Peter Gulia

Paul I, you raise a nice point on which Pennsylvania law might be unclear. But if Pennsylvania law counts in compensation income any portion of the Federal income that results from a non-Roth to Roth rollover within an employer-sponsored plan, the distributee gets cost recovery up to the sum of her previously Pennsylvania-taxed contributions. Further, there might be an interpretation that nothing of the Federal income that results from a non-Roth to Roth rollover within an employer-sponsored plan counts in Pennsylvania compensation income if the whole of that rollover is allocable to previously Pennsylvania-taxed contributions. Pennsylvania’s Revenue department has unofficially communicated an explanation: “If a distribution from an IRA was received before age 59½ and retiring, and [the distributee] rolled the entire distribution (100 percent) into a Roth IRA directly or within 60 days, the [rolled-over] distribution is not taxable income for Pennsylvania purposes. If the entire distribution was not rolled into another IRA, Pennsylvania-taxable income must be reported to the extent the distribution exceeds your contributions.” https://www.revenue.pa.gov/FormsandPublications/PAPersonalIncomeTaxGuide/Pages/Gross-Compensation.aspx Such an interpretation might be logically consistent with recognizing that such a conversion-to-Roth rollover, even if it results in income for Federal income tax purposes, is not for Pennsylvania personal income tax purposes an early distribution that pays or delivers compensation income to the continuing participant. And Pennsylvania should treat a conversion-to-Roth rollover within an employer-sponsored plan no less favorably than Pennsylvania treats a conversion-to-Roth rollover within an individual’s IRAs. https://revenue-pa.custhelp.com/app/answers/detail/a_id/1470/kw/rollover%20AND%20Roth

Today, I’m writing my updates of two chapters—Beneficiary Designations and Domestic Relations Orders—in Governmental Plans Answer Book. In that book and others, when I write a fictional example about State law I use the State of Anxiety, the State of Confusion, the State of Disarray, and the State of Goodness. (The examples often point out something mainstream “ERISA” practitioners might miss.) Because Pennsylvania’s personal income tax law is not based on the US Internal Revenue Code, I checked it first. A distribution reported with a rollover code on the Form 1099-R is treated, at least in processing, as not counting in compensation income. Does any State (that has an income tax) have law about rollovers that differs from Federal income tax law?

A State might have an income tax law that does not follow the US Internal Revenue Code. Is anyone aware of a State’s tax law that would treat as not an income-free rollover a transaction or an amount treated as rolled over for Federal income tax purposes?

Fair market value might matter. A loyal, prudent, and impartial fiduciary might not sell a retirement plan’s contract for less than adequate consideration, which might be the contract’s fair market value. Or if the plan distributes the contract to the participant, fair market value might affect the amount the plan trustee tax-reports on Form 1099-R. Showing attention to the valuation methods described in the Internal Revenue Service’s guidance might help show that the plan trustee acted in good faith.

A prohibited-transaction exemption (which is available regarding both ERISA §§ 406-408 and Internal Revenue Code § 4975) sets a playbook for a plan’s sale of its life insurance contract to the participant/insured. Prohibited Transaction Exemption 92-6 (PTE 92-6) Involving the Transfer of Individual Life Insurance Contracts and Annuities from Employee Benefit Plans to Plan Participants, Certain Beneficiaries of Plan Participants, Personal Trusts, Employers and Other Employee Benefit Plans amended, 67 Federal Register 56313 (Sept. 3, 2002) https://www.govinfo.gov/content/pkg/FR-2002-09-03/pdf/02-22376.pdf Here’s the key condition: “the amount received by the plan as consideration for the sale is at least equal to the amount necessary to put the plan in the same cash position as it would have been had it retained the contract, surrendered it, and made any distribution owing to the participant on his vested interest under the plan[.]” Or, if the plan provides (or at least does not preclude) a distribution of property other than money and the insured participant is entitled (perhaps by having reached a specified age) to a distribution, the participant might claim his distribution. The plan’s trustee would tax-report the distribution on Form 1099-R.

My method has been and remains doing (even for a micro plan, although for them with no fee) a revised summary plan description at least once each year, every year. I typically refresh the SPD each November, just after the IRS releases the inflation adjustments looking to the next year. And I do an off-cycle restatement if there is a change in a plan provision, or something else communicated in the SPD. Such a restated SPD describes not only the provisions stated in what practitioners call “the” plan documents but also provisions not yet written in those documents but “in operation” as the remedial-amendment legal fiction allows. I recognize such a method is wildly impractical if the plan’s sponsor/administrator relies exclusively on its recordkeeper’s or third-party administrator’s or its licensor’s document-assembly engine. For administrators that lack the resources to do it my way, there’s a wide range of business methods recordkeepers and third-party administrators use. Some suggest SPDs; some suggest SMMs. Some key the descriptions to what the plan-documents engine knows. Some include in-operation provisions the plan’s administrator has instructed. And service providers suggest a wide range of ways to schedule these communications. Belgarath, if you seek to avoid a series of summaries of material modifications as each year’s newly applicable provisions arrive, some practitioners suggest one can write a summary that includes not-yet-applicable provisions if the writing is clear about when each provision becomes applicable. However, such an explanation would require the plan’s administrator to know which optional provisions the plan’s sponsor has adopted and, for each, whether the sponsor makes it available with the earliest time relevant tax law allows, or some later applicability time the sponsor specified. An SPD or an SMM describes a plan. A plan’s administrator must not describe a provision the plan’s sponsor has not adopted. But a plan’s sponsor might adopt a provision, at least for ERISA title I purposes, by means much less formal than what practitioners call “the” plan documents.

What if a forfeiture balance is used to reimburse the employer for its payment of a proper plan-administration expense? What if it's not only a final-administration expense but some plan-administration from the recent past? If so, how much into the past may the fiduciary reimburse the employer?

Beyond considering points about tax-qualification conditions, consider whether each subsidiary's plan-administration method was (i) stated by the plan's governing documents; (ii) at least a plausible interpretation of the plan's governing documents; or (iii) contrary to or otherwise inconsistent with the plan's governing documents.

I advise big plans, but through my work as counsel to recordkeepers and other service providers I have deep experience with mid-size, small, and micro plans. Here’s one more way of considering why public law (and plan sponsors’ choices) shouldn’t make a plan’s administrator a decider of whether an individual needs to use her resources: Big and mid-size plans long ago arranged for recordkeepers to provide a service of deciding hardship claims. (Governmental plans even longer ago required their service providers to decide unforeseeable-emergency claims.) If a review is anything more than checking that a form, whether paper or website, is filled-out and signed, that’s a cost that gets accounted for in how the service provider quotes fees. The participants (who bear the plan-administration expenses, no matter how a fiduciary pays or allocates them) are paying for being told whether one’s circumstances are worthy of using one’s own resources.

Bri, RatherBeGolfing, and Paul I, thank you for your swift and nice help. If you count your pro bono volunteer hours, this counts; you’ve aided my volunteer work for a charitable organization. Bri, thank you for correcting my too-hasty reading. I read Schedule H’s line 4e on page 4 without seeing a lead on page 3. That “During the plan year:” phrase resolve almost all the reporting questions (and the remaining bit is trivial).

A Form 5500 Schedule H or I question asks: “Was this plan covered by a fidelity bond?” The form has boxes for Yes or No, and a line to state an amount. How does one answer this question if a fiduciary obtained the insurance before the administrator signed the Form 5500 but after the reported-on plan year ended? (Assume the fiduciary does not buy retroactive coverage.) Does the past-tense “was” refer to any time in the past? Or does “was” in context suggest the question refers, somehow, to the reported-on plan year? How does one answer the question if the fiduciary obtained the insurance during the reported-on plan year (so the plan was uninsured for some portion of the year)? Am I right in guessing the usual software restrains a user from answering both Yes and No? For the line that calls for a coverage amount, does one report the amount that applied as at the beginning of, or the end of, the reported-on year? Or is it the highest coverage amount on any day in the plan year?

Thank you for your kind words. Yes, it’s challenging for a recordkeeper to order and present a logic path and information when a user has many, and complex, choices. But Congress decided to allow the choices. (And decided not to rationally reorder the choices.) And once a recordkeeper offers a service feature to any of its customers, the recordkeeper becomes committed to developing or licensing the software, and making the service available to at least the big-enough customers.

Managing uncertainty is a part (often, a most important part) of the job for a lawyer or other adviser. How about this? Let all participants make non-Roth and Roth deferrals as each chooses, and recognize: a need to plan for what to do assuming an absence of agency guidance. a need to plan for what to do assuming software will be ineffective or unavailable. an employer/administrator should put in some effort—reasonable considering the plan’s risk (see the next three points), the employer’s resources, and the plan’s resources while not incurring more than prudent plan-administration expense—to apply the tax-qualification condition of restricting a $145,000 participant’s catchup deferrals to Roth. the Internal Revenue Service has limited resources to detect errors in applying this tax-qualification condition. that, even in an examination, the IRS might have institutional reasons not to enforce too harshly, perhaps especially if an error happened before the Treasury or IRS had published guidance. that, if an employer/administrator, an independent qualified public accountant, or even the IRS detects an error, there are opportunities to correct the error without tax-disqualifying the plan. that the Labor department’s Employee Benefits Security Administration seems unlikely to pursue enforcement for harms (if any could be proved) to an individual participant, or even an affected class of the plan’s participants, that resulted because the plan’s administrator followed the participant’s direction (even if the direction was arguably contrary to the plan’s governing documents).

Paul I, thank you for your wise thinking. I concur: If a plan allows self-certifying for other kinds of claims, it’s savvy to allow self-certifying also for hardship or unforeseeable-emergency claims. How about putting all kinds of claims that are self-certifying on one claim form? Seeing the several kinds of early-out claims on one form might help a participant see opportunities to use the least restrictive kind that meets her needs. A participant might avoid an extra 10% too-early tax when she could claim a kind that doesn’t bear that tax. Likewise, one wouldn’t lose the opportunity to repay an amount into the plan (or some eligible retirement plan) if she can meet her need using a kind of claim that includes a repayment right. What do you think? Distributions added or changed by SECURE 2019 and 2022.pdf

Please see a discussion under the "457 Plans" message board.

I’ve moved from the 401(k) to this board AMDG’s question: “Self-certification is now permissible for governmental 457(b) plans, but the 457(b) regs are not as formulaic as the 401(k) regs regarding the events that constitute [an unforeseeable emergency]. Pending IRS guidance, it seems reasonable to me for a gov’t plan sponsor to adopt the 401(k) self-certification service model for its 457(b) plan, especially as EPCRS applies differently (basically, no risk of plan disqualification). I would love your thoughts! Thanks!” Here’s some information, and some of what I think. Internal Revenue Code of 1986 § 457(d)(4) provides: “In determining whether a distribution to a participant is made when the participant is faced with an unforeseeable emergency, the administrator of a plan maintained by an eligible employer described in subsection (e)(1)(A) may rely on a written certification by the participant that the distribution is— (A) made when the participant is faced with an unforeseeable emergency of a type which is described in regulations prescribed by the Secretary as an unforeseeable emergency, and (B) not in excess of the amount required to satisfy the emergency need, and that the participant has no alternative means reasonably available to satisfy such emergency 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 participant’s certification, and for procedures for addressing cases of participant misrepresentation. An unnumbered flush paragraph at the end of § 457(b) provides: “A plan which is established and maintained by an employer which is described in subsection (e)(1)(A) and which is administered in a manner which is inconsistent with the requirements of any of the preceding paragraphs [§ 457(b)(1)-(6)] shall be treated as not meeting the requirements of such paragraph as of the 1st plan year beginning more than 180 days after the date of notification by the Secretary of the inconsistency unless the employer corrects the inconsistency before the 1st day of such plan year.” And here’s the rule or regulation § 457(d)(4)(A) refers to: 26 C.F.R. § 1.457-6(c) https://www.ecfr.gov/current/title-26/part-1/section-1.457-6#p-1.457-6(c). I think (but advise no one): Until another Treasury final or temporary rule is published, effective, and applicable, a State or local government employer may rely in good faith on its reasonable interpretation of the statutes. Several interpretations of § 457(d)(4) are at least reasonable. That a participant may self-certify she faces a situation particularly or generally described in § 1.457-6(c)(2)(i) seems at least a plausible interpretation of the statutes. Observe that § 401(k)(14)(C) refers to “a financial need of a type which is deemed in regulations prescribed by the Secretary to be an immediate and heavy financial need” while § 457(d)(4)(A) refers to “an unforeseeable emergency of a type which is described in regulations prescribed by the Secretary as an unforeseeable emergency[.]” As always, a government official, participant, service provider, or anyone affected by the question should get her or its lawyer’s advice.

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

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

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

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

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

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

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

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

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