Peter Gulia

fmsinc, we recognize that under some, perhaps many, States’ laws a State’s court ought not to issue a bare no-divorce order sought to be treated as a QDRO. But, as you observe, some judges might sign orders of that kind. There have been three or four BenefitsLink discussions in which a retirement-plans practitioner faces an order a plan’s administrator must accept or deny. And in this discussion Adi tells us: “These orders are gaining traction and several law firms are promoting them[.]” Once a State court’s order has issued and someone has submitted it for treatment as a QDRO, the retirement plan’s administrator must decide whether to accept or deny. I’m unaware of any Federal court decision that analyzes whether an order directed to a retirement plan but unrelated to seeking any annulment, divorce, separation, or child support is a QDRO, or even a DRO, within the meaning of ERISA § 206(d)(3) or an ERISA-governed plan’s provision following it. At least for an ERISA-governed plan, that’s a question for which Federal law preempts State law. (That’s so even if one accepts an interpretation that an ERISA-governed plan’s administrator need not, and perhaps ought not, evaluate the State-law effect of a State court’s order.) A decision of even a State’s highest court is not a precedent that binds a Federal court about whether an order is a QDRO, or even a DRO, within the meaning of ERISA § 206(d)(3) or an ERISA-governed plan’s provision following it. BenefitsLink neighbors, what say you: Would you advise an ERISA-governed plan’s administrator to accept an in-marriage order as a QDRO?

In the 1990s, I, as a recordkeeper’s inside counsel, tried to help an AmLaw 200 firm design a mainstream § 401(k) plan for a large national restaurant chain. The (unwritten) guidance from Internal Revenue Service lawyers was that an employee could not make a § 401(k) deferral from compensation she had already received by collecting from a table, or directly from a diner, a tip paid in currency. IRS people listened to explanations about how this deprived tens or hundreds of thousands of workers from an opportunity open to others. But no one had a solution for the idea that a cash-or-deferred election applies to compensation not currently available. Beyond increasing use of credit-card tips, has anything changed?

If one assume the Labor department’s rules about due dates for Form 5500 reports and summary annual reports are not contrary to law, the rule calls an administrator to furnish the SAR “within nine months after the close of the plan year.” 29 C.F.R. § 2520.104b-10(c) 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). The Treasury department’s Saturday-Sunday-holiday rule applies to “the performance of any act” required or permitted “under authority of any internal revenue law[.]” 26 C.F.R. § 301.7503-1. For a pension plan’s Form 5500 report, the Labor department made no similar rule. But the three-agency Instructions for a Form 5500 report include the Saturday-Sunday-holiday rule. I’m unaware of any Labor department rule that allows a Saturday-Sunday-holiday grace for furnishing a summary annual report. For a report on a plan that ended its accounting year on December 31, 2021, I’d advise the administrator to furnish the SAR today. That said, if the administrator furnishes the SAR next Monday, one wonders that an EBSA investigator reviewing that conduct might prefer not to challenge the timeliness of that SAR (unless there are further reasons to find fault with the plan’s administrator, or its service provider).

Some retirement-plans practitioners have seen that spouses seeking a QDRO without seeking an annulment, divorce, or separation is “a thing”. For example, In Marriage QDRO https://tmsearch.uspto.gov/bin/gate.exe?f=doc&state=4804:deq3j3.2.7 Now, let’s ask ourselves how plans’ administrators should respond to these. Imagine a court’s order otherwise meets all QDRO conditions, and the only questions are whether the order is a domestic-relations order or “relates to the provision of . . . alimony payments, or marital property rights to a spouse . . . of a participant[.]” Imagine that, from the face of the order alone, the administrator knows neither the participant nor the proposed alternate payee asked for an annulment, divorce, or separation. Imagine the order recites that the order “is made pursuant to [the State’s] domestic relations law” but states no support for that statement. To simplify the issues, imagine the State is not a community-property State, and the order has no mention of, or reference to, community property. Should a plan’s administrator reject the order? If so, should the administrator explain its finding that the order is not a DRO? Or, even if the circumstances strongly suggest the still-married and unseparated spouses’ purpose is to get a distribution the participant could not get, should a plan’s administrator accept the order as a QDRO? What would you advise, and why?

While I don’t know your client’s and its plan’s provisions, other facts, and surrounding circumstances: Consider the possibility that an employer’s contribution might be delinquent or past-due for one or more government-contracts purposes, but not necessarily a prohibited transaction under ERISA § 406 or Internal Revenue Code § 4975. Also, if there is a nonexempt prohibited transaction, consider exactly which person must file Form 5330. If the plan’s administrator is not the same person as the employer, consider that the person liable for the excise tax might be the one that must file Form 5330.

Consider whether, even if not all tax-qualifying amendments were done by the date of the resolution that discontinued the plan, it might be good enough that the amendments are done before the plan terminates by paying or delivering its final distributions. Understand that the Treasury department’s remedial-amendment concept might provide no relief concerning ERISA §§ 402-404. On a few of many related points: Has the plan’s administrator yet communicated to participants, beneficiaries, and alternate payees that the plan is ended and will pay a final distribution? If that communication has happened, would the not-yet-done amendment affect anything that was communicated, or affect any choice available to a distributee? If so, the plan’s administrator might evaluate whether a further communication is needed or appropriate. Also, if any to-be-amended provision was not explained in a previous summary plan description or summary of material modifications, the plan’s administrator might evaluate whether it must or should write and furnish a revised SPD or SMM.

The rule’s first sentence calls for a lifetime-income illustration “[a]t least annually[.]” 29 C.F.R. § 2520.105-3(a) https://www.ecfr.gov/current/title-29/subtitle-B/chapter-XXV/subchapter-C/part-2520/subpart-F/section-2520.105-3#p-2520.105-3(a). Even in the rule’s context, the use of the word “annually” in that sentence is ambiguous. Although it is not the situation you ask about, the statute calls for a pension-benefit statement (of which a lifetime-income illustration is an element) “at least once each calendar year to a participant or beneficiary who has his or her own account under the plan but does not have the right to direct the investment of assets in that account[.]” ERISA § 105(a)(1)(A)(ii), unofficially compiled as 29 U.S.C. § 1025(a)(1)(A)(ii) (emphasis added) http://uscode.house.gov/view.xhtml?req=(title:29%20section:1025%20edition:prelim)%20OR%20(granuleid:USC-prelim-title29-section1025)&f=treesort&edition=prelim&num=0&jumpTo=true. Even if a plan’s administrator must furnish statements quarter-yearly: “In the case of pension benefit statements described in clause (i) of paragraph (1)(A), a lifetime income disclosure under clause (iii) of this subparagraph shall be required to be included in only one pension benefit statement during any one 12-month period.” ERISA § 105(a)(2)(B) (flush language) (emphasis added), unofficially compiled as 29 U.S.C. § 1025(a)(2)(B). Also, the statute provides: “In no case shall a participant or beneficiary of a plan be entitled to more than 1 statement described in subparagraph (A)(iii) or (B)(ii) of subsection (a)(1), whichever is applicable, in any 12-month period.” ERISA § 105(b), unofficially compiled as 29 U.S.C. § 1025(b). While the statute’s text is unclear, a fair reading should consider the statements’ intervals and dates, not when a statement is delivered or furnished. To implement lifetime-income illustrations for a plan for which the administrator regularly furnishes quarter-yearly statements, I’d suggest the administrator decide which of a year’s four statements regularly gets the illustration, and then regularly follow that course year after year. Neither a court nor the Labor department should find that an administrator violated ERISA § 105 because a delivery of an illustration was more than 12 months after the delivery of the preceding illustration if the statement dates the illustrations are grounded on are only 12 months apart.

kpension, I won't defend, or interpret, Honeywell's (or any plan's) "whole percentages" provision.

Oops, intervals.

That an involuntary distribution is no more than $1,000 does not deprive it of treatment as an eligible rollover distribution. A plan’s administrator must permit such a distributee to elect a direct rollover if her eligible rollover distributions during a year total at least $200. 26 C.F.R. § 1.401(a)(31)-1/Q&A-11 https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR6f8c3724b50e44d/section-1.401(a)(31)-1. Or has tax law changed from what I remember? Internal Revenue Code of 1986 § 401(a)(31)(B)(i)(I), which sets $1,000 as the most a plan may distribute without providing a default rollover for a distributee who does not elect a different rollover or no rollover, refers to “a distribution . . .”, not an account balance or an accrued benefit. The last day of a plan year might not be a relevant measure. Some plans that provide an involuntary distribution look to a different time. Some plans provide involuntary distributions more often than yearly. Some do it quarter-yearly, or monthly. Some provide an involuntary distribution timed from each participant’s severance from employment. For example, an employer/administrator might include a § 402(f) notice and the form for specifying a rollover with employment-exit papers. For an involuntary severance from employment, some employers furnish a retirement plan’s notices and forms when the employer presents its proposed release and severance agreement. Yet, if the concept is that it’s good enough that a distributee’s account is no more than the specified amount on a relevant date that reasonably precedes the involuntary distribution, that concept might apply no matter what internals or timing the plan uses. Thank you, all, for the suggestions about providing for a determination date. And thank you for your information about practical experiences. Likewise, I don’t doubt there are IRS-preapproved documents one could read as allowing an involuntary distribution more than $5,000 if the accrued benefit at some relevant earlier date was no more than $5,000 (or the plan’s specified amount). At least one recordkeeper’s IRS-preapproved document mandates the involuntary distribution if the amount does not exceed $5,000 (or the other specified amount) “at the time” the participant or beneficiary “becomes entitled” to a distribution. Because, without an IRS determination, I am responsible for my advice about whether the plan’s governing document and written procedures state a tax-qualified plan, I’ll advise the plan’s sponsor and administrator about the opportunities and risks.

Must a domestic-relations order relate to a domestic-relations proceeding? At least one court found that because neither of two spouses had asked the court for a divorce, annulment, separation, or other domestic-relations relief, there was no matter that could call for an order a plan might treat as a QDRO. “[A] QDRO is a procedural right derivative of or adjunct to a domestic relations matter, but outside the context of a domestic relations matter, a QDRO is not a distinct, discrete legal claim. . . . . [W]e hold that absent a divorce or other domestic relations matter pending between spouses, they cannot obtain a QDRO for the sole purpose of moving funds in the participant/spouse’s [retirement] plan out of the plan to the non-participating spouse[‘s IRA].” Jago v. Jago, 2019 Pa. Super. 246, 217 A.3d 289, 297 (Pa. Super. Ct. Aug. 19, 2019) https://casetext.com/case/jago-v-jago?sort=relevance&resultsNav=false&q=. The opinion reflects the trial and appeals courts’ reasoning because only one attorney appeared, and he presented the argument for allowing the domestic-relations order. At least one bit of the US Labor department’s nonrule guidance states somewhat different reasoning, but finds a similar conclusion. “[I]t is the view of the Department of Labor that Congress intended the QDRO provisions to encompass state community property laws only insofar as such laws would ordinarily be recognized by courts in determining alimony, property settlement and similar orders issued in domestic relations proceedings. We find no indication Congress contemplated that the QDRO provisions would serve as a mechanism in which a non-participant spouse’s interest derived only from state property law could be enforced against a pension plan.” ERISA Advisory Opinion 90-46A (Dec. 4, 1990), https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/our-activities/resource-center/advisory-opinions/1990-46a.pdf But an agency’s document that is not a rule or regulation (and usually is made with less process than a notice-and-comment rulemaking) is an interpretation a court need not defer to; instead, it gets only “respect” and only if the interpretation is persuasive. For example, Christensen v. Harris County, 529 U.S. 576 (May 1, 2000) (rejecting an argument that the Court should give Chevron deference to a Labor department opinion letter); Bussian v. RJR Nabisco Inc., 223 F.3d 286, 25 Empl. Benefits Cas. (BL) 1120, 1127-1128 (5th Cir. Aug. 14, 2000) (rejecting the Secretary of Labor’s argument that the court should give Chevron deference to a Labor department interpretive bulletin). A retirement plan’s administrator or a reviewing court might construe or interpret the statute differently than either of the two interpretations mentioned above. Beyond the merits of whether the court’s order is or isn’t a DRO, a plan’s administrator might want its lawyers’ advice about whether the plan’s governing documents provide deference to an administrator’s decision about whether a court’s order is a QDRO or even a DRO. Further, a plan’s administrator might want its lawyer’s advice about the extent to which a court should or would defer to the administrator’s plausible interpretations of the plan’s governing documents (including interpretations of ERISA sections 3, 205, 206, 404, and 514) and discretionary findings.

Is there a similar issue if the plan’s involuntary distribution is set for no more than $5,000? What happens if yesterday’s balance was $4,999 and today’s is $5,001? One hopes some smart recordkeeper has methods for situations in which a tolerance (whether $1,000, $5,000, or something else) would have been met when a distribution was anticipated, but is not met when investments would be redeemed to pay the distribution. Is it really as simple as canceling the anticipated distribution?

JOH, thank you (!) for your gift to this discussion. Even if a judge finds a not-yet spouse is not a spouse (and so not a disqualified person), wasn’t the IRA holder, who had powers to direct the IRA’s investments and the sale, the IRA’s fiduciary, and so a disqualified person? If so, that leaves mixed factual and legal findings about whether the IRA holder as the IRA’s fiduciary acted for an interest other than maximizing the IRA’s investment value.

EBECatty, thank you (!!) for this nice find. It no longer is possible for the transaction’s parties to err on the side of caution; the transaction was done years ago. Even if there was no § 4975(c)(1)(A) or § 4975(c)(1)(D) transaction, it seems there might have been a § 4975(c)(1)(E) transaction. The IRA holder, who was the directing fiduciary of his IRA, had at least two self-dealing interests other than the IRA’s interest: (1) the fiduciary’s personal interest in benefitting his intended spouse; and (2) the fiduciary’s personal interest in providing his residence. Further, under many States’ laws, a couple engaged to marry might have a confidential (fiduciary) relation, each one to the other. And even if a relevant State’s law recognizes no such relation, mutual promises to marry might set up an interest that could affect one’s exercise of one’s best judgment as an IRA’s fiduciary.

CuseFan, thank you (!) for giving me your thinking. I recognize I alone am responsible for whatever advice I might provide. I’ll do my own research and analysis. I asked BenefitsLink neighbors because sometimes it gives me a nice start before I search in Bloomberg Law, CCH/Wolters Kluwer, LexisNexis, and ThomsonReuters’ Westlaw. The statute defines a prohibited transaction as one that is “direct or indirect[.]” Internal Revenue Code of 1986 § 4975(c)(1) (emphasis added) http://uscode.house.gov/view.xhtml?req=(title:26%20section:4975%20edition:prelim)%20OR%20(granuleid:USC-prelim-title26-section4975)&f=treesort&edition=prelim&num=0&jumpTo=true Has anyone seen an IRS argument that a transaction with someone who was not yet (but soon became) a disqualified person was doing indirectly that which must not be done directly?

The sponsor of a retirement plan that yet has no provision for an involuntary distribution desires to provide an involuntary distribution if a participant is severed from employment and her balance is no more than $1,000. The sponsor prefers to limit the plan’s involuntary distribution to the amount specified in Internal Revenue Code § 401(a)(31)(B)(i)(I) because the sponsor/administrator is unwilling to provide for a default-rollover IRA, which would be required if an involuntary distribution is more than $1,000 and the participant/distributee furnishes no different instruction. The plan’s provision would look to whether a participant’s whole account, including her rollover-contributions subaccount, is no more than $1,000. The plan’s governing document uses no IRS-preapproved document. The sponsor would amend the document to state its desired provision (except to the extent a provision would tax-disqualify the plan). Assume all amounts are 100% nonforfeitable. The plan provides participant-directed investment, with a broad range of investment alternatives. Account balances are recomputed every New York Stock Exchange day. For simplicity (and to not resume a June 2020 BenefitsLink discussion), assume the plan incurs no fee for processing a distribution, and a participant’s account incurs no charge that could result in a distribution amount less than the participant’s before-charge account balance. What happens if, between the time the plan’s administrator sends a § 402(f) notice and the form for instructing a direct rollover and the time the administrator would process an involuntary distribution, the participant’s changes from less than $1,000 to more than $1,000? Must the administrator cancel the distribution? What happens if, on the day the involuntary distribution would be processed, the participant’s account balance changes from $999 (based on the preceding day’s funds’ shares’ prices) to $1,001 (based on the funds’ shares’ prices on which shares would be redeemed)? Must the administrator cancel the distribution? How does a recordkeeper do that? If looking to the preceding day’s balance is good enough and the distribution is not canceled, what does the recordkeeper with the breakage between $1,000 and the funds’ shares’ redemption value? How do plans’ administrators and, perhaps more important, recordkeepers deal with this in the practical real world?

kmhaab, when you asked about a plan that has no participants, I guessed you used the word participant not for a technical or legal meaning under ERISA or the Internal Revenue Code, but the way many people use it, especially about § 401(k) arrangements, to refer to those who make an elective-deferral contribution. ERISA § 3(7) defines participant to include an employee “who is or may become eligible to receive a benefit[.]” The Form 5500 Instructions (hyperlink above) include in a count of a retirement plan’s participants “individuals who are eligible to elect to have the employer make payments [elective-deferral contributions] under a Code section 401(k) qualified cash or deferred arrangement.”

Is an IRA’s sale to a not-yet spouse a prohibited transaction? Imagine this not-so-hypothetical situation: Two people who have contemplated marriage decide to wait. Why? One’s IRA owns real property, which the couple intend as their new residence. The IRA holder believes that living in the property while the IRA owns it would result in an improper personal benefit and prohibited transaction. Instead, the IRA sells the property to the holder’s not-yet spouse. (Assume the IRA’s sale is for an amount an appraiser says is fair market value.) The couple delay their marriage, and the IRA holder’s move, until the year after the year in which the IRA sold the property. BenefitsLink neighbors, have you seen any court decision or agency proceeding that analyzes a situation anything like this as a too-clever evasion or somehow a prohibited transaction? What tax-law doctrines might the IRS (or a taxpayer) use to reason that the IRA’s sale to a not-yet spouse ought to be treated as if it were a sale to the IRA holder’s spouse?

That no participant elected a deferral is not among the reasons the Instructions’ page 3 states for not filing. https://www.dol.gov/sites/dolgov/files/EBSA/employers-and-advisers/plan-administration-and-compliance/reporting-and-filing/form-5500/2021-instructions.pdf

Even presuming consistency rules for all an employer’s employee-benefit plans (of those that seek to meet a tax law condition that refers to Internal Revenue Code of 1986 § 414(q)): The Treasury department’s temporary rule (adopted February 19, 1988, and last amended June 27, 1994) interprets § 414(q) as it was in effect for 1996 and earlier years. Under that rule, § 414(q)’s definition for a highly-compensated employee applies if another Internal Revenue Code section refers to § 414(q). 26 C.F.R. § 1.414(q)-1T https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR686e4ad80b3ad70/section-1.414(q)-1T About health, other welfare, and fringe-benefit plans, that § 414(q) temporary rule lists sections 89, 106, 117(d), 125, 129, 132, 274, 423(b), 501(c)(17)-(18), and 505. Section 223—Health Savings Accounts states no reference to § 414(q). Does some coverage or nondiscrimination rule apply intermediately or indirectly?

I have never seen the Labor department question a change from cash-receipts-and-disbursements accounting to accrual accounting (if the Form 5500 report shows an adjustment). Many small plans, especially those with no TPA, begin reporting on cash accounting. Among several reasons, a plan’s administrator might adopt, without editing, the information a recordkeeper furnished. A recordkeeper might lack enough information to form an accrual entry. And even if that information is available to a recordkeeper, many prefer to avoid anything that could suggest even a slight discretion. When a small plan becomes one for which the plan’s administrator must engage an independent qualified public accountant, an IQPA usually persuades the administrator to change to accrual accounting.

I do not know anything that would help you answer your question. But the circumstances you describe suggest another question: Does an actuary assume a pension plan’s current provisions and an absence of change in the provisions (until the plan’s sponsor or administrator instructs different assumptions)? Or does an actuary’s professional conduct require her to make assumptions about a plan’s likely future provisions, even if one’s client has furnished no such instruction or guidance?

When a recordkeeper's customer-service person does not cite an authority, my experience suggests there is none. And even if there might be some Internal Revenue Service notice or announcement (or even a Revenue Ruling), only the Treasury department's rule binds a taxpayer.

Thank you for sharing Chief Judge Hall’s opinion. On your who’s-responsible question, there were plenty of people with plenty of opportunities to avoid unwelcome results. Among those, the multiemployer plan’s sponsor—the joint board of trustees, which decides the plan’s provisions arguably as a nonfiduciary creator, could have much more carefully stated the plan’s provisions. It is unclear (some might say doubtful) whether the plan provisions Judge Hall found were the provisions the plan’s sponsor intended. Further, even if one assumes only Judge Hall’s fact findings (which are incomplete), other possible interpretations of the plan (and of the plan’s application to each of the disputed beneficiary designations) are at least permissible and might be persuasive. The opinion suggests little or nothing about whether the plan’s administrator breached its responsibility because the opinion describes no analysis on such an issue. Further, it seems likely none of the interpleaded claimants presented a fiduciary-breach counterclaim or crossclaim. If there is an appeal, the appeals judges should defer to the trial judge’s findings of fact (unless clearly wrong), and might defer to the trial judge’s interpretations of the governing plan document, the summary plan description, and the plan’s form for making a beneficiary designation. If so, there might be little or nothing left in public law issues on which appeals judges would do a fresh analysis.

If, for a plan’s cash-or-deferred arrangement, the plan does not provide an automatic-contribution arrangement, doesn’t the absence of a participant’s affirmative election to defer mean she elects “cash” compensation (that is, no § 401(k) elective deferral)? See 26 C.F.R. § 1.401(k)-1(a)(3)(ii) (explaining that the absence of an affirmative election has a default consequence), https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR6f8c3724b50e44d/section-1.401(k)-1#p-1.401(k)-1(a)(3)(ii). However, the plan’s administrator might evaluate whether an employee received the plan’s governing document, a summary plan description, or some other notice of her opportunity to elect for or against § 401(k) elective deferrals. If an employee is or was a minor, an administrator might evaluate whether notice to the minor’s natural guardian or conservator (a parent) is or was notice to the minor. That a plan’s administrator might have breached a fiduciary responsibility by failing to deliver a summary plan description does not by itself mean the plan or its cash-or-deferred arrangement fails to tax-qualify under Internal Revenue Code § 401(a)-(k).