Peter Gulia

SECURE 2022’s § 120 provides a statutory prohibited-transactions exemption for an automatic-portability provider’s receipt of fees and compensation for its “services provided in connection with an automatic portability transaction.” Internal Revenue Code of 1986 (26 U.S.C.) § 4975(d)(25). But nothing in SECURE 2022 § 120 provides an exception from a fiduciary’s responsibility under ERISA § 404(a) [29 U.S.C. § 1104(a)]. Congress directs the Secretary of Labor to “issue” regulations or other guidance by December 29, 2023 (which also is the first day the exemption becomes available). Congress directs that the guidance “make clear that the [IRC § 4975(d)(25)] exemption . . . applies solely to the automatic portability transactions described therein, and, to the extent the Secretary deems necessary or advisable, specify how the application of the exemption relates to or coordinates with the application of other statutory provisions, regulations, administrative guidance, or exemptions.” Some might imagine the Labor department making a rule to interpret ERISA § 404(a) so a default-distributing ERISA-governed plan’s fiduciary is not responsible for a later automatic-portability transaction from the default IRA into a rollover-receiving employer-sponsored retirement plan. Some fiduciaries might wait until such a notice-and-comment rule is published, effective, and applicable. Some fiduciaries might consider whether such a rule would be enough to protect the fiduciary. And some fiduciaries might wait until Congress enacts non-responsibility in a statute.

Your query might lack some relevant information. Among other points: Did the participant die before, on, or after the participant’s required beginning date? Had a distribution begun? If a distribution began, did it begin before, on, or after the participant’s required beginning date?

If one follows the Form 5500 Instructions for an authorized service provider’s signature, that signer is not responsible for the Form 5500 report; rather, one signs only five process statements about how the plan administrator’s signer authorized the service provider to submit the administrator’s report. If you do something else, consider that the signer states: Under penalties of perjury and other penalties set forth in the instructions, I declare that I have examined this return/report, including accompanying schedules, statements and attachments, as well as the electronic version of this return/report, and to the best of my knowledge and belief, it is true, correct, and complete.

A few observations (none of which is advice) you might consider: If there is a doubt about which provisions the plan’s sponsor intends, that doubt might call for a conversation with the plan’s sponsor. To discern what the plan’s governing documents now might provide, a fiduciary (or its adviser) would, as Belgarath suggests, read carefully all writings that comprise the plan. That might include annuity contracts, custodial-account agreements, and other writings the labeled plan documents refer to. Despite a statement in an IRS-approved document that “the plan” controls over inconsistent provisions of an annuity contract or custodial-account agreement, consider that such a statement might have no effect on an annuity contract or custodial-account agreement. Likewise, such a statement in a plan document might not bind an insurer or custodian. For some annuity contracts, it might be unlawful for an insurer to accept provisions beyond those stated by the approved form of contract. Don’t assume a custodian, insurer, recordkeeper, or other investment or service provider has an obligation to follow the plan’s governing documents (even those that unquestionably state the plan’s provisions). Many agreements provide no such obligation. Some agreements expressly state that a payer or processor may rely, without inquiry, on the plan administrator’s instruction.

As CuseFan says. Some retirement plans have only one administrator, and the one decides everything that calls for a discretionary decision. Yet, some retirement plans have a top-level administrator and ERISA section 405 allocations of distinct fiduciary responsibilities to one or more claims administrators, each for a specified set of kinds of claims. For example, some plans I work with contract an administrator for claims that a participant is entitled to a distribution (whether by hardship, severance from employment, age, or another reason), and another separate administrator for claims that a court order is a qualified domestic relations order.

Some of my clients fear a government shutdown, and other clients would welcome it. Likewise, some of my clients think a delay, however slight, in government agencies’ guidance would harm the client’s interests; and others think a delay would advance the client’s interests.

Remember, SECURE 2022’s § 301 adds two provisions: Employee Retirement Income Security Act of 1974 § 206(h) [29 U.S.C. § 1056(h)] http://uscode.house.gov/view.xhtml?req=(title:29%20section:1056%20edition:prelim)%20OR%20(granuleid:USC-prelim-title29-section1056)&f=treesort&edition=prelim&num=0&jumpTo=true Internal Revenue Code of 1986 (26 U.S.C.) § 414(aa). http://uscode.house.gov/view.xhtml?req=(title:26%20section:414%20edition:prelim)%20OR%20(granuleid:USC-prelim-title26-section414)&f=treesort&edition=prelim&num=0&jumpTo=true

It is the employer that might lack a deduction. The employee gets the same exclusion from income, for non-Roth contributions, that any employee gets for the kind of plan used. Likewise, a distribution to a participant gets the income tax treatment that follows from whether the contributions were non-Roth or Roth contributions.

If this is a plan the employer intends to restrict to a select group (as ERISA sections 201, 301, and 401 describe it), a written plan might state that the employer decides, in its business discretion, who is eligible for deferrals under the plan. Your description of the document you were given suggests your client’s plan might not be so stated. If the document leaves an ambiguity, you might ask the employer for its interpretation.

The Joint Committee on Taxation estimate [JCX-21-22 (Dec. 22, 2022)] scored the hardship self-certification provision as raising only $358 million for fiscal years 2023-2032. While one cannot read the mind of a Member of Congress, here’s another explanation: The SECURE 2022 provisions for accepting a claimant’s statement about her hardship or unforeseeable emergency approximate what already has been the situation with many plans. Participants learn, often quietly and quickly, how to mark a website app or paper form to state a claim the service provider processes in good order with nothing that requires any further instruction from the supervising fiduciary.

You’re right that a fiduciary should get its lawyer’s advice about: (i) whether an agreement with the service provider obligates the employer to pay the provider’s fee; and if so, (ii) whether a charge on individuals’ accounts that relieves the employer of some of its obligation is a nonexempt prohibited transaction. Another path is to revise the service agreement to make clear that only the plan is obligated to pay the provider’s fee. The agreement might also state that the employer has a right, but no obligation, to pay a portion of the fee.

The software developers and recordkeepers could, if they choose, decide interpretations for SECURE 2022’s unanswered questions. And if a critical mass did so with common answers, they could, practically, force the IRS to fall in with those interpretations. So far, the businesses seem to prefer a go-slow.

Yes. If the domestic worker is not employed in a trade or business, for a farm, or in some other way that makes the worker’s compensation deductible, the employer’s contribution: is allowed (within the plan’s limits), is not an expense the employer deducts, but does not—if within § 4972(c)(6)(B)—attract the excise tax on a nondeductible contribution.

That might leave some interpretation questions for the claims administrator.

That’s similar to a method I’ve seen. If the recordkeeper’s fee for a quarter-year is $4,250 and there are accounts for 120 individuals (counting all participants, beneficiaries, and alternate payees), a no-longer-employed participant is charged $35.41 for that quarter-year.

For those planning software changes and service changes following law changes from the SECURE 2.0 Act of 2022: “The federal government could shut down in October. Here’s how and why.” https://www.washingtonpost.com/business/2023/government-shutdown/?utm_campaign=wp_the_5_minute_fix&utm_medium=email&utm_source=newsletter&wpisrc=nl_fix An Anti-Deficiency Act government shutdown does not stop every function. But if Labor or Treasury has an appropriations lapse, its work on rulemakings and interpretive guidance would pause until the shutdown ends. The most recent shutdown lasted 34 days. Even if we set aside optional changes, what happens if an absence of guidance results in no software for provisions required as a condition of continued tax qualification?

Might the claims administrator evaluate whether the claimed need amount (before a gross-up for taxes on the hardship distribution) seeks no more than one-fourth (or another appropriate fraction) of a reasonable down payment (not the mortgage) to purchase the place that includes what would become the participant’s principal residence? This is NOT advice to anyone.

Yes, I have experience with situations in which an employer absorbs plan-administration expenses for only those of the participants who are current employees. The key about the significant-detriment rule is that a no-longer-employed participant’s account must be charged no more than her fair share of plan-administration expenses. Unless the plan’s documents expressly obligate the employer to pay the plan’s expenses, a plan may charge the plan’s prudently incurred reasonable expenses against the individual accounts of the plan’s participants, beneficiaries, and alternate payees. “Nothing in Title I of ERISA limits the ability of a plan sponsor to pay only certain plan expenses[,] or only expenses on behalf of certain plan participants. [S]uch payments by a plan sponsor on behalf of [some] plan participants are equivalent to the plan sponsor providing an increased benefit to those employees on whose behalf the expenses are paid. Therefore, [a] plan[] may charge vested separated participant accounts the account’s share ([for example], pro rata or per capita) of reasonable plan expenses, without regard to whether the accounts of active participants are [not] charged such expenses[.]” DoL-EBSA, Allocation of Expenses in a Defined Contribution Plan, Field Assistance Bulletin 2003-3 (May 19, 2003). However, a retirement plan must provide that a vested benefit that exceeds $5,000 (or, soon, $7,000) may not be distributed before normal retirement age without the participant’s consent. ERISA § 203(e)(1), 29 U.S.C. § 1053(e)(1); accord I.R.C. (26 U.S.C.) § 411(a)(11)(A). Interpreting both the tax-qualified-plan condition and the ERISA provision, a Treasury rule provides that a participant’s “consent” to a distribution is invalid if the plan imposed a “significant detriment” on a participant who doesn’t consent. 26 C.F.R. § 1.411(a)-11(c)(2)(i). To interpret this significant-detriment rule, the Internal Revenue Service stated its view that a plan may charge the accounts of former employees (even while not charging current employees) if the expense otherwise is proper and a severed participant’s account bears no more than its “fair share” of the plan’s expense. The Revenue Ruling expressly cautions that former employees’ accounts must not subsidize current employees’ accounts. But a plan doesn’t run afoul of the significant-detriment rule merely because it charges beneficiaries’, alternate payees’, and severed participants’ accounts the charge that would fairly result if the administrator allocated expenses uniformly among all individuals’ accounts. Rev. Rul. 2004-10, 2004-7 I.R.B. 484, 485 (Feb. 17, 2004). Whether a particular allocation of plan-administration expenses meets that standard and otherwise is proper in particular circumstances turns on all the documents, facts, and circumstances.

Consider also that it seems unlikely that useful guidance would be published before 2024. A plan sponsor or a plan's administrator might want advice from its lawyer's, certified public accountant's, enrolled agent's, enrolled actuary's, or other recognized practitioner's written advice to support reasonable cause for relying on a good-faith interpretation.

Here’s an earlier BenefitsLink conversation (some of it before we knew SECURE 2022’s enactment date). https://benefitslink.com/boards/index.php?/topic/70080-anyone-know-when-president-signing-consolidated-appropriations-act-2023-including-secure-20/ Unlike the example 5 mentioned above, some of us imagined a plan year that began December 30 and ended December 31. Recall that a plan and its § 401(k) arrangement might provide that “a sole proprietor’s compensation is deemed currently available on the last day of the individual’s taxable year.” 26 C.F.R. § 1.401(k)-1(a)(6)(iii) https://www.ecfr.gov/current/title-26/part-1/section-1.401(k)-1#p-1.401(k)-1(a)(6)(iii). Even if the IRS’s example 5 interpretation is incorrect, is there any harm in following it for a sole proprietor who is her business’s only employee?

A few suggestions for ways to think about your question: Many BenefitsLink neighbors remind us that an answer to a question about a retirement plan often might be answered by RTFD—Read The Fabulous Document. That reminder might help too with a health plan. If the employer’s or labor union’s health plan is self-insured—that is, the benefit is provided other than by a health insurance contract, the plan’s documents state which coverage or coverages a participant (or continuee) may or must not choose. Would it be odd for one health plan to allow more than one non-insured general medical coverage? Because such a self-insured health plan’s benefits are not paid by a health insurer, might a coordination between distinct coverages be awkward because all benefits are paid by the same obligor?

Some pooled-plan providers have designed the plans to allow each participating employer to: specify its subplan’s investment alternatives; choose to include or omit some kinds of distributions and other plan features; and direct the trustee or custodian to pay an adviser’s fee. And some third-party administrators serve as the pooled-plan provider or its service provider. A deferral-only § 401(k)(16) arrangement might fit for an employer that needs or want to facilitate pay deductions for retirement contributions, won’t provide a nonelective or matching contribution, and prefers a 401(k) over IRAs for reasons about efficiency or convenience. Yet, many employers will see value in more carefully designed plans with finer service.

Using a pooled-employer plan might further simplify the administration, especially if all participating employers are 401(k)(16) employers and the pooled-plan provider sets which, if any, before-retirement distributions are allowed.

Thanks, Belgarath and Paul I. 401(k)(16) allows a no-cost plan with no nonelective or matching contribution as a way to not suffer a tax or other consequence under a State’s play-or-pay law. In finding reasons for a business owner to choose an employer-maintained plan over an absence of ERISA fiduciary responsibility, getting the employer an opportunity to say it has a “401(k) plan” might matter (perhaps for some employers). Interesting point about only one payee for all pay deductions for retirement contributions. Likewise, for an employer otherwise exposed to many subnational laws, using an ERISA-governed plan avoids multiple laws and conflict-of-laws issues. (Had States making play-or-pay laws been smarter, they would have made a compact for all those States to use one IRA provider. And the States’ laws might have included an ordering rule to let one State’s default contribution suffice under all States’ laws.) Paul I, do you think some service providers for § 401(k)(16) plans will offer to serve as a plan’s administrator so an employer could do nothing in deciding claims for distributions, deciding whether a domestic-relations order is qualified, filing Form 5500 reports, and doing other plan-administration tasks?

Beginning with 2024, new Internal Revenue Code § 401(k)(16) sets up a new kind of individual-account retirement plan—a starter 401(k) deferral-only arrangement. For relief from top-heavy treatment and from actual-deferral-percentage nondiscrimination constraints, the price is providing no contribution beyond elective deferrals, and limiting them to $6,000 (or $7,000 for those 50 and older). Under which conditions would an employer prefer a starter 401(k) over sending payroll deductions to Individual Retirement Accounts? Is it about saying, in recruiting workers, that the employer has a “401(k) plan”? Under which circumstances would it be rational for an employer to pay (instead of letting participants bear) all or some of a starter 401(k)’s plan-administration expenses?