Peter Gulia

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?

Is this restatement cycle an opportunity to get a little IRS guidance on some unsettled SECURE 2019 and SECURE 2022 ambiguities? Could a maker of preapproved documents express in its documents some provisions and choices that express a desired interpretation? If the IRS reviewers don’t say no to something expressed in the documents and flagged in one’s application, that’s tantamount to a soft guidance. Or if the IRS reviewers resist, that gives us at least a preliminary look into the issues.

For austin3515’s questions, does it matter whether the employer’s Federal, State, and local income tax returns had been and are made on the cash-receipts-and-disbursements method of accounting? To the extent that “incurred” matters, which facts might establish that a discretionary contribution regarding a year was incurred within that year?

Until the Treasury department’s or its Internal Revenue Service’s guidance: Consider Internal Revenue Code of 1986 (26 U.S.C.) § 7701(a)(25): When used in this title, where not otherwise distinctly expressed or manifestly incompatible with the intent thereof— The terms “paid or incurred” and “paid or accrued” shall be construed according to the method of accounting upon the basis of which the taxable income is computed under subtitle A. Consider I.R.C. § 446. Consider the regulations interpreting and implementing § 446. Consider logical consistency with I.R.C. § 404, and with the regulations interpreting and implementing § 404. To the extent that “incurred” is relevant, consider what incurred means under generally accepted accounting principles.

Informal poll: Of participants and beneficiaries in your clients’ plans, what portion get routine deliveries of disclosures by electronic means? _____% electronic means _____% still get paper. And how many of your clients’ plans charge an individual’s account for getting paper statements and other disclosures? _____% charge an individual’s account an incremental amount for getting paper.

Also, a distribution’s gross-up need not be restricted to amounts withheld toward taxes but might, even for a hardship distribution, include someone’s reckoning of “amounts necessary [for the distributee] to pay any federal, state, or local income taxes or penalties reasonably anticipated to result from the distribution[.]” 26 C.F.R. § 1.401(k)-1(d)(3)(iii)(A). I’ve seen a plan’s administrator approve a hardship distribution for 200% of the need amount. For some New York City residents (with marginal income tax rates summing more than 50%), that’s still not enough to meet the taxes that result from a too-early distribution. A plan’s administrator and its service provider might assume they don’t know everything about the distributee’s and one’s spouse’s circumstances, and so approve a gross-up request within a plausible range.

The rule’s form [29 C.F.R. § 2520.104b-10(d)(3)] suggests a few clues: The instruction says the description should be “brief”. The form suggests that what follows “Your plan is a” might fit one sentence. The instruction directs that the description must include (i) whether the pension plan is a defined benefit plan or an individual-account plan, and (ii) whether the plan is a multiemployer plan, a single-employer plan, a pooled-employer plan, or a multiple-employer plan other than a pooled-employer plan. The instruction suggests the description should be logically consistent with the to-be-summarized report’s plan characteristic codes. The instruction does not say the description must include all information from all plan characteristic codes. (That’s good because one individual-account pension plan might have as many as 19 codes. Expressing all that information might be more than a “brief description” the Labor department envisioned.) Here’s one illustration (for a plan with a § 401(k) arrangement, but no nonelective or matching contribution): Your plan is a single-employer individual-account retirement plan that requires participant-directed investment. That sentence meets required elements, and adds an extra fact that can be logically consistent with a few plan characteristic codes. Or here’s another illustration: Your plan is a multiple-employer association retirement plan that provides an individual account for each participant or beneficiary. BenefitsLink neighbors might have many more ideas. And I would not be surprised if software logic and constraints result in a description that chops phrases and sentences, and omits information that’s not strictly necessary.

Imagine an employer has 200 nonexcludable employees, which means 50 employees is the lesser-of for Internal Revenue Code § 401(a)(26)(A). Is the fix a corrective amendment to cover a few more employees? See 26 C.F.R. § 1.401(a)(26)-7(c) https://www.ecfr.gov/current/title-26/part-1/section-1.401(a)(26)-7#p-1.401(a)(26)-7(c).

A QDRO distribution now (if the plan provides it without waiting for an earliest retirement age) might meet your client’s need for money. That might be so if “about 90%” of the QDRO distribution is allocable to Roth amounts and the conditions for a Roth-qualified distribution are met. About Federal income tax generally: Even if a court order commands or an alternate payee requests an immediate distribution, a plan’s administrator first divides a participant’s account into the participant’s and the alternate payee’s separate portions, and sets up a segregated account for the alternate payee. Unless the court order specifies otherwise (and calls for nothing contrary to the plan), a division should result in the alternate payee’s segregated account getting Roth and non-Roth amounts in proportion to the participant’s before-division account. See 26 C.F.R. § 1.402A-1/Q&A-9(b) (“When the separate account is established for an alternate payee . . . , each separate account [the participant’s and the alternate payee’s] must receive a proportionate amount attributable to investment in the contract.”). See also I.R.C. (26 U.S.C.) § 72(m)(10). If an alternate payee is or was the participant’s spouse, such an alternate payee is treated as the distributee of a distribution paid or delivered from the alternate payee’s segregated account. I.R.C. (26 U.S.C.) § 402(e)(1)(A). A distribution allocable to non-Roth amounts likely is ordinary income. A distribution allocable to Roth amounts might be a qualified distribution not counted in income. I.R.C. (26 U.S.C.) §§ 402(d), 408A(d)(2)(A). (Your description of the assumed facts does not say whether the participant completed a five-taxable-year period of participation in the designated Roth account, and does not say whether the participant is dead, disabled, or reached age 59½. See https://www.irs.gov/retirement-plans/retirement-plans-faqs-on-designated-roth-accounts.) About the too-early tax: “Any distribution to an alternate payee pursuant to a qualified domestic relations order (within the meaning of section 414(p)(1))” is an exception from the extra 10% too-early income tax that otherwise might apply to a distribution before a distributee’s age 59½. I.R.C. (26 U.S.C.) § 72(t)(2)(C). About a payer’s withholding toward Federal income tax: Whatever the withholding rate or instruction, a payer applies it to the portion of the distribution counted in income. “[A] designated distribution does not include any portion of a distribution which it is reasonable to believe is not includible in the gross income of the payee.” 26 C.F.R. § 35.3405-1T/Q&A-2(a) Hyperlinks to sources: Statute: I.R.C. (26 U.S.C.) § 72 http://uscode.house.gov/view.xhtml?req=(title:26%20section:72%20edition:prelim)%20OR%20(granuleid:USC-prelim-title26-section72)&f=treesort&edition=prelim&num=0&jumpTo=true. I.R.C. (26 U.S.C.) § 402 http://uscode.house.gov/view.xhtml?req=(title:26%20section:402%20edition:prelim)%20OR%20(granuleid:USC-prelim-title26-section402)&f=treesort&edition=prelim&num=0&jumpTo=true. I.R.C. (26 U.S.C.) § 402A http://uscode.house.gov/view.xhtml?req=(title:26%20section:402A%20edition:prelim)%20OR%20(granuleid:USC-prelim-title26-section402A)&f=treesort&edition=prelim&num=0&jumpTo=true. I.R.C. (26 U.S.C.) § 408A http://uscode.house.gov/view.xhtml?req=(title:26%20section:408A%20edition:prelim)%20OR%20(granuleid:USC-prelim-title26-section408A)&f=treesort&edition=prelim&num=0&jumpTo=true. Executive agency rules: 26 C.F.R. § 1.402A-1/Q&A-9(b) https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/section-1.402A-1. 26 C.F.R. § 35.3405-1T/Q&A-2(a) https://www.ecfr.gov/current/title-26/chapter-I/subchapter-C/part-35/section-35.3405-1T. Caution: Nothing here is advice to your client, or to you.

In many BenefitsLink discussions, we present observations grounded on a set of assumed or possible facts. And we might suggest something based on an inference about a hypothetically assumed or possible fact. In this discussion, some of us might have drawn different inferences about some ambiguous, inconsistent, or confusing facts described in Renee H’s originating post and follow-up. As the earlier of my posts said, there are many possibilities. That post expressly recognizes that Renee H’s client might not have accurately or completely described the facts. I imagined at least two possibilities, including that a person described as a nonemployee director might be an employee. My later post assumed the information and descriptions in Renee H’s follow-up, and suggests one of several possible ways to handle a situation if a person is a nonemployee director, if the person desires a retirement plan, and if it is feasible to design a separate plan. We recognize that records or other facts furnished to Renee H might include an inaccurate description the client made following its own decision-making without anyone’s advice, or perhaps with another professional’s advice. We know that a business organization, whether small or big, might misdescribe some facts—sometimes unknowingly, sometimes inadvertently, sometimes ill-advisedly, or even for one or more other reasons or causes. Among the challenges facing a lawyer, accountant, actuary, TPA, or other adviser is that a client might not furnish enough information to get the facts right. Many BenefitsLink discussions proceed from a commenter’s inferences and guesses about facts to be assumed. An originating post often doesn’t fully describe all relevant facts. Often, that’s because the person seeking information or suggestions doesn’t yet know enough to discern fully which facts might be relevant. Often, it’s because the originating poster doesn’t yet have the facts. Still, many of us find help in a neighbor’s analysis of, or observation about, even a hypothesized situation. Often, that helps a questioner consider which facts and other assumptions to ask for, or which modes of analysis or advice-giving to pursue.

But the embarrassment or frustration of whichever person advised or decided the reporting of the nonemployee compensation might fade if it is feasible to design a separate retirement plan for each director, perhaps with annual additions up to the § 415(c) limit or accruals up to the § 415(b) limit (but subject to coverage and nondiscrimination conditions).

Jokes and laughs aside, in fairness the report did not suggest a failing of Central States, Southeast & Southwest Areas Pension Plan. Rather, the report criticizes the PBGC for not using the full death master file, a resource not available to Central States. https://oig.pbgc.gov/pdfs/SR-2023-10.pdf

There are many possibilities. Just a few of them are: The data furnished to the TPA did not include a record of hours of service for a worker who in fact had hours of service. For some directors, officers, or professionals, the measure of service might not be obvious. Or, an employer or service recipient might lack records. An amount reported as wages might have been nonemployee compensation. For example, if a nonemployee director’s fee is not an employee’s wages, it might be the individual’s self-employment income. A director might be in the business of being a corporation’s director. If so, that separate business might establish its separate retirement plan. As just one illustration, a 50-year-old director’s fee of $20,000 a month might support a year’s individual-account retirement plan contributions of $76,500 [2024]. But a businessperson considering such a plan needs a practitioner’s advice about many qualified-plan conditions, including coverage and nondiscrimination, especially if the self-employed business might be treated as a part of a § 414 employer that includes the corporation the director serves. Renee H might face some delicate choices about whether to do the TPA’s work on the data presented, or to invite a conversation about a client’s information and a client’s (and perhaps others’) choices and wishes.

For a plan with a cash-or-deferred arrangement established before December 29, 2022 (and so excepted from § 414A’s automatic-enrollment tax-qualification condition): Could a plan provide an automatic-contribution arrangement for all or some of those who become eligible under full-time eligibility conditions, while also providing no automatic-contribution arrangement for those eligible only under the long-term-part-time provision? Please understand that I do not suggest this plan design; I seek only to learn whether it’s possible if it is what a plan sponsor wants.

One advising a participating employer might consider, and advise about, these points: A participating employer is a pooled-employer plan’s fiduciary. ERISA § 3(43)(B)(iii). ERISA makes it a fiduciary breach (and a Federal crime) for a person to handle plan assets or serve as a plan’s fiduciary unless the person is “bonded” with ERISA fidelity-bond insurance, at least for the § 412(a)-required amount. Even if one is confident that the employer-fiduciary never handles plan assets, construing § 412(a) to require only a bond of $0.00 is a doubtful interpretation of the statute. Section 412(a) includes: “In no case shall such bond be less than $1,000[.] An interpretation in the 2008 Field Assistance Bulletin or in the 2022 Information Letter is not a rule or regulation. A court need not defer to it. A court need not even consider it. If a court considers an executive agency’s nonrule guidance, a court considers the stated reasoning and evaluates whether the reasoning persuades the court about how to interpret an ambiguous statute. Not buying the insurance because one assumes an employer-fiduciary regularly pays over contributions promptly and so does not handle plan assets is risky. Fidelity-bond insurance does not protect a plan from a theft loss unless the insurance is in effect when the theft happens. Imagine a plan suffers a theft loss with the theft happening before money was collected by the pooled-employer plan’s trustee or its agent. Imagine all or some of the loss would be covered had the employer obtained ERISA fidelity-bond insurance. Could a participant harmed by the theft loss assert that the employer-fiduciary is personally liable for the uncovered loss because the fiduciary failed to do what the statute commands? Consider ERISA § 409(a). Even if the employer pays the insurance premium (and it need not, because fidelity-bond coverage is a plan-administration expense), might that be much less expensive than bearing personal liability for a theft loss?

With David Rigby’s good help, we see that an ancillary benefit includes “[a] benefit payable under a defined benefit plan in the event of disability (to the extent that the benefit exceeds the benefit otherwise payable)[.]” 26 C.F.R. § 1.411(d)-3(g)(2)(ii). Here's a negative inference from that sentence: A participant’s right to a distribution under an individual-account (defined-contribution) plan because the participant is disabled is not an ancillary benefit. Do BenefitsLink mavens read the rule that way?

Instead of looking to a secondary source, it might be simpler to read the Treasury’s rule. It includes a subsection on “Effect of failure”. 26 C.F.R. § 1.403(b)-3(d) https://www.ecfr.gov/current/title-26/part-1/section-1.403(b)-3#p-1.403(b)-3(d). About a failure, Treasury’s rule sends you to Internal Revenue Code sections 61, 72, 83, 402(b), and 403(c). A 403(b)-failed annuity contract still might be an annuity contract. While a contribution that gets no § 403(b) exclusion counts in income, a build-up under an annuity contract might not be taxed until paid, distributed, or made available. See 26 C.F.R. § 1.403(b)-3(d)(1)(i)-(iii). 26 C.F.R. § 1.403(b)-3(d)(1)(ii) describes which failures affect a whole plan, which affect a class of individuals, and which affect only a particular individual.

Without remarking on public-policy questions about the too-early tax and exceptions from it: If we imagine Congress believed that somehow involving the distributing plan’s administrator might lower false claims that a distributee was terminally ill, such a belief would have been unsound, at least partially. Even if a plan’s administrator or its recordkeeper receives a physician’s certificate and makes and keeps a document-image record of what was received, the plan’s administrator need do nothing to detect whether a purported certificate is a forgery or other false document, and need not evaluate or even read the certificate. Yet, that the statute calls for someone who wants the § 72(t)(2)(L) terminal-illness tax treatment to furnish a physician’s certificate might deter some false claims because: A plan’s claimant might imagine, often mistakenly, that the plan’s administrator will at least look at the certificate. A plan’s administrator might assume, often mistakenly, that the administrator must or should consider the certificate. If either of those had been Congress’s reasoning, that would be a deplorable way to make law. Whatever the awkwardness of receiving evidence the administrator has no current need to consider, I suggest a plan’s administrator ask its recordkeeper to make and keep records of whatever the recordkeeper received for a § 72(t)(2)(L) certificate. I suggest that even when the certificate is irrelevant to deciding a claim. And I suggest it even when the certificate is irrelevant to coding a Form 1099-R—whether because no too-early tax would apply anyhow, or because the payer does not apply to Form 1099-R coding a fact the plan’s administration did not decide. Whether a payer must, should, or even may code a Form 1099-R for an exception from a too-early tax when the distributing plan’s claims administrator did not decide or determine a fact that would invoke the exception is not a point I remark on in this discussion.

According to a report from the Pension Benefit Guaranty Corporation’s Office of Inspector General, the US overpaid the Central States teamsters pension plan about $127 million because an application for special financial assistance reported 3,479 participants who had died. “While the [PBGC]’s review process required Central States to provide a list of all Plan participants and proof of a search for deceased participants (death audit), the [PBGC] did not cross-check the information against the Social Security Administration’s (SSA) Full Death Master File (DMF)—the source recommended by the U.S. Government Accountability Office for reducing improper payments to deceased people. (The Full DMF is more accurate than any database private pension plans have access to[,] and is used by the [PBGC] in its other insurance programs to ensure proper payments of pension benefits to plan participants).” Deceased Participants in the Central States' Special Financial Assistance Calculation.pdf

BenefitsLink host Lois Baker gives us the hyperlinks to the Office of the Federal Register’s posting of the prepublication texts, showing they are scheduled to be published tomorrow, November 3. https://benefitslink.com/boards/topic/71280-dol-proposed-investment-advice-package-scheduled-for-publication-in-the-federal-register/#comment-334192 Before third-party administrators too hastily assume this would affect only investment brokers and advisers, read the proposed rule. You don’t need the explanation; just skip to page 272. And think carefully if your arrangements about indirect compensation are anything less tidy than what Paul I describes.

Just curious: In your experience, does the indirect compensation that would be used as a set-off on your compensation influence the employer's decision-making?

Here are some questions for our BenefitsLink neighbors. If the Labor department’s proposed rule becomes a final rule and becomes effective and applicable, what effects would the rule have on your business? Is there a service you now provide that you would stop when the rule becomes applicable? Is there a service you don’t now provide that you would develop and offer? If you’re a recordkeeper or third-party administrator, would the rule change any aspect of your relationships with investment brokers and advisers? If you provide services as a § 3(16) administrator, are you ready to defend claims that you knew an investment adviser breached and you didn’t do enough to remedy that other fiduciary’s breach? And how about your own business: (1) Even as only a third-party administrator, do you sometimes help an employer select a participant-directed plan’s “menu” of investment alternatives? Or do you as a part of your business help an employer select a recordkeeper and that choice means taking on some of the recordkeeper’s or its affiliate’s investments? (2) Do you get any compensation, however indirectly, you would not get unless the plan made a choice under #1? If #1 and #2 are yes, are you an investment-advice fiduciary? If you are, which exemption do you use to cure your compensation conflicts?

How would the proposed investment-advice rule affect you? On October 31, President Biden and Acting Secretary of Labor Julie A. Su announced that she will propose a new rule to interpret whether a person provides investment advice that makes the person an employee-benefit plan’s fiduciary. The same rule would interpret also whether one is a fiduciary regarding an Individual Retirement Account or Annuity (IRA), a health savings account, an Archer Medical Savings Account, or a Coverdell education savings account, even if the account is unconnected to an employment-based plan. (Whether a rule would be or might become contrary to law is beyond this explanation.) To go with those interpretations about investment advice that makes one a fiduciary, the Secretary will propose changes for five class prohibited-transaction exemptions (PTEs). These matter because both section 406 of the Employee Retirement Income Security Act of 1974 (ERISA) and Internal Revenue Code of 1986 (I.R.C.) § 4975 make it a prohibited transaction for a fiduciary’s advice-giving to affect her compensation, business, or other personal interest. Under a 1978 government reorganization plan, the Labor department’s rules, exemptions, and interpretations are authority not only for ERISA-governed employee-benefit plans but also for accounts subject to a tax-law consequence under or regarding I.R.C. § 4975. BenefitsLink’s news pages link to the prepublication texts and some news releases and articles. Eight hyperlinks are posted in the October 31 news. The proposals are not yet published in the Federal Register. If published soon, the 60-day comment period would end in early January. And without waiting for a request, the Labor department expects to schedule a hearing in mid-December. What’s in the proposals? Here’s a few key points: Investment advice that makes one a fiduciary includes a recommendation of any investment transaction or any investment strategy. That applies for someone in a business that regularly involves investment-related recommendations, or who “represents or acknowledges that they are acting as a fiduciary when making investment recommendations.” The proposed rule’s explanation of a recommendation aligns with uses of that word under securities law and insurance law. A recommendation need not be about securities; it would be about any kind of investment property, including an annuity contract, even a fixed annuity contract, and a life insurance contract, unless it has no investment element. An investment adviser is a fiduciary only “to the extent” it renders investment advice. For example, a securities broker-dealer or insurance agency that presents a rollover recommendation might be a plan’s or IRA’s fiduciary only when it forms and presents a particular recommendation. One might be a fiduciary only for a day or two. For example, a one-time recommendation to rollover a payout into an IRA could make the recommender a fiduciary, but her responsibility might end when the distributee accepts or rejects the recommendation. Responsibility for one-time advice also might apply to a suggestion about how another fiduciary selects or monitors designated investment alternatives, or about whether to allow a brokerage window. That a person is not (or is no longer) a fiduciary under ERISA or the Internal Revenue Code does not excuse the person from duties under banking, commodities, insurance, or securities law. The revised best-interest exemption (PTE 2020-02) would let a Financial Institution—such as a bank, trust company, insurance company, securities broker-dealer, or registered investment adviser—and its Investment Professionals provide self-dealing advice if they don’t put their interests ahead of the Retirement Investor’s interests and don’t put the Retirement Investor’s interests below the Financial Institution’s or its Investment Professional’s interests. Some changes would widen which persons can get relief. Some changes would tighten disclosures. Among other changes, a Financial Institution and its Investment Professional must confirm in a written disclosure that they act as fiduciaries. A change would require a Financial Institution’s yearly compliance reviews to check “that [t]he Financial Institution has filed (or will file timely, including extensions) Form 5330 reporting any non-exempt prohibited transactions discovered by the Financial Institution in connection with investment advice covered under [I.R.C. §] 4975(e)(3)(B), corrected those transactions, and paid any resulting excise taxes owed under [§] 4975[.]” If the Labor department adopts its proposed change in PTE 84-24, an Independent Producer who recommends an unaffiliated Insurer’s annuity contract could get a fully disclosed commission or fee if the exemption’s protective conditions are met. What’s the big change? The Insurer “would not be treated as a fiduciary merely because it exercised oversight responsibilities over independent insurance agents under the exemption.” And the Insurer “only would be required to exercise supervisory authority over the independent agent’s recommendation of [the Insurer’s] products.” Another proposal would change PTEs 75-1, 77-4, 80-83, 83-1, and 86-128 so each provides no relief for a self-dealing transaction, including conflicted compensation. Instead, a fiduciary must meet the conditions of the best-interest exemption. This is only a quick and short look at a few of the many points in the proposals. For more information, read the source texts. Or, post your query in this BenefitsLink discussion.

To many people thinking about the public-policy point, it’s not obvious why an employer wants to exclude an employee from what anyone but the most knowledgeable retirement-plan practitioners might perceive as allowing little or no more than an opportunity to save for retirement from the employee’s wages. Those who hope for IRS guidance that a plan may exclude employees on some ground other than (and not a subterfuge for) a measure of service might consider informing the IRS about an employer’s reasons for excluding an employee. Consider that the IRS’s lawyers don’t have the daily lived experience of third-party administrators. Even those IRS lawyers with previous work experience in law, accounting, or consulting firms, or inside a retirement-services provider, might lack experience with the kinds of employers and kinds of plans that raise an issue or concern that might be a plan sponsor’s reason for excluding an employee.