Peter Gulia

If a plan provides beneficiary-directed investment, a fiduciary might want its recordkeeper or other service provider to divide a deceased participant’s account into the beneficiaries’ segregated-share accounts on the earlier of any beneficiary’s claim for a distribution or any beneficiary’s delivery of an investment direction. Further, if a plan provides beneficiary-directed investment and a fiduciary wants an ERISA § 404(c) defense that a beneficiary has control over investments for his or her account (or a similar State-law defense regarding a governmental plan or a church plan), a fiduciary might want its service provider to divide a deceased participant’s account into the beneficiaries’ segregated-share accounts as soon as any beneficiary is identified (and the maximum number of segregated shares is known or determined). A fiduciary might want its service provider to send an identified beneficiary a “welcome” package that includes the summary plan description, the most recent 404a-5 disclosure, notices, other communications, preliminary identity credentials, and instructions about ways to submit investment directions. Among several purposes and reasons, that a beneficiary received such a package might set up that the beneficiary then had control over investments for his or her account. Some recordkeepers do not “split” a participant’s account until at least one beneficiary is sufficiently identified with (at least) a name, a Taxpayer Identification Number, and an address. Some recordkeepers do not “split” a participant’s account until there is a name, a TIN, and an address for each of the segregated-share accounts. But some recordkeepers might allow filling-in placeholder information for a not-yet-identified beneficiary with a placeholder, the plan administrator’s EIN, and the plan administrator’s address.

In my experience, an unwinding of a ROBS brings plenty of billable hours; but no prospective client ever has been willing to spend even a small amount to set up correctly a retirement plan's investment in a new business.

I too prefer that my client not interpret a word that has a generally received legal meaning to mean something other than relevant law’s received meaning. If the plan’s sponsor were my client, the particular question we’re remarking on would never happen because I would have written or rewritten, even for an IRS-preapproved document, the provisions for a default taker. And for a provision that looks to the estate, the plan would provide (at least) for a payment to a human who, or an artificial person that, has power to act as the or a personal representative of the estate, perhaps including a small-estate affiant. The plan’s trustee and administrator need someone to do the act of depositing or otherwise negotiating the plan trust’s check or other payment. Even if my client provides (or interprets the plan to recognize) a small-estate-affidavit regime, the administrator (often, the same person as the plan’s sponsor) might prefer not to learn the State laws of 50+ States. Some might not want to rely only on an affidavit to pay the six-figure amounts some States’ laws allow. Some might not want the burden of deciding which State’s law is relevant. Those and further reasons are why I leave room for a plan’s sponsor or administrator to invent its own nationally uniform regime that builds from the concepts of small-estate-affidavit regimes, without applying a particular State’s law. I too advise clients that being correct is not enough to avoid a loss, liability, or expense. But all courses of action (including inaction) can bear those risks. If one must defend something, it might be simpler for an ERISA-governed plan’s fiduciary to defend a posture that courts have recognized: the plan-documents rule, or Firestone deference to a fiduciary’s discretionary interpretation. Anyhow, we see similarly your idea that an ERISA-governed plan’s administrator may choose as its discretionary interpretation one that looks to relevant State law. One doubts a Federal court would say such an interpretation is so obviously unreasoned that it does not get (at least) deference.

I concur with MoJo’s observations that an ERISA-governed retirement plan’s administrator need not (and should not) consider the interests of a participant/decedent’s creditors. But to discern the meaning of the plan’s governing documents—including status terms such as “personal representative”, “estate”, “child”, “parent”, or “sibling”—or to resolve questions of fact, a plan’s fiduciary makes its own discretionary interpretations, which need not follow any State’s law. A court follows the fiduciary’s interpretation unless it is obviously unreasoned. For example, Herring v. Campbell, 690 F.3d 413, 53 Empl. Benefits Cas. (BL) 2515 (5th Cir. Aug. 7, 2012) (John Wayne Hunter, the participant/decedent, died with no effective beneficiary designation. The retirement plan’s default beneficiary provision provided the remaining benefit according to a priority that put the participant’s “surviving children” ahead of his “surviving brothers and sisters[.]” Stephen Herring and Michael Herring, John’s stepsons, claimed the benefit. John’s will left his estate to Stephen and Michael, and referred to them as his “beloved sons.” Also, Stephen and Michael asserted that under Texas law’s doctrine of equitable adoption they were John’s children. The plan’s administrator decided that the word “children” referred only to a biological or legally adopted child. The appeals court held that it was proper for the plan’s administrator to ignore Texas’ and any State’s law. The appeals court deferred to the administrator’s interpretation of the plan.) About ERISA’s express supersession or preemption provision, the text is: “Except as provided in subsection (b) of this section, the provisions of this title [I] and title IV shall supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan described in section 4(a) and not exempt under section 4(b).” ERISA § 514(a) (emphasis added). (The quotation is of ERISA § 514(a), not the unofficial compilation in 29 United States Code § 1144(a). The “relate to” text is the same in both the Statutes at Large and the unofficial U.S.C. compilation.) MoJo is right that courts, struggling to find meaning in and some boundary for “relates to” have sometimes considered whether a State’s statute seems consistent or inconsistent with ERISA’s provisions, including Congress’s § 2 findings and declaration of policy. But courts’ decisions about preemption, and about ERISA § 404(a)(1)(D)’s plan-documents rule, have been clearest when requiring a plan’s fiduciary to follow States’ laws would interfere with administering a plan according to its governing documents, or would interfere with national uniformity in a plan’s administration. For example: Boggs v. Boggs, 520 U.S. 833, 21 Empl. Benefits Cas. (BL) 1047 (June 2, 1997) (A plan’s administrator may ignore a State’s community-property law. Further, ERISA preempted Louisiana law to the extent that it allowed the participant’s spouse to make a testamentary transfer of her State-law property interest in benefits the plans had already distributed.). Egelhoff v. Egelhoff, 532 U.S. 141, 151, 25 Empl. Benefits Cas. (BL) 2089 (Mar. 21, 2001) (ERISA supersedes a State law that, absent a plan provision to the contrary, would revoke, absent reaffirmation, a beneficiary designation that names a former spouse). The Court’s opinion reasoned that the State law’s provision allowing a plan’s sponsor to opt out of the default-revocation provision did not remove the State law from ERISA’s preemption. The Court’s opinion reasoned that a need to maintain awareness of States’ laws “is exactly the burden ERISA seeks to eliminate.” Kennedy v. Plan Adm’r for DuPont Sav. & Inv. Plan, 555 U.S. 285, 45 Empl. Benefits Cas. (BL) 2249 (Jan. 26, 2009) (A plan’s administrator may ignore a State’s law, even a State court’s order, that purports to waive a benefit the plan’s governing document provides.). All these decisions refer to what the DuPont opinion describes as a need for “a uniform administrative scheme” that does not require a plan’s administrator to look to any State’s law. I’m unaware of any US Supreme Court or Federal appeals court decision holding that an ERISA-governed plan’s fiduciary must pay or deliver money, rights, or other property to obey a State’s small-estate-affidavit statute.

If the person seeking to invest in a startup is a representative or other supervised person of an investment adviser or a securities broker-dealer, he might want his lawyer’s advice about what he would disclose to each firm he is a representative of or otherwise associated with, and how those firms might treat the investment as a personal securities transaction, an outside business activity, or both. Or even if the might-be investor is the sole owner-operator of his investment-advice business, he might want his lawyer’s advice about what must or should be disclosed to securities regulators and, perhaps, to his clients and prospective clients.

For some plans, a discussion might be text on or accompanying the claim form to guide the claimant about how much gross-up to request, and about what withholding instruction to give.

If an ERISA-governed plan’s administrator chooses to rely on a small-estate-affidavit regime for some claims, the administrator might constrain (to less than what a superseded State law allows) the circumstances for which the administrator might accept such an affidavit, the waiting period for observing that no probate petition is filed, and the amount for which the administrator might rely. For example, instead of waiting only the 30 or 40 days many States’ statutes require, an administrator might require a longer wait. And instead of allowing a distribution up to $184,500 (California), a plan’s administrator might set a procedure-specified national limit—for example, $100,000 or, if less, the State-law limit for the State whose law the claimant’s affidavit is based on.

My experience with Form 5500-EZ paper filings (before electronic filing) is that the IRS often processed deficiency letters for information returns that unquestionably had been filed. That the IRS had signed a certified-mail receipt confirming that the Form 5500-EZ was received did not slow down processing the mistaken deficiency letters.

I suspect there might be few instances in which the IRS found an error not corrected because the plan’s administrator lacked adequate compliance procedures to make the situation eligible for self-correction. But that might result not because IRS people think the procedures are good enough, but because the IRS examines so few plans, and even those ordinarily only for a few years. Yet, I confess my limited experience; let’s look for what BenefitsLink neighbors say.

Consider that there might not yet be a case. The Employee Retirement Income Security Act of 1974 grants the Secretary of Labor broad investigation powers. These include powers to require almost anyone to submit records and other information. Labor’s subagencies, including the Employee Benefits Security Administration, sometimes do this using a summons or subpoena, especially if a service provider requests this (often, so the service provider is not perceived as voluntarily revealing its client’s information). ERISA § 504, 29 U.S.C. § 1134 http://uscode.house.gov/view.xhtml?req=(title:29%20section:1134%20edition:prelim)%20OR%20(granuleid:USC-prelim-title29-section1134)&f=treesort&edition=prelim&num=0&jumpTo=true; see also EBSA Enforcement Manual, chapter 33. About whether a health plan must or should cover marriage-and-family therapy, one presumes the plan’s sponsor will want its lawyers’ advice.

The employer may decide which way it prefers to file a Form 5500-EZ; but you may decide which services you offer and which clients you accept.

The plan’s administrator might consider whether the beneficiary might have practical notice that the blackout period ended if the beneficiary received, perhaps in a mailing sent to participants and other individuals who can direct investments or request a distribution, information about ways to communicate with the successor recordkeeper and the individual’s preliminary identity credentials.

About records retention, there is no one uniform answer that’s right for every service provider. Many possible approaches to records retention and records destruction turn not only on what public law might require but also on what a holder or processor of records seeks to accomplish or avoid. Here’s a list of some questions I ask when I help design a TPA’s, recordkeeper’s, or similar service provider’s records-retention/destruction plan: How often does it happen that a client’s question, worry, or request, or the service provider’s response, is in email and is not fully described in other writings? Does the service provider want to be ready to save a client from the client’s failure to keep a record it ought to have kept? How much value might old records have as knowledge management for how the service provider does its work? Does the service provider or an affiliate sometimes offer services as a § 3(16) administrator? As a plan’s trustee? As an investment manager? Does the service provider or an affiliate sometimes offer banking services? Insurance-agency services? Securities broker-dealer services? Investment-adviser services? Has the service provider made any agreement with another service provider or a financial-services business? Read each of those agreements to find records-retention obligations. What does the provider’s service agreement say about delivering or keeping records after either party ends the service? Are some workers of the service provider arguably practicing law, accounting, or another profession, which might impose distinct records-retention duties? Or privacy and security duties? Which U.S. States’ privacy or security laws might burden the service provider? Which European and other nations’ privacy or security laws might burden the service provider? How strong or weak are the service provider’s systems in not receiving, or limiting the use and keeping, of records that could reveal sensitive personal information, especially a Social Security Number (or ITIN) or a date of birth? Does any record about a client ever get used in evaluating an employee’s job performance? (Employment-related laws might impose a retention on a record so used.) In which States are the clients located? Where are participants located? Considering the clients’ States, what is a typical statute-of-limitations period for a breach-of-contract claim? Considering those States, what are the potential statute-of-limitations periods for a third person’s negligence claim? Considering the service provider’s usual forms of agreements, do they always, often, seldom, or never specify which State’s law governs the agreement? How often is the chosen law the service provider’s preference? How often is it the client’s preference? Considering the service provider’s usual forms of agreements, do they always, often, seldom, or never specify a time limit on claims against the service provider? How often do clients face IRS, EBSA, and other document-production demands? How often does the service provider itself face IRS, EBSA, and other document-production demands? Does the service provider charge a client expenses, fees, or both for a document production? If there are document productions for the IRS’s examination of a client or a client’s plan, will the client or the service provider seek the IRS’s reimbursement of document-production expenses? Are the service provider’s records likely to include some for which a client might assert the client’s evidence-law privilege, including for lawyer-client communications or IRC § 7525 practitioner-taxpayer communications? Are the service provider’s records likely to include some for which the service provider might assert its own evidence-law privilege, including for its lawyer-client communications? How practically useful are the systems in sorting writings (including emails and mobile-device texts) to segregate or identify those for which a client or the service provider might assert an evidence-law privilege? If, for an IRS examination, EBSA investigation, or something else, a client or the service provider must furnish a privilege log, how efficiently could you assemble it? How much would have to be done by human intervention? How easily could you prove you obeyed your records-destruction plan?

Even if there is no duty to do so, some administrators and their service providers respond to a query of this kind. One might invite the inquirer to look at the plan’s form for requesting other kinds of before-severance distributions—for example, a qualified birth or adoption distribution or qualified disaster recovery distribution—and ask whether a claim on the circumstances that allow a hardship distribution also would fit one of those other categories. That illustration might be most effective if one can say the plan provides all early-out possibilities tax law permits. Or if the question is why doesn’t the Internal Revenue Code provide an exception from the too-early tax for my situation (or why does tax law impose a too-early tax), the 1970s reply was “write your Congress member.” A 2023 reply might be “neither of us was elected to Congress.” I have had clients use Bri’s way of showing an inquirer relevant law, using not a secondary source but one published by the U.S. Government Publishing Office, so it looks “official”. Until recently, that might have been awkward because the Office of the Law Revision Counsel of the United States House of Representatives had not yet edited the United States Code to follow Congress’s Act of December 29, 2022. Title 26’s section 72 now is recompiled. I.R.C. (26 U.S.C.) § 72(t)(2) 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#72_4_target

The Treasury department’s rule provides: “A distribution is treated as necessary to satisfy an immediate and heavy financial need of an employee only to the extent the amount of the distribution is not in excess of the amount required to satisfy the financial need (including any amounts necessary 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) https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR6f8c3724b50e44d/section-1.401(k)-1#p-1.401(k)-1(d)(3)(iii)(A). Consider that how much tax is “reasonably anticipated” leaves room for defending plausible assumptions. For example, if one uses the middle of the seven marginal Federal income tax rates (24%) and the middle of the nine New York State income tax rates (6.25%), that results in a combined marginal income tax rate of 30.25%. If one assumes many hardship distributions might attract the extra 10% Federal income tax on a too-early distribution, that’s 40.25%. For New York City employees, one might assume (even looking to a middle range) almost 44%. If one assumes the marginal income taxes are 40.25%, to meet a $10,000 hardship need calls for a $16,736.40 distribution. A New York City employer I worked with had data to prove its employees’ marginal income tax rates averaged (some years ago) greater than 50%. Yet, the plan’s administrator restricted the gross-up to no more than double the hardship need. If not already done, consider redesigning the claim form so the claimant specifies the deemed hardship need amount and her desired gross-up amount; and self-certifies that the sum is “not in excess of the amount required to satisfy [the] financial need[.]” I.R.C. § 401(k)(14)(C)(ii). With this, a plan’s administrator might limit a hardship distribution to what results from using the lesser of the claimant’s requested gross-up or an outer limit estimated on marginal income tax rates, perhaps recognizing that an employer does not know each individual’s circumstances. If such an outer limit is set for a reasonable range, the amount of such a gross-up alone, without other facts, should not set up that the employer/administrator had “actual knowledge” that the gross-up was more than what 26 C.F.R. § 1.401(k)-1(d)(3)(iii)(A) allows.

Belgarath, thank you for your helpful observations. It’s nice to see more tolerance to self-correct demographic failures, employer eligibility failures, and some loan failures. Among the challenges for the employee-benefits lawyers you or I suggest a client consult is that whether the factual situation qualifies for self-correction (even under the new standard) often is ambiguous. Helping a client with a self-correction often results in an implied opinion that the situation more likely than not qualifies for self-correction. That puts a risk exposure on the lawyer or other adviser. Depending on the size of the plan and on what might happen later, it can be a substantial risk exposure.

To apply the 60-63 variation, an employer/administrator might need plan-administration software and payroll-administration software that uses a record of each employee’s date-of-birth, relates it to a year, and does this for more than a binary selection. Before 2025, the software needs only two stages: not-yet-50, and 50-or-older. To apply the 60-63 variation, the software needs four stages: not-yet-50; 50-59; 60-63; and 64-or-older. (Some programmers might combine stages 2 and 4, but doing so might require at least one conditional expression.) Imagine 2025 is approaching and an employer/administrator has software that applies the binary selection between not-yet-50 and at-least-50, but does not (yet) apply the 60-63 and 64-or-older stages. An employer, as a plan’s sponsor, might decide not to provide the 60-63 variation.

Just curious, if the plan’s administrator (we presume it directs the bank trustee for distributions) considers any risk: What information did the plan’s administrator use to decide that the participant had no more than those six children?

I’ll start with two answers to my question 3: Some prefer VCP over self-correction if the plan’s sponsor is a business organization that anticipates a sale of its shares, member interests, or partner interests (rather than a sale of the business’s assets). In mergers-and-acquisitions due diligence and negotiations, producing an IRS letter is simpler, quicker, and less expensive than writing a law firm’s or accounting firm’s opinion letter. Some prefer VCP over self-correction if one doubts a self-correction memo will persuade an independent qualified public accountant that the correction is enough that the auditor may accept the plan administrator’s representation that the plan is tax-qualified.

BenefitsLink helpfully posted the IRS’s prepublication release of Notice 2023-43 https://www.irs.gov/pub/irs-drop/n-23-43.pdf. Here are my open questions for BenefitsLink neighbors’ observations: 1. What does this IRS guidance let us do tomorrow that we couldn’t do before December 29, 2022? 2. What were you hoping for that the IRS isn’t yet allowing? 3. If an Eligible Inadvertent Failure is one that may be self-corrected, under what circumstances might one prefer to submit a VCP application?

Everything about counting service—for any of many retirement plan purposes—is complex (and always was, at least since 1974). In my experience, all but the most fully computerized employers lack complete capabilities for service counting applied “in real time.” Those weaknesses might not matter if a plan provides immediate entry and immediate vesting. Or even if a plan’s administrator might count years of vesting service to determine the nonforfeitable portion of subaccounts for matching and other nonelective contributions, one might not need to count the service until after the participant is severed from employment (or has reached 59½ or another retirement age). austin3515 rightly observes that if a plan counts service to determine an employee’s eligibility, counting service to apply, distinctly, the § 401(k)(15) conditions is a further and different complexity. And austin3515 is right to have the information included in a plan-design conversation.

We see the row from someone's outline; but who is the author or publisher?

Here’s the whole text of that subparagraph C.B. Zeller mentions: Effective opportunity. An applicable employer plan that offers catch-up contributions and that is otherwise subject to section 401(a)(4) (including a plan that is subject to section 401(a)(4) pursuant to section 403(b)(12)) will not satisfy the requirements of section 401(a)(4) unless all catch-up eligible participants who participate under any applicable employer plan maintained by the employer are provided with an effective opportunity to make the same dollar amount of catch-up contributions. A plan fails to provide an effective opportunity to make catch-up contributions if it has an applicable limit ([for example], an employer-provided limit) that applies to a catch-up eligible participant and does not permit the participant to make elective deferrals in excess of that limit. An applicable employer plan does not fail to satisfy the universal availability requirement of this paragraph (e) solely because an employer-provided limit does not apply to all employees or different limits apply to different groups of employees under paragraph (b)(2)(i) of this section. However, a plan may not provide lower employer-provided limits for catch-up eligible participants. 26 C.F.R. § 1.414(v)-1(e)(1)(i) https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR686e4ad80b3ad70/section-1.414(v)-1#p-1.414(v)-1(e)(1)(i). Further, the Treasury department’s rule was made 20 years ago, and interpreted the statute as it was in 2003. 68 Fed. Reg. 40510-40520 (July 8, 2003) https://www.govinfo.gov/content/pkg/FR-2003-07-08/pdf/03-17226.pdf. A taxpayer is unburdened by that rule to the extent the rule is inconsistent with the current statute as it now (or in the future) applies.

And if applying ERISA results in depriving the surviving spouse of some payments she ought to have received under the pension plan’s provisions, the spouse might have a claim against the decedent’s estate for the harm his false statement caused.

One imagines the administrator of a multiemployer pension plan is the plan’s joint board of trustees. If you’re a nondiscretionary service provider, perhaps you want whatever instruction that fiduciary gives you, which might include a stop instruction. Consider that the trustees might instruct that all communications are from or to their counsel, to help preserve (as much as is possible, even recognizing the fiduciary exception) evidence-law privileges for lawyer-client communications made to help the lawyers form their advice or render their advice. If the plan’s administrator acted innocently and prudently in relying on the participant’s false statement, ERISA § 205(c)(6) might afford some relief. “If a plan fiduciary acts in accordance with part 4 of this subtitle [ERISA’s fiduciary-responsibility provisions] in . . . (B) making a determination under paragraph (2) [for example, about whether a consent was excused “because there is no spouse”], then such . . . determination shall be treated as valid for purposes of discharging the plan from liability to the extent of payments made pursuant to such Act [sic].” ERISA § 205(c)(6), 29 U.S.C. § 1055(c)(6) (emphasis added) 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 At least one court construed the “to the extent” phrase to mean that a plan must pay the surviving spouse an amount or amounts based on what remains of the benefit that would have been provided in the absence of the participant’s false election after subtracting the amounts the plan paid. Hearn v. Western Conference of Teamsters Pension Trust Fund, 68 F.3d 301 (9th Cir. 1995).