Peter Gulia

Here’s a more recent BenefitsLink discussion with some different observations: https://benefitslink.com/boards/topic/69943-religious-exemption-from-plan-participation/. If a plan’s menu already is broad enough and prudently selected and arranged, adding another investment alternative because some participants want it might be no breach if the fiduciary prudently finds that the availability of that alternative does not harm other participants. As always, a plan’s fiduciary will want its lawyer’s advice.

Perhaps these two rules might help you answer some aspects of your question. Interpreting the Employee Retirement Income Security Act of 1974’s title I: 29 C.F.R. § 2520.104b-31 https://www.ecfr.gov/current/title-29/part-2520/section-2520.104b-31#p-2520.104b-31(a); Interpreting the Internal Revenue Code of 1986: 26 C.F.R. § 1.401(a)-21 https://www.ecfr.gov/current/title-26/part-1/section-1.401(a)-21#p-1.401(a)-21(a). These rules set conditions for using electronic communications to meet some notice requirements. But a communication that meets these rules might not be enough for a communication about a plan’s end and final distribution. Among other points, a plan’s fiduciary might evaluate risks that some participants, beneficiaries, or alternate payees might fail to read an electronic communication.

As Luke Bailey suggests, I imagine the situation you describe involves an IRS-preapproved documents set and the IRS’s opinion letter on it. While we haven’t seen the plan documents, service agreement, and other facts of your situation, here’s another point that could become relevant in some situations. Even if both old and new TPAs are licensees of the same plan-documents publisher, don’t assume a document would be constant. A publisher (ASC, Datair, FIS Relius, ftwilliam, McKay Hochman, etc.), working from the same “chassis” for a kind of plan document, might make many different versions. Even with nonexclusive licenses, different TPAs might have licensed different versions. Further, a recordkeeper or third-party administrator (perhaps a “bundled vendor”) might get a publisher to make a custom version. For that version, the TPA might get the whole copyright, share the copyright, or get rights to enforce the publisher’s copyright. Either way, some versions omit choices a service provider doesn’t want its user to select. Some versions add provisions a service provider insists its user include. Many have customizations—beyond names and identifying information—that relate to the service provider’s business. You might be surprised by some of the plan provisions a service provider seeks to influence. To be confident that what you hope to accomplish is feasible, you’d need to look into the exact details. Or if you or your client has any doubt, might it be simpler to start over? Whatever someone might assert about lacking reliance on an IRS opinion letter when a user no longer gets a service from that document’s sponsor or licensee, one doubts another provider’s service agreement would preclude your client from relying on an IRS opinion letter issued to you (or the publisher you license from) when your client adopts a plan-documents version you licensed. Nothing I post here is tax or legal advice. TPApril, you should ask your firm’s lawyer.

I’ve seen practitioners arrange a transfer as of midnight between December 31 and January 1, with the receiving plan’s administrator and its professionals finding that beginning that plan’s Form 5500 reporting with January 1 is good-enough reporting. I’ve also seen transactions in which everything happened within December, and others for which everything happened on January 1 or 2. I’ve never needed to consider which choice of transaction date or what reporting is correct. Other BenefitsLink neighbors can explain the reporting. As with any transaction, a decision-maker shouldn’t conclude anything until one has collaborated advice from one’s lawyers, actuaries, accountants, and other professionals.

At least from the individual-account plan, and perhaps from the defined-benefit plan too, the partners might consider a spin-off in which a new plan for Joe’s new firm accepts a symmetry of assets and obligations allocable to Joe and those who follow Joe into Joe’s firm. The partners ought not do a spin-off until Mary, with her lawyer’s and her actuary’s advice, and Joe, with his lawyer’s and his actuary’s advice, each finds that the split is fair. If the partners agree on a spin-off, might they prefer transfers-out with December’s year-close and transfers-in with January’s beginning?

BenefitsLink neighbors, please help me consider how to administer, and later amend, a plan to follow § 401(k)(2)(D)/401(k)(15). (Let’s assume the proposed rule becomes the final rule.) Before 2024 (and before 2019), the plan makes an employee eligible (unless a specified exclusion applies) if she is age 21. There is no service condition. An employee enters with the first pay period that begins with or after the date she met the eligibility conditions. So, a new employee enters the plan on her first day of employment. The eligibility conditions are the same for each of elective contributions, matching contributions, and nonelective contributions. If it matters, the plan uses no nondiscrimination safe harbor. The plan is one of a few dozen different plans that are counted together in one § 414(b)-(c)-(m)-(n)-(o) group. The plan is not, and has no risk of becoming, top-heavy. Before 2024, the plan excludes an employee the employer classifies as an intern (even if that employee is not an intern for some purpose other than the retirement plan). The employer classifies as an intern anyone who lacks a baccalaureate degree. An intern works in a summer, between semesters. The proposed rule sets up some consequences for an eligibility condition that “has the effect of imposing an age or service requirement with the employer or employers maintaining the plan.” No general statement in the proposed rule explains or describes how one would discern that a condition “has the effect of imposing an age or service requirement[.]” Beginning with 2024, the plan’s administrator intends to administer the plan according to what the administrator anticipates the later amended and restated plan will retroactively provide. If an intern is invited for a third consecutive summer, she will have completed two consecutive 12-month periods during each of which she was credited with 500 hours of service. [29 C.F.R. § 2530.200b-3(c)-(e) https://www.ecfr.gov/current/title-29/part-2530/section-2530.200b-3#p-2530.200b-3(c)] If such an intern has reached age 21 (and no exclusion applies), meeting § 401(k)(2)(D) would make the intern eligible for elective contributions. 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 average-deferral-percentage test.)

What does the partnership agreement provide about how the partnership’s funding of the cash-balance pension plan is allocated among the partners? Even when public law governs the partnership’s funding obligation to the pension plan, the private law of the partnership agreement might govern the allocations of those and other expenses among a partnership’s partners. A partner might want her lawyer or her certified public accountant (or, perhaps better, their collaborative work) to check the partnership’s accountings and allocations of expenses against the partner’s and her professionals’ independent reading of the partnership agreement. And if those professionals are not pension experts, they might bring in an actuary’s or a lawyer’s work to discern how much of the partnership’s funding obligation is incremental because of a particular partner’s or other individual’s benefit, which might, in turn, help discern how much is allocable to the partner under her partnership agreement.

If the plan’s governing documents provide that forfeitures are used first for plan-administration expenses, the plan’s fiduciaries might consider paying outstanding expenses, reimbursing the employer for its recent payments of expenses it was not obligated to pay, and prepaying prudently anticipated plan-administration expenses. With a plan’s discontinuance and termination, it can be wise (especially if the employer too is or soon will become defunct) to see to it that service providers—lawyers, accountants, recordkeepers, third-party administrators (!)—are paid before the plan’s final distributions to participants and beneficiaries. I’ve advised on situations in which a plan’s administrator didn’t think to prepay or reserve for final plan-administration expenses. That can result in unpleasant consequences for former executives of the defunct employer. In some situations, the Labor department asserts that a human who was the plan’s fiduciary is personally liable to pay for needed services, including those needed to prepare the final Form 5500 report with an independent qualified public accountant’s audit of the plan’s financial statements.

Is there a tax law difference between treating a contribution as "incurred" to take a deduction and treating a contribution as "incurred" to take a credit? Should these be treated the same? Or differently?

Is this restatement cycle an opportunity to get a little IRS guidance on some unsettled SECURE 2019 and SECURE 2022 ambiguities? Could a maker of preapproved documents express in its documents some provisions and choices that express a desired interpretation? If the IRS reviewers don’t say no to something expressed in the documents and flagged in one’s application, that’s tantamount to a soft guidance. Or if the IRS reviewers resist, that gives us at least a preliminary look into the issues.

For austin3515’s questions, does it matter whether the employer’s Federal, State, and local income tax returns had been and are made on the cash-receipts-and-disbursements method of accounting? To the extent that “incurred” matters, which facts might establish that a discretionary contribution regarding a year was incurred within that year?

Until the Treasury department’s or its Internal Revenue Service’s guidance: Consider Internal Revenue Code of 1986 (26 U.S.C.) § 7701(a)(25): When used in this title, where not otherwise distinctly expressed or manifestly incompatible with the intent thereof— The terms “paid or incurred” and “paid or accrued” shall be construed according to the method of accounting upon the basis of which the taxable income is computed under subtitle A. Consider I.R.C. § 446. Consider the regulations interpreting and implementing § 446. Consider logical consistency with I.R.C. § 404, and with the regulations interpreting and implementing § 404. To the extent that “incurred” is relevant, consider what incurred means under generally accepted accounting principles.

Informal poll: Of participants and beneficiaries in your clients’ plans, what portion get routine deliveries of disclosures by electronic means? _____% electronic means _____% still get paper. And how many of your clients’ plans charge an individual’s account for getting paper statements and other disclosures? _____% charge an individual’s account an incremental amount for getting paper.

Also, a distribution’s gross-up need not be restricted to amounts withheld toward taxes but might, even for a hardship distribution, include someone’s reckoning of “amounts necessary [for the distributee] to pay any federal, state, or local income taxes or penalties reasonably anticipated to result from the distribution[.]” 26 C.F.R. § 1.401(k)-1(d)(3)(iii)(A). I’ve seen a plan’s administrator approve a hardship distribution for 200% of the need amount. For some New York City residents (with marginal income tax rates summing more than 50%), that’s still not enough to meet the taxes that result from a too-early distribution. A plan’s administrator and its service provider might assume they don’t know everything about the distributee’s and one’s spouse’s circumstances, and so approve a gross-up request within a plausible range.

The rule’s form [29 C.F.R. § 2520.104b-10(d)(3)] suggests a few clues: The instruction says the description should be “brief”. The form suggests that what follows “Your plan is a” might fit one sentence. The instruction directs that the description must include (i) whether the pension plan is a defined benefit plan or an individual-account plan, and (ii) whether the plan is a multiemployer plan, a single-employer plan, a pooled-employer plan, or a multiple-employer plan other than a pooled-employer plan. The instruction suggests the description should be logically consistent with the to-be-summarized report’s plan characteristic codes. The instruction does not say the description must include all information from all plan characteristic codes. (That’s good because one individual-account pension plan might have as many as 19 codes. Expressing all that information might be more than a “brief description” the Labor department envisioned.) Here’s one illustration (for a plan with a § 401(k) arrangement, but no nonelective or matching contribution): Your plan is a single-employer individual-account retirement plan that requires participant-directed investment. That sentence meets required elements, and adds an extra fact that can be logically consistent with a few plan characteristic codes. Or here’s another illustration: Your plan is a multiple-employer association retirement plan that provides an individual account for each participant or beneficiary. BenefitsLink neighbors might have many more ideas. And I would not be surprised if software logic and constraints result in a description that chops phrases and sentences, and omits information that’s not strictly necessary.

Imagine an employer has 200 nonexcludable employees, which means 50 employees is the lesser-of for Internal Revenue Code § 401(a)(26)(A). Is the fix a corrective amendment to cover a few more employees? See 26 C.F.R. § 1.401(a)(26)-7(c) https://www.ecfr.gov/current/title-26/part-1/section-1.401(a)(26)-7#p-1.401(a)(26)-7(c).

A QDRO distribution now (if the plan provides it without waiting for an earliest retirement age) might meet your client’s need for money. That might be so if “about 90%” of the QDRO distribution is allocable to Roth amounts and the conditions for a Roth-qualified distribution are met. About Federal income tax generally: Even if a court order commands or an alternate payee requests an immediate distribution, a plan’s administrator first divides a participant’s account into the participant’s and the alternate payee’s separate portions, and sets up a segregated account for the alternate payee. Unless the court order specifies otherwise (and calls for nothing contrary to the plan), a division should result in the alternate payee’s segregated account getting Roth and non-Roth amounts in proportion to the participant’s before-division account. See 26 C.F.R. § 1.402A-1/Q&A-9(b) (“When the separate account is established for an alternate payee . . . , each separate account [the participant’s and the alternate payee’s] must receive a proportionate amount attributable to investment in the contract.”). See also I.R.C. (26 U.S.C.) § 72(m)(10). If an alternate payee is or was the participant’s spouse, such an alternate payee is treated as the distributee of a distribution paid or delivered from the alternate payee’s segregated account. I.R.C. (26 U.S.C.) § 402(e)(1)(A). A distribution allocable to non-Roth amounts likely is ordinary income. A distribution allocable to Roth amounts might be a qualified distribution not counted in income. I.R.C. (26 U.S.C.) §§ 402(d), 408A(d)(2)(A). (Your description of the assumed facts does not say whether the participant completed a five-taxable-year period of participation in the designated Roth account, and does not say whether the participant is dead, disabled, or reached age 59½. See https://www.irs.gov/retirement-plans/retirement-plans-faqs-on-designated-roth-accounts.) About the too-early tax: “Any distribution to an alternate payee pursuant to a qualified domestic relations order (within the meaning of section 414(p)(1))” is an exception from the extra 10% too-early income tax that otherwise might apply to a distribution before a distributee’s age 59½. I.R.C. (26 U.S.C.) § 72(t)(2)(C). About a payer’s withholding toward Federal income tax: Whatever the withholding rate or instruction, a payer applies it to the portion of the distribution counted in income. “[A] designated distribution does not include any portion of a distribution which it is reasonable to believe is not includible in the gross income of the payee.” 26 C.F.R. § 35.3405-1T/Q&A-2(a) Hyperlinks to sources: Statute: I.R.C. (26 U.S.C.) § 72 http://uscode.house.gov/view.xhtml?req=(title:26%20section:72%20edition:prelim)%20OR%20(granuleid:USC-prelim-title26-section72)&f=treesort&edition=prelim&num=0&jumpTo=true. I.R.C. (26 U.S.C.) § 402 http://uscode.house.gov/view.xhtml?req=(title:26%20section:402%20edition:prelim)%20OR%20(granuleid:USC-prelim-title26-section402)&f=treesort&edition=prelim&num=0&jumpTo=true. I.R.C. (26 U.S.C.) § 402A http://uscode.house.gov/view.xhtml?req=(title:26%20section:402A%20edition:prelim)%20OR%20(granuleid:USC-prelim-title26-section402A)&f=treesort&edition=prelim&num=0&jumpTo=true. I.R.C. (26 U.S.C.) § 408A http://uscode.house.gov/view.xhtml?req=(title:26%20section:408A%20edition:prelim)%20OR%20(granuleid:USC-prelim-title26-section408A)&f=treesort&edition=prelim&num=0&jumpTo=true. Executive agency rules: 26 C.F.R. § 1.402A-1/Q&A-9(b) https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/section-1.402A-1. 26 C.F.R. § 35.3405-1T/Q&A-2(a) https://www.ecfr.gov/current/title-26/chapter-I/subchapter-C/part-35/section-35.3405-1T. Caution: Nothing here is advice to your client, or to you.

In many BenefitsLink discussions, we present observations grounded on a set of assumed or possible facts. And we might suggest something based on an inference about a hypothetically assumed or possible fact. In this discussion, some of us might have drawn different inferences about some ambiguous, inconsistent, or confusing facts described in Renee H’s originating post and follow-up. As the earlier of my posts said, there are many possibilities. That post expressly recognizes that Renee H’s client might not have accurately or completely described the facts. I imagined at least two possibilities, including that a person described as a nonemployee director might be an employee. My later post assumed the information and descriptions in Renee H’s follow-up, and suggests one of several possible ways to handle a situation if a person is a nonemployee director, if the person desires a retirement plan, and if it is feasible to design a separate plan. We recognize that records or other facts furnished to Renee H might include an inaccurate description the client made following its own decision-making without anyone’s advice, or perhaps with another professional’s advice. We know that a business organization, whether small or big, might misdescribe some facts—sometimes unknowingly, sometimes inadvertently, sometimes ill-advisedly, or even for one or more other reasons or causes. Among the challenges facing a lawyer, accountant, actuary, TPA, or other adviser is that a client might not furnish enough information to get the facts right. Many BenefitsLink discussions proceed from a commenter’s inferences and guesses about facts to be assumed. An originating post often doesn’t fully describe all relevant facts. Often, that’s because the person seeking information or suggestions doesn’t yet know enough to discern fully which facts might be relevant. Often, it’s because the originating poster doesn’t yet have the facts. Still, many of us find help in a neighbor’s analysis of, or observation about, even a hypothesized situation. Often, that helps a questioner consider which facts and other assumptions to ask for, or which modes of analysis or advice-giving to pursue.

But the embarrassment or frustration of whichever person advised or decided the reporting of the nonemployee compensation might fade if it is feasible to design a separate retirement plan for each director, perhaps with annual additions up to the § 415(c) limit or accruals up to the § 415(b) limit (but subject to coverage and nondiscrimination conditions).

Jokes and laughs aside, in fairness the report did not suggest a failing of Central States, Southeast & Southwest Areas Pension Plan. Rather, the report criticizes the PBGC for not using the full death master file, a resource not available to Central States. https://oig.pbgc.gov/pdfs/SR-2023-10.pdf

There are many possibilities. Just a few of them are: The data furnished to the TPA did not include a record of hours of service for a worker who in fact had hours of service. For some directors, officers, or professionals, the measure of service might not be obvious. Or, an employer or service recipient might lack records. An amount reported as wages might have been nonemployee compensation. For example, if a nonemployee director’s fee is not an employee’s wages, it might be the individual’s self-employment income. A director might be in the business of being a corporation’s director. If so, that separate business might establish its separate retirement plan. As just one illustration, a 50-year-old director’s fee of $20,000 a month might support a year’s individual-account retirement plan contributions of $76,500 [2024]. But a businessperson considering such a plan needs a practitioner’s advice about many qualified-plan conditions, including coverage and nondiscrimination, especially if the self-employed business might be treated as a part of a § 414 employer that includes the corporation the director serves. Renee H might face some delicate choices about whether to do the TPA’s work on the data presented, or to invite a conversation about a client’s information and a client’s (and perhaps others’) choices and wishes.

For a plan with a cash-or-deferred arrangement established before December 29, 2022 (and so excepted from § 414A’s automatic-enrollment tax-qualification condition): Could a plan provide an automatic-contribution arrangement for all or some of those who become eligible under full-time eligibility conditions, while also providing no automatic-contribution arrangement for those eligible only under the long-term-part-time provision? Please understand that I do not suggest this plan design; I seek only to learn whether it’s possible if it is what a plan sponsor wants.

One advising a participating employer might consider, and advise about, these points: A participating employer is a pooled-employer plan’s fiduciary. ERISA § 3(43)(B)(iii). ERISA makes it a fiduciary breach (and a Federal crime) for a person to handle plan assets or serve as a plan’s fiduciary unless the person is “bonded” with ERISA fidelity-bond insurance, at least for the § 412(a)-required amount. Even if one is confident that the employer-fiduciary never handles plan assets, construing § 412(a) to require only a bond of $0.00 is a doubtful interpretation of the statute. Section 412(a) includes: “In no case shall such bond be less than $1,000[.] An interpretation in the 2008 Field Assistance Bulletin or in the 2022 Information Letter is not a rule or regulation. A court need not defer to it. A court need not even consider it. If a court considers an executive agency’s nonrule guidance, a court considers the stated reasoning and evaluates whether the reasoning persuades the court about how to interpret an ambiguous statute. Not buying the insurance because one assumes an employer-fiduciary regularly pays over contributions promptly and so does not handle plan assets is risky. Fidelity-bond insurance does not protect a plan from a theft loss unless the insurance is in effect when the theft happens. Imagine a plan suffers a theft loss with the theft happening before money was collected by the pooled-employer plan’s trustee or its agent. Imagine all or some of the loss would be covered had the employer obtained ERISA fidelity-bond insurance. Could a participant harmed by the theft loss assert that the employer-fiduciary is personally liable for the uncovered loss because the fiduciary failed to do what the statute commands? Consider ERISA § 409(a). Even if the employer pays the insurance premium (and it need not, because fidelity-bond coverage is a plan-administration expense), might that be much less expensive than bearing personal liability for a theft loss?

With David Rigby’s good help, we see that an ancillary benefit includes “[a] benefit payable under a defined benefit plan in the event of disability (to the extent that the benefit exceeds the benefit otherwise payable)[.]” 26 C.F.R. § 1.411(d)-3(g)(2)(ii). Here's a negative inference from that sentence: A participant’s right to a distribution under an individual-account (defined-contribution) plan because the participant is disabled is not an ancillary benefit. Do BenefitsLink mavens read the rule that way?

Instead of looking to a secondary source, it might be simpler to read the Treasury’s rule. It includes a subsection on “Effect of failure”. 26 C.F.R. § 1.403(b)-3(d) https://www.ecfr.gov/current/title-26/part-1/section-1.403(b)-3#p-1.403(b)-3(d). About a failure, Treasury’s rule sends you to Internal Revenue Code sections 61, 72, 83, 402(b), and 403(c). A 403(b)-failed annuity contract still might be an annuity contract. While a contribution that gets no § 403(b) exclusion counts in income, a build-up under an annuity contract might not be taxed until paid, distributed, or made available. See 26 C.F.R. § 1.403(b)-3(d)(1)(i)-(iii). 26 C.F.R. § 1.403(b)-3(d)(1)(ii) describes which failures affect a whole plan, which affect a class of individuals, and which affect only a particular individual.