grant discretion, courts defer to the administrator’s reasoned interpretation. See Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 10 Empl. Benefits Cas. (BL) 1873 (Feb. 21, 1989). Not seeing the whole set of documents you mention, I won’t speculate about the interpretation. This is not advice to anyone.

But does that rule preclude a payer from volunteering Form 1099-R reports no matter how small the amount?

Until the law changes for years after a plan’s first year, consider that this point is one on which a third-party administrator might add value. A recordkeeper might have no facility to record a deferral election expressed with anything beyond the deferral’s amount or percentage of compensation. And a recordkeeper might not explain that if a participant’s deferral is expressed in part with other terms or conditions, the plan’s administrator must keep that record without relying on the recordkeeper. A good TPA might explain how a deferral election might be stated with conditions, if the plan’s governing documents allow it. I’m aware that many self-employed individuals manage this point by falsely dating a deferral election as having been made in the preceding December. But why do that if a needed or desired flexibility in the elective-deferral amount can be specified with a proper election?

If a fee lowers a participant’s distribution to $0.00, is there an information and communication value in generating and sending a Form 1099-R report to show the distribution paid as $0.00? Or do plans’ administrators use other ways to preserve evidence that the account-closing distribution was provided? And for the year or quarter-year in which the account becomes $0.00, does one send the participant a final account statement?

Avoiding unwelcome information about an employee’s living situation is among the reasons an employer/administrator might prefer that claims for a hardship distribution be processed from a self-certifying claim form.