Peter Gulia

The plan-design choice Paul mentions is based on ERISA § 205(f). http://uscode.house.gov/view.xhtml?req=(title:29%20section:1055%20edition:prelim)%20OR%20(granuleid:USC-prelim-title29-section1055)&f=treesort&edition=prelim&num=0&jumpTo=true

Some practitioners set up a distinct plan for each individual. (Following Tom’s example, 15 plans.) If such a plan covers only an owner and no employee, the plan is not ERISA-governed. Each individual (or her corporation or LLC, if she has one distinct from the group’s business entity) is her plan’s administrator and trustee. Each individual is responsible for her plan’s Form 5500 return. No owner need be responsible for another’s plan information. And if the group has an employee, they set up another distinct (ERISA-governed) plan, under which only employees participate. Minimum participation, coverage, nondiscrimination, and top-heavy are counted on the § 414 employer. Among other provisions to meet nondiscrimination, the plan for employees (if any) includes a participant’s right to use a brokerage account.

The plan’s fiduciaries should get the securities broker-dealer’s records at least as needed to administer the plan and its trust, and to obey ERISA § 107 and § 209 and Internal Revenue Code of 1986 § 6001. Also, a careful plan sponsor and plan administrator might edit the plan documents, trust agreement or declaration, investment-direction procedure, summary plan description, and other documents and communications so whatever account-stated, arbitration, and other provisions end or limit the broker-dealer’s responsibility to its customer also reasonably end or limit the directing participant’s (or beneficiary’s, or alternate payee’s) rights and remedies regarding the plan and the plan’s fiduciaries. Why risk even a possibility that the plan could face an obligation to a participant even arguably greater than the broker-dealer’s obligation to the plan’s trust?

Labor’s rule does not preclude that a participant “loan provides the plan with a return [greater than] the interest rates charged by persons in the business of lending money for loans which would be made under similar circumstances.” See 29 C.F.R. § 2550.408b-1(e) https://www.ecfr.gov/current/title-29/part-2550/section-2550.408b-1#p-2550.408b-1(e). Some fiduciaries might set for participant loans an interest rate a little higher than prevailing rates.

If a potential exclusion is determined by something other than a measure of service: Am I right in guessing an employer—not a service provider—controls whether to apply the exclusion, or to override it to meet ERISA § 202(b)-(c)? If that is so, are the interpretation challenges about the advice one provides a client?

Luke Bailey, I see no reason Congress could not have legislated § 414(v)(7)’s restriction to a self-employed individual with more than $145,000 in §§ 1401-1402 self-employment income attributable to the trade or business that is the plan’s sponsor or participating employer. I’m unaware of a Congressional document suggesting the provision Congress might have intended is anything different than the provision Congress enacted. I doubt there is much lobbying interest in pursuing a law change to restrain choices of self-employed individuals. But we can imagine extending § 414(v)(7)’s Roth-ing to self-employed individuals might be among the possibilities the next time Congress seeks revenue gainers to balance a reconciliation’s Revenue Effects scorecard.

Yup. A firm’s employee with § 3121(a) wages more than $145,000 would be § 414v)(7)-restricted to catch-up deferrals as Roth contributions while the firm’s partner with a million-dollar draw (but no wages) has her choice between Roth and non-Roth contributions. That’s how the statute reads, and the IRS confirmed it. Whether that’s fair or decent we leave to the Members of Congress.

C. B. Zeller, do you think some of those changes should be presented as an implied-assent election with an opt-out opportunity? For example: We presume you want your deferrals made as Roth contributions, rather than not made at all, if tax law does not permit a portion of your deferral to be made as non-Roth contribution. But if you prefer no deferral for the portion that cannot be made as non-Roth contributions, please let us know as soon as you can and no later than nn days from this email.

The Labor department’s interpretation about an interest rate for a participant loan has been constant since at least 1981. ERISA Advisory Opinion 81-12A (Jan. 15, 1981). Further, Labor proposed its notice-and-comment rule in 1988 and made it final in 1989. The Treasury department’s prevailing-rate standard is even older, no later than 1960, than the Labor department’s 1981 advice.

Under to-be-published Notice 2023-62 (which the Bakers and others flag for us), the Internal Revenue Service quiets a few questions. “[U]ntil taxable years beginning after December 31, 2025, (1) those catch-up contributions [made on behalf of § 414(v)(7)-restricted participants] will be treated as satisfying the requirements of section 414(v)(7)(A), even if the contributions are not designated as Roth contributions, and (2) a plan that does not provide for designated Roth contributions will be treated as satisfying the requirements of section 414(v)(7)(B).” Further, the IRS practically confirms: Self-employment income does not count to determine whether a participant is § 414(v)(7)-restricted. An employer and an administrator may treat a non-Roth election as a Roth election if needed for a catch-up deferral to meet § 414(v)(7). Some non-aggregation tolerances for a multiemployer or multiple-employer plan about a participant who has more than one participating employer.

Under to-be-published Notice 2023-62 (which the Bakers and C.B. Zeller flag for us), the Internal Revenue Service makes our queries practically irrelevant. “[U]ntil taxable years beginning after December 31, 2025, (1) those catch-up contributions [made on behalf of § 414(v)(7)-restricted participants] will be treated as satisfying the requirements of section 414(v)(7)(A), even if the contributions are not designated as Roth contributions, and (2) a plan that does not provide for designated Roth contributions will be treated as satisfying the requirements of section 414(v)(7)(B).” Further, the IRS practically confirms: Self-employment income does not count to determine whether a participant is § 414(v)(7)-restricted. An employer and an administrator may treat a non-Roth election as a Roth election if needed for a catch-up deferral to meet § 414(v)(7). Some non-aggregation tolerances for a multiemployer or multiple-employer plan about a participant who has more than one participating employer.

I didn’t mean to suggest any plan sponsor need adopt its remedial amendment any sooner than that regime calls for. Rather, for a plan’s sponsor/administrator that lacks the help of one of us and relies on what a recordkeeper’s systems produce, doing what those systems see as a plan amendment sometimes is a way to push communications about a new or changed provision, if the recordkeeper has integrated other communications, including notices and forms, with its plan-documents system.

This illustrates one of the many awkwardnessses of tax law’s remedial-amendment regime (which ERISA’s title I does not recognize). In this instance, there might be a tension because a provision, even if not yet stated in what tax law treats as the written plan, nonetheless must be written enough so the plan’s administrator can communicate the provision to participants. If we know a new or changed provision well enough that we can in plain language explain the provision in communications to participants, why should the sponsor delay the written plan amendment?

Until the plan’s sponsor no longer desires a § 401(k) arrangement. (Or until Congress has changed the law, and that change has become applicable.)

Communicating the availability of a plan provision might be an element of showing the provision was effectively available. I imagine that with many service providers’ systems either changed box in the adoption agreement would generate at least a summary of material modifications, and should change any affected text in system-assembled notices and forms. Is that what happens practically in the real world?

Imagine a service provider with almost all its clients using IRS-preapproved documents. Imagine the service provider thinks it is safer for its clients (and efficient for the service provider) to do a § 414(v)(7) plan amendment before 2023 ends. Imagine the amendment takes the form of checking the adoption agreement’s Roth-deferral box, or unchecking the catchup box. I know any processing is work. But of plan-amendment tasks, is this a somewhat simpler one? (I ask only about the document task, not the work of implementing whichever provision the plan’s sponsor chooses.) Is this a change for which a service provider may set a default provision? For example: If you don’t respond to this request, you instruct us to perform our services assuming your plan does not allow catchup deferrals after 2023.

For a participant loan to get its prohibited-transaction exemption, the loan must “[b]ear a reasonable rate of interest[.]” 29 C.F.R. § 2550.408b-1(a)(1)(iv). The same rule provides: “A loan will be considered to bear a reasonable rate of interest if such loan provides the plan with a return commensurate with the interest rates charged by persons in the business of lending money for loans which would be made under similar circumstances.” 29 C.F.R. § 2550.408b-1(e) https://www.ecfr.gov/current/title-29/part-2550/section-2550.408b-1#p-2550.408b-1(e). That standard is nonsense. Among a few reasons, there is no loan a commercial lender makes under terms similar to a typical participant loan. None of -1(e)’s three examples describes a loan that meets the rule. Plans’ fiduciaries, often with little or no advice (because many service providers deny providing tax or legal advice), have specified ways to set an interest rate for a participant loan. The prime-plus-two setting many plans use is not in any administrative-law document. IRS employees described it in a telephone forum. (You can read the nonliteral transcript: https://www.irs.gov/pub/irs-tege/loans_phoneforum_transcript.pdf.) Whatever was spoken was preceded by a warning that a speaker’s remarks “should not be considered official guidance[.]” (A Treasury rule excludes the remarks from even the nonprecedential authorities one may use to support a tax position.) Further, the IRS employees did not say they spoke, even unofficially, for anything of the US Labor department. A value of the prime-plus-two setting might be that, because so many plans use it, it might be impractical for either government agency to enforce against it. Before looking to the Moody’s measure, a fiduciary might consider whether loan-taking participants are as creditworthy as the corporate borrowers the Moody’s measure refers to.

Is the grantor a § 501(c)(3) charitable organization? Is the grantor a supporting organization of the school? Is the grantor a part of the same § 414(c) employer as the school? For example, the school and the grantor (if both are charities) might be one employer if there is enough overlap between their governing boards. Or, the school and the grantor might be one employer if they coordinate their activities and permissively aggregate. 26 C.F.R. § 1.414(c)-5 https://www.ecfr.gov/current/title-26/section-1.414(c)-5. If the grantor is not a part of the same employer as the school, is the grantor nonetheless a participating employer under the school’s § 403(b) plan? What are the plan’s governing documents’ provisions?

Before the administrator of the PEO’s pooled-employer plan or other multiple-employer plan adopts an interpretation that one counts the wages Internal Revenue Code § 414(v)(7) refers to without counting wages paid by the participant’s former employer that now is the PEO’s service recipient, the administrator might want a written legal opinion of expert employee-benefits counsel. For that advice, a mixed question of law and fact might be affected by the particular plan’s governing documents, including provisions other than those for which SECURE 2022 permits a years-later remedial amendment. Also, the PEO and the PEO plan’s administrator each might want its lawyer’s advice about whether a failure affects the tax treatment of the whole plan, or only a portion of the plan attributable to the service recipient that brought the problem.

Some plans’ administrators might interpret § 1.401(k)-1(d)(3)(ii)(B)(5)’s use of child by considering, even if it does not apply, Internal Revenue Code § 152(f)(1)(A)(i), which treats a stepson or stepdaughter as the taxpayer’s child for purposes of § 152. 26 C.F.R. § 1.401(k)-1(d)(3)(ii)(B)(5) https://www.ecfr.gov/current/title-26/part-1/section-1.401(k)-1#p-1.401(k)-1(d)(3)(ii)(B)(5) I.R.C. (26 U.S.C.) § 152 http://uscode.house.gov/view.xhtml?req=(title:26%20section:152%20edition:prelim)%20OR%20(granuleid:USC-prelim-title26-section152)&f=treesort&edition=prelim&num=0&jumpTo=true This is only one of many possible interpretations. I give no advice to anyone.

Even textualists say an interpreter might find meaning in how a word is used in related contexts. There are many statutes and rules in the tax law of retirement plans that use the word “employee” despite a context that suggests the use includes a participant who is a former employee. To pick only one example (and we could find many), the proposed rule to interpret and implement Internal Revenue Code § 401(a)(9) has 1,349 uses of the word “employee” (and only 41 uses of the word “participant”). Proposed § 1.401(a)(9)–2(a) states: “Distributions commencing during an employee’s lifetime In order to satisfy section 401(a)(9)(A), the entire interest of each employee must be distributed to the employee not later than the required beginning date, or must be distributed, beginning not later than the required beginning date, over the life of the employee or the joint lives of the employee and a designated beneficiary or over a period not extending beyond the life expectancy of the employee or the joint life and last survivor expectancy of the employee and the designated beneficiary.” https://www.govinfo.gov/content/pkg/FR-2022-02-24/pdf/2022-02522.pdf Does the Internal Revenue Service, acting under the Secretary of the Treasury’s delegation, intend to limit that minimum-distribution rule to a participant who is still an employee? Likewise, the statute the proposed rule would interpret and implement reads: “Required distributions.— (A) In general.— A trust shall not constitute a qualified trust under this subsection unless the plan provides that the entire interest of each employee— (i) will be distributed to such employee not later than the required beginning date, or (ii) will be distributed, beginning not later than the required beginning date, in accordance with regulations, over the life of such employee or over the lives of such employee and a designated beneficiary (or over a period not extending beyond the life expectancy of such employee or the life expectancy of such employee and a designated beneficiary). I.R.C. (26 U.S.C.) § 401(a)(9)(A) http://uscode.house.gov/view.xhtml?req=(title:26%20section:401%20edition:prelim)%20OR%20(granuleid:USC-prelim-title26-section401)&f=treesort&edition=prelim&num=0&jumpTo=true Does Congress intend to limit that minimum-distribution rule to a participant who is still an employee? Does Congress intend to impose a too-early tax on a participant who submitted her claim within § 414(w)’s time but not until after her severance from employment?

That ends that query! On the point about whether § 414(v)(7) restrains only employees (and not self-employed individuals), some law, accounting, investment-adviser, and other firms with working owners might have a perhaps awkward situation that nonpartners are restrained in choosing the tax treatment of catch-up deferrals while partners might be unconstrained in their choice of tax treatment.

While it’s not something I suggest (and I’m asking much more generally, rather than about ratherbereading’s situation): Would it be feasible for a plan to omit Roth elective deferrals and provide that a § 414(v) catch-up is available only to those participants not constrained by § 414(v)(7)? Would such a provision sufficiently avoid discriminating in favor of § 414(q) highly-compensated employees?

SECURE 2022’s § 338 amendment of ERISA § 105(a)(2) “shall apply with respect to plan years beginning after December 31, 2025.” That effective-date expression is somewhat awkward because ERISA § 105(a)(2)(E)’s command applies regarding calendar years. Some administrators are planning paper statements (to the extent required) in January 2027 for periods ended and as at December 31, 2026.

Even if a participant, beneficiary, or alternate payee affirmatively or impliedly assented to electronic delivery of disclosures, furnishing a statement in the participant portal is not, by itself, enough. Rather, the plan’s administrator (or its service provider) sends to the individual’s email or smartphone address a notice of internet availability, which describes the document furnished and hyperlinks to or specifies the website address at which the individual retrieves the document. 29 C.F.R. § 2520.104b-31(d)(3) https://www.ecfr.gov/current/title-29/part-2520/section-2520.104b-31#p-2520.104b-31(d)(3). The idea is that the administrator must tell the participant that there is something to look for.