Peter Gulia

PS, if you are a nonfiduciary service provider taking instructions from the plan’s administrator or trustee (which might be a qualified termination administrator, court-appointed fiduciary, or other successor fiduciary), you ask the fiduciary for its instructions. If you are the fiduciary, you face decisions about the plan’s accounting and final distributions.

However the employer’s paymaster and the plan’s administrator resolve challenges of these kinds, it might be stronger to put the solutions in written procedures, and in participant-facing communications, including a summary plan description and the form by which a participant instructs her elective deferral.

If a § 401(k), § 403(b), or governmental § 457(b) plan’s sponsor or administrator removes from the plan’s investment alternatives a lifetime-income investment (which might include an annuity contract with guaranteed-lifetime-withdrawal-benefit provisions), an exception from the usual restrictions against a distribution before severance-from-employment or age 59½ allows a limited distribution to remove from the plan the annuity contracts. This could include delivering to a participant a qualified plan distribution annuity contract. Internal Revenue Code §§ 401(a)(38), 401(k)(2)(B)(i)(VI), 403(b)(11)(D), 457(d)(1)(A)(iv). Has anyone done this? Did you have a good experience, or a bad time? Did the insurance company cooperate? What difficulties did you encounter? What cautions and pointers would you suggest to someone now planning a project? (Please don’t misunderstand my query as suggesting any view for or against any insurance or investment product. Rather, I seek help about how a practitioner might guide a plan sponsor that has already decided to remove lifetime-income investments.)

rocknrolls2, thank you for your observations. Sponsors of retirement plans have wide ranges of choices in setting provisions about who gets a benefit after a participant’s death. My descriptions posted above presume a particular set of (perhaps idiosyncratic) provisions I’m familiar with. Those provisions include: Only a participant (before her death) can name a beneficiary, or change the participant’s beneficiary designation. A person is not a beneficiary unless the person is alive when the distribution otherwise would become payable. A person is not a beneficiary unless the person is alive when the particular payment under a distribution otherwise would become payable. Any right of a beneficiary is strictly personal to that beneficiary and lapses on her death. An undistributed benefit that would have been distributable to a person had she lived is not distributable to that person’s legatees or heirs. On a beneficiary’s death, any undistributed benefit attributable to that beneficiary becomes distributable to the remaining primary beneficiaries or beneficiary if any, or if none, to the remaining contingent beneficiaries or beneficiary, in each case to be distributable in equal shares to all living beneficiaries of the applicable primary or contingent beneficiary class. The provisions I describe are not my reading of any widely recognized document provider’s IRS-preapproved documents or similar models. The regime you describe—that a primary beneficiary’s right (including perhaps a right to appoint a further disposition) becomes fixed when that beneficiary survives the participant—could be a correct or sensible reading if the plan’s governing documents so provide, or lack text to provide something else. I concur that a plan’s sponsor, a sponsor’s lawyer and other advisers, and (in some circumstances) service providers should put more attention on carefully designing and writing a plan’s beneficiary provisions. That includes a plan’s default provision. A § 3(16) administrator, third-party administrator, recordkeeper, or other service provider might more efficiently handle difficult situations and might save (sometimes unbillable) time and by thinking through which provisions fit one’s clients’ plans and the service provider’s business interests.

Luke Bailey, thank you for your observations. The provision ESOP Guy described (if it’s the provision I remember some recordkeepers putting in documents furnished to customers) applies also if the employment-based retirement plan permits or requires a single-sum distribution. Without such a statement in the plan’s text, some might interpret a plan as allowing a person who (by surviving the participant) gained a right to take a payment a right to name a successor beneficiary for whatever remains of the portion the participant-named beneficiary could have taken before her death. Yet, a change from a primary beneficiary to a contingent beneficiary is likelier with yearly or other periodic payments. (The last time I saw an ERISA-governed § 401(k) plan that provided an annuity was almost 30 years ago.) The essential import of the provision is that a plan’s administrator (and its service provider) never looks to a beneficiary designation beyond one the participant made before her death. Among several reasons for such a provision is that many plan-administration regimes have no way to record a beneficiary designation made by a person other than a participant. And some consider it appropriate for a participant to control, except for the plan’s limited protections for a surviving spouse, the disposition of an accumulation the participant created.

Some plans specify that only the participant’s beneficiary designation (including a contingent beneficiary designation) governs who gets any benefit any time after the participant’s death. Under provisions of that kind, a benefit not exhausted by a primary beneficiary’s death might be provided to a contingent beneficiary the participant named. (If the participant’s beneficiary designation, including the participant’s contingent beneficiary designation, is exhausted, the plan’s default beneficiary might apply.) If a plan’s sponsor considers providing that a beneficiary may name a further beneficiary, the sponsor might carefully evaluate whether the plan’s administrator can administer that beneficiary regime. Likely, the employer/administrator would administer such a beneficiary-designation regime without the recordkeeper’s help.

While I advise no one, a fiduciary might want his, her, or its lawyer’s advice to consider these and related points: If the only tension were that an investment adviser gets compensation for its services, ERISA § 408(b)(2) might exempt that prohibited transaction. But if a service arrangement involves a fiduciary’s self-dealing, the self-dealing act is a separate prohibited transaction. 29 C.F.R. § 2550.408b-2(e)(1); accord 29 C.F.R. § 2550.408b-2(f) example 6 (about father and son). “Thus, a fiduciary may not use the authority, control, or responsibility which makes such person a fiduciary to cause a plan to pay an additional fee to such fiduciary (or to a person in which such fiduciary has an interest which may affect the exercise of such fiduciary’s best judgment as a fiduciary) to provide a service.” 29 C.F.R. § 2550.408b-2(e)(1) (emphasis added). A fiduciary’s recusal might not get rid of the conflict unless none of the remaining fiduciaries has any personal interest in pleasing the father or otherwise to select the son. https://www.ecfr.gov/current/title-29/subtitle-B/chapter-XXV/subchapter-F/part-2550/section-2550.408b-2 If the plan’s fiduciaries (preferably those other than the father) sincerely believe that the son might be the investment adviser that would be selected on the merits, those fiduciaries might engage an independent fiduciary to evaluate investment-adviser candidates and select the plan’s investment adviser. Yet, a fiduciary would do so only if the plan’s expense for the independent fiduciary’s service would be no more than a prudently incurred expense needed to serve the plan’s exclusive purpose.

Unlike a single-employer plan, a multiple-employer plan might get no Securities Act of 1933 § 3(a)(2) exemption. Years ago, I lost an engagement because I mentioned a securities-law issue. Although I said that responding to the issue was not a condition to my availability and explained that enforcement was unlikely, the organizer disliked being told even that there was any issue. There’s a meaningful difference between an “open” multiple-employer plan with unrelated employers and a “closed” MEP involving business relationships. For a multiple-employer plan about which the employers have business ties, the staff of the US Securities and Exchange Commission have delivered no-action letters.

Might your inquirer consider a multiple-employer plan under which a contractor might be a participating employer?

No matter what the court order is labeled or recites, the regulation setting up the defined term “court order acceptable for processing” was published on July 29, 1992. While the lingo might not matter (because it seems the system accepted the 2003 court order as a COAP), the regulations might affect how the order relates to the annuity the plan provides, and whether your friend gets a “former spouse survivor annuity” (also a defined term in the regulations). The regulations about survivor annuities date from May 13, 1985. Those regulations too affect the annuity the plan provides, and might affect how the order relates to the annuity the plan provides. Those points recognized, it might be efficient for your friend to ask an Office of Personnel Management employee or agent what OPM believes are the nonretiree’s benefits. While I imagine your friend doesn’t expect you to sort through the detailed regulations, I furnished the citations and hyperlinks because some BenefitsLink readers welcome an opportunity to read primary sources.

Rules for domestic-relations orders directed to the Civil Service Retirement System or Federal Employees Retirement System [FERS] are in the Code of Federal Regulations at title 5 part 838. As David Rigby mentions, the defined terms include “court order” (conceptually similar to how ERISA § 206(d)(3) defines a DRO) and “court order acceptable for processing” or COAP (conceptually similar to a QDRO, in the sense of an order the system recognizes to do something under the plan). 5 C.F.R.§ 838.103 https://www.ecfr.gov/current/title-5/chapter-I/subchapter-B/part-838/subpart-A/subject-group-ECFR6ebcec98dccc68e/section-838.103 For rules about survivor annuities, see title 5 part 831 subpart F—5 C.F.R. §§ 831.601 to 831.685 https://www.ecfr.gov/current/title-5/chapter-I/subchapter-B/part-831/subpart-F.

If the employer’s plan uses a group disability insurance contract, does that contract allow the employer to make choices of the kinds you ask about?

For a governmental § 457(b) plan, distributions typically are processed using some combination of services of a trustee, custodian, or insurer and the recordkeeper. For a nongovernmental tax-exempt organization’s unfunded § 457(b) or § 457(f) plan, some employers process deferred compensation through the employer’s payroll function to support Form W-2 wage reporting and withholding. Others process deferred compensation with an investment or service provider that offers needed wage reporting and withholding services. The employer would check carefully its investment and service contracts.

BenefitsLink just posted in today’s news the IRS’s draft of the 2023 version of Publication 15-A. https://benefitslink.com/news/index.cgi

Beyond publications and instructions, the Internal Revenue Service on September 1 published a webpage with recent guidance about substitutes for Form W-4R and Form W-4P. https://www.irs.gov/forms-pubs/additional-guidance-for-substitute-and-telephonic-submissions-of-forms-w-4p-and-w-4r IRS Publication 15-A, Employer’s Supplemental Tax Guide, states requirements for substitutes, including electronic submissions. https://www.irs.gov/pub/irs-pdf/p15a.pdf When a recordkeeper processes millions of tax-withholding instructions, small process improvements can make it worthwhile to discern just how much one may or should do in adapting these substitutes. Your description about your circumstances suggests you might practically limit how much attention, time, and effort—if any—to put on adapting from the IRS forms to your clients’ substitutes. The IRS’s revisions seek to push a distributee to estimate carefully how much withholding she asks for. So, one might be cautious about omitting anything in how a user steps through the IRS’s logic path and arithmetic.

One might consider these steps to follow Luke Bailey’s line of inquiry. “For purposes of section 401(a)(9), a 5-percent owner is an employee who is a 5-percent owner (as defined in section 416)[.]” 26 C.F.R. § 1.401(a)(9)-2/Q&A-2(c). That section defines: “For purposes of this paragraph, the term ‘5-percent owner’ means— (I) if the employer is a corporation, any person who owns (or is considered as owning within the meaning of section 318) more than 5 percent of the outstanding stock of the corporation or stock possessing more than 5 percent of the total combined voting power of all stock of the corporation[.]” Internal Revenue Code of 1986 (26 U.S.C.) § 416(i)(1)(B)(i)(I). That section provides: “Stock owned, directly or indirectly, by or for a trust (other than an employees’ trust described in section 401(a) which is exempt from tax under section 501(a)) shall be considered as owned by its beneficiaries in proportion to the actuarial interest of such beneficiaries in such trust.” I.R.C. § 318(a)(2)(B)(i) (emphasis added). Accord 26 C.F.R.§ 1.416-1/Q&A-17, Q&A-18. For thoroughness, one might check whether the proposed rules to interpret and implement Internal Revenue Code § 401(a)(9) answer the question similarly or differently.

The agency rule mentioned—26 C.F.R. § 1.410(b)-8—was published on September 19, 1991. https://www.govinfo.gov/content/pkg/FR-1991-09-19/pdf/FR-1991-09-19.pdf Even if an agency’s rule was a permissible interpretation or implementation of the statute when the agency made the rule, one cannot rely on a rule to the extent that the statute to be applied differs from the statute the agency considered when it made the rule. The 1996 Act substantially revised Internal Revenue Code of 1986 § 414(q). Portions of many rules under Internal Revenue Code sections 401 to 419A no longer reflect current law. More than a few rule texts are a quarter-century, half-century, or more out-of-date. On March 14, 2019, the Treasury department removed from the Code of Federal Regulations 296 obsolete rules. But these removals were about rules for which a whole rule (not some portion of a rule’s text) lacked “any current or future applicability under the Internal Revenue Code[.]” https://www.govinfo.gov/content/pkg/FR-2019-03-14/pdf/2019-03474.pdf

Under that rule, there is no condition for an advance notice about the presumed means of communication. The rule’s conceit is that a worker will see the communication because “access to the employer’s or plan sponsor’s electronic information system is an integral part of [his or her duties as an employee][.]” 29 C.F.R. § 2520.104b-1(c)(2)(i)(B), referring to 29 C.F.R. § 2520.104b-1(c)(2)(i)(A). Further, the rule’s conditions include that “[n]otice is provided to each participant . . . , in electronic or non-electronic form, at the time a document is furnished electronically, that apprises the individual of the significance of the document when it is not otherwise reasonably evident as transmitted ([for example], the attached document describes changes in the benefits provided by your plan)[,] and of the right to request and obtain a paper version of such document[.]” 29 C.F.R. § 2520.104b-1(c)(1)(iii). I like to include in an email’s subject line some expressions to show that the communication is about the participant’s retirement, health, or other employee benefits, and why one should open and read the email. For the whole of the wired-at-work (or affirmative-consent) rule, 29 C.F.R. § 2520.104b-1(c) https://www.ecfr.gov/current/title-29/subtitle-B/chapter-XXV/subchapter-C/part-2520/subpart-F/section-2520.104b-1#p-2520.104b-1(c).

I don’t know any answer to your questions, but consider this: In that rule (including its six examples), all mentions of voting power refer to a corporation. Yet for other aspects, the rule carefully distinguishes how a concept applies regarding a corporation, a partnership, a sole proprietorship, and a trust or estate. When the Treasury proposed the rule in 1975 (and proposed a related rule in 1983), adopted the rule in 1988, and revised it in 1994, that a partnership might involve management powers that could be described in ways similar to voting power regarding a corporation ought to have been known to the Treasury and IRS lawyers who worked on the rulemaking.

If anyone is wondering, ERISA§ 206(d)(3)(H)&(I) provides: (H) (i) During any period in which the issue of whether a domestic relations order [defined in § 206(d)(3)(B)(ii)] is a qualified domestic relations order is being determined (by the plan administrator, by a court of competent jurisdiction, or otherwise), the plan administrator shall separately account for the amounts (hereinafter in this subparagraph referred to as the “segregated amounts”) which would have been payable to the alternate payee during such period if the order had been determined to be a qualified domestic relations order. (ii) If within the 18-month period described in clause (v) the order (or modification thereof) is determined to be a qualified domestic relations order, the plan administrator shall pay the segregated amounts (including any interest thereon) to the person or persons entitled thereto. (iii) If within the 18-month period described in clause (v)— (I) it is determined that the order is not a qualified domestic relations order, or (II) the issue as to whether such order is a qualified domestic relations order is not resolved, then the plan administrator shall pay the segregated amounts (including any interest thereon) to the person or persons who would have been entitled to such amounts if there had been no order. (iv) Any determination that an order is a qualified domestic relations order which is made after the close of the 18-month period described in clause (v) shall be applied prospectively only. (v) For purposes of this subparagraph, the 18-month period described in this clause is the 18-month period beginning with the date on which the first payment would be required to be made under the domestic relations order. (I) If a plan fiduciary acts in accordance with [ERISA §§ 401-414] in— (i) treating a domestic relations order as being (or not being) a qualified domestic relations order, or (ii) taking action under subparagraph (H), then the plan’s obligation to the participant and each alternate payee shall be discharged to the extent of any payment made pursuant to such [a]ct. ****** {We regret this display does not show the indents I wrote to show the arrangement of the subparagraphs, clauses, and subclauses.} Receiving notice that someone who might become an alternate payee might pursue an order, which might be a DRO the proponent asks the plan’s administrator to treat as a QDRO, might not be the same thing as the beginning of “[a] period in which the issue of whether a domestic relations order is a qualified domestic relations order is being determined[.]” Yet, as others in the discussion have observed, some plans’ administrators use procedures that impose a hold promptly after the administrator finds that someone might seek an order. I express no view about whether such a procedure is wise or unwise, or prudent or imprudent.

Consider too that whatever the Internal Revenue Service allows under an IRS-preapproved documents regime answers no question under title I of the Employee Retirement Income Security Act of 1974. A plan’s administrator might want its lawyer’s advice about whether a plan sponsor’s or employer’s declaration of a contribution and its “instructions” about how to allocate the contribution (if the allocation was not already specified) is, within the meaning of ERISA § 104(b)(1), “a modification or change described in [ERISA] section 102(a)” such that the administrator must furnish “a summary description of such modification or change[.]” If it is, an administrator might carefully write the “communication” the plan’s governing documents require to meet also ERISA’s call for a summary of material modifications. A plan administrator’s duties under ERISA sections 102, 104, and 404(a) could include writing the summary “to be understood by the average plan participant, and [to] be sufficiently accurate and comprehensive to reasonably apprise such participants and beneficiaries of their rights . . . under the plan.” ERISA § 102(a).

Whether forfeitures are allocated without regard to which participating employer’s participants generated the forfeitures or by some specified subsets is stated by (or to be interpreted from) the documents governing the plan.

That fees vary by participating employer should not by itself mean a set of fees results in a nonexempt prohibited transaction if the transactions meet the conditions of the statutory and class exemptions the service provider relies on. For example, ERISA § 408(b)(2)’s exemption can apply only “if no more than reasonable compensation is paid [for the necessary services].” Also, each participating employer “retains fiduciary responsibility for” selecting and monitoring the pooled plan provider “and any other person who, in addition to the pooled plan provider, is designated as a named fiduciary of the plan[.]” ERISA § 3(43)(B)(iii). That could include duties for a participating employer, acting with no less loyalty and prudence than ERISA § 404(a)(1) requires, to find the fees charged to its portion of the plan’s assets are reasonable.

To fill out the logic path ESOP Guy suggests: In one’s reading of the plan’s governing documents and plan-administration procedures, consider as possibly relevant not only texts that particularly refer to domestic-relations orders but also texts that provide the plan’s administrator’s or a claims administrator’s powers.

If you’re asking what the plan provides, Read (and interpret) The Fabulous Document. A typical IRS-preapproved document partially paraphrases and refers to the tax-law rules, including 26 C.F.R. § 1.401(a)(9)-5. https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR6f8c3724b50e44d/section-1.401(a)(9)-5 That rule looks to “the account balance as of the last valuation date in the calendar year immediately preceding that distribution calendar year[.]” Q&A-3(a). If the plan has valuation dates quarter-yearly or more often, it seems likely a December-close date fits that description.