Peter Gulia

Thank you!!!

Consider whether not correctly recording the owner and nature of securities accounts and other investment-related accounts could result in generating tax-information reports—including, for example, Forms 1099-B, 1099-DIV, 1099-INT, which might suggest capital gains, dividends, and interest to be shown in the tax return of the organization with the Employer Identification Number.

Another retirement plan’s administrator that filed a Form 5500 report on 2021 without an independent qualified public accountant’s opinion is Trump Payroll Corp., the sponsor and administrator of the Trump Payroll Corp. 401(k) / Profit Sharing Plan. See pdf page 22 of 23. (I didn’t look for this; I stumbled across it while searching for a different plan.) Trump Payroll Corp 401k 2021 5500 20221017112257NAL0029732609001.pdf

That the recordkeeper says a signature is needed does not necessarily mean the recordkeeper says the plan requires that signature. Rather, it might be about something the recordkeeper or a custodian requires under either’s service agreement. A custodian might have no authority to decide whether the plan requires or permits a distribution. A custodianship for a retirement plan is nondiscretionary, with all payments instructed. If the decedent is the only human who had authority to act for the plan’s administrator/trustee, instructing a distribution might have to wait until there is someone with authority to act for the plan’s administrator/trustee.

Consider also checking Wright & Miller’s Federal Practice and Procedure treatise to see whether its part on interpleaders explains a convention about tax reporting for an amount paid into the court’s registry.

I haven’t looked to discern whether the statute and rule are clear or ambiguous about your question. Would a Form 1099-R report issued before the distributee is known show in the “recipient’s name” box the United States’ court and in the “recipient’s TIN” box the omission of a taxpayer identification number? Although courts nowadays favor text interpretations over purpose interpretations, a court might find such a report would be so useless to the Internal Revenue Service that an interpretation that the statute and rule require such reporting is incorrect or otherwise unsound. Beyond your advice, perhaps there’s a way to get some comfort, or at least some showing that the payer/reporter (if your client has that responsibility) acted in good faith. In the petition, consider asking not only for the court to decide the rightful distributee but also for the court’s declaratory judgment that the plan’s administrator or trustee ought not to file any Form 1099-R tax-information report until the court has decided the proper distributee (or the matter is settled and the interpleader case is ended). (One would not ask this unless the payer/reporter, after thorough legal research, finds that the question is unsettled or otherwise doubtful.) If the court grants that declaratory judgment, the IRS should not assert a penalty against the report for acting according to the court’s order. Or if the court grants no relief, the payer/reporter will have shown it was aware of the question about when and what to report, did reasonable legal research, and in good faith sought to get a confirmation of the answer.

For a § 401(a) plan stated using IRS-preapproved documents, a user’s reliance on the IRS’s letter is not lost merely because the user changed or added some “administrative” provisions the Revenue Procedure sets up some limited tolerance for. For a § 403(b) plan, the 2013 Revenue Procedure omits a similar tolerance. Is that correct? Is that still current? Is it so that a user must do no change beyond what the adoption-agreement form allows?

What sets up a restorative payment is that a fiduciary pays it to restore losses to a plan (or IRA) if there was a reasonable risk of liability for the fiduciary’s breach, and other facts and circumstances show the payment is not a disguised contribution. For a § 401(a)-qualified plan (or another plan that has § 415 limits), a Treasury department rule distinguishes between an annual addition and a restorative payment, which does not count as an annual addition. 26 C.F.R. § 1.415(c)-1(b)(2)(ii)(C) https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR686e4ad80b3ad70/section-1.415(c)-1#p-1.415(c)-1(b)(2)(ii)(C); Limitations on Benefits and Contributions Under Qualified Plans, 72 Federal Register 16878, 16887 [middle column] (Apr. 5, 2007), https://www.govinfo.gov/content/pkg/FR-2007-04-05/pdf/E7-5750.pdf. That rule follows a general principle described in Revenue Ruling 2002-45, 2002-2 C.B. 116. The Internal Revenue Service has issued letter rulings applying the principle regarding IRAs. IRS Letter Rulings 2009-21-039 (Feb. 25, 2009), 2008-52-034 (Sept. 30, 2008), 2008-50-054 (Sept. 18, 2008), 2007-38-025 (June 26, 2007), 2007-24-040 (Mar. 20, 2007), 2007-19-017 (Feb. 12, 2007), 2007-14-030 (Jan. 11, 2007), 2007-05-031 (Nov. 9, 2006). [In the numbering of letter rulings, the two digits after the year show the week in which the ruling was released under the Freedom of Information Act.] Although a letter ruling is no precedent [I.R.C. § 6110(k)(3)], one might use the reasoning of the three layers of sources described above—and that the IRS has consistently applied the principle since at least 2002—to support a substantial-authority tax-return position. 26 C.F.R. § 1.6662‐4(d)(2)-(3) 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). The position will be stronger if the IRA holder had and keeps evidence, preferably independent evidence, that shows the settlement was truly made to end a fiduciary’s (or alleged fiduciary’s) risk exposure.

CuseFan, thanks.

Belgarath, thank you for the point about a before-severance payout of amounts, perhaps including money-purchase amounts, other than 401(k) or 403(b) amounts.

Bird, thanks. CuseFan, just for my curiosity, how does normal retirement age relate to nondiscrimination testing (when there is no combo)? (I ask out of ignorance; I haven't reviewed a nondiscrimination test report since the 1990s.)

Any takers? When using an IRS-preapproved document and its many adoption-agreement choices, this is a real question clients ask all the time.

After collecting relevant facts, including when and where the employee works, and considering how the US-Canada income tax treaty applies in the employee’s circumstances, the plan sponsor might consider this: “Special treaty rule. In addition, an employee who is a nonresident alien (within the meaning of section 7701(b)(1)(B)) and who does receive earned income (within the meaning of section 911(d)(2)) from the employer that constitutes income from sources within the United States (within the meaning of section 861(a)(3)) is permitted to be excluded, if all of the employee’s earned income from the employer from sources within the United States is exempt from United States income tax under an applicable income tax convention. This paragraph (c)(2) applies only if all employees described in the preceding sentence are so excluded.” 26 C.F.R. § 1.410(b)-6(c)(2) https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR686e4ad80b3ad70/section-1.410(b)-6#p-1.410(b)-6(c)(2).

Let’s ask our BenefitsLink experts this plan-design question: For an employer with only an individual-account (defined-contribution) retirement plan: Beyond the possibility I mentioned, in what circumstances and for what reason might a plan sponsor prefer to set a normal retirement age earlier or less onerous than the latest that doesn’t offend an ERISA or Internal Revenue Code requirement? Or is it always rational to specify the latest?

A voluntary correction program suggests a could-be user faces a choice about whether to use the program. For delayed-contribution situations, I imagine many plan fiduciaries treat the choice as a cost-benefit decision, estimating the expenses and other costs of using VFCP against the estimated benefits of ending some probabilities-discounted risks of detection, investigation, and enforcement. But I do not know this from any experience on this particular decision-making. Do clients ask a TPA or recordkeeper for guidance or information about whether using VFCP for a delayed contribution makes sense on a cost-benefit analysis? If so, how do you explain such a choice?

If whether an individual-account retirement plan generates account balances that could provide retirement income depends exclusively or heavily on whether eligible employees make elective contributions and the plan’s fiduciary prudently finds that some eligible employees would not contribute unless they can direct investment to a fund that meets one’s religious or social interest, that finding might support selecting a fund that otherwise might not be selected as an investment alternative (if the fiduciary finds that the availability of the investment alternative would not harm other participants, or that harm to other participants involves a reasonable balancing within a fiduciary’s duty of impartiality). The US Labor department’s revised investment-duties rule to be published tomorrow tends to support that idea. “The plan fiduciary of a participant-directed individual account plan does not violate the duty of loyalty under paragraph (c)(1) of this section solely because the fiduciary takes into account participants’ preferences in a manner consistent with the requirements of paragraph (b) [prudence] of this section.” To-be-codified 29 C.F.R. § 2550.404a–1(c)(3) (to be published Dec. 1, 2022; effective Jan. 30, 2023), https://public-inspection.federalregister.gov/2022-25783.pdf.

For many individual-account retirement plans that permit retirement distributions (even without waiting for severance from employment) as soon as age 59½ and (by requiring no more than a few years of vesting service) make most participants’ accounts nonforfeitable before an individual’s 60-something age, that a written plan specifies a normal retirement age seems mostly a vestige. As Riley Bretton mentions, many plans do not impose an involuntary distribution earlier than needed to meet Internal Revenue Code § 401(a)(9)’s tax-qualification condition, which now usually refers to age 72 (for a participant who is no longer employed, or is a more-than-5%-owner). Although I imagine few plans so provide, a plan may provide an involuntary distribution once the participant reaches the plan’s normal retirement age or, if later, age 62. “Immediately distributable. Participant consent is required for any distribution while it is immediately distributable, [that is], prior to the later of the time a participant has attained normal retirement age (as defined in section 411(a)(8)) or age 62. Once a distribution is no longer immediately distributable, a plan may distribute the benefit . . . in the normal form . . . without consent.” 26 C.F.R. § 1.411(a)-11(c)(4) https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR686e4ad80b3ad70/section-1.411(a)-11#p-1.411(a)-11(c)(4) Under Reorganization Plan No. 4 of 1978 § 101, the Treasury department’s rule interprets not only Internal Revenue Code of 1986 § 411 but also ERISA § 203.

If the participant’s objection is based on sharia and the plan provides participant-directed investment, the plan’s sponsor or administrator might consider adding to the plan’s designated investment alternatives a fund with investment strategies to meet sharia. These might be available in a recordkeeper’s platform (even without needing a brokerage window), or could be added on a plan fiduciary’s request.

Some retirement plans’ fiduciaries prefer to integrate searches with the service provider one selects for default rollovers to Individual Retirement Accounts. If the plan lacks such a service provider, consider looking first to service providers that advertise with BenefitsLink.

Do the plan’s governing documents allow an “immediate and heavy financial need” beyond the seven deemed needs?

A restorative payment is not a § 415(c) annual addition. It’s enough that there was a “reasonable risk of liability for breach of a fiduciary duty[.]” You can read the whole clause here: 26 C.F.R. § 1.415(c)-1(b)(2)(ii)(C) https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR686e4ad80b3ad70/section-1.415(c)-1#p-1.415(c)-1(b)(2)(ii)(C). I wrote Treasury a comment that led to this rule.

There is a partly analogous authority—one that is not a precedent (because any letter ruling is not), but that might (to the extent of the on-point and persuasive reasoning) be used as an element in a taxpayer’s substantial authority for an interpretation. In IRS Letter Ruling 2003-34-040 (May 30, 2003), the Internal Revenue Service treated “for purposes of section 403(b) of the Code” employees of a limited-liability company (which “has not elected to be treated as a corporation or as an entity separate from its owner”) as employees of that company’s sole member. In that ruling’s recited facts, “Company B [the limited-liability company] is engaged in the business of providing management information technology and consulting services to health care organizations such as [charitable] Hospital A [B’s sole member] and other such entities requiring such services.” The ruling’s reasoning was a straightforward application of 26 C.F.R. §§ 301.7701-1, -2, and -3. Before considering that reasoning regarding an unfunded plan (whether § 451(a)/§ 409A, § 457(f), or § 457(b)), one would consider whether the limited-liability company alone is, or the LLC and its member are, the obligor on the deferred wages. This matters for several accounting, tax, and other legal purposes. That includes whether a plan is “established and maintained by an eligible employer” that is an organization exempt from tax under the Internal Revenue Code’s subtitle for income taxes. See I.R.C. (26 U.S.C.) § 457(b), 457(e)(1)(B). Also, your client might check whether a limited-liability company’s executive is that company’s employee, or instead is the parent’s employee leased to or shared with the parent’s subsidiary. Forms of plan documents available from a plan-documents publisher or a recordkeeper might lack choices and texts adequate to specify exactly which person is, or persons are, obligated to pay the deferred wages of a subsidiary’s, affiliate’s, or other participating employer’s executive. Depending on the scope and nature of your relationship with your client, consider urging your client to ask its lawyers to attend to the details of the obligations.

While I have no experience with using an annuity contract to resolve a defined-benefit plan’s obligation, I have heard that Annua sources placements of that kind. https://annua.com/ Further, one might check businesses that advertise on BenefitsLink.

Even if one were to believe it is 100% certain the Service would grant the requested relief, a practitioner’s fee for writing up her client’s explanation of its reasonable cause might be more than $500.

In 2019, the pitch for adding SECURE’s portability provision was that plans’ sponsors and fiduciaries might be less fearful of trying a lifetime-income investment alternative if one knew there is a way out. Now, almost three years later, has anyone tested whether the out practically works?