Peter Gulia

While I don’t know the buyer’s reasoning, let’s imagine one possibility. The seller company (now owned by the buyer) might have been at least a party-in-interest and, perhaps, a fiduciary—whether a named fiduciary, such as plan administrator, or a functional fiduciary—of the discontinued (but not yet ended) seller plan. If so, not only the humans but also the company remains exposed to one or both § 502 civil penalties (even if one assumes all bad transactions are fully corrected). And that’s so even if the seller plan becomes terminated. Each of the seller company’s former owners might want his or her lawyers’ advice about whether an after-closing provision obligates the former owner to apply for VFCP no-action relief, and what consequences might result from breaching the provision. Or the seller company’s former owners might welcome a VFCP application (if feasible) because the no-action relief, including nonassertion of civil penalties, could protect a breaching fiduciary who did the bad transactions and another fiduciary who failed to meet her direct or cofiduciary responsibilities. About whether VFCP no-action relief could be obtained, that’s fact-sensitive. Each of the seller company’s former owners might want his or her lawyers’ advice about that too.

Assuming an ERISA-governed plan, this seems an illustration of another situation in which the plan’s administrator is not responsible for the participant’s failure (but might, practically, be burdened by it). David Rigby and CuseFan suggest one recognize that, even after the divorce and after the participant’s death, a court might issue a domestic-relations order. See 29 C.F.R. § 2530.206(c)(2) https://www.ecfr.gov/current/title-29/subtitle-B/chapter-XXV/subchapter-D/part-2530/subpart-C/section-2530.206. In responding to claims (if any), a plan’s administrator should be punctilious in following ERISA § 503’s and the plan’s claims procedures.

G8Rs, thank you for your helpful explanation about what a plan might provide or omit. Does a typical IRS-preapproved document include adoption-agreement choices for whether an involuntary distribution on or after retirement age gets or lacks a default rollover (for a distributee who did not specify her choice)?

Is this about a proposed sale, or a concluded sale? Did the buyer buy shares or other capital interests of the seller? Or did the buyer buy assets from the seller? Did the buyer assume the seller’s plan? Did the seller terminate or discontinue the seller’s plan before the closing? Did the seller’s executives (including perhaps two or more of the breaching fiduciaries) become executives of the buyer? Why does the buyer want the seller plan’s breaching fiduciaries to get relief from ERISA civil penalties (on a correction amount already paid)? (Unlike a tax-law correction, which might protect a plan’s treatment as a tax-qualified plan, VFCP no-action relief protects a breaching fiduciary regarding the breach disclosed and corrected. About VFCP’s essential relief, an ERISA § 502(i) or § 502(l) penalty is imposed on a party-in-interest or a fiduciary, not the plan.) If the answers to those questions don’t end someone’s desire for a VFCP application, consider also whether perceptions about relevant facts and circumstances differ. For example, might the buyer’s lawyer have assumed there was a loan? While you assume the corporation had the money with no legally enforceable obligation to repay? Likewise, might the buyer’s lawyer have assumed there was no theft from the plan? While you assume there was a theft from the plan? Voluntary Fiduciary Correction Program https://www.govinfo.gov/content/pkg/FR-2006-04-19/pdf/06-3674.pdf {Underlining not mine}

A similar effect can be had using a § 403(b) plan and a § 457(b) plan. For example, a public-school employee who is 50 might instruct salary-reduction deferrals of $30,000 [2023] under each plan, for a combination of $60,000. Many public-school employers provide both § 403(b) and § 457(b) plans, allowing two deferrals from one paycheck.

If you’d like BenefitsLink neighbors’ help to double-check your reading of the plan’s governing documents, it might help to quote the portions of the texts that seem to provide (i) an involuntary distribution on normal retirement age, and (ii) no default rollover on such a distribution. Also, are the documents the subject of an IRS-preapproved documents’ opinion letter? Or an individually-designed plan’s written determination?

A governmental § 457(b) plan and its trust or trust substitute include provisions designed to meet Internal Revenue Code of 1986 § 457(b)(6), which require that “all assets and income of the plan . . . are held in trust for the exclusive benefit of participants and their beneficiaries.” Analogizing to a recognized exception from ERISA’s exclusive-purpose command and Internal Revenue Code § 401(a)’s exclusive-benefit condition, some governmental § 457(b) plans include a provision for returning a contribution an employer made by a mistake of fact. ERISA allows “[in the case of a contribution . . . – if such contribution or payment is made by an employer to a plan (other than a multiemployer plan) by a mistake of fact, paragraph (1) [about noninurement and exclusive-purpose commands] shall not prohibit the return of such contribution to the employer within one year after the payment of the contribution[.]” ERISA § 403(c)(2)(A)(i) [29 U.S.C. § 1103(c)] http://uscode.house.gov/view.xhtml?req=(title:29%20section:1103%20edition:prelim)%20OR%20(granuleid:USC-prelim-title29-section1103)&f=treesort&edition=prelim&num=0&jumpTo=true See also Internal Revenue Service Revenue Ruling 91-4, 1991-1 C.B. 57. http://www.legalbitstream.com/scripts/isyswebext.dll?op=get&uri=/isysquery/irl466b/1/doc. If the plan has such a provision, the plan’s sponsor and administrator might want its lawyer’s advice about whether the circumstances fit the plan’s provision. JOH, if you want BenefitsLink neighbors’ help about whether the employer’s error fits tax law’s concept of a mistake of fact, you might describe in more detail what mistake caused the employer to pay a contribution the plan did not provide. For example, did the employer pay over the contribution with someone within the employer not knowing that the employee’s classification changed from one that gets an alternative-to-FICA contribution to one that does not get that contribution?

Now that the September inflation measures are released, has anyone done the math on how the limit on a healthcare flexible spending account adjusts? I saw a service provider’s earlier projection that this might increase from $2,850 to $3,050 for 2023. Is that still the right projection?

Yes, whether such an arrangement would meet the terms of a particular government (or government-funded) contract turns on the details of the contract, including the laws the contract invokes. But if each individual has a choice between immediate money wages and the employer’s contribution to a retirement plan, isn’t that a cash-or-deferred arrangement? Is it meaningfully different from increasing the employee’s money wages, leaving her with choices about what reductions and deductions she instructs the employer to take from her wages?

A few paths each sponsor/administrator might want its lawyer’s advice on: Many IRS-preapproved documents and other documents using an adoption-agreement format include texts about what provision results when an adoption agreement does not specify the user’s choice. A sponsor/administrator might look for provisions of that kind before assuming that what was administered is what the plan provides. If there is an ambiguity about whether the statute calls for a restated summary plan description or a summary of material modifications, one might interpret the ambiguity considering Congress’s purpose that a participant may look to the summary to know those of the plan’s provisions that ought to be summarized. And one might ask this rhetorical question: Could a participant—without asking the employer/administrator, and just by reading the SPD/SMM—know the plan’s service-counting provision (and check whether the plan’s administrator applied it)? If furnishing an SPD or SMM incurs almost no incremental expense, an administrator might weight its decision-making in favor of communication. Conversely, if the statute and rules for an SPD/SMM do not clearly require the update and a nontrivial expense would burden participants’, beneficiaries’, and alternate payees’ accounts, a fiduciary might consider that circumstance in evaluating when to furnish the next restated SPD or SMM.

You gave the right guidance by suggesting the employer ask its lawyer. What a contractor must, may, or must not do involves the conditions of the applicable Federal, State, and intergovernmental government-contracts laws and the contractor’s obligations under each contract. For example, how much choice a contractor has to select components of wages and ways to use them in meeting each prevailing-wage condition turns on the details of each law and contract. Businesses that regularly make government contracts use lawyers that focus on the laws, including prevailing-wage laws, of the kinds of government contracts the business makes. Also, some labor-relations or employment lawyers advise on prevailing-wage laws. A further thought: Contracts with prevailing-wage conditions often involve reporting, auditing, and other means to show that the contractor met the conditions. The employer might want careful records about each contribution and the allocation of it. And the employer might want to preserve access to those records for periods longer than a TPA otherwise might maintain them.

To find court decisions that interpret and apply regarding a retirement plan the United States’ enforcement of a judgment imposing a fine or restitution regarding a crime, a researcher might use a publisher’s annotated version (for example, Westlaw, LexisNexis, Bloomberg Law) of the United States Code. Also, one might use treatises and other secondary sources in Wolters Kluwer’s VitalLaw. One would look for annotations under 18 U.S.C. §§ 3316, 3556, 3663, 3663A, 3664; 28 U.S.C. §§ 3001-3308. To learn some arguments that were presented and rejected, one might read a Second Circuit decision BenefitsLink posted. https://benefitslink.com/src/ctop/us-v-greebel-2dcir-08242022.pdf The participant, Evan Greebel, was a partner in Katten Muchin Rosenman LLP. He was represented by Gibson, Dunn & Crutcher LLP. The appeals court held that the Mandatory Victims Restitution Act authorizes garnishment of the convict’s retirement plan account, and that the Consumer Credit Protection Act’s 25% limit on a garnishment does not apply. The appeals court did not decide whether the extra 10% tax on a too-early distribution is imposed on garnishment. If an effort an ERISA-governed plan’s administrator, trustee, or other fiduciary might consider would be at the plan’s expense, the fiduciary might want its lawyer’s advice about how much effort and expense is loyal and prudent for the plan’s exclusive purpose of providing the plan’s retirement benefits.

After the first wave of Schlicter lawsuits in late 2006, the January 2007 paper I wrote for, and presented at, Pension & Investments February 11, 2007 Defined Contribution Conference reported on 12 cases. In the first few years of the emerging trend, some law firms kept notes on these and similar ERISA fiduciary-breach cases. But as Lois Baker mentions, growing numbers of cases made publication impractical, even for Groom. Some law firms and insurance intermediaries estimate about 100 new cases each year in recent years and 2022. The list you wish for might report on about 300 cases, and pulling it together would be expensive work. To follow ERISA fiduciary-breach complaints, judges’ opinions, and settlements, a simple way is to scan BenefitsLink’s News page. Employee Benefits: News, Regs, Analysis, Laws, Surveys and Policy (benefitslink.com) It reliably gets you important developments.

We’ve been discussing these “in-marriage QDRO” issues assuming the retirement plan’s administrator somehow knows that neither (or none) of the State court’s litigants asked for an annulment, divorce, separation, or child support. But for many State courts that might issue an order for which a would-be alternate payee seeks a plan’s QDRO treatment, an order might recite that the order “is made pursuant to a State domestic relations law” and “relates to the provision of marital property rights to a spouse”, and might state nothing that would reveal to the retirement plan’s reader that no one had asked for an annulment, divorce, separation, or child support. If an order like that (and no other information) is submitted to the plan’s administrator, is it proper for the administrator to treat the order as a DRO and, if it meets the plan’s further conditions, a QDRO?

If the loan is unsecured and at no interest, why would the plan repay sooner than its obligated due date? Or would the terms include a discount on an early repayment?

Yes, the key is that the terms be spelled out in the written obligation. To see the current conditions, skip to the last page. Amendment to Prohibited Transaction Exemption 80–26 (PTE 80–26) for Certain Interest Free Loans to Employee Benefit Plans, 71 Fed. Reg. 17917, 17920 (Apr. 7, 2006) https://www.govinfo.gov/content/pkg/FR-2006-04-07/pdf/E6-5075.pdf Consider how the loan will be reported in the employer’s financial statements. Consider how the obligation will be reported in the plan’s financial statements and Form 5500 report. In both, it might be a related-party transaction (even if it is an exempt prohibited transaction). {The underlining is not mine.}

About QDROphile’s point, if the distribution followed the individual’s severance from employment and was her whole account, she might no longer be a participant. If the distribution would not have been provided except for the distributee’s hardship, the distribution might not have been an eligible rollover distribution.

When (in the 1990s) I last had any observation about this point, the IRS’s hang-up was about currency tips a server collected from the diner’s table. I do not remember any discussion about tip pooling, or even whether any of that client’s restaurant chains or franchisees used such a business practice. The AmLaw 200 lawyer told me he presented possible reasonings of the kind Luke Bailey describes. This was before the Treasury adopted, or even proposed, the § 401(k) regulation, which some might argue could support different interpretations. About payment-card tips, perhaps one or more of the lawsuits (the complaint I hyperlinked above is not the only one) will survive a motion to dismiss for failure to state a fiduciary-breach claim, and result in some information about the facts (or even about private Internal Revenue Service determinations).

The suggestion for a cash-out provision, of any kind, is not mine, and has no grounding in any advice I provided or would provide. Considering a nonlawyer pension consultant’s reason for suggesting the provision is beyond the scope of my engagement. The plan’s sponsor/administrator is not worried about liability for selecting or monitoring a default-IRA provider. Rather, it has different reasons for preferring not to put anyone in a default IRA. (And considering those reasons is beyond my scope.) The plan’s sponsor/administrator also has no worry about abandoned-property administration or other difficulties regarding unnegotiated payments. Likewise, no worry about having tax-reported, and withheld income taxes from, an involuntary distribution. Luke Bailey, thank you for suggesting a possible interpretation, and that an IRS examiner might show some tolerance. I don’t have that luxury. What my client asks for is my advice on the correct reading of the statute. Absent a court decision, a Treasury rule, IRS subregulatory guidance, or another “[t]ype[] of authority” mentioned in 26 C.F.R. § 1.6662-4(d)(3)(iii), I could advise a substantial-authority tax position “only by [my] well-reasoned construction of the applicable statutory provision.” 26 C.F.R. § 1.6662-4(d)(3)(ii). 26 C.F.R. § 1.6662-4(d) (Substantial authority) 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). I’ll advise the plan’s sponsor and administrator about the opportunities and risks. I am considering a good-enough if the individual’s account was no more than $1,000 as of the daily valuation that immediately precedes the administrator’s final instruction on the day investments allocable to the individual’s account are redeemed—even if, because of changes in funds’ shares’ prices that day, the overnight redemption and next morning’s payment is more than $1,000. That necessity reasoning might be little or no more than that the plan’s administrator cannot know what redemption would result before the administrator must conclude the instruction for the recordkeeper and directed trustee to process the distribution.

The underlining is not mine.

Facing a need to decide whether a State court’s order is a DRO and a QDRO, a plan’s administrator with its lawyer’s advice might consider these points (with others): A fiduciary acting with the exclusive-purpose loyalty, prudence, and impartiality ERISA requires may, and perhaps ordinarily should, decide questions using the fiduciary’s best interpretation of the plan (including interpreting ERISA as needed to interpret the plan). A fiduciary might want its lawyer’s advice, not only for help in evaluating the best interpretation but also to show the fiduciary’s procedural prudence. A fiduciary might balance seeking the best interpretation with incurring no more than “reasonable expenses of administering the plan[.]” If the plan’s trust does not regularly maintain a reserve for plan-administration expenses, a fiduciary would consider how it would allocate the expense among individuals’ accounts. If an administrator denies QDRO treatment, it might not have much to fear from the would-be alternate payee’s potential challenge. Or if an administrator approves QDRO treatment, it might not have much to fear from the participant’s potential challenge. (If an administrator denies QDRO treatment, it is the would-be alternate payee who has constitutional standing to challenge the administrator’s decision. If an administrator approves QDRO treatment, it is the participant who might have constitutional standing to challenge the administrator’s decision. I say might because in the State court’s proceeding the spouses might both have sought an order with an intent that the plan treat it as a QDRO, so an administrator’s grant of QDRO treatment might have provided the participant what he or she asked for.) A lawyer who advised about pursuing an in-marriage domestic-relations order might not be available to litigate the administrator’s to-be-challenged decision. (Some of the lawyers pursuing an in-marriage domestic-relations order are primarily estate-planning or financial-planning lawyers who do not routinely, or ever, manage litigation. Or a lawyer might lack a plenary admission to practice before the court the plan provides as an exclusive forum [see below] (or any Federal court), and would need to work with another attorney.) Or, the could-be challenger might lack ready money to pay a litigator’s attorneys’ fees. (Even if a complaint would include in its prayers for relief that the court order the defendant to pay the plaintiff’s attorneys’ fees, many lawyers would require current payment, unwilling to risk advancing one’s time for an uncertain recovery.) If a challenger sues the plan’s administrator in a State court that lacks personal jurisdiction of the administrator, it should succeed in getting a dismissal on that ground alone. If a challenger sues the plan’s administrator in a State court that has personal jurisdiction, the administrator may (and often should) remove the case to a Federal court. If the plan includes an exclusive-forum provision, the administrator might remove the case to the specified forum (for example, the sponsor/administrator’s preferred Federal district and division). Whichever was the administrator’s challenged decision, a judge might be persuaded that the court should defer to the administrator’s plausible interpretation that, even if it might be incorrect, was a reasoned (and so not capricious) interpretation of the plan. Even if the Federal court undoes the administrator’s decision, the relief might be little more than an order that the administrator administer the plan according to the court’s finding about whether the order is or is not a QDRO. A challenger might be unable to show harm that resulted from the asserted breach of the administrator’s fiduciary responsibility. Although a Federal court has discretion about attorneys’ fees, a judge might not award attorneys’ fees even to a winning plaintiff if the judge finds the administrator put in a sincere effort to interpret and apply the plan, and responded to a submission of the State court’s order, and any claimant’s requests for reviews, using sound procedure. Even if one fears or abhors the potential challenges and other consequences, an ERISA-governed plan’s administrator has a fiduciary responsibility to decide the claims presented.

Here’s the Treasury department’s 1960 interpretation. 26 C.F.R. § 1.401-1(b)(2)-(3) https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR6f8c3724b50e44d/section-1.401-1#p-1.401-1(b)(2). One might interpret this interpretation, including by considering coverage, nondiscrimination, and top-heavy rules as they apply for the years involved.

Bri’s query was about an initial (not extended) due date and the effects of Saturday-Sunday adjustments. The unextended due date for a Form 5500 report on a year ended December 31, 2021 moved only one day from Sunday, July 1 to Monday, August 1. And the rule for a summary annual report does not say “two months after”; it says “nine months after the close of the plan year.” About an extended Form 5500 report, the rule for a summary annual report includes this: “When an extension of time in which to file an annual report has been granted by the Internal Revenue Service, such furnishing [of the summary annual report] shall take place within 2 months after the close of the period for which the extension was granted.” 29 C.F.R. § 2520.104b-10(c)(2) https://www.ecfr.gov/current/title-29/subtitle-B/chapter-XXV/subchapter-C/part-2520/subpart-F/section-2520.104b-10#p-2520.104b-10(c)(2). For a Form 5500 report due by October 17, 2022, some might interpret that rule to support an SAR due date of December 19, 2022.

Thank you for sharing the news. While I won’t suggest a filer claim relief it does not need, perhaps BenefitsLink mavens can help resolve an ambiguity in the news about filing relief. If a Form 5500 report claims Hurricane Ian relief but neither the plan sponsor’s mailing address in line 2a nor the plan administrator’s mailing address in line 3a shows Florida (or another disaster-designated place), will the Employee Benefits Security Administrator or the Internal Revenue Service question whether the filer gets the disaster-extended due date? Or do EBSA and IRS accept the filer’s statement (made under penalties of perjury) that the filing gets the disaster relief? If the filing relief is not on the honor system: What if none of the plan sponsor’s or plan administrator’s offices is in or anywhere near Florida, but the employee responsible for the Form 5500 report ordinarily works from her work-from-home office in Florida? What if the recordkeeper or third-party administrator that assembles a Form 5500 report (but does not electronically submit it) ordinarily works from its office in Florida? How would EBSA or the IRS check whether the filer gets the disaster-extended due date? If the filer’s reason for Hurricane Ian relief is that the independent qualified public accountant ordinarily works from its office in Florida, how would EBSA or the IRS check whether the filer gets the disaster-extended due date?

I don’t know whether relevant tax law, or the IRS’s interpretations (written or unwritten), have changed since I worked on this issue. The fact change is more payment-card tips processed by an employer (rather than paid in currency or delivered in other ways immediately available to the worker). Even those tips might not practically support a § 401(k) elective deferral. For example, a Federal court complaint alleges: “Hyatt has a mandatory policy of requiring tipped employees . . . to be paid all charged tips in cash rather than through payroll, interfering with Plaintiff’s and Class members’ ability to defer income under the terms of the [Hyatt Corporation Retirement Savings] Plan.” https://si-interactive.s3.amazonaws.com/prod/plansponsor-com/wp-content/uploads/2022/03/15112816/BairdvHyattCorpComplaint.pdf