Peter Gulia

CuseFan, I reacted to the query, which says an unidentified someone (perhaps the plan’s administrator? or its agent?) “told” a participant “she had to take an RMD for 2022[.]” If the participant did not truly consent to a distribution, the plan’s administrator mistakenly imposed an involuntary distribution, and the plan’s provisions did not require that imposition, does the participant have a right to demand that the plan accept a repayment and credit her account?

Here’s an even better question: If the plan’s provisions did not require an involuntary distribution, may the plan’s administrator treat it as a mistaken distribution and allow the participant to restore it to the plan and allocate the restoration to the participant’s individual account?

MoJo, thank you for your help. The recordkeeper’s system expected two electronic signatures. It is unclear whether the recordkeeper’s system sent (to anyone) a request for the adopting employer’s signature. Also, it is unclear whether the recordkeeper had set any contact for the anticipated adopting employer. The CFO is adamant that she received only the request for the plan sponsor’s signature. As mentioned, the CFO who signed for the sponsor also is the CFO of the sponsor’s subsidiary and has power to sign for it. Further, the only change made by the restated adoption agreement is adding the adopting employer. Without any leading question or suggestion, the CFO confirmed her authority to act for both corporations, and that she knew and intended that she acted for both. Before I read your helpful note, my advice was about the same as your suggestion. Likewise, I wrote the file memo.

In 2022, a retirement plan’s sponsor asked its recordkeeper to prepare a plan amendment to add, effective January 1, 2023, a business organization the sponsor acquired last summer. Using an IRS-preapproved document’s forms, the recordkeeper sent a restated adoption agreement. In December, the plan sponsor’s chief financial officer signed it. That signature is dated and time-stamped in the recordkeeper’s electronic-signature system. The trouble? The recordkeeper now says the amendment is ineffective because it lacks a signature on behalf of the adopting employer. The CFO who signed for the sponsor also is the CFO of the sponsor’s subsidiary and has power to sign for it. I’m guessing there is, or ought to be, no defect. But I know enough to recognize that I might not know enough about rules or customary processes for using IRS-preapproved documents. What am I missing?

MSN, thank you for pointing us to a 2022 proposals book. Your last paragraph is apt. Absent legislation and absent Treasury department guidance, an employer (and a plan’s administrator, if not the employer) should get and consider its lawyers’ advice. That advice might consider a range of issues, including, for example, how to measure a participant’s compensation for one or more purposes and how to determine elective deferrals (if applied as a percentage of compensation). Query: If a TPA knows an employer has these pay arrangements and knows the employer has not considered any of the tax law issues (including those that affect the retirement plan), how much responsibility should a TPA take on to suggest the employer get advice?

AMDG, thank you for your good help. And we see that it matters not only whether the plan now allows Roth deferrals but also whether the plan allowed Roth deferrals for the past periods. BenefitsLink neighbors, here’s my follow-up question: Should a participant who pays her make-up contribution by her personal check always prefer to designate that deferral as a Roth deferral?

An individual-account (defined-contribution) plan has no nonelective contribution and no matching contribution, only a participant’s elective deferrals. The plan allows participants a choice between non-Roth and Roth deferrals. After qualified military service, a reemployed participant invokes her right to make her contribution regarding the time she was away on military service. The participant’s wages are not enough to support her current-year deferrals and extra reductions for prior years’ deferrals. Fortunately, the reemployed person has savings. For the prior years’ deferrals, she sends her personal check to the plan’s recordkeeper/trustee. The participant asks that her make-up contribution be credited to her plan account’s Roth subaccount. Is there any reason the plan would not do this?

The story suggests someone used your work without the business courtesy of engaging your services or explaining why they weren’t. If you’re willing to speak with the certified public accountant, what else could you say beyond suggesting the CPA maintain her malpractice insurance, might want her own advice about whether to disassociate from further tax returns and other professional-conduct points, and might consider suggesting that the employer lawyer-up. Or if you are willing to offer services to support corrections, suggest that the employer’s lawyer engage you, to maximize evidence-law privileges for confidential communications. And you’d require a much-more-than-you-estimate advance retainer. Among other cautions, don’t you want to test whether the employer is serious about corrections?

In the 1980s, I often needed to tell people that following logic is not a reliable way to discern what the law is. By the late 1990s, everyone knew; and few wasted time even considering logic.

Remedial-amendment periods often result in several years for which tax law tolerates administering a plan not according to its ostensible governing documents but instead according to what the administrator presumes will become the written plan. For example, a provision in effect as early as January 1, 2020 need not be stated in “the” written plan until December 31, 2025, almost six years later. If remedial-amendment tolerances are good enough for a continuing plan, why does tax law seek a completed document the moment before the plan ends? Should SECURE 3.0’s lobbyists ask Congress to amend Internal Revenue Code § 401(b) so a plan’s end does not require the written plan to be amended for anything within the recognized remedial-amendment tolerances?

EBP, thank you for your observation that IRS employees sometimes expect, and for a written determination, might demand, unnecessary text in a plan’s document. Whether some portion of a plan termination’s single-sum final distribution must be treated as not an eligible rollover distribution because it is a § 401(a)(9)-required minimum distribution turns on what tax law provides, even if the plan provides the distribution sooner than § 401(a)(9) requires. In my view, whether a distribution (or a portion of a distribution) is not an eligible rollover distribution because it is a § 401(a)(9)-required minimum distribution does not turn on what the plan provides, but rather on whether Internal Revenue Code § 401(a)(9) requires the distribution for the plan to meet that tax-qualification condition. Citations below. For example, if a plan provides only a single-sum distribution (as many normally continuing plans do) and sets its required beginning date as the date the participant attains age 69 or, if later, normal retirement age (which I recognize is a much less usual provision), that the plan provides a required beginning date earlier than § 401(a)(9) requires for the plan to tax-qualify does not make the distribution one the payer must tax-report and withhold from as not an eligible rollover distribution, nor one for which the distributee could not direct a rollover. Belgarath, that no convenient text for a plan-termination amendment is available from the TPA (because it gets none from its plan-document supplier) might influence the plan sponsor’s decision-making about whether a plan-termination amendment must or should do something about the plan’s required beginning date (if nothing else calls for an amendment). While recognizing risks of the kind EBP describes, a plan’s sponsor might decide not to incur an incremental expense to draft a plan amendment that might not affect the plan’s real provision or administration. Selected citations: I.R.C. (26 U.S.C.) § 402(c)(4)(B) (excepting from an eligible rollover distribution “any distribution to the extent such distribution is required under section 401(a)(9)”) https://irc.bloombergtax.com/public/uscode/doc/irc/section_402; 26 C.F.R. § 1.402(c)-2/Q&A-3(b)(2) (excluding from an eligible rollover distribution “[a]ny distribution to the extent the distribution is a required minimum distribution under section 401(a)(9)” https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/section-1.402(c)-2.

If a plan-termination amendment provides a single-sum final distribution to every participant, beneficiary, and alternate payee, does that make unnecessary an amendment of the plan’s required beginning date?

A plan’s administrator, to guide its discretionary decisions about whether to pursue or forbear overpayments, might create, implement, and maintain a set of written procedures. Whatever discretion ERISA § 206(h) recognizes, a fiduciary must use discretion following everything else in ERISA, including § 404(a) and its implied duty of impartiality. To supplement a general concept of treating similar situations similarly, one might overlay not favoring highly-compensated employees. But that idea does not by itself mean one must pursue an overpayment merely because the distributee was a highly-compensated employee. A fiduciary might ask itself a rhetorical question: What would we do in each of the imaginable future situations in which a computation error results in too-much allocations to participants’ accounts? An administrator should pursue an overpayment if the error was, or resulted from, a failure to apply a limit under Internal Revenue Code of 1986 § 401(a)(17) or § 415. See I.R.C. (26 U.S.C.) § 414(aa)(4). While it hasn’t happened yet, the Treasury department might restrain some flexibility I suggest. “The Secretary may issue regulations or other guidance of general applicability specifying how benefit overpayments and their recoupment or non-recoupment from a participant or beneficiary shall be taken into account for purposes of satisfying any requirement applicable to a [tax-qualified] plan[.]”. I.R.C. (26 U.S.C.) § 414(aa)(5).

If the plan’s discontinuance and final distributions both are in 2023, there might be little to nothing to amend for. For SECURE 2022’s many provisions that would not apply until 2024, 2025, 2026, or 2027, one need not amend. For SECURE 2022’s optional provisions that, even if available in 2023, the plan did not operate, one need not amend. BenefitsLink mavens, what’s needed? Whether as a necessary tax-qualification provision? Or as an optional provision a plan did or would operate in 2023?

Paul I, thank you for your smart observation about how payroll's capabilities might follow from experience with similar incentives. About employers that might omit the incentive’s amount in counting compensation as a plan’s governing documents define it, could a retroactive plan amendment in 2025 or later legitimate what was done after 2022? SECURE 2022’s remedial-amendment period applies, if other conditions are met, “to any retirement plan or annuity contract which is made—pursuant to any amendment made by this Act or pursuant to any regulation issued by the Secretary of the Treasury or the Secretary of Labor (or a delegate of either such Secretary) under this Act[.]” Consolidated Appropriations Act, 2023, SECURE 2.0 Act of 2022 § 501(b)(1)(A). One imagines the designers of IRS-preapproved plan documents might add yet another box to check (or leave unchecked) for an exclusion or subtraction from what a document otherwise provides as a measure of compensation.

An employer now may give a de minimis financial incentive to employees who elect § 401(k) contributions. If that incentive is a “low-dollar gift card” some in Congress mentioned, an employer likely must tax-report on Form W-2 as taxable wages the gift card’s cash-equivalent amount. What do BenefitsLink neighbors think about whether America’s payroll people are ready to take on that work?

While many paragraphs of Internal Revenue Code § 401(a) don’t apply or apply differently regarding a church plan, § 401(a)(2) is not among those. Thus, a tax-qualification condition is that “under the trust instrument it is impossible, at any time prior to the satisfaction of all liabilities with respect to employees and their beneficiaries under the trust, for any part of the corpus or income to be (within the taxable year or thereafter) used for, or diverted to, purposes other than for the exclusive benefit of [the employer’s] employees or their beneficiaries[.]” Some indemnity is proper. For example, an indemnity State law provides a trustee even if nothing is specially expressed in the trust document likely is a fit. And a somewhat broader indemnity might be appropriate, especially if without it the plan might suffer some difficulty in attracting good people willing to serve as the plan’s trustees. But a too-broad indemnity might invade the exclusive-benefit concept. To balance those points, one might consider how much indemnity a charitable corporation may provide its director or officer. See, for example, Ala. Code § 10A-3-2.43. Even if a desired indemnity would be within a respectable range, one might look for whether the provision would be enforceable or void under the governing State law’s trust code or other statutory or common law of trusts. See, for example, Ala. Code §§ 19-3B-105(b)(9), 19-3B-1008. If it is the to-be-indemnified trustees who have power to make or amend the governing documents, one might consider doing something to show that making the indemnity is not “inserting” an exoneration provision or otherwise self-dealing. Approval by the church might help. A church plan’s indemnity should not be contrary to the internal law of the church that established the church plan, or regarding which, the church plan is established. This might matter considerably for a hierarchical church, or less so for a convention that favors local church autonomy. If you want some free help, please feel welcome to call me. I’m experienced with church plans, and I regularly work with Alabama people.

The employer might want its employee-benefits lawyer’s advice about these (and other) possibilities: For the periods for which the plan (if a plan was created) had not been communicated to employees, it might not be a tax-qualified plan. “A qualified pension, profit-sharing, or stock bonus plan is a definite written program and arrangement which is communicated to the employees and which is established and maintained by an employer[.]” 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). But if neither the employer nor any participant paid in a contribution (including a rollover-in contribution if the plan allows them), how much should one worry about the plan not being tax-qualified? From creation (if a plan was created), the plan might be a plan governed by title I of the Employee Retirement Income Security Act of 1974, and one or more of the plan’s fiduciaries might have breached a responsibility to communicate to employees the plan’s existence and essential provisions. If so, a fiduciary might be liable to make good a participant’s loss (for example, a lost elective deferral opportunity) that resulted from the fiduciary’s breach in not meeting a communications responsibility ERISA’s title I requires. But the employer that serves as the plan’s administrator might evaluate how likely or unlikely it is that a participant is aware and mindful of her ERISA rights. Or an IRS-recognized correction about a failure to provide an elective deferral opportunity might reduce a fiduciary’s ERISA liability to make good the participants’ losses.

To help sate George Chimento’s curiosity (and mine), would BenefitsLink neighbors fill us in about the rebalancing methods some recordkeepers use? ADP? Alight? Ascensus? BPAS? CBIZ? Corebridge? Empower? Fidelity? Infosys? John Hancock? Milliman? Nationwide? Newport? OneAmerica? Principal, PCS, Schwab? TIAA? Transamerica? Voya?

That’s right for those particular facts, and thank you for correcting me. My observation is that too many people imagine 73 is a particular plan’s applicable age without reading the plan’s governing documents and (if those documents state something else) without asking (even internally within an employer that serves as the plan’s sponsor and administrator) whether the plan’s sponsor intends to amend the plan.

If the plan’s governing documents do not specify 72 or 70½ for the applicable age, or the plan’s administrator presumes the plan’s sponsor will amend the plan and the amendment will have retroactive effect.

Do the flow-throughs of the tax credit mean the employer’s owners pay the $50,000 contribution and the $5,000 startup fee with the US Treasury’s money?

Let’s put some arithmetic on this: Imagine an employer has exactly 50 employees (not counting any business owner), all with wages less than $100,000, none a military spouse, and all are participants under the individual-account retirement plan. In 2023, the employer created that new plan. (Assume all accounting, tax, plan, and limitation years are the calendar year.) For 2023, the employer provides and pays a nonelective contribution of $1,000 for each participant. Is this portion of the tax credit $50,000? Imagine this employer pays the plan’s recordkeeper a $5,000 startup fee. Is this portion of the tax credit $5,000? Is the total tax credit for 2023 $55,000? Internal Revenue Code of 1986 (26 U.S.C.) § 45E Small Employer Pension Plan Startup Costs https://irc.bloombergtax.com/public/uscode/doc/irc/section_45e

Yes, there are many possible ways, and even many widely used ways, to state an instruction for investment allocations. And yes, it’s not unusual for a regime to align instructions for accumulated balances with instructions for ongoing contributions. From context, I’m guessing your query is about a participant’s investment direction expressed as a standing instruction—one that regularly and periodically continues, rather than an instruction that’s one-time or episodic. While it might be useful to consider recordkeepers’ methods, a more immediate question is whether the allocations the particular recordkeeper’s operations produce follow the text of the form the directing participant signed. If the allocations a recordkeeper produces vary from those that would result by following the standing-instruction form, it’s time to rewrite the form to communicate accurately and fairly what the recordkeeper really does. Or if the allocations follow the standing-instruction form but are not what a directing participant expected, it’s time to rewrite the form to communicate helpfully to a reasonable reader. (We know either effort will partially fail because of some participants’ aliteracy. But that doesn’t excuse trying to write a text a reasonable reader could comprehend.) If the clients you mention are employers that serve as plans’ administrators, you might be on to something to suggest a fiduciary attend to this. In my experiences, what recordkeepers do often makes good sense, but sometimes is communicated less skillfully than one might like.

Absent details in the forms’ instructions, one might look to the definitions in Internal Revenue Code of 1986 § 3405 to draw a line between periodic and nonperiodic distributions. Section 3405(e)’s definitions include these: (2) Periodic payment The term “periodic payment” means a designated distribution which is an annuity or similar periodic payment. (3) Nonperiodic distribution The term “nonperiodic distribution” means any designated distribution which is not a periodic payment. http://uscode.house.gov/view.xhtml?req=(title:26%20section:3405%20edition:prelim)%20OR%20(granuleid:USC-prelim-title26-section3405)&f=treesort&edition=prelim&num=0&jumpTo=true That a distributee receives standing-instruction monthly, quarter-yearly, or yearly payments counted to meet § 401(a)(9) minimum-distribution amounts might not make those payments sufficiently “similar” to an annuity that a payment is a periodic payment within the meaning of § 3405(e)(2). If either the distributee or the payer has a right to end or change the arrangement, that might make it dissimilar. If a plan precludes an annuity and similarly obligated payments, a plan’s administrator might prefer to treat minimum-distribution payments as nonperiodic. That way, the plan’s administration might use only one of the two withholding forms (for US payees).