Peter Gulia

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.

From BenefitsLink’s helpful postings of Labor and Treasury regulatory agendas: An agenda item shows Treasury’s estimate, perhaps optimistic, that the agency would publish a notice of a proposed rulemaking by December 2023. https://www.reginfo.gov/public/do/eAgendaViewRule?pubId=202304&RIN=1545-BQ70 If you want to send suggestions even before a proposal is published or released, the agenda item names three lawyers assigned to the project.

Many commenters in these website discussions are confident in their knowledge about how the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code of 1986 govern or affect retirement plans or, for fewer, health and other welfare-benefit plans. Fewer would claim expertise about laws that more generally govern other aspects of an employment relationship. (And I have no knowledge of employment laws more than general awareness.) The United States’ Family and Medical Leave Act of 1993 is complex, even for points about which employers might be covered and which employees might become entitled to a leave. Among other points, there are differences between whether the Act governs an employer, and whether its employee has a right to FMLA leave. The Act can govern an employer, even if none of its employees could become entitled to FMLA leave. A regulation interprets what is a worksite (not only a principal office or other headquarters) and how to measure who is “within 75 miles of [her] worksite[.]” 29 U.S.C. § 2611. And the 75-mile radius is not “as the crow flies” or as simply drawn on a map. 29 C.F.R. § 825.111 https://www.ecfr.gov/current/title-29/subtitle-B/chapter-V/subchapter-C/part-825/subpart-A/section-825.111. The Federal law does not supersede or preempt “any State or local law that provides greater family or medical leave rights[.]” 29 U.S.C. § 2651. Many States’ and cities’ laws provide more. If your client, whether as an employer or as an employee-benefit plan’s administrator, needs answers, it might want more help than you’re likely to find as general information here.

To get BenefitsLink neighbors’ best help, consider filling-in some missing facts and assumptions. When did the former owner die? Was it before, on, or after December 29, 2022? Does the successor owner intend the company continue as an operating business? Does the successor owner intend to continue the retirement plan? Or end the plan? For the trustee-managed account with the time-to-redeem investments, how much of that account is allocated to the former owner rather than other participants? What (approximately) are the relative percentages? Do the plan’s governing documents allow for a distribution delivered in rights or property other than money? Do the plan’s governing documents allow a distribution paid or delivered over time? Or does the plan provide only a single-sum distribution? Is the surviving spouse older, the same age as, or younger than the former owner? If the plan’s governing documents do not expressly provide an involuntary distribution sooner than as needed to meet an Internal Revenue Code § 401(a)(9) tax-qualification condition, might the plan’s administrator interpret the plan’s minimum-distribution and required-beginning-date provisions (including some impliedly adopted during a remedial-amendment period) to align with current Federal tax law (including recent proposed regulations and the SECURE 2.0 Act of 2022)?

Jamie Hopkins’ Forbes article quotes me for the idea that a participant, on reaching age 18 (or 19 or 21, if an arguably relevant State law sets that end of minority), is unlikely to disaffirm elective deferrals made while he was a minor. “If mom’s business gives her son a paycheck, a tax-favored savings opportunity, and a matching contribution, how likely is it that a first-year college kid will disaffirm his teenage years’ 401(k) contributions? And if he did, mom could get back her matching contributions and the investment gains on them.” https://www.forbes.com/sites/jamiehopkins/2021/03/15/the-how-tos-and-benefits-of-a-minor-participating-in-401ks/?sh=10656eae5a48

Even if the Service does not reconsider the interpretation about discretionary matching contributions, the Service should allow no less flexibility for plans with § 403(b) arrangements than for plans with § 401(k) arrangements. Further, publishers of IRS-preapproved documents might present to the Service reasoned arguments about how charities—with no business owners, and often fewer opportunities for highly-compensated employees to tilt contributions in their favor—ought to get more flexibility. Yet, I know no “word on the street” about what the Service might allow or forbid.

Here is the agency’s record of comment letters, which includes two filed in the reopened comment period: https://www.regulations.gov/docket/EBSA-2022-0026/comments?postedDateFrom=2022-11-01&postedDateTo=2023-06-12. Among other points, some comment letters advocate: Allowing correction of delinquent participant contributions or loan repayments up to the due date for filing the Form 5500 report for the year in which the breach happened. Or allowing 365 calendar days from the date an amount was or ought to have been segregated from wages. More use of government website calculators to count to-be-restored investment earnings and excise taxes (or excise-tax amounts instead included in restoration of participants’ accounts). Omitting a condition of notifying the Labor department about a self-correction. Increasing the $1,000 limit on to-be-restored earnings to make self-correction available for more plans, including plans with thousands of participants. And if there are other points on your wish list, one might read the fifteen comment letters to see whether anyone raised the point.

MD-Benefits Guy, listen carefully to Brian Gilmore’s wide knowledge. And don’t be distracted by the example about California law; the concepts described might apply regarding Maryland’s and other States’ laws.

If a “MAY” letter results in someone submitting a claim, consider following carefully ERISA § 503 and the plan’s claims procedure, including notices about time limits to seek a review and a time bar on a challenge in court or arbitration.

A few questions: Is the employee-benefit plan ERISA-governed? Is any health or other welfare benefit provided by an insurance contract? Is any health or other welfare benefit provided from the employer’s resources and not by an insurance contract? To the extent that the plan’s provisions are not constrained by a State’s insurance law or by an insurer’s contract, what would the plan’s sponsor prefer to provide? About a State’s or a political subdivision’s requirement, do you mean a general public law? Or do you mean a condition imposed regarding a government’s action as a buyer of goods or services offered by the plan’s sponsor or its affiliate?

If a plan provides beneficiary-directed investment, a fiduciary might want its recordkeeper or other service provider to divide a deceased participant’s account into the beneficiaries’ segregated-share accounts on the earlier of any beneficiary’s claim for a distribution or any beneficiary’s delivery of an investment direction. Further, if a plan provides beneficiary-directed investment and a fiduciary wants an ERISA § 404(c) defense that a beneficiary has control over investments for his or her account (or a similar State-law defense regarding a governmental plan or a church plan), a fiduciary might want its service provider to divide a deceased participant’s account into the beneficiaries’ segregated-share accounts as soon as any beneficiary is identified (and the maximum number of segregated shares is known or determined). A fiduciary might want its service provider to send an identified beneficiary a “welcome” package that includes the summary plan description, the most recent 404a-5 disclosure, notices, other communications, preliminary identity credentials, and instructions about ways to submit investment directions. Among several purposes and reasons, that a beneficiary received such a package might set up that the beneficiary then had control over investments for his or her account. Some recordkeepers do not “split” a participant’s account until at least one beneficiary is sufficiently identified with (at least) a name, a Taxpayer Identification Number, and an address. Some recordkeepers do not “split” a participant’s account until there is a name, a TIN, and an address for each of the segregated-share accounts. But some recordkeepers might allow filling-in placeholder information for a not-yet-identified beneficiary with a placeholder, the plan administrator’s EIN, and the plan administrator’s address.

In my experience, an unwinding of a ROBS brings plenty of billable hours; but no prospective client ever has been willing to spend even a small amount to set up correctly a retirement plan's investment in a new business.

I too prefer that my client not interpret a word that has a generally received legal meaning to mean something other than relevant law’s received meaning. If the plan’s sponsor were my client, the particular question we’re remarking on would never happen because I would have written or rewritten, even for an IRS-preapproved document, the provisions for a default taker. And for a provision that looks to the estate, the plan would provide (at least) for a payment to a human who, or an artificial person that, has power to act as the or a personal representative of the estate, perhaps including a small-estate affiant. The plan’s trustee and administrator need someone to do the act of depositing or otherwise negotiating the plan trust’s check or other payment. Even if my client provides (or interprets the plan to recognize) a small-estate-affidavit regime, the administrator (often, the same person as the plan’s sponsor) might prefer not to learn the State laws of 50+ States. Some might not want to rely only on an affidavit to pay the six-figure amounts some States’ laws allow. Some might not want the burden of deciding which State’s law is relevant. Those and further reasons are why I leave room for a plan’s sponsor or administrator to invent its own nationally uniform regime that builds from the concepts of small-estate-affidavit regimes, without applying a particular State’s law. I too advise clients that being correct is not enough to avoid a loss, liability, or expense. But all courses of action (including inaction) can bear those risks. If one must defend something, it might be simpler for an ERISA-governed plan’s fiduciary to defend a posture that courts have recognized: the plan-documents rule, or Firestone deference to a fiduciary’s discretionary interpretation. Anyhow, we see similarly your idea that an ERISA-governed plan’s administrator may choose as its discretionary interpretation one that looks to relevant State law. One doubts a Federal court would say such an interpretation is so obviously unreasoned that it does not get (at least) deference.

I concur with MoJo’s observations that an ERISA-governed retirement plan’s administrator need not (and should not) consider the interests of a participant/decedent’s creditors. But to discern the meaning of the plan’s governing documents—including status terms such as “personal representative”, “estate”, “child”, “parent”, or “sibling”—or to resolve questions of fact, a plan’s fiduciary makes its own discretionary interpretations, which need not follow any State’s law. A court follows the fiduciary’s interpretation unless it is obviously unreasoned. For example, Herring v. Campbell, 690 F.3d 413, 53 Empl. Benefits Cas. (BL) 2515 (5th Cir. Aug. 7, 2012) (John Wayne Hunter, the participant/decedent, died with no effective beneficiary designation. The retirement plan’s default beneficiary provision provided the remaining benefit according to a priority that put the participant’s “surviving children” ahead of his “surviving brothers and sisters[.]” Stephen Herring and Michael Herring, John’s stepsons, claimed the benefit. John’s will left his estate to Stephen and Michael, and referred to them as his “beloved sons.” Also, Stephen and Michael asserted that under Texas law’s doctrine of equitable adoption they were John’s children. The plan’s administrator decided that the word “children” referred only to a biological or legally adopted child. The appeals court held that it was proper for the plan’s administrator to ignore Texas’ and any State’s law. The appeals court deferred to the administrator’s interpretation of the plan.) About ERISA’s express supersession or preemption provision, the text is: “Except as provided in subsection (b) of this section, the provisions of this title [I] and title IV shall supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan described in section 4(a) and not exempt under section 4(b).” ERISA § 514(a) (emphasis added). (The quotation is of ERISA § 514(a), not the unofficial compilation in 29 United States Code § 1144(a). The “relate to” text is the same in both the Statutes at Large and the unofficial U.S.C. compilation.) MoJo is right that courts, struggling to find meaning in and some boundary for “relates to” have sometimes considered whether a State’s statute seems consistent or inconsistent with ERISA’s provisions, including Congress’s § 2 findings and declaration of policy. But courts’ decisions about preemption, and about ERISA § 404(a)(1)(D)’s plan-documents rule, have been clearest when requiring a plan’s fiduciary to follow States’ laws would interfere with administering a plan according to its governing documents, or would interfere with national uniformity in a plan’s administration. For example: Boggs v. Boggs, 520 U.S. 833, 21 Empl. Benefits Cas. (BL) 1047 (June 2, 1997) (A plan’s administrator may ignore a State’s community-property law. Further, ERISA preempted Louisiana law to the extent that it allowed the participant’s spouse to make a testamentary transfer of her State-law property interest in benefits the plans had already distributed.). Egelhoff v. Egelhoff, 532 U.S. 141, 151, 25 Empl. Benefits Cas. (BL) 2089 (Mar. 21, 2001) (ERISA supersedes a State law that, absent a plan provision to the contrary, would revoke, absent reaffirmation, a beneficiary designation that names a former spouse). The Court’s opinion reasoned that the State law’s provision allowing a plan’s sponsor to opt out of the default-revocation provision did not remove the State law from ERISA’s preemption. The Court’s opinion reasoned that a need to maintain awareness of States’ laws “is exactly the burden ERISA seeks to eliminate.” Kennedy v. Plan Adm’r for DuPont Sav. & Inv. Plan, 555 U.S. 285, 45 Empl. Benefits Cas. (BL) 2249 (Jan. 26, 2009) (A plan’s administrator may ignore a State’s law, even a State court’s order, that purports to waive a benefit the plan’s governing document provides.). All these decisions refer to what the DuPont opinion describes as a need for “a uniform administrative scheme” that does not require a plan’s administrator to look to any State’s law. I’m unaware of any US Supreme Court or Federal appeals court decision holding that an ERISA-governed plan’s fiduciary must pay or deliver money, rights, or other property to obey a State’s small-estate-affidavit statute.

If the person seeking to invest in a startup is a representative or other supervised person of an investment adviser or a securities broker-dealer, he might want his lawyer’s advice about what he would disclose to each firm he is a representative of or otherwise associated with, and how those firms might treat the investment as a personal securities transaction, an outside business activity, or both. Or even if the might-be investor is the sole owner-operator of his investment-advice business, he might want his lawyer’s advice about what must or should be disclosed to securities regulators and, perhaps, to his clients and prospective clients.

For some plans, a discussion might be text on or accompanying the claim form to guide the claimant about how much gross-up to request, and about what withholding instruction to give.

If an ERISA-governed plan’s administrator chooses to rely on a small-estate-affidavit regime for some claims, the administrator might constrain (to less than what a superseded State law allows) the circumstances for which the administrator might accept such an affidavit, the waiting period for observing that no probate petition is filed, and the amount for which the administrator might rely. For example, instead of waiting only the 30 or 40 days many States’ statutes require, an administrator might require a longer wait. And instead of allowing a distribution up to $184,500 (California), a plan’s administrator might set a procedure-specified national limit—for example, $100,000 or, if less, the State-law limit for the State whose law the claimant’s affidavit is based on.

My experience with Form 5500-EZ paper filings (before electronic filing) is that the IRS often processed deficiency letters for information returns that unquestionably had been filed. That the IRS had signed a certified-mail receipt confirming that the Form 5500-EZ was received did not slow down processing the mistaken deficiency letters.

I suspect there might be few instances in which the IRS found an error not corrected because the plan’s administrator lacked adequate compliance procedures to make the situation eligible for self-correction. But that might result not because IRS people think the procedures are good enough, but because the IRS examines so few plans, and even those ordinarily only for a few years. Yet, I confess my limited experience; let’s look for what BenefitsLink neighbors say.