Peter Gulia

That ends that query! On the point about whether § 414(v)(7) restrains only employees (and not self-employed individuals), some law, accounting, investment-adviser, and other firms with working owners might have a perhaps awkward situation that nonpartners are restrained in choosing the tax treatment of catch-up deferrals while partners might be unconstrained in their choice of tax treatment.

While it’s not something I suggest (and I’m asking much more generally, rather than about ratherbereading’s situation): Would it be feasible for a plan to omit Roth elective deferrals and provide that a § 414(v) catch-up is available only to those participants not constrained by § 414(v)(7)? Would such a provision sufficiently avoid discriminating in favor of § 414(q) highly-compensated employees?

SECURE 2022’s § 338 amendment of ERISA § 105(a)(2) “shall apply with respect to plan years beginning after December 31, 2025.” That effective-date expression is somewhat awkward because ERISA § 105(a)(2)(E)’s command applies regarding calendar years. Some administrators are planning paper statements (to the extent required) in January 2027 for periods ended and as at December 31, 2026.

Even if a participant, beneficiary, or alternate payee affirmatively or impliedly assented to electronic delivery of disclosures, furnishing a statement in the participant portal is not, by itself, enough. Rather, the plan’s administrator (or its service provider) sends to the individual’s email or smartphone address a notice of internet availability, which describes the document furnished and hyperlinks to or specifies the website address at which the individual retrieves the document. 29 C.F.R. § 2520.104b-31(d)(3) https://www.ecfr.gov/current/title-29/part-2520/section-2520.104b-31#p-2520.104b-31(d)(3). The idea is that the administrator must tell the participant that there is something to look for.

To evaluate required or permitted ways to use the VEBA’s assets on a termination or dissolution, the VEBA trustees might consider, with other information, these documents: the VEBA’s trust declaration (or other governing document); the VEBA’s Form 1024 application for the Internal Revenue Service’s recognition of the VEBA’s Internal Revenue Code § 501(a) tax-exempt treatment; 26 C.F.R. § 1.501(c)(9)-4(d) https://www.ecfr.gov/current/title-26/part-1/section-1.501(c)(9)-4#p-1.501(c)(9)-4(d).

If the plan’s sponsor/administrator, after considering its lawyer’s advice, decides that § 414(v)(7)’s constraint does not apply to a self-employed individual, is there any employee (not a deemed employee) who in 2024 will be at least 50 and will have had $145,000 in 2023 wages?

An employer/administrator might further interpret Internal Revenue Code § 414(v)(7) by observing that the statute assumes a participant’s wages for the preceding year is knowable. A self-employed individual’s self-employment income for a calendar year might not be determined until the business organization has completed its tax returns and related tax-information reports for that year, perhaps by September or October of the next year. If there are different possible interpretations of § 414(v)(7) (and I don’t admit that idea), a sensible interpreter might prefer an interpretation that is reasonable to administer.

And might a limitation year be specified differently than a plan year? Perhaps another RTFD moment?

Luke Bailey is right that EBSA and IRS enforcement about ROBS transactions is almost none. In each of the unwinds I worked on, the participant and the corporation had already been advised that the prospect of government enforcement is zero. Rather, the businessperson’s motivator is an opportunity to use an unwind of a not conceded but arguable nonexempt prohibited transaction as a way to get ownership of the growing business out of the retirement plan and the law governing the retirement plan. It’s not about fearing the IRS; it’s about opening business-planning opportunities. This is for situations in which the startup is successful and the individual expects the business to grow. If the retirement plan holds the employer securities, carefully limit the scope of each provider’s services. That would be especially important for a registered (or not-required-to-be-registered) investment adviser. But remember, an agreement cannot rid a plan’s fiduciary of an ERISA § 405(a) co-fiduciary responsibility. A certified public accountant who provides nonaudit tax services should follow her professional standards, including the AICPA’s Statement on Standards for Tax Services. In my experience, some CPAs feel extra steps made necessary by employer securities in the retirement plan, even if those steps are only within the CPA firm, push the time on an engagement past the budget the firm assumed for the fixed fee quoted or estimated.

Read ERISA § 206(h), 29 U.S.C. § 1056(h) http://uscode.house.gov/view.xhtml?req=(title:29%20section:1056%20edition:prelim)%20OR%20(granuleid:USC-prelim-title29-section1056)&f=treesort&edition=prelim&num=0&jumpTo=true Read Internal Revenue Code of 1986 (26 U.S.C.) § 414(aa) http://uscode.house.gov/view.xhtml?req=(title:26%20section:414%20edition:prelim)%20OR%20(granuleid:USC-prelim-title26-section414)&f=treesort&edition=prelim&num=0&jumpTo=true One or more of the plan’s fiduciaries might want advice about: whether the failure was inadvertent; whether the participant’s survivor was culpable; whether some portion of the unprovided allocations was contrary to an IRC § 415 limit; and whether a loyal, prudent, and impartial fiduciary might make an informed and thoughtfully considered decision not to recoup some portion of the overpayment.

For Pennsylvania’s personal income tax, a retirement plan’s distribution—if not treated as an excludable old-age retirement benefit—counts in compensation income only after the distributee recovers her previously taxed contributions. 61 Pa. Code § 101.6(c)(8)(iii) https://www.pacodeandbulletin.gov/Display/pacode?file=/secure/pacode/data/061/chapter101/s101.6.html&d=reduce

Check whether the plan sponsor's agreement with its investment or service provider includes a service for not only paying a plan distribution but also tax-reporting it and withholding taxes from it. The deferred wages paid under a 457(b) plan can be sufficiently unhooked from regular wages that a service provider could do the tasks separately from the payer of regular wages.

Swimming, you mention: “The [plan-owned] company so far has been quite successful[.]” If the participant who has employer securities allocated to her plan account believes the corporation’s business will continue to grow, she might prefer to own the corporation’s shares outside the plan so she can get capital-gains tax treatment for future growth. Likewise, she might prefer that ownership of the shares become unburdened by ERISA and other constraints that govern the retirement plan. The plan’s fiduciaries might prefer to unwind, before the beginning of the first plan year for which the plan’s administrator must engage an independent qualified public accountant to audit the plan’s financial statements and related reporting, anything an IQPA might view as possibly a nonexempt prohibited transaction. If you are, or your investment-adviser firm is, or might become a fiduciary regarding the retirement plan, you might prefer to steer clear of potential situations in which you might have a cofiduciary responsibility to remedy another fiduciary’s breach. ERISA § 405(a)(3), 29 U.S.C. § 1105(a)(3) http://uscode.house.gov/view.xhtml?req=(title:29%20section:1105%20edition:prelim)%20OR%20(granuleid:USC-prelim-title29-section1105)&f=treesort&edition=prelim&num=0&jumpTo=true None of these observations is advice. I have substantial experience in unwinding ROBS transactions. If the ROBS-capitalized business is successful, a carefully designed unwind often improves the owner’s business planning and personal financial planning, including tax treatment.

Paul I, you raise a nice point on which Pennsylvania law might be unclear. But if Pennsylvania law counts in compensation income any portion of the Federal income that results from a non-Roth to Roth rollover within an employer-sponsored plan, the distributee gets cost recovery up to the sum of her previously Pennsylvania-taxed contributions. Further, there might be an interpretation that nothing of the Federal income that results from a non-Roth to Roth rollover within an employer-sponsored plan counts in Pennsylvania compensation income if the whole of that rollover is allocable to previously Pennsylvania-taxed contributions. Pennsylvania’s Revenue department has unofficially communicated an explanation: “If a distribution from an IRA was received before age 59½ and retiring, and [the distributee] rolled the entire distribution (100 percent) into a Roth IRA directly or within 60 days, the [rolled-over] distribution is not taxable income for Pennsylvania purposes. If the entire distribution was not rolled into another IRA, Pennsylvania-taxable income must be reported to the extent the distribution exceeds your contributions.” https://www.revenue.pa.gov/FormsandPublications/PAPersonalIncomeTaxGuide/Pages/Gross-Compensation.aspx Such an interpretation might be logically consistent with recognizing that such a conversion-to-Roth rollover, even if it results in income for Federal income tax purposes, is not for Pennsylvania personal income tax purposes an early distribution that pays or delivers compensation income to the continuing participant. And Pennsylvania should treat a conversion-to-Roth rollover within an employer-sponsored plan no less favorably than Pennsylvania treats a conversion-to-Roth rollover within an individual’s IRAs. https://revenue-pa.custhelp.com/app/answers/detail/a_id/1470/kw/rollover%20AND%20Roth

Today, I’m writing my updates of two chapters—Beneficiary Designations and Domestic Relations Orders—in Governmental Plans Answer Book. In that book and others, when I write a fictional example about State law I use the State of Anxiety, the State of Confusion, the State of Disarray, and the State of Goodness. (The examples often point out something mainstream “ERISA” practitioners might miss.) Because Pennsylvania’s personal income tax law is not based on the US Internal Revenue Code, I checked it first. A distribution reported with a rollover code on the Form 1099-R is treated, at least in processing, as not counting in compensation income. Does any State (that has an income tax) have law about rollovers that differs from Federal income tax law?

A State might have an income tax law that does not follow the US Internal Revenue Code. Is anyone aware of a State’s tax law that would treat as not an income-free rollover a transaction or an amount treated as rolled over for Federal income tax purposes?

Fair market value might matter. A loyal, prudent, and impartial fiduciary might not sell a retirement plan’s contract for less than adequate consideration, which might be the contract’s fair market value. Or if the plan distributes the contract to the participant, fair market value might affect the amount the plan trustee tax-reports on Form 1099-R. Showing attention to the valuation methods described in the Internal Revenue Service’s guidance might help show that the plan trustee acted in good faith.

A prohibited-transaction exemption (which is available regarding both ERISA §§ 406-408 and Internal Revenue Code § 4975) sets a playbook for a plan’s sale of its life insurance contract to the participant/insured. Prohibited Transaction Exemption 92-6 (PTE 92-6) Involving the Transfer of Individual Life Insurance Contracts and Annuities from Employee Benefit Plans to Plan Participants, Certain Beneficiaries of Plan Participants, Personal Trusts, Employers and Other Employee Benefit Plans amended, 67 Federal Register 56313 (Sept. 3, 2002) https://www.govinfo.gov/content/pkg/FR-2002-09-03/pdf/02-22376.pdf Here’s the key condition: “the amount received by the plan as consideration for the sale is at least equal to the amount necessary to put the plan in the same cash position as it would have been had it retained the contract, surrendered it, and made any distribution owing to the participant on his vested interest under the plan[.]” Or, if the plan provides (or at least does not preclude) a distribution of property other than money and the insured participant is entitled (perhaps by having reached a specified age) to a distribution, the participant might claim his distribution. The plan’s trustee would tax-report the distribution on Form 1099-R.

My method has been and remains doing (even for a micro plan, although for them with no fee) a revised summary plan description at least once each year, every year. I typically refresh the SPD each November, just after the IRS releases the inflation adjustments looking to the next year. And I do an off-cycle restatement if there is a change in a plan provision, or something else communicated in the SPD. Such a restated SPD describes not only the provisions stated in what practitioners call “the” plan documents but also provisions not yet written in those documents but “in operation” as the remedial-amendment legal fiction allows. I recognize such a method is wildly impractical if the plan’s sponsor/administrator relies exclusively on its recordkeeper’s or third-party administrator’s or its licensor’s document-assembly engine. For administrators that lack the resources to do it my way, there’s a wide range of business methods recordkeepers and third-party administrators use. Some suggest SPDs; some suggest SMMs. Some key the descriptions to what the plan-documents engine knows. Some include in-operation provisions the plan’s administrator has instructed. And service providers suggest a wide range of ways to schedule these communications. Belgarath, if you seek to avoid a series of summaries of material modifications as each year’s newly applicable provisions arrive, some practitioners suggest one can write a summary that includes not-yet-applicable provisions if the writing is clear about when each provision becomes applicable. However, such an explanation would require the plan’s administrator to know which optional provisions the plan’s sponsor has adopted and, for each, whether the sponsor makes it available with the earliest time relevant tax law allows, or some later applicability time the sponsor specified. An SPD or an SMM describes a plan. A plan’s administrator must not describe a provision the plan’s sponsor has not adopted. But a plan’s sponsor might adopt a provision, at least for ERISA title I purposes, by means much less formal than what practitioners call “the” plan documents.

What if a forfeiture balance is used to reimburse the employer for its payment of a proper plan-administration expense? What if it's not only a final-administration expense but some plan-administration from the recent past? If so, how much into the past may the fiduciary reimburse the employer?

Beyond considering points about tax-qualification conditions, consider whether each subsidiary's plan-administration method was (i) stated by the plan's governing documents; (ii) at least a plausible interpretation of the plan's governing documents; or (iii) contrary to or otherwise inconsistent with the plan's governing documents.

I advise big plans, but through my work as counsel to recordkeepers and other service providers I have deep experience with mid-size, small, and micro plans. Here’s one more way of considering why public law (and plan sponsors’ choices) shouldn’t make a plan’s administrator a decider of whether an individual needs to use her resources: Big and mid-size plans long ago arranged for recordkeepers to provide a service of deciding hardship claims. (Governmental plans even longer ago required their service providers to decide unforeseeable-emergency claims.) If a review is anything more than checking that a form, whether paper or website, is filled-out and signed, that’s a cost that gets accounted for in how the service provider quotes fees. The participants (who bear the plan-administration expenses, no matter how a fiduciary pays or allocates them) are paying for being told whether one’s circumstances are worthy of using one’s own resources.

Bri, RatherBeGolfing, and Paul I, thank you for your swift and nice help. If you count your pro bono volunteer hours, this counts; you’ve aided my volunteer work for a charitable organization. Bri, thank you for correcting my too-hasty reading. I read Schedule H’s line 4e on page 4 without seeing a lead on page 3. That “During the plan year:” phrase resolve almost all the reporting questions (and the remaining bit is trivial).

A Form 5500 Schedule H or I question asks: “Was this plan covered by a fidelity bond?” The form has boxes for Yes or No, and a line to state an amount. How does one answer this question if a fiduciary obtained the insurance before the administrator signed the Form 5500 but after the reported-on plan year ended? (Assume the fiduciary does not buy retroactive coverage.) Does the past-tense “was” refer to any time in the past? Or does “was” in context suggest the question refers, somehow, to the reported-on plan year? How does one answer the question if the fiduciary obtained the insurance during the reported-on plan year (so the plan was uninsured for some portion of the year)? Am I right in guessing the usual software restrains a user from answering both Yes and No? For the line that calls for a coverage amount, does one report the amount that applied as at the beginning of, or the end of, the reported-on year? Or is it the highest coverage amount on any day in the plan year?

Thank you for your kind words. Yes, it’s challenging for a recordkeeper to order and present a logic path and information when a user has many, and complex, choices. But Congress decided to allow the choices. (And decided not to rationally reorder the choices.) And once a recordkeeper offers a service feature to any of its customers, the recordkeeper becomes committed to developing or licensing the software, and making the service available to at least the big-enough customers.