Peter Gulia

The Internal Revenue Manual is a set of directions and instructions addressed to IRS employees. Nothing in the Manual is a rule that applies to a taxpayer. And nothing the Internal Revenue Service or the Treasury department writes can undo an Act of Congress.

The February 2017 memo (later compiled in the Internal Revenue Manual) considered tax law before SECURE 2022, and before SECURE 2019. The whole text of Internal Revenue Code § 401(k)(14)(C) is: “In determining whether a distribution is upon the hardship of an employee, the administrator of the plan may rely on a written certification by the employee that the distribution is— (i) on account of a financial need of a type which is deemed in regulations prescribed by the Secretary to be an immediate and heavy financial need, and (ii) not in excess of the amount required to satisfy such financial need, and that the employee has no alternative means reasonably available to satisfy such financial need. The Secretary may provide by regulations for exceptions to the rule of the preceding sentence in cases where the plan administrator has actual knowledge to the contrary of the employee’s certification, and for procedures for addressing cases of employee misrepresentation.” I.R.C. (26 U.S.C.) § 401(k)(14)(C) 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 Nothing in that text provides an exception to the allowed reliance until: (1) the Secretary has published a rule or regulation (not subregulatory guidance); (2) that rule “provides . . . exceptions . . . [for] cases where the plan administrator has actual knowledge to the contrary of the employee’s certification[;]” and (3) the rule has become effective and applicable. So far, the Treasury has not even proposed a rule, much less completed a rulemaking. Amended § 401(k)(14)(C) applies to plan years that began or begin after December 29, 2022. Nothing in § 401(k)(14)(C) limits an administrator’s permitted reliance according to whether the participant made one or more previous claims, or received one or more hardship distributions, in a year.

To return to Lou S.’s query, the statute, the Internal Revenue Code of 1986, reads: § 401(k)(2)(B)(i)(III) A qualified cash or deferred arrangement must meet a set of conditions, which include: “(B) . . . amounts held by the trust which are attributable to employer contributions made pursuant to the employee’s election— (i) may not be distributable to participants or other beneficiaries earlier than— (III) in the case of a profit-sharing or stock bonus plan, the attainment of age 59½[.]” Accord 26 C.F.R. § 1.401(k)-1(d)(1)(ii)(A) (“[t]he employee’s attainment of age 59½”). § 72(t)(2)(A)(i) “Except as provided in paragraphs (3) and (4), paragraph (1) [the imposition of an extra tax on a too-early distribution] shall not apply to any of the following distributions: Distributions which are—made on or after the date on which the employee attains age 59½[.]”

The article [https://www.consultrms.com/Resources/38/Hardship-Withdrawals/188/Hardship-Document-Should-You-Allow-Self-Certification] seems to elide a description of the self-substantiation method the Internal Revenue Service unveiled in February 2017’s TEGE Council meeting. Substantiation Guidelines for Safe-Harbor Hardship Distributions from 401(k) Plans.pdf

ERISA § 413, which Paul I points to, governs a fiduciary-breach claim under ERISA’s title I. ERISA does not specify a limitations period for a benefit claim. Federal and States’ courts’ interpretations and applications vary, and sometimes “borrow” a period from a relevant State’s law. Claims under banking, insurance, securities, and other law might involve yet different periods. Instead of assuming the risk of error about which rule or rules might apply and how a court might interpret and apply them, a fiduciary might consider, with its lawyer’s evaluation and other help, negotiating an insurance contract under which one premium covers the tail risks with the insurer underwriting the risk on how long the fiduciary’s exposure continues. Just my musing; not advice to anyone.

I don’t know the tax law about remedial-amendment periods, but many BenefitsLink commenters do. Perhaps they’ll weigh in on my related question: If a plan’s sponsor is adding a provision for Roth deferrals because it’s needed to help meet SECURE 2022’s new tax-qualification condition that § 414(v) deferrals be Roth deferrals, is the provision sufficiently related that it gets a SECURE 2022 remedial-amendment period? If so, does the tax-qualification regime tolerate operate now, amend later? Or does that not work?

For a relevant meaning about what is minimum essential coverage, see Internal Revenue Code (26 U.S.C.): § 4980H http://uscode.house.gov/view.xhtml?req=(title:26%20section:4980H%20edition:prelim)%20OR%20(granuleid:USC-prelim-title26-section4980H)&f=treesort&edition=prelim&num=0&jumpTo=true §5000A(f) http://uscode.house.gov/view.xhtml?req=(title:26%20section:5000A%20edition:prelim)%20OR%20(granuleid:USC-prelim-title26-section5000A)&f=treesort&edition=prelim&num=0&jumpTo=true and rules: 26 C.F.R. § 54.4980H-1(a)(27) https://www.ecfr.gov/current/title-26/chapter-I/subchapter-D/part-54/section-54.4980H-1#p-54.4980H-1(a)(27). The regulator for the § 4980H excise tax on an applicable large employer that does not offer minimum essential coverage is the Treasury department and its Internal Revenue Service.

If DCFSA refers to dependent care flexible spending account: The plan’s provisions relate not only to Federal tax law but also to the employer’s plan-design choices. What does the written plan provide about when a participant may change her election? Does the election the participant seeks to change relate only to a § 129 dependent-care plan? Or does it integrate with a set of choices under a wider § 125 plan, perhaps including a health plan or health flexible spending account? Not all employers’ plans have the same provisions.

Individual-account retirement plans’ fiduciaries differ widely on what oversight and monitoring (if any) is proper or prudent regarding participants’, beneficiaries’, and alternate payees’ directed investment using securities accounts. Further, some plan’s creators specify in one or more governing documents which steps a fiduciary must, may, or must not take. Yet, even when those provisions are clear, fiduciaries sometimes consider whether one must disobey a plan’s provisions as inconsistent, whether generally or in particular circumstances, with ERISA’s title I. In my experience, few fiduciaries consider anything about investment merits, except expenses. Some fiduciaries consider restrictions for points beyond investment merits. Instead of a plan’s fiduciary doing the work of examining accounts for troublesome holdings or transactions, a fiduciary might rely, at least primarily, on the broker-dealer’s representations, warranties, and continuing covenants that the broker-dealer will restrict each securities account’s holdings and transactions to apply the plan administrator’s specified restrictions. Some of the more common exclusions are: open-end funds available as a designated investment alternative; securities issued by the plan’s sponsor, a participating employer, or an affiliate of any (even if one or more of these is not employer securities); securities that were employer securities regarding the plan during a specified past period; securities not traded on at least one nation’s national securities exchange (except securities that were exchange-traded when acquired); securities, commodities, or other property for which the plan’s trustee, custodian, and subcustodians lack enough control of ownership to meet ERISA § 404(b); securities, commodities, or other property for which the broker-dealer does not determine and report fair market value; anything that could result in a loss in excess of the individual’s account balance. Some fiduciaries prefer not to know what a particular individual directs investment in. If an employer does not need visibility to check for the professional-services points I describe above, an employer/administrator might prefer not to have “too much information.”

An administrator’s (or recordkeeper’s) desire for the implied-assent election jsample described results because many plans use continuing cash-or-deferred elections, and some participants might have made, before 2024, elections under assumptions that become, in 2024, no longer true. While it’s better for a participant to be attentive and make considered choices, individual-account retirement plans’ administration has, for better or worse, adapted to filling-in some presumptions for those who do not communicate an affirmative instruction. Without doubting anything Paul I explains, sometimes recordkeepers do what they can with the law Congress provides.

Thanks again. For the situations I’m thinking of, a retirement plan would allow only one broker-dealer, and only the one aligned with the recordkeeper. An employer would not furnish its restricted list to the broker-dealer, because doing so would reveal the employer’s clients’ confidential information.

I wasn’t suggesting asking a broker-dealer to apply an employer’s restrictions. (For some employers, a list of restricted securities could number in the thousands.) I’m aware only that some employers want daily visibility into participants’ brokerage-window accounts, so the employer’s compliance analysts can check that a participant has no unapproved holding.

With some (or many) participants, a plan might have three layers of implied-assent choices: 1. Whether a participant is deemed to have chosen a deferral; 2. The default amount of an implied-assent deferral; and 3. For a § 414(v) catchup portion of a deferral (even if the deferral results from affirmative elections), a default presumption of Roth-ing that portion; rather than no deferral for the portion that cannot be non-Roth deferrals. If the Internal Revenue Service doesn’t publish the requested guidance soon enough, there might be an implied-assent choice in another frame: A recordkeeper might propose to its customer plan fiduciary a #3 implied assent for a participant in the $145,000 group as an interpretation of uncertain law that the plan fiduciary approves, and instructs the recordkeeper to use in providing the recordkeeper’s services.

Beyond a plan fiduciary’s other needs, my query is motivated by employers that restrict or restrain an employee’s personal securities trading. For example: A law firm might restrict trading in securities issued by the firm’s client, identified prospective client, and either’s opponent or known party to a contract. An accounting firm might restrict trading in securities as needed to maintain an audit practice’s independence and availability for current and reasonably anticipated clients. A firm of actuaries might restrict trading in securities to avoid conflicts or maintain independence. A firm that sometimes serves as an appraiser, independent fiduciary, or expert witness might restrict trading in securities to maintain independence. For these employers, a lack of computer feeds could make a brokerage window a nonstarter.

The Labor department’s Voluntary Fiduciary Correction Program’s § 5 (General Rules for Acceptable Corrections) includes this: “The fiduciary, plan sponsor[,] or other Plan Official, shall pay the costs of correction, which may not be paid from plan assets.” § 5(c)(1). “[T]he plan may not pay any costs associated with recalculating participant account balances to take into account the new valuation. There would be no need for these additional calculations . . . if [the fiduciary had not breached its responsibility]. Therefore, the cost of recalculating the plan participants’ account balances is not a reasonable plan expense, but is part of the costs of correction.” § 5(c)(3). “Any fees paid to such representative for services relating to the preparation and submission of the [VFC] application may not be paid from plan assets.” § 6(b). https://www.govinfo.gov/content/pkg/FR-2006-04-19/pdf/06-3674.pdf Even if no fiduciary uses the VFC Program, a fiduciary might, unless its lawyer advises differently, presume the Program’s conditions follow an Employee Benefits Security Administration general interpretation that a plan ought not to be burdened by an expense that would not have been incurred had a fiduciary not breached its responsibility to the plan. Such an interpretation might be logically consistent with ERISA § 409(a): “Any person who is a fiduciary with respect to a plan who breaches any of the responsibilities, obligations, or duties imposed upon fiduciaries by this title [I] shall be personally liable to make good to such plan any losses to the plan resulting from each such breach, . . . , and shall be subject to such other equitable or remedial relief as the court may deem appropriate[.]” The circumstances and reasoning might be different if there was no fiduciary breach.

ERISA’s 404a-5 rule particularly mentions as an example of an individual expense “fees attendant to processing . . . qualified domestic relations orders[.]” 29 C.F.R. § 2550.404a-5(c)(3)(i)(A) https://www.ecfr.gov/current/title-29/subtitle-B/chapter-XXV/subchapter-F/part-2550/section-2550.404a-5#p-2550.404a-5(c)(3)(i)(A). While others might interpret the rule differently, I do not read it to preclude disclosing a QDRO-review charge merely because the charge is for a time-based fee. A plan’s administrator might furnish its most recent 404a-5 disclosure when the administrator furnishes its procedure for reviewing domestic-relations orders.

When a retirement plan allows a recordkeeper’s brokerage window: Does the plan’s named fiduciary get reports on the details of which stocks, bonds, and other securities each participant buys, holds, and sells? Or does the named fiduciary get access to a database with that information? Is that reporting or access routine? Or must the fiduciary specifically ask for those services?

About what writing is helpful to remember which in-operation provisions a plan’s administrator applied while waiting for an eventual remedial amendment, I do not suggest a need for a plan sponsor’s affirmative choice. But I wonder whether a service provider should “go through the motions” of seeking a sponsor’s instruction (and proposing a default instruction) on the required beginning date applicable age. Or, if the service provider prefers not to present a choice, at least informing a service recipient that it instructs the service provider to provide services on the presumption that the plan’s in-operation provision is the § 401(a)(9)(C)(v) applicable ages for setting a required beginning date. Either notice might set up some written evidence about which in-operation provisions were administered while waiting for an eventual remedial amendment. Even if nothing is done, the risk of administration contrary to the plan’s retroactive provisions might be slight. Even a service provider with a power to amend a user’s plan might prefer to restrain its use of that power. Further, until the plan is amended, a service provider might be cautious about not too lightly presuming what the plan’s in-operation provisions are. While waiting for an eventual amendment (whoever later makes it), a plan’s named fiduciary administrator might have discretionary authority to interpret a not-yet-amended plan document to include provisions the administrator anticipates likely could become the plan’s provisions with retroactive effect. But a service provider might lack such an interpretation power.

About Paul I’s last paragraph: In my interpretation, a distribution paid or delivered before January 1 of the year in which the participant attains the applicable age Internal Revenue Code § 401(a)(9)(C)(v) allows within the conditions for treating a plan as a tax-qualified plan (not a younger age a plan might provide) is treated as not § 401(a)(9)-required and so an eligible rollover distribution (if it otherwise qualifies). See 26 C.F.R. § 1.402(c)-2 https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/section-1.402(c)-2.

Might some higher-paid employees’ deferrals reach a need to use a § 414(v) catchup as soon as January 2024? Imagine 2024’s § 401(a)(17) limit might be $340,000 and 2024’s § 402(g) limit (without an age-based catchup) might be $23,000. Imagine 2024’s § 414(v)(2)(B)(i) amount might remain $7,500. Assume a plan provides a nonelective contribution of 3% of compensation. Assume the plan permits elective deferrals up to 97% of compensation. An employee is 51 years old. The employee’s base pay (all of which is wages) is $1 million for 2024. Assume monthly pay periods. $1 million / 12 = $83,333.33. $340,000 / 12 = $28,333.33. $28,333.33 x 97% = $27,483.33 In a continuing cash-or-deferred election made in 2023 to apply for compensation after 2023, the employee had elected deferrals of 97% of compensation, had elected these deferrals be non-Roth to the extent the plan permits, and had elected that any portion of her deferral not allowable as non-Roth be treated as Roth. (To remove the implied-election question from our hypothetical, imagine the employee made, before 2024, all these elections as affirmative written elections.) For this employee’s first 2024 pay, $23,000 is non-Roth elective deferrals, and $4,483.33 is Roth elective deferrals. Even with these $27,483.33 in retirement plan deferrals, the employee’s January pay will have another $55,850 available for withholding taxes and other pay deductions. Or am I missing something? To return to Gruegen’s query, some plans’ administrators might need to form one’s interpretation about whether an administrator may (or must not, or should not) rely on implied assent to treat elective deferrals as Roth contributions without waiting for the hoped-for government guidance. And recordkeepers might estimate how many plan administrators will want such a service feature.

I too have seen (indirectly) many orders that split a QDRO-processing fee between the participant and the alternate payee. But those charges have been for a fixed fee based on routine processing, not “hours” of calculations. If a QDRO-processing fee to be charged against individuals’ accounts is time-based, I like Bri’s point about inviting divorce lawyers and unadvised litigants to consider how an order’s provisions might affect expenses allocated to the participant or alternate payee.

Bri, do some clients’ plans provide that such a fee is allocated to the participant’s account, the alternate payee’s segregated account, or some combination of them?

Many IRS-preapproved documents did not (and still do not) state a required beginning date or its applicable age by referring to a relevant Internal Revenue Code text. For example, an IRS-preapproved document a recordkeeper presented to my client in July 2022 includes six uses of age 70½, with none of them modified by reference to any subpart of Internal Revenue Code section 401. Let’s consider a potential by-reference interpretation. Suppose the IRS-preapproved document includes: “All distributions required under [the document’s part for minimum distributions] will be determined and made in accordance with Regulations under Code § 401(a)(9) and the minimum distribution incidental benefit requirement of Code § 401(a)(9)(G).” (That’s a quotation from the document presented to my client.) That provision does not negate the same document’s uses of age 70½. A distribution would not fail to meet those regulations because the distribution begins sooner than the Internal Revenue Code’s required beginning date. Further, those regulations describe age 70½ as the age that sometimes sets a required beginning date. We recognize the Internal Revenue Service’s procedures for a preapproved plan often results in documents that do not reflect current provisions of the Internal Revenue Code and other law. We recognize that tax law includes a tolerance that permits a plan’s administrator to interpret a plan as if states provisions the administrator anticipates could become the plan’s provisions with retroactive effect. We recognize it’s reasonable to presume a plan’s sponsor prefers to provide as a required beginning date’s applicable age the latest the plan may provide without defeating treatment as a tax-qualified plan. But without asking for at least an implied-assent instruction, how do we know that the plan’s in-operation provision changed from 70½ to 72, and again to 73? If one accepts the remedial-amendment regime, wouldn’t it be better to maintain a thorough record of a plan’s in-operation provisions?

I hope BenefitsLink neighbors will help me learn something about a particular oddity regarding remedial-amendment cycles. For optional changes a recent Act of Congress permits, a typical way a recordkeeper or third-party administrator knows what a plan’s sponsor adopted often results practically from the sponsor’s responses to a service provider’s solicitation of instructions. These sometimes involve not only express instructions but also implied assent to the service provider’s proposed default instructions. Even when a sponsor does not make or keep its own records, the service provider’s records of what it was instructed become a history that can support the remedial amendment. It seems at least some big recordkeepers did not (in 2020-2022) ask, even in implied-assent form, whether a sponsor wanted to change the applicable age for a required beginning date from 70½ to 72, and again have not asked whether a sponsor wants to change it to 73. Many plans’ documents still say 70½. If a service provider did not ask whether a sponsor wants an optional change in the applicable age for a required beginning date, how does one know what the plan provides? (I recognize that what service a provider was or is obligated to provide need not, and often does not, refer to what the plan provides.) Even if we expect 99.99% of sponsors would adopt all permitted changes to the applicable age, should service providers “go through the motions” of seeking a sponsor’s instruction (and proposing a default instruction) on the required beginning date applicable age? Or are there reasons not to ask?

I often suggest that a plan’s administrator (and those who advise it) not reflexively imagine that a service provider does everything. And I often suggest that a service recipient gets more useful services when the recipient is mindful of and considerate about the provider’s business needs, practical needs, and constraints. When there is a candid working relationship between the plan’s administrator and its recordkeeper, there often are shared opportunities for improvements, with both recipient and provider benefitting from their exchange of information.