Peter Gulia

The rulemaking’s explanation states: “Both Form 5500 and 5500–SF and their instructions are being revised to reflect a change in the reporting methodology related to the number of participants used in the current threshold ([that is], less than 100 participants) for determining when a defined contribution pension plan may file as a small plan. This change in methodology also includes eligibility for the waiver of the requirement for small plans to have an audit and include the report of an independent qualified public accountant (IQPA) with their annual report.” Page 12002 middle column. And pages 12002-12003 explain that a point about long-term part-time workers helped persuade the Labor and Treasury departments to adopt the with-a-balance count. The Labor department conservatively estimated the expense savings as $146 million. https://www.govinfo.gov/content/pkg/FR-2023-02-24/pdf/2023-02653.pdf

ERISA § 103(a)(3)(C) [29 U.S.C. § 1023(a)(3)(C)] and 29 C.F.R. § 2520.103-8 speak in terms of what an independent qualified public accountant’s examination and report “need not extend to[.]” And the rule can apply not only if all, but also when only some, of the plan’s assets were “held by a bank or similar institution or insurance carrier[.]” 29 C.F.R. § 2520.103-8(b) https://www.ecfr.gov/current/title-29/subtitle-B/chapter-XXV/subchapter-C/part-2520/subpart-C/section-2520.103-8#p-2520.103-8(b). The AICPA Auditing Standards Board’s Forming an Opinion and Reporting on Financial Statements of Employee Benefit Plans Subject to ERISA recognizes this: SAS 136 ¶ 8: “When [the plan’s administrator] elects an ERISA [§] 103(a)(3)(C) audit, as discussed in paragraph 7, the audit need not extend to any statements or information related to assets held for investment of the plan (hereinafter referred to as investment information) by a bank or similar institution or an insurance carrier [if all § 103(a)(3)(C) conditions are met].” SAS 136 ¶ 34: “Plans may hold investments in which only a portion are covered by a certification by a qualified institution. In that case, the auditor should perform audit procedures on the investment information that has not been certified.” The implementation guidance and illustrations suggest an IQPA’s report might need notes to communicate clearly about which investment information was certified, and which was not.

To preserve a protected benefit, would it be enough to provide that the transferee plan accepts a repayment of a qualified birth or adoption distribution a transferor plan paid before that plan’s transfer-in?

If part-time employees might put a plan over a threshold and call for engaging an independent qualified public accountant, is it feasible to divide participations into two (or more) plans? If an employer anticipates a meaningful number of employees will become eligible because of § 401(k)(2)(D)(ii), one might—to facilitate efficient coverage and nondiscrimination testing, or for other plan-administration reasons—organize two distinct plans: (1) a plan for those who meet eligibility conditions without any to meet § 401(k)(2)(D)(ii), and (2) another plan for those who are eligible only by meeting eligibility conditions provided to meet § 401(k)(2)(D)(ii). One would design and administer the plans to meet required aggregations and disaggregations, and to rely on only permitted aggregations and disaggregations. Or is this where BenefitsLink mavens remind me I don’t know enough about how services are provided to small plans?

Although it does not affect how the law cited above applies, consider too that many ESOPs, especially many designed to invest in shares of a corporation with subchapter S income tax treatment, preclude a participant from ever getting shares, even for a distribution.

Thank you all for contributions to this discussion. From this and other observations, here’s some of my anecdotal findings about people who work on retirement plans: Many (likely a majority) have never submitted a Form 2848. Many have never appeared before the Internal Revenue Service, not even as an unenrolled return preparer. Many have no government-granted license or privilege that invokes any set of professional-conduct rules; yet, almost all self-impose conduct norms similar to lawyers’ professional-conduct rules. Likewise, many voluntarily follow the Treasury department’s “Circular 230” rules for practice before the IRS, even when those rules never apply. Only a very few of us have ever acted as a representative seeking a letter ruling. Requests for a determination that a plan is tax-qualified are mainly for plan terminations, not creations. Some midlife determinations happen after a merger or acquisition. The big categories that call for someone eligible to practice before the IRS are examinations and voluntary corrections. Here’s my follow-up query to refresh my survey: Considering the SECURE 2.0 Act of 2022’s expansions of how much may be done with self-corrections, do you anticipate decreases in how many VCP submissions you handle?

C.B. Zeller and Belgarath, thank you for helping me with a thoroughness check. Further, a perhaps related point of tax law treats someone who has been a self-employed individual as continuing to be a self-employed individual even if a year’s earned income is zero or negative. The term “self-employed individual” means, with respect to any taxable year, an individual who has earned income (as defined in paragraph (2)) for such taxable year. To the extent provided in regulations prescribed by the Secretary, such term also includes, for any taxable year— (i) an individual who would be a self-employed individual within the meaning of the preceding sentence but for the fact that the trade or business carried on by such individual did not have net profits for the taxable year, and (ii) an individual who has been a self-employed individual within the meaning of the preceding sentence for any prior taxable year. I.R.C. (26 U.S.C.) § 401(c)(1)(B) http://uscode.house.gov/view.xhtml?req=(title:26%20section:401%20edition:prelim)%20OR%20(granuleid:USC-prelim-title26-section401)&f=treesort&edition=prelim&num=0&jumpTo=true. For purposes of section 401, a self-employed individual who receives earned income from an employer during a taxable year of such employer beginning after December 31, 1962, shall be considered an employee of such employer for such taxable year. Moreover, such an individual will be considered an employee for a taxable year if he would otherwise be treated as an employee but for the fact that the employer did not have net profits for that taxable year. . . . . 26 C.F.R. § 1.401-10(b)(1) https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR6f8c3724b50e44d/section-1.401-10#p-1.401-10(b)(1).

To rely on a remedial-amendment period, one must administer the plan according to the provisions that are not yet written. For some provisions, that might be a challenge if a plan sponsor anticipates using and relying on an IRS-preapproved document, and the writing of that document is not wholly in the plan sponsor’s control.

For many years (and before turning 50), Jane has been, and still is, a partner in a business organization. With many partners, Jane’s capital interest and her profits interest both have been always less than 5%. Now in her 90s, Jane remains an equity partner, still has her capital interest, and gets a draw on her profits interest. Jane still performs some personal services in the business. Assume the business organization’s individual-account retirement plan requires no more than is needed to meet § 401(a)(9) to tax-qualify. When is Jane’s required beginning date?

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?