Peter Gulia

Here’s the situation (with some facts adjusted slightly to protect my client’s and others’ privacy): About four weeks after a 78-year-old participant’s death, the plan’s administrator receives a document the sender presents as the participant’s beneficiary designation. It is dated a few days before the participant’s death. Nothing about the form is witnessed, by a notary or anyone else. But the employer has no record that its former employee ever had a spouse (or any child or other dependent), and the obituary mentions no spouse or former spouse and no child. The employer/administrator worries that the ostensible beneficiary-designation form might not be the participant’s act. Here’s the difficulty: Because the participant retired 16 years ago, the employer discarded records that might have showed its former employee’s handwriting. The retiree’s request, a few years ago, for automated minimum-distribution payments was processed through the plan’s website. The recordkeeper too has nothing that shows the participant’s handwriting. No one now working for the employer knows anything about the retiree beyond what’s in a computer system record from when she retired. (The employer has tens of thousands of employees, and many retirees.) What information would you want to form a discretionary finding about whether the form submitted as the participant’s beneficiary designation likely is the participant’s act? What information might suggest to you that the ostensible beneficiary designation is not genuine?

With a nongovernmental tax-exempt organization’s unfunded plan for select-group executives, there is no contribution; rather, there is a credit to the account the parties use to measure the organization’s unfunded contract obligation to its executive. (That many practitioners describe a credit as a contribution is understandable; even the Treasury department’s rules describe it that way.) A deferral under a § 457(b) plan counts against § 457(b)’s deferral limit for the participant’s tax year “in which the amount of compensation deferred is no longer subject to a substantial risk of forfeiture.” 26 C.F.R. § 1.457-2(b)(1). If an amount is not immediately vested, the amount “must be adjusted to reflect gain or loss allocable to the compensation deferred until the substantial risk of forfeiture lapses.” 26 C.F.R. § 1.457-2(b)(2). Unless a plan provides immediate vesting or a separate vesting time on each year’s forfeitable credits, either rule (or a combination of them) might result in a bunching of what counts against a year’s deferral limit. See 26 C.F.R. § 1.457-4(c)(1)(iv) example 3 (five years’ nonelective credits, adjusted for an investment gain, counted as a deferral for the year in which the amount becomes nonforfeitable). In my experience, this easily might overwhelm the vesting year’s deferral limit. To consider your question about whether a nonelective credit not paid over to a rabbi trust or other measurement investment until 2023 counts for 2022’s limit, one would evaluate whether the participant’s contract right to the deferred compensation became fixed and vested in 2022. What did (or does) the written plan (which 26 C.F.R. § 1.457-3(a) requires) provide? https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFRf2be51fac065c2d/section-1.457-2 https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFRf2be51fac065c2d/section-1.457-3 https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFRf2be51fac065c2d/section-1.457-4#p-1.457-4(c)(1)(iv)

Consider also which laws against age discrimination (if any) apply to this employer.

CuseFan, thanks. The two new early-out distributions, and a hardship distribution, can be self-certifying; and my assumption (which I neglected to state in my originating post) is that the plan or its administrator would make them self-certifying. Might a plan’s sponsor or administrator set a lower charge on some kinds of distributions? For example, imagine the plan’s undifferentiated charge for a distribution is $100. That charge might not attract attention when applied on a $200,000 severance-from-employment distribution. But imagine a participant wants to use an emergency personal expense distribution to meet her need to raise $200. The participant would need to claim $300 to raise $200. (Assume no withholding for income taxes.) The $100 processing charge then is 50% of the net amount the distributee receives. Because this kind of distribution is for $1,000 or less, some processing charges participants tolerate for bigger distributions might seem disproportionate. Others might say that’s what happens when one uses a retirement plan as an any-purpose savings account. I don’t advocate for or against any view. Rather, my queries are about illustrating the difficult choices service providers and plan fiduciaries face, and that there might be many (and differing) interests to consider.

Yes, absent a plan provision otherwise, one might assume the gross-up amount is money wages (and not a part of the fringe benefit). Even if the plan’s administrator will take advice from another practitioner, consider reminding your client that a finding should not treat highly-compensated employees more favorably than similarly situated (if any) non-highly-compensated employees. And beyond Internal Revenue Code §§ 401-414, an employer/administrator might consider whether its finding would be fair regarding similar gross-ups, and perhaps other kinds of gross-ups. Further, the employer might evaluate whether anything about the gross-up or a treatment of it violates the employer’s provisions for, or a desired tax treatment of, the fringe benefit, including as it applies regarding other employees.

I’ve never needed to apply a § 401(a) plan’s provisions on your question (because every gross-up I’ve seen has been for someone with compensation that, no matter how counted, would exceed the § 401(a)(17) limit). But unless a Read-The-Fabulous-Document exercise points in a different direction, I might assume the gross-up amount is money wages (and not a part of the fringe benefit), and then apply the plan’s provisions following that finding. That wouldn’t completely answer your question because a plan might restrict or limit which payments of money wages count in compensation. If the plan’s sponsor prefers excluding this gross-up from this employee’s (or some similarly situated employees’) compensation, consider that the Treasury department’s rule to interpret and implement Internal Revenue Code § 414(s) favors exclusions that lower the compensation of a highly-compensated employee. See, for example, 26 C.F.R. § 1.414(s)-1(c)(5) https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR686e4ad80b3ad70/section-1.414(s)-1#p-1.414(s)-1(c)(5), § 1.414(s)-1(d)(3)(ii)(B) https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR686e4ad80b3ad70/section-1.414(s)-1#p-1.414(s)-1(d)(3)(ii)(B).

Belgarath, thank you for your helpful thoughts, practical observations, and fact observation. For a big or mid-size plan, about a year is a project timeline for the many operational, legal, and communications steps needed to implement a change. I’m now negotiating some plans’ service agreements for terms that begin on or a little before January 1, 2024—just when the new early-out distributions take effect. That a sponsor or fiduciary should make informed choices is why their counsel is thinking about it now. Is there really much about the new distributions that’s unknown? For each kind, we know: whether it allows a before-severance payment; whether a claim is self-certifying; whether the distribution is treated, for tax reporting and withholding, as not an eligible rollover distribution; whether the distributee has a three-year option to restore the amount to the plan; and other essential points. Thank you for your observations about keeping charges for distributions constant, and not using a charge to influence participants’ behavior. BenefitsLink neighbors, if one does not use a charge to influence participants’ behavior but seeks only to allocate a cost to those who generate the cost, how would you feel about charging more for a particular kind of distribution if the recordkeeper’s cost accounting shows clearly that it costs substantially more to process that kind of distribution? Or, once a service provider has built capacity, do distinctions about costs become blended or at least less clearly attributable?

Carol’s client’s story might lead a designer of a plan’s governing documents to simplify what the plan’s administrator must, may, or must not do when a writing submitted as a participant’s beneficiary designation is submitted after the participant’s death. The US Government’s Thrift Savings Plan rejects such a writing: “To be valid and accepted by the TSP record keeper, a TSP designation of beneficiary must: (1) Be received by the TSP record keeper on or before the date of the participant’s death[.]” 5 C.F.R. § 1651.3(c)(1) https://www.ecfr.gov/current/title-5/chapter-VI/part-1651#p-1651.3(c)(1) (emphasis added). A plan provision like that could make it unnecessary to evaluate whether a writing submitted after its ostensible maker’s death is genuine. What do BenefitsLink neighbors think: Good idea? Bad idea? Or if one wants to allow a near-death beneficiary designation with some time for it to be delivered to the plan’s administrator or recordkeeper, what about a cutoff nn days after the participant’s death? And how many days would you allow?

Some BenefitsLink neighbors have observed that a recordkeeper will incur considerable expenses to tool up for new distributions and other features SECURE 2.0 permits. And some have observed that, even if one knew or estimated that many or most plan sponsors don’t want the newly permitted provisions, the expense to build a capability is almost unavoidable, because there will be some current and prospective service recipients that want a provision (or the opportunity and flexibility to choose it). Further, new kinds of distributions—such as, an emergency personal expense distribution (not to be confused, or cost-accounted for, with a distribution from an emergency savings account) and an eligible distribution to domestic abuse victim—might involve increased complexity, might generate increases in transactions, and so might increase attributable or allocable costs. (Without discussing specific amounts or anything else that could be price-fixing, collusion, or anti-competition:) How should plan fiduciaries and recordkeepers together seek to allocate these expenses? Compared to a fee for processing a normal distribution after severance from employment (or age 59½) and assuming one’s only reasoning is an attempt to allocate a cost to those who generate the cost: Should a fee for processing an emergency personal expense distribution be less than, the same as, or more than the fee for processing a normal distribution? Why? Should a fee for processing a domestic-abuse distribution be less than, the same as, or more than the fee for processing a normal distribution? Why? Should a fee for processing a hardship distribution be less than, the same as, or more than the fee for processing a normal distribution? Why? Should a plan’s sponsor—using its non-fiduciary settlor powers to decide a plan’s provisions, including charges—favor or disfavor some kinds of distributions? Should a sponsor disfavor an emergency personal expense distribution by charging a higher distribution fee? Should a sponsor disfavor a hardship distribution by charging a higher distribution fee?

I’m aware of EBSA’s bulletins, which describe non-rule interpretations that might allow an employer, without establishing or maintaining an ERISA-governed plan, to pay employer-provided contributions into a health savings account for its employee, even one who had not created an account or assented to receiving a contribution. Likewise, an employer might restrict which health savings account providers the employer allows for employer or payroll-deduction contributions. Health Saving Accounts, Field Assistance Bulletin No. 2004-01 (Apr. 7, 2004), Health Savings Accounts—ERISA Q&As, Field Assistance Bulletin No. 2006-02 (Oct. 27, 2006). A court need not defer to any of these interpretations. See, e.g., Christensen v. Harris County, 529 U.S. 576, 586–88 (2000) (rejecting an argument that the Court should give Chevron deference to a Labor department opinion letter, and further rejecting even Auer deference); Bussian v. RJR Nabisco Inc., 223 F.3d 286, 296–97 (5th Cir. 2000) (rejecting the Labor department’s argument that the court should give Chevron deference to an interpretive bulletin). Yet, I recognize many employers follow the bulletins’ interpretations. My questions about what some summary plan description might explain really are open, without any presumed conclusion. Thank you for the idea that some employers might prefer to say little or nothing about Health Savings Accounts in a high-deductible group health plan’s summary plan description because a discussion might unwisely suggest, or be argued as, the employer’s implied endorsement of, or involvement with, the HSAs the employer seeks to treat as a non-plan.

We’re aware that many employers assume a Health Savings Account is not an ERISA-governed employee-benefit plan. For discussion, let’s assume the premise. But should a summary plan description for a plan that is or allows high-deductible health coverage explain that having no health coverage beyond high-deductible coverage is a condition for the desired tax treatment of a Health Savings Account? And what about other interactions? The HDHP-HSA relation is not the only one for which a participant’s spouse’s choices (whether under the same employer’s plans, or under another employer’s plans) affect a participant’s choices or other rights. While recognizing other communications, should information of this kind also be explained in some plan’s summary plan description?

BenefitsLink neighbors, I’m curious: How much does a summary plan description explain about how coverage under an unrelated employer’s plan affects coverage under the plan the SPD explains? And how much does a summary plan description explain about the potential tax treatments of rights and features under or related to the plan the SPD explains, and how coverage under an unrelated employer’s plan could affect the tax treatments? How much does a summary plan description explain about a participant’s need to coordinate one’s elections with one’s spouse’s elections? How much do SPDs explain? How much should SPDs explain? What’s practical? What’s impractical?

Belgarath, you’re right that a question of this kind (if not solved by recognizing that the pattern of the visa workers’ employment will make an exclusion practically unnecessary) involves law beyond what’s comfortable for most retirement-plans practitioners, even really smart ones like you. You spotted the issue: An exclusion that fits ERISA participation rules and comports with tax law coverage and nondiscrimination rules might nonetheless violate one or more Federal or State civil-rights or employment laws. Further, an incautious exclusion could violate the conditions of a visa or work permit, or violate other immigration law. The next time you see a question of this kind, tell the employer you can help much more efficiently if you know which visa or work-permit program the employer relies on. For the employment law firms I’m counsel to, we’ve been able to design an exclusion or otherwise solve these needs in as little as one tenth of an hour if we know which program the employer relies on. And you too could solve one if you can look up the terms of the program involved. CuseFan is right that it often fits to specify an exclusion by the name of the immigration program under which the employer is permitted to hire the workers otherwise ineligible to work in the United States.

Here’s a rhetorical question about the two business owners and the certified public accountant: If several third-party administrators told the CPA the desired design is okay, why have the business owners not implemented the design with one of those TPAs?

relying on claimant certification for deemed hardship.pdf

Internal Revenue Code of 1986 § 401(k)(14)(C) allows relying on a claimant’s certification “that the distribution is on account of a financial need of a type which is deemed in regulations prescribed by the Secretary [of the Treasury] to be an immediate and heavy financial need, and not in excess of the amount required to satisfy such financial need, and that the employee has no alternative means reasonably available to satisfy such financial need.” SECURE 2.0 § 312 [attached]. If the hypo’s mention of a facts-and-circumstances hardship provision refers to an evaluation beyond the seven needs 26 C.F.R. § 1.401(k)-1(d)(3)(ii)(B) deems “an immediate and heavy financial need”, § 401(k)(14)(C)’s tolerance for relying on a claimant’s certification does not apply. Further, even if the plan allows only deemed hardships and adopts § 401(k)(14)(C)’s self-certification regime, one doubts § 401(k)(14)(C) would protect ostensible reliance if the human who acts for the plan’s administrator is the human who submitted the claim and its certification. In those circumstances, if the certification was false the Internal Revenue Service might plausibly assert that the plan’s administrator “ha[d] actual knowledge to the contrary of the employee’s certification[.]”

Will the visa-program workers live in the USA? Or elsewhere? Or some of both? Will the visa-program workers perform services in the USA? Or elsewhere? Or some of both?

Many of my current and former students do deal work—some from a firm’s M&A practice, and more from a firm’s employee-benefits practice (with deal flow still the biggest driver of billable hours in many eb practices). They might like things that result in an agency’s no-action or closing letter. Among other reasons, that’s easy to furnish in a due-diligence stage. Absent a government agency’s letter, someone acting for the buyer, a buy-side investment banker, or a lender will push the seller to deliver its law firm’s opinion letter that all defects were and are sufficiently corrected. Lawyers hate that because it exposes the firm’s capital-interest partners to personal liability (worse, with exposures to persons that might have little or no relationship with the firm). A firm with clients over time anticipates the later requests that will come when a business is sold, reorganized, or refinanced. Appetites and tastes vary when the client is unlikely to become a subject of deal work.

At least since the 1990s, some plans have used no-substantiation and self-certification regimes for hardship claims. In a February 23, 2017 memo, the IRS openly recognized no-substantiation regimes. (The memo, although addressed to IRS examiners, was announced to practitioners with some fanfare in the Joint TE/GE Council’s 2017 meeting, and with news reporting by Bloomberg BNA, CCH/WoltersKluwer, and others. Further, the memo is codified in the Internal Revenue Manual, which anyone may read.) The memo describes a set of circumstances for which an IRS examiner is instructed not to request source documents to substantiate a hardship. Some of us see Congress’s Act as a next logical step. tege-04-0217-0008.pdf

AKowalski, thank you for your many helpful observations. What I hear from friends in employee-benefits and retirement-services practices is that, while the employer/administrator is responsible, self-correction puts some subtle and not-so-subtle pressures on a professional to find (1) that the employer had procedures (when it really didn’t), (2) that the defect is proper for self-correction (when that finding too is shaky), and (3) that the correction fits the Revenue Procedure (even if one strongly suspects or almost knows the employer isn’t spending the money and effort needed for sufficient correction). And, while the employer is responsible, a client wants comfort, if not the professional’s express written assurance at least the implied assurance that results from allowing the self-correction to proceed with the professional omitting to raise that it doesn’t work. With VCP a practitioner is professionally responsible for a truthful presentation of relevant facts, but can lay off interpretations and findings to the IRS. And the procedure ends with a paper with the IRS’s name at the head. Some practitioners like self-correction because it puts a professional in charge. Others dislike self-correction because it puts responsibility on the professional. If I did corrections work, I’d be inclined toward self-correction. But I can see why some prefer to ask (and sometimes be compelled to ask) for a government agency’s approval.

I don’t read new § 401(k)(14)(C) as precluding a service arrangement under which a service provider processes hardship claims “within a framework of policies, interpretations, rules, practices and procedures” instructed by the plan’s administrator. See 29 C.F.R. § 2509.75-8/D-2 https://www.ecfr.gov/current/title-29/subtitle-B/chapter-XXV/subchapter-A/part-2509/section-2509.75-8.

The Act’s text is: “The Secretary may provide by regulations for exceptions to the rule of the preceding sentence in cases where the plan administrator has actual knowledge to the contrary of the employee’s certification, and for procedures for addressing cases of employee misrepresentation.” New Internal Revenue Code of 1986 § 401(k)(14)(C) is in effect for plan years that began or begin after December 29, 2022. The tax-qualification condition’s tolerance for an administrator to rely on a claimant’s certification is not conditioned on the Secretary of the Treasury having made regulations. Rather, Treasury may make regulations to restrain an administrator’s reliance on a claimant’s certification “where the plan administrator has actual knowledge to the contrary of the employee’s certification[.]” Those regulations, if made and not contrary to Congress’s delegation or other law, could constrain an administrator’s reliance on a certification. But until Treasury makes regulations (and the statute specifies “regulations” rather than IRS subregulatory guidance), an administrator may rely on a certification if the administrator has no “actual knowledge to the contrary of the employee’s certification[.]” rely on hardship certification.pdf

Section 305 of the SECURE 2.0 Act of 2022 division of the Consolidated Appropriations Act, 2023 undoes some limits on the Internal Revenue Service’s Self-Correction Program. In a BenefitsLink discussion, Luke Bailey invites considering “whether VCP [the Internal Revenue Service’s Voluntary Correction Program] will be the rare exception going forward, replaced almost entirely by SCP, in light of SECURE 2.0 Sec. 305[.]” https://benefitslink.com/boards/index.php?/topic/70104-brain-cramp-employer-has-two-401k-plans/#comment-327871. To open a discussion: Who decides that the plan’s administrator had “established practices and procedures” that allow one to use self-correction? Who decides that a failure is inadvertent? Who decides that a failure meets the further conditions for an “eligible inadvertent failure”? Who decides that a correction fits within what a Revenue Procedure allows? How does a plan’s sponsor or administrator get comfort that a failure was eligible for self-correction and is sufficiently corrected? If a client wants a comfort letter, may a practitioner who is neither an attorney-at-law nor a certified public accountant render the letter? If a third person (for example, an acquirer of shares of, or business assets from, the plan’s sponsor or a participating employer) wants a comfort letter, may a practitioner who is neither an attorney-at-law nor a certified public accountant render the letter?

Whether a plan allows or precludes a before-retirement distribution is the plan sponsor’s choice. Whether a plan’s administrator must, may, or must not rely on a claimant’s certification turns on how much or how little discretion the plan’s governing documents grant. (A typical IRS-preapproved document likely grants a user plan’s administrator discretion about whether it relies on or ignores these certifications.) The Internal Revenue Code of 1986 provisions for relying on a claimant’s certification permit it for each of: an eligible distribution to a domestic abuse victim, an emergency personal expense distribution, a hardship distribution, a qualified birth or adoption distribution, an unforeseeable emergency distribution (under a government employer’s § 457(b) plan). A Federal or State prosecutor may pursue a claimant for a false-statement or theft-by-deception crime. But such a prosecution seems rare. (On January 13, 2022, a Federal grand jury charged Marilyn J. Mosby with four false-statement crimes. An indictment is not a finding of guilt. An accused is presumed innocent until proven guilty in later proceedings.) I doubt the Internal Revenue Service could tax-disqualify a whole plan if its administrator lacked actual knowledge that the claimant’s certification was false, and the administrator relied no more than the statute allows.

Belgarath, thank you for contributing your thoughts. I consider these questions from the perspective of a retirement plan’s administrator (the named fiduciary, not a third-party administrator). If 2033 arrives with no correction from Congress (and no Treasury department rule that binds a plan’s administrator), I’m not sure it’s cautious to compel an involuntary distribution, which might be contrary to a participant’s or beneficiary’s right to preserve her retirement savings. About a summary plan description (a task I’m working on now), I’ll explain the provision for those born in 1958 and earlier, explain it for those born in 1960 and later; state that there is an ambiguity for those born in 1959, and inform that the plan’s administrator intends not to decide an interpretation until it becomes necessary. BenefitsLink neighbors, other thoughts? A Treasury department interpretation or tolerance seems somewhat likely. SECURE 2.0 includes not only the change from age 72 to age 73 or 75 but also other nuances about minimum-distribution provisions. Treasury could include these points in a revision of its pending proposed rulemaking. BenefitsLink neighbors, any predictions?