Peter Gulia

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.

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[.]”