Peter Gulia

Here’s my question: Imagine someone who advises the individual, and does not advise either of the employment-based retirement plans. If you think it matters, imagine this adviser is an attorney-at-law, a certified public accountant, an enrolled actuary, an IRS-enrolled agent, an IRS-enrolled retirement plan agent, or one who wears none of those stripes—your choice of illustration. In advising the individual, is it professionally and ethically permissible to provide advice that explains the tax law, including 26 C.F.R. § 1.402(g)-1(e)(8)(iv), AND explains that the IRS lacks resources to detect that a later distribution includes amounts the individual ought to treat as a return of excess deferrals? If you think the advice about nondetection is inappropriate, why? I’m developing a point in my summer-semester course, Professional Conduct in Tax Practice. I’ll keep these observations anonymous, unless you prefer attribution.

In this morning’s psalms and canticles, I’ll include prayers for Mike Preston and his family.

Without remarking on what a plan’s procedure should provide or omit: The statute’s regime does not require segregating any portion of a participant’s benefit until the plan has received a court’s order that is a domestic-relations order. From that receipt (if the plan absent a QDRO permits the participant to take a distribution), the segregation period is up to 18 months, but ends when the plan’s administrator decides that the order is not a qualified domestic-relations order. ERISA § 206(d)(3)(G)&(H) https://uscode.house.gov/view.xhtml?req=(title:29%20section:1056%20edition:prelim)%20OR%20(granuleid:USC-prelim-title29-section1056)&f=treesort&edition=prelim&num=0&jumpTo=true

As the background for my query explained: “The plan sponsor’s general policy in setting plan provisions is to treat participants as adults who make one’s choices about what to do with one’s money.” And “the plan allows every kind of early-out distribution that can be allowed without tax-disqualifying the plan.”

Fidelity suggests: “You may be able to request a refund of federal income taxes that you originally paid on the amount of your birth or adoption distribution if you timely file an amended federal income tax return for the applicable year(s).” https://nb.fidelity.com/bin-public/600_WI_PreLogin_English/documents/976801.1.0_QBOAD_Recontribution.pdf (emphasis added). But I found no Treasury rule and no IRS nonrule guidance that directly supports that statement. Some practitioners might guess it’s not happenstance that the three-year repayment period (for a QBAD received after December 29, 2022) aligns, somewhat, with a usual time for filing an amended return.

Yes, “the computers can [and do] administer the loan program.”

Paul I, thank you for your helpful thinking. (If it matters, this plan allows, beyond payroll deduction, other ways to make loan repayments, including one’s individual checks.) BenefitsLink neighbors, if the participant has fully repaid the defaulted loan, is there any tax-law reason not to allow to allow such a participant to take another loan?

Should a plan allow a loan after the participant defaulted on an earlier loan but later fully repaid the loan? An individual-account (defined-contribution) retirement plan allows participant loans. These loans are meant to follow Internal Revenue Code § 72(p) so making a loan is not then treated as a distribution. The plan has no nonelective or matching contributions, only elective deferrals. The plan sponsor’s general policy in setting plan provisions is to treat participants as adults who make one’s choices about what to do with one’s money. For example, the plan allows every kind of early-out distribution that can be allowed without tax-disqualifying the plan. The plan’s current loan policy precludes another loan if the participant defaulted on an earlier loan. That restriction applies even if the participant fully repaid the loan after the default. The plan sponsor is considering revising the policy to allow a participant to take another loan if the participant has fully repaid the defaulted loan. Nothing in the plan’s procedure, whether current or proposed, for processing participant loans calls for the plan’s sponsor/administrator to do anything on a particular request. (A loan never requires a spouse’s consent.) Rather, the recordkeeper routinely processes approvals and denials of loans on nondiscretionary terms. BenefitsLink neighbors, what do you think? Is it a good idea to allow a participant to take another loan if the participant has fully repaid the defaulted loan? Or if it is a bad or troublesome idea, why?

Some recordkeepers provide in-platform records of participant-directed broker-dealer accounts if the plan uses the broker-dealer the recordkeeper has an arrangement with. I express no view about whether to use these accounts, and observe only that it might be possible.

Last Friday, the United States filed its notice of appeal. Texas v. Garland, No. 5:23-CV-034-H, 2024 WL 814498 (N.D. Tex. Feb. 27, 2024), notice of appeal [document 113] filed Apr. 26, 2024. I express no view about whether the appealed-from decision is a correct or incorrect interpretation of the Constitution of the United States. Texas v Garland notice of appeal 177116797415.pdf

Or, if the limited-partnership interests are valued as at December 31, 2024, why not direct the plan’s trustee to deliver to the participant, on December 31, 2024 (or, if the participant prefers, in 2025Q1), a number of whole or fractional LP units that meets 2024’s minimum-distribution amount (or the greater portion the participant requests)?

Rather than amending the plan to legitimate only the troublesome rollover contribution, might the plan sponsor consider widely allowing a rollover contribution even if the employee has not met the age, service, and other eligibility conditions for a nonelective contribution, matching contribution, or elective-deferral contribution? Among other factors to consider: An advantage would be removing a fact-checking or decision about which the plan’s administrator or its service provider sometimes might err. A disadvantage could be that a rollover contribution might increase a count of participants with an account balance, which might matter for whether the administrator must engage an independent qualified public accountant. Likewise, a count of participants with a nonzero balance might matter for one or more other purposes.

If a plan’s administrator—following a reasonable record-retention (and destruction) plan—no longer has proof (beyond a presumption of regularity) that a distribution was paid, but the claimant lacks evidence that no distribution was paid, how do these situations resolve? If the Employee Benefits Security Administration opens an inquiry, what does EBSA ask for? And if the response is no records remain, do they close the file? Do any of these claimants bring a lawsuit? Something else?

One of the sadnesses of the IRS-preapproved documents regime is that IRS people set conditions on what will get an opinion letter, and often make those interpretations with no rulemaking procedure and even nothing in the Internal Revenue Bulletin.

Is this query about whether a set of IRS-preapproved documents may, regarding the participants of a collective-bargaining unit, provide an obligated contribution (or describe an intended contribution) by referring to a collective-bargaining agreement (rather than filling in something on an adoption-agreement form)?

Some employers and administrators use a dependent eligibility verification to find people not eligible for coverage under a health plan. These find participants who enrolled as a spouse someone who was not the participant’s spouse. But how often does this find participants who enrolled as one’s child someone who was not the participant’s child? BenefitsLink neighbors, any experiences you can describe (with anonymity)?

Just a curiosity: If a plan's sponsor and administrator decide (for whichever reason, or for no reason) not to correct a failure to obey the plan's governing documents, is there anything that must be shown in a Form 5500 report?

If the distributee was not the beneficiary: A transfer of plan assets to a party in interest might be a prohibited transaction. ERISA § 406(a)(1)(D), 29 U.S.C. § 1106(a)(1)(D) https://uscode.house.gov/view.xhtml?req=(title:29%20section:1106%20edition:prelim)%20OR%20(granuleid:USC-prelim-title29-section1106)&f=treesort&edition=prelim&num=0&jumpTo=true Was the aunt a party in interest? Unless the aunt was the employer’s employee or had some connection to the plan or the employer, the aunt might not have been a party in interest. ERISA § 3(14), 29 U.S.C. § 1002(14) https://uscode.house.gov/view.xhtml?req=(title:29%20section:1002%20edition:prelim)%20OR%20(granuleid:USC-prelim-title29-section1002)&f=treesort&edition=prelim&num=0&jumpTo=true This is not advice to anyone.

One can’t discern how to divide the executive’s rights, or even whether that’s possible, without reading, for each of the plans you mention, the plan’s governing documents. If you have a particular situation to work on, the former spouse’s lawyer might consider engaging the article’s author, Karen Field https://rsmus.com/people/karen-field.html.

pwitt, while recognizing Melton (if you find nothing that overrules, questions, or distinguishes it), consider these possibilities: Might an action seeking an equity remedy that the former spouse restore to the decedent’s estate property that in good conscience does not belong to the former spouse at least begin in a State’s courts? Might such an action proceed in a State’s courts? Or are the would-be litigants citizens of different States? If so, would the former spouse seek a removal to a Federal court? Might the former spouse and her lawyers be unaware of Melton (and of the several Federal district court decisions that follow Melton)? Might a judge be unaware of Melton (if neither litigant briefs it)? If an action proceeds in a State’s court, might a judge recognize that Melton does not control the States’ courts? Of Federal courts’ decisions, only a decision of the Supreme Court of the United States can be a precedent that controls a State’s courts. A decision of an inferior Federal court, while it usually gets “respectful consideration”, does not control a State court’s interpretation. Bryan A. Garner, Carlos Bea, Rebecca White Berch, Neil M. Gorsuch, Harris L Hartz, Nathan L. Hecht, Brett M. Kavanaugh, Alex Kozinski, Sandra L. Lynch, William H. Pryor Jr., Thomas M. Reavley, Jeffrey S. Sutton & Diane Wood, The Law of Judicial Precedent §§ 79-80 [pages 679-693] (Thomson Reuters 2016). If an action proceeds in a State’s court, is the decedent’s estate’s advocate excused from citing Melton because it is not “legal authority in the controlling jurisdiction”? Model Rules of Pro. Conduct r. 3.3(a)(2) (Am. Bar Ass’n 2024). Whatever might be a persuasive authority in a State’s court or even a precedent for a Federal court in the Seventh Circuit, is the decedent’s estate’s lawyer free to present “a good faith argument for an extension, modification[,] or reversal of existing law”? Model Rules of Pro. Conduct r. 3.1 (Am. Bar Ass’n 2024). Might each of the decedent’s estate and the former spouse recognize uncertainties about the other’s claims, uncertainties about remedies, and each’s burdens of litigation as reasons to settle on a partial amount to be restored to the decedent’s estate? This is not advice to anyone.

Pwitt, if you seek particularly a decision of the U.S. Court of Appeals for the Seventh Circuit, read Melton v. Melton, 324 F.3d 941, 943–945 (7th Cir. 2003) (ERISA preempts a State-law constructive-trust remedy), available at https://casetext.com/case/melton-v-melton. Trial courts in the Seventh Circuit have applied Melton’s reasoning. See, for example, Reliastar Life Ins. Co. v. Keddell, No. 09-c-1195, 2011 U.S. Dist. LEXIS 3164, 2011 WL 111733, at *3 (E.D. Wis. Jan. 12, 2011) (“A constructive trust would violate ERISA’s preemptive force even if it applied after the funds from the [plan] were actually distributed.”). You’d use your citator tools to find whether any Seventh Circuit decision questions or distinguishes Melton’s reasoning. I have not researched this point recently. This is not advice to anyone.

I don’t suggest any conclusion about what is or isn’t a “reasonably equivalent basis”. I suggest only that a decision-maker consider the point if it seeks either of the statutory prohibited-transaction exemptions.

Beyond whatever Federal income tax law might call for as a plan’s tax-qualification conditions, for a plan governed by ERISA’s part 4 (fiduciary responsibility) of subtitle B of title I or with transactions that can result in an excise tax or other consequences under Internal Revenue Code § 4975, consider that the rule implementing the statutory prohibited-transaction exemptions requires that participant loans “[a]re available to all such participants and beneficiaries [those who are a party-in-interest or disqualified person regarding a plan] on a reasonably equivalent basis[.]” 29 C.F.R. § 2550.408b-1(a)(1)(i) (emphasis added), https://www.ecfr.gov/current/title-29/part-2550/section-2550.408b-1#p-2550.408b-1(a)(1)(i).

And for those who want to advise about retirement, health, other employee benefits, and executive compensation challenges that come from a business deal, buy Ilene’s book: Employee Benefits in Mergers and Acquisitions, 2023-2024 Edition https://law-store.wolterskluwer.com/s/product/employee-benefits-in-mergers-acquisitions-20232024-misb/01t4R00000PBNhKQAX

And let’s consider: Many plans’ sponsors and administrators will interpret what the tax-law condition requires or permits and how to administer a set of partially or ambiguously written plan provisions about two or more years before those provisions might be stated by what tax law calls “the” plan document.