Peter Gulia

Beyond the cautions others mention, consider whether a provision of an IRS-preapproved document or of a Revenue Procedure under which the document sponsor and others offer uses of the document requires the document sponsor or its licensee or sublicensee to notify a user that the user seems to operate the user’s plan other than according to the user plan’s governing documents.

If Konstantina Dimou’s fact allegations (which Judge Todd Wallace Robinson must assume in evaluating whether the complaint states a claim on which the court could grant relief) support the complaint’s assertions, a fiduciary’s breach—and a prohibited transaction—was possible because a fiduciary had or exercised discretion about the order in which to use forfeitures. Among several ways to remove a difficulty, a plan’s sponsor might write the plan’s governing documents to provide the administrator no discretion about how to use forfeitures, instead specifying an ordering within the three recognized ways to use forfeitures. Considering RatherBeGolfing’s observations (above) about a proposed rule, one might consider now a plan amendment a plan’s sponsor might prefer to adopt before a final or interim rule’s applicability date.

Under ERISA § 406 and Internal Revenue Code § 4975, what characterizes a prohibited transaction is that a person other than the plan has some use of money, rights, or other property that belongs to the plan’s trust. Your example suggests that the employer promptly segregated contribution amounts from the employer’s assets and promptly remitted those amounts to the plan’s trustee or its agent. That the plan’s administrator did not direct the trustee to invest according to the participant’s direction did not cause the employer (or another fiduciary or party-in-interest) to have any personal use of the plan’s assets. If so, a mistake within how the plan’s trust invests might not result in a prohibited transaction. If there is no prohibited transaction, neither an IRC § 4975 excise tax nor an ERISA § 502(i) civil penalty is owing.

If the mistaken and selected investment alternatives all have daily prices, some recordkeepers will (at a customer’s request, and sometimes with an incremental fee) use system records and system or integrated software to generate the what-would-have-happened. Some of those generate an invoice for the restoration amount needed, and some also generate an instruction for the plan’s administrator to sign.

If, for an ERISA-governed retirement plan that provides participant-directed investment, the plan’s administrator did not follow the participant’s proper investment direction, a conscientious administrator should restore the participant’s account so it is credited with amount that would have resulted had the administrator promptly and correctly followed the investment direction. The administrator would credit the adjusted amounts to the participant’s selected investment alternatives in the proportions that would have resulted had the administrator promptly and correctly followed the investment direction. Ideally, the restoration should result in an account that, as nearly as possible, is what would result had no error happened. If the failure to implement the investment direction was the employer/administrator’s breach of its fiduciary responsibility, the administrator should pay the amount needed for the restoration. If the failure to implement the investment direction was the recordkeeper’s breach of its contract, the administrator should cause the recordkeeper to pay the amount needed for the restoration, to the extent the contract provides. If a participant sues to get the restoration, a court may award attorneys’ fees and costs. ERISA § 502(g), 29 U.S.C. § 1132(g) http://uscode.house.gov/view.xhtml?req=(title:29%20section:1132%20edition:prelim)%20OR%20(granuleid:USC-prelim-title29-section1132)&f=treesort&edition=prelim&num=0&jumpTo=true. But one hopes the person that erred will simply own its error and make the account right.

Thank you for the helpful information. I’ve never worked on a situation that used forfeitures for anything beyond plan-administration expenses; you helped me indulge a curiosity.

MoJo and other BenefitsLink mavens, in your experience, are there any employers that use forfeitures “[t]o reduce employer contributions” by applying a forfeiture balance as a setoff to the employer’s obligation to pay over participants’ elective-deferral contributions?

Whatever the law might be, in my practical experience the Labor department can be aggressive about pursuing a former shareholder, partner, member, director, manager, officer, or even nonofficer employee if any relation regarding the plan, however remote, might be argued to have made such a human a fiduciary who arguably could have done something, or even a cofiduciary with knowledge of another fiduciary’s breach. The pursuit might not be about the penalty for a failure to file an annual report. Rather, the Labor department might pursue one or more fiduciary breaches and civil penalties on those breaches. If one doesn’t persuade EBSA to stop its pursuit, winning a Labor department proceeding can take on substantial attorneys’ fees and other expenses. That observed, EBSA might be less vigorous in a fiduciary-breach pursuit if participants and beneficiaries have been paid. Below Ground, before you electronically process a Form 5500 report, consider making sure someone with authority to act for the plan’s administrator approved the report, including especially anything that involves a choice about how to report (such as electing to delay an independent qualified public accountant’s report), and instructed you to submit the approved report. You’ll want evidence to prove that you never had, and never exercised, any discretion.

You mean to thank Bri and Paul, who points to the Internal Revenue Service’s nonrule interpretations in Notice 97-45 1997-33 I.R.B. 7 (Aug. 18, 1997). If the administrator interprets either plan’s governing documents to mean something other than what a textual reading alone provides (or to resolve an ambiguity), the administrator might make a record of the reasoning for its interpretation. And if a nonapplication of a top-paid provision either plan’s governing documents arguably provides would lower a participant’s allocation or accrual under either plan, the administrator might want to be thoughtful and careful about the reasoning for its interpretation. That a governing document’s provision does not meet a tax-qualification condition does not, at least not by itself, give a plan’s administrator an excuse from ERISA § 404(a)(1)(D)’s command to administer a plan according to the plan’s governing documents. In my experience, a sensible reading of a plan stated using IRS-preapproved documents often calls for interpreting the plan to provide something other than what a reading of the plan’s text alone seems to provide. irb97-33.pdf

Following ERISA § 404(a)(1)(D), the administrator must administer each plan “in accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with the provisions of this title [I] and title IV.” What allocation results if the administrator applies each’s plan’s definitions, allocation conditions, and other provisions as each plan’s text provides?

For each plan, does the plan’s sponsor get reliance on an IRS determination letter or opinion letter?

Brian Gilmore, we hope you’ll indulge us with a little more of your wide knowledge. Internal Revenue Code § 125 is a tax-law construct. It relieves from constructive receipt a choice between money wages and one or more qualified benefits. A qualified benefit must be of a kind § 125 describes. Yet, a choice § 125 facilitates might be useless if the benefit is not available to the employee under the terms of a welfare plan, which might include a health plan. Most plans’ sponsors provide yearly choices not only for § 125’s cash-or-welfare construct but also among health coverages. But, assuming an absence of a special-enrollment right under ERISA’s part 7, must an ERISA-governed noninsured group health plan allow a participant an opportunity to switch from one health coverage to another health coverage?

Before paying final distributions to the plan’s participants and beneficiaries, did the plan’s administrator set a reserve for the plan’s administration expenses, including paying your fees and other professionals’ fees? If there is enough left in such a reserve, the plan’s administrator might pay an independent qualified public accountant’s fee from the reserve. If no Form 5500 report is filed or an incomplete report (lacking an IQPA’s report on the plan’s financial statements) is filed, expect the Labor department to pursue not only the plan-administrator business organization but also each human Labor might assert had any ability to act for the plan’s administrator.

Just as many BenefitsLink mavens use Read The Fabulous Document as a reminder or rhetoric, that idea too applies for a health plan. What does this health plan’s written plan provide for when, or even whether, a participant may choose a different coverage?

An “enrollment” period might be unnecessary if getting the health plan’s coverage requires no participant contribution and otherwise involves no choice.

You are right. Even more broadly than your reading of ERISA sections 101 and 105, nothing in part 1 or any part of subtitle B of title I of ERISA governs a plan if the plan is not ERISA-governed because the plan is not an employee-benefit plan within the meaning of ERISA § 3. A nonapplication of ERISA’s title I does not, at least not by itself, preclude a plan’s administrator from generating an illustration; but that’s a choice, rather than a response to ERISA § 105’s command.

Even if her investigation has a focus about one employer, the Secretary of Labor has broad powers to examine almost anything about an ERISA-governed employee-benefit plan. With further powers, the Secretary may “require the submission of reports, books, and records, and the filing of data in support of any information required to be filed with the Secretary under [ERISA].” For example, the Labor department may require production of every record behind any entry in the whole pooled-employer plan’s Form 5500 report. ERISA § 504(a)(1), 29 U.S.C. § 1134(a)(1) http://uscode.house.gov/view.xhtml?req=granuleid:USC-prelim-title29-section1134&num=0&edition=prelim. And that power applies even if the Labor department has no reason to suspect even a potential ERISA violation. Compare § 504(a)(1) with § 504(a)(2).

The tax-qualification condition for some nongovernmental and nonchurch § 401(k) or § 403(b) elective-deferral arrangements to include an automatic-contribution arrangement if the elective-deferral arrangement was not established before December 29, 2022 begins with a plan year that begins on or after January 1, 2025. Perhaps in the last few months of 2024 the Internal Revenue Service might announce a nonenforcement delay of Internal Revenue Code § 414A? If PredictIt [https://www.predictit.org/] were to offer a yes-or-no future on whether the IRS announces a nonenforcement by December 31, 2024, how much would you pay for each $1.00 yes future?

About a tax credit regarding startup expenses other than contributions: I have never interpreted any tax credit about retirement plans. Yet, here’s a general clue to consider: Does the text of the Internal Revenue Code section that provides the credit refer to expenses the employer “paid or incurred”? In the Internal Revenue Code, a phrase of that kind might signal alternatives related to whether the taxpayer’s accounting uses “the cash receipts and disbursements method” [§ 446(c)(1)], “an accrual method” [§ 446(c)(2)], or something else, which might include tax accounting conventions the Code provides and combinations of allowed methods [§ 446(c)(3)-(4)]. If the statute’s text doesn’t answer your question, one might favor an interpretation that is logically consistent with the employer’s tax accounting method. Also, a tax credit might allow a taxpayer some choice about which tax year is the first for a number of years of the credit.

Even if a delay might be unstated in a Form 5500 and otherwise not a big deal, a fiduciary that can work to push itself and its recordkeeper to prompt processing of contributions and other payroll payments should try to do so, if it does not detract from higher-order fiduciary responsibilities.

Before sorting out whether a creation of a new pension plan might have a minimum participation, coverage, or nondiscrimination issue: Consider suggesting that the former business owner seek, if he hasn’t already done so, his lawyers’, accountants’, tax advisers’, investment managers’, and financial-planning advisers’ advice about whether creating a pension plan fits his interests and the considered integration of the whole of his planning. What to do after an operating business’s sale of its assets often calls for full-picture advice, involving everyone who might advise or handle useful information.

If there is no Treasury regulation, a tax return might assert the taxpayer’s interpretation of the statute, and may do so with attaching a Form 8275-R. https://www.irs.gov/forms-pubs/about-form-8275-r. If a tax-return position is supported by substantial authority (which may be “a well-reasoned construction of the applicable statutory provision”), one need not attach Form 8275 to avoid an understatement penalty. 26 C.F.R. § 1.6662-4(d)(3)(ii) https://www.ecfr.gov/current/title-26/part-1/section-1.6662-4#p-1.6662-4(d)(3)(ii). If a tax-return position is less confident than substantial authority (which can be less confident than more likely than not [51%]) but has at least a reasonable basis and is disclosed (using Form 8275), this too avoids an understatement penalty. https://www.irs.gov/forms-pubs/about-form-8275. A certified public accountant who obeys AICPA professional-conduct standards does not recommend a tax-return position or prepare or sign a tax return taking a position unless the CPA “has a good-faith belief that the position has at least a realistic possibility of being sustained administratively or judicially on its merits if challenged.” Or, a CPA may prepare or sign a tax return that reflects a position if the CPA finds “there is a reasonable basis for the position and the position is appropriately disclosed.” Recordkeepers, third-party administrators, and other service providers often wish for guidance to interpret recent (and sometimes not-so-recent, or even decades-ago) tax legislation about retirement plans. But an absence of guidance sometimes affords a wider range of interpretations.

Some signers use for Form 5500 reporting authorizations a signature that is deliberately illegible and unlike the signature the signer uses for her personal banking, credit-card, and other financial matters.

Not only for the circumstances you describe but also for other interests that might be met by segregating owners from employees, many practitioners set up two plans. The first plan has only owners (including spouses of owners), excluding employees. The second plan has only employees, excluding owners and deemed owners. To the extent a test of coverage or nondiscrimination is needed, one looks to the appropriate aggregation of the two plans. In this setup, the first plan is a non-ERISA plan, and the second plan is an ERISA-governed plan. For the second plan, it might happen that no participant chooses for her investment any nonqualifying asset. If so (and if the count of participants with balances remains small), ERISA § 103 would not require an independent qualified public accountant’s audit of the plan’s financial statements. About an ERISA § 412 fidelity-bond insurance for the second plan, if that plan’s assets is less than $10,000, the required coverage is $1,000. (I don’t know what price an insurer seeks for a $1,000 coverage limit, perhaps a minimum premium based more on the records bother than the risk insured.) If, as you conjecture, the one LTPT participant chooses no elective deferral (and gets no employer-provided contribution), the second plan’s Form 5500 report would show one participant, zero participants with a balance, $0 in plan assets, and so on. Yet, the employer/administrator would want to file the reports.

Might this speak to your question? “The account balance is increased by the amount of any contributions or forfeitures allocated to the account balance as of dates in the valuation calendar year after the valuation date. For this purpose, contributions that are allocated to the account balance as of dates in the valuation calendar year after the valuation date, but that are not actually made during the valuation calendar year, are permitted to be excluded.” 26 C.F.R. § 1.401(a)(9)-5/Q&A-3(b) (emphasis added) https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR6f8c3724b50e44d/section-1.401(a)(9)-5.