Peter Gulia

Under soon-to-be-enacted Internal Revenue Code § 414A, some new § 401(k) or § 403(b) plans must include an automatic-contribution arrangement. For small-business employers not excused as too new or too small, could this new tax-qualification condition slow down creations of new plans?

Do we anticipate recordkeepers will urge customers to put these claims in self-certification regimes, with tick-the-box forms (whether paper or website), to support nondiscretionary processing that asks nothing of the plan’s administrator (beyond having approved the self-certification regime)?

When the Internal Revenue Code of 1986 becomes amended by this week’s Consolidated Appropriations Act, 2023, many provisions that permit a before-retirement payout, including a or an: eligible distribution to a domestic abuse victim, emergency personal expense distribution, hardship distribution (for a deemed hardship), qualified birth or adoption distribution, or unforeseeable-emergency distribution (under a governmental § 457(b) plan), permit reliance on the claimant’s written statement that she meets the tax law’s standard for the kind of distribution requested. (A plan’s administrator may not rely on such a “certification” if the administrator has actual knowledge that the claimant’s statement is false.) Let’s leave aside the public policy discussions about whether it’s wise to allow early access to savings purposed for retirement income. And let’s leave aside discussions about whether a self-certification regime invites a claimant’s incorrect, or even false, statement. Do you see any disadvantage, from the administrator’s perspective, of allowing these self-certification regimes?

Beyond thinking about when someone might have met a service condition to become eligible for allocations of one or more of the three kinds of contributions, remember too that “[a] cash or deferred election can only be made with respect to an amount that is not currently available to the employee on the date of the election.” 26 C.F.R. § 1.401(k)-1(a)(3)(iii)(A) https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR6f8c3724b50e44d/section-1.401(k)-1#p-1.401(k)-1(a)(3)(iii)(A).v If an employee is only now considering a § 401(k) election, one imagines the election might apply only to 2022’s 4th, 12th, 24th, or 26th pay period. The business organization might carefully check its records to discern whether it hired two employees or admitted two partners. “For purposes of [the same section’s] paragraph [about when cash or another taxable benefit is currently available to the employee or deemed employee], a partner’s compensation is deemed currently available on the last day of the partnership taxable year[.]” 26 C.F.R. § 1.401(k)-1(a)(6)(iii) https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR6f8c3724b50e44d/section-1.401(k)-1#p-1.401(k)-1(a)(6)(iii). Thus, a partner might, in 2022’s remaining two business weeks, elect a § 401(k) deferral regarding the whole of the partner’s 2022 compensation (if the partnership’s tax-accounting year ends with December’s end). I see nothing on the face of § 1.401(k)-1 that restricts which kinds of partnership interests get the last-day provision quoted above. A partner need not be a capital-interests partner; one could be a profits partner, or even a guaranteed-payments partner. The retirement plan’s measure of compensation and when it became available must be logically consistent with all the partnership’s tax returns and tax-information returns.

I don’t know whether any Treasury rule or Internal Revenue Service guidance provides for or against what you ask. Absent that knowledge, here’s my guess at a practical path. If an old W-4P election properly set withholding for a periodic distribution, continue that election until the distributee changes it. If an old W-4P election properly set withholding for a series of standing-instruction minimum distributions, continue that election until the distributee changes it. If an old W-4P election properly set withholding for a nonperiodic single-sum distribution for 100% of the account and the plan’s procedures and forms carefully provide for a cleanup payment to get rid of after-flow contributions, dividends, and restoration credits, apply the preceding withholding election to the cleanup payment. If a distribution is newly requested (such that a distributee is filling-out a new electronic or paper form), use the new withholding-certificate form or an IRS-recognized substitute. Perhaps BenefitsLink mavens who know more than I do might add more information.

Some plans furnish participants a § 402(f) notice in the summary plan description or with every quarter-year’s account statement (or both). A rule allows speaking an oral summary of a § 402(f) notice, referring to the previously furnished notice, and offering to furnish again the whole notice. See 26 C.F.R. § 1.402(f)-1, Q&A-2, Q&A-5 example 3 https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/section-1.402(f)-1. My description above about what might be possible assumes that many steps might require furnishing writings (often in paper form, if electronic delivery was not assented to) and waiting a reasonable and prudent time before proceeding with the requested distribution.

On one of the detail points mentioned above: Form W-4R (for a nonperiodic distribution, whether rollover-eligible or not) includes, in its general instructions, this statement: . . . . Your withholding choice (or an election not to have withholding on a nonperiodic payment) will generally apply to any future payment from the same plan or IRA. Submit a new Form W-4R if you want to change your election. https://www.irs.gov/pub/irs-prior/fw4r--2022.pdf

The key would be how comfortable is the recordkeeper’s counsel that the: identity control, address control, tightly scripting and supervising the call-center workers, record-making, distributee confirmations, plan administrator’s actual or implied approvals, records retention, fraud safeguards, other controls, and internal audit are strong enough to meet ERISA and Internal Revenue Code requirements, the service agreement’s obligations and conditions, and remove any discretion the recordkeeper does not want. With careful attention to technology, software, and detailed procedures, it’s possible to design and maintain a regime; but it’s work! In my experience, it works only when the recordkeeper’s counsel (whether inside, outside, or a combined effort) has deep experience with a recordkeeper’s operations, and the recordkeeper’s executives do not resist the needed protocols.

ERISA § 408(e)’s statutory prohibited-transaction exemption can apply only regarding a plan’s acquisition or sale of qualifying employer securities, as defined in ERISA § 407(d)(5). ERISA § 407(d)(5)’s definition of “qualifying employer security” includes the specially defined term employer security. ERISA § 407(d)(1) defines an “employer security” as “a security issued by an employer of employees covered by the plan, or by an affiliate of such employer.” ERISA § 407(d)(7) provides: “A corporation is an affiliate of an employer if it is a member of any controlled group of corporations (as defined in [I.R.C. §] 1563(a), except that ‘applicable percentage’ shall be substituted for ‘80 percent’ wherever the latter percentage appears in such section) of which the employer who maintains the plan is a member. For purposes of the preceding sentence, the term ‘applicable percentage’ means 50 percent, or such lower percentage as the Secretary [of Labor] may prescribe by regulation. A person other than a corporation shall be treated as an affiliate of an employer to the extent provided in regulations of the Secretary [of Labor]. An employer [that] is a person other than a corporation shall be treated as affiliated with another person to the extent provided by regulations of the Secretary [of Labor]. Regulations under this paragraph shall be prescribed only after consultation and coordination with the Secretary of the Treasury.” There is a Labor department rule that interprets ERISA § 407(d)(5). 29 C.F.R. § 2550.407d-5(a) https://www.ecfr.gov/current/title-29/subtitle-B/chapter-XXV/subchapter-F/part-2550/section-2550.407d-5#p-2550.407d-5(a). There is no Labor department rule that implements ERISA § 407(d)(7)’s delegation. All four rules interpreting ERISA § 407 were published in 1977, and not revised after. If there is a doubt on any question L.S. asks, one would want an employee-benefit lawyer’s advice. And even if one finds that an affiliate’s participant’s account’s investment in the parent corporation’s common shares could be permitted, one would Read The Fabulous Document to discern whether the investment is provided for.

Because a qualified birth or adoption distribution is treated as not an eligible rollover distribution for tax-reporting and tax-withholding purposes, could a distributee properly complete Form W-R to request zero withholding for Federal income tax? https://www.irs.gov/pub/irs-prior/fw4r--2022.pdf If the distributee’s address is in the USA, is there any reason by which a plan’s administrator or its payer would reject such a withholding election?

A plan should limit the plan’s qualified birth or adoption distribution to one participant for one birth or adoption to no more than $5,000. For tax-reporting and tax-withholding purposes, a qualified birth or adoption distribution is treated as not an eligible rollover distribution. Internal Revenue Code of 1986 (26 U.S.C.) § 72(t)(2)(H)(vi)(II). But get the distributee’s withholding certificate.

Whatever one might think about the public policy merits of a rule of the kind Flyboy John might like, the statute does not provide the Secretary of the Treasury authority to make such a rule.

Thank you. That the collectively-bargained employees are treated as a separate plan and separately tested (even when these employees are covered in a plan the employer could have excluded them from) resolves all the questions I wondered about.

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).