Peter Gulia

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.

The agency rule mentioned—26 C.F.R. § 1.410(b)-8—was published on September 19, 1991. https://www.govinfo.gov/content/pkg/FR-1991-09-19/pdf/FR-1991-09-19.pdf Even if an agency’s rule was a permissible interpretation or implementation of the statute when the agency made the rule, one cannot rely on a rule to the extent that the statute to be applied differs from the statute the agency considered when it made the rule. The 1996 Act substantially revised Internal Revenue Code of 1986 § 414(q). Portions of many rules under Internal Revenue Code sections 401 to 419A no longer reflect current law. More than a few rule texts are a quarter-century, half-century, or more out-of-date. On March 14, 2019, the Treasury department removed from the Code of Federal Regulations 296 obsolete rules. But these removals were about rules for which a whole rule (not some portion of a rule’s text) lacked “any current or future applicability under the Internal Revenue Code[.]” https://www.govinfo.gov/content/pkg/FR-2019-03-14/pdf/2019-03474.pdf

Under that rule, there is no condition for an advance notice about the presumed means of communication. The rule’s conceit is that a worker will see the communication because “access to the employer’s or plan sponsor’s electronic information system is an integral part of [his or her duties as an employee][.]” 29 C.F.R. § 2520.104b-1(c)(2)(i)(B), referring to 29 C.F.R. § 2520.104b-1(c)(2)(i)(A). Further, the rule’s conditions include that “[n]otice is provided to each participant . . . , in electronic or non-electronic form, at the time a document is furnished electronically, that apprises the individual of the significance of the document when it is not otherwise reasonably evident as transmitted ([for example], the attached document describes changes in the benefits provided by your plan)[,] and of the right to request and obtain a paper version of such document[.]” 29 C.F.R. § 2520.104b-1(c)(1)(iii). I like to include in an email’s subject line some expressions to show that the communication is about the participant’s retirement, health, or other employee benefits, and why one should open and read the email. For the whole of the wired-at-work (or affirmative-consent) rule, 29 C.F.R. § 2520.104b-1(c) https://www.ecfr.gov/current/title-29/subtitle-B/chapter-XXV/subchapter-C/part-2520/subpart-F/section-2520.104b-1#p-2520.104b-1(c).

I don’t know any answer to your questions, but consider this: In that rule (including its six examples), all mentions of voting power refer to a corporation. Yet for other aspects, the rule carefully distinguishes how a concept applies regarding a corporation, a partnership, a sole proprietorship, and a trust or estate. When the Treasury proposed the rule in 1975 (and proposed a related rule in 1983), adopted the rule in 1988, and revised it in 1994, that a partnership might involve management powers that could be described in ways similar to voting power regarding a corporation ought to have been known to the Treasury and IRS lawyers who worked on the rulemaking.

If anyone is wondering, ERISA§ 206(d)(3)(H)&(I) provides: (H) (i) During any period in which the issue of whether a domestic relations order [defined in § 206(d)(3)(B)(ii)] is a qualified domestic relations order is being determined (by the plan administrator, by a court of competent jurisdiction, or otherwise), the plan administrator shall separately account for the amounts (hereinafter in this subparagraph referred to as the “segregated amounts”) which would have been payable to the alternate payee during such period if the order had been determined to be a qualified domestic relations order. (ii) If within the 18-month period described in clause (v) the order (or modification thereof) is determined to be a qualified domestic relations order, the plan administrator shall pay the segregated amounts (including any interest thereon) to the person or persons entitled thereto. (iii) If within the 18-month period described in clause (v)— (I) it is determined that the order is not a qualified domestic relations order, or (II) the issue as to whether such order is a qualified domestic relations order is not resolved, then the plan administrator shall pay the segregated amounts (including any interest thereon) to the person or persons who would have been entitled to such amounts if there had been no order. (iv) Any determination that an order is a qualified domestic relations order which is made after the close of the 18-month period described in clause (v) shall be applied prospectively only. (v) For purposes of this subparagraph, the 18-month period described in this clause is the 18-month period beginning with the date on which the first payment would be required to be made under the domestic relations order. (I) If a plan fiduciary acts in accordance with [ERISA §§ 401-414] in— (i) treating a domestic relations order as being (or not being) a qualified domestic relations order, or (ii) taking action under subparagraph (H), then the plan’s obligation to the participant and each alternate payee shall be discharged to the extent of any payment made pursuant to such [a]ct. ****** {We regret this display does not show the indents I wrote to show the arrangement of the subparagraphs, clauses, and subclauses.} Receiving notice that someone who might become an alternate payee might pursue an order, which might be a DRO the proponent asks the plan’s administrator to treat as a QDRO, might not be the same thing as the beginning of “[a] period in which the issue of whether a domestic relations order is a qualified domestic relations order is being determined[.]” Yet, as others in the discussion have observed, some plans’ administrators use procedures that impose a hold promptly after the administrator finds that someone might seek an order. I express no view about whether such a procedure is wise or unwise, or prudent or imprudent.

Consider too that whatever the Internal Revenue Service allows under an IRS-preapproved documents regime answers no question under title I of the Employee Retirement Income Security Act of 1974. A plan’s administrator might want its lawyer’s advice about whether a plan sponsor’s or employer’s declaration of a contribution and its “instructions” about how to allocate the contribution (if the allocation was not already specified) is, within the meaning of ERISA § 104(b)(1), “a modification or change described in [ERISA] section 102(a)” such that the administrator must furnish “a summary description of such modification or change[.]” If it is, an administrator might carefully write the “communication” the plan’s governing documents require to meet also ERISA’s call for a summary of material modifications. A plan administrator’s duties under ERISA sections 102, 104, and 404(a) could include writing the summary “to be understood by the average plan participant, and [to] be sufficiently accurate and comprehensive to reasonably apprise such participants and beneficiaries of their rights . . . under the plan.” ERISA § 102(a).

Whether forfeitures are allocated without regard to which participating employer’s participants generated the forfeitures or by some specified subsets is stated by (or to be interpreted from) the documents governing the plan.

That fees vary by participating employer should not by itself mean a set of fees results in a nonexempt prohibited transaction if the transactions meet the conditions of the statutory and class exemptions the service provider relies on. For example, ERISA § 408(b)(2)’s exemption can apply only “if no more than reasonable compensation is paid [for the necessary services].” Also, each participating employer “retains fiduciary responsibility for” selecting and monitoring the pooled plan provider “and any other person who, in addition to the pooled plan provider, is designated as a named fiduciary of the plan[.]” ERISA § 3(43)(B)(iii). That could include duties for a participating employer, acting with no less loyalty and prudence than ERISA § 404(a)(1) requires, to find the fees charged to its portion of the plan’s assets are reasonable.

To fill out the logic path ESOP Guy suggests: In one’s reading of the plan’s governing documents and plan-administration procedures, consider as possibly relevant not only texts that particularly refer to domestic-relations orders but also texts that provide the plan’s administrator’s or a claims administrator’s powers.

If you’re asking what the plan provides, Read (and interpret) The Fabulous Document. A typical IRS-preapproved document partially paraphrases and refers to the tax-law rules, including 26 C.F.R. § 1.401(a)(9)-5. https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR6f8c3724b50e44d/section-1.401(a)(9)-5 That rule looks to “the account balance as of the last valuation date in the calendar year immediately preceding that distribution calendar year[.]” Q&A-3(a). If the plan has valuation dates quarter-yearly or more often, it seems likely a December-close date fits that description.

While I don’t know the buyer’s reasoning, let’s imagine one possibility. The seller company (now owned by the buyer) might have been at least a party-in-interest and, perhaps, a fiduciary—whether a named fiduciary, such as plan administrator, or a functional fiduciary—of the discontinued (but not yet ended) seller plan. If so, not only the humans but also the company remains exposed to one or both § 502 civil penalties (even if one assumes all bad transactions are fully corrected). And that’s so even if the seller plan becomes terminated. Each of the seller company’s former owners might want his or her lawyers’ advice about whether an after-closing provision obligates the former owner to apply for VFCP no-action relief, and what consequences might result from breaching the provision. Or the seller company’s former owners might welcome a VFCP application (if feasible) because the no-action relief, including nonassertion of civil penalties, could protect a breaching fiduciary who did the bad transactions and another fiduciary who failed to meet her direct or cofiduciary responsibilities. About whether VFCP no-action relief could be obtained, that’s fact-sensitive. Each of the seller company’s former owners might want his or her lawyers’ advice about that too.

Assuming an ERISA-governed plan, this seems an illustration of another situation in which the plan’s administrator is not responsible for the participant’s failure (but might, practically, be burdened by it). David Rigby and CuseFan suggest one recognize that, even after the divorce and after the participant’s death, a court might issue a domestic-relations order. See 29 C.F.R. § 2530.206(c)(2) https://www.ecfr.gov/current/title-29/subtitle-B/chapter-XXV/subchapter-D/part-2530/subpart-C/section-2530.206. In responding to claims (if any), a plan’s administrator should be punctilious in following ERISA § 503’s and the plan’s claims procedures.

G8Rs, thank you for your helpful explanation about what a plan might provide or omit. Does a typical IRS-preapproved document include adoption-agreement choices for whether an involuntary distribution on or after retirement age gets or lacks a default rollover (for a distributee who did not specify her choice)?

Is this about a proposed sale, or a concluded sale? Did the buyer buy shares or other capital interests of the seller? Or did the buyer buy assets from the seller? Did the buyer assume the seller’s plan? Did the seller terminate or discontinue the seller’s plan before the closing? Did the seller’s executives (including perhaps two or more of the breaching fiduciaries) become executives of the buyer? Why does the buyer want the seller plan’s breaching fiduciaries to get relief from ERISA civil penalties (on a correction amount already paid)? (Unlike a tax-law correction, which might protect a plan’s treatment as a tax-qualified plan, VFCP no-action relief protects a breaching fiduciary regarding the breach disclosed and corrected. About VFCP’s essential relief, an ERISA § 502(i) or § 502(l) penalty is imposed on a party-in-interest or a fiduciary, not the plan.) If the answers to those questions don’t end someone’s desire for a VFCP application, consider also whether perceptions about relevant facts and circumstances differ. For example, might the buyer’s lawyer have assumed there was a loan? While you assume the corporation had the money with no legally enforceable obligation to repay? Likewise, might the buyer’s lawyer have assumed there was no theft from the plan? While you assume there was a theft from the plan? Voluntary Fiduciary Correction Program https://www.govinfo.gov/content/pkg/FR-2006-04-19/pdf/06-3674.pdf {Underlining not mine}

A similar effect can be had using a § 403(b) plan and a § 457(b) plan. For example, a public-school employee who is 50 might instruct salary-reduction deferrals of $30,000 [2023] under each plan, for a combination of $60,000. Many public-school employers provide both § 403(b) and § 457(b) plans, allowing two deferrals from one paycheck.

If you’d like BenefitsLink neighbors’ help to double-check your reading of the plan’s governing documents, it might help to quote the portions of the texts that seem to provide (i) an involuntary distribution on normal retirement age, and (ii) no default rollover on such a distribution. Also, are the documents the subject of an IRS-preapproved documents’ opinion letter? Or an individually-designed plan’s written determination?

A governmental § 457(b) plan and its trust or trust substitute include provisions designed to meet Internal Revenue Code of 1986 § 457(b)(6), which require that “all assets and income of the plan . . . are held in trust for the exclusive benefit of participants and their beneficiaries.” Analogizing to a recognized exception from ERISA’s exclusive-purpose command and Internal Revenue Code § 401(a)’s exclusive-benefit condition, some governmental § 457(b) plans include a provision for returning a contribution an employer made by a mistake of fact. ERISA allows “[in the case of a contribution . . . – if such contribution or payment is made by an employer to a plan (other than a multiemployer plan) by a mistake of fact, paragraph (1) [about noninurement and exclusive-purpose commands] shall not prohibit the return of such contribution to the employer within one year after the payment of the contribution[.]” ERISA § 403(c)(2)(A)(i) [29 U.S.C. § 1103(c)] http://uscode.house.gov/view.xhtml?req=(title:29%20section:1103%20edition:prelim)%20OR%20(granuleid:USC-prelim-title29-section1103)&f=treesort&edition=prelim&num=0&jumpTo=true See also Internal Revenue Service Revenue Ruling 91-4, 1991-1 C.B. 57. http://www.legalbitstream.com/scripts/isyswebext.dll?op=get&uri=/isysquery/irl466b/1/doc. If the plan has such a provision, the plan’s sponsor and administrator might want its lawyer’s advice about whether the circumstances fit the plan’s provision. JOH, if you want BenefitsLink neighbors’ help about whether the employer’s error fits tax law’s concept of a mistake of fact, you might describe in more detail what mistake caused the employer to pay a contribution the plan did not provide. For example, did the employer pay over the contribution with someone within the employer not knowing that the employee’s classification changed from one that gets an alternative-to-FICA contribution to one that does not get that contribution?

Now that the September inflation measures are released, has anyone done the math on how the limit on a healthcare flexible spending account adjusts? I saw a service provider’s earlier projection that this might increase from $2,850 to $3,050 for 2023. Is that still the right projection?

Yes, whether such an arrangement would meet the terms of a particular government (or government-funded) contract turns on the details of the contract, including the laws the contract invokes. But if each individual has a choice between immediate money wages and the employer’s contribution to a retirement plan, isn’t that a cash-or-deferred arrangement? Is it meaningfully different from increasing the employee’s money wages, leaving her with choices about what reductions and deductions she instructs the employer to take from her wages?