Peter Gulia

Following ESOP Guy’s good help, a rule states: “[T]he required minimum distribution amount will never exceed the [participant’s] entire account balance on the date of the distribution.” 26 C.F.R. § 1.401(a)(9)-5/Q&A-1(a) https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR6f8c3724b50e44d/section-1.401(a)(9)-5 If a plan’s administrator fears a distributee’s § 401(a)(9) RMD amount determined on the preceding calendar year’s last valuation date would consume too much of a pooled account, the administrator might use its discretion to declare a special valuation date (which it also might do to support the plan termination’s final distribution). Using that valuation, the administrator would apply the rule quoted above so an otherwise required minimum would not invade other individuals’ accounts.

Among the many differences of working with governmental plans: A State’s law (from multiple sources) might be ambiguous about whether a State or local government is required, or permitted, to follow the State’s abandoned-property regime. If a State follows the State’s internal law about abandoned property, it might not follow another State’s law. A State might find that the State (including its agency, instrumentality, or political subdivision) cannot be compelled, and might not volunteer, to follow the law of another State.

About the defined-benefit pension plan, a prudent fiduciary might put the benefit-waiving participant’s distribution last. Even if the plan’s fiduciary assumes all other participants’ pensions are knowns, the amounts needed to satisfy them might not be. And even if those amounts are certain, the expenses of the plan’s administration might not be completely known. Ending a plan often results in unexpected investment expenses and charges, and generates accounting, actuarial, and legal issues beyond those that are usual for a continuing plan. For an individual-account (defined-contribution) plan with pooled investment, your method of not paying any final distribution until all will be determined on the same valuation (perhaps a special valuation) seems wise. For an individual-account (defined-contribution) plan with participant-directed investment, it sometimes can work to pay claims for final distributions as the plan’s administrator receives them—if, among other conditions, all professionals and other service providers have been paid in advance (or the plan’s fiduciary prudently finds that a plan-expenses reserve is enough to meet all expenses). Further, a professional or other service provider might protect itself by being unwilling to provide services unless those of the participants who are fiduciaries assent to take their distributions last.

Thank you for inviting me to explain my point. I do not mean to refer to courts’ and the Labor department’s distinction between a settlor expense and a plan-administration expense. Rather, my point is about cost-benefit tradeoffs in a fiduciary’s decision-making. If a nonsettlor expense otherwise could be proper but a fiduciary’s prudent cost-benefit analysis finds the expense unreasonable, we recognize that a fiduciary must not cause the plan to incur that expense. Yet, recognizing that the plan must not bear an expense does not always mean the employer (or some other person) must bear the expense. Courts’ and the Labor department’s interpretations of ERISA § 404(a)(1) recognize that a fiduciary need not spend $300 of the plan’s money to pursue the plan’s $30 claim (or even a $249 claim). (This illustration is simplified.) If ERISA allows a fiduciary to abandon the plan’s claim because the fiduciary prudently estimates that pursuing it likely would not be cost-effective, why should an employer (absent an obligation) be required—or even expected—to pay a plan-administration expense the plan would not bear? In my view, an individual-account retirement plan’s fiduciary does not breach its ERISA § 404(a) responsibility because it did not require an unobligated employer to pay a nonsettlor expense the fiduciary found would be imprudent for the plan to pay. I recognize it’s my view, and that there might be no court decision on point. I would have a different view if the plan’s need to pursue a claim or correction arose because the employer/administrator breached its responsibility to the plan.

For anything on which the plan would incur an expense, a fiduciary must incur no more than prudently incurred “reasonable expenses of administering the plan[.]” ERISA § 404(a)(1)(A)(ii), 404(a)(1)(B). Further, for situations in which an employer volunteers (but has no obligation) to pay the plan’s plan-administration expenses, the employer ought not to be required to incur an expense if it would be imprudent for the plan to incur the expense.

With so many practitioners observing that Congress's command is useless or worse than useless, it's good to see you found a silver lining.

For your first question, many BenefitsLink mavens would say Read The Fabulous Document. But you, as one of a very few national experts on governmental plans, know that a governmental pension plan might not be tidily stated by one document, or even one consolidated or compiled set of statutes. You do what you can to discern and interpret the plan’s provisions. Or sometimes one must invent a provision. If a participant has permanently left government employment and reached an age such that a distribution, perhaps an involuntary distribution, must begin, the plan’s normal form might be a life-contingent annuity, with or without a survivor provision, and with or without a years-certain provision. If that is the plan’s provision and the State or local government is considering amending the plan to allow some election after the annuity commenced, one would consult actuaries to design a provision unlikely to result in increased cost. For example, an after-commencement election might be limited to a specified period after the annuity commencement date, and the amount available as a nonannuity sum might be something less than the commuted value of the plan’s annuity obligation released. Those and other points might help protect the plan against adverse selection. About payments not collected, consider that the pension plan might be required or permitted to follow the abandoned-property law of the State of which the plan’s participating employers are agencies, instrumentalities, or political subdivisions.

RatherBeGolfing, thank you for helping me with information about kinds of plans I have almost no experience with. I am glad to learn about the business challenges TPAs face.

I don’t advise anyone here. Some fiduciaries might include in one’s reasoning: If the plan’s administrator can do so without incurring an incremental expense, the administrator might send a demand letter asking the distributee to restore to the plan the overpaid amount. If the plan’s trust collects a restored amount, the plan’s administrator might evaluate whether the employer had paid an amount to the plan under a mistake of fact and, if so, whether an amount (adjusted regarding loss or income) must or may be returned to the employer. See ERISA § 403(c)(2)(A)(i) and the governing documents’ provision. Assuming customary provisions in the plan’s governing documents, a fiduciary might evaluate that it need not sue the distributee for a restoration of the overpaid amount if the fiduciary prudently finds that the value of the claim—discounted by the probability of getting the court’s judgment, and further discounted by the probability of collecting a judgment—is less than the court’s filing fee and the fees and expenses for the plan’s attorneys and their assistants. Whatever is or isn’t done to correct this error, one hopes a plan’s independent qualified public accountant would see that the error is not material, and not even significant, in the plan’s financial statements.

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?