Peter Gulia

BenefitLink is a great forum for venting some frustrations. And while I wouldn’t describe Bill Presson’s smart observation as a rant, reading and learning from neighbors’ intelligent observations and criticisms is among the reasons I use BenefitsLink. But we can learn by thoughtfully considering the observations. (My note above is an observation about an observation.) For a field that involves many professions and special-focus workers—third-party administrators, recordkeepers, lawyers, public accountants, actuaries, consultants, investment advisers, and many others, we can do better by being mindful of other perspectives. For example, there are many things recordkeepers do that are profoundly frustrating to me and my clients. Yet, by understanding why recordkeepers do it the way they do, I can provide better advice and help my clients manage problems that result from recordkeepers’ business methods.

Even when that alternative-plan rule applies, it might not preclude a new organization from creating a retirement plan, even one that includes a § 401(k) arrangement. Rather, the consequences fall on the “old” plan. That plan might have paid a too-soon distribution—absent some circumstance (perhaps including age 59½) that under the “old” plan’s provisions allows a distribution from the participant’s elective-deferrals subaccount. That plan’s supposed cash-or-deferred arrangement might be treated as not a § 401(k) arrangement. And that plan might be tax-disqualified if, in approving a too-soon distribution, the plan’s administrator acted contrary to the plan’s written provisions. Further, a too-soon distribution from a tax-disqualified plan might not be an eligible rollover distribution. But none of those consequences by itself precludes a new organization from creating a retirement plan, even one that includes a § 401(k) arrangement. The challenges are about administering the “old” plan. And the new organization’s plan might refuse an attempted rollover contribution if the would-be-receiving plan’s administrator knows the distribution from the “old” plan was not an eligible rollover distribution. 26 C.F.R. § 1.401(k)-1(d)(4)(i) https://www.ecfr.gov/current/title-26/part-1/section-1.401(k)-1#p-1.401(k)-1(d)(4)(i). This is not advice to anyone.

Because advice about what to do with retirement plans, and even health and other employee-benefit plans, was not in the scope one’s client allowed. Or, even was contrary to one’s client’s instructions. Or, a lawyer advised about what to do with employee-benefit plans, yet the client didn’t follow the lawyer’s advice. Or, tolerating a retirement-plans exposure was the client’s choice, after considering its lawyers’ advice. Or, the retirement-plans exposure would no longer belong to one’s client. Or, one’s client had no choice to make. There are many ways a retirement-plans exposure can be left behind despite a client’s lawyers having done good or even perfect work.

Is your query about 2023? If so, has the former partner received her K-1 reporting her share of the partnership's items of income, deduction, and credit? Might the tax preparer have already done the apportioning, including figuring the former partner's shares of items based on the portion of the year for which she was a partner?

If a retirement plan’s circumstances include the trust’s investment in an employer security or a significant stake in a security beyond pooled investment fund shares, some TPAs drop a courtesy hint or reminder. Some might do this quietly with the plan fiduciary’s lawyer, if the TPA has a working relationship with that lawyer. Otherwise, a TPA might suggest to the plan’s fiduciary that it ask its lawyer. While many TPAs gives tons of legal advice (and on some topics know much more than many lawyers), the Corporate Transparency Act might be better suited for a handoff.

PS, what instructions (if any) have you received from the retirement plan’s administrator or trustee? Or is your recordkeeper, third-party-administrator, or consulting business a subsidiary or affiliate of a financial institution that applies an OFAC-administered law?

MoJo, lawyers in AmLaw 200 law firms and employee-benefits boutiques “keep book” on which recordkeepers have inside counsel who think about the service recipients’ interests. We hope you’ll stick with it.

If the common shares of the plan-sponsor corporation were transferred to the participant’s former spouse, consider that some right or interest in the reversion might belong, legally or equitably, to the former spouse. The State law that governs the corporation might include law for reviving even a dissolved corporation to take title to its property not collected and disposed of before the dissolution. Also, the State law that governs the divorce or a settlement agreement might include rights and responsibilities. The plan’s trustee should not dispose of or use the plan’s assets until the trustee gets the trustee’s lawyer’s advice. This is not advice to anyone.

MoJo, your recordkeeper’s way is much better than many others.

If one translates the communication to what might (depending on the service agreement) be arguably legitimate: The service provider offers its service to support your plan’s provision for a small-balance involuntary distribution only if your plan’s provision sets its condition at the maximum amount ERISA and the Internal Revenue Code permit. Many service agreements include provisions designed to support service changes. If so, the service recipient’s choices might be: 1) Fall in with the recordkeeper’s business preference. 2) Change the plan to omit a provision for a small-balance involuntary distribution. 3) Don’t change the plan, but accept that the recordkeeper will perform its services applying the maximum amount. 4) Find another recordkeeper. 5) Administer the plan without a recordkeeper. Many service recipients will find choices 3-5 impractical. If I were to advise a plan sponsor (one that also serves as its plan’s administrator and trustee) that received this communication, my advice might be grounded, in some (not all) meaningful parts, on (1) whether the service provider has a contract right to treat the service change as accepted if not expressly rejected; (2) the service recipient’s overall working relationship with the service provider; (3) whether the service recipient has bargaining power; and (4) whether it is feasible for the service recipient to find a recordkeeper that would behave better.

Jaded, thank you for sharing the information. About the situation for which the National Labor Relations Board asserted an unfair labor practice: 1) Did the collective-bargaining agreement provide for the union-covered workers to participate in a multiemployer plan or a union plan? 2) Did the collective-bargaining agreement provide, expressly, that the union-covered workers are excluded from the employer’s plans? 3) If neither #1 nor #2, did the collective-bargaining agreement at least recite that retirement benefits had been considered in the bargaining?

EBECatty, if, after you complete your research and analysis, the ESOP-owned corporation and Joe’s corporation are one employer, could the problems that result be solved with qualified separate lines of business? Or is QSLOB treatment unavailable in the circumstances? Or would QSLOB treatment not solve the particular problem Joe seeks to resolve?

MoJo is right that a careful lawyer advises her client not only about whether the facts might or might not support a § 415 restorative payment but also about whether providing restoration, even with no concession, might alert someone about a fiduciary’s arguable breach and a loss or harm beyond the one on which the fiduciary provided restoration. Also, banks and insurers offer many ways to resolve a market-value adjustment (if a plan or its participant has not by other means done something for the adjustment not to apply).

Unless you work for the national firm, consider suggesting that the plan’s administrator lawyer-up to evaluate whether the administrator has good claims against the third-party administrator. Yet, a lawyer so engaged might fair-mindedly consider that the fact that a contracted service was not performed does not necessarily mean the service provider breached its contract. Until the whole story is discovered, it’s at least possible that the service recipient did not meet a condition. That recognized, a lawyer doesn’t concede her client’s weaknesses, and might assert anything that can be stated truthfully. Further, consider that the employer-administrator might want to protect the secrecy of its communications with evidence law’s privileges for lawyer-client communications and attorney work product.

The Internal Revenue Code § 401(a)(4) and § 410(b)(3)(A) exclusions refer to “employees who are included in a unit of employees covered by an agreement [that] the Secretary of Labor finds to be a collective bargaining agreement between employee representatives and one or more employers, if there is evidence that retirement benefits were the subject of good[-]faith bargaining between such employee representatives and such employer or employers[.]” So, before a § 401(k) plan’s administrator decides to run coverage and nondiscrimination testing without the second union’s covered workers, one might read the collective-bargaining agreement. A collective-bargaining agreement that follows labor-relations norms typically has some chapter, article, or section with a heading that uses the word “retirement”. Or if you don’t see something like that, look for a sentence saying what topics the parties considered. It can be okay that a covered worker has no access to a plan with an elective-deferral arrangement if the worker is covered by some retirement benefit. That might be a union, multiemployer, multiple-employer, or single-employer defined-benefit plan. But if a collective-bargaining agreement says nothing about which retirement plan the covered workers participate in and lacks a recital that the parties bargained over retirement benefits, a tax practitioner might not assume the § 401(a)(4) and § 410(b)(3)(A) exclusions until “there is evidence that retirement benefits were the subject of good[-]faith bargaining[.]”

Thanks. My point is that, even for a plan sponsor that uses an IRS-preapproved document, spending a few minutes at the plan-documents stage—to read the default-beneficiary provision, or even without reading to replace that default with the plan sponsor’s preference—can save lots of foolishness later.

Here’s the reopening of the comment period: https://www.govinfo.gov/content/pkg/FR-2023-02-14/pdf/2023-02545.pdf. That comment period closed April 17, 2023. https://www.reginfo.gov/public/do/eAgendaViewRule?pubId=202310&RIN=1210-AB64 One year would be quick in rulemaking time, especially when other topics consumed attention.

I concur with your observation that, ideally, the government agencies could have done better work on their rulemaking. I believe those who worked on the project sincerely did the best they could, facing constraints on their time and attention and the limits of language. Life is imperfect. We observe together that many clients don’t like spending money for a lawyer to parse text interpretation on what a client imagines ought to be a straightforward question with a simple answer. But let it be the client that decides not to spend money on advice (beyond whatever advice you provide without seeking an incremental fee). And with or without advice, let it be the client that owns the consequences of its choices, whichever choices it makes. Observe that for the underlying question we remark on, there is at least one risk in either direction. Deciding that with-a-balance omits an allocation receivable risks that the administrator doesn’t engage an audit when ERISA required it. Deciding that with-a-balance counts an allocation receivable risks that the administrator spends money—which might be the employer’s money, or some participants’ money—on an audit ERISA didn’t require. Governments often write ambiguous laws, rules, and instructions. An adviser tries to help her client deal with an ambiguity. But that help need not relieve an advisee’s responsibility for choosing.

Another lesson we might take from this: Different service providers’ documents vary on what a base document provides as the default when there is no participant-named beneficiary. That’s so even for service providers that license documents from the same vendor. Even within one service provider, defaults might vary by documents for different business lines. Except for providing a death benefit to a surviving spouse, a provision about a default beneficiary might be an “administrative provision” a user may change without defeating reliance on an IRS-preapproved document’s opinion letter. Before adopting a document (including an amendment or a restatement), a plan sponsor should at least read what default the document would provide. A plan sponsor should consider whether the proposed default fits the sponsor’s interests. If the plan sponsor serves as the plan’s administrator, one might consider whether the proposed default could lead to difficult or inefficient administration. Which default provisions produce which kinds of frustrations and inefficiencies can vary with a particular plan’s other provisions, and with the employer’s workforce and the plan’s participants. While some employers might think a default-beneficiary provision isn’t worthwhile to think about at a plan-documents stage, even one beneficiary situation might cost more time and attention than what the plan sponsor would have used on getting the documents right.

Whatever the instruction might mean, imagine a big recordkeeper might not apply it with an allocation receivable in generating draft Form 5500 reports. Imagine a recordkeeper counts participants with an account balance by looking to what “the system” says was the balance actually credited on December 31. If the participants-with-balances count in a draft Form 5500 report suggests the plan’s administrator need not engage an independent qualified public accountant, often the administrator will accept that assumption. An administrator that assumes its plan was, for a to-be-reported year, a small plan often has not engaged a CPA firm to audit the plan’s financial statements; so no auditor probes any count of participants. Administrators of these plans might not think to ask a lawyer for advice. Not every plan’s administrator has engaged a TPA other than the recordkeeper. So for many plans, an administrator might have no one questioning the recordkeeper’s counts. After considering those possibilities (some might say likelihoods), how many 2023 Form 5500 reports will be filed using a with-a-balance count that omitted participants with only an allocation receivable? Then, imagine the Labor department, lobbied by big businesses, publishes revised instructions to clarify that with-a-balance means a balance actually credited on the applicable date, and need not consider an allocation receivable. If austin3515 suggested a plan’s administrator count as with-a-balance a participant with only an allocation receivable, might your small-business client be displeased with what some might perceive as your overly cautious advice? Even when a client prefers not to be bothered with questions it expects a professional to resolve, is it safer at least to ask one’s client its choice about something that involves spending, as you put it, an extra $20,000?

Before one suggests asking the Labor department to clarify what “with a balance” means, consider the proverbial saying: “Be careful what you wish for, . . . .” Or another practical caution: “Don’t unnecessarily ask a question if you’re not sure you’ll get the answer you’d like.”

If a prospective audit client’s starting point is that the plan’s administrator (or “management” in auditor jargon) did not file required reports, a CPA firm might think it’s difficult to make the engagement profitable. If CPAs find the auditee has weak controls or, worse, missing controls, generally accepted auditing standards (“GAAS”) require an auditor to widen and intensify controls testing and audit procedures. That the plan’s administrator didn’t know ERISA and the Internal Revenue Code required it to file yearly reports suggests at least one weak or missing control. And one wonders about what else was not done. Further, an auditor cannot rely on the recordkeeper’s controls if the auditor knows (or using “appropriate professional skepticism” should consider) that the plan’s administrator did not operate what that report describes as the compensating controls. While in theory a CPA firm might increase its fee to get the extra work paid for (and still get a normal or reasonable return to margin), in the real world it might be impractical to increase the fee that much. TPApril, one way to persuade a CPA firm to take on a difficult engagement is to reach out to a firm that knows and trusts you, and persuade the engagement partner that your new client is committed to doing everything you advise them to do.

The Form 5500 Instructions states: Line 6g. Enter in line 6g(1) the total number of participants included on line 5 (total participants at the beginning of the plan year) who have account balances at the beginning of the plan year. Enter in line 6g(2) the total number of participants included on line 6f (total participants at the end of the plan year) who have account balances at the end of the plan year. For example, for a Code section 401(k) plan, the number entered on line 6g(2) should be the number of participants counted on line 6f who have made a contribution, or for whom a contribution has been made, to the plan for this plan year or any prior plan year. . . . . https://www.dol.gov/sites/dolgov/files/ebsa/employers-and-advisers/plan-administration-and-compliance/reporting-and-filing/form-5500/2023-instructions.pdf I’m unaware of any Labor department guidance that further explains whether an account balance (whether as at an end-of-year, or as of a beginning-of-year) includes an allocation from a contribution receivable (or of a distribution payable). I could interpret the instruction several different ways. Also, some aspects of those interpretations might vary with whether the plan provides or omits participant-directed investment. To show only one partial path: The instruction’s nonrestrictive illustration refers to whether “a contribution has been made[.]” Perhaps made and owing mean different things. As always, it’s the plan administrator’s decision, with whatever advice the administrator considers. But a service provider might make business decisions about what services it offers or provides.

Thank you for your kind help.

For a plan that sticks with Teachers Insurance and Annuity Association of America, do you like TIAA’s Target Date Plus model portfolios? Why or why not?