Peter Gulia

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.

Does either business have an employee beyond the shareholder-employee?

Here’s the Treasury department’s interpretive rule: 26 C.F.R. § 1.401-1(b)(2) https://www.ecfr.gov/current/title-26/part-1/section-1.401-1#p-1.401-1(b)(2). TPApril, does the business have employees other than the owner? If so, is it imaginable that an already anticipated buyer of the business might continue the retirement plan for the employees (or might merge the recently created seller’s plan into the buyer’s plan)?

I doubt the US government prosecutes a false-statement crime beyond outrageous situations. The indictment’s charge against Marilyn Mosby for her false statements to her deferred compensation plan seem related to other circumstances, including frauds against financial institutions and the US Treasury’s lien for unpaid Federal taxes, with an outstanding balance more than $69,040. The convict was a Maryland State’s Attorney, Baltimore’s prosecutor. (Someone who ought to have a deeper-than-common understanding about needs for truthfulness in signing a penalties-of-perjury statement.) She suffered no reduction in her $247,955.58 [2020] salary. She was not unable to work because of a lack of child care. She did not state an interruption in her husband’s income. (Nick J. Mosby is the president of Baltimore’s City Council.) Her coronavirus-related distributions were $90,000. The two amounts and the timing suggest an absence of a relation to a coronavirus-related change. I’ve seen no suggestion that Baltimore’s deferred compensation plan service provider, Nationwide, did anything wrong by processing the participant’s self-certifying claims.

Under an ERISA-governed individual-account (defined-contribution) retirement plan’s typical provisions, the default regime for the absence of the participant’s affirmative beneficiary designation begins with the participant’s surviving spouse. If the participant’s (not yet divorced) husband survives the participant, the typical provisions would provide the death benefit—typically, the whole of it—to the husband. ERISA § 205(b)(1)(C), 29 U.S.C. § 1055(b)(1)(C) http://uscode.house.gov/view.xhtml?req=(title:29%20section:1055%20edition:prelim)%20OR%20(granuleid:USC-prelim-title29-section1055)&f=treesort&edition=prelim&num=0&jumpTo=true.

And classifying a payment as restoration might be unnecessary if the plan includes as reimbursement provision as Paul I describes.

To fit Paul I’s suggestion about classifying a payment as something other than a contribution: The plan’s administrator might want its lawyer’s advice about whether the amounts to be restored to participant accounts might be a restorative payment. 26 C.F.R. § 1.415(c)-1(b)(2)(ii)(C) https://www.ecfr.gov/current/title-26/part-1/section-1.415(c)-1#p-1.415(c)-1(b)(2)(ii)(C). That classification might fit if the plan’s administrator arguably breached ERISA § 102 or § 404(a)(1) in communicating (or failing to communicate) the plan’s provisions, or arguably breached a fiduciary responsibility in instructing the service provider. A fiduciary’s breach need not be proven or conceded; it is enough that there is “a reasonable risk of liability[.]” If a restorative payment meets the reasonable-risk condition, is allocated to restore the harm that follows from the fiduciary’s arguable breach, and meets further conditions the rule specifies, it is not an annual addition. Thus, it does not count in measuring a § 415(c) limit. Likewise, it might not count in a coverage or nondiscrimination test to the extent that the test looks to annual additions. Because the participant does not control a restorative payment, it should not be treated as an elective deferral, and so should not count for a § 402(g) limit, or for a coverage or nondiscrimination test that looks to elective deferrals. This is not accounting, tax, or legal advice to anyone.

Many plan administrators and their third-party administrators, recordkeepers, and other service providers limit their communications to describing what the plan’s administration will or won’t do, and avoid suggestions about what an individual should do. Suggestions that might be sensible if a domestic-relations lawyer or an estate-planning lawyer presents them could be inapt or unwise for a nonlawyer service provider to present. That might be especially so when a service provider routinely warns that it does not provide tax or legal advice. Further, a service provider might have much less than complete information about an individual’s facts and circumstances.

As always, Read The Fabulous Document and ERISA § 205. Is a separated spouse a spouse for spouse’s-consent purposes? Yes. No matter how long a separation continues, a marriage does not end until a court orders the divorce. See Davis v. College Suppliers Co., 813 F. Supp. 1234 (S.D. Miss. 1993). Just to pick one example, although a husband and wife were separated for the last 15 years of their 19 years’ marriage, they remained spouses until the participant’s death. Further, their written separation agreement had no effect under his retirement plan, and the surviving spouse was entitled to her qualified preretirement survivor annuity. Board of Trustees of the Equity-League Pension Trust Fund v. Royce, 238 F.3d 177, 25 Empl. Benefits Cas. (BL) 2394 (2d Cir. 2001). Likewise, a division of the spouses’ marital property does not end the marriage. For example, Callegari v. Scottrade, Inc., No. 16-1750, 2016 U.S. Dist. LEXIS 105468 (E.D. La. Aug. 10, 2016) (court-approved consent judgment to separate community property did not end the marriage); Gallagher v. Gallagher, No. 12-40027-TSH, 57 Empl. Benefits Cas. (BL) 2648, 2013 U.S. Dist. LEXIS 26061 (D. Mass. Feb. 26, 2013). What about a legal separation? A plan’s governing documents may (but need not) provide that a spouse’s consent is excused if the plan’s administrator decides (1) the participant and the spouse are legally separated, (2) the participant has a court order to that effect, and (3) no QDRO requires the spouse’s consent. See 26 C.F.R. § 1.401(a)-20, A-27. The combination of these three conditions is unlikely. Divorce? After 16 years’ separation, one imagines the participant likely has sufficient grounds to obtain a divorce. None of this is accounting, tax, or legal advice to anyone.

In 2023, I worked on what those who sell it call a near-site clinic. The plan was designed under assumptions that the plan does not fit relief for an onsite clinic, and is a group health plan. That includes provisions about COBRA continuation coverage (102%), ERISA communications, ERISA claims procedure, Family and Medical Leave Act leave, HIPAA privacy, military service, qualified medical child support orders (QMCSOs), and other group health plan provisions. The employer offers its near-site clinic to all employees (and one’s spouse and children not yet 26). The employer excludes no one based on a preexisting condition. The employer sets no lifetime limit, or yearly limit, on the care provided. The plan recognizes some covered persons might prefer no coverage beyond high-deductible health coverage. (This can be so even when the employer provides no other group health plan; for example, a spouse and an employee might have health coverage under the spouse’s employer’s plan. And it might matter when a participant’s child has coverage under the child’s employer’s health plan or the child’s spouse’s employer’s health plan) The plan lets each covered person elect against care that cannot be provided within what’s allowed while being limited to only high-deductible coverage. I added provisions for allocations of fiduciary responsibilities (especially about claims, and for a separate COBRA administrator), a time bar on lawsuits, and an exclusive forum for lawsuits. The near-site clinic I helped design is for only one employer. A plan for access to a clinic shared with other employers might involve yet more design issues. Nothing in this is accounting, tax, or legal advice to anyone.

Some suggest that a revision (whether a restated SPD, or a summary of material modifications) need explain only those plan provisions that are “material”. “Material” is awkward legalese for “it matters” (to inform some choice a participant, beneficiary, or alternate payee could make). If a plan is amended to discontinue contributions and get ready for a single-sum final distribution, some provisions included in an otherwise boilerplate plan amendment might never apply.

Observe that Bloomberg displays I.R.C. § 408(p)(11). In context, not as a footnote, Bloomberg introduces the change: Editor’s Note: Sec. 408(p)(11), below, after being added by Pub. L. 117-328, Div. T, Sec. 332(a), is effective for taxable years beginning after Dec. 31, 2023. https://irc.bloombergtax.com/public/uscode/doc/irc/section_408

Many practitioners who don’t pay Bloomberg, CCH/Wolters Kluwer, Lexis, Tax Analysts, Thomson Reuters/Westlaw, or another commercial publisher for a professionally edited and annotated version, use: Bloomberg’s free version https://irc.bloombergtax.com/; or the US Government’s United States Code. http://uscode.house.gov/. In that compilation, I.R.C. § 401 = 26 U.S.C. § 401. The government’s compilation includes SECURE 2022 provisions applicable for 2024, and shows full sets of amendment notes. Bloomberg’s version (even its free version) displays in-context notes to show which provisions apply to 2024, which apply to earlier years, and which not-yet-applicable provisions will apply for later years—2025, 2026, 2027, 2028, 2029, and 2030.

Consider asking the IRS’s litigator what appeal bond would be satisfactory to the IRS. Your client might be pleasantly surprised by the answer.

As QDROphile observes, even if the plan grants the administrator the widest discretionary authority, that fiduciary must consider (at least) all instruments and documents governing the plan, the plan administrator’s written procedures, including forms, and other relevant documents. None of us sees the writing the participant signed. But following Dougsbpc’s description, some fiduciaries might find that the participant named two primary beneficiaries, 50% each. Some fiduciaries find reasons to excuse some failures in completing a form; others, not so much. Fact-finding is sensitive to all the facts and circumstances. If the plan granted the administrator discretionary authority, an advantage of using it is that a court defers to the fiduciary’s exercise of discretion unless it is so unreasoned that the law treats it as “arbitrary and capricious”.

Thank you for sharing your helpful observations. (While the example I described is not an interpretation I would advise, I can see how some lawyers might.) Another curiosity: Is an analysis of whether a nonowner employee is deemed self-employed different if the employer is a partnership (or a limited-liability company treated as a partnership for Federal income tax purposes)? Is there anything in the Internal Revenue Code, or in the proposed § 125 rules, that treats a parent as a deemed partner or otherwise a self-employed individual because the parent’s adult child is a partner?

Brian Gilmore, just my curiosity: When there is no final, interim, or temporary rule, many look to a proposed rule or other nonrule guidance as a source of cautious interpretation. While I imagine Newfront and its smart lawyer would be careful not to suggest doing so, have you ever seen a cafeteria plan sponsor use its own interpretation, perhaps with its tax practitioner’s advice, about the meaning of employee as used in § 125? For example, have you ever seen a plan that excludes an actual 2% shareholder, but treats as a § 125-eligible employee someone who is not a shareholder (and would be a deemed shareholder only by attribution from an adult child if one follows the proposed rule’s interpretation)?

Some churches allow both § 403(b) and § 457(b). If an employee is 50 or older, eligible for both plans, and has enough compensation, this might allow elective deferrals up to $61,000 [2004]. That’s in addition to nonelective and matching contributions (if any), if those are provided under a plan other than a § 457(b) plan. This is not accounting, tax, or legal advice to anyone.

Consider also: The plan’s administrator might not need to decide anything until someone submits a claim, or the plan mandates an involuntary distribution (for example, under a § 401(a)(9) provision). When someone submits a claim or it otherwise becomes necessary or appropriate to decide who is or is not a rightful beneficiary, the administrator should follow ERISA § 503 and the plan’s claims procedure. This is not accounting, tax, or legal advice to anyone.

The plan’s administrator might read carefully the plan’s governing documents to discern how much discretionary authority the administrator has not only to interpret the plan’s provisions but also to interpret a participant’s beneficiary designation and to make discretionary findings of fact.

And to help discern the meaning of, or find support for an interpretation of, § 414(m)(5), consider the Conference Committee Report on the Tax Equity and Fiscal Responsibility Act of 1982. Many judges now disfavor legislative history as a way to interpret an enacted text. Yet, for older statutes, especially tax legislation, it can be a useful source of background information. A staff explanation about Congress’s reason for legislating (even if partly or wholly imagined) can suggest useful clues to interpret the enacted text.

Exactly when did the plan sponsor sign the document that stated the provision the plan sponsor did not intend?