Peter Gulia

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.

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.