Peter Gulia

Osteopathic, I’m so sorry for you and your wife. While whoever spoke for your wife’s 401(k) plan’s administrator presumably was well intentioned, don’t assume that person knows how best to serve your wife’s or your interests. If you want my advice, I’d be glad to help you without fee. You might find advantages in discussing your situation confidentially with not only professional-conduct protections but also the evidence-law privilege for lawyer-client communications.

Paul I, thank you for your reading—one the Internal Revenue Service might adopt. (And until the Treasury department or its Internal Revenue Service publishes an interpretation, I’ll ask recordkeepers to provide services to support an individual’s most cautious interpretation.) Even if one uses only traditional modes and canons for construing and interpreting a statute, there are several possible, and even plausible, constructions and interpretations. Among them: If a distributee wants the exception from the too-early tax, a cautious reading of the statute is that the physician’s certificate and any further “sufficient evidence” must have not only been made but also have been furnished to the distributing plan’s administrator—even if useless for every claim and every report that administrator would decide—before that plan paid or delivered the distribution the distributee seeks to treat as a § 72(t)(2)(L) terminal-illness distribution. Yet, § 72(t)(2)(L)(iii) about furnishing “sufficient evidence” [sufficient for which purpose?] to “the [sic] plan administrator” does not express which plan’s administrator must be furnished the evidence. If the only thing anyone might use the evidence for is to persuade a repayment-accepting plan’s administrator that a physician certified the repayment-seeking individual as having a terminal illness and that the physician made that certificate before the individual claimed the distribution from the distributing plan, a court might reason that the administrator a participant could furnish evidence to is the administrator of the plan into which the individual seeks to contribute the repayment. A practitioner advising a repayment-accepting plan’s administrator might render written advice that such an interpretation is supported by “substantial authority” (a lower standard than more-likely-than-not), which a Treasury rule states can be met with nothing more than a reasoned interpretation of the statute’s text alone. 26 C.F.R. § 1.6662-4(d)(3)(ii) (“There may be substantial authority for the tax treatment of an item despite the absence of certain types of authority. Thus, a taxpayer may have substantial authority for a position that is supported only by a well-reasoned construction of the applicable statutory provision.”), https://www.ecfr.gov/current/title-26/part-1/section-1.6662-4#p-1.6662-4(d)(3)(ii). And the IRS won’t expect written advice to have considered an authority that had not been published. About “in such form and manner as the Secretary may require”, one might reason that there is no such requirement or condition (beyond the statute’s other text) until the Treasury department has issued a final, interim, temporary, or proposed rule or the Internal Revenue Service has published subrule guidance of general applicability. For these and other reasons, the IRS ought not to tax-disqualify a plan for having followed its administrator’s good-faith interpretation that met the IRS’s reasonable-cause standard. I’m mindful that many recordkeepers, third-party administrators, and other service providers often think in terms of “waiting for guidance”, and might do so for good legal and practical reasons. Yet, when I advise a plan sponsor or a plan’s administrator, I like to be at least preliminarily prepared for what I anticipate my client might ask if it must decide something before an executive agency’s guidance has been published or released.

That a church plan is not ERISA-governed does not mean no fiduciary law applies. As John Feldt suggests, consider: the plan’s governing documents; the wage-deduction agreement’s express and implied terms; a provision implied by interpreting a gap or ambiguity to favor a provision needed for the plan to get § 403(b) tax treatment; the church’s internal law, which might provide a church employer’s responsibilities or a worker’s rights beyond those the plan provides; State law, at least of the State the governing documents specify as the plan’s governing law and, if no choice is specified or the choice’s effect is doubtful, the law of each State that arguably might govern the plan or a participant’s rights. each applicable State’s wage-payment law, which might set up, expressly or impliedly, a wage payer’s responsibility to apply promptly a wage deduction the worker authorized. Under the common law of trusts, agency, and other fiduciary relationships, one will find a duty to invest or apply reasonably promptly the relationship’s assets.

Paul I, thank you for widening our information with your top-notch explanation. To a growing list of interpretation and practical questions, I’ll add another: Imagine a governmental § 457(b) plan’s participant takes a distribution. Imagine she then has no need for a § 72(t)(2)(L) excuse from a § 72(t) too-early tax because that tax does not apply to § 457(b) amounts. Years later, but within § 72(t)(2)(L)(iv)’s repayment period, the individual wants to repay the amount into an eligible retirement plan, and that plan will accept the payment if accepting the amount as a § 72(t)(2)(L)(iv) repayment is allowed within the plan’s intended tax treatment. May a repayment-receiving plan rely on a physician’s certification that was dated and signed before the individual took the distribution to be treated as having been a terminal-illness distribution but which never was considered by, nor even furnished to, the distribution-paying plan’s administrator?

Paul I, thank you for your smart look into ERISA § 202(a)(2). When (before SECURE 2022) I had been evaluating an involuntary distribution before a required beginning date, the plan sponsor’s motive was not to avoid the work of determining any § 401(a)(9) requirement, but to help inattentive or misinformed participants move a Roth subaccount into a Roth IRA before some portion became a § 401(a)(9) amount no longer rollover-eligible. And the participants we were seeking to help were not working, but had plan accounts after retirement.

“Do we have to let [a distributee] repay [a terminal-illness distribution] to our plan?” I didn’t need to consider that question because the plans I wrote for prefer to allow rollover contributions, transfer contributions, and repayment contribution to the full extent Federal tax law permits.

In writing January’s plan amendments, I wrote a definition for a terminal-illness distribution (referring to the subparagraph of the Internal Revenue Code), and added that defined term to the plan’s provision accepting repayments. There is a logic gap in the statute: None of § 401(k)(2)(B)(i), § 403(b)(7)(A)(i), § 403(b)(11), and § 457(d)(1)(A) sets up a terminal illness as a reason for allowing a distribution. A plan might pay a distribution—which the distributee might want to treat as fitting § 72(t)(2)(L)—without the plan’s administrator deciding anything about whether the distributee has, or even has documented, a terminal illness. Rather, a distribution might be provided because the distributee reached age 59½ or has a severance from employment. It’s awkward to ask a plan’s administrator to receive evidence when the administrator has no current need to consider the evidence administering the plan’s provisions. But a distributee who wants to preserve § 72(t)(2)(L)’s excuse from a too-early tax or a right to repay an amount into an eligible retirement plan must “furnish[] sufficient evidence to the plan administrator[.]” 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 A distributee might argue that having furnished the evidence is enough, even if the distributing plan’s administrator never considered the evidence. An administrator might keep in its records the evidence received. I have not yet considered what evidence an administrator should require before a plan accepts a contribution a participant claims is a repayment of an amount from a terminal-illness distribution.

In the article G8Rs links to (thank you!), Groom cites Westlaw for the remarked-on court decision. Later, West/Thomson Reuters reported it as 562 F. Supp. 3d 890 (C.D. Cal. Mar. 3, 2022). As a district court’s decision, it is not precedent anywhere, not even in the Central District of California. A plan sponsor considering whether to provide an involuntary distribution earlier than a § 401(a)(9) required beginning date should get its lawyer’s or other practitioner’s advice. Further, it’s not easy to document such a provision if the plan sponsor uses an IRS-preapproved document and that format is not designed to facilitate the choice. Before SECURE 2022, I had been evaluating, for some clients depending on particular circumstances, a full or partial involuntary distribution about a year sooner than § 401(a)(9)’s applicable age. Internal Revenue Code of 1986 § 402A(d)(5), added by SECURE 2022 § 325, removes, beginning with 2024, a key reason. Before that change, a Roth IRA need not impose an involuntary distribution before the holder’s death, but a Roth subaccount under a § 401(a)-(k) plan requires a § 401(a)(9) minimum even during the participant’s life.

Some plans provide an involuntary distribution after normal retirement age.

Bri, do you think that vesting trap can be avoided by making all employees eligible for elective deferrals, with no eligibility service condition? IRC § 401(k)(15)(B)(iii) about vesting applies only to “an employee described in clause [401(k)(15)(B)](i)[.]” That clause refers to “employees who are eligible to participate in the [§ 401(k) cash-or-deferred] arrangement solely by reason of paragraph [401(k)](2)(D)(ii)[.]” If an employee did not become eligible for elective deferrals because of § 401(k)(2)(D)(ii), wouldn’t the plan determine vesting service without any variation from § 401(k)(15)(B)(iii)? Or is there something I’m missing?

Here’s the rule: The term “blackout period” means, in connection with an individual account plan, any period for which any ability of participants or beneficiaries under the plan, which is otherwise available under the terms of such plan, to direct or diversify assets credited to their accounts, to obtain loans from the plan, or to obtain distributions from the plan is temporarily suspended, limited, or restricted, if such suspension, limitation, or restriction is for any period of more than three consecutive business days. 29 C.F.R. § 2520.101-3(d)(1)(i) https://www.ecfr.gov/current/title-29/part-2520/section-2520.101-3#p-2520.101-3(d)(1)(i). As Luke Bailey points out: Even if there is no disruption to an individual’s power to direct investment (because the plan does not provide such a power until after the recordkeeping change is completed), a blackout might result if there is a practical inability to get a loan or distribution.

Consider that whether an employee must be eligible involves not merely a condition of tax-qualified treatment but further an ERISA title I command. ERISA § 202(c) Special Rule for Certain Part-time Employees.— (1) In general. A pension plan that includes either a qualified cash or deferred arrangement (as defined in section 401(k) of the Internal Revenue Code of 1986) or a salary reduction agreement (as described in section 403(b) of such Code) shall not require, as a condition of participation in the arrangement or agreement, that an employee complete a period of service with the employer (or employers) maintaining the plan extending beyond the close of the earlier of— (A) the period permitted under subsection (a)(1) (determined without regard to subparagraph (B)(i) thereof); or (B) the first 24-month period— (i) consisting of 2 consecutive 12-month periods during each of which the employee has at least 500 hours of service; and (ii) by the close of which the employee has met the requirement of subsection (a)(1)(A)(i). . . . . If a plan’s governing documents omit a provision ERISA’s title I requires, a court will, and a fiduciary should, interpret the plan as if it includes the required provision. See, for example, Lefkowitz v. Arcadia Trading Co. Ltd. Benefit Pension Plan, 996 F.2d 600, 604 (2d Cir. 1993); Gallagher v. Park West Bank & Trust Co., 921 F. Supp. 867 (D. Mass. 1996). If a plan’s administrator must decide something when ERISA § 202’s command is uncertain, the administrator must interpret the plan and applicable law. (Even if the IRS releases some subrule guidance before 2024 and one looks to Reorganization Plan No. 4 of 1978 to treat the guidance as an interpretation also of ERISA § 202, answers to questions of the kind RatherBeGolfing mentions might be uncertain for a few or many years.) An administrator must form its interpretation according to the obedience, exclusive-purpose loyalty, and experienced prudence ERISA § 404(a) commands.

One reason some plan designers provide an involuntary distribution a little sooner than the time needed to meet § 401(a)(9)’s condition for tax-qualified treatment is that 100% of a single-sum distribution would be rollover-eligible.

While you’re helping your client consider its decision-making, consider—among many points—this question: What bad consequence would or might result if these employees become eligible to elect deferrals but are excluded from all employer-provided contributions?

Yes, a plan sponsor may write a plan’s governing document to provide an involuntary distribution on a specified time after the participant reached normal retirement age. For some individual-account retirement plans, especially a plan under which the only form of distribution is a single sum, there can be reasons a plan designer might want an account emptied before any amount would be treated as a § 401(a)(9)-required distribution.

Unless one has inside information, we don’t know exactly when the IRS will release the adjustments. But we can confidently presume the Bakers will post it on BenefitsLink promptly after the IRS’s release.

Many third-party administrators and other service providers include in one’s service agreement a right to perform services following the employer/administrator’s instructions, including default instructions that result from the service recipient’s nonresponse to a default after a contract-specified notice period. If that’s the contract parties’ deal, a service provider might prepare a disclosure so it follows the instructed in-operation provisions rather than those stated by a to-be-amended-later plan document. While that way of doing things might not always be proper for a plan’s administrator, it might be fair between the service provider and its service recipient. I have no thought on your particular question about a safe-harbor notice; I no longer know that rule.

Many businesses use pro re nata, as-needed, on-call, or other intermittent employees. Unless the plan’s governing document provides an involuntary distribution on the participant’s reaching a specified age, the plan’s administrator should decide whether the individual is severed from employment. A required beginning date refers, in part, to “the calendar year in which the employee retires.” I.R.C. (26 U.S.C.) § 401(a)(9)(C)(i)(II). For this context, the statute does not define “retires”. The Treasury department’s rule refers to “the calendar year in which the employee retires from employment with the employer maintaining the plan.” 26 C.F.R. § 1.401(a)(9)-2/Q&A-2(a) https://www.ecfr.gov/current/title-26/section-1.401(a)(9)-2. The rule does not define “retires”. Following the rule’s text that “retires” is “from employment with the employer”, many interpret “retires” as severance-from-employment. The Treasury department’s rule to interpret Internal Revenue Code § 401(k)(2)(B)(i)(I) states: “An employee has a severance from employment when the employee ceases to be an employee of the employer maintaining the plan.” 26 C.F.R. § 1.401(k)-1(d)(2) https://www.ecfr.gov/current/title-26/part-1/section-1.401(k)-1#p-1.401(k)-1(d)(2). In evaluating whether the individual “has a severance from employment”, the plan’s administrator might consider whether the employer removed the individual from the roster of those the employer might call for an as-needed work shift. Some administrators might look to an absence of a Form W-2/W-3 wage report for a whole calendar year as a clue to ask the employer whether it removed the individual from the roster. If the PRN is for work that requires a professional or occupational license, a nonrenewal of the individual’s license might suggest the individual no longer is available for the work.

Luke Bailey and Belgarath, thank you for your further observations. Luke Bailey, thank you for mentioning Kovel translation or explanation, fact-gathering, and other arrangements preparing a lawyer to form her advice. In my course’s lesson about confidences and evidence-law privileges, we’ve considered whether a Kovel (or similar State-law) tolerance applies when a lawyer engages an accounting firm or consulting firm but nothing in that firm’s work involves accounting, actuarial practice, business advice, investment advice, or any discipline other than legal advice. But a lawyer’s engagement of others for fact-gathering should work with no need for any Kovel doctrine.

Towanda, thank you for your helpful information. Because we recognize that a plan sponsor’s representative practices before the IRS, here’s the Circular 230 rule about conflicting interests: § 10.29 Conflicting interests. (a) Except as provided by paragraph (b) of this section, a practitioner shall not represent a client before the Internal Revenue Service if the representation involves a conflict of interest. A conflict of interest exists if— (1) The representation of one client will be directly adverse to another client; or (2) There is a significant risk that the representation of one or more clients will be materially limited by the practitioner’s responsibilities to another client, a former client{,} or a third person, or by a personal interest of the practitioner. (b) Notwithstanding the existence of a conflict of interest under paragraph (a) of this section, the practitioner may represent a client if— (1) The practitioner reasonably believes that the practitioner will be able to provide competent and diligent representation to each affected client; (2) The representation is not prohibited by law; and (3) Each affected client waives the conflict of interest and gives informed consent, confirmed in writing by each affected client, at the time the existence of the conflict of interest is known by the practitioner. The confirmation may be made within a reasonable period after the informed consent, but in no event later than 30 days. (c) Copies of the written consents must be retained by the practitioner for at least 36 months from the date of the conclusion of the representation of the affected clients, and the written consents must be provided to any officer or employee of the Internal Revenue Service on request. 31 C.F.R. § 10.29 https://www.ecfr.gov/current/title-31/section-10.29. As CuseFan suggests, whether a conflict exists turns on the surrounding facts and circumstances, which might include whether the practitioner’s advice is obvious or involves discretion that could an affect an interest beyond the plan sponsor’s interest.

Rocha’s originating post—“no kin to be found”—suggests the plan’s administrator might have already pursued some effort to find someone who might fit the plan’s default-beneficiary provision. It might be impractical to pay or deliver any distribution, even an involuntary distribution, if the identity of the distributee is yet unknown.

Thank you for your thinking, especially about what might or might not set up a conflict of interests. Others with different or further observations?

Please let me preface this request by saying I don’t do corrections work, and my interest is only academic. I’m developing a lesson for my multidisciplinary course on Professional Conduct in Tax Practice. For a Voluntary Correction Program submission to the Internal Revenue Service, a plan sponsor might want a representative, and might find it efficient and effective to be represented by a practitioner who works for the recordkeeper or third-party administrator. Do some offer this service? Must a submission be prepared, or at least supervised, by an owner or employee who is an attorney, accountant, actuary, or enrolled retirement plan agent recognized for practice before the IRS? If the practitioner’s employer was at fault for the to-be-corrected failure, does the practitioner have a conflict of interests? What ways do you use to avoid or manage such a conflict? If the practitioner’s employer was not at fault for but was involved about the to-be-corrected failure, does the practitioner have a conflict of interests? What ways do you use to avoid or manage such a conflict? If a recordkeeper or TPA does not offer a service of letting its employee serve as a plan sponsor’s representative, is that because you see a conflict that can’t be avoided or managed? Because I lack experience, I hope BenefitsLink neighbors will help me learn about real-world practice.

About whether one must pay or deliver an involuntary distribution to meet § 401(a)(9): The Internal Revenue Service instructs Employee Plans examiners not to treat a plan as failing to meet § 401(a)(9) if the plan’s administrator has not found the beneficiary after a search that includes three steps the Internal Revenue Manual specifies. Internal Revenue Manual 4.71.1.4(15)(d) (Examination Objectives and Development of Issues) (Feb. 25, 2022) https://www.irs.gov/irm/part4/irm_04-071-001. That guidance tells an examiner to excuse what otherwise might be a § 401(a)(9) failure if the beneficiary is known but not found. A logical inference is that the IRS ought to excuse the absence of a § 401(a)(9) minimum distribution if the participant named no beneficiary (or all named are deceased or do not exist) and the default beneficiary is not yet known after the plan’s administrator made prudent efforts to find a person who might be the beneficiary under the plan’s default-beneficiary provision.

That is how the statute reads. And the IRS’s Internal Revenue Manual describes the statute: “IRC 6652(e) provides for non-assertion of the penalty if reasonable cause can be shown.” Internal Revenue Manual 20.1.8.4.3(18) (Oct. 6, 2022) (emphasis added) https://www.irs.gov/irm/part20/irm_20-001-008r.