Peter Gulia

Consider also the terms and conditions of the plan’s administrator’s service agreement with the recordkeeper. That a plan’s governing documents permit or even provide something does not by itself obligate a nonfiduciary service provider to provide a service to support doing that something.

Thank you!

Without considering any plan-document change (most of which can wait until 2025 or the later remedial-amendment time): For an individual-account retirement plan with a § 401(k) arrangement (with no auto-anything provision, and no need or intent to add any); allowing non-Roth and Roth elective deferrals, including age-based catch-up (with non-Roth not restrained for those who had wages more than $145,000 in the preceding year); immediate eligibility with no age, service, or other condition beyond employment; no matching contribution, and no nonelective contribution; distribution permitted on age 59½ or severance from employment; no involuntary distribution (except as IRC § 401(a)(9) requires); no risk of a coverage, nondiscrimination, or top-heavy failure; and with the calendar year as the employer’s tax year, all participants’ tax year, the plan year, and the IRC § 415 limitation year: Which SECURE 2022 changes must the plan sponsor put in operation starting with 2024? Which SECURE 2022 changes may the plan sponsor put in operation starting with 2024?

If you can post here the broker-dealer’s agreement—redacting names, and without breaking the participant’s, the plan administrator’s, and any trustee’s privacy, we might learn something about instructions the agreement permits the broker-dealer to rely on: from which person, and for which transaction.

Does the plan’s administrator have a written claims procedure? 29 C.F.R. § 2560.503-1(b) https://www.ecfr.gov/current/title-29/part-2560/section-2560.503-1#p-2560.503-1(b). If so, what does that procedure provide about whether a claim for a principal-residence loan requires evidence beyond the participant’s statements on the claim form? If the written procedure grants the administrator discretion about whether to require or excuse supporting evidence, what has the administrator done regarding similarly situated claimants? If the claims procedure calls for evidence beyond the claimant’s statement that the participant loan is used to buy the participant’s principal residence, consider these points from the Treasury department’s rule: “The tracing rules established under section 163(h)(3)(B) apply in determining whether a loan is treated as for the acquisition of a principal residence in order to qualify as a principal residence plan loan.” 26 C.F.R. § 1.72(p)-1/Q&A-7 https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR807fc2326e73cb3/section-1.72(p)-1. I.R.C. (26 U.S.C.) § 163(h)(3)(B)(i): “The term ‘acquisition indebtedness’ means any indebtedness which— (I) is incurred in acquiring, constructing, or substantially improving any qualified residence of the taxpayer, and (II) is secured by such residence. Such term also includes any indebtedness secured by such residence resulting from the refinancing of indebtedness meeting the requirements of the preceding sentence (or this sentence); but only to the extent the amount of the indebtedness resulting from such refinancing does not exceed the amount of the refinanced indebtedness.” http://uscode.house.gov/view.xhtml?req=(title:26%20section:163%20edition:prelim)%20OR%20(granuleid:USC-prelim-title26-section163)&f=treesort&edition=prelim&num=0&jumpTo=true. And back to the § 72(p) rule: “[A] loan from a qualified employer plan used to repay a loan from a third party will qualify as a principal residence plan loan if the plan loan qualifies as a principal residence plan loan without regard to the loan from the third party. (b) Example. The following example illustrates the rules in paragraph (a) of this Q&A–8 and is based upon the assumptions described in the introductory text of this section: Example. (i) On July 1, 2003, a participant requests a $50,000 plan loan to be repaid in level monthly installments over 15 years. On August 1, 2003, the participant acquires a principal residence and pays a portion of the purchase price with a $50,000 bank loan. On September 1, 2003, the plan loans $50,000 to the participant, which the participant uses to pay the bank loan. (ii) Because the plan loan satisfies the requirements to qualify as a principal residence plan loan (taking into account the tracing rules of section 163(h)(3)(B)), the plan loan qualifies for the exception in section 72(p)(2)(B)(ii). 26 C.F.R. § 1.72(p)-1/Q&A-8 https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR807fc2326e73cb3/section-1.72(p)-1.

CKocher, I don't here express a view about whether an employer/administrator selects between Form 5500-EZ and Form 5500-SF based on facts during the plan year, as of the end of the plan year, or when the administrator files its report. Several interpretations are plausible, and I ask what our BenefitsLink neighbors think.

About whether and when a plan might be no longer a one-participant plan as Form 5500 instructions use that term, an employer/administrator might consider not only when a marriage ended but also whether a former spouse who had been a community-property or equitable owner during the marriage became a title-holding partner. For example, if a divorce’s settlement agreement provides a former spouse an interest in a partnership or an interest in a limited-liability company treated as a partnership, that interest could make the former spouse a partner. See 29 C.F.R. § 2510.3-3(c)(2) https://www.ecfr.gov/current/title-29/part-2510/section-2510.3-3#p-2510.3-3(c)(2). BenefitsLink mavens, if a former spouse gets no partnership interest, how would you advise a plan’s administrator to report this situation: The divorce decree is made after the end of the to-be-reported-on plan year but became legally effective months before the plan’s administrator completes its Form 5500 report on that plan year. Would you: Report as a one-participant plan (because those were the facts on the last day of the plan year)? Report as an ERISA-governed plan (because the Form 5500 instructions defining a one-participant plan speak in present tense—“covers”—and when the administrator makes its report the plan covers a participant who is neither a partner nor a partner’s spouse)?

pmacduff thank you for the further information. That a recordkeeper requires a third-party administrator to have insurance is part of a general trend. For example, custodians available to independent investment advisers require an adviser to maintain professional liability/errors-and-omissions insurance and cybersecurity insurance.

Bill Presson, Paul I, and Dare Johnson, thank you for this helpful information.

Other BenefitsLink neighbors might help you reconstruct the many amendments and restatements the plan’s sponsor ought to have done over the past 37 years. Whichever person is evaluating whether to pursue corrections and by which means might want to evaluate whether the plan was administered according to implied provisions that would have met Internal Revenue Code § 401(a)’s conditions for treating the plan as tax-qualified. Also, if the accountant knew—or, in the exercise of the care his profession requires, ought to have known—that plan amendments were needed but not done, he might want his lawyer’s advice about the accountant’s professional-conduct responsibilities regarding tax returns and tax-information returns, and about liability exposures.

Do some third-party-administrator businesses get malpractice or errors-and-omissions insurance? Without saying anything about how much the premium is (or what coverage limits are available): Which errors are insured? Does it include incorrect or incomplete advice (or a failure to advise) about the Internal Revenue Code? Does it include incorrect or incomplete advice (or a failure to advise) about ERISA’s (nontax) title I? Which errors are not insured? Which liabilities are excluded? (My query does not relate to any client; it’s to support my charitable and educational work with young people preparing to enter the business.)

For 404a-5 disclosures to directing participants, beneficiaries, and alternate payees, the plan’s administrator is responsible for its disclosures. Whether to furnish a corrected disclosure is the plan administrator’s decision, which it should make loyally and prudently for the exclusive purpose of administering the plan and providing its benefits, incurring no more than reasonable expense. ERISA’s 404a-5 rule includes this: “A plan administrator will not be liable for the completeness and accuracy of information used to satisfy these disclosure requirements when the plan administrator reasonably and in good faith relies on information received from or provided by a plan service provider or the issuer of a designated investment alternative.” 29 C.F.R. § 2550.404a-5(b)(1) https://www.ecfr.gov/current/title-29/part-2550/section-2550.404a-5#p-2550.404a-5(b)(1). That sentence might help an administrator when the error is about something like the past 1-, 5-, and 10-year returns of “benchmark” indexes, which the administrator contracted a service provider to retrieve and put in the disclosures. And perhaps that nonliability sentence helps if the administrator relied on a service provider’s incorrect rule 408b-2 disclosure when the circumstances are such that a prudent fiduciary would not have known or suspected the disclosure is wrong. But it’s less clear whether an administrator relies in good faith on its misdescription of the plan’s allocation of plan-administration expenses when that allocation is something the administrator decided and so has in its knowledge (and records) without looking to anyone else. Even if an administrator contracts a service provider to assemble 404a-5 disclosures, shouldn’t the administrator read at least the text of the form of the disclosure document the service provider will use for the function? The consequence of a 404a-5 disclosure that is less than complete and accurate is that the administrator doesn’t get the rule’s satisfaction of the administrator’s responsibility “to ensure, consistent with section 404(a)(1)(A) and (B), that such participants and beneficiaries, on a regular and periodic basis, are made aware of their rights and responsibilities with respect to the investment of assets held in, or contributed to, their accounts and are provided sufficient information regarding the plan, including fees and expenses, and regarding designated investment alternatives, including fees and expenses attendant thereto, to make informed decisions with regard to the management of their individual accounts.” 29 C.F.R. § 2550.404a-5(a) https://www.ecfr.gov/current/title-29/part-2550/section-2550.404a-5#p-2550.404a-5(a). Not having met that responsibility might be a tolerable exposure if one expects few directing individuals will suffer harm from the incorrect disclosure, and perhaps fewer will pursue one’s claim that the fiduciary breached its responsibility and caused the individual losses that the fiduciary must make good. This is not advice to anyone.

As ERISA § 205(b)(1)(C) provides, an individual-account retirement plan may provide, instead of § 205(a)’s survivor-annuity regime, that on a participant’s death the vested account is distributable to the participant’s surviving spouse. If the plan so provides, the participant’s surviving spouse is the beneficiary, absent a participant’s qualified election with the spouse’s consent. Many individual-account plans provide such a 100% death benefit. Kinds of plans that may avoid the QJSA/QPSA regime include plans that tax law classifies as a profit-sharing plan (including one that includes a § 401(k) arrangement) or as a stock-bonus plan (including one with employee stock ownership provisions). Many of these plans not only lack a QJSA/QPSA but also have no provision for any annuity. Some expressly preclude an annuity. Beyond ERISA’s title I, the Internal Revenue Code sometimes requires a QJSA/QPSA regime as a condition for a desired tax treatment. That applies regarding a plan tax law classifies as a money-purchase plan, including a target-benefit plan. But a § 409(h) part of a benefit under a money-purchase employee stock ownership plan may omit a QJSA/QPSA for that part. Even if neither ERISA § 205 nor anything in the Internal Revenue Code requires the QJSA/QPSA regime, a plan’s governing documents might provide it. As many BenefitsLink neighbors say, Read The Fabulous Document. And if the plan is ERISA-governed, read also ERISA’s title I. Why? Some documents fail to meet ERISA § 205. If a plan’s governing documents lack a QJSA/QPSA regime when ERISA § 205 commands it, a court should interpret the plan as if it states a statute-commanded provision. See Lefkowitz v. Arcadia Trading Co. Ltd. Benefit Pension Plan, 996 F.2d 600, 604 (2d Cir. 1993) (for a defined-benefit pension plan that omitted to provide for a qualified preretirement survivor annuity, the court interpreted the plan as providing a QPSA); Gallagher v. Park West Bank & Trust Co., 921 F. Supp. 867 (D. Mass. 1996) (for an individual-account retirement plan that omitted to state any qualified preretirement survivor annuity or other survivor provision, the court interpreted the plan as providing a 50% QPSA). A governmental plan or a church plan (if the church plan has not elected to be ERISA-governed) often provide differently than either ERISA § 205 regime. For example, many New York governmental plans do not provide a protection for a participant’s surviving spouse. (And New York’s elective-share law results in nothing for a surviving spouse if the participant’s annuity or account is fully paid by the participant’s death.) Some church plans do not permit a participant to elect against a survivor annuity, even with the spouse’s consent.

For those grappling with an absence of Internal Revenue Service guidance about how to interpret 2019 and 2022 changes to ERISA and the Internal Revenue Code about a long-term-part-time employee’s eligibility, here’s another wrinkle: Who decides? If a participating employer excludes from elective deferrals under a pooled-employer plan (or other multiple-employer plan) an employee the pooled-plan provider or administrator decides ought to be included, what corrective steps and remedies must or should the pooled-plan provider or administrator pursue? Or imagine a single-employer plan has a § 3(16) administrator unaffiliated with the employer, and that administrator’s responsibility includes deciding which employees are eligible (for each kind of participation, including elective deferrals): If the employer excludes from elective deferrals an employee the administrator decides ought to be included, what corrective steps and remedies must or should the administrator pursue? Are there circumstances in which an administrator may defer to an employer’s interpretation about which long-term-part-time employees need not be eligible? Or would that be an abdication of the fiduciary's responsibility?

The solution Bill Presson describes—making a corporation the trustee that holds record title to several brokerage accounts—might be one available to employers in some States. While many States’ laws prohibit a corporation that’s not a bank or trust company from engaging in a business of serving as a trustee or other fiduciary, a State’s law might permit a corporation to serve, without compensation, as the trustee of a trust for an employee-benefit plan for the corporation’s employees. To pick just one example, Pennsylvania’s Banking Code expressly permits a nonbank corporation to act as trustee of a trust “for the benefit of [the corporation’s] own employe[e]s[.]” 7 Pa. Stat. § 106(a)(iii).

The Bakers helpfully pointed us to Nevin Adams’ alliteratively titled article on a court’s decision that ForUsAll, Inc. can’t sue the U.S. Labor department about EBSA’s “Compliance Assistance Release” about “cryptocurrencies”. https://www.napa-net.org/news-info/daily-news/401k-crypto-case-crumbles-federal-court; https://www.napa-net.org/sites/napa-net.org/files/ForUsAll%20Inc.%20v.%20U.S.%20Department%20of%20Labor%20et%20al_082923.pdf; https://www.dol.gov/sites/dolgov/files/ebsa/employers-and-advisers/plan-administration-and-compliance/compliance-assistance-releases/2022-01.pdf. Judge Christopher Reid Cooper finds that, even if the Employee Benefits Security Administration acted contrary to law by issuing its nonrule document, ordering the Release to be treated legally as a nothing would not relieve the harm ForUsAll asserts because prospective customers would still face the same risks about investigations and enforcement. Also, the opinion finds that courts do not review a Federal government agency’s nonrule document if it sets no legal right or duty, and no legal consequence flows from the document. The judge found EBSA’s Compliance Release was “informational” and does not compel anyone to do anything. Rather, it suggests fiduciaries “be prepared to explain how [their] actions comport with their duties of prudence and loyalty—whatever those duties are.” The opinion observes that the law is unsettled about what responsibility a plan’s fiduciary might have regarding an account that is not a designated investment alternative.

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.