Peter Gulia

If a contribution was not labeled as an elective deferral (whether Roth or non-Roth) or as an employee contribution (if the plan’s governing documents permit such a contribution), consider whether the contribution might have been a nonelective contribution. Unless the proprietor is confident he will have compensation (rather than a loss) for 2023, consider whether the contribution could exceed the § 415(c) annual-additions limit, a § 404 deduction limit, or some other relevant limit.

In the Internal Revenue Code of 1986, § 45E is under these divisions: Subtitle A—Income taxes Chapter 1—Normal taxes and surtaxes Subchapter A—Determination of tax liability Part IV—Credits Against Tax Subpart D—Business Related Credits (sections 38 to 45AA) I.R.C. § 45E. The § 45E credit is classed among the many that form § 38’s general business credit. (Refundable credits are in subpart C—sections 31-37.)

In 1985, few employment-based retirement plans provided the convenience of paying a distribution as a rollover contribution directly to another retirement plan or an Individual Retirement Account. About what happened or what was reported, the individual might request from the IRS a copy of her 1985 tax return (and of later years’ returns). Form 4506 https://www.irs.gov/pub/irs-pdf/f4506.pdf. Consider whether the individual’s tax returns over many years might have been filed under an assumption that the account was an IRA. If so, consistency might require a taxpayer not to assert a different treatment now. See, for example, Estate of Hilda Ashman v. Commissioner, Tax Court Docket No. 15578-96, T.C. Memo. 1998-14575 T.C.M. (CCH) 2160, T.C.M. (RIA) 98,145, 22 Empl. Benefits Cas. (BL) 1283, Pension Plan Guide (CCH) ¶ 23943M, 1998 Tax Ct. Memo LEXIS 146, 1998 WL 188936 (U.S. Tax Court Apr. 22, 1998) (In 1990, a distributee received a distribution from a qualified pension plan, and her tax return treated it as rolled over to another plan. For 1993, the taxpayer was estopped from asserting that the 1990 distribution was taxable in 1990.). See generally R. H. Stearns Co. v. United States, 291 U.S. 54 (1934) (by Cardozo, J.).

If an employer waits a few months to pay the contribution needed to meet the top-heavy minimum allocations, what is due to a participant who was a non-key employee at the relevant time who before the plan-wide top-heavy contribution has been paid severs from employment, is entitled to take a single-sum distribution of her whole account, and claims it? Must or should the employer “top up” such a participant’s account so it will have had its top-heavy minimum allocation before the participant exits the plan? If an employer does not do that, must or should the employer and administrator later credit the individual’s account with a “trailing” top-heavy minimum allocation?

That a direct rollover is available only when a distributee has a distribution to roll over is stated in the rule the requesting participant cited. In the Treasury department’s regulation to interpret and implement § 401(a)(31), the general rule’s first sentence states: “To satisfy section 401(a)(31), added by UCA, a plan must provide that if the distributee of any eligible rollover distribution elects to have the distribution paid directly to an eligible retirement plan, and specifies the eligible retirement plan to which the distribution is to be paid, then the distribution will be paid to that eligible retirement plan in a direct rollover described in Q&A-3 of this section.” 26 C.F.R. § 1.401(a)(31)-1/Q&A-1(a) (emphasis added). That rule follows the statute, which provides: “A trust shall not constitute a qualified trust under this section unless the plan of which such trust is a part provides that if the distributee of any eligible rollover distribution—(i) elects to have such distribution paid directly to an eligible retirement plan, and (ii) specifies the eligible retirement plan to which such distribution is to be paid (in such form and at such time as the plan administrator may prescribe), such distribution shall be made in the form of a direct trustee-to-trustee transfer to the eligible retirement plan so specified.” Internal Revenue Code of 1986 (26 U.S.C.) § 401(a)(31)(A) (emphasis added). If the employer’s plan is stated using an IRS-preapproved document, we’d be surprised to find a provision that allows an ostensible direct rollover in circumstances wider than those stated by the regulation. Further, the Internal Revenue Code, not an employer’s plan, governs whether a transaction is for Federal income tax purposes a rollover.

Internal Revenue Code of 1986 § 414A(c)(2)(A)(i) provides: “Subsection (a) [providing that an arrangement is not a § 401(k) arrangement unless it meets § 414A(b)’s automatic-enrollment requirements] shall not apply to—any qualified cash or deferred arrangement established before the date of the enactment of this section[.]” Whether an arrangement was established before December 29, 2022 is a mixed question of law and fact. To interpret what “established” means for § 414A(c)(2)(A)(i), there is no Treasury department rule or regulation, no IRS guidance, no court decision. If an employer wants a prediction about whether a plan with facts like those described above will become subject to § 414A(b), the employer might want its lawyer’s or other tax practitioner’s written advice. If 2025 arrives and there is yet no rule and no guidance, an employer’s good-faith reliance on an IRS-recognized practitioner’s written tax advice might support tax-return, information-return, and other reporting positions. “There may be substantial authority for the tax treatment of an item despite the absence of certain types of authority. Thus, a taxpayer may have substantial authority for a position that is supported only by a well-reasoned construction of the applicable statutory provision.” 26 C.F.R. § 1.6662-4(d)(3)(ii) https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR1d0453abf9d86e0/section-1.6662-4#p-1.6662-4(d)(3)(ii).

CuseFan has the information right. I can think of two situations in which Internal Revenue Code § 404 might be relevant: A charitable organization has some activities that result in unrelated business taxable income. Such a charity might want a § 404 deduction for the portion of retirement plan contributions allocated to the business that produces the UBTI. An employer—considering everything that counts together as one employer under IRC § 414(b)-(c)-(m)-(n)-(o)—includes not only charities and other exempt organizations but also taxable organizations. Contributions for employees of a taxable organization would be to a plan other than a § 403(b) plan. There can be accounting and tax-allocation issues when compensation of executives or physicians who perform services used by several charitable, tax-exempt, and taxable organizations of an employer is allocated to the organizations.

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.