Peter Gulia

Paul I and CuseFan and kmhaab, thank you for your further observations. My clients use procedures designed so a recordkeeper, without accepting discretion, can process as good-order or “NIGO” almost all kinds of claims. For a participant loan, an emergency personal expense distribution, a qualified birth or adoption distribution, an eligible distribution to a domestic abuse victim, and a hardship distribution, there is no tax-law need (and, in my view, no good reason) to evaluate the claim beyond good-order processing. Claims for retirement distributions and even death distributions ordinarily can be handled in the recordkeeper’s processing without discretion. A recordkeeper involves the plan’s administrator only when a claimant asserts her right to dispute the recordkeeper’s response, or the circumstances relate to a court proceeding, bankruptcy, or other trouble. Many recordkeepers have not built forms, procedures, and systems for SECURE 2022’s and SECURE 2019’s new kinds of distributions. Their explanations to plan sponsors (and consultants too) blame an absence or insufficiency of IRS guidance. Some of that blame is fair; much of it is unfair. Small plans are stuck; bigger plans negotiate workarounds. Many recordkeepers need to intensify identity controls, address controls, and cybersecurity protections. Like it or not, a retirement plan account is increasingly like a bank account in a holder’s power to take money out whenever she wants—yet with bigger amounts and bigger risks. Returning to my originating question about which provision one would recommend (after solving the plan-administration issues, or imagining a hypothetical absence of them): Some plan sponsors might dislike allowing a too-easy payout. Yet, if a plan’s opportunity to generate retirement income for a participant depends, exclusively or heavily, on participant contributions, providing SECURE 2019’s and SECURE 2022’s before-retirement distributions can be a way to help reassure reluctant savers that one’s money will be available to meet needs when they happen. And I suggest employers treat working people as adults, who make one’s own decisions about how to use one’s resources.

Thank you!

Belgarath, you’re on to something. Even if the underlined statement might be generally so, there are many possible variations about when and how a plan measures service and other entry conditions. Further, even a plan with no service condition might have a class exclusion that the proposed rule to interpret IRC § 401(k)(2)(D) might treat as a proxy age or service condition, which might involve entries of some employees only because one is a § 401(k)(2)(D)(ii) employee.

A summary plan description I’m reviewing includes this paragraph: If your distribution is an eligible rollover distribution and exceeds $200, you may instruct a direct rollover of all or a portion of your distribution to an eligible retirement plan. But you may instruct a direct rollover of a portion less than all of your account only if each portion is at least $500 (with this minimum counted separately for each portion of Roth or non-Roth amounts). Are those amounts still current?

RatherBeGolfing, thank you for your observations about how some plan sponsors might dislike allowing a too-easy payout. Paul I, thank you for your smart caution about the participant’s address. Do you think it’s feasible for a recordkeeper’s employee to suggest the participant change the account’s address and wait two weeks before taking the distribution? About designing procedures to protect an abuse victim’s privacy (and a plan administrator’s and employer’s lack of knowledge): An administrator can instruct its recordkeeper to process a claim if the claimant completed and signed the plan’s form, which includes the self-certifying statements. An advantage of such a procedure is that no one sees the facts of the participant’s situation, just the claimant’s conclusion. A plan’s administrator can set up the communications, forms flow, and claims procedure so the administrator never sees the participant’s claim, nor sees or hears a participant’s inquiry. (One of my clients gets a report on the number of claims paid, but nothing that reveals any distributee’s or claimant’s identity. And for reasons you suggest and some others, human-resources people might welcome a lack of knowledge.) Yet, I recognize many plans might be unable to implement these procedures and services.

RatherBeGolfing, thank you for helping me think. Would your suggestion be different if no service provider (and no fiduciary) worries about a difficulty in tax-reporting this distribution?

When a plan sponsor asks for your advice about whether to provide or omit an eligible distribution to a domestic abuse victim, what do you recommend or suggest?

Is the question about what law applies or is relevant? Or is the question about an amount? Do the recently published inflation adjustments give any information that’s useful? Revenue Procedure 2023-34, 2023-48 Internal Revenue Bulletin 1287 (Nov. 27, 2023), available at https://www.irs.gov/pub/irs-irbs/irb23-48.pdf and https://www.irs.gov/irb/2023-48_IRB#REV-PROC-2023-34.

Yesterday evening, reacting to your description of what webinar speakers said, I indulged a moment’s curiosity about possible interpretations of § 414A, and observed that the described interpretation is a possible interpretation. Other interpretations, including what you suggest, also are possible. I have not thought about strengths and weaknesses of imaginable interpretations of § 414A. It might be a while before we know what rule the Treasury department proposes (if any) or what nonrule interpretation the Internal Revenue Service publishes (if any). Or, some indirect practical guidance might happen in the IRS’s reviews, perhaps beginning February 1, 2025, of submissions for cycle 4 opinion letters.

Here’s new Internal Revenue Code § 414A, as compiled in the United States Code’s title 26. (I have not compared this to the Statutes at Large to check whether the compilation is accurate.) https://uscode.house.gov/view.xhtml?req=(title:26%20section:414A%20edition:prelim)%20OR%20(granuleid:USC-prelim-title26-section414A)&f=treesort&edition=prelim&num=0&jumpTo=true Here’s one possible interpretation of the statute: If no exception is met and § 414A applies regarding a plan, and some employees are excluded from such a plan’s § 414(w)(3) eligible automatic contribution arrangement established to meet § 414A, whatever ostensible cash-or-deferred arrangement those employees are eligible for is not a § 401(k) arrangement. austin3515’s query is only one of many issues that call for interpretations of § 414A and Internal Revenue Code provision that affect or relate to § 414A. Might some of those interpretations be the Treasury/IRS’s Black Friday greetings to practitioners on or about November 29, 2024?

While none of us knows the facts, some of what’s in the situation FishOn describes suggests a possibility of facts that might set up some opportunity for a different analysis. A rule interpreting and implementing ERISA § 3(42)’s definition for "plan assets" states this “include[s] . . . amounts that a participant has withheld from his wages by an employer, for contribution or repayment of a participant loan to the plan, as of the earliest date on which such contributions or repayments can reasonably be segregated from the employer’s general assets.” 29 C.F.R. § 2510.3-102(a)(1) https://www.ecfr.gov/current/title-29/part-2510/section-2510.3-102#p-2510.3-102(a)(1). But the rule does not specify a particular act that then must happen. Rather, the focus is on treating an amount as plan assets, distinct from the employer’s assets. An amount delivered to the plan’s trustee or its custodian, or either’s agent might be treated as the plan’s assets—even if not yet allocated to any participant’s or beneficiary’s account. As Lou S. guesses, some collaboration of the plan’s administrator, trustee, and service provider might have treated the amount that lacked instructions as the plan’s asset. Further, FishOn’s story suggests the employer/administrator or a service provider made good the balance allocated to the participant’s account as if the allocation had not been delayed. In this context, “back-dating” is an unfortunate word some recordkeeping people sometimes use to describe the operations that result in a participant’s account getting the balance the account would have if an amount had been invested on the trading day it ought to have been invested had all fiduciaries and service providers acted correctly. Perhaps there’s room for a fiduciary, after using diligence and prudence (including getting its prudently selected lawyer’s advice), to find that there was no prohibited transaction. Or a fiduciary might find the facts are not so crisp. Either way, a fiduciary might evaluate whether to use the Voluntary Fiduciary Correction Program. (An applicant may use VFCP without conceding that there was a breach.)

Internal Revenue Code § 403(b)(7)(i) provides as a condition to § 403(b) Federal income tax treatment that “under the custodial account—(i) no such amounts may be paid or made available to any distributee . . . before— . . . (III) the employee has a severance from employment[.]” Internal Revenue Code § 403(b)(11)(A) provides: “This subsection [§ 403(b)] shall not apply to any annuity contract unless under such contract distributions attributable to contributions made pursuant to a salary reduction agreement . . . may be paid only—(A) when the employee . . . has a severance from employment[.]” Although either condition refers to “has a severance from employment”, these differ in how one looks to a measuring or other relevant time. A rule interpreting the statute is 26 C.F.R. § 1.403(b)-6 https://www.ecfr.gov/current/title-26/section-1.403(b)-6. About a situation in which a participant had a severance from employment with the charitable organization that paid contributions into the annuity contract or custodial account and later becomes an employee of the same charitable organization, several interpretations are possible. Among them: Some suggest a participant may be allowed a distribution only while she “has a severance from employment”, and so no longer gets a severance-from-employment distribution if reemployed by the same charitable organization. Some suggest a participant might be allowed a distribution to the extent of a separate subaccount of contributions made before the severance from employment, adjusted for gain or loss allocable to those contributions. That interpretation has some indirect support in nonrule guidance about allowing a distribution to the extent of a separate account for rolled-in amounts. See Revenue Ruling 2004-12, 2004-1 C.B. [2004-7 I.R.B.] 478. Even if the plan’s administration ordinarily does not record separate subaccounts for a rehire, some might suggest a separate-accounting condition (if relevant) is met if the annuity contract or custodial account has received no contribution after the participant was rehired. Allowing or refusing a distribution involves interpreting tax law, and how that law relates to an administrator’s fiduciary duties in administering the plan. The plan’s administrator should get its lawyer’s advice.

Recognizing RatherBeGolfing’s observation that the truth might not be one-sided: If you help uncover the past, get the plan sponsor/administrator’s attorney to engage you to assist her. That way, what you communicate to the attorney can be shielded under evidence-law privileges for lawyer-client communications and attorney work product.

MoJo, thank you for your clear thinking. As I mentioned in my posts Sunday, Tuesday, and Wednesday, I have not yet completed even my preliminary thinking about what advice I might render if I’m asked (and I don’t yet know whether I’ll be asked). All my posts have recognized that the intern exclusion might be a proxy age or service condition; that’s why I invited the discussion. Here’s the way I’m leaning: 1) Suggest the plan sponsor amend its plan to make an intern eligible if she is 21 (and perhaps to exclude an eligible intern from matching and nonelective contributions). Don’t condition elective-contribution eligibility on any hours of service. 2) If the plan is not so or otherwise amended, suggest the plan’s administrator: assume the Treasury’s proposed rule might be a permissible interpretation not only of IRC § 401(k)(2)(D) but also of ERISA § 202; assume the plan’s intern exclusion might involve an indirect age or service condition; and ignore the governing documents’ exclusion if an intern meets ERISA § 202 eligibility conditions. (That would not bring in many interns because few would be 21 until the summer between one’s third and fourth college years. And not many of them will have had two preceding summers.) As usual, I’d render full-picture advice about the range of risks and opportunities.

If, rather than relying on a claimant’s self-certification, a governmental § 457(b) plan’s administrator or its service provider evaluates a participant’s claim for an unforeseeable-emergency distribution: Start with RTFD, Read The Fabulous Document. Some plans state provisions more restrictive than those needed to make the plan an eligible plan under § 457(b). If the plan’s provisions are the least needed to make a plan § 457(b)-eligible: Some interpret 26 C.F.R. § 1.457-6(c)(2)(ii) as not mandating another way to meet an emergency need if that other way “would [] itself cause severe financial hardship[.]” For example: Some might interpret that a participant loan—especially if it calls for payroll-deduction repayment—could in some circumstances worsen the participant’s cash-flow crunch. That interpretation might be logically consistent with the rule’s presumption that a participant ought to cease deferrals (to stop that drain on her cash wages she could use to meet her living expenses). A distribution from a rolled-in amount might worsen the participant’s hardship if the rolled-in amount came from a plan other than another § 457(b) plan and the participant meets no exception from the extra 10% tax on a too-early distribution. If the plan allows the claimant a distribution because she is severed from employment or because she reached age 59½ (or some later age), there is no need for an unforeseeable-emergency distribution. Many governmental § 457(b) plans delegate decisions, at least first-stage decisions, on unforeseeable-emergency claims to a service provider. Service providers’ frameworks and methods vary considerably.

About part-time employees, which provisions might be implied by law, or might be needed for a plan to tax-qualify under Internal Revenue Code of 1986 § 403(b), relates to whether the plan is: a plan governed by part 2 of subtitle B of title I of the Employee Retirement Income Security Act of 1974, a church plan that has not elected to be ERISA-governed, a governmental plan, a payroll convenience with so little employer involvement that it is not a plan within ERISA § 3’s (rather than IRC § 403(b)’s) meaning. For an ERISA-governed plan, ERISA sections 202 and 203 command provisions partially similar to IRC § 401(k)(2)(D)’s provisions for a cash-or-deferred arrangement. Under Reorganization Plan No. 4 of 1978, the Treasury’s notice of proposed rulemaking to interpret IRC § 401(k)(2) also is an interpretation about similar provisions in ERISA §§ 202-203. If an ERISA-governed plan’s administrator interprets the plan to include eligibility provisions implied by ERISA §§ 202-203 and looks to the Treasury’s interpretation as an aid to the administrator’s interpretation, a court might treat that as some evidence of the administrator’s good faith. For a nonplan, all employees are eligible because for an employer to decide which employees are eligible would establish an ERISA-governed plan (if it’s not church or governmental). For a plan that is not ERISA-governed, IRC § 403(b)(12) describes provisions for a plan to get § 403(b) Federal income tax treatment. Beyond Federal law: For a governmental plan, State law governs which provisions a plan must, may, or must not include. For a church plan, internal church law might govern which provisions a plan must, may, or must not include. As always, a plan’s administrator (or an employer) should get its lawyer’s advice. Santo Gold, if you tell us which of the four kinds of § 403(b) plan your client maintains, BenefitsLink neighbor might be able to give you more detailed help.

I can't remember the last time I saw a recordkeeper's platform list that lacked funds that advertised Sharia compliance, a Christian focus, and other religious themes. Meeting a participant's interest might be less expensive than learning what duties might exist and how they might apply.

I've worked with this plan for 17 years. A final-four accounting firm does a full set of coverage and nondiscrimination tests. I've never heard a moment's trouble. You're right; it's about the nature of the business and the workforce.

Even if the Internal Revenue Service publishes the nonenforcement guidance American Retirement Association seeks, that would not preclude a participant, including a should-be participant, from enforcing ERISA § 202(c) and ERISA § 203(b)(4). Reorganization Plan No. 4 of 1978 transfers to the Treasury department powers to interpret ERISA sections 202 and 203. But that does not undo a participant’s ERISA § 502(a) civil-enforcement opportunities. Even if the IRS might not pursue failures of conditions for tax-qualified treatment, plans’ administrators and their advisers should continue their interpretations of what ERISA’s title I commands.

Even if no other notice is mandated or chosen in the fiduciary’s prudence, an individual-account retirement plan’s discontinuance and later termination usually results in a final distribution, which typically is an involuntary distribution and is an eligible rollover distribution. Some retirement-services people use “plan-termination notice” to describe a notice about those points.

If a plan sponsor adds an automatic-contribution arrangement and wants it to apply to less than all eligible employees, one might specify carefully which employees are benefited or burdened by the implied election (or which are not). If the plan sponsor uses IRS-preapproved documents, one might evaluate whether a particular set of documents allows enough choice to specify the intended provision without defeating reliance on the IRS opinion letter.

And alumni privileges with your college or university.

MoJo and RatherBeGolfing, thank you for your helpful thinking. For the potential situation I haven’t yet advised on, here’s the employer’s definition or classification: An intern is anyone who lacks a baccalaureate degree. I can imagine arguments for and against considering this a subterfuge for a service condition. Here’s just one in each direction. For: Many interns work only seasonally or part-time because it’s demanding to be a full-time employee and a good student. Against: Many interns work a full-time job and do so even when taking a full load of courses in each of fall, spring, and summer semesters. About a particular plan I’m preparing to advise about, it’s awkward to think about whether a classification might be a subterfuge for a service condition because the plan has no service condition for an employee’s eligibility. I worry somewhat more that this employer’s classification might be seen as an indirect age condition. While it’s possible to start college at a young age (for example, 16) or finish in fewer than four years, a norm is to start around 18 and finish around 22. And a delay or interruption might mean finishing at a yet older age. If a plan’s design were my decision, I’d make every intern—even those who don’t meet § 401(k)(2)(D) conditions—eligible for elective contributions. But it’s not my decision, and I want to get ready to give full-picture advice.

And here’s a thread on which I posed some similar questions: https://benefitslink.com/boards/topic/71371-ltpt-proposed-regs-issued-by-irs/#comment-334692 May the plan’s administrator exclude an intern under the plan’s intern exclusion? This would mean finding the intern exclusion is not a proxy for an age or service condition. Or should the plan’s administrator reason that the intern exclusion “has the effect of imposing an age or service requirement” and treat a three-peat intern as eligible for elective contributions? If the plan sponsor now amends the plan to make every intern—even those who don’t meet § 401(k)(2)(D) conditions—eligible for elective contributions (but not for matching contributions, nor for nonelective contributions), would any unwelcome consequence result? (Assume neither the plan sponsor nor the employer worries about how this change would affect an ADP test or an ACP test.)

Asrar Ahmed, ERISA and Sharia Law, 21-1 Journal of Pension Benefits 5-13 (Autumn 2013). Among the article’s observations: “ERISA Section 404(c) provides an opportunity to relinquish the burden of investment decision-making and a defense to a claim of fiduciary breach that allows a plan fiduciary to limit his exposure to liability by shifting the responsibility of directing the investments to the participant.” BenefitsLink neighbors, if you subscribe to a Wolters Kluwer VitalLaw® suite, the Journal of Pension Benefits, including back issues, might be in your subscription. Over the past 11 years, Asrar Ahmed has steadily risen in the U.S. Labor department.