Peter Gulia

A few court decisions about a fiduciary’s decision-making regarding a security that is no longer an employer security after a spin-off are: Young v. Gen. Motors Inv. Mgmt. Corp., 325 F. App’x 31, 32 (2d Cir. May 6, 2009) (a fiduciary’s duty of diversification applies to the plan as a whole). Usenko v. MEMC LLC, 926 F.3d 468 (8th Cir. June 4, 2019) (applying a presumption that a publicly-traded security trades at efficient-market prices; allegations were insufficient to make plausible an assertion that it was imprudent to continue a security, no longer an employer security, as an investment alternative). Schweitzer v. The Investment Committee of the Phillips 66 Savings Plan, 960 F.3d 190 (5th Cir. May 22, 2020) (Construing the present-tense word “acting” in ERISA § 3(5)’s definition of an employer, the former employer’s stock no longer was employer securities of the spun-off employer) (For a plan that provides participant-directed investment, a fiduciary need only provide investment alternatives that enable a participant to create a diversified portfolio; the fiduciary need not ensure that participants actually diversify their portfolios.), cert. denied, No. 20-1255 (Dec. 13, 2021). Stegemann v. Gannett Company, Inc., 970 F.3d 465 (4th Cir. Aug. 11, 2020) (The complaint alleged enough facts to assert a plausible claim that a fiduciary failed to monitor a nondiversified investment alternative.), petition for rehearing en banc denied, No. 19-1212 ECF No. 48 (Sept. 22, 2020), cert. petition filed sub nom. Gannet Co. Inc. v. Quatrone, No. 20-609 (Oct. 30, 2020) {On April 19, 2021, the Court invited the Acting Solicitor General’s brief. On November 9, 2021, the United States filed a brief arguing that the Fourth Circuit’s decision was correct (at least on the particular alleged facts), and that what the fiduciary described as a circuit split did not need review.}, cert. denied sub nom. Gannett Co., Inc. v. Quatrone, No. 20-609, 142 S. Ct. 707 (Dec. 13, 2021), Civil Action 1:18-cv-325-AJT/JFA, 2023 U.S. Dist. LEXIS 216644, 2023 WL 8436056 (E.D. Va. Dec. 5, 2023) (by Judge Anthony J. Trenga) (after a bench trial, finding no breach of diversification or prudence) (“[A] prudent fiduciary considering the timing and other circumstances of divestiture would have weighed the risks of single stock fund holdings against the risks of forced and/or rapid divestiture.”). Snider v. Administrative Committee, Seventy-Seven Energy, Inc. Retirement & Savings Plan, No. Civ-20-977-D, slip op. pages 14-17 (W.D. Okla. Oct. 8, 2021) (Rule 12(b)(6) permits a dismissal of a claim as barred by an affirmative defense only when the complaint and properly considered materials admit all elements of the affirmative defense by alleging the factual basis of those elements.).

Your observation about how to find the facts is just what I need to advise the plan-administration committee. Thank you.

BenefitsLink neighbors, what do you think about this not-repaid loan story? On February 13, 2023, the participant took a $10,000 loan. The participant received the check and the promissory note, showing that her first payment was due on April 7, 2023. The recordkeeper sent the loan file. The employer admits it erred in not uploading the loan file to payroll’s systems. No loan repayment was taken from the participant’s wages. On August 14, 2023, the recordkeeper sent the participant a letter informing her that, if she does not pay, her loan will default. The participant does not admit she received this letter. Yet, the address is the same address to which the $10,000 check was sent, and, one assumes, received—because the check was deposited. The recordkeeper’s record shows the participant loan defaulted on September 29, 2023. In early 2024, the participant received a Form 1099-R, reporting the unpaid loan. The participant is 62, and works part-time. The plan treats the participant as not severed from employment. The plan does not provide a distribution on age 59½. The plan provides none of the SECURE 2019 or SECURE 2022 early distributions. The participant is ineligible for any further loan. The participant asserts she has no computer. That includes lacking a mobile device beyond an old flip phone. The participant asserts that she never looks at her pay confirmations. The participant asserts that she was unaware of any problem about the loan until she received the Form 1099-R report. The participant complains that she lacks money to pay even her Federal income tax (there is no State income tax) on the extra $10,000 income. If the plan’s administrator (a committee of the employer) believes the participant’s statement that she did not notice any problem about the loan until she received the Form 1099-R, should the administrator direct the recordkeeper and trustee to reverse the loan default?

If a taxpayer obeys the Notice and keeps her records, including the physician’s certification, as Internal Revenue Code § 6001 directs, her recontribution opportunity ends before the records-retention period ends. See 26 C.F.R. § 1.6001-1(e) https://www.ecfr.gov/current/title-26/part-1/section-1.6001-1#p-1.6001-1(e).

The Internal Revenue Service’s nonrule interpretation includes this: Q. F-15: If a qualified retirement plan does not permit terminally ill individual distributions, may an employee treat an otherwise permissible in-service distribution as a terminally ill individual distribution? A. F-15: Yes. If a qualified retirement plan does not permit terminally ill individual distributions and an employee receives an otherwise permissible in-service distribution that meets the requirements of both the permissible in-service distribution and a terminally ill individual distribution [see Q&A F-1], the employee may treat the distribution as a terminally ill individual distribution on the employee’s federal income tax return. As part of the employee’s tax return, the employee will claim on Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, that the distribution is a terminally ill individual distribution, in accordance with form’s instructions. The employee must retain the physician’s certification that meets the requirements of Q&A F-6 and F-13 of this notice in the employee’s tax files (as required by [I.R.C. §] 6001) in case the IRS later requests the certification. The terminally ill individual distribution, while includible in gross income, is not subject to the 10 percent additional tax under section 72(t)(1). If the employee decides to recontribute the amount to a qualified retirement plan, the employee may recontribute the amount to an IRA. For example, on May 15, 2024, Participant B, age 50, goes to the doctor and gets a certification of terminal illness that meets the requirements of Q&A F-6 of this notice. Participant B’s plan, a section 401(k) plan, does not permit terminally ill individual distributions but does permit hardship distributions. On June 10, 2024, Participant B applies for a hardship distribution in the amount of $15,000. When Participant B files his tax return, Participant B indicates on Form 5329 that the distribution is excepted from the 10 percent additional tax as a terminally ill individual distribution under section 72(t)(2)(L). Participant B retains the physician’s certification, dated May 15, 2024, with Participant B’s files as part of Participant B’s tax returns for tax year 2024. Participant B does not owe the additional $1,500 (representing the 10 percent additional tax of the amount includible in gross income). Unlike a hardship distribution, Participant B may also recontribute the $15,000 to an IRA following rules similar to qualified birth or adoption distributions. Miscellaneous Changes Under the SECURE 2.0 Act of 2022, Notice 2024-2, 2024-2 I.R.B. 316, 327 (Jan. 8, 2024), https://www.irs.gov/pub/irs-irbs/irb24-02.pdf. I read Q&A F-15, including its example, as allowing a distributee the exception from the too-early extra tax (and a limited recontribution opportunity) even if the claim for the distribution did not furnish the physician’s certification. BenefitsLink neighbors, do you concur? If the plan’s claims procedure for a hardship distribution normally does not receive any evidence beyond the participant’s self-certifying statement on the electronic or paper claim form, am I right in thinking a plan’s administrator need not receive a physician’s certification? If a plan’s administrator need not receive a physician’s certification, might an administrator deliberately not receive it, to avoid privacy and security risks about the individual’s information?

I don’t know what might be correct or incorrect on the underlying question. But here’s an observation: In situations in which a recordkeeper seeks to impose its rule despite the plan administrator’s readiness, after it considers a lawyer’s or other practitioner’s advice, to deliver a written instruction (one within the service agreement) and even expressly indemnify the recordkeeper for following the instruction, we sometimes remind the recordkeeper that: they say they do not give tax or other legal advice, and they say they lack discretion to administer the plan. In my experience, the recordkeeper’s reluctance to process a proper instruction fades quickly.

While the governing law might be a State’s law, don’t assume that it’s the law of a State in which the IRA holder is or was a domiciliary or resident. Many IRA trust or custody agreements include a choice-of-law provision. Putnam’s chooses Massachusetts law. Another reason to read the agreement: Many allow the trustee or custodian to delay a payment until potentially interfering claims are resolved. Some allow the trustee or custodian to honor a transfer incident to a divorce or separation. If seeking a court’s order becomes necessary or helpful, consider whether the court will have or lack personal jurisdiction regarding the custodian. Some trust companies carefully avoid contacts with any more than one or two States. Putnam Fiduciary Trust Company, LLC, is a New Hampshire limited-liability company, with its office in Boston, Massachusetts. A trustee or custodian might follow a court’s order made with enough jurisdiction to bind all the competing claimants. But a court’s order is stronger if binds the trustee or custodian.

As Paul I suggests: Beyond whatever ERISA and the Internal Revenue Code call for, labor-relations law might require that this be done under collective bargaining or some other labor-relations process. During a collective-bargaining agreement’s term, an employer doesn’t change terms or conditions of employment without the union’s assent. And this might need three parties’ assent or accord. A retirement plan is a person separate from the employer or employee organization that establishes or maintains the plan. While there often is some overlap between a labor union’s executives or other employees and a retirement plan’s trustees, it is not necessarily the same people. And even if is, the roles and responsibilities differ. Further, if the union-oriented plan is a multiemployer plan, it might have some trustees elected or appointed by employers. It would do little for an employer and a labor union to agree on a spin-off if the transferee plan might not accept the transfer. Some union-oriented retirement plans evaluate not only that the transfer would be proper, but also that it would be practical in the circumstances. (I’ve seen a union’s retirement plan reject a plan-to-plan transfer when that transferee’s recordkeeper disliked the data feeds that would come from the transferor’s recordkeeper.) I don’t say that any of this is difficult to do. (In my experience, it’s easy—except for getting the recordkeepers to play nice.) Rather, everyone should seek to follow the processes to do it right.

Thank you. As often happens with fiduciary questions, many answers are Be Prudent.

Imagine this (hypothetical) example: A $1 billion plan has plan-administration expenses—a recordkeeper, an administrator (not the plan’s sponsor), a CPA firm, a law firm, and an investment consultant—around $1.5 million a year. If this were charged to the 20,000 individual accounts by the heads, that would be a $75 charge ($18.75 each quarter-year) on each account. That could burden beginner and other low-balance participants. Instead, the fiduciary decides to charge accounts 15 basis points, so bigger-balance participants subsidize lower-balance participants. The charges on individuals’ account are imposed and collected only quarter-yearly, and so a little less often than the plan pays some service providers. Further, the plan’s capacity to meet dollar-measured expenses using asset-measured charges is vulnerable to sometime dips in investment markets. Considering both these factors, the fiduciary leaves a prudent reserve in the plan-expenses account so money is there when needed to pay service providers. Imagine that, as at a December 31, the plan-expenses account’s balance is $1 million, and that amount then is around one-tenth of one percent of the plan’s assets. Is that too much? Or, perhaps after some runups in investments, is $2 million too much? What if the fiduciary prudently finds that money might be needed toward expenses? What if the fiduciary seeks to guard against two or three years of a downturn in investment markets? Or what if the employer’s business might call for layoffs, with many participants taking their account balances when they leave? Has either agency published even nonrule guidance about how much of a plan-expenses reserve is too much? Or is it just what some people in EBSA or the IRS think? Paul I and other BenefitsLink neighbors, your thoughts?

Over the past 40 years, I’ve many times observed frustrations of the kind you allude to. Too many banking, insurance, investment-management, and related businesses face too many incentives to provide weak customer service. But in my experience, the people trying to provide some customer service often are doing the best they can in bad circumstances. And yes, they often invent explanations, and sometimes give wrong answers, without knowing the real content. For a retirement-plans practitioner, knowing when and how to cut past customer service is a valuable aptitude and skill. Especially if the plan lacks its own power. My earlier note was to suggest only that it can help to know the client’s rights, and the investment or service provider’s obligation, before asking for something.

If the contract permits the insurer or custodian to require a medallion signature guarantee, it would be about a person who has authority to instruct the requested distribution. To help your client evaluate how to get what it seeks, consider at least a possibility that the annuity contract or custodial account might not provide the ERISA-governed plan’s administrator authority to instruct a distribution. Some § 403(b) contracts limit a payout right to the individual. Just as some BenefitsLink mavens like to remind one to Read The Fabulous (plan) Document, sometimes with a 403(b) it helps to Read The F****** Contract. And don’t assume that a plan overrides a contract; it might not.

The webpage has an error in its citation of the ruling. IRS Letter Ruling 2001-10-005 (issued Nov. 14, 2000, released Mar. 9, 2001) http://www.legalbitstream.com/scripts/isyswebext.dll?op=get&uri=/isysquery/irl781f/1/doc. The pastor would have gross income when she receives the deferred compensation.

If the plan’s administrator finds that the plan-expenses account is a plan asset. For Schedule H’s asset statement, a balance of the plan-expenses account might fit 1c(15)? For Schedule H’s income-and-expense statement, a credit to the plan-expenses account might, depending on the arrangement and other facts, fit line 2c other income or be a negative amount for line 2i(11)? If the plan-expenses account’s balance includes a carry-over from before the reported-on year began (and preceding years’ reports omitted the asset), one might encounter difficulty reconciling the asset statement with the income-and-expense statement. Or the report might need an adjusting entry. If the plan’s administrator engages an independent qualified public accountant to audit the plan’s financial statement, consider collaborating with the CPA firm about what classifications they consider fair accounting.

Thanks, QDROphile and austin3515. I’m aware that a plan’s fiduciary sets general directions about what’s excluded from the brokerage accounts. I’m aware that a recordkeeper has no control over, and often little or no information about, what happens within the brokerage account. For some plan sponsors, that can be a feature, not a bug. After I asked my question about immediate or delayed crediting to the brokerage account, I found that it’s feasible, if needed, to use a money-market fund for processing without making that fund a designated investment alternative.

Would complaints to Ohio’s insurance regulator help get attention? Or would a need to respond to complaints divert resources from fixing the weaknesses?

For those recordkeepers that offer services regarding a retirement plan’s self-directed brokerage accounts, does a recordkeeper require that a contribution amount allocated to a participant’s account be credited first to an investment other than the brokerage account? Or may the participant’s contribution amount be immediately allocated to her brokerage account?

The employer is considering providing that the plan’s investment alternatives are the mutual funds in the brokerage window, and that there is no designated investment alternative. It’s mutual-funds-only because the firm prohibits its employees from trading individual stocks, bonds, and securities other than shares of SEC-registered funds. About expenses, the employer will pay both the recordkeeper’s fee and the broker-dealer’s fee (for those participants who are employees, not for those who left the employer). I know many retirement-plan practitioners don’t like an absence of designated investment alternatives, feeling it can be hard on some participants. But that policy concern aside, are there operations difficulties or other disadvantages in administering a plan with only nondesignated investment alternatives?

For an individual-account retirement plan that provides participant-directed investment, an employer seeks a mutual-fund-only window. It’s okay if the window is provided through self-directed brokerage accounts. But it must be limited to funds, and must preclude individual stocks, bonds, and securities other than shares of registered-investment-company mutual funds. The selection of mutual funds must not be limited by anything beyond the recordkeeper’s and the broker-dealer’s operations constraints. Which recordkeepers offer this?

If a business owner’s spouse’s or child’s work is not measured with time records, might one reach 1,000 hours of service by working once in each of six months of the year? 29 C.F.R. § 2530.200b-3(e)(1)(iv) https://www.ecfr.gov/current/title-29/part-2530/section-2530.200b-3#p-2530.200b-3(e)(1)(iv). 29 C.F.R. § 2530.200b-2(a)(1) https://www.ecfr.gov/current/title-29/part-2530/section-2530.200b-2#p-2530.200b-2(a)(1) But if a plan’s design lacks safe harbors, is there value in finding a spouse or child is eligible only as a long-term-part-time employee?

Thank you!

I'm thinking of suggesting a client amend its plan to specify this; any reason not to specify?

Albert Feuer (718) 263-9874 Totally a New Yorker, 45 years’ experience Top-rated https://www.martindale.com/attorney/albert-feuer-416689/ While high-educated and deeply knowledgeable, he is pleasantly down-to-earth.

If a measure of compensation relates to Form W-2 wages or § 3401 wages, whether with or without adjustments: For 2023, the educational assistance excluded from an employee’s income (at least for Federal income tax) under a § 127(b) educational assistance program does not count in Form W-2’s box 1 wages. But if some portion was not excludable (for example, because the employer provided more than § 127(a)(2)’s $5,250 limit, the excess is included in income and in box 1 wages. Internal Revenue Code § 127 https://irc.bloombergtax.com/public/uscode/doc/irc/section_127. Form W-2 instructions at page 10, right column, last paragraph, and page 18, right column, item 11 https://www.irs.gov/pub/irs-pdf/iw2w3.pdf. Using your example, ($7,000 - $5,250), $1,750 counts in box 1 wages. In some circumstances, an amount beyond $5,250 might be excluded from the employee’s income and wages to the extent of a working-condition fringe benefit or a required activity that is ordinary and necessary in the employer’s business. Consider testing the detail file against the W-2 file. After finding or confirming the “W-2” starting point, one would discern the meaning of the plan’s provision to exclude from compensation “taxable employee benefits” and apply that provision.

Maybe it’s easier to ignore whichever document anyone suggests. If the plan’s provisions need not be written in the thing tax law calls “the” plan document until the end of a remedial-amendment period, why not wait? If a service provider requires an instruction on what to assume in performing its services, the plan’s administrator might deliver a service instruction (but the plan sponsor can avoid an unnecessary formality, and might avoid several premature obligations).