Peter Gulia

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?

While many paragraphs of Internal Revenue Code § 401(a) don’t apply or apply differently regarding a church plan, § 401(a)(2) is not among those. Thus, a tax-qualification condition is that “under the trust instrument it is impossible, at any time prior to the satisfaction of all liabilities with respect to employees and their beneficiaries under the trust, for any part of the corpus or income to be (within the taxable year or thereafter) used for, or diverted to, purposes other than for the exclusive benefit of [the employer’s] employees or their beneficiaries[.]” Some indemnity is proper. For example, an indemnity State law provides a trustee even if nothing is specially expressed in the trust document likely is a fit. And a somewhat broader indemnity might be appropriate, especially if without it the plan might suffer some difficulty in attracting good people willing to serve as the plan’s trustees. But a too-broad indemnity might invade the exclusive-benefit concept. To balance those points, one might consider how much indemnity a charitable corporation may provide its director or officer. See, for example, Ala. Code § 10A-3-2.43. Even if a desired indemnity would be within a respectable range, one might look for whether the provision would be enforceable or void under the governing State law’s trust code or other statutory or common law of trusts. See, for example, Ala. Code §§ 19-3B-105(b)(9), 19-3B-1008. If it is the to-be-indemnified trustees who have power to make or amend the governing documents, one might consider doing something to show that making the indemnity is not “inserting” an exoneration provision or otherwise self-dealing. Approval by the church might help. A church plan’s indemnity should not be contrary to the internal law of the church that established the church plan, or regarding which, the church plan is established. This might matter considerably for a hierarchical church, or less so for a convention that favors local church autonomy. If you want some free help, please feel welcome to call me. I’m experienced with church plans, and I regularly work with Alabama people.

The employer might want its employee-benefits lawyer’s advice about these (and other) possibilities: For the periods for which the plan (if a plan was created) had not been communicated to employees, it might not be a tax-qualified plan. “A qualified pension, profit-sharing, or stock bonus plan is a definite written program and arrangement which is communicated to the employees and which is established and maintained by an employer[.]” 26 C.F.R. § 1.401 1(a)(2) https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR6f8c3724b50e44d/section-1.401-1#p-1.401-1(a)(2). But if neither the employer nor any participant paid in a contribution (including a rollover-in contribution if the plan allows them), how much should one worry about the plan not being tax-qualified? From creation (if a plan was created), the plan might be a plan governed by title I of the Employee Retirement Income Security Act of 1974, and one or more of the plan’s fiduciaries might have breached a responsibility to communicate to employees the plan’s existence and essential provisions. If so, a fiduciary might be liable to make good a participant’s loss (for example, a lost elective deferral opportunity) that resulted from the fiduciary’s breach in not meeting a communications responsibility ERISA’s title I requires. But the employer that serves as the plan’s administrator might evaluate how likely or unlikely it is that a participant is aware and mindful of her ERISA rights. Or an IRS-recognized correction about a failure to provide an elective deferral opportunity might reduce a fiduciary’s ERISA liability to make good the participants’ losses.

To help sate George Chimento’s curiosity (and mine), would BenefitsLink neighbors fill us in about the rebalancing methods some recordkeepers use? ADP? Alight? Ascensus? BPAS? CBIZ? Corebridge? Empower? Fidelity? Infosys? John Hancock? Milliman? Nationwide? Newport? OneAmerica? Principal, PCS, Schwab? TIAA? Transamerica? Voya?

That’s right for those particular facts, and thank you for correcting me. My observation is that too many people imagine 73 is a particular plan’s applicable age without reading the plan’s governing documents and (if those documents state something else) without asking (even internally within an employer that serves as the plan’s sponsor and administrator) whether the plan’s sponsor intends to amend the plan.

If the plan’s governing documents do not specify 72 or 70½ for the applicable age, or the plan’s administrator presumes the plan’s sponsor will amend the plan and the amendment will have retroactive effect.

Do the flow-throughs of the tax credit mean the employer’s owners pay the $50,000 contribution and the $5,000 startup fee with the US Treasury’s money?

Let’s put some arithmetic on this: Imagine an employer has exactly 50 employees (not counting any business owner), all with wages less than $100,000, none a military spouse, and all are participants under the individual-account retirement plan. In 2023, the employer created that new plan. (Assume all accounting, tax, plan, and limitation years are the calendar year.) For 2023, the employer provides and pays a nonelective contribution of $1,000 for each participant. Is this portion of the tax credit $50,000? Imagine this employer pays the plan’s recordkeeper a $5,000 startup fee. Is this portion of the tax credit $5,000? Is the total tax credit for 2023 $55,000? Internal Revenue Code of 1986 (26 U.S.C.) § 45E Small Employer Pension Plan Startup Costs https://irc.bloombergtax.com/public/uscode/doc/irc/section_45e

Yes, there are many possible ways, and even many widely used ways, to state an instruction for investment allocations. And yes, it’s not unusual for a regime to align instructions for accumulated balances with instructions for ongoing contributions. From context, I’m guessing your query is about a participant’s investment direction expressed as a standing instruction—one that regularly and periodically continues, rather than an instruction that’s one-time or episodic. While it might be useful to consider recordkeepers’ methods, a more immediate question is whether the allocations the particular recordkeeper’s operations produce follow the text of the form the directing participant signed. If the allocations a recordkeeper produces vary from those that would result by following the standing-instruction form, it’s time to rewrite the form to communicate accurately and fairly what the recordkeeper really does. Or if the allocations follow the standing-instruction form but are not what a directing participant expected, it’s time to rewrite the form to communicate helpfully to a reasonable reader. (We know either effort will partially fail because of some participants’ aliteracy. But that doesn’t excuse trying to write a text a reasonable reader could comprehend.) If the clients you mention are employers that serve as plans’ administrators, you might be on to something to suggest a fiduciary attend to this. In my experiences, what recordkeepers do often makes good sense, but sometimes is communicated less skillfully than one might like.

Absent details in the forms’ instructions, one might look to the definitions in Internal Revenue Code of 1986 § 3405 to draw a line between periodic and nonperiodic distributions. Section 3405(e)’s definitions include these: (2) Periodic payment The term “periodic payment” means a designated distribution which is an annuity or similar periodic payment. (3) Nonperiodic distribution The term “nonperiodic distribution” means any designated distribution which is not a periodic payment. http://uscode.house.gov/view.xhtml?req=(title:26%20section:3405%20edition:prelim)%20OR%20(granuleid:USC-prelim-title26-section3405)&f=treesort&edition=prelim&num=0&jumpTo=true That a distributee receives standing-instruction monthly, quarter-yearly, or yearly payments counted to meet § 401(a)(9) minimum-distribution amounts might not make those payments sufficiently “similar” to an annuity that a payment is a periodic payment within the meaning of § 3405(e)(2). If either the distributee or the payer has a right to end or change the arrangement, that might make it dissimilar. If a plan precludes an annuity and similarly obligated payments, a plan’s administrator might prefer to treat minimum-distribution payments as nonperiodic. That way, the plan’s administration might use only one of the two withholding forms (for US payees).

Thanks. I added a note: Widenings of which former employees might get this exception apply for a distribution after December 29, 2022. Providing this exception not only for age 50 but also for 25 years of service applies for a distribution after December 29, 2022. I didn’t edit the reference to § 72(t)(10), which refers to both its subparagraphs. Subparagraph (A) states the exception from the too-early tax. Subparagraph (B) states the specially defined term qualified public safety employee. That definition is “[f]or purposes of this paragraph,”—that is, § 72(t)(10). Yet, I see some awkwardness: Section 72(t)(10)(A) provides the exception from the too-early tax “to an employee who provides firefighting services” even if she was neither “any employee of a State or political subdivision of a State” within the meaning of § 72(t)(10)(B)(i) nor someone described in § 72(t)(10)(B)(ii). That paragraph (10)’s heading now mentions “private sector firefighters” suggests Congress might have intended to provide this exception from the too-early tax not only to those who received the distribution from a governmental plan but also “to an employee who provides firefighting services[.]” Distributions added or changed by SECURE 2019 and 2022.pdf

Yes, adding an investment alternative usually requires an advance notice under ERISA’s 404a-5 rule. My point was not that adding an investment alternative would not call for such an advance notice. Rather, my point is that many recordkeepers set practical requirements beyond what ERISA’s 404a-5 rule might require for a plan’s administrator to meet its fiduciary responsibility to communicate to participants and beneficiaries. An agreement might condition a service on a notice to the plan’s participants and beneficiaries, even in circumstances for which ERISA’s 404a-5 rule might not require an advance notice. Further, an agreement might condition a service on more days’ notice—at least to the recordkeeper—than the 30 days’ notice the 404a-5 rule calls for. When responding to questions about how quickly or easily a plan’s administrator may change or add an investment alternative, it’s often efficient to look to the recordkeeper’s service agreement.

Without commenting on which, or whether any, description of the law is right or wrong: Consider that each of ADP or Ascensus routinely asserts it does not provide tax or legal advice. Recordkeepers and other service providers use plenty of smart people, who often know as much or more law than lawyers in law firms. But evaluate whether it’s prudent to follow legal advice from a person that denies that it provides legal advice.

And this is a recurring situation: Many payers lack a directing plan administrator’s instruction about a disability if deciding a disability was unnecessary to approve a claim for a distribution.

My wider point is that an adviser—no matter how great her knowledge, methods, and skills—cannot render good advice until she knows the identity of the advisee and learns the advisee’s goals and interests. In the situation described, the seller and the buyer might have diverging interests—at the least, one ought to recognize that possibility. A search for “the correct solution” is not in the abstract. Which solution is fitting depends on what one’s advisee hopes to accomplish.

Before you turn to your questions (and perhaps some others), you might consider who has authority to make decisions in administering seller company’s plan. Assuming seller company’s plan names seller company as the plan’s administrator: If buyer company bought shares of seller company, it seems likely that buyer company controls all or most rights to manage seller company, likely including seller company’s powers to administer seller company’s plan. But if buyer company bought assets from seller company, powers to administer seller company’s plan might have remained with seller company. You might prefer to wait on analyzing potential plan-administration adjustments until you know from whom you get your engagement and scope. And who has authority to pay, and has paid, or will be obligated to pay, your fee.

tuphao and Lou S., thank you.

Combining SECURE 2019 and SECURE 2022 changes, a sole proprietor may establish, retroactively, a plan (up to her tax-return date with extensions) and may make, retroactively, an elective-deferral election (up to her tax-return date without extensions). (Let’s leave aside the BenefitsLink discussion about whether that’s practically useful for 2022. Imagine a sole proprietor with calendar tax years, and a plan and § 401(k) arrangement that, when retroactively adopted, are effective January 1, 2023.) Am I right in thinking the situations in which a proprietor might want a § 401(k) arrangement are: the proprietor is 50 or older and classifying a portion of a contribution as a § 414(v) catch-up elective deferral enables a contribution up to $73,500 instead of $66,000; or the proprietor’s deemed compensation is less than $264,000? Is there another situation in which an elective deferral allows a proprietor to do something she could not do with her nonelective contribution alone? (Please ignore Pennsylvania income tax.)

CuseFan, thank you for linking us to a service provider’s article and its link to a Bureau of Consumer Financial Protection Advisory Opinion. https://www.govinfo.gov/content/pkg/FR-2020-12-10/pdf/2020-26664.pdf Perhaps one of the trade associations might ask the Internal Revenue Service to publish a Revenue Ruling that assumes the facts of CFPB’s “Covered Earned Wage Access Program” and sorts out how an eligible retirement plan’s provisions for elective deferrals apply regarding the before-paydate pay and the later wage-payment adjustments.