Peter Gulia

Using that example, what’s our guess about how much of a recordkeeper’s or other service provider’s incremental expense won’t be paid or reimbursed by the employer or the plan, or otherwise indemnified?

Here’s a factor we haven’t yet discussed: Might a service provider charge a somewhat higher fee because a particular plan (or a class of plans) poses a risk that the service provider might be dragged into a lawsuit or investigation, or otherwise incur expenses, for something that is not the service provider’s fault but nonetheless results in expenses, which might not be indemnified, and other costs? Is this a factor in real-world pricing?

The statute defines “retirement income”. That definition’s first eight subparagraphs refer to kinds of retirement plans, contracts, or accounts. Subparagraph (I) about nonqualified deferred compensation puts some restraint on which payments are treated as retirement income.

For an ERISA-governed plan, a fiduciary must loyally and prudently evaluate and engage service providers considering only the exclusive purpose of what’s best for the plan “solely in the interest of the participants and beneficiaries[.]” Whether using a local service provider supports an incremental fee might depend on many factors, perhaps including the exact services engaged, how useful and valuable to the plan’s administrator or a participant is the physical nearness of a contact, and how much (or how little) of the work involves using a particular physical location of the service provider or of the employer/administrator. We might never learn how and where a court would “draw the line” because few ERISA litigations are about plans that might have borne an incremental fee because a fiduciary’s selection was based even partly on geographic nearness. Often, what’s important are qualities of the service-provider business and its services.

A Federal statute (4 U.S.C. § 114) restrains a State’s and political subdivisions’ income taxes on a nonresident’s retirement income. In the 1980s and early 1990s, several States assessed State income taxes on people who no longer resided or worked in the State. How? ‘The State provided you an exclusion from income when you lived or worked here and made your before-tax § 401(k), § 403(b), or § 457(b) contributions to those tax-deferred retirement plans. The State gets income tax to the extent your retirement payout is attributable to the accumulation from the exclusion we provided you.’ Often, this resulted, whether legally or practically, in “double taxation” because the State in which a retiree resided imposed its tax on retirement income, often with no credit for the working-years State’s income tax. Congress legislated a Federal supersedure, which applies to amounts received after December 31, 1995. 4 U.S.C. § 114 https://uscode.house.gov/view.xhtml?req=(title:4%20section:114%20edition:prelim)%20OR%20(granuleid:USC-prelim-title4-section114)&f=treesort&edition=prelim&num=0&jumpTo=true.

RatherBeGolfing and ESOP Guy, thank you for explaining the presence or absence of regional differences. BenefitsLink neighbors, are there other factors that result in variations in service providers’ prices (for a same or similar service)?

Another clue is that the Joint Committee on Taxation estimated the provision as having a “negligible revenue effect”, even over the whole ten-year budgeting period.

About healthcare services, a news article this morning describes wide price variations for the same service—even in the same hospital—based on prices negotiated with a health plan. For example, an injection of Rituximab at Rush University Medical Center in Chicago ranged from $899.33 to $9,260.13, and a vaginal delivery with post-delivery care in Los Angeles ranged from $1,183 to $32,563. Sarah Hansard, Hospital Pricing Data Troves Raise Stakes on Employer Plan Costs, Bloomberg Law Daily Labor Deport (Dec. 18, 2023, 5:05 AM EST). Following size and some other factors, there are price differences for most kinds of services a retirement plan buys. But are the ranges as wide as the examples quoted above? I don’t disparage price differences. There are many legitimate reasons for prices to differ. Among them: Some fixed costs are about the same for a plan no matter its size. Some variable costs can be much more for a small plan than for a big plan. And some economies of scale, with either a plan or a service provider, can affect costs and prices. Rather, I hope to learn more about how much prices differ.

In some ways, the added bit in the statute follows a practical reality. When the human who makes an election and the human who receives and records the election are the same human, there might be little or no obvious evidence about exactly when something happened. While a good practitioner doesn’t tell her client to create false evidence, some would suggest: “You should search your records carefully to find the election you signed that December.” Not many IRS examiners have the time and tools to uncover that a paper election dated December 26, 2022 wasn’t signed, or even written, until April 2023. The new tolerance is only for a first year. After, the proprietor or sole member will need to remember the need for the by-the-end-of-the-year election. Some business owners find it’s simpler to elect one’s § 401(k) deferral, declare one’s nonelective contribution, and pay both into the plan trust all before the year ends.

Does the plan’s governing document command, permit, or at least not preclude paying (and reimbursing) plan-administration expenses from the plan’s assets? If so, was the exit fee a proper and prudent plan-administration expense?

Anticipating that the Internal Revenue Service might fail to record the paper received from the US postal service, I often add “Form nnnn” on the green return-receipt card, to set up a little more evidence about what the IRS received. Do others use some method like this? If so, does a response that shows evidence of this kind help persuade the IRS that a notice is mistaken?

The new § 401(b)(2) opportunity (for plan years that begin after December 29, 2022) to make a § 401(k) cash-or-deferred election after the last day of the year to which the election would apply can be available only for the plan’s first plan year, only if the election is made by the person who owns the entirety of an unincorporated business, and only if she is the only employee (a deemed employee) of that unincorporated business. Otherwise, “a self-employed individual may not make a cash or deferred election with respect to compensation for a partnership or sole proprietorship taxable year after the last day of that year.” 26 C.F.R. § 1.401(k)-1(a)(6)(iii) https://www.ecfr.gov/current/title-26/part-1/section-1.401(k)-1#p-1.401(k)-1(a)(6)(iii). When such an elective contribution must or should be paid into the plan’s trust might be governed and influenced by other law. Other law might include ERISA or, for a plan ERISA does not govern, State law. And other law might include relevant tax law, including about tax returns and tax-information reporting.

Must the plan’s administrator demand a return of amounts the payee’s bank collected after that bank had notice of the payee’s death? The sum is not trifling. The administrator worries that the participant/decedent’s surviving spouse will spend the miscollected money, and the plan might be liable to the rightful beneficiary. Am I right in imaging this situation happens often enough that recordkeepers have routines for what to do, at least when an employer/administrator asks?

For a governmental plan designed to be an eligible deferred compensation plan within the meaning of Internal Revenue Code of 1986 § 457(b), Federal tax law allows (with 2024) a plan to provide these kinds of distributions: § 457(d)(1)(A)(i) age 59½ § 457(d)(1)(A)(ii) severance from employment § 457(d)(1)(A)(iii) unforeseeable emergency § 72(t)(2)(H) qualified birth or adoption distribution § 72(t)(2)(I) emergency personal expense distribution § 72(t)(2)(K) eligible distribution to a domestic abuse victim § 72(t)(2)(M) qualified disaster recovery distribution This is a deliberately incomplete list. For any of these, a plan might limit the amount of a distribution, and for some of these a plan must limit the amount of that kind of distribution. That Federal tax law allows a plan to provide something does not mean a particular State or local government employer’s plan provides that thing. Consider asking your plan’s service provider which provisions your employer’s plan includes or omits.

Thank you for the vote of confidence, but I didn’t state a view. Rather, I said: “I am unaware of any Federal court precedent that holds for or against treating a deceased nonparticipant former spouse’s executor or similar personal representative as an alternate payee within the meaning of ERISA § 206(d)(3)(K).” At least one State court reasoned that an order can be a QDRO only if it restricts its alternate payee—including a successor-in-interest to an original alternate payee—to a spouse, former spouse, child, or other dependent of the participant. In re Marriage of Janet D. & Gene T. Shelstead, 66 Cal. App. 4th 893, 78 Cal. Rptr. 2d 365, 22 Empl. Benefits Cas. (BL) 1906 (Cal. Ct. App. [4th App. Dist., Div. 1] Sept. 15, 1998) (interpreting ERISA § 206(d)(3), and applying ERISA § 206(d)(3)(K)). But a State court’s decision is no precedent that constrains a Federal court’s interpretation of ERISA § 206. If an order is submitted, an ERISA-governed plan’s administrator decides whether the order is a domestic relations order and whether it is a qualified domestic relations order. If a plan’s administrator denies QDRO treatment and a disappointed person challenges that decision, the administrator could insist that litigation proceed in Federal court. More than 39 years after enactment, many questions about the import of ERISA § 206(d)(3) remain undecided.

Yes. While TPAs do a great job explaining Federal tax law, complexity about what powers a local government has or lacks calls for a lawyer’s advice.

A non-ERISA plan’s sponsor/employer/administrator found that its recordkeeper made a few years’ monthly ACH payments after the participant’s death but before either the administrator or its recordkeeper had notice of the death. The payments were made under the participant’s instruction to use the recordkeeper’s service for automated payments of the amounts the recordkeeper computed as the participant’s § 401(a)(9) minimums. The payments were made to a bank account for which the participant and her spouse were joint holders. But the nonparticipant spouse is not, and never was, the participant’s named beneficiary. Also, the plan provides no right to the spouse. The plan’s trustee is a State-chartered trust company that is a subsidiary or affiliate of the recordkeeper. The payer is that trust company or its paying agent. Am I right in thinking the payer should demand a return of (at least) the amounts the payee’s bank collected after that bank had notice of the payee’s death? Is this a task recordkeepers routinely handle? If not, will a trustee/recordkeeper do it on the plan administrator’s instruction?

Some lawyers have interpreted Pennsylvania’s Fiscal Code § 8.2 [72 Pa. Stat. § 4521.2] as the Commonwealth not providing a nonelective or matching contribution for a Commonwealth officer or employe, but not—by the enabling statute’s two sections [cited below] alone—precluding a political subdivision from providing a nonelective or matching contribution. See 72 Pa. Stat. § 4521.2(g) (including “nor shall the Commonwealth contribute to its deferred compensation program”). Here’s Pennsylvania’s enabling statute for governmental § 457(b) plans: 72 P.S. § 4521.1 https://govt.westlaw.com/pac/Document/NEEF65700343A11DA8A989F4EECDB8638?viewType=FullText&listSource=Search&originationContext=Search+Result&transitionType=SearchItem&contextData=(sc.Search)&navigationPath=Search%2fv1%2fresults%2fnavigation%2fi0ad7140b0000018c68930141e98d975f%3fppcid%3d6daf38e7a9864d17b11a10c8d1bc3a74%26Nav%3dSTATUTE_PUBLICVIEW%26fragmentIdentifier%3dNEEF65700343A11DA8A989F4EECDB8638%26startIndex%3d1%26transitionType%3dSearchItem%26contextData%3d%2528sc.Default%2529%26originationContext%3dSearch%2520Result&list=STATUTE_PUBLICVIEW&rank=1&t_querytext=deferred+compensation&t_Method=WIN 72 P.S. § 4521.2 https://govt.westlaw.com/pac/Document/NF25AB7B0343A11DA8A989F4EECDB8638?viewType=FullText&originationContext=documenttoc&transitionType=CategoryPageItem&contextData=(sc.Default)&bhcp=1. These are current through 2023 Regular Session Act 32. The hyperlinks above are to an unannotated (and unofficial) version of Pennsylvania Statutes. A researcher should read an authoritative text, read the annotations, and use a citator tool to look for court decisions and attorney general opinions that interpret the statute. (It has been many years since I last looked at the law on a question of this kind.) Consider that other Pennsylvania or municipal law might preclude, restrict, or constrain a political subdivision’s employer-provided contribution. Likewise, consider that a response to your query might vary with the identity of the particular political subdivision, its funding sources, its supervision from Commonwealth agencies and instrumentalities, its ordinances and other local law, its bargaining with labor association, and other facts and circumstances. Internal Revenue Code § 457(b)’s deferral limit applies to the sum of a year’s deferrals, including elective, matching, and nonelective deferrals. Nothing here is legal advice.

I’m glad to hear that TPAs now are expressly counting at least some of the cost.

In some dim past, IRS correspondence problems seemed fewer and perhaps less burdensome to resolve, so many third-party administrators handled the messes without charging an incremental fee. Are some TPAs now billing time for handling the IRS messes? For those who aren’t billing this incremental work, why not? Or is a TPA’s fixed fee priced to include costs for handling IRS messes?

If a nongovernmental and nonchurch charitable organization prefers to make available voluntary-only wage-reduction arrangements to buy a contract with Internal Revenue Code § 403(b) Federal income tax treatment and do so without establishing or maintaining a plan that would be ERISA-governed, such an employer prefers to avoid discretionary decision-making. That includes avoiding discretion about whether a participant has a hardship withing the meaning of § 403(b)(7)(A)(i)(V) or § 403(b)(11)(B). Many public-school employers too prefer to avoid involvement in those decisions. Are 403(b) insurers and custodians allowing a participant to self-certify her hardship? Does allowing self-certification help remove not only an employer but also an insurer or custodian from discretionary decisions about hardships? What’s happening in the real world?

If a negotiation with the young participant’s spouse is not concluded with time to pay or deliver all final distributions by the discontinued plan’s scheduled final-distributions date, might the plan’s trustee buy—and deliver to the participant—an insurance company’s annuity contract that includes a qualified joint and survivor annuity and a qualified preretirement survivor annuity? We recognize that might not be what one or more of the persons involved might like, but it is a way to end the pension plan. Further, a potential division of the annuity contract rights would not involve the pension plan’s administrator.

If a plan’s governing document is ambiguous, one might remove an ambiguity by amending the document. Might the plan sponsor amend the plan to provide that, if the administrator has not received other instructions, the final distribution is delivered as a rollover to a default IRA?

If a might-be domestic-relations order is submitted, a plan’s administrator might evaluate whether the order’s would-be payee is an alternate payee within the meaning of ERISA § 206(d)(3)(K). I am unaware of any Federal court precedent that holds for or against treating a deceased nonparticipant former spouse’s executor or similar personal representative as an alternate payee within the meaning of ERISA § 206(d)(3)(K).

Many plans provide only one form of distribution—a single-sum payment. A plan may provide that a no-longer-working participant (rather than a still-working 5%-owner) who has reached her required beginning date is paid her whole account. (Only rarely would a participant who has reached her required beginning date not also have reached her normal retirement age, which allows an involuntary distribution.) If a direct rollover is requested or provided, the administrator divides the account into minimum-distribution and rollover-eligible portions. If a participant has not requested her distribution, the plan pays an involuntary distribution. This might include a direct rollover—of the rollover-eligible portion—to a default Individual Retirement Account. The minimum-distribution portion is a money payment.