Peter Gulia

Without remarking on public-policy questions about the too-early tax and exceptions from it: If we imagine Congress believed that somehow involving the distributing plan’s administrator might lower false claims that a distributee was terminally ill, such a belief would have been unsound, at least partially. Even if a plan’s administrator or its recordkeeper receives a physician’s certificate and makes and keeps a document-image record of what was received, the plan’s administrator need do nothing to detect whether a purported certificate is a forgery or other false document, and need not evaluate or even read the certificate. Yet, that the statute calls for someone who wants the § 72(t)(2)(L) terminal-illness tax treatment to furnish a physician’s certificate might deter some false claims because: A plan’s claimant might imagine, often mistakenly, that the plan’s administrator will at least look at the certificate. A plan’s administrator might assume, often mistakenly, that the administrator must or should consider the certificate. If either of those had been Congress’s reasoning, that would be a deplorable way to make law. Whatever the awkwardness of receiving evidence the administrator has no current need to consider, I suggest a plan’s administrator ask its recordkeeper to make and keep records of whatever the recordkeeper received for a § 72(t)(2)(L) certificate. I suggest that even when the certificate is irrelevant to deciding a claim. And I suggest it even when the certificate is irrelevant to coding a Form 1099-R—whether because no too-early tax would apply anyhow, or because the payer does not apply to Form 1099-R coding a fact the plan’s administration did not decide. Whether a payer must, should, or even may code a Form 1099-R for an exception from a too-early tax when the distributing plan’s claims administrator did not decide or determine a fact that would invoke the exception is not a point I remark on in this discussion.

According to a report from the Pension Benefit Guaranty Corporation’s Office of Inspector General, the US overpaid the Central States teamsters pension plan about $127 million because an application for special financial assistance reported 3,479 participants who had died. “While the [PBGC]’s review process required Central States to provide a list of all Plan participants and proof of a search for deceased participants (death audit), the [PBGC] did not cross-check the information against the Social Security Administration’s (SSA) Full Death Master File (DMF)—the source recommended by the U.S. Government Accountability Office for reducing improper payments to deceased people. (The Full DMF is more accurate than any database private pension plans have access to[,] and is used by the [PBGC] in its other insurance programs to ensure proper payments of pension benefits to plan participants).” Deceased Participants in the Central States' Special Financial Assistance Calculation.pdf

BenefitsLink host Lois Baker gives us the hyperlinks to the Office of the Federal Register’s posting of the prepublication texts, showing they are scheduled to be published tomorrow, November 3. https://benefitslink.com/boards/topic/71280-dol-proposed-investment-advice-package-scheduled-for-publication-in-the-federal-register/#comment-334192 Before third-party administrators too hastily assume this would affect only investment brokers and advisers, read the proposed rule. You don’t need the explanation; just skip to page 272. And think carefully if your arrangements about indirect compensation are anything less tidy than what Paul I describes.

Just curious: In your experience, does the indirect compensation that would be used as a set-off on your compensation influence the employer's decision-making?

Here are some questions for our BenefitsLink neighbors. If the Labor department’s proposed rule becomes a final rule and becomes effective and applicable, what effects would the rule have on your business? Is there a service you now provide that you would stop when the rule becomes applicable? Is there a service you don’t now provide that you would develop and offer? If you’re a recordkeeper or third-party administrator, would the rule change any aspect of your relationships with investment brokers and advisers? If you provide services as a § 3(16) administrator, are you ready to defend claims that you knew an investment adviser breached and you didn’t do enough to remedy that other fiduciary’s breach? And how about your own business: (1) Even as only a third-party administrator, do you sometimes help an employer select a participant-directed plan’s “menu” of investment alternatives? Or do you as a part of your business help an employer select a recordkeeper and that choice means taking on some of the recordkeeper’s or its affiliate’s investments? (2) Do you get any compensation, however indirectly, you would not get unless the plan made a choice under #1? If #1 and #2 are yes, are you an investment-advice fiduciary? If you are, which exemption do you use to cure your compensation conflicts?

How would the proposed investment-advice rule affect you? On October 31, President Biden and Acting Secretary of Labor Julie A. Su announced that she will propose a new rule to interpret whether a person provides investment advice that makes the person an employee-benefit plan’s fiduciary. The same rule would interpret also whether one is a fiduciary regarding an Individual Retirement Account or Annuity (IRA), a health savings account, an Archer Medical Savings Account, or a Coverdell education savings account, even if the account is unconnected to an employment-based plan. (Whether a rule would be or might become contrary to law is beyond this explanation.) To go with those interpretations about investment advice that makes one a fiduciary, the Secretary will propose changes for five class prohibited-transaction exemptions (PTEs). These matter because both section 406 of the Employee Retirement Income Security Act of 1974 (ERISA) and Internal Revenue Code of 1986 (I.R.C.) § 4975 make it a prohibited transaction for a fiduciary’s advice-giving to affect her compensation, business, or other personal interest. Under a 1978 government reorganization plan, the Labor department’s rules, exemptions, and interpretations are authority not only for ERISA-governed employee-benefit plans but also for accounts subject to a tax-law consequence under or regarding I.R.C. § 4975. BenefitsLink’s news pages link to the prepublication texts and some news releases and articles. Eight hyperlinks are posted in the October 31 news. The proposals are not yet published in the Federal Register. If published soon, the 60-day comment period would end in early January. And without waiting for a request, the Labor department expects to schedule a hearing in mid-December. What’s in the proposals? Here’s a few key points: Investment advice that makes one a fiduciary includes a recommendation of any investment transaction or any investment strategy. That applies for someone in a business that regularly involves investment-related recommendations, or who “represents or acknowledges that they are acting as a fiduciary when making investment recommendations.” The proposed rule’s explanation of a recommendation aligns with uses of that word under securities law and insurance law. A recommendation need not be about securities; it would be about any kind of investment property, including an annuity contract, even a fixed annuity contract, and a life insurance contract, unless it has no investment element. An investment adviser is a fiduciary only “to the extent” it renders investment advice. For example, a securities broker-dealer or insurance agency that presents a rollover recommendation might be a plan’s or IRA’s fiduciary only when it forms and presents a particular recommendation. One might be a fiduciary only for a day or two. For example, a one-time recommendation to rollover a payout into an IRA could make the recommender a fiduciary, but her responsibility might end when the distributee accepts or rejects the recommendation. Responsibility for one-time advice also might apply to a suggestion about how another fiduciary selects or monitors designated investment alternatives, or about whether to allow a brokerage window. That a person is not (or is no longer) a fiduciary under ERISA or the Internal Revenue Code does not excuse the person from duties under banking, commodities, insurance, or securities law. The revised best-interest exemption (PTE 2020-02) would let a Financial Institution—such as a bank, trust company, insurance company, securities broker-dealer, or registered investment adviser—and its Investment Professionals provide self-dealing advice if they don’t put their interests ahead of the Retirement Investor’s interests and don’t put the Retirement Investor’s interests below the Financial Institution’s or its Investment Professional’s interests. Some changes would widen which persons can get relief. Some changes would tighten disclosures. Among other changes, a Financial Institution and its Investment Professional must confirm in a written disclosure that they act as fiduciaries. A change would require a Financial Institution’s yearly compliance reviews to check “that [t]he Financial Institution has filed (or will file timely, including extensions) Form 5330 reporting any non-exempt prohibited transactions discovered by the Financial Institution in connection with investment advice covered under [I.R.C. §] 4975(e)(3)(B), corrected those transactions, and paid any resulting excise taxes owed under [§] 4975[.]” If the Labor department adopts its proposed change in PTE 84-24, an Independent Producer who recommends an unaffiliated Insurer’s annuity contract could get a fully disclosed commission or fee if the exemption’s protective conditions are met. What’s the big change? The Insurer “would not be treated as a fiduciary merely because it exercised oversight responsibilities over independent insurance agents under the exemption.” And the Insurer “only would be required to exercise supervisory authority over the independent agent’s recommendation of [the Insurer’s] products.” Another proposal would change PTEs 75-1, 77-4, 80-83, 83-1, and 86-128 so each provides no relief for a self-dealing transaction, including conflicted compensation. Instead, a fiduciary must meet the conditions of the best-interest exemption. This is only a quick and short look at a few of the many points in the proposals. For more information, read the source texts. Or, post your query in this BenefitsLink discussion.

To many people thinking about the public-policy point, it’s not obvious why an employer wants to exclude an employee from what anyone but the most knowledgeable retirement-plan practitioners might perceive as allowing little or no more than an opportunity to save for retirement from the employee’s wages. Those who hope for IRS guidance that a plan may exclude employees on some ground other than (and not a subterfuge for) a measure of service might consider informing the IRS about an employer’s reasons for excluding an employee. Consider that the IRS’s lawyers don’t have the daily lived experience of third-party administrators. Even those IRS lawyers with previous work experience in law, accounting, or consulting firms, or inside a retirement-services provider, might lack experience with the kinds of employers and kinds of plans that raise an issue or concern that might be a plan sponsor’s reason for excluding an employee.

Osteopathic, I’m so sorry for you and your wife. While whoever spoke for your wife’s 401(k) plan’s administrator presumably was well intentioned, don’t assume that person knows how best to serve your wife’s or your interests. If you want my advice, I’d be glad to help you without fee. You might find advantages in discussing your situation confidentially with not only professional-conduct protections but also the evidence-law privilege for lawyer-client communications.

Paul I, thank you for your reading—one the Internal Revenue Service might adopt. (And until the Treasury department or its Internal Revenue Service publishes an interpretation, I’ll ask recordkeepers to provide services to support an individual’s most cautious interpretation.) Even if one uses only traditional modes and canons for construing and interpreting a statute, there are several possible, and even plausible, constructions and interpretations. Among them: If a distributee wants the exception from the too-early tax, a cautious reading of the statute is that the physician’s certificate and any further “sufficient evidence” must have not only been made but also have been furnished to the distributing plan’s administrator—even if useless for every claim and every report that administrator would decide—before that plan paid or delivered the distribution the distributee seeks to treat as a § 72(t)(2)(L) terminal-illness distribution. Yet, § 72(t)(2)(L)(iii) about furnishing “sufficient evidence” [sufficient for which purpose?] to “the [sic] plan administrator” does not express which plan’s administrator must be furnished the evidence. If the only thing anyone might use the evidence for is to persuade a repayment-accepting plan’s administrator that a physician certified the repayment-seeking individual as having a terminal illness and that the physician made that certificate before the individual claimed the distribution from the distributing plan, a court might reason that the administrator a participant could furnish evidence to is the administrator of the plan into which the individual seeks to contribute the repayment. A practitioner advising a repayment-accepting plan’s administrator might render written advice that such an interpretation is supported by “substantial authority” (a lower standard than more-likely-than-not), which a Treasury rule states can be met with nothing more than a reasoned interpretation of the statute’s text alone. 26 C.F.R. § 1.6662-4(d)(3)(ii) (“There may be substantial authority for the tax treatment of an item despite the absence of certain types of authority. Thus, a taxpayer may have substantial authority for a position that is supported only by a well-reasoned construction of the applicable statutory provision.”), https://www.ecfr.gov/current/title-26/part-1/section-1.6662-4#p-1.6662-4(d)(3)(ii). And the IRS won’t expect written advice to have considered an authority that had not been published. About “in such form and manner as the Secretary may require”, one might reason that there is no such requirement or condition (beyond the statute’s other text) until the Treasury department has issued a final, interim, temporary, or proposed rule or the Internal Revenue Service has published subrule guidance of general applicability. For these and other reasons, the IRS ought not to tax-disqualify a plan for having followed its administrator’s good-faith interpretation that met the IRS’s reasonable-cause standard. I’m mindful that many recordkeepers, third-party administrators, and other service providers often think in terms of “waiting for guidance”, and might do so for good legal and practical reasons. Yet, when I advise a plan sponsor or a plan’s administrator, I like to be at least preliminarily prepared for what I anticipate my client might ask if it must decide something before an executive agency’s guidance has been published or released.

That a church plan is not ERISA-governed does not mean no fiduciary law applies. As John Feldt suggests, consider: the plan’s governing documents; the wage-deduction agreement’s express and implied terms; a provision implied by interpreting a gap or ambiguity to favor a provision needed for the plan to get § 403(b) tax treatment; the church’s internal law, which might provide a church employer’s responsibilities or a worker’s rights beyond those the plan provides; State law, at least of the State the governing documents specify as the plan’s governing law and, if no choice is specified or the choice’s effect is doubtful, the law of each State that arguably might govern the plan or a participant’s rights. each applicable State’s wage-payment law, which might set up, expressly or impliedly, a wage payer’s responsibility to apply promptly a wage deduction the worker authorized. Under the common law of trusts, agency, and other fiduciary relationships, one will find a duty to invest or apply reasonably promptly the relationship’s assets.

Paul I, thank you for widening our information with your top-notch explanation. To a growing list of interpretation and practical questions, I’ll add another: Imagine a governmental § 457(b) plan’s participant takes a distribution. Imagine she then has no need for a § 72(t)(2)(L) excuse from a § 72(t) too-early tax because that tax does not apply to § 457(b) amounts. Years later, but within § 72(t)(2)(L)(iv)’s repayment period, the individual wants to repay the amount into an eligible retirement plan, and that plan will accept the payment if accepting the amount as a § 72(t)(2)(L)(iv) repayment is allowed within the plan’s intended tax treatment. May a repayment-receiving plan rely on a physician’s certification that was dated and signed before the individual took the distribution to be treated as having been a terminal-illness distribution but which never was considered by, nor even furnished to, the distribution-paying plan’s administrator?

Paul I, thank you for your smart look into ERISA § 202(a)(2). When (before SECURE 2022) I had been evaluating an involuntary distribution before a required beginning date, the plan sponsor’s motive was not to avoid the work of determining any § 401(a)(9) requirement, but to help inattentive or misinformed participants move a Roth subaccount into a Roth IRA before some portion became a § 401(a)(9) amount no longer rollover-eligible. And the participants we were seeking to help were not working, but had plan accounts after retirement.

“Do we have to let [a distributee] repay [a terminal-illness distribution] to our plan?” I didn’t need to consider that question because the plans I wrote for prefer to allow rollover contributions, transfer contributions, and repayment contribution to the full extent Federal tax law permits.

In writing January’s plan amendments, I wrote a definition for a terminal-illness distribution (referring to the subparagraph of the Internal Revenue Code), and added that defined term to the plan’s provision accepting repayments. There is a logic gap in the statute: None of § 401(k)(2)(B)(i), § 403(b)(7)(A)(i), § 403(b)(11), and § 457(d)(1)(A) sets up a terminal illness as a reason for allowing a distribution. A plan might pay a distribution—which the distributee might want to treat as fitting § 72(t)(2)(L)—without the plan’s administrator deciding anything about whether the distributee has, or even has documented, a terminal illness. Rather, a distribution might be provided because the distributee reached age 59½ or has a severance from employment. It’s awkward to ask a plan’s administrator to receive evidence when the administrator has no current need to consider the evidence administering the plan’s provisions. But a distributee who wants to preserve § 72(t)(2)(L)’s excuse from a too-early tax or a right to repay an amount into an eligible retirement plan must “furnish[] sufficient evidence to the plan administrator[.]” 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 A distributee might argue that having furnished the evidence is enough, even if the distributing plan’s administrator never considered the evidence. An administrator might keep in its records the evidence received. I have not yet considered what evidence an administrator should require before a plan accepts a contribution a participant claims is a repayment of an amount from a terminal-illness distribution.

In the article G8Rs links to (thank you!), Groom cites Westlaw for the remarked-on court decision. Later, West/Thomson Reuters reported it as 562 F. Supp. 3d 890 (C.D. Cal. Mar. 3, 2022). As a district court’s decision, it is not precedent anywhere, not even in the Central District of California. A plan sponsor considering whether to provide an involuntary distribution earlier than a § 401(a)(9) required beginning date should get its lawyer’s or other practitioner’s advice. Further, it’s not easy to document such a provision if the plan sponsor uses an IRS-preapproved document and that format is not designed to facilitate the choice. Before SECURE 2022, I had been evaluating, for some clients depending on particular circumstances, a full or partial involuntary distribution about a year sooner than § 401(a)(9)’s applicable age. Internal Revenue Code of 1986 § 402A(d)(5), added by SECURE 2022 § 325, removes, beginning with 2024, a key reason. Before that change, a Roth IRA need not impose an involuntary distribution before the holder’s death, but a Roth subaccount under a § 401(a)-(k) plan requires a § 401(a)(9) minimum even during the participant’s life.

Some plans provide an involuntary distribution after normal retirement age.

Bri, do you think that vesting trap can be avoided by making all employees eligible for elective deferrals, with no eligibility service condition? IRC § 401(k)(15)(B)(iii) about vesting applies only to “an employee described in clause [401(k)(15)(B)](i)[.]” That clause refers to “employees who are eligible to participate in the [§ 401(k) cash-or-deferred] arrangement solely by reason of paragraph [401(k)](2)(D)(ii)[.]” If an employee did not become eligible for elective deferrals because of § 401(k)(2)(D)(ii), wouldn’t the plan determine vesting service without any variation from § 401(k)(15)(B)(iii)? Or is there something I’m missing?

Here’s the rule: The term “blackout period” means, in connection with an individual account plan, any period for which any ability of participants or beneficiaries under the plan, which is otherwise available under the terms of such plan, to direct or diversify assets credited to their accounts, to obtain loans from the plan, or to obtain distributions from the plan is temporarily suspended, limited, or restricted, if such suspension, limitation, or restriction is for any period of more than three consecutive business days. 29 C.F.R. § 2520.101-3(d)(1)(i) https://www.ecfr.gov/current/title-29/part-2520/section-2520.101-3#p-2520.101-3(d)(1)(i). As Luke Bailey points out: Even if there is no disruption to an individual’s power to direct investment (because the plan does not provide such a power until after the recordkeeping change is completed), a blackout might result if there is a practical inability to get a loan or distribution.

Consider that whether an employee must be eligible involves not merely a condition of tax-qualified treatment but further an ERISA title I command. ERISA § 202(c) Special Rule for Certain Part-time Employees.— (1) In general. A pension plan that includes either a qualified cash or deferred arrangement (as defined in section 401(k) of the Internal Revenue Code of 1986) or a salary reduction agreement (as described in section 403(b) of such Code) shall not require, as a condition of participation in the arrangement or agreement, that an employee complete a period of service with the employer (or employers) maintaining the plan extending beyond the close of the earlier of— (A) the period permitted under subsection (a)(1) (determined without regard to subparagraph (B)(i) thereof); or (B) the first 24-month period— (i) consisting of 2 consecutive 12-month periods during each of which the employee has at least 500 hours of service; and (ii) by the close of which the employee has met the requirement of subsection (a)(1)(A)(i). . . . . If a plan’s governing documents omit a provision ERISA’s title I requires, a court will, and a fiduciary should, interpret the plan as if it includes the required provision. See, for example, Lefkowitz v. Arcadia Trading Co. Ltd. Benefit Pension Plan, 996 F.2d 600, 604 (2d Cir. 1993); Gallagher v. Park West Bank & Trust Co., 921 F. Supp. 867 (D. Mass. 1996). If a plan’s administrator must decide something when ERISA § 202’s command is uncertain, the administrator must interpret the plan and applicable law. (Even if the IRS releases some subrule guidance before 2024 and one looks to Reorganization Plan No. 4 of 1978 to treat the guidance as an interpretation also of ERISA § 202, answers to questions of the kind RatherBeGolfing mentions might be uncertain for a few or many years.) An administrator must form its interpretation according to the obedience, exclusive-purpose loyalty, and experienced prudence ERISA § 404(a) commands.

One reason some plan designers provide an involuntary distribution a little sooner than the time needed to meet § 401(a)(9)’s condition for tax-qualified treatment is that 100% of a single-sum distribution would be rollover-eligible.

While you’re helping your client consider its decision-making, consider—among many points—this question: What bad consequence would or might result if these employees become eligible to elect deferrals but are excluded from all employer-provided contributions?

Yes, a plan sponsor may write a plan’s governing document to provide an involuntary distribution on a specified time after the participant reached normal retirement age. For some individual-account retirement plans, especially a plan under which the only form of distribution is a single sum, there can be reasons a plan designer might want an account emptied before any amount would be treated as a § 401(a)(9)-required distribution.

Unless one has inside information, we don’t know exactly when the IRS will release the adjustments. But we can confidently presume the Bakers will post it on BenefitsLink promptly after the IRS’s release.

Many third-party administrators and other service providers include in one’s service agreement a right to perform services following the employer/administrator’s instructions, including default instructions that result from the service recipient’s nonresponse to a default after a contract-specified notice period. If that’s the contract parties’ deal, a service provider might prepare a disclosure so it follows the instructed in-operation provisions rather than those stated by a to-be-amended-later plan document. While that way of doing things might not always be proper for a plan’s administrator, it might be fair between the service provider and its service recipient. I have no thought on your particular question about a safe-harbor notice; I no longer know that rule.

Many businesses use pro re nata, as-needed, on-call, or other intermittent employees. Unless the plan’s governing document provides an involuntary distribution on the participant’s reaching a specified age, the plan’s administrator should decide whether the individual is severed from employment. A required beginning date refers, in part, to “the calendar year in which the employee retires.” I.R.C. (26 U.S.C.) § 401(a)(9)(C)(i)(II). For this context, the statute does not define “retires”. The Treasury department’s rule refers to “the calendar year in which the employee retires from employment with the employer maintaining the plan.” 26 C.F.R. § 1.401(a)(9)-2/Q&A-2(a) https://www.ecfr.gov/current/title-26/section-1.401(a)(9)-2. The rule does not define “retires”. Following the rule’s text that “retires” is “from employment with the employer”, many interpret “retires” as severance-from-employment. The Treasury department’s rule to interpret Internal Revenue Code § 401(k)(2)(B)(i)(I) states: “An employee has a severance from employment when the employee ceases to be an employee of the employer maintaining the plan.” 26 C.F.R. § 1.401(k)-1(d)(2) https://www.ecfr.gov/current/title-26/part-1/section-1.401(k)-1#p-1.401(k)-1(d)(2). In evaluating whether the individual “has a severance from employment”, the plan’s administrator might consider whether the employer removed the individual from the roster of those the employer might call for an as-needed work shift. Some administrators might look to an absence of a Form W-2/W-3 wage report for a whole calendar year as a clue to ask the employer whether it removed the individual from the roster. If the PRN is for work that requires a professional or occupational license, a nonrenewal of the individual’s license might suggest the individual no longer is available for the work.