Peter Gulia

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.

Perhaps a plan’s governing documents might not preclude an individual from specifying her elective-deferral election with conditions beyond those customary regarding an employee’s wages to refer to one or more business conditions. For example, how about: . . . ? My elective deferral is the greatest amount that: (i) does not exceed the IRC § 402(g) limit (with the applicable IRC § 414(v) extension) and, counting the employer’s nonelective contribution, does not exceed the IRC § 415(c) limit; (ii) does not result in any contribution to the plan that otherwise would be deductible under IRC § 404 being nondeductible for 2024; (iii) is limited such that Supportable Inc. does not breach any debt covenant; (iv) is limited such that Supportable Inc.’s net profit for 2024 is no less than $10,000; and (v) is limited such that, immediately after payment into the plan’s trust, Supportable Inc.’s cash-on-hand is no less than $5,000. Could we defend an election like that as determinable and as decided before the year closed? This is not advice to anyone.

To think about how to classify a fee or other expense, one would want to know more about the plan and about what service was provided. Is the plan a health plan? A disability plan? A life insurance plan? Some other kind of welfare benefit? Or is the plan a defined-benefit pension plan? Or an individual-account retirement plan? Was the service about a health insurance contract? A stop-loss contract? Disability insurance? Life insurance? Fiduciary liability insurance? Some other casualty insurance? A fixed annuity contract? A variable annuity contract? And was the service truly advice to the plan? Or was it a service to an issuer or intermediary of an insurance contract?

Just curious: Does Form 5500 software include any programming that sets a presumptive path for reporting based on how an amount is coded for Schedule C? Is there a logical-consistency check between Schedule C and Schedule H?

ERISA § 204(h)(8)(A) defines an “applicable individual” as a participant or alternate payee “whose rate of future benefit accrual under the plan may reasonably be expected to be significantly reduced by such plan amendment.” https://uscode.house.gov/view.xhtml?req=(title:29%20section:1054%20edition:prelim)%20OR%20(granuleid:USC-prelim-title29-section1054)&f=treesort&edition=prelim&num=0&jumpTo=true

Consider also that the Internal Revenue Service would not tax-disqualify a plan for a failure to administer the plan according to the written plan if one administers the plan according to the documents as later changed by a remedial amendment the IRS recognizes. About § 401(a)(9)’s ten-year period regarding a beneficiary who is not an eligible designated beneficiary, for a participant’s minor child the ten-year period does not begin until “the date the individual reaches majority”, which the Treasury department interprets as 21 (even while recognizing that only one of the 50 States has an age of majority that late). minimum-distribution rules proposed FR 2022-02522.pdf

Are both reports for the same period? And even if they are, consider that one report's item might be on an accrual basis of accounting while the other report's similar item refers to an amount actually paid or received. Further, seemingly similar items might not be exactly the same in a particular report's query or instructions.

After we left off this discussion, another state's courts reason against a during-marriage domestic-relations order. Wallace v. Wildensee, 990 N.W.2d 637, 2023 Empl. Benefits Cas. (BL) ¶ 154,219 (Iowa 2023) (When there is no divorce or separate-maintenance proceeding, a court lacks power to issue a domestic-relations order.).

Why is the plan’s administrator so eager to pay? The facts and circumstances you describe suggest that no one submitted a claim. Even if the plan would provide an involuntary minimum distribution because the beneficiary’s required beginning date is a few days away (or the plan otherwise provides an involuntary distribution), an administrator might consider it prudent not to pay if the payee’s identity is not determined. If an administrator needs or wants to put in an effort to identify a minor’s payee, an administrator might consider checking records of the court in which the decedent’s will likely would be admitted to probate and, if different, records of the court that has jurisdiction to appoint the minor’s conservator, guardian, or other fiduciary. A search of publicly available records might be logically consistent, by analogy, with the IRS’s internal guidance directing an EP examiner not to challenge a plan’s tax-qualified treatment for failing to pay a required minimum distribution when the plan’s administrator has not located the distributee. This is not advice to anyone.

Based on how much strength a tax position needs to get the taxpayer an excuse or relief from a tax-reporting penalty, tax practice has developed a special lingo with term-of-art phrases to describe the relative strength of interpretations of tax law. See my table “How strong is this interpretation of tax law?” attached below. One of those term-of-art descriptors—“more likely than not”—applies in generally accepted accounting principles for accounting for income taxes. A less-confident “substantial authority” often lets a taxpayer assert a tax-return position without a particular disclosure that the IRS might view the tax law differently. (Using Belgarath’s illustration, if a practitioner doesn’t nudge her thinking from 50/50 to 51/49, one would write a substantial-authority opinion. That might be enough to omit a particular disclosure from a tax return, but might not be enough to omit an accrual from financial statements.) A practitioner who renders written advice often provides a reasoned opinion that at least alludes to, and often describes, other possible interpretations. Likewise, it’s often useful to present all or some possible interpretations and explain the strengths, weaknesses, and consequences of each choice. This note is about tax advice a practitioner provides to her client that or who is the taxpayer. An opinion or advice that a nonclient third person may read is a different practice. And a lawyer’s advice to an employee-benefit plan’s fiduciary often is burdened by recognizing that an ERISA-governed plan’s fiduciary—and, depending on State law and other circumstances, a governmental plan’s or church plan’s fiduciary—cannot invoke the evidence-law privilege for lawyer-client communications against the participants and beneficiaries of the fiduciary relation. How strong is this interpretation of tax law.pdf