Peter Gulia

Imagine this situation: An employer sponsors and administers a § 401(a) plan that allows § 401(k) elective deferrals, provides matching contributions, and provides nonelective contributions. None of this is a safe-harbor arrangement. All plan, limitation, accounting, and tax years are the calendar year. When 2022 begins, the plan did not exclude union-represented employees; they were participants under the same conditions as all employees. In the spring, the employer and the union negotiate a collective-bargaining agreement. The CBA, effective June 1, provides for the union-represented employees to be covered only by the union’s multiemployer individual-account (defined-contribution) plan, including for § 401(k) elective deferrals, matching contributions, and nonelective contributions (which all are set to no less than what was provided under the single-employer plan). Promptly after signing the collective-bargaining agreement, the employer amended its single-employer plan to exclude, from June 1, the union-represented employees. The amendment also specifies that the 2022 nonelective contribution allocated to a union-represented participant is counted only on her January-through-May compensation. How does a plan’s administrator (and, more practically, its recordkeeper or third-party administrator) run coverage and nondiscrimination tests for this year? Are there two sets of tests—one for the year’s first five months, and another for the year’s last seven months? Or are there other ways the measures or tests (or both) adjust for the fact that classifications of participants changed during the year?

Here’s the remembrance-fund exception Cassopy mentions: Remembrance funds. For purposes of title I of [ERISA] and this chapter [29 C.F.R. part 2500 to 2599], the terms “employee welfare benefit plan” and “welfare plan” shall not include a program under which contributions are made to provide remembrances such as flowers, an obituary notice in a newspaper[,] or a small gift on occasions such as the sickness, hospitalization, death[,] or termination of employment of employees, or members of an employee organization, or members of their families. 29 C.F.R. § 2510.3-1(g) https://www.ecfr.gov/current/title-29/subtitle-B/chapter-XXV/subchapter-B/part-2510/section-2510.3-1#p-2510.3-1(g). This subsection (g) is distinct from the rule’s subsection (b) for payroll practices. Cassopy describes the benefit as unfunded. And Cassopy’s description suggests the employer might not be obligated to pay it. Might there be no plan?

What CuseFan explains is further supported by the § 415(c) rule about compensation. See 26 C.F.R. § 1.415(c)-2(e)(3)(iv) https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR686e4ad80b3ad70/section-1.415(c)-2#p-1.415(c)-2(e)(3)(iv). Further, the distinction between compensation attributable to the former employee’s services before separation (even if paid after the separation) and compensation paid as severance pay is useful. To get the former employee’s releases and covenants not to sue, the separation agreement must provide the releasor something she was not otherwise entitled to.

Without defending the weak conduct of any recordkeeper: And without knowing what the retirement plan allows or precludes: The surviving spouse might consider that asking a recordkeeper to do something it seems not tooled-up to do could lead to poor service. The surviving spouse might prefer to direct a rollover to an eligible retirement plan that’s ready to receive the rollover contribution.

Nate S, thank you for your helpful observations.

Also, the written terms of the certificate of deposit might make the CD nontransferable and nonassignable.

If we allow a § 401(k) or § 403(b) participant to self-certify her hardship (with only a pledge to furnish substantiation later, if asked), should we allow a participant to self-certify that she will use her loan to acquire her principal residence?

QDROphile, thank you for your kind help. Other observations? Other methods?

Many § 401(a)-(k), § 403(b), and governmental § 457(b) plans distinguish between participant loans with a repayment period no more than five years and those used to acquire the participant’s principal residence. If a participant’s request for a loan asks for a repayment period more than five years: Does a plan’s administrator (or a service provider acting for it) accept the participant’s written statement, made under penalties of perjury, that the loan will be used to acquire the participant’s principal residence? Or, does a plan’s administrator require some evidence independent of the participant’s statement? If so, what substantiation does an administrator or its service provider require? A mortgage commitment? A purchase agreement? Something else? If a plan’s procedure requires independent evidence, does this mean a claim must be submitted in paper form? Or does a service provider’s software allow uploading pdf files for the independent evidence? In your experience, what percentage of plans process a principal-residence loan by relying on the participant’s written statement, seeking no independent evidence?

Commissioner v. Keystone Consol. Industries, Inc., 508 U.S. 152, 159-162, 16 Empl. Benefits Cas. (BL) 2121 (May 24, 1993) (The Court construed ERISA title II’s parallel text, Internal Revenue Code § 4975(f)(3), as extending, but not limiting, the reach of § 4975(c)(1)(A) [ERISA § 406(a)(1)(A)] to include as such a prohibited sale or exchange a contribution of encumbered property, even if that contribution is not used to meet a funding obligation. The Court held a contribution of property other than money—even assuming the property was unencumbered, and the contribution was valued at the property’s fair market value—was a prohibited transaction.) The Labor department’s Pension and Welfare Benefits Administration further interpreted this in Interpretive bulletin [94-3] relating to in-kind contributions to employee benefit plans (Dec. 21, 1994), 59 Fed. Reg. 66736 (Dec. 28, 1994), reprinted in 29 C.F.R. § 2509.94-3, https://www.ecfr.gov/current/title-29/subtitle-B/chapter-XXV/subchapter-A/part-2509/section-2509.94-3.

It’s been decades since I last advised anything about a plan that uses a safe harbor for coverage and nondiscrimination. Am I right in remembering that a subaccount attributable to safe-harbor matching or nonelective contributions must be withdrawal-restricted as if it were a subaccount attributable to § 401(k) elective deferrals?

I think what Terry Power describes is what I meant. The merger-out might not be a termination such as to require immediate vesting for the transferred participants. But if the merger-out resulted in the single-employer plan’s assets and obligations becoming zero, that ends the single-employer plan (and the Form 5500 reporting should show the merger-out and end).

While TPAs and others who know much more than I do could give you more information, I assume the transfer of assets and obligations from the single-employer plan into the multiple-employer pooled-employer plan results, if the single-employer plan’s assets and obligations became $0.00, in the single-employer plan’s termination. The pooled-employer plan will have its own EIN and PIN, which are independent of a participating employer.

Some audit delays result because the plan’s administrator failed to furnish, or cause to be furnished, information the accounting firm reasonably requested. And some delays result because the auditors uncover a nonexempt prohibited transaction, fiduciary breach, serious error or omission in the plan’s financial statements, lack of control, or other point that precludes rendering a “clean” report. But if the delay truly and fairly is the accounting firm’s fault, hinting at the accounting firm’s liability exposure for its client’s penalties sometimes can be a way to motivate auditors to finish their work and release their IQPA report. In my experience, there are ways a client might politely and deftly hint.

If your departed client engages and pays you to test what happened before the single-employer plan was merged out and to compile a final Form 5500 report for that terminated plan (for its 2022 short year that ended when the merger-out was completed), that might be a reasonable task. Before accepting an engagement, you might consider whether you would get useful information from the single-employer plan’s former recordkeeper and investment custodians. For anything after the merger-out, it’s the pooled-employer plan’s administrator that decides which, if any, service providers it engages.

In 2017, the Internal Revenue Service issued to its employees (with releases to practitioners and the public) guidance directing IRS examiners not to challenge a plan as failing to meet a § 401(a)(9) provision if the plan’s administrator was unable, after specified efforts, to locate the should-be distributee. While it is only my reasoning, a plan should not be expected to pay a minimum distribution when the identity of the would-be distributee is unknown. Further, even without ERISA’s stronger protections, a plan with a provision to meet Internal Revenue Code § 401(a)(2) must be administered for the exclusive benefit of the participant’s beneficiary. It is not proper to pay someone who is not the participant’s beneficiary. missing participant or beneficiary minimum-distribution memo-for-employee-plans 2017-10-19.pdf

Thank you!!!

Consider whether not correctly recording the owner and nature of securities accounts and other investment-related accounts could result in generating tax-information reports—including, for example, Forms 1099-B, 1099-DIV, 1099-INT, which might suggest capital gains, dividends, and interest to be shown in the tax return of the organization with the Employer Identification Number.

Another retirement plan’s administrator that filed a Form 5500 report on 2021 without an independent qualified public accountant’s opinion is Trump Payroll Corp., the sponsor and administrator of the Trump Payroll Corp. 401(k) / Profit Sharing Plan. See pdf page 22 of 23. (I didn’t look for this; I stumbled across it while searching for a different plan.) Trump Payroll Corp 401k 2021 5500 20221017112257NAL0029732609001.pdf

That the recordkeeper says a signature is needed does not necessarily mean the recordkeeper says the plan requires that signature. Rather, it might be about something the recordkeeper or a custodian requires under either’s service agreement. A custodian might have no authority to decide whether the plan requires or permits a distribution. A custodianship for a retirement plan is nondiscretionary, with all payments instructed. If the decedent is the only human who had authority to act for the plan’s administrator/trustee, instructing a distribution might have to wait until there is someone with authority to act for the plan’s administrator/trustee.

Consider also checking Wright & Miller’s Federal Practice and Procedure treatise to see whether its part on interpleaders explains a convention about tax reporting for an amount paid into the court’s registry.

I haven’t looked to discern whether the statute and rule are clear or ambiguous about your question. Would a Form 1099-R report issued before the distributee is known show in the “recipient’s name” box the United States’ court and in the “recipient’s TIN” box the omission of a taxpayer identification number? Although courts nowadays favor text interpretations over purpose interpretations, a court might find such a report would be so useless to the Internal Revenue Service that an interpretation that the statute and rule require such reporting is incorrect or otherwise unsound. Beyond your advice, perhaps there’s a way to get some comfort, or at least some showing that the payer/reporter (if your client has that responsibility) acted in good faith. In the petition, consider asking not only for the court to decide the rightful distributee but also for the court’s declaratory judgment that the plan’s administrator or trustee ought not to file any Form 1099-R tax-information report until the court has decided the proper distributee (or the matter is settled and the interpleader case is ended). (One would not ask this unless the payer/reporter, after thorough legal research, finds that the question is unsettled or otherwise doubtful.) If the court grants that declaratory judgment, the IRS should not assert a penalty against the report for acting according to the court’s order. Or if the court grants no relief, the payer/reporter will have shown it was aware of the question about when and what to report, did reasonable legal research, and in good faith sought to get a confirmation of the answer.

For a § 401(a) plan stated using IRS-preapproved documents, a user’s reliance on the IRS’s letter is not lost merely because the user changed or added some “administrative” provisions the Revenue Procedure sets up some limited tolerance for. For a § 403(b) plan, the 2013 Revenue Procedure omits a similar tolerance. Is that correct? Is that still current? Is it so that a user must do no change beyond what the adoption-agreement form allows?

What sets up a restorative payment is that a fiduciary pays it to restore losses to a plan (or IRA) if there was a reasonable risk of liability for the fiduciary’s breach, and other facts and circumstances show the payment is not a disguised contribution. For a § 401(a)-qualified plan (or another plan that has § 415 limits), a Treasury department rule distinguishes between an annual addition and a restorative payment, which does not count as an annual addition. 26 C.F.R. § 1.415(c)-1(b)(2)(ii)(C) https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR686e4ad80b3ad70/section-1.415(c)-1#p-1.415(c)-1(b)(2)(ii)(C); Limitations on Benefits and Contributions Under Qualified Plans, 72 Federal Register 16878, 16887 [middle column] (Apr. 5, 2007), https://www.govinfo.gov/content/pkg/FR-2007-04-05/pdf/E7-5750.pdf. That rule follows a general principle described in Revenue Ruling 2002-45, 2002-2 C.B. 116. The Internal Revenue Service has issued letter rulings applying the principle regarding IRAs. IRS Letter Rulings 2009-21-039 (Feb. 25, 2009), 2008-52-034 (Sept. 30, 2008), 2008-50-054 (Sept. 18, 2008), 2007-38-025 (June 26, 2007), 2007-24-040 (Mar. 20, 2007), 2007-19-017 (Feb. 12, 2007), 2007-14-030 (Jan. 11, 2007), 2007-05-031 (Nov. 9, 2006). [In the numbering of letter rulings, the two digits after the year show the week in which the ruling was released under the Freedom of Information Act.] Although a letter ruling is no precedent [I.R.C. § 6110(k)(3)], one might use the reasoning of the three layers of sources described above—and that the IRS has consistently applied the principle since at least 2002—to support a substantial-authority tax-return position. 26 C.F.R. § 1.6662‐4(d)(2)-(3) 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)(3). The position will be stronger if the IRA holder had and keeps evidence, preferably independent evidence, that shows the settlement was truly made to end a fiduciary’s (or alleged fiduciary’s) risk exposure.

CuseFan, thanks.