Peter Gulia

Recognizing MoJo’s guidance, there sometimes might be a deliberate variation from the mainstream approach of setting a plans’ merger’s effect for a year-turn. A receiving plan’s sponsor/administrator might prefer that a merger not happen by midnight December 31 because that might increase the receiving plan’s beginning-of-year count of participants to require engaging an independent qualified public accountant when the receiving plan’s administrator otherwise would not engage an IQPA. Instead, one might set the plans’ merger for the first business day of January.

That might not be about what the IRS allows because self-correction means the employer doesn’t ask the IRS. Among the burdens of self-correction (even before SECURE 2.0 § 305) is that it puts responsibility on the employer and, practically, its adviser. If, after a self-correction, the plan’s tax-qualified treatment is challenged, the burdens of proof and persuasion are on the employer to show that the failure was eligible for self-correction and that the correction was appropriate. When a professional is asked for advice, whether written or oral, that a failure is eligible for self-correction, the professional evaluates the liability exposures and other risks of that advice. About the example you set up, ask yourself this rhetorical question: Could Belgarath, knowing that States’ laws hold a nonlawyer to the same standard of care that would be used by a prudent lawyer (with the same exposures for liability to one’s advisee and third persons), write something to confirm the failure is eligible for self-correction?

Consider: 5 C.F.R. § 1631.35 Certification (authentication) of copies of records. The [Federal Retirement Thrift Investment] Board may certify that copies of records are true copies in order to facilitate their use as evidence. The records custodian or other qualified individual shall certify copies of books, records, papers, writings, and documents by attaching a written declaration that complies with current Federal Rules of Evidence. No seal or notarization shall be required. https://www.ecfr.gov/current/title-5/chapter-VI/part-1631/subpart-B/section-1631.35 Perhaps the State’s domestic-relations court would be satisfied if a record is so certified. Here are addresses for the TSP Legal Processing Unit: https://www.opm.gov/retirement-center/my-annuity-and-benefits/thrift-savings-plan/ Likely, you and your fellow practitioners already know those procedures.

Is it 3.5% for a matching contribution, or 3% for a nonelective contribution?

If a charity’s § 403(b) plan provides a qualified automatic contribution arrangement with auto-escalation, to get coverage and nondiscrimination safe harbors: how much must the employer provide as a matching contribution? how much must the employer provide as a nonelective contribution?

Before adjusting any tax-information reporting, are there other issues to sort out? Considering the plan’s provisions: Did the participant have a right to payments that continue after the participant’s death? If so, is the participant’s spouse the participant’s beneficiary? If the after-death payments did not belong to the person who deposited or negotiated the checks, should the employer pursue its remedies against a bank that processed the checks? If the after-death payments did not belong to the person who deposited or negotiated the checks, should the employer pursue its remedies against the person who made false statements?

Beyond reading a retirement plan’s governing documents and a plan’s agreement with a recordkeeper or other service provider, the employer/administrator should read the particular prevailing-wage statute and implementing rules (these can vary by State and political subdivision, place of work, and other factors) and the particular labor agreement (which might specify prevailing-wage provisions less flexible than those the prevailing-wage law permits).

While I’m good on fiduciary law, I’m no more than a novice on qualified-plan rules. But using your expertise, consider these points: Elapsed time doesn’t measure service; it measures time that elapses between a beginning moment and an ending moment. The ending moment is “[t]he date the employee severs from service[.]” 26 C.F.R. § 1.410(a)-7(a)(2)(ii) https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR686e4ad80b3ad70/section-1.410(a)-7#p-1.410(a)-7(a)(2)(ii) A perhaps related point of tax law treats someone who has been a self-employed individual as continuing to be a self-employed individual even if a year’s earned income is zero or negative. The term “self-employed individual” means, with respect to any taxable year, an individual who has earned income . . . for such taxable year. To the extent provided in regulations prescribed by the Secretary, such term also includes, for any taxable year— (i) an individual who would be a self-employed individual within the meaning of the preceding sentence but for the fact that the trade or business carried on by such individual did not have net profits for the taxable year, and (ii) an individual who has been a self-employed individual within the meaning of the preceding sentence for any prior taxable year. I.R.C. (26 U.S.C.) § 401(c)(1)(B) http://uscode.house.gov/view.xhtml?req=(title:26%20section:401%20edition:prelim)%20OR%20(granuleid:USC-prelim-title26-section401)&f=treesort&edition=prelim&num=0&jumpTo=true. A regulation the statute calls for, and delegates to, provides: For purposes of section 401, a self-employed individual who receives earned income from an employer during a taxable year of such employer beginning after December 31, 1962, shall be considered an employee of such employer for such taxable year. Moreover, such an individual will be considered an employee for a taxable year if he would otherwise be treated as an employee but for the fact that the employer did not have net profits for that taxable year. . . . . 26 C.F.R. § 1.401-10(b)(1) https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR6f8c3724b50e44d/section-1.401-10#p-1.401-10(b)(1). If the self-employed business has not ended and the self-employed individual remains available to perform services if her deemed employer gets an engagement, the individual might not have severed from service. If that’s the administrator’s interpretation of the plan’s governing documents, the self-employed individual and her deemed employer might be careful to file tax returns so they’re consistent with not having closed the business. For example, a sole proprietor’s Schedule C might show a zero revenue, a little expense (for a business-privilege tax, or something else needed to keep the business available), and a slight loss.

About promptness for participant contributions (and participant loan repayments), the 29 C.F.R. § 2510.3-102(a)(2) deemed-reasonable “safe harbor” is for “a plan with fewer than 100 participants at the beginning of the plan year[.]” https://www.ecfr.gov/current/title-29/subtitle-B/chapter-XXV/subchapter-B/part-2510/section-2510.3-102#p-2510.3-102(a)(2)(i) Changing that rule would require a notice-and-comment rulemaking.

If a contribution was not labeled as an elective deferral (whether Roth or non-Roth) or as an employee contribution (if the plan’s governing documents permit such a contribution), consider whether the contribution might have been a nonelective contribution. Unless the proprietor is confident he will have compensation (rather than a loss) for 2023, consider whether the contribution could exceed the § 415(c) annual-additions limit, a § 404 deduction limit, or some other relevant limit.

In the Internal Revenue Code of 1986, § 45E is under these divisions: Subtitle A—Income taxes Chapter 1—Normal taxes and surtaxes Subchapter A—Determination of tax liability Part IV—Credits Against Tax Subpart D—Business Related Credits (sections 38 to 45AA) I.R.C. § 45E. The § 45E credit is classed among the many that form § 38’s general business credit. (Refundable credits are in subpart C—sections 31-37.)

In 1985, few employment-based retirement plans provided the convenience of paying a distribution as a rollover contribution directly to another retirement plan or an Individual Retirement Account. About what happened or what was reported, the individual might request from the IRS a copy of her 1985 tax return (and of later years’ returns). Form 4506 https://www.irs.gov/pub/irs-pdf/f4506.pdf. Consider whether the individual’s tax returns over many years might have been filed under an assumption that the account was an IRA. If so, consistency might require a taxpayer not to assert a different treatment now. See, for example, Estate of Hilda Ashman v. Commissioner, Tax Court Docket No. 15578-96, T.C. Memo. 1998-14575 T.C.M. (CCH) 2160, T.C.M. (RIA) 98,145, 22 Empl. Benefits Cas. (BL) 1283, Pension Plan Guide (CCH) ¶ 23943M, 1998 Tax Ct. Memo LEXIS 146, 1998 WL 188936 (U.S. Tax Court Apr. 22, 1998) (In 1990, a distributee received a distribution from a qualified pension plan, and her tax return treated it as rolled over to another plan. For 1993, the taxpayer was estopped from asserting that the 1990 distribution was taxable in 1990.). See generally R. H. Stearns Co. v. United States, 291 U.S. 54 (1934) (by Cardozo, J.).

If an employer waits a few months to pay the contribution needed to meet the top-heavy minimum allocations, what is due to a participant who was a non-key employee at the relevant time who before the plan-wide top-heavy contribution has been paid severs from employment, is entitled to take a single-sum distribution of her whole account, and claims it? Must or should the employer “top up” such a participant’s account so it will have had its top-heavy minimum allocation before the participant exits the plan? If an employer does not do that, must or should the employer and administrator later credit the individual’s account with a “trailing” top-heavy minimum allocation?

That a direct rollover is available only when a distributee has a distribution to roll over is stated in the rule the requesting participant cited. In the Treasury department’s regulation to interpret and implement § 401(a)(31), the general rule’s first sentence states: “To satisfy section 401(a)(31), added by UCA, a plan must provide that if the distributee of any eligible rollover distribution elects to have the distribution paid directly to an eligible retirement plan, and specifies the eligible retirement plan to which the distribution is to be paid, then the distribution will be paid to that eligible retirement plan in a direct rollover described in Q&A-3 of this section.” 26 C.F.R. § 1.401(a)(31)-1/Q&A-1(a) (emphasis added). That rule follows the statute, which provides: “A trust shall not constitute a qualified trust under this section unless the plan of which such trust is a part provides that if the distributee of any eligible rollover distribution—(i) elects to have such distribution paid directly to an eligible retirement plan, and (ii) specifies the eligible retirement plan to which such distribution is to be paid (in such form and at such time as the plan administrator may prescribe), such distribution shall be made in the form of a direct trustee-to-trustee transfer to the eligible retirement plan so specified.” Internal Revenue Code of 1986 (26 U.S.C.) § 401(a)(31)(A) (emphasis added). If the employer’s plan is stated using an IRS-preapproved document, we’d be surprised to find a provision that allows an ostensible direct rollover in circumstances wider than those stated by the regulation. Further, the Internal Revenue Code, not an employer’s plan, governs whether a transaction is for Federal income tax purposes a rollover.

Internal Revenue Code of 1986 § 414A(c)(2)(A)(i) provides: “Subsection (a) [providing that an arrangement is not a § 401(k) arrangement unless it meets § 414A(b)’s automatic-enrollment requirements] shall not apply to—any qualified cash or deferred arrangement established before the date of the enactment of this section[.]” Whether an arrangement was established before December 29, 2022 is a mixed question of law and fact. To interpret what “established” means for § 414A(c)(2)(A)(i), there is no Treasury department rule or regulation, no IRS guidance, no court decision. If an employer wants a prediction about whether a plan with facts like those described above will become subject to § 414A(b), the employer might want its lawyer’s or other tax practitioner’s written advice. If 2025 arrives and there is yet no rule and no guidance, an employer’s good-faith reliance on an IRS-recognized practitioner’s written tax advice might support tax-return, information-return, and other reporting positions. “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.” 26 C.F.R. § 1.6662-4(d)(3)(ii) https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR1d0453abf9d86e0/section-1.6662-4#p-1.6662-4(d)(3)(ii).

CuseFan has the information right. I can think of two situations in which Internal Revenue Code § 404 might be relevant: A charitable organization has some activities that result in unrelated business taxable income. Such a charity might want a § 404 deduction for the portion of retirement plan contributions allocated to the business that produces the UBTI. An employer—considering everything that counts together as one employer under IRC § 414(b)-(c)-(m)-(n)-(o)—includes not only charities and other exempt organizations but also taxable organizations. Contributions for employees of a taxable organization would be to a plan other than a § 403(b) plan. There can be accounting and tax-allocation issues when compensation of executives or physicians who perform services used by several charitable, tax-exempt, and taxable organizations of an employer is allocated to the organizations.

The rulemaking’s explanation states: “Both Form 5500 and 5500–SF and their instructions are being revised to reflect a change in the reporting methodology related to the number of participants used in the current threshold ([that is], less than 100 participants) for determining when a defined contribution pension plan may file as a small plan. This change in methodology also includes eligibility for the waiver of the requirement for small plans to have an audit and include the report of an independent qualified public accountant (IQPA) with their annual report.” Page 12002 middle column. And pages 12002-12003 explain that a point about long-term part-time workers helped persuade the Labor and Treasury departments to adopt the with-a-balance count. The Labor department conservatively estimated the expense savings as $146 million. https://www.govinfo.gov/content/pkg/FR-2023-02-24/pdf/2023-02653.pdf

ERISA § 103(a)(3)(C) [29 U.S.C. § 1023(a)(3)(C)] and 29 C.F.R. § 2520.103-8 speak in terms of what an independent qualified public accountant’s examination and report “need not extend to[.]” And the rule can apply not only if all, but also when only some, of the plan’s assets were “held by a bank or similar institution or insurance carrier[.]” 29 C.F.R. § 2520.103-8(b) https://www.ecfr.gov/current/title-29/subtitle-B/chapter-XXV/subchapter-C/part-2520/subpart-C/section-2520.103-8#p-2520.103-8(b). The AICPA Auditing Standards Board’s Forming an Opinion and Reporting on Financial Statements of Employee Benefit Plans Subject to ERISA recognizes this: SAS 136 ¶ 8: “When [the plan’s administrator] elects an ERISA [§] 103(a)(3)(C) audit, as discussed in paragraph 7, the audit need not extend to any statements or information related to assets held for investment of the plan (hereinafter referred to as investment information) by a bank or similar institution or an insurance carrier [if all § 103(a)(3)(C) conditions are met].” SAS 136 ¶ 34: “Plans may hold investments in which only a portion are covered by a certification by a qualified institution. In that case, the auditor should perform audit procedures on the investment information that has not been certified.” The implementation guidance and illustrations suggest an IQPA’s report might need notes to communicate clearly about which investment information was certified, and which was not.

To preserve a protected benefit, would it be enough to provide that the transferee plan accepts a repayment of a qualified birth or adoption distribution a transferor plan paid before that plan’s transfer-in?

If part-time employees might put a plan over a threshold and call for engaging an independent qualified public accountant, is it feasible to divide participations into two (or more) plans? If an employer anticipates a meaningful number of employees will become eligible because of § 401(k)(2)(D)(ii), one might—to facilitate efficient coverage and nondiscrimination testing, or for other plan-administration reasons—organize two distinct plans: (1) a plan for those who meet eligibility conditions without any to meet § 401(k)(2)(D)(ii), and (2) another plan for those who are eligible only by meeting eligibility conditions provided to meet § 401(k)(2)(D)(ii). One would design and administer the plans to meet required aggregations and disaggregations, and to rely on only permitted aggregations and disaggregations. Or is this where BenefitsLink mavens remind me I don’t know enough about how services are provided to small plans?

Although it does not affect how the law cited above applies, consider too that many ESOPs, especially many designed to invest in shares of a corporation with subchapter S income tax treatment, preclude a participant from ever getting shares, even for a distribution.

Thank you all for contributions to this discussion. From this and other observations, here’s some of my anecdotal findings about people who work on retirement plans: Many (likely a majority) have never submitted a Form 2848. Many have never appeared before the Internal Revenue Service, not even as an unenrolled return preparer. Many have no government-granted license or privilege that invokes any set of professional-conduct rules; yet, almost all self-impose conduct norms similar to lawyers’ professional-conduct rules. Likewise, many voluntarily follow the Treasury department’s “Circular 230” rules for practice before the IRS, even when those rules never apply. Only a very few of us have ever acted as a representative seeking a letter ruling. Requests for a determination that a plan is tax-qualified are mainly for plan terminations, not creations. Some midlife determinations happen after a merger or acquisition. The big categories that call for someone eligible to practice before the IRS are examinations and voluntary corrections. Here’s my follow-up query to refresh my survey: Considering the SECURE 2.0 Act of 2022’s expansions of how much may be done with self-corrections, do you anticipate decreases in how many VCP submissions you handle?

C.B. Zeller and Belgarath, thank you for helping me with a thoroughness check. Further, a perhaps related point of tax law treats someone who has been a self-employed individual as continuing to be a self-employed individual even if a year’s earned income is zero or negative. The term “self-employed individual” means, with respect to any taxable year, an individual who has earned income (as defined in paragraph (2)) for such taxable year. To the extent provided in regulations prescribed by the Secretary, such term also includes, for any taxable year— (i) an individual who would be a self-employed individual within the meaning of the preceding sentence but for the fact that the trade or business carried on by such individual did not have net profits for the taxable year, and (ii) an individual who has been a self-employed individual within the meaning of the preceding sentence for any prior taxable year. I.R.C. (26 U.S.C.) § 401(c)(1)(B) http://uscode.house.gov/view.xhtml?req=(title:26%20section:401%20edition:prelim)%20OR%20(granuleid:USC-prelim-title26-section401)&f=treesort&edition=prelim&num=0&jumpTo=true. For purposes of section 401, a self-employed individual who receives earned income from an employer during a taxable year of such employer beginning after December 31, 1962, shall be considered an employee of such employer for such taxable year. Moreover, such an individual will be considered an employee for a taxable year if he would otherwise be treated as an employee but for the fact that the employer did not have net profits for that taxable year. . . . . 26 C.F.R. § 1.401-10(b)(1) https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR6f8c3724b50e44d/section-1.401-10#p-1.401-10(b)(1).

To rely on a remedial-amendment period, one must administer the plan according to the provisions that are not yet written. For some provisions, that might be a challenge if a plan sponsor anticipates using and relying on an IRS-preapproved document, and the writing of that document is not wholly in the plan sponsor’s control.

For many years (and before turning 50), Jane has been, and still is, a partner in a business organization. With many partners, Jane’s capital interest and her profits interest both have been always less than 5%. Now in her 90s, Jane remains an equity partner, still has her capital interest, and gets a draw on her profits interest. Jane still performs some personal services in the business. Assume the business organization’s individual-account retirement plan requires no more than is needed to meet § 401(a)(9) to tax-qualify. When is Jane’s required beginning date?