Peter Gulia

A non-ERISA plan’s sponsor/employer/administrator found that its recordkeeper made a few years’ monthly ACH payments after the participant’s death but before either the administrator or its recordkeeper had notice of the death. The payments were made under the participant’s instruction to use the recordkeeper’s service for automated payments of the amounts the recordkeeper computed as the participant’s § 401(a)(9) minimums. The payments were made to a bank account for which the participant and her spouse were joint holders. But the nonparticipant spouse is not, and never was, the participant’s named beneficiary. Also, the plan provides no right to the spouse. The plan’s trustee is a State-chartered trust company that is a subsidiary or affiliate of the recordkeeper. The payer is that trust company or its paying agent. Am I right in thinking the payer should demand a return of (at least) the amounts the payee’s bank collected after that bank had notice of the payee’s death? Is this a task recordkeepers routinely handle? If not, will a trustee/recordkeeper do it on the plan administrator’s instruction?

Some lawyers have interpreted Pennsylvania’s Fiscal Code § 8.2 [72 Pa. Stat. § 4521.2] as the Commonwealth not providing a nonelective or matching contribution for a Commonwealth officer or employe, but not—by the enabling statute’s two sections [cited below] alone—precluding a political subdivision from providing a nonelective or matching contribution. See 72 Pa. Stat. § 4521.2(g) (including “nor shall the Commonwealth contribute to its deferred compensation program”). Here’s Pennsylvania’s enabling statute for governmental § 457(b) plans: 72 P.S. § 4521.1 https://govt.westlaw.com/pac/Document/NEEF65700343A11DA8A989F4EECDB8638?viewType=FullText&listSource=Search&originationContext=Search+Result&transitionType=SearchItem&contextData=(sc.Search)&navigationPath=Search%2fv1%2fresults%2fnavigation%2fi0ad7140b0000018c68930141e98d975f%3fppcid%3d6daf38e7a9864d17b11a10c8d1bc3a74%26Nav%3dSTATUTE_PUBLICVIEW%26fragmentIdentifier%3dNEEF65700343A11DA8A989F4EECDB8638%26startIndex%3d1%26transitionType%3dSearchItem%26contextData%3d%2528sc.Default%2529%26originationContext%3dSearch%2520Result&list=STATUTE_PUBLICVIEW&rank=1&t_querytext=deferred+compensation&t_Method=WIN 72 P.S. § 4521.2 https://govt.westlaw.com/pac/Document/NF25AB7B0343A11DA8A989F4EECDB8638?viewType=FullText&originationContext=documenttoc&transitionType=CategoryPageItem&contextData=(sc.Default)&bhcp=1. These are current through 2023 Regular Session Act 32. The hyperlinks above are to an unannotated (and unofficial) version of Pennsylvania Statutes. A researcher should read an authoritative text, read the annotations, and use a citator tool to look for court decisions and attorney general opinions that interpret the statute. (It has been many years since I last looked at the law on a question of this kind.) Consider that other Pennsylvania or municipal law might preclude, restrict, or constrain a political subdivision’s employer-provided contribution. Likewise, consider that a response to your query might vary with the identity of the particular political subdivision, its funding sources, its supervision from Commonwealth agencies and instrumentalities, its ordinances and other local law, its bargaining with labor association, and other facts and circumstances. Internal Revenue Code § 457(b)’s deferral limit applies to the sum of a year’s deferrals, including elective, matching, and nonelective deferrals. Nothing here is legal advice.

I’m glad to hear that TPAs now are expressly counting at least some of the cost.

In some dim past, IRS correspondence problems seemed fewer and perhaps less burdensome to resolve, so many third-party administrators handled the messes without charging an incremental fee. Are some TPAs now billing time for handling the IRS messes? For those who aren’t billing this incremental work, why not? Or is a TPA’s fixed fee priced to include costs for handling IRS messes?

If a nongovernmental and nonchurch charitable organization prefers to make available voluntary-only wage-reduction arrangements to buy a contract with Internal Revenue Code § 403(b) Federal income tax treatment and do so without establishing or maintaining a plan that would be ERISA-governed, such an employer prefers to avoid discretionary decision-making. That includes avoiding discretion about whether a participant has a hardship withing the meaning of § 403(b)(7)(A)(i)(V) or § 403(b)(11)(B). Many public-school employers too prefer to avoid involvement in those decisions. Are 403(b) insurers and custodians allowing a participant to self-certify her hardship? Does allowing self-certification help remove not only an employer but also an insurer or custodian from discretionary decisions about hardships? What’s happening in the real world?

If a negotiation with the young participant’s spouse is not concluded with time to pay or deliver all final distributions by the discontinued plan’s scheduled final-distributions date, might the plan’s trustee buy—and deliver to the participant—an insurance company’s annuity contract that includes a qualified joint and survivor annuity and a qualified preretirement survivor annuity? We recognize that might not be what one or more of the persons involved might like, but it is a way to end the pension plan. Further, a potential division of the annuity contract rights would not involve the pension plan’s administrator.

If a plan’s governing document is ambiguous, one might remove an ambiguity by amending the document. Might the plan sponsor amend the plan to provide that, if the administrator has not received other instructions, the final distribution is delivered as a rollover to a default IRA?

If a might-be domestic-relations order is submitted, a plan’s administrator might evaluate whether the order’s would-be payee is an alternate payee within the meaning of ERISA § 206(d)(3)(K). I am unaware of any Federal court precedent that holds for or against treating a deceased nonparticipant former spouse’s executor or similar personal representative as an alternate payee within the meaning of ERISA § 206(d)(3)(K).

Many plans provide only one form of distribution—a single-sum payment. A plan may provide that a no-longer-working participant (rather than a still-working 5%-owner) who has reached her required beginning date is paid her whole account. (Only rarely would a participant who has reached her required beginning date not also have reached her normal retirement age, which allows an involuntary distribution.) If a direct rollover is requested or provided, the administrator divides the account into minimum-distribution and rollover-eligible portions. If a participant has not requested her distribution, the plan pays an involuntary distribution. This might include a direct rollover—of the rollover-eligible portion—to a default Individual Retirement Account. The minimum-distribution portion is a money payment.

Paul I and CuseFan and kmhaab, thank you for your further observations. My clients use procedures designed so a recordkeeper, without accepting discretion, can process as good-order or “NIGO” almost all kinds of claims. For a participant loan, an emergency personal expense distribution, a qualified birth or adoption distribution, an eligible distribution to a domestic abuse victim, and a hardship distribution, there is no tax-law need (and, in my view, no good reason) to evaluate the claim beyond good-order processing. Claims for retirement distributions and even death distributions ordinarily can be handled in the recordkeeper’s processing without discretion. A recordkeeper involves the plan’s administrator only when a claimant asserts her right to dispute the recordkeeper’s response, or the circumstances relate to a court proceeding, bankruptcy, or other trouble. Many recordkeepers have not built forms, procedures, and systems for SECURE 2022’s and SECURE 2019’s new kinds of distributions. Their explanations to plan sponsors (and consultants too) blame an absence or insufficiency of IRS guidance. Some of that blame is fair; much of it is unfair. Small plans are stuck; bigger plans negotiate workarounds. Many recordkeepers need to intensify identity controls, address controls, and cybersecurity protections. Like it or not, a retirement plan account is increasingly like a bank account in a holder’s power to take money out whenever she wants—yet with bigger amounts and bigger risks. Returning to my originating question about which provision one would recommend (after solving the plan-administration issues, or imagining a hypothetical absence of them): Some plan sponsors might dislike allowing a too-easy payout. Yet, if a plan’s opportunity to generate retirement income for a participant depends, exclusively or heavily, on participant contributions, providing SECURE 2019’s and SECURE 2022’s before-retirement distributions can be a way to help reassure reluctant savers that one’s money will be available to meet needs when they happen. And I suggest employers treat working people as adults, who make one’s own decisions about how to use one’s resources.

Thank you!

Belgarath, you’re on to something. Even if the underlined statement might be generally so, there are many possible variations about when and how a plan measures service and other entry conditions. Further, even a plan with no service condition might have a class exclusion that the proposed rule to interpret IRC § 401(k)(2)(D) might treat as a proxy age or service condition, which might involve entries of some employees only because one is a § 401(k)(2)(D)(ii) employee.

A summary plan description I’m reviewing includes this paragraph: If your distribution is an eligible rollover distribution and exceeds $200, you may instruct a direct rollover of all or a portion of your distribution to an eligible retirement plan. But you may instruct a direct rollover of a portion less than all of your account only if each portion is at least $500 (with this minimum counted separately for each portion of Roth or non-Roth amounts). Are those amounts still current?

RatherBeGolfing, thank you for your observations about how some plan sponsors might dislike allowing a too-easy payout. Paul I, thank you for your smart caution about the participant’s address. Do you think it’s feasible for a recordkeeper’s employee to suggest the participant change the account’s address and wait two weeks before taking the distribution? About designing procedures to protect an abuse victim’s privacy (and a plan administrator’s and employer’s lack of knowledge): An administrator can instruct its recordkeeper to process a claim if the claimant completed and signed the plan’s form, which includes the self-certifying statements. An advantage of such a procedure is that no one sees the facts of the participant’s situation, just the claimant’s conclusion. A plan’s administrator can set up the communications, forms flow, and claims procedure so the administrator never sees the participant’s claim, nor sees or hears a participant’s inquiry. (One of my clients gets a report on the number of claims paid, but nothing that reveals any distributee’s or claimant’s identity. And for reasons you suggest and some others, human-resources people might welcome a lack of knowledge.) Yet, I recognize many plans might be unable to implement these procedures and services.

RatherBeGolfing, thank you for helping me think. Would your suggestion be different if no service provider (and no fiduciary) worries about a difficulty in tax-reporting this distribution?

When a plan sponsor asks for your advice about whether to provide or omit an eligible distribution to a domestic abuse victim, what do you recommend or suggest?

Is the question about what law applies or is relevant? Or is the question about an amount? Do the recently published inflation adjustments give any information that’s useful? Revenue Procedure 2023-34, 2023-48 Internal Revenue Bulletin 1287 (Nov. 27, 2023), available at https://www.irs.gov/pub/irs-irbs/irb23-48.pdf and https://www.irs.gov/irb/2023-48_IRB#REV-PROC-2023-34.

Yesterday evening, reacting to your description of what webinar speakers said, I indulged a moment’s curiosity about possible interpretations of § 414A, and observed that the described interpretation is a possible interpretation. Other interpretations, including what you suggest, also are possible. I have not thought about strengths and weaknesses of imaginable interpretations of § 414A. It might be a while before we know what rule the Treasury department proposes (if any) or what nonrule interpretation the Internal Revenue Service publishes (if any). Or, some indirect practical guidance might happen in the IRS’s reviews, perhaps beginning February 1, 2025, of submissions for cycle 4 opinion letters.

Here’s new Internal Revenue Code § 414A, as compiled in the United States Code’s title 26. (I have not compared this to the Statutes at Large to check whether the compilation is accurate.) https://uscode.house.gov/view.xhtml?req=(title:26%20section:414A%20edition:prelim)%20OR%20(granuleid:USC-prelim-title26-section414A)&f=treesort&edition=prelim&num=0&jumpTo=true Here’s one possible interpretation of the statute: If no exception is met and § 414A applies regarding a plan, and some employees are excluded from such a plan’s § 414(w)(3) eligible automatic contribution arrangement established to meet § 414A, whatever ostensible cash-or-deferred arrangement those employees are eligible for is not a § 401(k) arrangement. austin3515’s query is only one of many issues that call for interpretations of § 414A and Internal Revenue Code provision that affect or relate to § 414A. Might some of those interpretations be the Treasury/IRS’s Black Friday greetings to practitioners on or about November 29, 2024?

While none of us knows the facts, some of what’s in the situation FishOn describes suggests a possibility of facts that might set up some opportunity for a different analysis. A rule interpreting and implementing ERISA § 3(42)’s definition for "plan assets" states this “include[s] . . . amounts that a participant has withheld from his wages by an employer, for contribution or repayment of a participant loan to the plan, as of the earliest date on which such contributions or repayments can reasonably be segregated from the employer’s general assets.” 29 C.F.R. § 2510.3-102(a)(1) https://www.ecfr.gov/current/title-29/part-2510/section-2510.3-102#p-2510.3-102(a)(1). But the rule does not specify a particular act that then must happen. Rather, the focus is on treating an amount as plan assets, distinct from the employer’s assets. An amount delivered to the plan’s trustee or its custodian, or either’s agent might be treated as the plan’s assets—even if not yet allocated to any participant’s or beneficiary’s account. As Lou S. guesses, some collaboration of the plan’s administrator, trustee, and service provider might have treated the amount that lacked instructions as the plan’s asset. Further, FishOn’s story suggests the employer/administrator or a service provider made good the balance allocated to the participant’s account as if the allocation had not been delayed. In this context, “back-dating” is an unfortunate word some recordkeeping people sometimes use to describe the operations that result in a participant’s account getting the balance the account would have if an amount had been invested on the trading day it ought to have been invested had all fiduciaries and service providers acted correctly. Perhaps there’s room for a fiduciary, after using diligence and prudence (including getting its prudently selected lawyer’s advice), to find that there was no prohibited transaction. Or a fiduciary might find the facts are not so crisp. Either way, a fiduciary might evaluate whether to use the Voluntary Fiduciary Correction Program. (An applicant may use VFCP without conceding that there was a breach.)

Internal Revenue Code § 403(b)(7)(i) provides as a condition to § 403(b) Federal income tax treatment that “under the custodial account—(i) no such amounts may be paid or made available to any distributee . . . before— . . . (III) the employee has a severance from employment[.]” Internal Revenue Code § 403(b)(11)(A) provides: “This subsection [§ 403(b)] shall not apply to any annuity contract unless under such contract distributions attributable to contributions made pursuant to a salary reduction agreement . . . may be paid only—(A) when the employee . . . has a severance from employment[.]” Although either condition refers to “has a severance from employment”, these differ in how one looks to a measuring or other relevant time. A rule interpreting the statute is 26 C.F.R. § 1.403(b)-6 https://www.ecfr.gov/current/title-26/section-1.403(b)-6. About a situation in which a participant had a severance from employment with the charitable organization that paid contributions into the annuity contract or custodial account and later becomes an employee of the same charitable organization, several interpretations are possible. Among them: Some suggest a participant may be allowed a distribution only while she “has a severance from employment”, and so no longer gets a severance-from-employment distribution if reemployed by the same charitable organization. Some suggest a participant might be allowed a distribution to the extent of a separate subaccount of contributions made before the severance from employment, adjusted for gain or loss allocable to those contributions. That interpretation has some indirect support in nonrule guidance about allowing a distribution to the extent of a separate account for rolled-in amounts. See Revenue Ruling 2004-12, 2004-1 C.B. [2004-7 I.R.B.] 478. Even if the plan’s administration ordinarily does not record separate subaccounts for a rehire, some might suggest a separate-accounting condition (if relevant) is met if the annuity contract or custodial account has received no contribution after the participant was rehired. Allowing or refusing a distribution involves interpreting tax law, and how that law relates to an administrator’s fiduciary duties in administering the plan. The plan’s administrator should get its lawyer’s advice.

Recognizing RatherBeGolfing’s observation that the truth might not be one-sided: If you help uncover the past, get the plan sponsor/administrator’s attorney to engage you to assist her. That way, what you communicate to the attorney can be shielded under evidence-law privileges for lawyer-client communications and attorney work product.

MoJo, thank you for your clear thinking. As I mentioned in my posts Sunday, Tuesday, and Wednesday, I have not yet completed even my preliminary thinking about what advice I might render if I’m asked (and I don’t yet know whether I’ll be asked). All my posts have recognized that the intern exclusion might be a proxy age or service condition; that’s why I invited the discussion. Here’s the way I’m leaning: 1) Suggest the plan sponsor amend its plan to make an intern eligible if she is 21 (and perhaps to exclude an eligible intern from matching and nonelective contributions). Don’t condition elective-contribution eligibility on any hours of service. 2) If the plan is not so or otherwise amended, suggest the plan’s administrator: assume the Treasury’s proposed rule might be a permissible interpretation not only of IRC § 401(k)(2)(D) but also of ERISA § 202; assume the plan’s intern exclusion might involve an indirect age or service condition; and ignore the governing documents’ exclusion if an intern meets ERISA § 202 eligibility conditions. (That would not bring in many interns because few would be 21 until the summer between one’s third and fourth college years. And not many of them will have had two preceding summers.) As usual, I’d render full-picture advice about the range of risks and opportunities.

If, rather than relying on a claimant’s self-certification, a governmental § 457(b) plan’s administrator or its service provider evaluates a participant’s claim for an unforeseeable-emergency distribution: Start with RTFD, Read The Fabulous Document. Some plans state provisions more restrictive than those needed to make the plan an eligible plan under § 457(b). If the plan’s provisions are the least needed to make a plan § 457(b)-eligible: Some interpret 26 C.F.R. § 1.457-6(c)(2)(ii) as not mandating another way to meet an emergency need if that other way “would [] itself cause severe financial hardship[.]” For example: Some might interpret that a participant loan—especially if it calls for payroll-deduction repayment—could in some circumstances worsen the participant’s cash-flow crunch. That interpretation might be logically consistent with the rule’s presumption that a participant ought to cease deferrals (to stop that drain on her cash wages she could use to meet her living expenses). A distribution from a rolled-in amount might worsen the participant’s hardship if the rolled-in amount came from a plan other than another § 457(b) plan and the participant meets no exception from the extra 10% tax on a too-early distribution. If the plan allows the claimant a distribution because she is severed from employment or because she reached age 59½ (or some later age), there is no need for an unforeseeable-emergency distribution. Many governmental § 457(b) plans delegate decisions, at least first-stage decisions, on unforeseeable-emergency claims to a service provider. Service providers’ frameworks and methods vary considerably.

About part-time employees, which provisions might be implied by law, or might be needed for a plan to tax-qualify under Internal Revenue Code of 1986 § 403(b), relates to whether the plan is: a plan governed by part 2 of subtitle B of title I of the Employee Retirement Income Security Act of 1974, a church plan that has not elected to be ERISA-governed, a governmental plan, a payroll convenience with so little employer involvement that it is not a plan within ERISA § 3’s (rather than IRC § 403(b)’s) meaning. For an ERISA-governed plan, ERISA sections 202 and 203 command provisions partially similar to IRC § 401(k)(2)(D)’s provisions for a cash-or-deferred arrangement. Under Reorganization Plan No. 4 of 1978, the Treasury’s notice of proposed rulemaking to interpret IRC § 401(k)(2) also is an interpretation about similar provisions in ERISA §§ 202-203. If an ERISA-governed plan’s administrator interprets the plan to include eligibility provisions implied by ERISA §§ 202-203 and looks to the Treasury’s interpretation as an aid to the administrator’s interpretation, a court might treat that as some evidence of the administrator’s good faith. For a nonplan, all employees are eligible because for an employer to decide which employees are eligible would establish an ERISA-governed plan (if it’s not church or governmental). For a plan that is not ERISA-governed, IRC § 403(b)(12) describes provisions for a plan to get § 403(b) Federal income tax treatment. Beyond Federal law: For a governmental plan, State law governs which provisions a plan must, may, or must not include. For a church plan, internal church law might govern which provisions a plan must, may, or must not include. As always, a plan’s administrator (or an employer) should get its lawyer’s advice. Santo Gold, if you tell us which of the four kinds of § 403(b) plan your client maintains, BenefitsLink neighbor might be able to give you more detailed help.