Peter Gulia

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.

I can't remember the last time I saw a recordkeeper's platform list that lacked funds that advertised Sharia compliance, a Christian focus, and other religious themes. Meeting a participant's interest might be less expensive than learning what duties might exist and how they might apply.

I've worked with this plan for 17 years. A final-four accounting firm does a full set of coverage and nondiscrimination tests. I've never heard a moment's trouble. You're right; it's about the nature of the business and the workforce.

Even if the Internal Revenue Service publishes the nonenforcement guidance American Retirement Association seeks, that would not preclude a participant, including a should-be participant, from enforcing ERISA § 202(c) and ERISA § 203(b)(4). Reorganization Plan No. 4 of 1978 transfers to the Treasury department powers to interpret ERISA sections 202 and 203. But that does not undo a participant’s ERISA § 502(a) civil-enforcement opportunities. Even if the IRS might not pursue failures of conditions for tax-qualified treatment, plans’ administrators and their advisers should continue their interpretations of what ERISA’s title I commands.

Even if no other notice is mandated or chosen in the fiduciary’s prudence, an individual-account retirement plan’s discontinuance and later termination usually results in a final distribution, which typically is an involuntary distribution and is an eligible rollover distribution. Some retirement-services people use “plan-termination notice” to describe a notice about those points.

If a plan sponsor adds an automatic-contribution arrangement and wants it to apply to less than all eligible employees, one might specify carefully which employees are benefited or burdened by the implied election (or which are not). If the plan sponsor uses IRS-preapproved documents, one might evaluate whether a particular set of documents allows enough choice to specify the intended provision without defeating reliance on the IRS opinion letter.

And alumni privileges with your college or university.

MoJo and RatherBeGolfing, thank you for your helpful thinking. For the potential situation I haven’t yet advised on, here’s the employer’s definition or classification: An intern is anyone who lacks a baccalaureate degree. I can imagine arguments for and against considering this a subterfuge for a service condition. Here’s just one in each direction. For: Many interns work only seasonally or part-time because it’s demanding to be a full-time employee and a good student. Against: Many interns work a full-time job and do so even when taking a full load of courses in each of fall, spring, and summer semesters. About a particular plan I’m preparing to advise about, it’s awkward to think about whether a classification might be a subterfuge for a service condition because the plan has no service condition for an employee’s eligibility. I worry somewhat more that this employer’s classification might be seen as an indirect age condition. While it’s possible to start college at a young age (for example, 16) or finish in fewer than four years, a norm is to start around 18 and finish around 22. And a delay or interruption might mean finishing at a yet older age. If a plan’s design were my decision, I’d make every intern—even those who don’t meet § 401(k)(2)(D) conditions—eligible for elective contributions. But it’s not my decision, and I want to get ready to give full-picture advice.

And here’s a thread on which I posed some similar questions: https://benefitslink.com/boards/topic/71371-ltpt-proposed-regs-issued-by-irs/#comment-334692 May the plan’s administrator exclude an intern under the plan’s intern exclusion? This would mean finding the intern exclusion is not a proxy for an age or service condition. Or should the plan’s administrator reason that the intern exclusion “has the effect of imposing an age or service requirement” and treat a three-peat intern as eligible for elective contributions? If the plan sponsor now amends the plan to make every intern—even those who don’t meet § 401(k)(2)(D) conditions—eligible for elective contributions (but not for matching contributions, nor for nonelective contributions), would any unwelcome consequence result? (Assume neither the plan sponsor nor the employer worries about how this change would affect an ADP test or an ACP test.)

Asrar Ahmed, ERISA and Sharia Law, 21-1 Journal of Pension Benefits 5-13 (Autumn 2013). Among the article’s observations: “ERISA Section 404(c) provides an opportunity to relinquish the burden of investment decision-making and a defense to a claim of fiduciary breach that allows a plan fiduciary to limit his exposure to liability by shifting the responsibility of directing the investments to the participant.” BenefitsLink neighbors, if you subscribe to a Wolters Kluwer VitalLaw® suite, the Journal of Pension Benefits, including back issues, might be in your subscription. Over the past 11 years, Asrar Ahmed has steadily risen in the U.S. Labor department.

Here’s a more recent BenefitsLink discussion with some different observations: https://benefitslink.com/boards/topic/69943-religious-exemption-from-plan-participation/. If a plan’s menu already is broad enough and prudently selected and arranged, adding another investment alternative because some participants want it might be no breach if the fiduciary prudently finds that the availability of that alternative does not harm other participants. As always, a plan’s fiduciary will want its lawyer’s advice.

Perhaps these two rules might help you answer some aspects of your question. Interpreting the Employee Retirement Income Security Act of 1974’s title I: 29 C.F.R. § 2520.104b-31 https://www.ecfr.gov/current/title-29/part-2520/section-2520.104b-31#p-2520.104b-31(a); Interpreting the Internal Revenue Code of 1986: 26 C.F.R. § 1.401(a)-21 https://www.ecfr.gov/current/title-26/part-1/section-1.401(a)-21#p-1.401(a)-21(a). These rules set conditions for using electronic communications to meet some notice requirements. But a communication that meets these rules might not be enough for a communication about a plan’s end and final distribution. Among other points, a plan’s fiduciary might evaluate risks that some participants, beneficiaries, or alternate payees might fail to read an electronic communication.

As Luke Bailey suggests, I imagine the situation you describe involves an IRS-preapproved documents set and the IRS’s opinion letter on it. While we haven’t seen the plan documents, service agreement, and other facts of your situation, here’s another point that could become relevant in some situations. Even if both old and new TPAs are licensees of the same plan-documents publisher, don’t assume a document would be constant. A publisher (ASC, Datair, FIS Relius, ftwilliam, McKay Hochman, etc.), working from the same “chassis” for a kind of plan document, might make many different versions. Even with nonexclusive licenses, different TPAs might have licensed different versions. Further, a recordkeeper or third-party administrator (perhaps a “bundled vendor”) might get a publisher to make a custom version. For that version, the TPA might get the whole copyright, share the copyright, or get rights to enforce the publisher’s copyright. Either way, some versions omit choices a service provider doesn’t want its user to select. Some versions add provisions a service provider insists its user include. Many have customizations—beyond names and identifying information—that relate to the service provider’s business. You might be surprised by some of the plan provisions a service provider seeks to influence. To be confident that what you hope to accomplish is feasible, you’d need to look into the exact details. Or if you or your client has any doubt, might it be simpler to start over? Whatever someone might assert about lacking reliance on an IRS opinion letter when a user no longer gets a service from that document’s sponsor or licensee, one doubts another provider’s service agreement would preclude your client from relying on an IRS opinion letter issued to you (or the publisher you license from) when your client adopts a plan-documents version you licensed. Nothing I post here is tax or legal advice. TPApril, you should ask your firm’s lawyer.

I’ve seen practitioners arrange a transfer as of midnight between December 31 and January 1, with the receiving plan’s administrator and its professionals finding that beginning that plan’s Form 5500 reporting with January 1 is good-enough reporting. I’ve also seen transactions in which everything happened within December, and others for which everything happened on January 1 or 2. I’ve never needed to consider which choice of transaction date or what reporting is correct. Other BenefitsLink neighbors can explain the reporting. As with any transaction, a decision-maker shouldn’t conclude anything until one has collaborated advice from one’s lawyers, actuaries, accountants, and other professionals.

At least from the individual-account plan, and perhaps from the defined-benefit plan too, the partners might consider a spin-off in which a new plan for Joe’s new firm accepts a symmetry of assets and obligations allocable to Joe and those who follow Joe into Joe’s firm. The partners ought not do a spin-off until Mary, with her lawyer’s and her actuary’s advice, and Joe, with his lawyer’s and his actuary’s advice, each finds that the split is fair. If the partners agree on a spin-off, might they prefer transfers-out with December’s year-close and transfers-in with January’s beginning?

BenefitsLink neighbors, please help me consider how to administer, and later amend, a plan to follow § 401(k)(2)(D)/401(k)(15). (Let’s assume the proposed rule becomes the final rule.) Before 2024 (and before 2019), the plan makes an employee eligible (unless a specified exclusion applies) if she is age 21. There is no service condition. An employee enters with the first pay period that begins with or after the date she met the eligibility conditions. So, a new employee enters the plan on her first day of employment. The eligibility conditions are the same for each of elective contributions, matching contributions, and nonelective contributions. If it matters, the plan uses no nondiscrimination safe harbor. The plan is one of a few dozen different plans that are counted together in one § 414(b)-(c)-(m)-(n)-(o) group. The plan is not, and has no risk of becoming, top-heavy. Before 2024, the plan excludes an employee the employer classifies as an intern (even if that employee is not an intern for some purpose other than the retirement plan). The employer classifies as an intern anyone who lacks a baccalaureate degree. An intern works in a summer, between semesters. The proposed rule sets up some consequences for an eligibility condition that “has the effect of imposing an age or service requirement with the employer or employers maintaining the plan.” No general statement in the proposed rule explains or describes how one would discern that a condition “has the effect of imposing an age or service requirement[.]” Beginning with 2024, the plan’s administrator intends to administer the plan according to what the administrator anticipates the later amended and restated plan will retroactively provide. If an intern is invited for a third consecutive summer, she will have completed two consecutive 12-month periods during each of which she was credited with 500 hours of service. [29 C.F.R. § 2530.200b-3(c)-(e) https://www.ecfr.gov/current/title-29/part-2530/section-2530.200b-3#p-2530.200b-3(c)] If such an intern has reached age 21 (and no exclusion applies), meeting § 401(k)(2)(D) would make the intern eligible for elective contributions. May the plan’s administrator exclude an intern under the plan’s intern exclusion? This would mean finding the intern exclusion is not a proxy for an age or service condition. Or should the plan’s administrator reason that the intern exclusion “has the effect of imposing an age or service requirement” and treat a three-peat intern as eligible for elective contributions? If the plan sponsor now amends the plan to make every intern—even those who don’t meet § 401(k)(2)(D) conditions—eligible for elective contributions (but not for matching contributions, nor for nonelective contributions), would any unwelcome consequence result? (Assume neither the plan sponsor nor the employer worries about how this change would affect an average-deferral-percentage test.)

What does the partnership agreement provide about how the partnership’s funding of the cash-balance pension plan is allocated among the partners? Even when public law governs the partnership’s funding obligation to the pension plan, the private law of the partnership agreement might govern the allocations of those and other expenses among a partnership’s partners. A partner might want her lawyer or her certified public accountant (or, perhaps better, their collaborative work) to check the partnership’s accountings and allocations of expenses against the partner’s and her professionals’ independent reading of the partnership agreement. And if those professionals are not pension experts, they might bring in an actuary’s or a lawyer’s work to discern how much of the partnership’s funding obligation is incremental because of a particular partner’s or other individual’s benefit, which might, in turn, help discern how much is allocable to the partner under her partnership agreement.

If the plan’s governing documents provide that forfeitures are used first for plan-administration expenses, the plan’s fiduciaries might consider paying outstanding expenses, reimbursing the employer for its recent payments of expenses it was not obligated to pay, and prepaying prudently anticipated plan-administration expenses. With a plan’s discontinuance and termination, it can be wise (especially if the employer too is or soon will become defunct) to see to it that service providers—lawyers, accountants, recordkeepers, third-party administrators (!)—are paid before the plan’s final distributions to participants and beneficiaries. I’ve advised on situations in which a plan’s administrator didn’t think to prepay or reserve for final plan-administration expenses. That can result in unpleasant consequences for former executives of the defunct employer. In some situations, the Labor department asserts that a human who was the plan’s fiduciary is personally liable to pay for needed services, including those needed to prepare the final Form 5500 report with an independent qualified public accountant’s audit of the plan’s financial statements.

Is there a tax law difference between treating a contribution as "incurred" to take a deduction and treating a contribution as "incurred" to take a credit? Should these be treated the same? Or differently?