Peter Gulia

At least since the 1990s, some plans have used no-substantiation and self-certification regimes for hardship claims. In a February 23, 2017 memo, the IRS openly recognized no-substantiation regimes. (The memo, although addressed to IRS examiners, was announced to practitioners with some fanfare in the Joint TE/GE Council’s 2017 meeting, and with news reporting by Bloomberg BNA, CCH/WoltersKluwer, and others. Further, the memo is codified in the Internal Revenue Manual, which anyone may read.) The memo describes a set of circumstances for which an IRS examiner is instructed not to request source documents to substantiate a hardship. Some of us see Congress’s Act as a next logical step. tege-04-0217-0008.pdf

AKowalski, thank you for your many helpful observations. What I hear from friends in employee-benefits and retirement-services practices is that, while the employer/administrator is responsible, self-correction puts some subtle and not-so-subtle pressures on a professional to find (1) that the employer had procedures (when it really didn’t), (2) that the defect is proper for self-correction (when that finding too is shaky), and (3) that the correction fits the Revenue Procedure (even if one strongly suspects or almost knows the employer isn’t spending the money and effort needed for sufficient correction). And, while the employer is responsible, a client wants comfort, if not the professional’s express written assurance at least the implied assurance that results from allowing the self-correction to proceed with the professional omitting to raise that it doesn’t work. With VCP a practitioner is professionally responsible for a truthful presentation of relevant facts, but can lay off interpretations and findings to the IRS. And the procedure ends with a paper with the IRS’s name at the head. Some practitioners like self-correction because it puts a professional in charge. Others dislike self-correction because it puts responsibility on the professional. If I did corrections work, I’d be inclined toward self-correction. But I can see why some prefer to ask (and sometimes be compelled to ask) for a government agency’s approval.

I don’t read new § 401(k)(14)(C) as precluding a service arrangement under which a service provider processes hardship claims “within a framework of policies, interpretations, rules, practices and procedures” instructed by the plan’s administrator. See 29 C.F.R. § 2509.75-8/D-2 https://www.ecfr.gov/current/title-29/subtitle-B/chapter-XXV/subchapter-A/part-2509/section-2509.75-8.

The Act’s text is: “The Secretary may provide by regulations for exceptions to the rule of the preceding sentence in cases where the plan administrator has actual knowledge to the contrary of the employee’s certification, and for procedures for addressing cases of employee misrepresentation.” New Internal Revenue Code of 1986 § 401(k)(14)(C) is in effect for plan years that began or begin after December 29, 2022. The tax-qualification condition’s tolerance for an administrator to rely on a claimant’s certification is not conditioned on the Secretary of the Treasury having made regulations. Rather, Treasury may make regulations to restrain an administrator’s reliance on a claimant’s certification “where the plan administrator has actual knowledge to the contrary of the employee’s certification[.]” Those regulations, if made and not contrary to Congress’s delegation or other law, could constrain an administrator’s reliance on a certification. But until Treasury makes regulations (and the statute specifies “regulations” rather than IRS subregulatory guidance), an administrator may rely on a certification if the administrator has no “actual knowledge to the contrary of the employee’s certification[.]” rely on hardship certification.pdf

Section 305 of the SECURE 2.0 Act of 2022 division of the Consolidated Appropriations Act, 2023 undoes some limits on the Internal Revenue Service’s Self-Correction Program. In a BenefitsLink discussion, Luke Bailey invites considering “whether VCP [the Internal Revenue Service’s Voluntary Correction Program] will be the rare exception going forward, replaced almost entirely by SCP, in light of SECURE 2.0 Sec. 305[.]” https://benefitslink.com/boards/index.php?/topic/70104-brain-cramp-employer-has-two-401k-plans/#comment-327871. To open a discussion: Who decides that the plan’s administrator had “established practices and procedures” that allow one to use self-correction? Who decides that a failure is inadvertent? Who decides that a failure meets the further conditions for an “eligible inadvertent failure”? Who decides that a correction fits within what a Revenue Procedure allows? How does a plan’s sponsor or administrator get comfort that a failure was eligible for self-correction and is sufficiently corrected? If a client wants a comfort letter, may a practitioner who is neither an attorney-at-law nor a certified public accountant render the letter? If a third person (for example, an acquirer of shares of, or business assets from, the plan’s sponsor or a participating employer) wants a comfort letter, may a practitioner who is neither an attorney-at-law nor a certified public accountant render the letter?

Whether a plan allows or precludes a before-retirement distribution is the plan sponsor’s choice. Whether a plan’s administrator must, may, or must not rely on a claimant’s certification turns on how much or how little discretion the plan’s governing documents grant. (A typical IRS-preapproved document likely grants a user plan’s administrator discretion about whether it relies on or ignores these certifications.) The Internal Revenue Code of 1986 provisions for relying on a claimant’s certification permit it for each of: an eligible distribution to a domestic abuse victim, an emergency personal expense distribution, a hardship distribution, a qualified birth or adoption distribution, an unforeseeable emergency distribution (under a government employer’s § 457(b) plan). A Federal or State prosecutor may pursue a claimant for a false-statement or theft-by-deception crime. But such a prosecution seems rare. (On January 13, 2022, a Federal grand jury charged Marilyn J. Mosby with four false-statement crimes. An indictment is not a finding of guilt. An accused is presumed innocent until proven guilty in later proceedings.) I doubt the Internal Revenue Service could tax-disqualify a whole plan if its administrator lacked actual knowledge that the claimant’s certification was false, and the administrator relied no more than the statute allows.

Belgarath, thank you for contributing your thoughts. I consider these questions from the perspective of a retirement plan’s administrator (the named fiduciary, not a third-party administrator). If 2033 arrives with no correction from Congress (and no Treasury department rule that binds a plan’s administrator), I’m not sure it’s cautious to compel an involuntary distribution, which might be contrary to a participant’s or beneficiary’s right to preserve her retirement savings. About a summary plan description (a task I’m working on now), I’ll explain the provision for those born in 1958 and earlier, explain it for those born in 1960 and later; state that there is an ambiguity for those born in 1959, and inform that the plan’s administrator intends not to decide an interpretation until it becomes necessary. BenefitsLink neighbors, other thoughts? A Treasury department interpretation or tolerance seems somewhat likely. SECURE 2.0 includes not only the change from age 72 to age 73 or 75 but also other nuances about minimum-distribution provisions. Treasury could include these points in a revision of its pending proposed rulemaking. BenefitsLink neighbors, any predictions?

For someone born in 1959, is 73 or 75 the “applicable age” that sets a required beginning date? The Consolidated Appropriations Act, 2023’s SECURE 2.0 Act of 2022 division includes this section 107: SEC. 107. INCREASE IN AGE FOR REQUIRED BEGINNING DATE FOR MANDATORY DISTRIBUTIONS. (a) IN GENERAL.—Section 401(a)(9)(C)(i)(I) is amended by striking “age 72” and inserting “the applicable age”. (b) SPOUSE BENEFICIARIES; SPECIAL RULE FOR OWNERS.—Subparagraphs (B)(iv)(I) and (C)(ii)(I) of section 401(a)(9) are each amended by striking “age 72” and inserting “the applicable age”. (c) APPLICABLE AGE.—Section 401(a)(9)(C) is amended by adding at the end the following new clause: “(v) APPLICABLE AGE.— (I) In the case of an individual who attains age 72 after December 31, 2022, and age 73 before January 1, 2033, the applicable age is 73. (II) In the case of an individual who attains age 74 after December 31, 2032, the applicable age is 75.”. (d) CONFORMING AMENDMENTS.—The last sentence of section 408(b) is amended by striking “age 72” and inserting “the applicable age (determined under section 401(a)(9)(C)(v) for the calendar year in which such taxable year begins)”. (e) EFFECTIVE DATE.—The amendments made by this section shall apply to distributions required to be made after December 31, 2022, with respect to individuals who attain age 72 after such date. Someone born in 1959 attains 73 in 2032, and attains 74 in 2033. Someone born in 1959 fits both clause (I) and clause (II). Imagine six Congresses (for twelve years) begin and adjourn with no enactment of any revision. Is there any reading of this statute that harmonizes clause (I) and clause (II)? If not: Is age 73 or age 75 the applicable age for someone born in 1959. What is the reasoning for your choice? And here’s a perhaps more immediate question: A summary that explains a plan—whether a summary plan description or a summary of material modifications—must “be written in a manner calculated to be understood by the average plan participant, and shall be sufficiently accurate and comprehensive to reasonably apprise such participants and beneficiaries of their rights and obligations under the plan. A summary of any material modification in the terms of the plan . . . shall be written in a manner calculated to be understood by the average plan participant[.]” ERISA § 102(a), 29 U.S.C. § 1022(a). How would a summary you write explain the “applicable age” that sets a required beginning date?

I’m not aware of anything in title I of the Employee Retirement Income Security Act of 1974 that requires a retirement plan’s administrator or trustee to provide a distributee the convenience of withholding for a State’s income tax. However, if a plan’s practice is not to withhold for State income tax unless law that governs the payer compels withholding, the plan’s administrator might consider whether a summary plan description and forms for requesting a distribution should furnish this information. Beyond the disclosures, notices, account statements, and reports that ERISA, by statute or a rule, requires, a fiduciary has duties to communicate further information a prudent fiduciary should know someone needs to protect his or her interests in the plan. A plan’s administrator must communicate with no less “care, skill, prudence, and diligence” than a prudent person who is experienced in administering a similar retirement plan would use.

While WCC’s explanation of the tax credit make this point needless: If a plan is not ERISA-governed (because, for example, there is no employee beyond an owner or deemed owner), unpreempted State law (for example, a wage-payment law) might preclude an automatic-contribution arrangement.

bito’money, Luke Bailey, and G8Rs, thank you for your helpful observations. I’m aware an IRS-preapproved document typically allows what ERISA § 205 allows. Some lawyers consider that restricting which witnesses and notarial acts are recognized might be within “administrative provisions” one may edit without losing reliance on the IRS’s opinion letter. Luke Bailey, thank you for sharing your experience that the IRS has not questioned plan provisions that restrict witnessing to a notary. bito’money, yes, a plan’s sponsor worries that allowing a “plan representative” to witness a consent leaves the employer that serves as the plan’s administrator vulnerable to an assertion that it is responsible for a failure in its representative’s witnessing, or at least for not prudently training and supervising its representative. Likewise, even with a State-licensed notary, there are arguments for making the notary’s employer responsible for the notary’s failure. The ways a notary’s employer might be liable are heightened when the employer has some interest in what would or would not be done following the presence or absence of a notary’s certificate. And even if an employer is not responsible for what a notary did or failed to do, a notary’s bad conduct can lead to litigation, which can require meaningful expenses. For one example: Butler v. Encyclopedia Brittanica, Inc., 41 F.3d 285, 287, 18 Empl. Benefits Cas. (BL) 2589, 2591, Pension Plan Guide (CCH) ¶ 23903B (7th Cir. 1994) (“The notary, Louise Joslyn [an employee of Britannica], stated that she does not know Anthony Cotini [the participant’s surviving spouse] and had no recollection as to whether he had personally appeared before her to sign the [spouse’s consent] documents [and did not recall meeting Cotini]. Joslyn stated that her general practice is to see the person actually sign a document before she will notarize it. However, she stated that she sometimes notarized documents without the signing party being present, particularly when an employee asked her to notarize a document that the employee claimed was signed by the employee’s spouse.”). Reading the trial and appeals courts’ published opinions, one imagines the employer/administrator spent more than a little money on Mayer, Brown & Platt’s work for an interpleader and several briefings and arguments. A plan’s administrator seeks more than to win at a trial, summary-judgment, or even motion-to-dismiss stage; rather, an administrator wants a claim never to be asserted. (Even winning a dismissal by explaining how a complaint fails to state a claim costs $$.) Facing no claim is likelier if there is no fact a plaintiff could allege (at least not without the attorney facing sanctions) to support an assertion about why the administrator is responsible for an alleged failure of the spouse’s consent. G8Rs, I too think that looking to a State-licensed notary gets an administrator more protection than likely would be had when allowing a plan representative to witness a spouse’s consent. But that a notary maintains a bond State law requires rarely helps. Those bond amounts are absurdly low. (Last time I looked, it was $1,000 for Pennsylvania, $10,000 for Texas, $15,000 for California.) Few notaries have enough errors-and-omissions insurance to restore a substantial retirement plan account. bito’money, I do not suggest an employer restrain its employee’s acts as a notary, certainly not off-hours and preferably not even during work hours. Rather, the restraint is about which notary’s certificate a plan’s administrator recognizes as sufficient for the administrator to accept a participant’s beneficiary designation. ERISA § 205’s purposes calling for someone to witness a spouse’s making of a written consent suggest the need for the witness’s independence. That’s why a plan’s sponsor/administrator might prefer a notary who lacks a personal loyalty, whether to the employer/administrator or to the consent-seeking participant, that could interfere, or even be argued to have interfered, with the notary’s judgment in acting honestly, impartially, and according to law. bito’money and Luke Bailey, I’ll give some thought to situations in which so few notaries are practically available that this might improperly or unfairly burden a participant’s opportunity to name a beneficiary other than one’s spouse.

My clients, whether plan sponsors or service providers, like the public policy of allowing bigger deferrals for early-60-somethings. Rather, some plan sponsors (and some who advise them) are mindful of how much we ask of recordkeepers and third-party administrators.

For services about an individual-account (defined-contribution) retirement plan, here’s a few key due dates, and whether each is (or isn’t) adjusted under the Treasury department’s rule about a return or payment due on a Saturday, Sunday, or legal holiday. For Form 5500 reports, the Labor department follows Treasury’s rule. January 15, a Sunday, is adjusted to Tuesday, January 17. March 15, a Wednesday, is not adjusted. April 15, a Saturday, is adjusted to Tuesday, April 18. If a Federal tax return is due on a Statewide legal holiday of the State in which the filer resides or a holiday of the District of Columbia, the return is timely if filed by the next day that is not a Saturday, Sunday, or legal holiday. 26 C.F.R. § 301.7503-1. In 2023, the District of Columbia’s Emancipation Day is observed on Monday, April 17. D.C. Code § 28-2701. Internal Revenue Code of 1986 § 7503 might provide no adjustment for something a retirement plan provides—for example, a corrective distribution—rather than an act the Internal Revenue Code commands. June 29 (180 days after 2022 ended), a Thursday, is not adjusted. July 29 (210 days after 2022 ended), although a Saturday, is not adjusted. See 29 C.F.R. § 2520.104b-3 (Summary of material modifications to the plan and changes in the information required to be included in the summary plan description). July 31, a Monday, is not adjusted. September 15, a Friday, is not adjusted. October 15, a Sunday, is adjusted to Monday, October 16.

The underlining is not mine.

Luke Bailey, thank you for your observations. And for causing me to look up the word stimmy. https://www.merriam-webster.com/words-at-play/stimmy-stimulus-words-were-watching About whether an ESA is a pension benefit: ERISA § 3(45) defines an ESA as “established and maintained as part of an individual account plan”, which ERISA § 3(34) defines as a pension plan. ERISA § 3(45)(A) further defines or describes an ESA as “a designated Roth account[.]” ERISA § 110(a) grants the Secretary of Labor power to “prescribe an alternative method for satisfying any requirement of this part with respect to any pension plan, or class of pension plans (including pension-linked emergency savings account features within a pension plan)[.]” ERISA § 404(c)(6) provides another situation in which a default investment is treated as a participant’s exercise of control. ERISA § 404(c)(6) applies “[f]or purposes of paragraph (1),” which refers to a pension plan. ERISA § 801(a)(1) provides that a sponsor of an individual-account plan “may include” an ESA in such a pension plan. ERISA § 801(c)(2)(A) commands that an ESA feature, if provided, “be included in the plan document of the individual account [pension] plan.” An ESA contribution may be a subject of a matching contribution that is a part of an individual-account pension plan. Under ERISA § 801(e), a plan with an ESA must allow, on a participant’s severance from employment (or the plan sponsor’s end of the ESA feature), a transfer from her ESA balance into another designated Roth account under the individual-account pension plan. An ESA may involve an automatic-contribution arrangement. These need ERISA § 514(e)’s (or ERISA § 802’s) preemption of States’ wage-payment laws. Although preemption can apply regarding a welfare-benefit plan, it’s not obvious that an ESA’s benefits are fairly described as “medical, surgical, or hospital care or benefits, or benefits in the event of sickness, accident, disability, death or unemployment, or vacation benefits, apprenticeship or other training programs, or day care centers, scholarship funds, or prepaid legal services[.]” See ERISA § 3(1)(A). Although Congress might have power to supersede State law regarding something that is neither kind of employee benefit, a court might find that a provision stated in part 5 or part 8 of subtitle B of title I of ERISA refers to an employee benefit ERISA § 3 describes. A plan’s administrator may consolidate notices about an ESA with notices under ERISA § 404(c)(5)(B) and ERISA § 514(e)(3). As I read ERISA § 206(d), that a pension plan includes an ESA feature does not alter the plan’s recognition of a qualified domestic relations order. But this might be no more burdensome regarding an ESA than for any other aspect of a plan that permits a QDRO distribution before the participant’s earliest retirement age. What’s different is that an ESA feature might bring in some participants who otherwise might have no account balance for a QDRO to reach.

As BenefitsLink yesterday informed us, this morning’s Federal Register publishes the Treasury department’s proposed rule that would permanently allow remote witnessing of a spouse’s consent, whether to a distribution not a survivor annuity or naming a beneficiary not the spouse. Some plans’ sponsor/administrators and those who advise them might use this as an occasion to reconsider what a plan allows for a spouse’s consent. ERISA § 205(c)(2)(A)(iii) permits recognizing a spouse’s consent “witnessed by a plan representative or a notary public[.]” But does anything require allowing both those means? May a plan provide that only a consent witnessed by a notary public allows something that requires the spouse’s consent? And further, may a plan provide that only a consent witnessed by a notary public who is neither an employee nor a nonemployee contractor of the plan’s sponsor/administrator is recognized?

https://www.whitehouse.gov/briefing-room/legislation/2022/12/29/bill-signed-h-r-2617/

The early-60s catch-up is for an “eligible participant who would attain age 60 but would not attain age 64 before the close of the taxable year[.]” Ignoring complexities about whether a few participants might use a tax year that doesn’t end with December: A software rule must look to what age a participant would attain by the year’s December 31, not what age a participant has attained when the system processes her deferral election. And about explaining things: An age 60 catch-up might begin for someone who is just barely past 59.

Internal Revenue Code of 1986 § 401(b)(2)’s new second sentence applies for “an individual who owns the entire interest in an unincorporated trade or business, and who is the only [deemed] employee of such trade or business[.]” I.R.C. § 401(b)(2), as amended by SECURE 2.0 § 317 (emphasis added). And it applies only for a “first plan year.” “[A] sole proprietor’s compensation is deemed currently available on the last day of the individual’s taxable year[.]”26 C.F.R. § 1.401(k)-1(a)(6)(iii) https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR6f8c3724b50e44d/section-1.401(k)-1#p-1.401(k)-1(a)(6)(iii). Before SECURE 2.0 (and for anyone not described in the new sentence), one must make her cash-or-deferred election by the last day of the year. With SECURE 2.0, one might make her cash-or-deferred election before the ides of April, and it is deemed made by the preceding year-close—if this is for a first plan year. Section 401(b)(2)’s new second sentence fits with its first sentence (from SECURE 2019), which provides that an “employer may elect to treat the plan as having been adopted as of the last day of the taxable year” if the employer adopts the plan “before the time prescribed by law for filing the return of the employer for the taxable year (including extensions thereof)[.]” Internal Revenue Code of 1986 § 401(b)(2). (The new sentence about the § 401(k) election is “without regard to any extensions[.]”) Under SECURE 2.0 § 317(b), the new second sentence added to IRC § 401(b)(2) “shall apply to plan years beginning after” December 29, 2022. I’ll leave to the BenefitsLink mavens whether a plan year may begin on December 30, 2022 and end on December 31, 2022.

If the requester will accept an email delivery of a pdf, consider furnishing a pdf of the whole Form 5500 annual report, including all schedules and the independent qualified public accountant’s report.

We anticipate the President will sign H.R. 2617 on December 30. Do BenefitsLink mavens think it's possible to establish and maintain a plan year that begins and ends on December 31?

H.R. 1450, the Small Business Emergency Savings Accounts Act of 2021 bill was introduced in the House of Representatives on March 1, 2021 but never acted on. H.R. 2617, the Consolidated Appropriations Act, 2023 bill passed both bodies of Congress last week and we anticipate the President will sign it tomorrow.

metsfan026: If the former owner of the employer died, which officer of the employer (which we imagine is the plan’s administrator) has authority to engage your services? Likewise, if the decedent served as the plan’s trustee, is there a successor trustee who can pay your fees?

Luke, thank you for your observation (which I suspect likely reflects the mainstream). If interpreting what a plan provides were my decision, I might carefully consider all the persons and interests you mention, perhaps even more carefully than other plan fiduciaries consider them. But my discussion question asks about what an employer (one that serves also as its retirement plan’s administrator) might do, and about whether a professional might support an interpretation as reasonable enough that it’s a possible, and perhaps plausible, interpretation. Does anything restrict a professional from writing a memo that analyzes all possible interpretations of what the plan’s governing documents provide for the non-key employees, describing strengths and weaknesses of each interpretation, and describing whether each interpretation has or lacks substantial authority? And after reading such a memo, could the employer/administrator, using its plan-granted discretion to interpret the plan, choose one of the possible interpretations? I’m mindful about how bad it is that an employer, as a fiduciary, decides a question that affects the employer’s personal interest. But ERISA § 408(c)(3) sets up that conflict. I recognize the questions I asked might be a fanciful hypothetical. Among many reasons, employers that face top-heavy issues might not engage a professional’s time for the analysis. I know some clients prefer that the professional resolve an ambiguity. But not every client thinks that way. And not every professional wants responsibility to make one’s client’s decision.

Not in this morning's White House briefing on many bills signed.