Peter Gulia

Last week, a BenefitsLink discussion considered whether self-certifying claims for a hardship distribution might be good or bad. Advantages: Self-certifying might remove unwanted discretion; simplify claims procedure; lower plan-administration expense; and help employers avoid information one would prefer not to know or even have access to. Disadvantages: Self-certifying might weaken retirement savings (and might lower an investment or service provider’s revenue); and might speed impostor thefts. https://benefitslink.com/boards/index.php?/topic/70898-form-for-relying-on-a-participant%E2%80%99s-written-statement-that-she-has-a-hardship/ A hardship is not the only kind of claim for a before-severance distribution a plan may permit a participant to self-certify. Others include: an emergency personal expense distribution [§ 72(t)(I)]; a qualified birth or adoption distribution [§ 72(t)(H)]; an eligible distribution to a domestic abuse victim [§ 72(t)(2)(K)]. If a plan’s sponsor or administrator is considering not allowing § 401(k)(14)(C) self-certification for hardship claims, are there reasons to treat differently these other claims?

Thefts are always risks to be managed. For a big recordkeeper, the expense savings gained by lessening the review of hardship claims might outweigh the incremental losses the recordkeeper pays on its cybersecurity promise. And the recordkeeper should maintain its controls and slowdowns on address changes and bank account changes.

MoJo, thank you for sharing more perspectives. I understand some of the reluctance you describe. And I recognize the difficult business choices you and your fellow executives face. Still, I hope recordkeepers will build a self-certifying method available to at least big-enough plans so they, with advice and thinking independent of the recordkeeper, can decide their resolutions of the policy and risk questions.

For almost any individual-account retirement plan for which the plan’s administrator or other oversight fiduciary has bargaining power and independent advice, clear service agreements set up an opportunity for better working relationships with clearer expectations. And it’s important for an agreement to be fair to not only the service recipient’s proper interests but also the service provider’s legitimate interests. Among many points, a nonfiduciary service provider should bear no responsibility for the consequences of the plan sponsor’s or the plan administrator’s decision.

Corey B. Zeller, thank you. If a recordkeeper requires the plan administrator’s confirmation that the administrator lacks knowledge contrary to the self-certifying claim on each claim, that interruption could defeat the value of instructing the recordkeeper to process the claims without the administrator’s involvement. Instead, might a recordkeeper accept (at least from a big-enough customer advised by its lawyers) a plan administrator’s instruction to process the hardship claims presuming the administrator lacks knowledge unless the administrator intervenes? After all, isn’t it a plan’s sponsor/administrator that owns the risk of a tax-disqualification because the plan allowed a distribution contrary to § 401(k)(2)(B)? And shouldn’t a service agreement relieve the recordkeeper from a liability or expense that results because the recordkeeper obeyed the administrator’s instructions? Paul I, thank you for your helpful explanation about recording sponsor/administrators’ instructions about plans’ provisions and administration methods, and about ordering of steps in a system logic. (It has been almost 18 years since I left inside experience with recordkeeping operations, and some of what I remember about that work is dimming!)

Paul I, thanks; and I hope you might help me learn more. If, like the regimes you describe, a plan’s administrator instructs its recordkeeper to treat as good order a hardship claim completed on the self-certifying form the administrator instructs, is that enough? Or does a recordkeeper think something more is needed for a plan’s administration to get § 401(k)(14)(C)’s protection? Also, is the needed software change only setting up a revised (or alternate) online claim form? Or would an administrator’s instruction that a recordkeeper use a self-certifying form touch something else that requires a software change? (I recognize recordkeepers are setting sooner and later priorities for SECURE 2022 software changes.)

Thanks. So at least ftwilliam furnishes a form. Perhaps BenefitsLink neighbors know whether Relius furnishes a form? The big recordkeepers seem reluctant to implement § 401(k)(14)(C). Is any big recordkeeper allowing the § 401(k)(14)(C) self-certification?

Has any big recordkeeper yet made available (if a plan-administrator customer asks for it) a form for relying on a participant’s written statement that she has a hardship?

If you get ASPPA’s Plan Consultant magazine, the Fall 2020 issue has an article for TPAs, “Rewrite your service agreement to protect your business: Ten tips to do it yourself.”

Congress’s repeal before the statute’s applicability date seems unlikely. Among many reasons, the Joint Committee on Taxation estimated the revenue raised by SECURE 2022’s § 603 as $16.637 billion for fiscal years 2024-2032. A July 19 letter asks the Treasury department for “transition relief.” In context and by implication, the letter asks for a year’s nonenforcement. If the Internal Revenue Service declines to apply Internal Revenue Code of 1986 § 414(v)(7), it’s doubtful any taxpayer has constitutional standing to seek a court’s order commanding the IRS to enforce § 414(v)(7). I don’t guess anything about whether the Treasury department might openly declare, or quietly set, a nonenforcement policy.

That you describe your firm as counsel to a union and a pension trust regarding the union suggests that your firm advises the labor-side pension trustees. Do the employer-side pension trustees have their counsel?

SECURE 2022’s § 120 provides a statutory prohibited-transactions exemption for an automatic-portability provider’s receipt of fees and compensation for its “services provided in connection with an automatic portability transaction.” Internal Revenue Code of 1986 (26 U.S.C.) § 4975(d)(25). But nothing in SECURE 2022 § 120 provides an exception from a fiduciary’s responsibility under ERISA § 404(a) [29 U.S.C. § 1104(a)]. Congress directs the Secretary of Labor to “issue” regulations or other guidance by December 29, 2023 (which also is the first day the exemption becomes available). Congress directs that the guidance “make clear that the [IRC § 4975(d)(25)] exemption . . . applies solely to the automatic portability transactions described therein, and, to the extent the Secretary deems necessary or advisable, specify how the application of the exemption relates to or coordinates with the application of other statutory provisions, regulations, administrative guidance, or exemptions.” Some might imagine the Labor department making a rule to interpret ERISA § 404(a) so a default-distributing ERISA-governed plan’s fiduciary is not responsible for a later automatic-portability transaction from the default IRA into a rollover-receiving employer-sponsored retirement plan. Some fiduciaries might wait until such a notice-and-comment rule is published, effective, and applicable. Some fiduciaries might consider whether such a rule would be enough to protect the fiduciary. And some fiduciaries might wait until Congress enacts non-responsibility in a statute.

Your query might lack some relevant information. Among other points: Did the participant die before, on, or after the participant’s required beginning date? Had a distribution begun? If a distribution began, did it begin before, on, or after the participant’s required beginning date?

If one follows the Form 5500 Instructions for an authorized service provider’s signature, that signer is not responsible for the Form 5500 report; rather, one signs only five process statements about how the plan administrator’s signer authorized the service provider to submit the administrator’s report. If you do something else, consider that the signer states: Under penalties of perjury and other penalties set forth in the instructions, I declare that I have examined this return/report, including accompanying schedules, statements and attachments, as well as the electronic version of this return/report, and to the best of my knowledge and belief, it is true, correct, and complete.

A few observations (none of which is advice) you might consider: If there is a doubt about which provisions the plan’s sponsor intends, that doubt might call for a conversation with the plan’s sponsor. To discern what the plan’s governing documents now might provide, a fiduciary (or its adviser) would, as Belgarath suggests, read carefully all writings that comprise the plan. That might include annuity contracts, custodial-account agreements, and other writings the labeled plan documents refer to. Despite a statement in an IRS-approved document that “the plan” controls over inconsistent provisions of an annuity contract or custodial-account agreement, consider that such a statement might have no effect on an annuity contract or custodial-account agreement. Likewise, such a statement in a plan document might not bind an insurer or custodian. For some annuity contracts, it might be unlawful for an insurer to accept provisions beyond those stated by the approved form of contract. Don’t assume a custodian, insurer, recordkeeper, or other investment or service provider has an obligation to follow the plan’s governing documents (even those that unquestionably state the plan’s provisions). Many agreements provide no such obligation. Some agreements expressly state that a payer or processor may rely, without inquiry, on the plan administrator’s instruction.

As CuseFan says. Some retirement plans have only one administrator, and the one decides everything that calls for a discretionary decision. Yet, some retirement plans have a top-level administrator and ERISA section 405 allocations of distinct fiduciary responsibilities to one or more claims administrators, each for a specified set of kinds of claims. For example, some plans I work with contract an administrator for claims that a participant is entitled to a distribution (whether by hardship, severance from employment, age, or another reason), and another separate administrator for claims that a court order is a qualified domestic relations order.

Some of my clients fear a government shutdown, and other clients would welcome it. Likewise, some of my clients think a delay, however slight, in government agencies’ guidance would harm the client’s interests; and others think a delay would advance the client’s interests.

Remember, SECURE 2022’s § 301 adds two provisions: Employee Retirement Income Security Act of 1974 § 206(h) [29 U.S.C. § 1056(h)] http://uscode.house.gov/view.xhtml?req=(title:29%20section:1056%20edition:prelim)%20OR%20(granuleid:USC-prelim-title29-section1056)&f=treesort&edition=prelim&num=0&jumpTo=true Internal Revenue Code of 1986 (26 U.S.C.) § 414(aa). 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

It is the employer that might lack a deduction. The employee gets the same exclusion from income, for non-Roth contributions, that any employee gets for the kind of plan used. Likewise, a distribution to a participant gets the income tax treatment that follows from whether the contributions were non-Roth or Roth contributions.

If this is a plan the employer intends to restrict to a select group (as ERISA sections 201, 301, and 401 describe it), a written plan might state that the employer decides, in its business discretion, who is eligible for deferrals under the plan. Your description of the document you were given suggests your client’s plan might not be so stated. If the document leaves an ambiguity, you might ask the employer for its interpretation.

The Joint Committee on Taxation estimate [JCX-21-22 (Dec. 22, 2022)] scored the hardship self-certification provision as raising only $358 million for fiscal years 2023-2032. While one cannot read the mind of a Member of Congress, here’s another explanation: The SECURE 2022 provisions for accepting a claimant’s statement about her hardship or unforeseeable emergency approximate what already has been the situation with many plans. Participants learn, often quietly and quickly, how to mark a website app or paper form to state a claim the service provider processes in good order with nothing that requires any further instruction from the supervising fiduciary.

You’re right that a fiduciary should get its lawyer’s advice about: (i) whether an agreement with the service provider obligates the employer to pay the provider’s fee; and if so, (ii) whether a charge on individuals’ accounts that relieves the employer of some of its obligation is a nonexempt prohibited transaction. Another path is to revise the service agreement to make clear that only the plan is obligated to pay the provider’s fee. The agreement might also state that the employer has a right, but no obligation, to pay a portion of the fee.

The software developers and recordkeepers could, if they choose, decide interpretations for SECURE 2022’s unanswered questions. And if a critical mass did so with common answers, they could, practically, force the IRS to fall in with those interpretations. So far, the businesses seem to prefer a go-slow.

Yes. If the domestic worker is not employed in a trade or business, for a farm, or in some other way that makes the worker’s compensation deductible, the employer’s contribution: is allowed (within the plan’s limits), is not an expense the employer deducts, but does not—if within § 4972(c)(6)(B)—attract the excise tax on a nondeductible contribution.

That might leave some interpretation questions for the claims administrator.