Peter Gulia

For many individual-account retirement plans that permit retirement distributions (even without waiting for severance from employment) as soon as age 59½ and (by requiring no more than a few years of vesting service) make most participants’ accounts nonforfeitable before an individual’s 60-something age, that a written plan specifies a normal retirement age seems mostly a vestige. As Riley Bretton mentions, many plans do not impose an involuntary distribution earlier than needed to meet Internal Revenue Code § 401(a)(9)’s tax-qualification condition, which now usually refers to age 72 (for a participant who is no longer employed, or is a more-than-5%-owner). Although I imagine few plans so provide, a plan may provide an involuntary distribution once the participant reaches the plan’s normal retirement age or, if later, age 62. “Immediately distributable. Participant consent is required for any distribution while it is immediately distributable, [that is], prior to the later of the time a participant has attained normal retirement age (as defined in section 411(a)(8)) or age 62. Once a distribution is no longer immediately distributable, a plan may distribute the benefit . . . in the normal form . . . without consent.” 26 C.F.R. § 1.411(a)-11(c)(4) https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR686e4ad80b3ad70/section-1.411(a)-11#p-1.411(a)-11(c)(4) Under Reorganization Plan No. 4 of 1978 § 101, the Treasury department’s rule interprets not only Internal Revenue Code of 1986 § 411 but also ERISA § 203.

If the participant’s objection is based on sharia and the plan provides participant-directed investment, the plan’s sponsor or administrator might consider adding to the plan’s designated investment alternatives a fund with investment strategies to meet sharia. These might be available in a recordkeeper’s platform (even without needing a brokerage window), or could be added on a plan fiduciary’s request.

Some retirement plans’ fiduciaries prefer to integrate searches with the service provider one selects for default rollovers to Individual Retirement Accounts. If the plan lacks such a service provider, consider looking first to service providers that advertise with BenefitsLink.

Do the plan’s governing documents allow an “immediate and heavy financial need” beyond the seven deemed needs?

A restorative payment is not a § 415(c) annual addition. It’s enough that there was a “reasonable risk of liability for breach of a fiduciary duty[.]” You can read the whole clause here: 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). I wrote Treasury a comment that led to this rule.

There is a partly analogous authority—one that is not a precedent (because any letter ruling is not), but that might (to the extent of the on-point and persuasive reasoning) be used as an element in a taxpayer’s substantial authority for an interpretation. In IRS Letter Ruling 2003-34-040 (May 30, 2003), the Internal Revenue Service treated “for purposes of section 403(b) of the Code” employees of a limited-liability company (which “has not elected to be treated as a corporation or as an entity separate from its owner”) as employees of that company’s sole member. In that ruling’s recited facts, “Company B [the limited-liability company] is engaged in the business of providing management information technology and consulting services to health care organizations such as [charitable] Hospital A [B’s sole member] and other such entities requiring such services.” The ruling’s reasoning was a straightforward application of 26 C.F.R. §§ 301.7701-1, -2, and -3. Before considering that reasoning regarding an unfunded plan (whether § 451(a)/§ 409A, § 457(f), or § 457(b)), one would consider whether the limited-liability company alone is, or the LLC and its member are, the obligor on the deferred wages. This matters for several accounting, tax, and other legal purposes. That includes whether a plan is “established and maintained by an eligible employer” that is an organization exempt from tax under the Internal Revenue Code’s subtitle for income taxes. See I.R.C. (26 U.S.C.) § 457(b), 457(e)(1)(B). Also, your client might check whether a limited-liability company’s executive is that company’s employee, or instead is the parent’s employee leased to or shared with the parent’s subsidiary. Forms of plan documents available from a plan-documents publisher or a recordkeeper might lack choices and texts adequate to specify exactly which person is, or persons are, obligated to pay the deferred wages of a subsidiary’s, affiliate’s, or other participating employer’s executive. Depending on the scope and nature of your relationship with your client, consider urging your client to ask its lawyers to attend to the details of the obligations.

While I have no experience with using an annuity contract to resolve a defined-benefit plan’s obligation, I have heard that Annua sources placements of that kind. https://annua.com/ Further, one might check businesses that advertise on BenefitsLink.

Even if one were to believe it is 100% certain the Service would grant the requested relief, a practitioner’s fee for writing up her client’s explanation of its reasonable cause might be more than $500.

In 2019, the pitch for adding SECURE’s portability provision was that plans’ sponsors and fiduciaries might be less fearful of trying a lifetime-income investment alternative if one knew there is a way out. Now, almost three years later, has anyone tested whether the out practically works?

PS, if you are a nonfiduciary service provider taking instructions from the plan’s administrator or trustee (which might be a qualified termination administrator, court-appointed fiduciary, or other successor fiduciary), you ask the fiduciary for its instructions. If you are the fiduciary, you face decisions about the plan’s accounting and final distributions.

However the employer’s paymaster and the plan’s administrator resolve challenges of these kinds, it might be stronger to put the solutions in written procedures, and in participant-facing communications, including a summary plan description and the form by which a participant instructs her elective deferral.

If a § 401(k), § 403(b), or governmental § 457(b) plan’s sponsor or administrator removes from the plan’s investment alternatives a lifetime-income investment (which might include an annuity contract with guaranteed-lifetime-withdrawal-benefit provisions), an exception from the usual restrictions against a distribution before severance-from-employment or age 59½ allows a limited distribution to remove from the plan the annuity contracts. This could include delivering to a participant a qualified plan distribution annuity contract. Internal Revenue Code §§ 401(a)(38), 401(k)(2)(B)(i)(VI), 403(b)(11)(D), 457(d)(1)(A)(iv). Has anyone done this? Did you have a good experience, or a bad time? Did the insurance company cooperate? What difficulties did you encounter? What cautions and pointers would you suggest to someone now planning a project? (Please don’t misunderstand my query as suggesting any view for or against any insurance or investment product. Rather, I seek help about how a practitioner might guide a plan sponsor that has already decided to remove lifetime-income investments.)

rocknrolls2, thank you for your observations. Sponsors of retirement plans have wide ranges of choices in setting provisions about who gets a benefit after a participant’s death. My descriptions posted above presume a particular set of (perhaps idiosyncratic) provisions I’m familiar with. Those provisions include: Only a participant (before her death) can name a beneficiary, or change the participant’s beneficiary designation. A person is not a beneficiary unless the person is alive when the distribution otherwise would become payable. A person is not a beneficiary unless the person is alive when the particular payment under a distribution otherwise would become payable. Any right of a beneficiary is strictly personal to that beneficiary and lapses on her death. An undistributed benefit that would have been distributable to a person had she lived is not distributable to that person’s legatees or heirs. On a beneficiary’s death, any undistributed benefit attributable to that beneficiary becomes distributable to the remaining primary beneficiaries or beneficiary if any, or if none, to the remaining contingent beneficiaries or beneficiary, in each case to be distributable in equal shares to all living beneficiaries of the applicable primary or contingent beneficiary class. The provisions I describe are not my reading of any widely recognized document provider’s IRS-preapproved documents or similar models. The regime you describe—that a primary beneficiary’s right (including perhaps a right to appoint a further disposition) becomes fixed when that beneficiary survives the participant—could be a correct or sensible reading if the plan’s governing documents so provide, or lack text to provide something else. I concur that a plan’s sponsor, a sponsor’s lawyer and other advisers, and (in some circumstances) service providers should put more attention on carefully designing and writing a plan’s beneficiary provisions. That includes a plan’s default provision. A § 3(16) administrator, third-party administrator, recordkeeper, or other service provider might more efficiently handle difficult situations and might save (sometimes unbillable) time and by thinking through which provisions fit one’s clients’ plans and the service provider’s business interests.

Luke Bailey, thank you for your observations. The provision ESOP Guy described (if it’s the provision I remember some recordkeepers putting in documents furnished to customers) applies also if the employment-based retirement plan permits or requires a single-sum distribution. Without such a statement in the plan’s text, some might interpret a plan as allowing a person who (by surviving the participant) gained a right to take a payment a right to name a successor beneficiary for whatever remains of the portion the participant-named beneficiary could have taken before her death. Yet, a change from a primary beneficiary to a contingent beneficiary is likelier with yearly or other periodic payments. (The last time I saw an ERISA-governed § 401(k) plan that provided an annuity was almost 30 years ago.) The essential import of the provision is that a plan’s administrator (and its service provider) never looks to a beneficiary designation beyond one the participant made before her death. Among several reasons for such a provision is that many plan-administration regimes have no way to record a beneficiary designation made by a person other than a participant. And some consider it appropriate for a participant to control, except for the plan’s limited protections for a surviving spouse, the disposition of an accumulation the participant created.

Some plans specify that only the participant’s beneficiary designation (including a contingent beneficiary designation) governs who gets any benefit any time after the participant’s death. Under provisions of that kind, a benefit not exhausted by a primary beneficiary’s death might be provided to a contingent beneficiary the participant named. (If the participant’s beneficiary designation, including the participant’s contingent beneficiary designation, is exhausted, the plan’s default beneficiary might apply.) If a plan’s sponsor considers providing that a beneficiary may name a further beneficiary, the sponsor might carefully evaluate whether the plan’s administrator can administer that beneficiary regime. Likely, the employer/administrator would administer such a beneficiary-designation regime without the recordkeeper’s help.

While I advise no one, a fiduciary might want his, her, or its lawyer’s advice to consider these and related points: If the only tension were that an investment adviser gets compensation for its services, ERISA § 408(b)(2) might exempt that prohibited transaction. But if a service arrangement involves a fiduciary’s self-dealing, the self-dealing act is a separate prohibited transaction. 29 C.F.R. § 2550.408b-2(e)(1); accord 29 C.F.R. § 2550.408b-2(f) example 6 (about father and son). “Thus, a fiduciary may not use the authority, control, or responsibility which makes such person a fiduciary to cause a plan to pay an additional fee to such fiduciary (or to a person in which such fiduciary has an interest which may affect the exercise of such fiduciary’s best judgment as a fiduciary) to provide a service.” 29 C.F.R. § 2550.408b-2(e)(1) (emphasis added). A fiduciary’s recusal might not get rid of the conflict unless none of the remaining fiduciaries has any personal interest in pleasing the father or otherwise to select the son. https://www.ecfr.gov/current/title-29/subtitle-B/chapter-XXV/subchapter-F/part-2550/section-2550.408b-2 If the plan’s fiduciaries (preferably those other than the father) sincerely believe that the son might be the investment adviser that would be selected on the merits, those fiduciaries might engage an independent fiduciary to evaluate investment-adviser candidates and select the plan’s investment adviser. Yet, a fiduciary would do so only if the plan’s expense for the independent fiduciary’s service would be no more than a prudently incurred expense needed to serve the plan’s exclusive purpose.

Unlike a single-employer plan, a multiple-employer plan might get no Securities Act of 1933 § 3(a)(2) exemption. Years ago, I lost an engagement because I mentioned a securities-law issue. Although I said that responding to the issue was not a condition to my availability and explained that enforcement was unlikely, the organizer disliked being told even that there was any issue. There’s a meaningful difference between an “open” multiple-employer plan with unrelated employers and a “closed” MEP involving business relationships. For a multiple-employer plan about which the employers have business ties, the staff of the US Securities and Exchange Commission have delivered no-action letters.

Might your inquirer consider a multiple-employer plan under which a contractor might be a participating employer?

No matter what the court order is labeled or recites, the regulation setting up the defined term “court order acceptable for processing” was published on July 29, 1992. While the lingo might not matter (because it seems the system accepted the 2003 court order as a COAP), the regulations might affect how the order relates to the annuity the plan provides, and whether your friend gets a “former spouse survivor annuity” (also a defined term in the regulations). The regulations about survivor annuities date from May 13, 1985. Those regulations too affect the annuity the plan provides, and might affect how the order relates to the annuity the plan provides. Those points recognized, it might be efficient for your friend to ask an Office of Personnel Management employee or agent what OPM believes are the nonretiree’s benefits. While I imagine your friend doesn’t expect you to sort through the detailed regulations, I furnished the citations and hyperlinks because some BenefitsLink readers welcome an opportunity to read primary sources.

Rules for domestic-relations orders directed to the Civil Service Retirement System or Federal Employees Retirement System [FERS] are in the Code of Federal Regulations at title 5 part 838. As David Rigby mentions, the defined terms include “court order” (conceptually similar to how ERISA § 206(d)(3) defines a DRO) and “court order acceptable for processing” or COAP (conceptually similar to a QDRO, in the sense of an order the system recognizes to do something under the plan). 5 C.F.R.§ 838.103 https://www.ecfr.gov/current/title-5/chapter-I/subchapter-B/part-838/subpart-A/subject-group-ECFR6ebcec98dccc68e/section-838.103 For rules about survivor annuities, see title 5 part 831 subpart F—5 C.F.R. §§ 831.601 to 831.685 https://www.ecfr.gov/current/title-5/chapter-I/subchapter-B/part-831/subpart-F.

If the employer’s plan uses a group disability insurance contract, does that contract allow the employer to make choices of the kinds you ask about?

For a governmental § 457(b) plan, distributions typically are processed using some combination of services of a trustee, custodian, or insurer and the recordkeeper. For a nongovernmental tax-exempt organization’s unfunded § 457(b) or § 457(f) plan, some employers process deferred compensation through the employer’s payroll function to support Form W-2 wage reporting and withholding. Others process deferred compensation with an investment or service provider that offers needed wage reporting and withholding services. The employer would check carefully its investment and service contracts.

BenefitsLink just posted in today’s news the IRS’s draft of the 2023 version of Publication 15-A. https://benefitslink.com/news/index.cgi

Beyond publications and instructions, the Internal Revenue Service on September 1 published a webpage with recent guidance about substitutes for Form W-4R and Form W-4P. https://www.irs.gov/forms-pubs/additional-guidance-for-substitute-and-telephonic-submissions-of-forms-w-4p-and-w-4r IRS Publication 15-A, Employer’s Supplemental Tax Guide, states requirements for substitutes, including electronic submissions. https://www.irs.gov/pub/irs-pdf/p15a.pdf When a recordkeeper processes millions of tax-withholding instructions, small process improvements can make it worthwhile to discern just how much one may or should do in adapting these substitutes. Your description about your circumstances suggests you might practically limit how much attention, time, and effort—if any—to put on adapting from the IRS forms to your clients’ substitutes. The IRS’s revisions seek to push a distributee to estimate carefully how much withholding she asks for. So, one might be cautious about omitting anything in how a user steps through the IRS’s logic path and arithmetic.

One might consider these steps to follow Luke Bailey’s line of inquiry. “For purposes of section 401(a)(9), a 5-percent owner is an employee who is a 5-percent owner (as defined in section 416)[.]” 26 C.F.R. § 1.401(a)(9)-2/Q&A-2(c). That section defines: “For purposes of this paragraph, the term ‘5-percent owner’ means— (I) if the employer is a corporation, any person who owns (or is considered as owning within the meaning of section 318) more than 5 percent of the outstanding stock of the corporation or stock possessing more than 5 percent of the total combined voting power of all stock of the corporation[.]” Internal Revenue Code of 1986 (26 U.S.C.) § 416(i)(1)(B)(i)(I). That section provides: “Stock owned, directly or indirectly, by or for a trust (other than an employees’ trust described in section 401(a) which is exempt from tax under section 501(a)) shall be considered as owned by its beneficiaries in proportion to the actuarial interest of such beneficiaries in such trust.” I.R.C. § 318(a)(2)(B)(i) (emphasis added). Accord 26 C.F.R.§ 1.416-1/Q&A-17, Q&A-18. For thoroughness, one might check whether the proposed rules to interpret and implement Internal Revenue Code § 401(a)(9) answer the question similarly or differently.