Peter Gulia

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?

A few paths each sponsor/administrator might want its lawyer’s advice on: Many IRS-preapproved documents and other documents using an adoption-agreement format include texts about what provision results when an adoption agreement does not specify the user’s choice. A sponsor/administrator might look for provisions of that kind before assuming that what was administered is what the plan provides. If there is an ambiguity about whether the statute calls for a restated summary plan description or a summary of material modifications, one might interpret the ambiguity considering Congress’s purpose that a participant may look to the summary to know those of the plan’s provisions that ought to be summarized. And one might ask this rhetorical question: Could a participant—without asking the employer/administrator, and just by reading the SPD/SMM—know the plan’s service-counting provision (and check whether the plan’s administrator applied it)? If furnishing an SPD or SMM incurs almost no incremental expense, an administrator might weight its decision-making in favor of communication. Conversely, if the statute and rules for an SPD/SMM do not clearly require the update and a nontrivial expense would burden participants’, beneficiaries’, and alternate payees’ accounts, a fiduciary might consider that circumstance in evaluating when to furnish the next restated SPD or SMM.

You gave the right guidance by suggesting the employer ask its lawyer. What a contractor must, may, or must not do involves the conditions of the applicable Federal, State, and intergovernmental government-contracts laws and the contractor’s obligations under each contract. For example, how much choice a contractor has to select components of wages and ways to use them in meeting each prevailing-wage condition turns on the details of each law and contract. Businesses that regularly make government contracts use lawyers that focus on the laws, including prevailing-wage laws, of the kinds of government contracts the business makes. Also, some labor-relations or employment lawyers advise on prevailing-wage laws. A further thought: Contracts with prevailing-wage conditions often involve reporting, auditing, and other means to show that the contractor met the conditions. The employer might want careful records about each contribution and the allocation of it. And the employer might want to preserve access to those records for periods longer than a TPA otherwise might maintain them.

To find court decisions that interpret and apply regarding a retirement plan the United States’ enforcement of a judgment imposing a fine or restitution regarding a crime, a researcher might use a publisher’s annotated version (for example, Westlaw, LexisNexis, Bloomberg Law) of the United States Code. Also, one might use treatises and other secondary sources in Wolters Kluwer’s VitalLaw. One would look for annotations under 18 U.S.C. §§ 3316, 3556, 3663, 3663A, 3664; 28 U.S.C. §§ 3001-3308. To learn some arguments that were presented and rejected, one might read a Second Circuit decision BenefitsLink posted. https://benefitslink.com/src/ctop/us-v-greebel-2dcir-08242022.pdf The participant, Evan Greebel, was a partner in Katten Muchin Rosenman LLP. He was represented by Gibson, Dunn & Crutcher LLP. The appeals court held that the Mandatory Victims Restitution Act authorizes garnishment of the convict’s retirement plan account, and that the Consumer Credit Protection Act’s 25% limit on a garnishment does not apply. The appeals court did not decide whether the extra 10% tax on a too-early distribution is imposed on garnishment. If an effort an ERISA-governed plan’s administrator, trustee, or other fiduciary might consider would be at the plan’s expense, the fiduciary might want its lawyer’s advice about how much effort and expense is loyal and prudent for the plan’s exclusive purpose of providing the plan’s retirement benefits.

After the first wave of Schlicter lawsuits in late 2006, the January 2007 paper I wrote for, and presented at, Pension & Investments February 11, 2007 Defined Contribution Conference reported on 12 cases. In the first few years of the emerging trend, some law firms kept notes on these and similar ERISA fiduciary-breach cases. But as Lois Baker mentions, growing numbers of cases made publication impractical, even for Groom. Some law firms and insurance intermediaries estimate about 100 new cases each year in recent years and 2022. The list you wish for might report on about 300 cases, and pulling it together would be expensive work. To follow ERISA fiduciary-breach complaints, judges’ opinions, and settlements, a simple way is to scan BenefitsLink’s News page. Employee Benefits: News, Regs, Analysis, Laws, Surveys and Policy (benefitslink.com) It reliably gets you important developments.

We’ve been discussing these “in-marriage QDRO” issues assuming the retirement plan’s administrator somehow knows that neither (or none) of the State court’s litigants asked for an annulment, divorce, separation, or child support. But for many State courts that might issue an order for which a would-be alternate payee seeks a plan’s QDRO treatment, an order might recite that the order “is made pursuant to a State domestic relations law” and “relates to the provision of marital property rights to a spouse”, and might state nothing that would reveal to the retirement plan’s reader that no one had asked for an annulment, divorce, separation, or child support. If an order like that (and no other information) is submitted to the plan’s administrator, is it proper for the administrator to treat the order as a DRO and, if it meets the plan’s further conditions, a QDRO?

If the loan is unsecured and at no interest, why would the plan repay sooner than its obligated due date? Or would the terms include a discount on an early repayment?

Yes, the key is that the terms be spelled out in the written obligation. To see the current conditions, skip to the last page. Amendment to Prohibited Transaction Exemption 80–26 (PTE 80–26) for Certain Interest Free Loans to Employee Benefit Plans, 71 Fed. Reg. 17917, 17920 (Apr. 7, 2006) https://www.govinfo.gov/content/pkg/FR-2006-04-07/pdf/E6-5075.pdf Consider how the loan will be reported in the employer’s financial statements. Consider how the obligation will be reported in the plan’s financial statements and Form 5500 report. In both, it might be a related-party transaction (even if it is an exempt prohibited transaction). {The underlining is not mine.}

About QDROphile’s point, if the distribution followed the individual’s severance from employment and was her whole account, she might no longer be a participant. If the distribution would not have been provided except for the distributee’s hardship, the distribution might not have been an eligible rollover distribution.

When (in the 1990s) I last had any observation about this point, the IRS’s hang-up was about currency tips a server collected from the diner’s table. I do not remember any discussion about tip pooling, or even whether any of that client’s restaurant chains or franchisees used such a business practice. The AmLaw 200 lawyer told me he presented possible reasonings of the kind Luke Bailey describes. This was before the Treasury adopted, or even proposed, the § 401(k) regulation, which some might argue could support different interpretations. About payment-card tips, perhaps one or more of the lawsuits (the complaint I hyperlinked above is not the only one) will survive a motion to dismiss for failure to state a fiduciary-breach claim, and result in some information about the facts (or even about private Internal Revenue Service determinations).

The suggestion for a cash-out provision, of any kind, is not mine, and has no grounding in any advice I provided or would provide. Considering a nonlawyer pension consultant’s reason for suggesting the provision is beyond the scope of my engagement. The plan’s sponsor/administrator is not worried about liability for selecting or monitoring a default-IRA provider. Rather, it has different reasons for preferring not to put anyone in a default IRA. (And considering those reasons is beyond my scope.) The plan’s sponsor/administrator also has no worry about abandoned-property administration or other difficulties regarding unnegotiated payments. Likewise, no worry about having tax-reported, and withheld income taxes from, an involuntary distribution. Luke Bailey, thank you for suggesting a possible interpretation, and that an IRS examiner might show some tolerance. I don’t have that luxury. What my client asks for is my advice on the correct reading of the statute. Absent a court decision, a Treasury rule, IRS subregulatory guidance, or another “[t]ype[] of authority” mentioned in 26 C.F.R. § 1.6662-4(d)(3)(iii), I could advise a substantial-authority tax position “only by [my] well-reasoned construction of the applicable statutory provision.” 26 C.F.R. § 1.6662-4(d)(3)(ii). 26 C.F.R. § 1.6662-4(d) (Substantial authority) https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR1d0453abf9d86e0/section-1.6662-4#p-1.6662-4(d). I’ll advise the plan’s sponsor and administrator about the opportunities and risks. I am considering a good-enough if the individual’s account was no more than $1,000 as of the daily valuation that immediately precedes the administrator’s final instruction on the day investments allocable to the individual’s account are redeemed—even if, because of changes in funds’ shares’ prices that day, the overnight redemption and next morning’s payment is more than $1,000. That necessity reasoning might be little or no more than that the plan’s administrator cannot know what redemption would result before the administrator must conclude the instruction for the recordkeeper and directed trustee to process the distribution.

The underlining is not mine.

Facing a need to decide whether a State court’s order is a DRO and a QDRO, a plan’s administrator with its lawyer’s advice might consider these points (with others): A fiduciary acting with the exclusive-purpose loyalty, prudence, and impartiality ERISA requires may, and perhaps ordinarily should, decide questions using the fiduciary’s best interpretation of the plan (including interpreting ERISA as needed to interpret the plan). A fiduciary might want its lawyer’s advice, not only for help in evaluating the best interpretation but also to show the fiduciary’s procedural prudence. A fiduciary might balance seeking the best interpretation with incurring no more than “reasonable expenses of administering the plan[.]” If the plan’s trust does not regularly maintain a reserve for plan-administration expenses, a fiduciary would consider how it would allocate the expense among individuals’ accounts. If an administrator denies QDRO treatment, it might not have much to fear from the would-be alternate payee’s potential challenge. Or if an administrator approves QDRO treatment, it might not have much to fear from the participant’s potential challenge. (If an administrator denies QDRO treatment, it is the would-be alternate payee who has constitutional standing to challenge the administrator’s decision. If an administrator approves QDRO treatment, it is the participant who might have constitutional standing to challenge the administrator’s decision. I say might because in the State court’s proceeding the spouses might both have sought an order with an intent that the plan treat it as a QDRO, so an administrator’s grant of QDRO treatment might have provided the participant what he or she asked for.) A lawyer who advised about pursuing an in-marriage domestic-relations order might not be available to litigate the administrator’s to-be-challenged decision. (Some of the lawyers pursuing an in-marriage domestic-relations order are primarily estate-planning or financial-planning lawyers who do not routinely, or ever, manage litigation. Or a lawyer might lack a plenary admission to practice before the court the plan provides as an exclusive forum [see below] (or any Federal court), and would need to work with another attorney.) Or, the could-be challenger might lack ready money to pay a litigator’s attorneys’ fees. (Even if a complaint would include in its prayers for relief that the court order the defendant to pay the plaintiff’s attorneys’ fees, many lawyers would require current payment, unwilling to risk advancing one’s time for an uncertain recovery.) If a challenger sues the plan’s administrator in a State court that lacks personal jurisdiction of the administrator, it should succeed in getting a dismissal on that ground alone. If a challenger sues the plan’s administrator in a State court that has personal jurisdiction, the administrator may (and often should) remove the case to a Federal court. If the plan includes an exclusive-forum provision, the administrator might remove the case to the specified forum (for example, the sponsor/administrator’s preferred Federal district and division). Whichever was the administrator’s challenged decision, a judge might be persuaded that the court should defer to the administrator’s plausible interpretation that, even if it might be incorrect, was a reasoned (and so not capricious) interpretation of the plan. Even if the Federal court undoes the administrator’s decision, the relief might be little more than an order that the administrator administer the plan according to the court’s finding about whether the order is or is not a QDRO. A challenger might be unable to show harm that resulted from the asserted breach of the administrator’s fiduciary responsibility. Although a Federal court has discretion about attorneys’ fees, a judge might not award attorneys’ fees even to a winning plaintiff if the judge finds the administrator put in a sincere effort to interpret and apply the plan, and responded to a submission of the State court’s order, and any claimant’s requests for reviews, using sound procedure. Even if one fears or abhors the potential challenges and other consequences, an ERISA-governed plan’s administrator has a fiduciary responsibility to decide the claims presented.

Here’s the Treasury department’s 1960 interpretation. 26 C.F.R. § 1.401-1(b)(2)-(3) https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR6f8c3724b50e44d/section-1.401-1#p-1.401-1(b)(2). One might interpret this interpretation, including by considering coverage, nondiscrimination, and top-heavy rules as they apply for the years involved.

Bri’s query was about an initial (not extended) due date and the effects of Saturday-Sunday adjustments. The unextended due date for a Form 5500 report on a year ended December 31, 2021 moved only one day from Sunday, July 1 to Monday, August 1. And the rule for a summary annual report does not say “two months after”; it says “nine months after the close of the plan year.” About an extended Form 5500 report, the rule for a summary annual report includes this: “When an extension of time in which to file an annual report has been granted by the Internal Revenue Service, such furnishing [of the summary annual report] shall take place within 2 months after the close of the period for which the extension was granted.” 29 C.F.R. § 2520.104b-10(c)(2) https://www.ecfr.gov/current/title-29/subtitle-B/chapter-XXV/subchapter-C/part-2520/subpart-F/section-2520.104b-10#p-2520.104b-10(c)(2). For a Form 5500 report due by October 17, 2022, some might interpret that rule to support an SAR due date of December 19, 2022.

Thank you for sharing the news. While I won’t suggest a filer claim relief it does not need, perhaps BenefitsLink mavens can help resolve an ambiguity in the news about filing relief. If a Form 5500 report claims Hurricane Ian relief but neither the plan sponsor’s mailing address in line 2a nor the plan administrator’s mailing address in line 3a shows Florida (or another disaster-designated place), will the Employee Benefits Security Administrator or the Internal Revenue Service question whether the filer gets the disaster-extended due date? Or do EBSA and IRS accept the filer’s statement (made under penalties of perjury) that the filing gets the disaster relief? If the filing relief is not on the honor system: What if none of the plan sponsor’s or plan administrator’s offices is in or anywhere near Florida, but the employee responsible for the Form 5500 report ordinarily works from her work-from-home office in Florida? What if the recordkeeper or third-party administrator that assembles a Form 5500 report (but does not electronically submit it) ordinarily works from its office in Florida? How would EBSA or the IRS check whether the filer gets the disaster-extended due date? If the filer’s reason for Hurricane Ian relief is that the independent qualified public accountant ordinarily works from its office in Florida, how would EBSA or the IRS check whether the filer gets the disaster-extended due date?

I don’t know whether relevant tax law, or the IRS’s interpretations (written or unwritten), have changed since I worked on this issue. The fact change is more payment-card tips processed by an employer (rather than paid in currency or delivered in other ways immediately available to the worker). Even those tips might not practically support a § 401(k) elective deferral. For example, a Federal court complaint alleges: “Hyatt has a mandatory policy of requiring tipped employees . . . to be paid all charged tips in cash rather than through payroll, interfering with Plaintiff’s and Class members’ ability to defer income under the terms of the [Hyatt Corporation Retirement Savings] Plan.” https://si-interactive.s3.amazonaws.com/prod/plansponsor-com/wp-content/uploads/2022/03/15112816/BairdvHyattCorpComplaint.pdf

fmsinc, we recognize that under some, perhaps many, States’ laws a State’s court ought not to issue a bare no-divorce order sought to be treated as a QDRO. But, as you observe, some judges might sign orders of that kind. There have been three or four BenefitsLink discussions in which a retirement-plans practitioner faces an order a plan’s administrator must accept or deny. And in this discussion Adi tells us: “These orders are gaining traction and several law firms are promoting them[.]” Once a State court’s order has issued and someone has submitted it for treatment as a QDRO, the retirement plan’s administrator must decide whether to accept or deny. I’m unaware of any Federal court decision that analyzes whether an order directed to a retirement plan but unrelated to seeking any annulment, divorce, separation, or child support is a QDRO, or even a DRO, within the meaning of ERISA § 206(d)(3) or an ERISA-governed plan’s provision following it. At least for an ERISA-governed plan, that’s a question for which Federal law preempts State law. (That’s so even if one accepts an interpretation that an ERISA-governed plan’s administrator need not, and perhaps ought not, evaluate the State-law effect of a State court’s order.) A decision of even a State’s highest court is not a precedent that binds a Federal court about whether an order is a QDRO, or even a DRO, within the meaning of ERISA § 206(d)(3) or an ERISA-governed plan’s provision following it. BenefitsLink neighbors, what say you: Would you advise an ERISA-governed plan’s administrator to accept an in-marriage order as a QDRO?

In the 1990s, I, as a recordkeeper’s inside counsel, tried to help an AmLaw 200 firm design a mainstream § 401(k) plan for a large national restaurant chain. The (unwritten) guidance from Internal Revenue Service lawyers was that an employee could not make a § 401(k) deferral from compensation she had already received by collecting from a table, or directly from a diner, a tip paid in currency. IRS people listened to explanations about how this deprived tens or hundreds of thousands of workers from an opportunity open to others. But no one had a solution for the idea that a cash-or-deferred election applies to compensation not currently available. Beyond increasing use of credit-card tips, has anything changed?

If one assume the Labor department’s rules about due dates for Form 5500 reports and summary annual reports are not contrary to law, the rule calls an administrator to furnish the SAR “within nine months after the close of the plan year.” 29 C.F.R. § 2520.104b-10(c) https://www.ecfr.gov/current/title-29/subtitle-B/chapter-XXV/subchapter-C/part-2520/subpart-F/section-2520.104b-10#p-2520.104b-10(c). The Treasury department’s Saturday-Sunday-holiday rule applies to “the performance of any act” required or permitted “under authority of any internal revenue law[.]” 26 C.F.R. § 301.7503-1. For a pension plan’s Form 5500 report, the Labor department made no similar rule. But the three-agency Instructions for a Form 5500 report include the Saturday-Sunday-holiday rule. I’m unaware of any Labor department rule that allows a Saturday-Sunday-holiday grace for furnishing a summary annual report. For a report on a plan that ended its accounting year on December 31, 2021, I’d advise the administrator to furnish the SAR today. That said, if the administrator furnishes the SAR next Monday, one wonders that an EBSA investigator reviewing that conduct might prefer not to challenge the timeliness of that SAR (unless there are further reasons to find fault with the plan’s administrator, or its service provider).

Some retirement-plans practitioners have seen that spouses seeking a QDRO without seeking an annulment, divorce, or separation is “a thing”. For example, In Marriage QDRO https://tmsearch.uspto.gov/bin/gate.exe?f=doc&state=4804:deq3j3.2.7 Now, let’s ask ourselves how plans’ administrators should respond to these. Imagine a court’s order otherwise meets all QDRO conditions, and the only questions are whether the order is a domestic-relations order or “relates to the provision of . . . alimony payments, or marital property rights to a spouse . . . of a participant[.]” Imagine that, from the face of the order alone, the administrator knows neither the participant nor the proposed alternate payee asked for an annulment, divorce, or separation. Imagine the order recites that the order “is made pursuant to [the State’s] domestic relations law” but states no support for that statement. To simplify the issues, imagine the State is not a community-property State, and the order has no mention of, or reference to, community property. Should a plan’s administrator reject the order? If so, should the administrator explain its finding that the order is not a DRO? Or, even if the circumstances strongly suggest the still-married and unseparated spouses’ purpose is to get a distribution the participant could not get, should a plan’s administrator accept the order as a QDRO? What would you advise, and why?

While I don’t know your client’s and its plan’s provisions, other facts, and surrounding circumstances: Consider the possibility that an employer’s contribution might be delinquent or past-due for one or more government-contracts purposes, but not necessarily a prohibited transaction under ERISA § 406 or Internal Revenue Code § 4975. Also, if there is a nonexempt prohibited transaction, consider exactly which person must file Form 5330. If the plan’s administrator is not the same person as the employer, consider that the person liable for the excise tax might be the one that must file Form 5330.

Consider whether, even if not all tax-qualifying amendments were done by the date of the resolution that discontinued the plan, it might be good enough that the amendments are done before the plan terminates by paying or delivering its final distributions. Understand that the Treasury department’s remedial-amendment concept might provide no relief concerning ERISA §§ 402-404. On a few of many related points: Has the plan’s administrator yet communicated to participants, beneficiaries, and alternate payees that the plan is ended and will pay a final distribution? If that communication has happened, would the not-yet-done amendment affect anything that was communicated, or affect any choice available to a distributee? If so, the plan’s administrator might evaluate whether a further communication is needed or appropriate. Also, if any to-be-amended provision was not explained in a previous summary plan description or summary of material modifications, the plan’s administrator might evaluate whether it must or should write and furnish a revised SPD or SMM.

The rule’s first sentence calls for a lifetime-income illustration “[a]t least annually[.]” 29 C.F.R. § 2520.105-3(a) https://www.ecfr.gov/current/title-29/subtitle-B/chapter-XXV/subchapter-C/part-2520/subpart-F/section-2520.105-3#p-2520.105-3(a). Even in the rule’s context, the use of the word “annually” in that sentence is ambiguous. Although it is not the situation you ask about, the statute calls for a pension-benefit statement (of which a lifetime-income illustration is an element) “at least once each calendar year to a participant or beneficiary who has his or her own account under the plan but does not have the right to direct the investment of assets in that account[.]” ERISA § 105(a)(1)(A)(ii), unofficially compiled as 29 U.S.C. § 1025(a)(1)(A)(ii) (emphasis added) http://uscode.house.gov/view.xhtml?req=(title:29%20section:1025%20edition:prelim)%20OR%20(granuleid:USC-prelim-title29-section1025)&f=treesort&edition=prelim&num=0&jumpTo=true. Even if a plan’s administrator must furnish statements quarter-yearly: “In the case of pension benefit statements described in clause (i) of paragraph (1)(A), a lifetime income disclosure under clause (iii) of this subparagraph shall be required to be included in only one pension benefit statement during any one 12-month period.” ERISA § 105(a)(2)(B) (flush language) (emphasis added), unofficially compiled as 29 U.S.C. § 1025(a)(2)(B). Also, the statute provides: “In no case shall a participant or beneficiary of a plan be entitled to more than 1 statement described in subparagraph (A)(iii) or (B)(ii) of subsection (a)(1), whichever is applicable, in any 12-month period.” ERISA § 105(b), unofficially compiled as 29 U.S.C. § 1025(b). While the statute’s text is unclear, a fair reading should consider the statements’ intervals and dates, not when a statement is delivered or furnished. To implement lifetime-income illustrations for a plan for which the administrator regularly furnishes quarter-yearly statements, I’d suggest the administrator decide which of a year’s four statements regularly gets the illustration, and then regularly follow that course year after year. Neither a court nor the Labor department should find that an administrator violated ERISA § 105 because a delivery of an illustration was more than 12 months after the delivery of the preceding illustration if the statement dates the illustrations are grounded on are only 12 months apart.