Peter Gulia

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.

Luke Bailey and Belgarath, thank you for your further observations. Luke Bailey, thank you for mentioning Kovel translation or explanation, fact-gathering, and other arrangements preparing a lawyer to form her advice. In my course’s lesson about confidences and evidence-law privileges, we’ve considered whether a Kovel (or similar State-law) tolerance applies when a lawyer engages an accounting firm or consulting firm but nothing in that firm’s work involves accounting, actuarial practice, business advice, investment advice, or any discipline other than legal advice. But a lawyer’s engagement of others for fact-gathering should work with no need for any Kovel doctrine.

Towanda, thank you for your helpful information. Because we recognize that a plan sponsor’s representative practices before the IRS, here’s the Circular 230 rule about conflicting interests: § 10.29 Conflicting interests. (a) Except as provided by paragraph (b) of this section, a practitioner shall not represent a client before the Internal Revenue Service if the representation involves a conflict of interest. A conflict of interest exists if— (1) The representation of one client will be directly adverse to another client; or (2) There is a significant risk that the representation of one or more clients will be materially limited by the practitioner’s responsibilities to another client, a former client{,} or a third person, or by a personal interest of the practitioner. (b) Notwithstanding the existence of a conflict of interest under paragraph (a) of this section, the practitioner may represent a client if— (1) The practitioner reasonably believes that the practitioner will be able to provide competent and diligent representation to each affected client; (2) The representation is not prohibited by law; and (3) Each affected client waives the conflict of interest and gives informed consent, confirmed in writing by each affected client, at the time the existence of the conflict of interest is known by the practitioner. The confirmation may be made within a reasonable period after the informed consent, but in no event later than 30 days. (c) Copies of the written consents must be retained by the practitioner for at least 36 months from the date of the conclusion of the representation of the affected clients, and the written consents must be provided to any officer or employee of the Internal Revenue Service on request. 31 C.F.R. § 10.29 https://www.ecfr.gov/current/title-31/section-10.29. As CuseFan suggests, whether a conflict exists turns on the surrounding facts and circumstances, which might include whether the practitioner’s advice is obvious or involves discretion that could an affect an interest beyond the plan sponsor’s interest.

Rocha’s originating post—“no kin to be found”—suggests the plan’s administrator might have already pursued some effort to find someone who might fit the plan’s default-beneficiary provision. It might be impractical to pay or deliver any distribution, even an involuntary distribution, if the identity of the distributee is yet unknown.

Thank you for your thinking, especially about what might or might not set up a conflict of interests. Others with different or further observations?

Please let me preface this request by saying I don’t do corrections work, and my interest is only academic. I’m developing a lesson for my multidisciplinary course on Professional Conduct in Tax Practice. For a Voluntary Correction Program submission to the Internal Revenue Service, a plan sponsor might want a representative, and might find it efficient and effective to be represented by a practitioner who works for the recordkeeper or third-party administrator. Do some offer this service? Must a submission be prepared, or at least supervised, by an owner or employee who is an attorney, accountant, actuary, or enrolled retirement plan agent recognized for practice before the IRS? If the practitioner’s employer was at fault for the to-be-corrected failure, does the practitioner have a conflict of interests? What ways do you use to avoid or manage such a conflict? If the practitioner’s employer was not at fault for but was involved about the to-be-corrected failure, does the practitioner have a conflict of interests? What ways do you use to avoid or manage such a conflict? If a recordkeeper or TPA does not offer a service of letting its employee serve as a plan sponsor’s representative, is that because you see a conflict that can’t be avoided or managed? Because I lack experience, I hope BenefitsLink neighbors will help me learn about real-world practice.

About whether one must pay or deliver an involuntary distribution to meet § 401(a)(9): The Internal Revenue Service instructs Employee Plans examiners not to treat a plan as failing to meet § 401(a)(9) if the plan’s administrator has not found the beneficiary after a search that includes three steps the Internal Revenue Manual specifies. Internal Revenue Manual 4.71.1.4(15)(d) (Examination Objectives and Development of Issues) (Feb. 25, 2022) https://www.irs.gov/irm/part4/irm_04-071-001. That guidance tells an examiner to excuse what otherwise might be a § 401(a)(9) failure if the beneficiary is known but not found. A logical inference is that the IRS ought to excuse the absence of a § 401(a)(9) minimum distribution if the participant named no beneficiary (or all named are deceased or do not exist) and the default beneficiary is not yet known after the plan’s administrator made prudent efforts to find a person who might be the beneficiary under the plan’s default-beneficiary provision.

That is how the statute reads. And the IRS’s Internal Revenue Manual describes the statute: “IRC 6652(e) provides for non-assertion of the penalty if reasonable cause can be shown.” Internal Revenue Manual 20.1.8.4.3(18) (Oct. 6, 2022) (emphasis added) https://www.irs.gov/irm/part20/irm_20-001-008r.

The penalty does not apply if “it is shown that [the] failure is due to reasonable cause[.]” But Congress set the amount.

We can remark on the IRS’s difficulties in processing tax returns, information returns, and other documents—especially those filed by mailing paper, and resulting burdens for a filer to preserve evidence of what was filed and when. But the amount of the penalty is Congress’s Act. Internal Revenue Code of 1986 (26 U.S.C.) § 6652(e), amended by SECURE 2019 § 403(a) http://uscode.house.gov/view.xhtml?req=(title:26%20section:6652%20edition:prelim)%20OR%20(granuleid:USC-prelim-title26-section6652)&f=treesort&edition=prelim&num=0&jumpTo=true. How Congress sets public policy might be attributed to representative democracy and the United States’ Constitution.

The § 414A(c)(3) exception includes “any church plan (within the meaning of section 414(e)).” http://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 Internal Revenue Code of 1986 (26 U.S.C.) § 414(e) states a definition for a church plan. http://uscode.house.gov/view.xhtml?req=(title:26%20section:414%20edition:prelim)%20OR%20(granuleid:USC-prelim-title26-section414)&f=treesort&edition=prelim&num=0&jumpTo=true A rule interpreting some aspects of that definition is: 26 C.F.R. § 1.414(e)-1(a) https://www.ecfr.gov/current/title-26/section-1.414(e)-1. Many books, whether print or internet-delivered, retirement-plans practitioners use include a chapter or unit on church plans. In 403(b) Answer Book, it is chapter 22.

If the only effect of an Internal Revenue Code § 457(b)(3) normal retirement age is to fix which three years get the § 457(b)(3) deferral limit, it’s much simpler for a plan not to specify any age, and to provide that a participant may elect her normal retirement age within the range § 457(b)(3) permits. 26 C.F.R. § 1.457-4(c)(3)(v)(A) https://www.ecfr.gov/current/title-26/part-1/section-1.457-4#p-1.457-4(c)(3)(v)(A). Following a worker’s job classification, defined-benefit pension rights, and other circumstances, a normal retirement age can be as young as 40 and as old as 70½. Example: Martha will turn 70½ in 2027 and elects 2024-2026 as her “special section 457 catch-up” years. Observe that a § 457(b)(3) deferral limit applies on the participant’s tax year, not any plan year. Whether a plan amendment is precluded or must be limited is governed by the United States’ and the State’s constitutions and other State law. But an amendment that does not diminish any participant’s rights should be unobjectionable.

Beyond retirement and health plans, has anyone, perhaps a big accounting firm, done projections on the many tax and other figures that get inflation adjustments?

Although Internal Revenue Code § 414A(a)(1) generally (with some exceptions) applies to a § 401(k) arrangement established on or after December 29, 2022, a plan need not provide an automatic-contribution arrangement until the first plan year that begins on or after January 1, 2025. Some plan sponsors might consider it awkward to omit an automatic-contribution arrangement for 2024, recognizing a need to add automatic for 2025. But others might prefer administering the first year of a new § 401(k) arrangement without the extra complexity of automatic.

Here’s the rule for delaying, not excusing, an independent qualified public accountant’s report. Observe the several mentions about both plan years. 29 C.F.R. § 2520.104-50(b) https://www.ecfr.gov/current/title-29/part-2520/section-2520.104-50#p-2520.104-50(b). Even if a later plan year begins with fewer than 100 counted participants, consider that there are several other conditions for excusing an independent qualified public accountant’s audit of the plan’s financial statements. 29 C.F.R. § 2520.104-46(b) https://www.ecfr.gov/current/title-29/part-2520/section-2520.104-46#p-2520.104-46(b).

With § 72(p) added to the Internal Revenue Code on September 3, 1982 and applying to loans made or revised after August 13, 1982, one would like to think that 41 years later the software ought to apply the rules and calculate a next loan’s limit without us needing to think about it. https://www.govinfo.gov/content/pkg/STATUTE-96/pdf/STATUTE-96-Pg324.pdf But experience teaches us to look for and check all assumptions.

Consider that a termination of plan B, a plan B participant’s severance from former employer B (if B is not part of the same employer as A), or a plan B participant’s age 59½ might not be the only distribution-allowing circumstances. Plan B might provide a limited distribution: to meet the participant’s hardship; as a qualified birth or adoption distribution; or under another early-out provision. Further, plan B’s administrator might carefully administer claims to decide whether a claimant is entitled to what she claims. Incautiously paying an unentitled claim might, in some circumstances, result in a participant’s account not bearing her fair share of the to-be-terminated plan’s final-administration expenses.