Peter Gulia

Bill Presson, thank you. Does anyone have a different setting in which the TPA does not furnish any individual’s account statement so furnishing a lifetime-income illustration would be an added service?

Bill Presson and Bri, thank you. Are there enough plans with accounts not getting a lifetime-income illustration from another provider that a TPA should build a service (with an incremental fee) for this?

I count at least six fields of law—agency, contracts, employment, healthcare, tax, and ERISA. (Some involve combinations of Federal laws and State laws.) Seeking an integrated solution that considers the wideness of the issues is why a physician might want her lawyers’ advice and negotiation.

In recent months, some BenefitsLink discussions have remarked on ERISA § 105’s command for lifetime-income illustrations. These discussions assume recordkeepers provide a service to generate the illustrations. Some discussions observe that an illustration is not routinely furnished for a self-directed brokerage account. I guess those mentions refer to a situation in which there is a securities broker-dealer’s account AND there is not an arrangement that results in a computer feed of the SDBA’s balance (not the details) to the recordkeeper’s system. BenefitsLink neighbors, how much does this happen? How many ERISA-governed plans have this situation?

An efficient way to do this is for the healthcare lawyer handling the physician’s negotiation of his service agreement with the hospital to bring in her employee-benefits partner or, if the firm lacks an employee-benefits practice, to bring in another firm to add that knowledge.

Chaz, that Internal Revenue Code of 1986 § 223 alone might not preclude a contribution by or for a non-U.S. person might not fully answer an employer’s (or its employee’s) questions. A Health Savings Account might not be entirely controlled by an ERISA-governed employee-benefit plan for which an employer or a plan administrator decides almost everything. A custodian might make its independent business decisions. Someone might want to find a custodian that will accept the contributions. Also, an individual might consider not only U.S. Federal, State, and local tax laws but also income and other taxes under the laws of each nation of which the individual is a citizen, has her domicile, is a resident, or otherwise has a connection that could impose a tax. That might include considering treaties between or among nations.

The “short plan year rule” text on the Instructions’ page 8 is not, for as much as it explains, incorrect; it is incomplete. (Perhaps deliberately so.) Form 5500’s Schedule H at line 3d includes a checkbox for: “The opinion of an independent qualified public accountant is not attached because: (2) ÿ It will be attached to the next Form 5500 pursuant to 29 CFR 2520.104-50.” If that point is marked, I hope a Form 5500 report that omits an IQPA report should get through EFAST2’s check for internal logical consistency. Returning to bzorc’s query, we might learn something if bzorc can share with us whether it was EBSA’s software or a provider’s software that flagged a seeming error.

Here’s the rule: 29 CFR 2520.104-50 https://www.ecfr.gov/current/title-29/subtitle-B/chapter-XXV/subchapter-C/part-2520/subpart-D/section-2520.104-50#p-2520.104-50(a) The rule’s definition of “short plan year” states such an accounting period could result because “[a] plan is terminated[.]” 29 C.F.R. § 2520.104-50(a)(3). The rule’s general relief, subject to conditions, states: “A plan administrator is not required to include the report of an independent qualified public accountant in the annual report for the first of two consecutive plan years, one of which is a short plan year[.]” 29 C.F.R. § 2520.104-50(b). The Labor department’s explanation of the rule, including the Secretary’s consideration of comments on the proposed rule, includes this example: “The operation of the regulation in a situation where a plan is terminating may be illustrated by the following example. A plan which has a calendar year plan year will be terminating on May 31,1981. Pursuant to § 2520.104-50(a)(3), the period from January 1, 1981, through May 31, 1981, constitutes a short plan year. The plan year from January 1,1980, through December 31,1980, is the first of two consecutive plan years, one of which is a short plan year. Under the regulation, the plan administrator is not required to provide audited financial statements in the annual report for the plan year from January 1,1980, through December 31, 1980[.]” Regulation Relating to Reporting and Disclosure for Short Plan Years [final rule], 46 Fed. Reg. 1265 (Jan. 6, 1981), https://archives.federalregister.gov/issue_slice/1981/1/6/1261-1266.pdf#page=5.

Perhaps John Doe might consider a choice of some different ways: 1) John pays BadgerDon or another capable service provider to generate the illustrations. 2) John, without a service provider, generates the yearly illustrations. 3) John disobeys ERISA’s command, estimating that John’s expense for the civil penalties and other consequences, discounted for the probabilities of detection and enforcement, and with adjustments for time values of money, is less than the expense of #1 or cost of #2 4) John spins off from the ERISA-governed plan the assets and obligations allocable to John’s account into a new plan designed to exclude employees (other than John, or another deemed employee). John would evaluate whether the extra burden or expense of administering this second plan—including coverage and other testing to be combined with the first plan, and Form 5500 reports on the second plan—might exceed the expense of #1 or cost of #2. Further, John’s expense or cost even for evaluating these choices might exceed the expense of #1 or cost of #2.

The descriptions are wide. Several appropriations are for multiple purposes without a breakdown within an appropriation. The Commissioner has discretion. See § 10301, https://www.congress.gov/bill/117th-congress/house-bill/5376/text?q=%7B%22search%22%3A%5B%22hr5376%22%2C%22hr5376%22%5D%7D&r=1&s=1 One useful (but small) appropriation is $104,533,803 “to carry out functions related to promulgating regulations under the Internal Revenue Code of 1986[.]” The legislation is good news for many of my students. Demand for tax advice and related services, and for a better quality of advice, goes up if business organizations believe a tax return might be examined. https://www.irs.gov/pub/irs-utl/commissioners-letter-to-the-senate.pdf

I provide no advice. The plan’s administrator with its lawyer, and the independent qualified public accountant (IQPA) with its lawyer, might consider these steps and others. The plan’s administrator prepares a complete set of the plan’s general-purpose financial statements according to generally accepted accounting principles. One imagines most (but not necessarily all) amounts would be zeroes. The notes to these financial statements would include (at least) required explanations and other points. The IQPA reads the plan’s governing documents. The IQPA reads the employer’s business-organization documents to get reasonable assurance that no contribution was declared. If a bank or an insurance company set up an account, will the qualified institution furnish a certification to confirm the plan’s zero assets and that no money or property was delivered for investment? Absent a certification the IQPA may rely on, the IQPA performs such audit procedures as the IQPA finds appropriate to get reasonable assurance that the plan has no asset and has no contribution receivable. For each audit procedure the IQPA ordinarily would perform regarding another retirement plan, the IQPA records in the IQPA’s work papers why the procedure was unnecessary in this plan’s circumstances. The administrator signs a management-representations letter to state facts the IQPA reasonably requests to be confirmed. The IQPA reads the management-representations letter to find that all requested facts are stated. The IQPA reads the administrator’s Form 5500 report and schedules to find that these are logically consistent with the plan’s financial statements. The IQPA writes and delivers its audit report. The IQPA writes and delivers the after-audit communication required under generally accepted auditing principles.

If what’s described is proper and feasible, does the accounting firm propose a fee for the one engagement (including the extra work 29 C.F.R. § 2520.104-50(b)(2) requires) that’s less than the sum of the fees for what otherwise would be done in two years’ engagements?

For many ERISA-governed individual-account (defined-contribution) retirement plans, it’s at least possible, and often typical, to design a plan so a participant’s claim for a distribution or a loan usually does not require a spouse’s consent. Some observers question whether Congress should have set public policy that way. Some advisers might invite a retirement plan’s sponsor to consider whether one’s plan should require a spouse’s consent for some kinds of claims and directions even if neither ERISA § 205 nor an Internal Revenue Code tax-qualification condition calls for the plan’s provision. Reasons for doing so could include a plan sponsor’s desire to protect a participant’s spouse or child from the participant’s decision. Or some plan sponsors might do so to lower the plan administrator’s risks of being dragged into litigation. Even if a complaint fails to state a claim against the plan’s administrator (including when the plaintiff has no standing, or the court has no jurisdiction), getting rid of litigation bears distraction, time, and expense. Yet, some question how much a retirement plan ought to do in protecting spouses from one another. Or in protecting a child from one’s parent. Also, some plan sponsors prefer to avoid a provision that could, for a distribution or loan before the participant’s death, slow down or make nonroutine a computer’s processing of the claims. These and other choices about whether a plan provides survivor annuities or other plan-provided spouse’s-consent constraints, perhaps including some beyond ERISA § 205, are choices for a plan’s sponsor to consider. How much an adviser explains to its client turns on the scope of their relationship. Bird, a mainstream choice is for a plan’s sponsor is to get rid of (at least) survivor annuities (if not all annuities); provide a surviving spouse the whole of a participant’s account, absent a qualified election with the spouse’s consent; and otherwise not restrain a participant’s claims and directions. But, for some reasons mentioned in this discussion or in other BenefitsLink discussions (including those in which Larry Starr explains why his clients’ plans provide a qualified preretirement survivor annuity and tolerate the regimes that go with it), that mainstream choice might not be right for every plan.

Consider that, without regard to anything in Internal Revenue Code of 1986 § 223, a banking, insurance, or securities business might choose not to open an account for a non-U.S. person. Among several potential reasons, a business might do so to streamline its procedures or lower its expenses for obeying Federal and State know-your-customer and anti-money-laundering laws.

Thank you for the further information.

Bill Presson, I see your frustration about a recordkeeper that seeks its customer’s service instructions and proposes defaults (for a sponsor/administrator that does not respond) that could be inconsistent with the plan’s actual or presumed provisions. I’d like to learn your thoughts about ways a recordkeeper might avoid such an inconsistency (assuming the recordkeeper’s profile on its customer shows that the customer does not get its plan-documents service from the recordkeeper). Should the recordkeeper’s email to its customer: suggest one communicate promptly with its plan-documents provider before one responds to the recordkeeper’s request? include a mark-the-box choice (and a fill-in line to name the TPA’s or other provider’s contact) for the customer to ask the recordkeeper to request the other provider’s instructions, and rely on those? propose defaults different than those the recordkeeper sets for customers that use the recordkeeper’s plan-documents service? For example, might the circumstances suggest being less quick to presume the customer wants a new provision or other change? Something else that would help an inattentive sponsor/administrator avoid its unintended instructions?

What measure of a deferred compensation obligation could be affected by a reference to a “plan year” or other accounting year? What other purpose calls for an expression of a concept of a plan year? If the answers to those questions are none, your rewrite of the document might get rid of any mention of a plan year. Many tax-exempt organizations’ § 457(b) plans measure the obligation by reference to bookkeeping accounts that in turn refer to investments, whether participant-directed or not, the employer owns (whether directly, or as a grantor trust available to the employer’s creditors) as an unfunded way to meet the employer’s obligation. Those measure often have no reference to a plan year (and often none to any accounting year). Section 457(b)(2)-(3)’s deferral limits refer to the participant’s tax year. Some of § 457(d)’s conditions for a plan’s payout provisions refer to the calendar year.

If these are unfunded plans, the key issue is exactly which person is obligated to pay the deferred compensation. If the two obligations (or sets of obligations) your client seeks to merge would change which person is the obligor, would any executive object? When I represent an executive, we negotiate that no provision of the plan (really, a contract) can change without the executive’s affirmative written consent. When the executive is asked, she looks at whether the proposed obligor’s financial strength and claims-paying ability are or would become stronger or weaker than those of the existing obligor.

fmsinc, thank you for the information about how some might assert a spouse’s rights to evade a restitution obligation. This seems unlikely in the situation I described. The plan has no provision for recognizing a domestic-relations order. Further, even an attempt might be thwarted because an action for a divorce of the participant’s marriage or another domestic-relations order would be heard in the same court in which the State’s criminal case proceeds, and at least three subsets of the State’s attorneys general are tracking proceedings. Bob the Swimmer, thank you for your observation about what one might accomplish with careful attention to the text of the plan’s governing document. This plan includes an express forfeiture provision. It’s a variation on clauses I’ve been using since the 1980s. My question for this discussion arose because that provision—following how I revised it in 1996, when Congress added IRC § 457(g)—states an exception for a forfeiture that would contravene the plan’s exclusive-benefit provision, which follows IRC § 457(g)(1). Thank you, everyone, for helping me on a question of law (the one I anticipated before I got the fuller facts) that has not seen as many published interpretations as other points we work on.

I wrote my Wednesday and Thursday posts when I had only someone’s oral description of assumed facts, not yet the courts’ records. The State’s criminal prosecution is scheduled for a trial. The Federal criminal prosecution resulted in a plea agreement. That agreement recognizes restitution, debts, and other obligations the United States might collect under 18 U.S.C. §§ 3316, 3556, 3663, 3663A, including the Mandatory Victims Restitution Act of 1996; the Internal Revenue Code of 1986; and 28 U.S.C. §§ 3001-3308 (Federal Debt Collection Procedures Act of 1990). As Lois Baker, blguest, and Luke Bailey point to, the IRS’s and some courts’ interpretations treat an involuntary transfer to meet those debts to the United States as for the participant’s benefit. This situation is unlikely to reach the question of whether restitution ordered only under State law gets a similar tolerance in interpreting and applying the exclusive-benefit provision. (The participant’s debts under the Federal court’s order vastly exceed his § 457(b) balance.) Luke Bailey, thank you for the NAPPA article.

Thank you for this nice help. It confirms that in 2004 the IRS treated its 1984 interpretation as still good law. It is closer to my situation than the 1984 ruling because the 2004 ruling’s case 3 is about an individual-account (defined-contribution) plan, and found that the plan could pay the creditor rather than the participant when the participant severs from employment or reaches age 59½. And the 2004 ruling is a little stronger than the 1984 ruling because in 2004 the IRS allowed the payments to creditors despite the plan’s § 401(a)(13) anti-alienation provision. (A governmental § 457(b) plan need not state such a provision.) Do any of our governmental-plans mavens have more experience to add?

I see recordkeepers using a method like what’s described above: “If we do not receive your instruction by {date}, you instruct us to perform our services assuming your plan adds or omits provisions as stated by this email’s defaults.” Like MoJo, I see recordkeepers using one’s history of the off-document changes when it becomes time to compile the next restatement. Is it a pain-in-the-neck to keep those records? Or is the plan-documents software (or recordkeeping software) programmed to record the in-operation plan changes?

MoJo and Belgarath, thank you. Your descriptions are what I guessed, but it’s nice to have the pros confirm it.

In the mid-1970s, a friend (now 90) bought New York City bonds when the city was plainly insolvent, and had big operating deficits and huge debts. Many of his friends questioned the risks he took. His response: “If we can imagine a world in which the City of New York does not pay on its obligations, the concept of money will have ceased to have any meaning.”

blguest, thank you. The participant stole money (not other property) from the employer that maintains the governmental § 457(b) plan. The plan’s exclusive-benefit provision states: “The Plan is established for the exclusive benefit of Participants and their Beneficiaries. All assets and income of the Plan must be held for the exclusive benefit of the Plan’s Participants and their Beneficiaries. Any amount, property, or right held under the Plan will not be used for or diverted to any purpose other than for the exclusive benefit of Participants and Beneficiaries, except as otherwise permitted under IRC § 457(g)(1).” Another provision, captioned Forfeiture, states: “To the extent not precluded by [the exclusive-benefit provision], if a Participant pleads guilty or is convicted of a crime or offense relating to his or her government office or government employment and an Order provides for restitution relating to such crime or offense, the Participant (or, after the Participant’s death, each Beneficiary)—if he or she has not paid promptly the restitution that the Order requires—forfeits his, her, or its Benefit and Deferred Compensation to the extent needed to meet the restitution not paid.” The plan has no provision for making a surviving spouse a beneficiary other than as the participant designated. The plan has no provision for recognizing a domestic-relations order. No distribution has yet been made or approved. If it were not for considering a potential forfeiture to pay the unpaid restitution, the participant would be entitled as he is severed from employment. One reasoning urged is that paying restitution is for the participant’s benefit because it relieves him of an obligation. IRS General Counsel Memorandum 39267 (March 21, 1984) (“The exclusive benefit rule of section 401(a)(2) by its terms is designed to prohibit the use of plan assets for the benefit of anyone other than the employees and their beneficiaries. In this case the amounts in question are assigned to pay debts of a retired employee. It would be difficult to argue that such payments were not for the benefit of that employee or that such payments prejudiced the benefits to be received by other beneficiaries.”), http://www.legalbitstream.com/scripts/isyswebext.dll?op=get&uri=/isysquery/irlb6a5/1/doc; IRS Letter Ruling 84-26-124 (March 30, 1984) (“The repayment of debts for an employee is for the economic benefit of an employee since it relieves him of a liability.”), http://www.legalbitstream.com/scripts/isyswebext.dll?op=get&uri=/isysquery/irlb6b1/1/doc But a fact in that 1984 interpretation is that each debtor assented to a voluntary repayment plan under a chapter 13 bankruptcy. Some might reason that the plea agreement is voluntary. Others might reason that the plea agreement is somewhat less voluntary than the facts that persuaded the IRS in 1984. Does anyone know about other IRS interpretations one might use to reason through what the exclusive-benefit rule allows or precludes?