Peter Gulia

Looks like I might have guessed wrong in classifying the situation asked about. As BG5150, RatherBeGolfing, CuseFan, and I suggest, a benefit is not forfeitable because the accrued benefit is small. But many plans do what ratherbereading mentions. If the plan provides a small-balance involuntary distribution, the participant is severed from employment, and her account balance is no more than the cash-out level the plan specifies (whether $7,000, $5,000, $1,000, or $200), the administrator obeys the plan and instructs the involuntary distribution. If the account balance is $199 and the distribution-processing fee charged against the individual’s account is $75, that results in a net payment (before withholding for taxes) of $124. To follow TPApril’s example, if the distribution-processing fee to be charged is $100, but the account balance is $90, that might result in a net payment of $0.00. But it is a distribution, even if the distributee sees no money. (Some recordkeepers abate a fee so, as applied regarding a particular distributee, the fee is no more than distributee’s before-charge account balance. Also, some recordkeepers set the charge, if not the fee, so a net payment for the involuntary distribution never is less than $1, $5, or $10. Some do this so routine processing will make records showing that the distribution was paid.) If the plan’s administrator has segregated a forfeiture merely because an accrued benefit is small, each of the plan’s fiduciaries might want its or her lawyer’s advice.

I guessed TPApril didn’t intend to describe a forfeiture, at least not in the legal sense that ERISA § 203 (or Internal Revenue Code § 411) uses the constructs of nonforfeitable and forfeitable benefits. If what’s asked is about a situation in which a benefit is treated as forfeitable because the accrued benefit is small, I too would share BG5150’s question about what the documents governing the plan provide. And that includes interpreting a plan not to provide a forfeiture of a benefit ERISA § 203 commands to be nonforfeitable. Let’s hope TPApril clarifies which situation is asked about—a forfeiture, or an involuntary small-balance “cash-out” distribution.

BG5150, I guess the situation TPApril describes is about a small-balance (< $7,000) involuntary distribution after a participant is severed from employment. If so, TPApril asks about situations in which an account might be so small that a charge for a distribution-processing fee depletes the account, resulting in no net payment. As my note suggests, a plan’s fiduciary (or a service provider helping a plan’s fiduciary) might consider what communication could inform a distributee that the involuntary distribution was made.

If the employer paid the plan’s obligations before documenting an interest-free loan to the plan (and meeting all conditions of the prohibited-transaction exemption), the plan might have no obligation to repay the employer. About whether to reimburse an employer, a prudent fiduciary might want one’s lawyer’s advice about whether paying money when the plan has no obligation would be an exclusive-purpose breach. Each of the plan’s trustee and, if a different person, the plan’s administrator might want its or her lawyer’s advice about whether a fiduciary must or should decline to reimburse the employer until there is a solution that protects the plan’s fiduciaries. The employer might want its lawyer’s advice about whether the employer engaged in a nonexempt prohibited transaction, and whether the employer must or should file an excise-tax return (even if the PT has been corrected). Likewise, the employer might want its lawyer’s or certified public accountant’s advice about how to determine the “amount involved” in a prohibited transaction. There might be a pull toward not getting a lawyer’s help and informally resolving the situation. But recall some TPAs’ saying: “Don’t let the client’s problem become your problem.” Be ready to show that you did not give tax or other legal advice (unless you’re licensed and engaged to provide advice). And to prove that your services were only as instructed by the plan’s administrator and trustee. This is not advice to anyone.

Assuming the plan provides an involuntary distribution (and assuming a plan fiduciary had decided to allocate the distribution-processing fee uniformly to accounts involuntarily distributed): The plan’s administrator might consider no less communication than for a similar distribution that results in a net payment. That might include a § 402(f) explanation, even if the net amount of an eligible rollover distribution is $0.00. (Some service providers and plan administrators do not set up a $0.00 net payment as a reason to suppress a § 402(f) explanation that otherwise is called for.) (Be mindful that the IRS’s 2026 text, unedited, could confuse a reader. The awkwardness begins with the opening sentences: “You are receiving this notice because you are eligible to receive a payment from the [INSERT NAME OF PLAN] (the “Plan”) that you can transfer (roll over) to an IRA or another employer plan. This notice is intended to help you decide whether to roll over the payment (or some portion of it).”) After the quarter-year closes, an account statement ought to show the charge against the individual’s account and the resulting $0.00 balance. Beyond statute-prescribed communications, an administrator or its service provider might deliver—before the distribution is made—a one-paragraph explanation that the distribution-processing charge lowers the distributable account balance to $0.00. Will the payer deliver a Form 1099-R that shows the $0.00 distribution? To protect fiduciaries regarding later claims, one might consider how to preserve evidence that the involuntary distribution was made, and that it resulted in the distributee receiving the benefit she was entitled to. This is not advice to anyone. Have service providers developed a regime I’m unaware of?

Is there any reason the company would not open a new bank account?

Consider also legal and practical differences between the two audiences of disclosures: A service provider’s 408b-2 disclosure to the responsible plan fiduciary can be the service agreement itself, with no separate document. But a 404a-5 disclosure to a directing participant, beneficiary, or alternate payee calls, practically, for a distinct writing beyond the service agreement. Is a sales tax charged against the plan’s assets but not allocated particularly to the individual distributee who caused the sales tax to be incurred? If not charged particularly, is the plan's expense for sales tax generally allocated among all individuals’ accounts, including those who did nothing that incurred a sales tax?

George Morrison, thank you!

EBP, thank you for "cracking the code" for me.

Consider amending the documents governing the plan so they provide what the plan sponsor wants. Before writing an amendment, evaluate whether an otherwise desired provision might result in a tax-disqualifying discrimination in favor of highly-compensated employees. This is not advice to anyone.

Thank you! If the designer of the IRS-preapproved documents now or soon (before 2026 ends) offers a SECURE amendment: May a plan sponsor use such an amendment without defeating reliance on the IRS’s opinion letter on the IRS-preapproved documents? Is there a Revenue Procedure or some other IRS guidance that allows this?

I’m now reviewing a draft of a plan’s restatement. (The draft is not from the recordkeeper, nor my firm.) The IRS-preapproved documents lack items to specify which of SECURE 2022’s optional provisions the plan includes or omits. For whatever plan amendment ought to be done by December 31, 2026, the plan sponsor (following its internal business reasons) wants to do everything now. What’s an effective way to document the plan’s SECURE 2022 optional provisions (without defeating reliance on the IRS’s opinion letter on the IRS-preapproved documents)? Or is the plan sponsor’s preference to document now its SECURE 2022 provisions unwise?

If the IRS-preapproved documents are insufficient to express the plan sponsor’s desired provision, is it feasible to do a plan amendment that would state the desired provision?

For the annuity that began ten years ago, is it grounded on less than the whole of the participant’s (then undivided) benefit?

More outlooks and viewpoints?

Another point for my curiosity: If you knew for certain that the Regulations Governing Practice before the Internal Revenue Service do not apply to you—ever, or for the situation in which you’re evaluating your professional or business conduct, would that change your thinking? First, a worker who is not an attorney-at-law, certified public accountant, enrolled agent, enrolled actuary, or enrolled retirement plan agent has no right to practice before the Internal Revenue Service. Next, a worker who has a practice right might choose not to use it. (Some employee-benefits lawyers, and even tax lawyers, have rarely or never submitted a Form 2848 or otherwise appeared before the IRS.) Further, the Treasury department recognizes (after an appeals court’s unchallenged decisions) that Treasury’s power to impose conduct rules extends only to a representative, and only to the extent of the representation in a matter before the IRS. That recognition shows in the Treasury’s proposed § 10.34: § 10.34 Standards with respect to tax returns, and documents, affidavits, and other papers prepared or submitted while representing a client before the Internal Revenue Service. (a) Tax returns prepared or submitted while representing a client in a matter before the IRS. (1) A practitioner may not willfully, recklessly, or through gross incompetence— (i) Sign Prepare, while representing a client in a matter before the Internal Revenue Service or, for tax returns prepared by the practitioner prior to the representation, including returns already filed with the Internal Revenue Service, submit a tax return or claim for refund or a claim for a credit that the practitioner knows or reasonably should know contains a position that— . . . . (d) Relying on information furnished by clients. A practitioner advising a client to take a position on a tax return, document, affidavit{,} or other paper submitted to in a matter before the Internal Revenue Service, or preparing or signing a tax return as a preparer, generally may rely in good faith without verification upon information furnished by the client. The practitioner may not, hHowever, the practitioner may not ignore the implications of information furnished to, or actually known by, the practitioner, and must make reasonable inquiries if the information as furnished appears to be incorrect, inconsistent with an important fact or another factual assumption, or incomplete. Regulations Governing Practice Before the Internal Revenue Service [notice of proposed rulemaking], 89 Fed. Reg. 104915 (Dec. 26, 2024), https://www.govinfo.gov/content/pkg/FR-2024-12-26/pdf/2024-29371.pdf. See also https://www.reginfo.gov/public/do/eAgendaViewRule?pubId=202504&RIN=1545-BQ12. Even if the Treasury has some power to regulate written tax advice unconnected to a representation before the IRS, in the hypo described above a bad position does not result from the TPA’s tax advice. If you knew for certain that the Circular 230 rules do not apply to you, would you nonetheless follow those rules as a way to guide your conduct? (I ask about this for my university and other teaching on professional conduct. I’ll use any information I learn here only in an aggregate or anonymously.)

Now that we’ve responded to Jakyasar’s question: “Anything I am missing?”, let’s consider some conduct questions. Recall that the difficulty results from someone else’s, not Jakyasar’s, advice. Imagine a TPA tells her client (perhaps after politely telling her client’s accountant) about the issue-spotting we’ve described. Despite those conversations, imagine the client (and assume it is the retirement plan’s administrator) in writing instructs the TPA to treat the worker as an employee and to count the amount tax-reported on Form 1099-MISC or 1099-NEC as the worker’s compensation to be counted in the retirement plan’s definitions of compensation. And to perform the TPA’s services using those instructions. BenefitsLink neighbors, what do you think: Is it permissible to perform the TPA’s services as instructed? About whether to resign the engagement, is that a must, should, or need-not? What’s your reasoning for your outlook? Is your view affected or influenced by a professional-conduct rule? Is what to do based on a personal business choice?

Paul I, thank you for confirming my suspicion that, if ever a plan administrator beyond Stack-On Products Company did this, 30 years later it likely is no longer done.

I doubt you’re missing the essence. Assuming the employer or service recipient and the retirement plan’s administrator are, in essence, one person (whether a business organization or a human), and assuming the worker’s parent controls the business: Was the worker old enough that she could have made a nonvoidable contract? (Under most States’ laws, 18.) Even if old enough, is it believable that the worker was not subject to the service recipient’s control for the work done? Was the work done of a kind that would be done by nonemployees for a business of the kind the service recipient does? If the plan’s administrator interprets the plan’s governing document to treat a worker tax-reported as a nonemployee as an employee and to treat her nonemployee compensation as an employee’s wages, what is the administrator’s reasoning for that interpretation? Has anyone advised the employer/administrator about tax law’s duties of consistency? If your client tells you it has considered carefully and accepts all risks involved, how confident are you that you would not be seen to be involved in a breach or violation? Might it be effective to suggest to the certified public accountant—quietly, out of the view and hearing of your client—that the CPA reconsider one’s advice? And consider whether a Form 1099-MISC report was mistaken and should be undone and corrected with a Form W-2 report? This is not advice to anyone.

A PWBA interpretation suggests a fiduciary may override a participant’s last investment direction when the participant “can no longer be located” and the individual’s investment seems no longer prudent. ERISA Advisory Opinion No. 96-02A (Feb. 9, 1996) https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/our-activities/resource-center/advisory-opinions/1996-02A.pdf. BenefitsLink neighbors, are you aware of any plan that replaces a “missing” participant’s investment?

Paul I, thank you for sharing these investment perspectives.

A tax-qualified retirement plan might provide the plan’s payer’s tax-information reporting treating the plan’s participant as having been the beneficial owner of the life insurance death benefit (if the “P.S. 58” or other measure of each year’s value of death-benefit protection was tax-reported to the participant). This is not advice to anyone.

Four dozen views and no reply might suggest Fidelity’s Digital Assets Account might have relatively few fiduciaries’ approvals. Or, that take-ups were in Fidelity service platforms with little or no TPA involvement.

BG5150, the plan’s administrator ought to heed carefully a duty about tax-information reporting, and (often) a need to count excludable and taxable portions of the plan’s distribution. A life insurer might have or might lack information to support a reckoning of the death-benefit portion, the surrender-value portion, and previously-taxed amounts. Even when an insurer has all needed information, an insurer might have little or no duty or obligation regarding the retirement plan’s tax-information reporting of the plan’s distribution. The Treasury’s rule about the Federal income tax treatment of “Life insurance contracts purchased under qualified employee plans” is 26 C.F.R. § 1.72-16 https://www.ecfr.gov/current/title-26/section-1.72-16. This is not advice to anyone.

It’s not unusual for a life insurer to say its obligation ends with paying the death proceeds to its contract’s beneficiary. A retirement plan’s trustee, the trustee’s custodian, or either’s agent would receive the insurer’s payment, and the recordkeeper would (following the plan administrator’s express or implied instruction) credit an amount according to the retirement plan’s provisions. For an individual-account retirement plan, that’s typically crediting the amount to the deceased participant’s account. From there, a plan’s administrator would evaluate each claim that the claimant is the participant’s beneficiary according to the plan’s claims procedure. If no claim is submitted before the § 401(a)(9) beginning date nears, the plan’s administrator might initiate its finding about who is the participant’s beneficiary and prepare to pay an involuntary distribution. This is not advice to anyone.