Peter Gulia

If enacted, the SECURE 2.0 Act of 2022 division of the Consolidated Appropriations Act, 2023 amends also Internal Revenue Code of 1986 § 401(k)(15)(B) and § 416(g)(4)(H). I.R.C. § 401(k) (15) Special rules for participation requirement for long-term, part-time workers For purposes of paragraph (2)(D)(ii)— (B) Nondiscrimination and top-heavy rules not to apply (i) Nondiscrimination rules In the case of employees who are eligible to participate in the arrangement solely by reason of paragraph (2)(D)(ii), or by reason of such paragraph and section 202(c)(1)(B) of the Employee Retirement Income Security Act of 1974— (I) notwithstanding subsection (a)(4), an employer shall not be required to make nonelective or matching contributions on behalf of such employees even if such contributions are made on behalf of other employees eligible to participate in the arrangement, and (II) an employer may elect to exclude such employees from the application of subsection (a)(4), paragraphs (3), (12), and (13), paragraphs (2), (11), and (12) of subsection (m), and section 410(b). (ii) Top-heavy rules An employer may elect to exclude all employees who are eligible to participate in a plan maintained by the employer solely by reason of paragraph (2)(D)(ii) from the application of the vesting and benefit requirements under subsections (b) and (c) of section 416. (iii) Vesting For purposes of determining whether an employee described in clause (i) has a nonforfeitable right to employer contributions (other than contributions described in paragraph (3)(D)(i)) under the plan, each 12-month period for which the employee has at least 500 hours of service shall be treated as a year of service, and section 411(a)(6) shall be applied by substituting “at least 500 hours of service” for “more than 500 hours of service” in subparagraph (A) thereof. (iv) Employees who become full-time employees This subparagraph (other than clause (iii)) shall cease to apply to any employee as of the first plan year beginning after the plan year in which the employee meets the requirements of paragraph (2)(D) without regard to paragraph (2)(D)(ii). I.R.C. § 416(g)(4)(H): (g) Top-heavy plan defined For purposes of this section— (4) Other special rules For purposes of this subsection— (H) Cash or deferred arrangements or plans using alternative methods of meeting nondiscrimination requirements The term “top-heavy plan” shall not include a plan which consists solely of- (i) a cash or deferred arrangement which meets the requirements of section 401(k)(12) or 401(k)(13) and matching contributions with respect to which the requirements of paragraph (11), (12), or (13) of section 401(m) are met, or (ii) a starter 401(k) deferral-only arrangement described in section 401(k)(16)(B) or a safe harbor deferral-only plan described in section 403(b)(16). Such term shall not include a plan solely because such plan does not include nonelective or matching contributions to employees described in section 401(k)(15)(B)(i). If, but for this subparagraph, a plan would be treated as a top-heavy plan because it is a member of an aggregation group which is a top-heavy group, contributions under the plan may be taken into account in determining whether any other plan in the group meets the requirements of subsection (c)(2).

austin3515, if it helps you, here’s the whole text of SECURE 2.0 Act of 2022 § 310: SEC. 310. APPLICATION OF TOP HEAVY RULES TO DEFINED CONTRIBUTION PLANS COVERING EXCLUDABLE EMPLOYEES. (a) IN GENERAL.—Paragraph (2) of section 416(c) is amended by adding at the end the following new subparagraph: “(C) APPLICATION TO EMPLOYEES NOT MEETING AGE AND SERVICE REQUIREMENTS.— Any employees not meeting the age or service requirements of section 410(a)(1) (without regard to subparagraph (B) thereof) may be excluded from consideration in determining whether any plan of the employer meets the requirements of subparagraphs (A) and (B).”. (b) EFFECTIVE DATE.—The amendment made by subsection (a) shall apply to plan years beginning after December 31, 2023.

Another challenge for a recordkeeper’s software is slotting and maintaining an indicator to distinguish between a cash-or-deferred arrangement created before December 23, 2022 (and so unburdened by new I.R.C. § 414A(a)), and one created on or after.

WCC, thanks. Perhaps this is another set of tasks that call for integration of the payroll service provider's or paymaster's software with the recordkeeper's software.

Ron401k illustrates a challenge some (not all) employers face. There are plan-design ways to counter the behavior described, but they are work to administer. Further, the observation helps remind us that each of the four new Internal Revenue Code texts that allows a plan’s administrator to rely on a claimant’s certification is a may, not a must or shall.

Mojo, thank you for your observation. To extend the discussion, imagine a small-business employer is subject to a State’s or municipality’s law that imposes a play-or-pay tax or other monetary consequence on having no retirement-savings opportunity. Is such an employer’s administration burden for a new 401(k) plan’s automatic-contribution arrangement much harder than the burden for administering default and affirmatively elected payroll contributions under a State’s or municipality’s Individual Retirement Account program?

Some practitioners have suggested there might be practical difficulties about the SECURE 2.0 Act of 2022’s catch-up elective deferrals for ages 60, 61, 62, and 63. Just curious, what are the practical difficulties?

If the email is from EBSA, it might be a little disappointing that a government agency is unaware that most of us have been taught not to respond or react in any way to an email not preceded by a known course of dealing or that otherwise leaves a doubt about its authenticity.

JRN, don't the safe-harbor plan designs allow a smaller matching contribution if the plan has the fitting automatic-contribution arrangement?

One uses a summary of material modifications to disclose something that otherwise would be in a summary plan description. The Labor department’s rule calls a plan’s administrator to “furnish a summary description of any material modification to the plan and any change in the information required by section 102(b) of [ERISA] and § 2520.102-3 of these regulations [see a subsection quoted below] to be included in the summary plan description[.]” 29 C.F.R. § 2520.104b-3(a) (emphasis added) https://www.ecfr.gov/current/title-29/subtitle-B/chapter-XXV/subchapter-C/part-2520/subpart-F/section-2520.104b-3#p-2520.104b-3(a). The required contents of a summary plan description include “[t]he name, title[,] and address of the principal place of business of each trustee of the plan[.]” 29 C.F.R. § 2520.102-3(h) https://www.ecfr.gov/current/title-29/subtitle-B/chapter-XXV/subchapter-C/part-2520/subpart-B/section-2520.102-3#p-2520.102-3(h).

One might reread the governing documents’ definitions of, and provisions about, a severance from covered employment. Even if a worker was severed from a former employer that no longer participates under the multiemployer plan, might the worker now be employer by another participating employer? Under many multiemployer plans, covered employment often refers to employment with any participating employer. Likewise, many multiemployer plans treat a participant as not retired or severed until one is severed from all participating employers. But this is merely a surmise. The answers are in the documents governing the plan asked about.

CuseFan, your observations remind me of a business story. (I’m about three years older than you and, like you, went into the biz in 1984.) In the 1990s, a mid-size employer (about 20,000 employees) told my client, a growing recordkeeper, it could not be considered unless the recordkeeper alone would receive all salary-reduction agreements and the recordkeeper’s computer would feed all deferral instructions into the paymaster’s computer. The employer’s paymaster would never receive any paper, and would not lift a finger for any data entry. The paymaster would not look for errors. (How could it? The paymaster had no source information.) The recordkeeper had to indemnify the employer against all deferral errors, and for any failure in keeping records. That setup won’t work for small-business employers. But is integration of recordkeepers’ and payroll-service providers’ software a way forward?

That’s a meaningful risk. Anything that increases the ease or speed of payouts heightens risks of impersonator frauds. But a plan’s sponsor/administrator with bargaining power can shift those risks to the recordkeeper.

Bird, thanks. Others' outlooks and views?

Under soon-to-be-enacted Internal Revenue Code § 414A, some new § 401(k) or § 403(b) plans must include an automatic-contribution arrangement. For small-business employers not excused as too new or too small, could this new tax-qualification condition slow down creations of new plans?

Do we anticipate recordkeepers will urge customers to put these claims in self-certification regimes, with tick-the-box forms (whether paper or website), to support nondiscretionary processing that asks nothing of the plan’s administrator (beyond having approved the self-certification regime)?

When the Internal Revenue Code of 1986 becomes amended by this week’s Consolidated Appropriations Act, 2023, many provisions that permit a before-retirement payout, including a or an: eligible distribution to a domestic abuse victim, emergency personal expense distribution, hardship distribution (for a deemed hardship), qualified birth or adoption distribution, or unforeseeable-emergency distribution (under a governmental § 457(b) plan), permit reliance on the claimant’s written statement that she meets the tax law’s standard for the kind of distribution requested. (A plan’s administrator may not rely on such a “certification” if the administrator has actual knowledge that the claimant’s statement is false.) Let’s leave aside the public policy discussions about whether it’s wise to allow early access to savings purposed for retirement income. And let’s leave aside discussions about whether a self-certification regime invites a claimant’s incorrect, or even false, statement. Do you see any disadvantage, from the administrator’s perspective, of allowing these self-certification regimes?

Beyond thinking about when someone might have met a service condition to become eligible for allocations of one or more of the three kinds of contributions, remember too that “[a] cash or deferred election can only be made with respect to an amount that is not currently available to the employee on the date of the election.” 26 C.F.R. § 1.401(k)-1(a)(3)(iii)(A) 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)(iii)(A).v If an employee is only now considering a § 401(k) election, one imagines the election might apply only to 2022’s 4th, 12th, 24th, or 26th pay period. The business organization might carefully check its records to discern whether it hired two employees or admitted two partners. “For purposes of [the same section’s] paragraph [about when cash or another taxable benefit is currently available to the employee or deemed employee], a partner’s compensation is deemed currently available on the last day of the partnership taxable year[.]” 26 C.F.R. § 1.401(k)-1(a)(6)(iii) 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)(6)(iii). Thus, a partner might, in 2022’s remaining two business weeks, elect a § 401(k) deferral regarding the whole of the partner’s 2022 compensation (if the partnership’s tax-accounting year ends with December’s end). I see nothing on the face of § 1.401(k)-1 that restricts which kinds of partnership interests get the last-day provision quoted above. A partner need not be a capital-interests partner; one could be a profits partner, or even a guaranteed-payments partner. The retirement plan’s measure of compensation and when it became available must be logically consistent with all the partnership’s tax returns and tax-information returns.

I don’t know whether any Treasury rule or Internal Revenue Service guidance provides for or against what you ask. Absent that knowledge, here’s my guess at a practical path. If an old W-4P election properly set withholding for a periodic distribution, continue that election until the distributee changes it. If an old W-4P election properly set withholding for a series of standing-instruction minimum distributions, continue that election until the distributee changes it. If an old W-4P election properly set withholding for a nonperiodic single-sum distribution for 100% of the account and the plan’s procedures and forms carefully provide for a cleanup payment to get rid of after-flow contributions, dividends, and restoration credits, apply the preceding withholding election to the cleanup payment. If a distribution is newly requested (such that a distributee is filling-out a new electronic or paper form), use the new withholding-certificate form or an IRS-recognized substitute. Perhaps BenefitsLink mavens who know more than I do might add more information.

Some plans furnish participants a § 402(f) notice in the summary plan description or with every quarter-year’s account statement (or both). A rule allows speaking an oral summary of a § 402(f) notice, referring to the previously furnished notice, and offering to furnish again the whole notice. See 26 C.F.R. § 1.402(f)-1, Q&A-2, Q&A-5 example 3 https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/section-1.402(f)-1. My description above about what might be possible assumes that many steps might require furnishing writings (often in paper form, if electronic delivery was not assented to) and waiting a reasonable and prudent time before proceeding with the requested distribution.

On one of the detail points mentioned above: Form W-4R (for a nonperiodic distribution, whether rollover-eligible or not) includes, in its general instructions, this statement: . . . . Your withholding choice (or an election not to have withholding on a nonperiodic payment) will generally apply to any future payment from the same plan or IRA. Submit a new Form W-4R if you want to change your election. https://www.irs.gov/pub/irs-prior/fw4r--2022.pdf

The key would be how comfortable is the recordkeeper’s counsel that the: identity control, address control, tightly scripting and supervising the call-center workers, record-making, distributee confirmations, plan administrator’s actual or implied approvals, records retention, fraud safeguards, other controls, and internal audit are strong enough to meet ERISA and Internal Revenue Code requirements, the service agreement’s obligations and conditions, and remove any discretion the recordkeeper does not want. With careful attention to technology, software, and detailed procedures, it’s possible to design and maintain a regime; but it’s work! In my experience, it works only when the recordkeeper’s counsel (whether inside, outside, or a combined effort) has deep experience with a recordkeeper’s operations, and the recordkeeper’s executives do not resist the needed protocols.

ERISA § 408(e)’s statutory prohibited-transaction exemption can apply only regarding a plan’s acquisition or sale of qualifying employer securities, as defined in ERISA § 407(d)(5). ERISA § 407(d)(5)’s definition of “qualifying employer security” includes the specially defined term employer security. ERISA § 407(d)(1) defines an “employer security” as “a security issued by an employer of employees covered by the plan, or by an affiliate of such employer.” ERISA § 407(d)(7) provides: “A corporation is an affiliate of an employer if it is a member of any controlled group of corporations (as defined in [I.R.C. §] 1563(a), except that ‘applicable percentage’ shall be substituted for ‘80 percent’ wherever the latter percentage appears in such section) of which the employer who maintains the plan is a member. For purposes of the preceding sentence, the term ‘applicable percentage’ means 50 percent, or such lower percentage as the Secretary [of Labor] may prescribe by regulation. A person other than a corporation shall be treated as an affiliate of an employer to the extent provided in regulations of the Secretary [of Labor]. An employer [that] is a person other than a corporation shall be treated as affiliated with another person to the extent provided by regulations of the Secretary [of Labor]. Regulations under this paragraph shall be prescribed only after consultation and coordination with the Secretary of the Treasury.” There is a Labor department rule that interprets ERISA § 407(d)(5). 29 C.F.R. § 2550.407d-5(a) https://www.ecfr.gov/current/title-29/subtitle-B/chapter-XXV/subchapter-F/part-2550/section-2550.407d-5#p-2550.407d-5(a). There is no Labor department rule that implements ERISA § 407(d)(7)’s delegation. All four rules interpreting ERISA § 407 were published in 1977, and not revised after. If there is a doubt on any question L.S. asks, one would want an employee-benefit lawyer’s advice. And even if one finds that an affiliate’s participant’s account’s investment in the parent corporation’s common shares could be permitted, one would Read The Fabulous Document to discern whether the investment is provided for.

Because a qualified birth or adoption distribution is treated as not an eligible rollover distribution for tax-reporting and tax-withholding purposes, could a distributee properly complete Form W-R to request zero withholding for Federal income tax? https://www.irs.gov/pub/irs-prior/fw4r--2022.pdf If the distributee’s address is in the USA, is there any reason by which a plan’s administrator or its payer would reject such a withholding election?

A plan should limit the plan’s qualified birth or adoption distribution to one participant for one birth or adoption to no more than $5,000. For tax-reporting and tax-withholding purposes, a qualified birth or adoption distribution is treated as not an eligible rollover distribution. Internal Revenue Code of 1986 (26 U.S.C.) § 72(t)(2)(H)(vi)(II). But get the distributee’s withholding certificate.