Peter Gulia

Those are truly helpful and useful observations. Other BenefitsLink neighbors' views?

The Treasury’s Regulations Governing Practice before the Internal Revenue Service (reprinted as Circular 230) includes this: Requirements for written advice The practitioner must [when giving written advice on a Federal tax matter]— Not, in evaluating a Federal tax matter, take into account the possibility that a tax return will not be audited or that a matter will not be raised on audit. 31 C.F.R. § 10.37(a)(2)(vi) (emphasis added). If that rule governs a practitioner’s advice-giving, it applies only for written advice, and only for written advice that evaluates a matter. Even if one follows the IRS’s assertions that the Circular 230 rules govern everything a once-recognized practitioner does that, however indirectly, relates to her practice before the Internal Revenue Service, § 10.37(a)(2)(vi) does not restrain one from providing truthful information, not advice, about nondetection or nonenforcement. Beyond those tax-practice rules, whether a lawyer must, may, or must not provide advice or information about nondetection and nonenforcement remains a subject of considerable academic and professional discussion. In summer semesters, I teach a law school’s course on Professional Conduct in Tax Practice. Here’s an edited excerpt from a reading list I give them: Jamie G. Heller, Legal Counseling in the Administrative State: How to Let the Client Decide, 103 Yale L.J. 2503 (1994) (suggesting a lawyer educate her client with full-picture counseling about the law’s provisions, practical application, potential nondetection, potential nonenforcement, and purposes so the client can make fully informed choices). Stephen L. Pepper, Counseling at the Limits of the Law: An Exercise in the Jurisprudence and Ethics of Lawyering, 104 Yale L.J. 1545 (1995) (suggesting modes of reasoning about whether it is appropriate for a lawyer to advise a client about potential nondetection or nonenforcement). Linda Galler, The Tax Lawyer’s Duty to the System, 16 Va. Tax. Rev. 681 (1997). Robert W. Gordon, Why Lawyers Can’t Just Be Hired Guns [chapter 3] in Ethics in Practice: Lawyers’ Roles, Responsibilities, and Regulation (Deborah L. Rhode, ed. 2000) (“Lawyers have to help preserve the commons—to help clients comply with the letter and purpose of the frameworks of law and custom that sustain them all; and their obligation is clearly strongest where there is no adversary with access to the same body of facts to keep them honest, and no umpire or monitor to ensure conformity to legal norms and adequate protection of the interests of third parties and the integrity of the legal system.”). Frank J. Gould, Giving Tax Advice—Some Ethical, Professional, and Legal Considerations, 97 Tax Notes 593 (2002). Michael Hatfield, Legal Ethics and Federal Taxes, 1945-1965: Patriotism, Duties and Advice, 12:1 Fla. Tax Rev. 1-56 (2012). Michael Hatfield, Committee Opinions and Treasury Regulation: Tax Lawyer Ethics, 1965-1985, 15 Fla. Tax Rev. 675 (2014). Milton C. Regan, Tax Advisors and Conflicted Citizens, 16 Legal Ethics 322-349 (2014) (suggesting that ethics or professional-conduct expectations ought to vary with whether a lawyer serves as an advocate or an adviser, and for advisers by the context in which an advisee seeks advice). John S. Dzienkowski & Robert J. Peroni, The Decline in Tax Adviser Professionalism in American Society, 84-6 Fordham L. Rev. 2721 (2016). Heather M. Field, Aggressive Tax Planning & The Ethical Tax Lawyer, 36 Va. Tax Rev. 261 (2017) (suggesting a lawyer “identify and implement her philosophy of lawyering” about tax planning). Michael Blackwell, Conduct Unbefitting: Solicitors, the SRA and Tax Avoidance, 2019-1 British Tax Rev. 31-54 (2019) (criticizing the Solicitors Regulation Authority for wrongly suggesting that a solicitor who facilitates tax avoidance necessarily breaches the SRA Code of Conduct). Rashaud J. Hannah, Betwixt and Between: A Tax Lawyer’s Dual Responsibility, 34 Geo. J. Legal Ethics 991 (2021). ****** I imagine few of us want to coach a client on getting away with the wrong thing. But there are situations in which law is ambiguous, or how the facts relate to law is ambiguous. And even when there is no ambiguity, there are circumstances in which some of us think it’s appropriate to furnish information and let a client decide what the client does or omits.

On whether an employment-based plan’s administrator fails to administer the plan according to its governing documents (including a § 401(a)(9) provision) so that the IRS would tax-disqualify a plan on that ground, a fair reading of relevant tax law ought to allow some tolerance for situations in which the beneficiary is not yet decided. As Luke Bailey points out, we’ve not found a regulation, or even nonrule published guidance, that describes such a tolerance. A rulemaking project on § 401(a)(9) remains open. Further, the Treasury might revise its proposed rule to follow and interpret SECURE 2022 changes, and might invite another round of comments. For situations in which an administrator delays a distribution while deciding (or waiting for a court to decide) which person is the rightful beneficiary, would it be helpful or harmful for Treasury to put something in the regulations to recognize those situations? For example, a rule might say a plan is not tax-disqualified for failing to pay a beneficiary’s distribution when the plan’s administrator uses a claims procedure—with periods no longer than those permitted under ERISA § 503—to decide who is the beneficiary, or when a court proceeding to decide which person is the beneficiary is pending. BenefitsLink mavens, do we want an express rule? Or are we better off leaving this to good judgment?

Bri, instead of “sell it to whom”, if the mutual fund is a registered-investment-company open-end fund (and most money-market mutual funds are an open-end fund), a shareholder likely has a right to redeem shares with the fund itself—no need to find a buyer. A redemption of shares of such a fund is based on a net asset value of the securities and other property the fund holds. A money-market fund typically adjusts its accounting every NYSE day so a share’s NAV and redemption price is $1.00 per share every day. If the shares were worth $50,000 when delivered to the plan’s trustee, the trust likely holds a smidge more than 50,000 shares now. But “show your work” for the corrections, and see to it that the individual’s income tax return, the employer’s income tax return, and the pension plan’s information return all disclose what happened and how it is corrected. And when the business owner pays extra for that incremental work (or sees his tax preparer and you graciously do it without seeking an extra fee), remind him how much easier it would be if he consults the professionals first.

I really meant my three questions as questions. (I lack knowledge about tax-law rules for defined-benefit plans.) If the answer to my question: “Does the pension plan allow a contribution by a delivery of property other than money?” is No, or that the employer prefers not to use such a provision (perhaps because the contribution would not meet a funding obligation, or it would fail to meet a condition for the plan’s tax-qualified treatment), here’s our next question: Does the economic substance of what happened suggest an opportunity for a correction? Could the plan’s trustee redeem the trust’s money-market fund shares for money? Could the plan’s trustee return that money to the employer? Then, could the employer pay, in money, a proper contribution to the plan’s trust? (Or, could the trustee and the employer simplify transactions by treating the trust’s retention of the redemption’s money as an offset against the employer’s obligation for the contribution? With the employer paying, in money, the additional amount needed to make the sum correct?) Is it feasible for the employer and the plan’s one participant to bear the consequences that result from the contribution being paid later than it ought to have been paid (or later than some related point treats the contribution as having been paid)?

If an excise tax would apply and no other remedy or accounting fits, the employer, the plan’s administrator, and the plan’s trustee each might want advice to evaluate whether a contribution was made “by a mistake of fact” so that, if within one year after the payment of the mistaken contribution, the trustee might return the mistaken amount to the employer.

If the plan's administrator in fall 2023 did not know that the participant's death had happened, how does the plan's administrator know it now? And has the plan's administrator received a claim from anyone?

Yes, I have often seen (and continue to see) sloppy draft directions and instructions. I rewrite them. You’re right that the plan’s administrator should seek more and better attention. If the recordkeeper’s draft is not what the plan’s administrator wants to direct and instruct, the administrator might refuse to sign. If the plan’s administrator can get help from a lawyer who knows what’s needed, the administrator might present its rewrite. In my experience, a recordkeeper’s customer-service people often are glad to receive a rewrite because they can present this to an inside lawyer or plan-compliance manager. Doing so takes an open item out of the customer-service person’s time-tracking while the matter is in another department. And sometimes a review helps get better attention. If the plan’s administrator lacks help, it might wait on moving toward final distributions until the administrator can get help.

Whichever person is the plan’s administrator or, even if not so appointed, acts for those functions, directs the plan’s trustee, and instructs the administrator’s recordkeeper, third-party administrator, and other service providers. Your description suggests such an administrator or other fiduciary might need some lawyering to rewrite the directions and instructions. One practical suggestion to you 401 Chaos, don’t take on new or incremental work until you get a fresh (and carefully written) engagement and collect an advance payment of your fee. Beyond managing a risk of nonpayment, it’s a way to test whether a person has authority.

Ignoring, for analysis, the transaction with a disqualified person: Imagine: (1) the individual redeemed her money-market fund shares for money; (2) the individual paid money to the employer (a capital contribution, or a loan); (3) the employer paid money into the pension plan’s trust; and (4) the pension plan’s trust bought money-market fund shares as the plan’s investment. Is the practical result of what happened similar to, or much different than, what would have resulted had the business owner done those four steps? Does the pension plan allow a contribution by a delivery of property other than money? If not, can the plan sponsor amend the plan to ratify a contribution by a delivery of property other than money?

It should be feasible to control this with the plan sponsor’s careful writing of the plan’s governing documents and the plan administrator’s careful writing of communications to participants. If the plan sponsor prefers that implied-assent elections in effect just before an amendment’s effectiveness remain in effect (despite the amendment providing no more implied-assent elections), it should be feasible for the documents and communications to specify that. An implied-assent regime presumes, if there is no opt-out, the communicated-to person’s assent to the provisions communicated to her. The rule for a cash-or-deferred election states: “For purposes of determining whether an election is a cash or deferred election, it is irrelevant whether the default that applies in the absence of an affirmative election is [that] the employee receives an amount in cash or some other taxable benefit[] or [that] the employer contributes an amount to a trust or provides an accrual or other benefit under a plan deferring the receipt of compensation[].” 26 C.F.R. § 1.401(k)-1(a)(3)(ii) https://www.ecfr.gov/current/title-26/part-1/section-1.401(k)-1#p-1.401(k)-1(a)(3)(ii). If the plan’s governing document is unclear about which election—implied-assent deferral or no-longer-implied-assent, and so “cash”—applies, the administrator might use whatever discretionary authority the plan’s governing document grants to the administrator for it to interpret (loyally and prudently) which election the plan provides. This is not accounting, tax, or legal advice to anyone.

JH, your description suggests there might not have been a change in the plan’s legally named administrator. (The word has different meanings following whether the usage is ordinary English, business English, or the Federal statutes’ specially defined term.) Rather, a change might be about a service provider. Even if there is no change in the plan’s administrator, follow the cautions about a possibility (many might say a likelihood) of change in the plan’s domestic-relations-order procedures. If you want a division processed (or a hold or freeze lifted), consider that a lawyer might navigate the plan’s provisions and procedures (perhaps practically including the service provider’s ways) more skillfully than you might. Nothing in this is accounting, tax, or legal advice to anyone.

Dianna912, if other efforts (including some Effen suggests) don’t result in clarifying the participant’s benefit to her satisfaction, and you seek to help your friend evaluate her potential courses of action: Consider whether the circumstances you describe suggest enough potential for clarifying (and so improving) the participant’s benefit that it could be worthwhile to pay for at least an initial consultation with a knowledgeable employee-benefits lawyer. If the pension plan is ERISA-governed: One possible interpretation of ERISA § 206(d)(3) is that a qualified domestic relations order—to the extent (if any) that an order may provide for a successor-in-interest to an original alternate payee—may so provide only if the order restricts such an alternate payee to a spouse, former spouse, child, or other dependent of the participant. (I’m imagining that the deceased’s nephew is not the participant’s dependent.) See, for example, 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. Sept. 15, 1998) (interpreting ERISA § 206(d)(3), and applying ERISA § 206(d)(3)(K)). But recognize that this decision is no precedent. One might use it in an effort to persuade a decision-maker—whether the pension plan’s administrator or a reviewing court—that an order is not a QDRO. A further possible interpretation of ERISA § 206(d)(3) is that a qualified domestic relations order cannot designate an alternate payee’s successor-in-interest if, under the pension plan’s provisions, a participant cannot designate the participant’s successor-in-interest. That also might be so if there is no remaining interest to dispose of after the relevant person’s death. Recognize that the pension plan’s provisions might matter greatly. Consider that the participant might use the pension plan’s DRO and claims procedures to question the administrator’s interpretation, and to request the participant’s interpretation. (Some courts might say one must exhaust the plan’s procedures before asking a court to declare that a domestic-relations court’s order is not a QDRO.) Using the plan’s internal procedures might be less burdensome than litigation in a Federal court. None of this is legal advice to anyone.

And let’s remember that executive agencies write a Paperwork Reduction Act explanation because Congress—decision-makers “we the people” elected—decides to require those explanations.

Amen!

About adjusting typefaces, fonts, point sizes, line spacing, margins and line lengths, columns, layout, and other visual elements, a plan’s administrator or payer might evaluate whether the result meets the rule’s command that “[t]he section 402(f) notice must be designed to be easily understood[.]” 26 C.F.R. § 1.402(f)-1 https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/section-1.402(f)-1. That observed, one might use good typography and layout to manage a page count while preserving readability.

The IRS’s Notice 2020-62 about safe-harbor explanations for eligible rollover distributions warns: “the updated safe harbor explanations will not satisfy § 402(f) to the extent the explanations are no longer accurate because of a change in the relevant law occurring after August 6, 2020.” https://www.irs.gov/irb/2020-35_IRB#NOT-2020-62. What changes do you make so a text furnished now explains current law, including SECURE 2022 changes? One imagines some service providers follow SPARK Institute’s suggestions (which SPARK warns is not tax or legal advice): https://www.sparkinstitute.org/wp-content/uploads/2023/03/Special-Tax-Notice-SECURE-2.0-Act-Updates-Final-3.24.23-00391206.pdf. Are there changes not mentioned in SPARK’s suggestions? Which law changes are included in (or omitted from) Relius’ suggested explanation?

MoJo, thank you for your observations about effects for an acquirer’s business. About some plan terminations, I long ago suggested that the terminating plan provide that the default final distribution, for a distributee who is (when the final distribution is distributed) eligible for the assets buyer’s plan, is a direct rollover into that new employer’s plan. Does anyone do that? About perhaps over-cautious lawyering: A century ago, it was common for one law firm to serve as a business’s counsel for all matters, and in lasting relationships over successive generations. That allowed for wider, sometimes almost holistic, advice. Now, a firm that works on a business’s acquisitions—even if it regularly does all of them—might have little or no other relationship with the business (and might not keep the relationship over time). If an avoidable risk happens, the firm will be criticized for not having gotten rid of the risk. But if a firm helps a client get good employees and good business productivity, the law firm won’t share in the win for those results.

Even for an assets-only purchase, some buyers put in the deal agreement a condition that the seller’s plan is terminated before closing. While in theory an assets buyer is not responsible for a retirement plan the buyer never assumed, some buyers fear the many ways a buyer can be stuck with a bad situation. As we remind ourselves to Read The Fabulous Document, sometimes we add RTFD to the deal agreement.

Just curious: How does the system handle a situation in which a § 401(a) plan has more than 120 participants (and more than 120 with an account balance), but all participants are self-employed individuals? That can happen if a firm separates retirement plans—a plan distinctly for working partners (and no employee), and a separate plan for employees. A plan that covers no employee is not ERISA-governed.

Internal Revenue Code of 1986 § 401(k)(14)(C) now reads: Special rules relating to hardship withdrawals For purposes of paragraph [401(k)](2)(B)(i)(IV)— (C) Employee certification In determining whether a distribution is upon the hardship of an employee, the administrator of the plan may rely on a written certification by the employee that the distribution is— (i) on account of a financial need of a type which is deemed in regulations prescribed by the Secretary to be an immediate and heavy financial need, and (ii) not in excess of the amount required to satisfy such financial need, and that the employee has no alternative means reasonably available to satisfy such financial need. The Secretary may provide by regulations for exceptions to the rule of the preceding sentence in cases where the plan administrator has actual knowledge to the contrary of the employee’s certification, and for procedures for addressing cases of employee misrepresentation. Congress has not enacted anything to repeal or amend that statute. This self-certification change applies to plan years that began or begin after December 29, 2022.

Beyond considering whatever is the before-1974 Federal tax law about vesting: You’ll want to consider whether: (1) the Contracts Clause of the US Constitution [U.S. Const. art. I, § 10], (2) a similar clause of the State’s constitution, or (3) the State constitution’s provision about retirement-plan rights (if any) precludes the change. States’ courts differ widely in how they interpret constitutional provisions of these kinds. That includes differences about when a right against change attaches. Under some provisions and interpretations, a right against change attaches as soon as the employee first became eligible for the retirement plan. The analysis turns on the exact texts of the constitutional provisions and the interpretations the State’s courts have found or would find.

Is your task: Interpreting what the plan now provides? or Evaluating whether it's feasible, and would be effective, to amend the plan?

If a governmental plan seeks to tax-qualify under Internal Revenue Code § 401(a), one considers nondiscrimination and vesting standards as in effect before September 2, 1974. To get into the details, use Carol V. Calhoun, Cynthia L. Moore & Keith Brainard, Governmental Plans Answer Book (Wolters Kluwer 5th ed., updated December 19, 2023), https://law-store.wolterskluwer.com/s/product/governmental-plans-answer-book-pension3-mo-subvitallaw-3r/01t0f00000J4aDTAAZ. Whether service may, must, or must not be counted turns on State law and, if permitted regarding a local government employer’s plan, further local law. Consider that a governmental plan often is not expressed in one fully integrated writing that looks like what pension practitioners call a plan document. Rather, a plan might be stated by some combination of a legislature’s statutes, executive agencies’ (including a retirement system’s) rules and subrule guidance documents, and courts’ interpretations of those law sources.

Whatever responsibility (if any) one might have for providing advice or information, the advisee or information recipient is responsible for what it decides or does. Many practitioners consider it professionally permissible to provide truthful information about nonenforcement. Others suggest omitting information that might lead an advisee or information recipient to noncompliance. A caution: If the information is nowhere published and instead is based only on anecdote or perception, it might be difficult to defend what one said about nonenforcement. Unless one warned the information had only that grounding, and can prove she said it.