Peter Gulia

Some suggest that a revision (whether a restated SPD, or a summary of material modifications) need explain only those plan provisions that are “material”. “Material” is awkward legalese for “it matters” (to inform some choice a participant, beneficiary, or alternate payee could make). If a plan is amended to discontinue contributions and get ready for a single-sum final distribution, some provisions included in an otherwise boilerplate plan amendment might never apply.

Observe that Bloomberg displays I.R.C. § 408(p)(11). In context, not as a footnote, Bloomberg introduces the change: Editor’s Note: Sec. 408(p)(11), below, after being added by Pub. L. 117-328, Div. T, Sec. 332(a), is effective for taxable years beginning after Dec. 31, 2023. https://irc.bloombergtax.com/public/uscode/doc/irc/section_408

Many practitioners who don’t pay Bloomberg, CCH/Wolters Kluwer, Lexis, Tax Analysts, Thomson Reuters/Westlaw, or another commercial publisher for a professionally edited and annotated version, use: Bloomberg’s free version https://irc.bloombergtax.com/; or the US Government’s United States Code. http://uscode.house.gov/. In that compilation, I.R.C. § 401 = 26 U.S.C. § 401. The government’s compilation includes SECURE 2022 provisions applicable for 2024, and shows full sets of amendment notes. Bloomberg’s version (even its free version) displays in-context notes to show which provisions apply to 2024, which apply to earlier years, and which not-yet-applicable provisions will apply for later years—2025, 2026, 2027, 2028, 2029, and 2030.

Consider asking the IRS’s litigator what appeal bond would be satisfactory to the IRS. Your client might be pleasantly surprised by the answer.

As QDROphile observes, even if the plan grants the administrator the widest discretionary authority, that fiduciary must consider (at least) all instruments and documents governing the plan, the plan administrator’s written procedures, including forms, and other relevant documents. None of us sees the writing the participant signed. But following Dougsbpc’s description, some fiduciaries might find that the participant named two primary beneficiaries, 50% each. Some fiduciaries find reasons to excuse some failures in completing a form; others, not so much. Fact-finding is sensitive to all the facts and circumstances. If the plan granted the administrator discretionary authority, an advantage of using it is that a court defers to the fiduciary’s exercise of discretion unless it is so unreasoned that the law treats it as “arbitrary and capricious”.

Thank you for sharing your helpful observations. (While the example I described is not an interpretation I would advise, I can see how some lawyers might.) Another curiosity: Is an analysis of whether a nonowner employee is deemed self-employed different if the employer is a partnership (or a limited-liability company treated as a partnership for Federal income tax purposes)? Is there anything in the Internal Revenue Code, or in the proposed § 125 rules, that treats a parent as a deemed partner or otherwise a self-employed individual because the parent’s adult child is a partner?

Brian Gilmore, just my curiosity: When there is no final, interim, or temporary rule, many look to a proposed rule or other nonrule guidance as a source of cautious interpretation. While I imagine Newfront and its smart lawyer would be careful not to suggest doing so, have you ever seen a cafeteria plan sponsor use its own interpretation, perhaps with its tax practitioner’s advice, about the meaning of employee as used in § 125? For example, have you ever seen a plan that excludes an actual 2% shareholder, but treats as a § 125-eligible employee someone who is not a shareholder (and would be a deemed shareholder only by attribution from an adult child if one follows the proposed rule’s interpretation)?

Some churches allow both § 403(b) and § 457(b). If an employee is 50 or older, eligible for both plans, and has enough compensation, this might allow elective deferrals up to $61,000 [2004]. That’s in addition to nonelective and matching contributions (if any), if those are provided under a plan other than a § 457(b) plan. This is not accounting, tax, or legal advice to anyone.

Consider also: The plan’s administrator might not need to decide anything until someone submits a claim, or the plan mandates an involuntary distribution (for example, under a § 401(a)(9) provision). When someone submits a claim or it otherwise becomes necessary or appropriate to decide who is or is not a rightful beneficiary, the administrator should follow ERISA § 503 and the plan’s claims procedure. This is not accounting, tax, or legal advice to anyone.

The plan’s administrator might read carefully the plan’s governing documents to discern how much discretionary authority the administrator has not only to interpret the plan’s provisions but also to interpret a participant’s beneficiary designation and to make discretionary findings of fact.

And to help discern the meaning of, or find support for an interpretation of, § 414(m)(5), consider the Conference Committee Report on the Tax Equity and Fiscal Responsibility Act of 1982. Many judges now disfavor legislative history as a way to interpret an enacted text. Yet, for older statutes, especially tax legislation, it can be a useful source of background information. A staff explanation about Congress’s reason for legislating (even if partly or wholly imagined) can suggest useful clues to interpret the enacted text.

Exactly when did the plan sponsor sign the document that stated the provision the plan sponsor did not intend?

You’re right to recognize a point many domestic-relations lawyers often don’t fully consider: One can’t divide a right that no longer exists. Too many people imagine a right under an individual-account retirement plan always is an account balance that can be simply and neatly divided. But what if it isn’t (at least not always)? Whether the regime for dividing a marriage’s property is a QDRO or other Federal regime or, without Federal supersedure, a State’s law, a general principle is that a court might divide property rights between the current, separated, divorcing, or former spouses, but should not impair the contract rights (or increase the contract obligations) of a third person. You’re right that a property-seeking spouse should act (or engage one’s attorney to act) quickly and vigorously to preserve one’s interests before some change happens. And ideally, a spouse would learn (or engage one’s lawyer to learn) a retirement plan’s provisions. Likewise, if a property-holding spouse made an annuity contract (perhaps without the other spouse’s consent), the property-seeking spouse would learn (or engage one’s lawyer to learn) the annuity contract’s provisions. If more plans allow insurance-provided annuities and more participants choose those annuities, some of your learned friends in domestic-relations practices might benefit from you teaching a continuing-legal-education course on these points.

If an employer requests a return of an amount the employer says it contributed by a mistake of fact, it is the plan’s trustee—or, if the trustee is directed, the plan’s administrator—that decides whether the contribution was made by a mistake of fact. ERISA § 403(c)(2)(A)(i) [29 U.S.C. § 1103(c)] does not define what is or isn’t a mistake of fact. No Labor department rule interprets this. No Treasury department rule interprets this. Plans’ fiduciaries differ widely in their interpretations about what is or isn’t a mistake of fact.

If a church seeks to design an unfunded deferred compensation plan that is not a § 457(b) eligible plan, the church should get its expert lawyers’ advice about whether a condition for the participant’s “future performance of substantial services”: is legally enforceable under each state law that would or could govern the employment, is proper under the internal law of the church, and provides enough risk that the condition might not be met, and enough confidence that the church or the church-related charitable organization would enforce the condition, so that the condition is a substantial risk of forfeiture within the meaning of § 457(f)(3)(B). Some conditions designed to protect interests of a profit-seeking business, or even of a nonchurch charitable organization, might be inapt regarding a church’s wider purposes (or might be contrary to a church’s beliefs about human dignity).

An unfunded deferred compensation plan is designed in ways that do not meet part 2 (participation and vesting), part 3 (funding), and part 4 (fiduciary responsibility) of subtitle B of title I of the Employee Retirement Income Security Act of 1974. For each of those parts, an exception excuses “a plan which is unfunded and is maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees[.]” To meet that exception, a nongovernmental ERISA-governed plan limits participation to such a “select group”. But a church plan (see below), which is not ERISA-governed unless it elects to be so governed, does not need the select-group exception if ERISA title I does not apply. A church plan is a plan that a church, a convention or association of churches, or an organization controlled by a church (or a convention or association of churches) establishes or maintains for a church’s employees. A church plan does not include a plan for employees of an unrelated trade or business. A church plan might include a plan established or maintained by an organization that is sufficiently controlled by, or associated with, a church. Before assuming a plan is a church plan, get an expert lawyer’s advice about whether the plan is sufficiently established and managed by the church, not merely a church-related organization. Also, a plan should obey the internal law of the church. Even if there is no ERISA title I need to limit participation, there are tax law, wage-payment law, contract law, and other reasons to limit participation under an unfunded deferred compensation plan. For more information on these points, see 457 Answer Book and ERISA: A Comprehensive Guide, both published by Wolters Kluwer in convenient internet formats. This is not accounting, tax, or legal advice to anyone.

Those are truly helpful and useful observations. Other BenefitsLink neighbors' views?

The Treasury’s Regulations Governing Practice before the Internal Revenue Service (reprinted as Circular 230) includes this: Requirements for written advice The practitioner must [when giving written advice on a Federal tax matter]— Not, in evaluating a Federal tax matter, take into account the possibility that a tax return will not be audited or that a matter will not be raised on audit. 31 C.F.R. § 10.37(a)(2)(vi) (emphasis added). If that rule governs a practitioner’s advice-giving, it applies only for written advice, and only for written advice that evaluates a matter. Even if one follows the IRS’s assertions that the Circular 230 rules govern everything a once-recognized practitioner does that, however indirectly, relates to her practice before the Internal Revenue Service, § 10.37(a)(2)(vi) does not restrain one from providing truthful information, not advice, about nondetection or nonenforcement. Beyond those tax-practice rules, whether a lawyer must, may, or must not provide advice or information about nondetection and nonenforcement remains a subject of considerable academic and professional discussion. In summer semesters, I teach a law school’s course on Professional Conduct in Tax Practice. Here’s an edited excerpt from a reading list I give them: Jamie G. Heller, Legal Counseling in the Administrative State: How to Let the Client Decide, 103 Yale L.J. 2503 (1994) (suggesting a lawyer educate her client with full-picture counseling about the law’s provisions, practical application, potential nondetection, potential nonenforcement, and purposes so the client can make fully informed choices). Stephen L. Pepper, Counseling at the Limits of the Law: An Exercise in the Jurisprudence and Ethics of Lawyering, 104 Yale L.J. 1545 (1995) (suggesting modes of reasoning about whether it is appropriate for a lawyer to advise a client about potential nondetection or nonenforcement). Linda Galler, The Tax Lawyer’s Duty to the System, 16 Va. Tax. Rev. 681 (1997). Robert W. Gordon, Why Lawyers Can’t Just Be Hired Guns [chapter 3] in Ethics in Practice: Lawyers’ Roles, Responsibilities, and Regulation (Deborah L. Rhode, ed. 2000) (“Lawyers have to help preserve the commons—to help clients comply with the letter and purpose of the frameworks of law and custom that sustain them all; and their obligation is clearly strongest where there is no adversary with access to the same body of facts to keep them honest, and no umpire or monitor to ensure conformity to legal norms and adequate protection of the interests of third parties and the integrity of the legal system.”). Frank J. Gould, Giving Tax Advice—Some Ethical, Professional, and Legal Considerations, 97 Tax Notes 593 (2002). Michael Hatfield, Legal Ethics and Federal Taxes, 1945-1965: Patriotism, Duties and Advice, 12:1 Fla. Tax Rev. 1-56 (2012). Michael Hatfield, Committee Opinions and Treasury Regulation: Tax Lawyer Ethics, 1965-1985, 15 Fla. Tax Rev. 675 (2014). Milton C. Regan, Tax Advisors and Conflicted Citizens, 16 Legal Ethics 322-349 (2014) (suggesting that ethics or professional-conduct expectations ought to vary with whether a lawyer serves as an advocate or an adviser, and for advisers by the context in which an advisee seeks advice). John S. Dzienkowski & Robert J. Peroni, The Decline in Tax Adviser Professionalism in American Society, 84-6 Fordham L. Rev. 2721 (2016). Heather M. Field, Aggressive Tax Planning & The Ethical Tax Lawyer, 36 Va. Tax Rev. 261 (2017) (suggesting a lawyer “identify and implement her philosophy of lawyering” about tax planning). Michael Blackwell, Conduct Unbefitting: Solicitors, the SRA and Tax Avoidance, 2019-1 British Tax Rev. 31-54 (2019) (criticizing the Solicitors Regulation Authority for wrongly suggesting that a solicitor who facilitates tax avoidance necessarily breaches the SRA Code of Conduct). Rashaud J. Hannah, Betwixt and Between: A Tax Lawyer’s Dual Responsibility, 34 Geo. J. Legal Ethics 991 (2021). ****** I imagine few of us want to coach a client on getting away with the wrong thing. But there are situations in which law is ambiguous, or how the facts relate to law is ambiguous. And even when there is no ambiguity, there are circumstances in which some of us think it’s appropriate to furnish information and let a client decide what the client does or omits.

On whether an employment-based plan’s administrator fails to administer the plan according to its governing documents (including a § 401(a)(9) provision) so that the IRS would tax-disqualify a plan on that ground, a fair reading of relevant tax law ought to allow some tolerance for situations in which the beneficiary is not yet decided. As Luke Bailey points out, we’ve not found a regulation, or even nonrule published guidance, that describes such a tolerance. A rulemaking project on § 401(a)(9) remains open. Further, the Treasury might revise its proposed rule to follow and interpret SECURE 2022 changes, and might invite another round of comments. For situations in which an administrator delays a distribution while deciding (or waiting for a court to decide) which person is the rightful beneficiary, would it be helpful or harmful for Treasury to put something in the regulations to recognize those situations? For example, a rule might say a plan is not tax-disqualified for failing to pay a beneficiary’s distribution when the plan’s administrator uses a claims procedure—with periods no longer than those permitted under ERISA § 503—to decide who is the beneficiary, or when a court proceeding to decide which person is the beneficiary is pending. BenefitsLink mavens, do we want an express rule? Or are we better off leaving this to good judgment?

Bri, instead of “sell it to whom”, if the mutual fund is a registered-investment-company open-end fund (and most money-market mutual funds are an open-end fund), a shareholder likely has a right to redeem shares with the fund itself—no need to find a buyer. A redemption of shares of such a fund is based on a net asset value of the securities and other property the fund holds. A money-market fund typically adjusts its accounting every NYSE day so a share’s NAV and redemption price is $1.00 per share every day. If the shares were worth $50,000 when delivered to the plan’s trustee, the trust likely holds a smidge more than 50,000 shares now. But “show your work” for the corrections, and see to it that the individual’s income tax return, the employer’s income tax return, and the pension plan’s information return all disclose what happened and how it is corrected. And when the business owner pays extra for that incremental work (or sees his tax preparer and you graciously do it without seeking an extra fee), remind him how much easier it would be if he consults the professionals first.

I really meant my three questions as questions. (I lack knowledge about tax-law rules for defined-benefit plans.) If the answer to my question: “Does the pension plan allow a contribution by a delivery of property other than money?” is No, or that the employer prefers not to use such a provision (perhaps because the contribution would not meet a funding obligation, or it would fail to meet a condition for the plan’s tax-qualified treatment), here’s our next question: Does the economic substance of what happened suggest an opportunity for a correction? Could the plan’s trustee redeem the trust’s money-market fund shares for money? Could the plan’s trustee return that money to the employer? Then, could the employer pay, in money, a proper contribution to the plan’s trust? (Or, could the trustee and the employer simplify transactions by treating the trust’s retention of the redemption’s money as an offset against the employer’s obligation for the contribution? With the employer paying, in money, the additional amount needed to make the sum correct?) Is it feasible for the employer and the plan’s one participant to bear the consequences that result from the contribution being paid later than it ought to have been paid (or later than some related point treats the contribution as having been paid)?

If an excise tax would apply and no other remedy or accounting fits, the employer, the plan’s administrator, and the plan’s trustee each might want advice to evaluate whether a contribution was made “by a mistake of fact” so that, if within one year after the payment of the mistaken contribution, the trustee might return the mistaken amount to the employer.

If the plan's administrator in fall 2023 did not know that the participant's death had happened, how does the plan's administrator know it now? And has the plan's administrator received a claim from anyone?

Yes, I have often seen (and continue to see) sloppy draft directions and instructions. I rewrite them. You’re right that the plan’s administrator should seek more and better attention. If the recordkeeper’s draft is not what the plan’s administrator wants to direct and instruct, the administrator might refuse to sign. If the plan’s administrator can get help from a lawyer who knows what’s needed, the administrator might present its rewrite. In my experience, a recordkeeper’s customer-service people often are glad to receive a rewrite because they can present this to an inside lawyer or plan-compliance manager. Doing so takes an open item out of the customer-service person’s time-tracking while the matter is in another department. And sometimes a review helps get better attention. If the plan’s administrator lacks help, it might wait on moving toward final distributions until the administrator can get help.

Whichever person is the plan’s administrator or, even if not so appointed, acts for those functions, directs the plan’s trustee, and instructs the administrator’s recordkeeper, third-party administrator, and other service providers. Your description suggests such an administrator or other fiduciary might need some lawyering to rewrite the directions and instructions. One practical suggestion to you 401 Chaos, don’t take on new or incremental work until you get a fresh (and carefully written) engagement and collect an advance payment of your fee. Beyond managing a risk of nonpayment, it’s a way to test whether a person has authority.