Peter Gulia

When a retirement plan allows a recordkeeper’s brokerage window: Does the plan’s named fiduciary get reports on the details of which stocks, bonds, and other securities each participant buys, holds, and sells? Or does the named fiduciary get access to a database with that information? Is that reporting or access routine? Or must the fiduciary specifically ask for those services?

About what writing is helpful to remember which in-operation provisions a plan’s administrator applied while waiting for an eventual remedial amendment, I do not suggest a need for a plan sponsor’s affirmative choice. But I wonder whether a service provider should “go through the motions” of seeking a sponsor’s instruction (and proposing a default instruction) on the required beginning date applicable age. Or, if the service provider prefers not to present a choice, at least informing a service recipient that it instructs the service provider to provide services on the presumption that the plan’s in-operation provision is the § 401(a)(9)(C)(v) applicable ages for setting a required beginning date. Either notice might set up some written evidence about which in-operation provisions were administered while waiting for an eventual remedial amendment. Even if nothing is done, the risk of administration contrary to the plan’s retroactive provisions might be slight. Even a service provider with a power to amend a user’s plan might prefer to restrain its use of that power. Further, until the plan is amended, a service provider might be cautious about not too lightly presuming what the plan’s in-operation provisions are. While waiting for an eventual amendment (whoever later makes it), a plan’s named fiduciary administrator might have discretionary authority to interpret a not-yet-amended plan document to include provisions the administrator anticipates likely could become the plan’s provisions with retroactive effect. But a service provider might lack such an interpretation power.

About Paul I’s last paragraph: In my interpretation, a distribution paid or delivered before January 1 of the year in which the participant attains the applicable age Internal Revenue Code § 401(a)(9)(C)(v) allows within the conditions for treating a plan as a tax-qualified plan (not a younger age a plan might provide) is treated as not § 401(a)(9)-required and so an eligible rollover distribution (if it otherwise qualifies). See 26 C.F.R. § 1.402(c)-2 https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/section-1.402(c)-2.

Might some higher-paid employees’ deferrals reach a need to use a § 414(v) catchup as soon as January 2024? Imagine 2024’s § 401(a)(17) limit might be $340,000 and 2024’s § 402(g) limit (without an age-based catchup) might be $23,000. Imagine 2024’s § 414(v)(2)(B)(i) amount might remain $7,500. Assume a plan provides a nonelective contribution of 3% of compensation. Assume the plan permits elective deferrals up to 97% of compensation. An employee is 51 years old. The employee’s base pay (all of which is wages) is $1 million for 2024. Assume monthly pay periods. $1 million / 12 = $83,333.33. $340,000 / 12 = $28,333.33. $28,333.33 x 97% = $27,483.33 In a continuing cash-or-deferred election made in 2023 to apply for compensation after 2023, the employee had elected deferrals of 97% of compensation, had elected these deferrals be non-Roth to the extent the plan permits, and had elected that any portion of her deferral not allowable as non-Roth be treated as Roth. (To remove the implied-election question from our hypothetical, imagine the employee made, before 2024, all these elections as affirmative written elections.) For this employee’s first 2024 pay, $23,000 is non-Roth elective deferrals, and $4,483.33 is Roth elective deferrals. Even with these $27,483.33 in retirement plan deferrals, the employee’s January pay will have another $55,850 available for withholding taxes and other pay deductions. Or am I missing something? To return to Gruegen’s query, some plans’ administrators might need to form one’s interpretation about whether an administrator may (or must not, or should not) rely on implied assent to treat elective deferrals as Roth contributions without waiting for the hoped-for government guidance. And recordkeepers might estimate how many plan administrators will want such a service feature.

I too have seen (indirectly) many orders that split a QDRO-processing fee between the participant and the alternate payee. But those charges have been for a fixed fee based on routine processing, not “hours” of calculations. If a QDRO-processing fee to be charged against individuals’ accounts is time-based, I like Bri’s point about inviting divorce lawyers and unadvised litigants to consider how an order’s provisions might affect expenses allocated to the participant or alternate payee.

Bri, do some clients’ plans provide that such a fee is allocated to the participant’s account, the alternate payee’s segregated account, or some combination of them?

Many IRS-preapproved documents did not (and still do not) state a required beginning date or its applicable age by referring to a relevant Internal Revenue Code text. For example, an IRS-preapproved document a recordkeeper presented to my client in July 2022 includes six uses of age 70½, with none of them modified by reference to any subpart of Internal Revenue Code section 401. Let’s consider a potential by-reference interpretation. Suppose the IRS-preapproved document includes: “All distributions required under [the document’s part for minimum distributions] will be determined and made in accordance with Regulations under Code § 401(a)(9) and the minimum distribution incidental benefit requirement of Code § 401(a)(9)(G).” (That’s a quotation from the document presented to my client.) That provision does not negate the same document’s uses of age 70½. A distribution would not fail to meet those regulations because the distribution begins sooner than the Internal Revenue Code’s required beginning date. Further, those regulations describe age 70½ as the age that sometimes sets a required beginning date. We recognize the Internal Revenue Service’s procedures for a preapproved plan often results in documents that do not reflect current provisions of the Internal Revenue Code and other law. We recognize that tax law includes a tolerance that permits a plan’s administrator to interpret a plan as if states provisions the administrator anticipates could become the plan’s provisions with retroactive effect. We recognize it’s reasonable to presume a plan’s sponsor prefers to provide as a required beginning date’s applicable age the latest the plan may provide without defeating treatment as a tax-qualified plan. But without asking for at least an implied-assent instruction, how do we know that the plan’s in-operation provision changed from 70½ to 72, and again to 73? If one accepts the remedial-amendment regime, wouldn’t it be better to maintain a thorough record of a plan’s in-operation provisions?

I hope BenefitsLink neighbors will help me learn something about a particular oddity regarding remedial-amendment cycles. For optional changes a recent Act of Congress permits, a typical way a recordkeeper or third-party administrator knows what a plan’s sponsor adopted often results practically from the sponsor’s responses to a service provider’s solicitation of instructions. These sometimes involve not only express instructions but also implied assent to the service provider’s proposed default instructions. Even when a sponsor does not make or keep its own records, the service provider’s records of what it was instructed become a history that can support the remedial amendment. It seems at least some big recordkeepers did not (in 2020-2022) ask, even in implied-assent form, whether a sponsor wanted to change the applicable age for a required beginning date from 70½ to 72, and again have not asked whether a sponsor wants to change it to 73. Many plans’ documents still say 70½. If a service provider did not ask whether a sponsor wants an optional change in the applicable age for a required beginning date, how does one know what the plan provides? (I recognize that what service a provider was or is obligated to provide need not, and often does not, refer to what the plan provides.) Even if we expect 99.99% of sponsors would adopt all permitted changes to the applicable age, should service providers “go through the motions” of seeking a sponsor’s instruction (and proposing a default instruction) on the required beginning date applicable age? Or are there reasons not to ask?

I often suggest that a plan’s administrator (and those who advise it) not reflexively imagine that a service provider does everything. And I often suggest that a service recipient gets more useful services when the recipient is mindful of and considerate about the provider’s business needs, practical needs, and constraints. When there is a candid working relationship between the plan’s administrator and its recordkeeper, there often are shared opportunities for improvements, with both recipient and provider benefitting from their exchange of information.

For an ERISA-governed retirement plan, a domestic-relations order is not a qualified domestic-relations order unless, with other conditions, the “order clearly specifies— . . . the amount or percentage of the participant’s benefits to be paid by the plan to each such alternate payee, or the manner in which such amount or percentage is to be determined[.]” ERISA § 206(d)(3)(C)(ii). Since 1984, recordkeepers have tried—sometimes subtly and sometimes unsubtly, and with varying degrees of success—to push divorce practitioners and unadvised litigants into writing orders that call for the alternate payee’s percentage to be applied on the day the plan’s administrator (or its service provider) implements the order. That’s because an order that calls for a division as of a date in the past, with some measure of investment results after that date, is a pain-in-the-assets for a recordkeeper’s services. A plan’s administrator, if it obeys the plan’s governing documents and applicable law, must not ignore what a court’s order provides if the order is a qualified domestic-relations order. But what a plan’s administrator must do might not be the measure of what service a recordkeeper is obligated to provide. As RatherBeGolfing suggests, consider making sure the information you read or heard truly is the recordkeeper’s work method. Also, consider whether you want a candid conversation about whether it might be wise (or unwise) to edit the plan administrator’s DRO procedure and model form of court order (if you furnish one) to fit more closely the work methods the administrator and the recordkeeper agree on.

Thanks again. I had thought about the notary idea. The plans I’m thinking about do everything with the recordkeeper. The plan’s sponsor/administrator receives nothing. Every form or other plan communication includes (after the internet and telephone means) the recordkeeper’s maildrop for the act or instruction involved. Required disclosures even give the recordkeeper’s address as the plan administrator’s address. Forms possibly made or perhaps forged near the participant’s death are the most troublesome. And we don’t know how many forms are forged by a former spouse or soon-to-be former spouse.

Paul I, thank you for your helpful observation, and your useful suggestion. Yet, people who make a beneficiary designation on a paper form might do so because they lack a personal computer, smartphone, or other internet-enabled device (or choose not to use it). Some recordkeepers’ services are designed to not release a beneficiary-designation form until the recordkeeper has sufficiently identified the requester as the plan’s participant. And then, they mail the form only to the address of record. That slows down (or helps a plan’s fiduciary detect) some forgeries, but many still get through. Beyond urging participants to make beneficiary designations through the plan’s website, are there other steps to consider?

If the only evidence of what might be a beneficiary designation is a fax, how do you check that what looks like a signature IS the participant's signature?

The lobbyists who asked Congress for an opportunity to use an unenrolled participant reminder notice spoke for situations in which the plan uses a recordkeeper that sorts participants’ accounts for electronic or paper, and soon will sort for “enrolled” or unenrolled. Employers and plans austin3515 describes might have had no one in the room.

Individual-account plan is ERISA’s defined term for what the Internal Revenue Code calls a defined-contribution plan. ERISA § 3 divides employee-benefit plans into two kinds: pension plans and welfare plans. See ERISA § 3(1)-(3). (Other ERISA provisions set a group health plan as a kind of welfare plan.) A pension plan, as ERISA (rather than the Internal Revenue Code) defines it, is a plan that “(i) provides retirement income to employees, or (ii) results in a deferral of income by employees for periods extending to the termination of covered employment or beyond[.]” ERISA § 3(2)(A). Of pension plans, there are two kinds: a defined-benefit plan [§ 3(35)], or an individual-account plan [§ 3(34)]. ERISA § 3(34): “The term ‘individual account plan’ or ‘defined contribution plan’ means a pension plan which provides for an individual account for each participant and for benefits based solely upon the amount contributed to the participant’s account, and any income, expenses, gains and losses, and any forfeitures of accounts of other participants which may be allocated to such participant’s account.” ERISA § 3, unofficially compiled as 29 U.S.C. § 1002 http://uscode.house.gov/view.xhtml?req=(title:29%20section:1002%20edition:prelim)%20OR%20(granuleid:USC-prelim-title29-section1002)&f=treesort&edition=prelim&num=0&jumpTo=true. The blackout rule uses “individual account plan” in the sense ERISA § 3(34) provides. That includes a whole defined-contribution plan’s subaccounts for nonelective contributions, matching contributions, elective-deferral contributions, and rollover contributions.

A “blackout period”, as the rule defines it, refers not only to an inability to direct investment but also to a temporary inability to obtain a distribution or a loan. 29 C.F.R. § 2520.101-3(d)(1)(i) https://www.ecfr.gov/current/title-29/subtitle-B/chapter-XXV/subchapter-C/part-2520/subpart-A/section-2520.101-3#p-2520.101-3(d)(1)(i).

Assume, for a retirement plan: A beneficiary designation states that the participant has no spouse. That statement is logically consistent with the employer/administrator’s records about the participant’s health coverage. Nothing in the plan’s documents requires that a beneficiary designation (if it needs no spouse’s consent) be witnessed by, or acknowledged before, anyone. The beneficiary designation is not made through the plan’s identity-controlled internet site. For such a beneficiary designation, do you: Require an original ink-on-paper form showing the maker’s signature? -or- Permit a fax, scan, or other copy as a possibly valid beneficiary designation? For either answer, why do you require ink-on-paper, or permit a copy? If you permit a copy, what controls do you use to guard against a writing that is not the participant’s act?

A fiduciary's evaluation about whether to make notices separate or combined turns on many factors, including the plan administrator's and its service provider's capabilities. Some plans' regimes lack a useful capability to segregate notices.

Before even SECURE 2019, some fiduciaries bunched several notices and other communications into one delivery. For example, in early November a calendar-year plan might deliver its: summary annual report (for the year ended almost a year ago), revised summary plan description, 401(k)/(m) safe-harbor notice, notice of automatic-contribution arrangements, notice of qualified default investment alternative, notice about diversifying out of employer securities, and rule 404a-5 information about account fees and investment expenses. Even regarding participants with account balances and ongoing elective deferrals, some plans might meet almost all communications requirements with one mailing—whether electronic, paper, or some of each—only once a year. Some Treasury department rules for some notices specify that a notice must be distinct—that is, not combined with another notice or other communication. Under ERISA § 111(c)(3), an annual reminder notice to an unenrolled participant must “provide[] [the § 111(c)(2)] information in a prominent manner calculated to be understood by the average participant.” But that statute section does not say the annual reminder notice must be completely separate or distinct from other information. Belgarath, I think you’re right that a typical 401(k)/(m) safe-harbor notice alone is not enough to prominently “notif[y] [an] unenrolled participant of” her “eligibility to participate in the plan[.]” A plan’s administrator might write a one-pager addressed to “unenrolled” participants, and put that page at the top of the stack of whatever the administrator sends to those participants. I’m aware many think this still is burdensome. But with default electronic delivery, it need not be.

Internal Revenue Code § 408(d)(8)(F)(i) states a general rule that “[a] taxpayer may for a taxable year elect under [§ 408(d)(8)(F)] to treat as meeting the requirement of [§ 408(d)(8)(B)(i)]” an IRA’s distribution to a split-interest entity. Internal Revenue Code § 408(d)(8)(B)(i) defines a qualified charitable distribution as an IRA’s distribution made to specified kinds of public charities. The statute sets up direct and indirect distributions to charity. I read the statute to apply the § 408(d)(8)(A) [$100,000] limit to the sum of all qualified charitable distributions of both ways. https://irc.bloombergtax.com/public/uscode/doc/irc/section_408

In formal terms: If an arrangement intended as a § 401(k) arrangement does not meet § 401(k)(2)(D)(ii), the arrangement is not a qualified cash or deferred arrangement. In the IRS’s view, a plan not administered according to its “definite written program” (including provisions that, as allowed by a remedial-amendment period, are treated as if they had been stated in the plan’s governing documents) is not a § 401(a)-qualified plan. 26 C.F.R. § 1.401-1(a)(2) https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR6f8c3724b50e44d/section-1.401-1#p-1.401-1(a)(2). In some circumstances, the Internal Revenue Service offers procedures to correct specified failures and restore a plan’s tax-qualified treatment. If the plan is governed by the Employee Retirement Income Security Act of 1974 (“ERISA”), a fiduciary’s failure to administer a plan according to the plan’s governing documents (perhaps including implied provisions) might be a breach of the fiduciary’s responsibility. A fiduciary is personally liable to restore losses and harms that result from the fiduciary’s breach. In practical terms: Assuming the failure results from an error or excusable inattention, many employers would correct such an error using an IRS procedure. As MoJo suggests, the essence of the failure might be that affected employees were denied their opportunities to elect deferrals. An IRS-recognized correction might be enough that an affected employee does not pursue her ERISA claim.

CuseFan and Paul I, thank you both for your smart observations. The statute grants the Secretary of the Treasury a power to provide “by regulations for exceptions to [reliance on a claimant’s certification] in cases where the plan administrator has actual knowledge to the contrary of the [participant’s] certification[.]” But until regulations are published, effective, and applicable, the statute alone governs. The statute provides that “the administrator of the plan may rely on a written certification[.]” And if the administrator may rely, why shouldn’t its servant rely, especially if their service agreement protects the nonfiduciary service provider’s obedience to the fiduciary’s instructions? How many recordkeepers want to make it so easy to get assets off their platforms? About not making hardship too easy, some recordkeepers now hesitating about § 401(k)(14)(C) certifications were advocates of the IRS’s no-substantiation method. Also, many of the new distributions require little explanation, and some are designed for relying on a claimant’s certification. (For example, many employers would prefer not to know any facts that might support a domestic-abuse distribution.) Like it or not, Congress decided that a plan’s sponsor may provide these early outs.

Employers might have a range of views about whether a plan should allow a hardship distribution on no more showing than the participant’s certification. But some employers welcome this opportunity to simplify a plan’s administration. And a recordkeeper or third-party administrator that provides a service of vetting hardship claims (whether as the § 3(16) decision-maker, under a nondiscretionary procedure the administrator instructed, or as a preliminary look before the administrator decides) might welcome this opportunity to lower its operating costs. Yet, some recordkeepers are unready to switch to the participant-certification regime, even with a customer plan administrator’s written instruction. They say they don’t want to implement the change until there is Treasury or Internal Revenue Service guidance. What are they worried about? Is any big recordkeeper allowing hardships on the participant’s certification?

And while it’s fine to start preparing for the advice you might render, resist an impulse to do something before you know who acts for your client or other instructing fiduciary. If the corporation or company is the retirement plan’s administrator or trustee (or both) and the deceased former owner acted for the corporation or company, someone might want advice in sorting out which person now has power to act for the corporation or company. If the deceased former owner served—personally, rather than as an executive of the corporation or company—as the retirement plan’s trustee, someone might want advice in sorting out who now is the successor trustee. An instructed service provider should use care not to act or rely on an instruction until the service provider checks that the instruction was made by a person who had power to decide what the instruction tells the service provider to do, or at least that your service agreement provides you a right to rely on that person’s instruction.

Even if the Treasury department meets this agenda item’s target, it is only for a proposal, not a rule. Even if the notice of proposed rulemaking states that taxpayers are protected in following the proposed rule, there is no assurance that systems and software would not need rework. If a § 3(16) administrator, recordkeeper, or third-party administrator expects to provide services regarding § 401(k)(15), it might prefer to make or buy software now, using rules that are the provider’s or its software developer’s interpretations of the statute.