Peter Gulia

If a worker has no elective deferral, no matching contribution, no account balance, and otherwise could not be the distributee of a distribution to be tax-reported, there might be no current need for her taxpayer identification number (whether SSN or ITIN). Not only in retirement plan services but also in many aspects of commerce, we should want to lessen overuse of Social Security Numbers. But many of us have little or no power to make, or even influence, those business choices. AlbanyConsultant, while the response might be disappointing to you and frustrating to your new client and its workers, it’s fair for a service provider to set terms under which it is willing or unwilling to provide its services. Even for a billion-dollar plan, sometimes a service provider has no better explanation than “that’s just the only way we do the service.” If your or the recordkeeper’s service includes a feature for an eligible employee to submit her “enrollment” and elective-deferral instruction electronically to the service provider (rather than to the employer), consider explaining, if truthful, that not having a taxpayer identification number already on record could deprive an employee of her opportunity to use the electronic-enrollment feature. A participant who has no elective deferral today might want one tomorrow. And some employers and employees prefer an electronic enrollment over a paper enrollment.

Before 2002, a § 457(b) plan participant’s deferred compensation was income subject to Federal income tax “for the taxable year in which such compensation . . . is paid or otherwise made available to the participant[.]” I.R.C. § 457(a), as in effect for 2001. Many § 457(b) plans were designed so a participant who had a severance from employment or other distribution-allowing event (for example, age 70½) was not entitled to a payout until after the end of a period in which the participant would elect, irrevocably, when the deferred compensation is to be paid. Absent an election to defer (with all future payments specified or determinable), a plan’s default might provide yearly or monthly installment payments over a few years, or the default might be a single-sum payment. Everything was designed so no compensation would be available sooner than it was scheduled to be paid. (Some plans allowed no choice, and specified a payout schedule.) Economic Growth and Tax Relief Reconciliation Act of 2001 § 649 removed a governmental § 457(b) plan’s need for those irrevocable-election provisions. Yet, a plan-design need to avoid a made-available trap continues for a plan of a nongovernmental tax-exempt organization. Compare I.R.C. § 457(a)(1)(A) with § 457(a)(1)(B) https://irc.bloombergtax.com/public/uscode/doc/irc/section_457. If a nongovernmental tax-exempt organization’s plan allows an election to defer, even a participant who severs from employment in her 40s or younger must make her irrevocable election about whether and how long to defer. That choice might have serious consequences for a payment obligation that is unfunded and unsecured. Not every tax-exempt organization is sure to be creditworthy for decades or even years to come.

If the wife’s corporation and the husband’s sole-proprietor business no longer are commonly controlled and otherwise are not parts of one employer under the several subsections of Internal Revenue Code § 414, is there any impediment to a spin-off plan taking on the obligations to the wife and getting a fair portion of the transferor plan’s assets?

Among the challenges about arrangements of the kind ESOP Guy describes is that businesspeople communicate expectations in ways that evade detection by a banking, insurance, or securities business’s compliance, internal-controls, and supervision systems.

I too suspect that many are unaware that one has a fiduciary responsibility to the retirement plan; of those who know they are a fiduciary, many don’t see the conflict; and very few get real advice.

CuseFan, there can be circumstances in which fees might relate to shared or coordinated services, with an experienced fiduciary’s prudent attention to protective conditions and reasoned accounting. But in the situation your opening post describes, wouldn’t a good fiduciary ask the service provider whether it would charge the employer a regular fee for the payroll service, and lower the fee charged to the retirement plan? Does the service provider’s offer of “free” payroll services suggest that the retirement plan’s fiduciary might not have selected or negotiated the best deal the plan could obtain? (Whether with the same provider, or by selecting a different provider?) When one fee otherwise would burden the employer and another fee burdens the plan, shouldn’t whatever combined fee lowering is available favor the entity the ERISA-governed fiduciary owes its exclusive-purpose loyalty to? And shouldn’t the retirement plan’s assets not benefit an entity about which the plan fiduciary might, even indirectly, have a compromising interest that could interfere with the plan fiduciary’s unimpeded decision-making for the plan’s benefit? Observe that the conflict might be less (but not completely removed) if the employer pays the retirement plan’s fees from the employer’s assets, with nothing charged to the plan. I concur with your observation that one might not call out a seeming breach, at least not without having collected and analyzed the facts. (Even if I saw an obvious breach, I wouldn’t say anything other than to my client.) Knowing that many plan fiduciaries do not get a lawyer’s advice (even when the retirement plan properly could pay that fee) motivated my question: What percentage of small-business employers innocently do not know that it is improper to allow a retirement plan to subsidize a lowered expense for some other service?

BenefitsLink neighbors, using our experience and observations, let’s ask this question: _____% of small-business employers innocently do not know that it is improper to allow a retirement plan to subsidize a lowered expense for some other service. _____% know it is improper, but allow it anyhow. Your thoughts?

Meeting § 457(b)-(e)’s application of § 401(a)(9) is not an exclusive explanation of a provision that refers to the April 1 after a severance. For example: In the 1980s, many § 457(b) plans were designed to allow a period—often, 60 days after the severance (or 60 days after the end of the year in which the severance occurred) for a participant’s election to defer payment to her specified date. Absent an election, a plan provided payment on the first of the month after the end of the election period. Some plans set provisions of this kind in terms of calendar dates. You’re right that Internal Revenue Code § 457 does not preclude provisions more limiting than those needed to state a § 457(b) eligible deferred compensation plan. For a governmental plan, church plan, or other plan for which ERISA does not supersede and preempt State law, a plan’s sponsor might consider relevant States’ laws. For a governmental § 457(b) plan, providing an involuntary distribution sooner than is needed to meet a condition for tax treatment as an eligible plan is unusual. For a nongovernmental § 457(b) plan, providing a distribution after severance from employment, with little or no choice to defer longer, is somewhat less unusual.

A disloyal or imprudent fiduciary burdening an employee-benefit plan with expenses that reflect a service provider’s offer of “free” services for something other than the plan likely happens more often than we read about. If the plan’s fiduciary gets no advice from anyone beyond the service provider that offered the arrangement, how likely is it that the employer/administrator’s Form 5500 report will disclose a prohibited transaction?

The court decisions David (fmsinc) notes are mostly about how to measure and value rights that are community property or subject to equitable division. Those points might matter between divorcing spouses, but are external to an employer that administers its obligations under a deferred compensation plan. I am unaware of any Federal court decision that compelled an employer to pay a nonparticipant according to a State court’s domestic-relations order ERISA supersedes. BenefitsLink neighbors, have you ever seen such a court decision? (I ask this as an open question because sorting property rights on divorce sometimes motivates a judge to render a decision contrary to law.)

Among the many issues in the ABB fiduciary-breach litigation, the plaintiffs asserted that allowing Fidelity to lower fees for other services, including payroll services, because Fidelity was getting more than enough revenue from retirement plan investments and services was a fiduciary breach and a nonexempt prohibited transaction. From Judge Laughrey’s opinion: “[O]nce Mr. Scarpa became aware that the PRISM [401(k)] recordkeeping fees appeared to be subsidizing ABB’s corporate programs, he had a fiduciary obligation to investigate and prevent any future subsidy.” Tussey v. ABB, Inc., No. 06-cv-0430-NKL, 52 Empl. Benefits Cas. (BL) 2826, 2850, 2012 BL 84927, 2012 U.S. Dist. LEXIS 45240, 2012 WL 1113291 (W.D. Mo. Mar. 31, 2012) (finding loyalty and prudence breaches), further proceedings not cited (the case litigated for 12¼ years).

When an ERISA-governed plan does not recognize domestic-relations orders, do employers suffer difficulties with divorce lawyers and judges who assert that “the plan” must give effect to what the divorce lawyers think of as a QDRO?

Thank you for your nice help. About the nongovernmental § 457(b) plans that include DRO provisions, do you guess that the plan sponsors knew they have the choice not to provide for domestic-relations orders?

ERISA § 206(d)(3)(A) provides: “Each pension plan shall provide for the payment of benefits in accordance with the applicable requirements of any qualified domestic relations order.” Even for a plan that is ERISA-governed, the quoted sentence about recognizing a QDRO does not apply to “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[.]” ERISA § 201(2). BenefitsLink neighbors, in your experience how likely is it that an unfunded deferred compensation plan omits provisions for following a domestic relations order? What legal, plan-design, and other reasons motivate an employer to omit QDRO provisions? What legal, plan-design, and other reasons might motivate an employer, despite the absence of a public law command, to include QDRO provisions (within what tax law permits without defeating the plan’s tax treatment)? What practical difficulties do employers and plan administrators encounter?

A common restraint on a participant naming a beneficiary other than her spouse is that a plan, following ERISA § 205(b)(1)(C), provides its death benefit to the participant’s surviving spouse, absent the spouse’s consent. But if there is no surviving spouse when the participant dies, a plan may provide the death benefit to the participant’s designated beneficiary. See ERISA § 205(b)(1)(C)(i). The situation Bird describes suggests the spouses are not yet divorced, but perhaps relatively soon might be. Imagine a beneficiary designation, made today, naming the participant’s child. Imagine the court issues the anticipated divorce order on February 29, and the order is legally effective as of the moment it is issued. Imagine the participant dies on March 1. If the plan’s provisions restrain no more than is needed to meet ERISA § 205(b)(1)(C), the beneficiary designation that would have been ineffective for a February death becomes applicable for a March death. A participant who finds it would be difficult or burdensome to obtain the spouse’s consent in a form the plan’s administrator would accept and believes the anticipated divorce will process in a few months might risk that the participant lives long enough for the spouse to be no longer a spouse.

Some (not all) plan administrators will record a beneficiary designation that now would be ineffective—because it lack’s the spouse’s consent, on the plan’s form and notarized—but could become effective—because the spouse later might die, become divorced, or otherwise become no longer the participant’s spouse. If the administrator allows this, one might intensify a warning that naming a beneficiary other than the spouse will have the hoped-for effect only if the current spouse becomes no longer the participant’s spouse before the entitlement to the plan’s death benefit occurs. If it would be difficult or burdensome to obtain the spouse’s consent in a form the plan’s administrator would accepts as valid under ERISA § 205 and the plan’s governing documents, a participant might assume a risk about whether the marriage ends before the participant’s death.

And a class prohibited-transaction exemption sets the conditions for a purchase from the retirement plan. https://www.federalregister.gov/documents/2002/09/03/02-22376/amendment-to-prohibited-transaction-exemption-92-6-pte-92-6-involving-the-transfer-of-individual https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/exemptions/class/PTE77-8.pdf

David Rigby and Paul I, thank you for this wonderful history lesson and insight.

Does anyone remember whether Congress had a reason (or even an imagined reason) for setting up 5% as a line that treats a participant unlike an employee who need not begin a distribution if she is not yet retired?

MoJo, thank you for sharing useful information, including a recordkeeper’s thinking about roles and responsibilities. I hope those who want the IRS’s guidance see that it might not happen. Each of § 401(k)(14)(C), § 403(b)(7)(D), § 403(b)(11), and § 457(d)(4) permits the Secretary of the Treasury to make regulations. But none of those commands or directs the Treasury or its IRS to do anything. Some lawyers in the IRS might believe that deliberate uncertainty is better than an interpretation—whether a rule or nonrule guidance—the IRS might publish. And even if they don’t believe that, some might think this point of law is less important than many others the IRS is called to interpret.

MoJo, accepting the premise you describe, might a response be different if a big-enough plan sponsored by an employer with a satisfactory financial condition indemnifies its service provider against whatever loss, liability, and expense results from following the plan administrator’s written instructions detailing nondiscretionary bright-line rules to apply forms-only facts on which claims to process as system-allowed and which are system-denied? If so, is it feasible for a recordkeeper to segment its customers between those that can transfer the risk away from the service provider, and those that can’t?

Almost a half-century after ERISA and almost 40 years after the Retirement Equity Act of 1984 (which requires a spouse’s consent), we might be disappointed by too many who think too little about the law that governs employee-benefit plans.

Assuming a plan governed by ERISA § 205: Some lawyers assert that after a plan has paid its benefit, those who would be takers under State law or an agreement external to the plan might have claims against a distributee. About a beneficiary who is not the participant’s surviving spouse, courts differ about whether ERISA supersedes a State court’s order—made after the ERISA plan has paid or delivered the plan’s benefit—that does not involve the plan or any fiduciary of it. About a beneficiary who is the participant’s surviving spouse, ERISA supersedes State law, including a State court’s order (other than a QDRO). For either situation, an ERISA-governed retirement plan’s administrator ignores the divorcing or separated persons’ settlement agreement (unless that agreement is a qualified domestic relations order). What happens after the retirement plan has paid might be “not my job” for the plan’s administrator.

A deferral limit catch-up that looks to a span of years (with other conditions) is in each of Internal Revenue Code § 403(b) and § 457(b). A § 403(b) participant who’s 50 and has 15 years with the qualified organization might defer up to $33,500 [2024]. A § 457(b)(3)(A) catch-up might allow a deferral up to $46,000 [2024] for some participants. Complete explanations of a section’s catchups are in 403(b) Answer Book and 457 Answer Book, published by Wolters Kluwer and available in its VitalLaw® products.

For practitioners who advise a plan’s administrator, here’s an important point: A plan is not tax-disqualified because the plan’s administrator relies on a participant’s written certification to the extent that the Internal Revenue Code permits that reliance. I’ve seen no suggestion that Baltimore’s § 457(b) plan suffers a tax consequence, or even an examination, because the plan’s administrator or its service provider relied on Marilyn Mosby’s self-certified claim.