Peter Gulia

Consider that a lawyer’s inquiry to EBSA now (during a government shutdown) likely could be ineffective because an EBSA employee who could provide useful information might be precluded from working for EBSA. Instead, a lawyer and her assistants might use the time before the government shutdown ends to gather facts, research relevant law, and refine arguments before one presents an inquiry. This is not advice to anyone.

I have not encountered a situation in which either a § 3(38) investment manager or a § 3(21) investment adviser was involved in preparing or reviewing a 404a-5 disclosure. Imagining your hypo, a smart lawyer might suggest her client limit the scope of the lawyer’s advice to whether, following ERISA § 404(a)(1)(B), the administrator reasonably may rely on the investment adviser’s advice, assuming the administrator would get the adviser to confirm in writing that its advice includes considering whether each comparator is “an appropriate broad-based securities market index” regarding the investment alternative for which it would be a comparator. If the administrator loyally and prudently selected the investment adviser, that and other surrounding facts and circumstances might make it reasonable for the administrator to rely on such an adviser’s advice about the fact-related question. While a relying fiduciary must not unquestioningly accept advice, a fiduciary using no less care than a similarly situated, experienced, and prudent fiduciary would use might find no fault in the advice. If the plan’s administrator does not limit the scope of the lawyer’s advice (and the lawyer accepts the task), a lawyer must provide her candid advice. If a plan’s administrator sees differences in its investment adviser’s and its lawyer’s advice, the administrator should discern—with whatever further advice the administrator gets—each better-reasoned finding. Or, with her client’s consent, a lawyer might discuss with the investment adviser its advice, and either might consider how to reevaluate and harmonize one’s advice. This is not advice to anyone. I suspect many of our BenefitsLink neighbors wonder why we’re thinking about situations that in their experience occur rarely, or perhaps never. In my work, it’s real.

In form, the rule applies on the filer—the employer, and not directly on a submitter. (Although other rules might apply regarding a submitter.) Consider some law sources: Form 5500-EZ Instructions: Mandatory electronic filing. A filer must file the Form 5500-EZ electronically using the EFAST2 Filing System for plan year beginning on or after January 1, 2024 if the filer is required to file at least 10 returns of any type with the IRS, including information returns (for example, Forms W-2 and Forms 1099), income tax returns, employment tax returns, and excise tax returns, during the calendar year that includes the first day of the applicable plan year. If a filer is required to file a Form 5500-EZ electronically but does not, the filer is considered to have not filed the form even if a paper Form 5500-EZ is submitted. See Treasury Regulations section 301.6058-2 (T.D. 9972) for more information on mandatory electronic filing of employee retirement benefit plan returns. Consider that an information return required under Internal Revenue Code of 1986 § 6058 is filed not only by the plan’s administrator but also by the employer. Here’s the rule: 26 C.F.R. § 301.6058-2 https://www.ecfr.gov/current/title-26/section-301.6058-2. Definition of filer. For purposes of this section, the term filer means the employer or employers maintaining the plan and the plan administrator within the meaning of section 414(g). 26 C.F.R. § 301.6058-2(d)(3)(ii) https://www.ecfr.gov/current/title-26/part-301/section-301.6058-2#p-301.6058-2(d)(3)(ii). The rule’s example shows how an owner+spouse business might file at least ten tax returns. 26 C.F.R. § 301.6058-2(e)(1) https://www.ecfr.gov/current/title-26/part-301/section-301.6058-2#p-301.6058-2(e)(1). Here’s another illustration: A 100% shareholder of a professional corporation does not employ her spouse. Yet, that employer with only one shareholder-employee might file for each year at least ten Federal tax returns: Form 1120-S (1), Form W-2 (1), Form 940 (1), Form 941 (4), Form 945 (1), Form 1099-R (1) [for a yearly rollover from her § 401(a) plan into an IRA], and Form 5500-EZ (1). Rather than sort for which clients might file fewer than ten tax returns for a particular year, a third-party administrator might prefer the efficiency of preparing all clients’ Form 5500-EZ returns in electronic form. We might not know whether EBSA’s or the IRS’s software is smart enough to count all tax returns filed under an employer identification number. Yet, even if a practitioner advises about nonenforcement or nondetection on other points, I’m not readily seeing why a client might risk it for Form 5500-EZ.

Paul I, thank you for confirming what I suspected about how a service provider might display an index without evaluating whether it is “appropriate” to the supposed comparison. (I see as rational some recordkeepers’ business decisions to do the task that way.) I’ve seen recordkeeper-assembled 404a-5 disclosures with foolish comparisons. For example, comparing: a global stock fund (which invests about half in US stocks) to an index of only non-US stocks; an emerging-markets fund to a developed-markets index; a US small-cap fund to the S&P 500 index (which is at least large-cap); a short-term Treasuries fund to an aggregate bond index; a US real-estate fund to a global stock index; a US value fund to a blend index. And some “benchmarks” I’ve seen used as a comparator for target-year funds involve no recognition of the asset allocation the fund targets. While I see the 404a-5 disclosures as often useless noise and sometimes harmful, here’s a trap. Even if many plans’ administrators accept without question a recordkeeper-assembled 404a-5 disclosure, a few ask for advice. If a plan’s administrator asks its lawyer for advice about whether a suggested format for a 404a-5 disclosure meets 29 C.F.R. § 2550.404a-5(c)-(d), including 29 C.F.R. § 2550.404a-5(d)(1)(iii) about “an appropriate broad-based securities market index”, the lawyer must pretend the Labor department’s interpretive rule generally has a purpose, and that the particular condition has a purpose. How else could one give advice about whether a displayed index is an “appropriate” index? While I do it often, it’s at least awkward to invite a plan’s fiduciary to evaluate whether the expenses of following a Labor department interpretation would be a loyal and prudent use of the retirement plan’s assets.

When it’s practically achievable, I prefer making a target-year fund’s comparator a composite of index returns, weighted to the fund’s target allocations. To make this fair, the target allocations are those previously stated in each fund’s offering documents. For each asset class, the composite names its widely recognized index. But am I right in guessing some recordkeepers don’t do this in assembling a 404a-5 disclosure?

The Instructions for Form 5500-EZ describe its construct of a one-participant plan in the present tense. The instructions do not specify an as-of date on which to measure whether a plan was or wasn’t (or is or isn’t) a one-participant plan. That the instructions tell a filer to use a year-end amount to determine, if the administrator prefers, a distinct option about whether the plan’s (or all plans’) assets exceed $250,000 does not mean the instructions specify the year-end as the time to measure whether the plan is or was a one-participant plan. Absent some further guidance, a plan’s administrator might be reluctant to report a plan as a one-participant plan if it was not a one-participant plan throughout the whole year. This is not advice to anyone.

For ERISA-governed individual-account retirement plans that provide participant-directed investment, many such plans’ administrators furnish disclosures to follow 29 C.F.R. § 2550.404a-5. That rule calls one to show specified comparisons of a designated investment alternative’s past-performance returns to those of “an appropriate broad-based securities market index[.]” 29 C.F.R. § 2550.404a-5(d)(1)(iii) https://www.ecfr.gov/current/title-29/part-2550/section-2550.404a-5#p-2550.404a-5(d)(1)(iii). Although Congress in 2022 directed the Secretary of Labor to “promulgate regulations” about a benchmark one may use when an investment alternative “contains a mix of asset classes”, no such rule has been made or even proposed. Recognizing that (at least for smaller plans) many recordkeepers and third-party administrators assemble 404a-5 disclosures with little or no guidance from a customer plan administrator, what are service providers using as the benchmark for target-year funds?

If the plan covered a nonowner employee or former employee during some part of the to-be-reported-on year, was the plan ERISA-governed (for at least that part of the year)? ERISA § 3(1)-(3), 29 U.S.C. § 1002(1)-(3); 29 C.F.R. § 2510.3-3 https://www.ecfr.gov/current/title-29/section-2510.3-3 If so, wouldn’t the plan’s administrator continue reporting on Form 5500-SF, at least until reporting the first year that has no coverage of any nonowner (at any time during the to-be-reported-on year)?

About the originating question—May an employer’s group health plan require an examination as an eligibility condition for covering an employee’s spouse?: Is ambiguous law a bad thing, or a good thing? BenefitsLink neighbors, what are your observations?

In my experience, an independent qualified public accountant might close the work-papers file and release the IQPA's report on the plan's financial statements after the IQPA has received a comfort letter from a recognized practitioner who confirms that she has been engaged to see through the correction of the errors and is confident that the corrections will be sufficient to preserve tax-qualified status and restore ERISA breaches.

Artie M, I do concur with your observation that there is a tax issue; and I cite sources so the inquirer can help the plan's administrator look up enough information to describe the issue to the plan's administrator.

A State's wage-payment law isn't preempted if it includes criminal provisions, as some do.

A foreign trust is a trust other than a United States person trust. I.R.C. § 7701(a)(31)(B); 26 C.F.R. § 301.7701-7(a)(2). A United States person trust is “any trust if a court within the United States is able to exercise primary supervision over the administration of the trust, AND one or more United States persons [has or] have the authority to control all substantial decisions of the trust.” I.R.C. § 7701(a)(30)(E); 26 C.F.R. § 301.7701-7(a)(1). Even when the trustee is a United States person, a retirement plan’s trust is a foreign trust if the trustee is a directed trustee and a non-U.S. administrator or other directing person decides plan distributions or other “substantial decisions.” 26 C.F.R. § 301.7701-7(d)(1)(ii). In addition, if a non-U.S. person has the power to remove, add, or replace the trustee, that power means the non-U.S. person controls substantial decisions of the trust. 26 C.F.R. § 301.7701-7(d)(1)(ii)(H). If a nongrantor trust becomes a foreign trust, that “conversion” is treated as a sale of the trust’s assets from a U.S. person to a foreign trust. This deemed sale means that the difference between the fair market value of the trust’s property and the property’s adjusted basis is income subject to federal income tax. I.R.C. § 684. It has been many years since I last looked at this; so, check all the citations and read for yourself. The plan’s administrator should get its lawyer’s advice.

About the hyperlinked article and the court decision it explains, neither says that anyone other than the participant did anything wrong.

Did the acquirer buy the shares or capital interests of the company? Or did the acquirer buy assets from the company? Would a non-US human have authority to act for the US corporation, limited-liability company, or partnership that serves as the retirement plan’s administrator? The Form 5500 Instructions include this: “If the plan administrator is an entity, the electronic signature must be in the name of a person authorized to sign on behalf of the plan administrator.” (Or, if the plan’s administrator authorizes its service provider to file, that “manual” signature must be made by someone who has authority to act for the plan’s administrator.) That someone signs under penalties of perjury suggests the signer ought to have acted prudently to form a sincere belief that the Form 5500 report “is true, correct, and complete.” Would a non-US human not previously involved know enough about the plan and its administration to form that belief? This is not advice to anyone.

While recognizing Lou S.’s observation’s put-up-or-shut-up wisdom, consider this too: Unless the adviser is admitted to law practice, recognize that a promise might be legally unenforceable. While the details vary, a State’s law of contracts might not enforce a promise that calls the promisor to commit a crime—the unlawful practice of law. Likewise, an insurance or investment adviser’s errors-and-omissions insurance won’t respond to a claim that the insured gave faulty legal advice. One or more exclusions would remove that from the potential scope of the e&o coverage. This is not advice to anyone.

Although many retirement plans’ administrators often rely, practically, on a third-party administrator or other service provider, deciding how to present a Form 5500 report is the plan administrator’s (typically, the employer’s) decision.

Here’s what’s in the plan documents of a particular client I’m thinking about: “For purposes of this Plan, disability will mean (select one) [of four options]: Option 3: The Participant is eligible to receive disability benefits under the Social Security Act, as determined by the Social Security Administration.” Considering that this might be a shorthand that refers to a fuller provision in the basic plan document, I looked there. Nothing. (The plan sponsor hopes the plan is designed so the plan’s administrator need not face a discretionary decision about whether a participant is disabled.) A possible reading of the quoted definition of disability is that whatever the plan might provide because of a participant’s disability is not provided unless the claimant presents to the plan’s administrator the Social Security Administration’s disability determination. And that this applies even if the participant’s physical or mental condition is such that, were she a citizen with a sufficient work history, she would get the Social Security Act’s disability benefit. But some might worry that denying a benefit because the participant is not a citizen (and is not a qualified alien) might be contrary to one or more Federal civil-rights law, including those that preclude an employer’s discrimination regarding alienage or national origin.

Many adoption-agreement forms for a set of IRS-preapproved documents present a choice of ways to define a disability. Often, one of those ways is to follow the Social Security Administration’s determination that the person is eligible to receive Social Security Disability Insurance benefits under the Social Security Act of 1935. Suppose the plan sponsor ticked that box. But what if there would be no Social Security determination because the participant is an alien, but not a qualified alien, or is a citizen or qualified alien but lacks sufficient Social Security work credits? Does a basic plan document provide a fail-safe provision to determine a disability if there would be no Social Security determination? And what if no document states any such provision: May a plan’s administrator interpret the plan to treat a participant as not disabled, absent a Social Security determination, no matter how bad the individual’s physical or mental condition?

As some comment letters and the Treasury’s preamble explained, some plans’ administrators prefer to have no responsibility to look beyond a Form W-2 wage report. In some circumstances, one W-2 might include wages from employers other than the employer through which the participant is a participant under the plan to be administered. Beyond practical administration in applying a plan’s I.R.C. § 414(v)(7) provision, I’m unaware of a reason a plan’s sponsor or administrator would have for depriving a participant of an otherwise available opportunity to elect non-Roth deferrals.

Even if the plan’s administrator reports the plan’s financial statements with accrual accounting: To determine whether an individual participant “ha[d] [an] account balance[]” as the instructions for Form 5500 line 6g and other elements describe that construct, might it make sense to interpret the instruction considering what the participant would have seen had she looked up her individual account in the recordkeeper’s system on the relevant day? Many individual-account retirement plans are administered using systems and services that have no facility for recording an accrual in an individual’s account. Even if a service provider’s system counts in an individual’s account the individual’s share in the plan’s contribution receivable, does that by itself mean the plan’s administrator adopted accrual accounting for individuals’ accounts? This is not advice to anyone.

Even if the amount might be small, the trust ought to return the mistaken amount with no less net interest or time value of money than the trust obtained or, if more, the amount required under an applicable State wage-payment law. Even if no Federal or State statute specifies that the return is with interest (and nothing in the plan’s or its trust’s governing documents specifies how to deal with mistaken amounts), the law of trusts, agency, or other fiduciary relationships requires a fiduciary that has received money or other property that does not belong to the fiduciary (whether personally, or for the fiduciary relation) to return the property. The property interests to be returned might include not only the mistaken amount but also the time value of money. In correcting the error, consider which person—the trustee or the employer—bears the expenses of the return and other aspects of the correction. This is not advice to anyone.

If participant contributions were paid into a trust, shouldn’t the participant get the return of the mistaken amount with no less net interest or time value of money than the trust obtained? But might this be a small amount?

Without remarking on what is or isn’t typical or what a service recipient might demand or tolerate (or what a service provider might insist on or negotiate): To evaluate an indemnity provision or a limitation-of-liability provision, distinguish whether the provision applies: between the 3(16) fiduciary and the plan; between the 3(16) fiduciary and the plan’s administrator (personally, not as the plan’s fiduciary); between the 3(16) fiduciary and the employer. Each of those can result in different law about what’s void or otherwise legally ineffective, and what might be legally enforceable. If the plan is governed by ERISA’s fiduciary-responsibility provisions, consider ERISA § 410 [29 U.S.C. § 1110] https://uscode.house.gov/view.xhtml?req=(title:29%20section:1110%20edition:prelim)%20OR%20(granuleid:USC-prelim-title29-section1110)&f=treesort&edition=prelim&num=0&jumpTo=true. A plan may exonerate or reimburse a fiduciary for its prudently incurred expenses if the fiduciary did not breach its responsibility. The plan (or a use of the plan’s assets) can’t relieve a fiduciary, including a 3(16) administrator if it is a fiduciary, from its responsibility or liability to the plan. ERISA § 410(a) does not preclude a person other than the plan or its trust from indemnifying a plan fiduciary, as long as that other person uses personal resources rather than the plan’s assets. A court might not enforce an indemnity provision if it has the effect of setting up an incentive for a fiduciary not to perform the fiduciary’s responsibility. Consider Artie M’s suggestion that a service recipient ought to expect a service provider to stand behind its services. That’s so even if the service provider is a mere contractor, and ought to be especially so if the service provider also is a fiduciary. Over the past 41 years, I’ve done all sides of these negotiations. And with many layers of bargaining power. Remember, an indemnity obligation is only as good as the financial capacity and honesty of the obligor. This is not advice to anyone.

Is the group health plan coverage provided by a health insurance contract? Or is the coverage provided under an employer's "self-funded" arrangement? Were participant contributions paid into a trust? Or were participant contributions a set-off from the employer's obligation to pay wages?