Peter Gulia

An amount paid into a probate estate might become available to the decedent’s creditor. That is among the reasons not to name one’s estate as one’s retirement plan beneficiary (and to affirmatively name beneficiaries so a plan’s default provision won’t apply).

Those of us who advise retirement plans’ administrators often turn to two articles of faith: 1. Federal law generally, and ERISA particularly, supersedes and preempts most State laws. 2. A retirement plan’s benefit cannot be assigned or alienated (except for a QDRO or the plan’s offset against a breaching fiduciary’s benefit). Those points often frustrate people who deal with accounts not so privileged. Imagine a participant dies with an almost-zero bank account and no other asset beyond her individual account under a retirement plan. Imagine a creditor recognizes the only way to get paid what the decedent owes is by pursuing the retirement plan. Has anyone experienced a situation in which a creditor tried to get a retirement plan to hold off on paying a beneficiary, asserting some right against the retirement plan? If so, did the plan’s administrator get rid of the creditor’s effort quickly and easily? Or was it a pain-in-the-neck to make the creditor go away? Did the plan’s administrator act by itself, or did they use a lawyer to shut down the creditor?

And here’s another variation: 1. The plan’s sponsor decides that every individual annuity contract no longer is a plan investment alternative. 2. The plan’s administrator informs each affected participant that her annuity contract will be delivered as a direct rollover to the eligible retirement plan she specifies or, absent a proper direction (or if the other plan refuses the rollover), delivered to the participant (no later than 90 days after the annuity contract no longer is a plan investment alternative). This presumes each annuity contract already states provisions that meet I.R.C. § 403(b). 3. If done carefully, the result is that the individual holds the annuity contract, which is no longer the plan’s asset. 4. Even without a rollover, a distribution of the annuity contract does not count in the individual’s income. Rather, the individual has income when she takes a distribution from her annuity contract. The insurer might try some resistance. But there might be nothing the insurer can do to the employer if the employer never was a party to the individual annuity contracts. See Internal Revenue Code of 1986 [26 U.S.C.] § 401(a)(38) allowing qualified distributions of a lifetime income investment, or of a lifetime income investment in the form of a qualified plan distribution annuity contract http://uscode.house.gov/view.xhtml?req=(title:26%20section:401%20edition:prelim)%20OR%20(granuleid:USC-prelim-title26-section401)&f=treesort&edition=prelim&num=0&jumpTo=true § 402(c)(8) http://uscode.house.gov/view.xhtml?req=(title:26%20section:402%20edition:prelim)%20OR%20(granuleid:USC-prelim-title26-section402)&f=treesort&edition=prelim&num=0&jumpTo=true § 403(b)(11)(D) allowing such a distribution without waiting for age 59½, severance, or hardship http://uscode.house.gov/view.xhtml?req=(title:26%20section:403%20edition:prelim)%20OR%20(granuleid:USC-prelim-title26-section403)&f=treesort&edition=prelim&num=0&jumpTo=true

A participant (or her beneficiary or alternate payee) might prefer to know the amounts of the previously taxed participant contributions. Why? Not every distribution is a retirement benefit. For example, a distribution before age 59½ with no condition about “a stated period of employment” might not be a retirement benefit. See 61 Pa. Code § 101.6(c)(8)(iii)(A)(I). If a distribution is not a retirement benefit (and is not a tax-free transfer or rollover into another plan), the distribution “shall be included in income to the extent that contributions were not previously included in this [compensation] income.” 61 Pa. Code § 101.6(c)(8)(iii)(A). The previously taxed amounts are recovered first, not proportionately over periodic payments. 61 Pa. Code § 101.6(c)(8)(iii)(B). Pennsylvania’s instructions and other publications tell a taxpayer to keep records of her previously taxed amounts.

Might the charitable organization, acting as a plan’s sponsor, also amend the old plan and create the new plan to provide: Payroll-deduction repayment of a participant loan is available only under the new plan, not the old plan? An in-plan conversion from non-Roth to Roth is available only under the new plan, not the old plan? Not knowing the charity’s particular facts and circumstances, I do not say either idea is feasible; rather, only that your consulting might evaluate those and other opportunities.

To the extent (if any) that tax affects one’s decision-making about where to live, someone who made substantial non-Roth elective deferrals while a Pennsylvania resident (who hasn’t yet converted the amounts in a Roth treatment) might prefer to remain a resident for payout years (unless her new residence imposes no income tax). For Pennsylvania’s income tax, a pension is not counted. But only some specified kinds and forms of distributions qualify for favorable treatment as such a pension. 72 Pa. Cons. Stat. Ann. §§ 7301(d)(3), 7303; 61 Pa. Code § 101.6(c); Bickford v. Commonwealth, 533 A.2d 822 (Pa. 1987). ------ For a Philadelphia resident, the current income tax on an elective deferral is 6.9098% [3.07% Pa. + 3.8398% Phila.]. When I started it was 8.06% [3.10% Pa. + 4.96% Phila.]. https://www.phila.gov/media/20211217105117/Historic-Tax-Rate-PDF-Template-update-December-2021.pdf

Consider also that paying over some reasonable measure of interest or time value of money might be needed to correct whatever prohibited transactions might have resulted from the employer keeping (and having the opportunity to use) money that in good conscience belonged to the plan.

Consider that a nonelective contributions subaccount might not be a countable resource regarding a Social Security disability benefit if, following the retirement plan’s provisions, the participant cannot get a distribution from that subaccount. 20 C.F.R. § 416.1201(a) https://www.ecfr.gov/current/title-20/chapter-III/part-416/subpart-L/section-416.1201 For example, if the plan provides no distribution from a nonelective contributions subaccount until the participant’s normal retirement age, a younger participant might lack a countable resource.

The rulemaking project remains open. View Rule (reginfo.gov) https://www.reginfo.gov/public/do/eAgendaViewRule?pubId=202110&RIN=1210-AB97

In my fee statements, I include (in chronological order) descriptions of tasks I choose not to bill with as much detail as for tasks billed. Among other advantages, this creates another record about work I did and advice I delivered. If ever there is the question “Why didn’t you tell me . . . .”, it’s nice to have an extra way to show I delivered the advice. For an audit, I can truthfully confirm the statements needed for an ABA/AICPA no-undisclosed-loss-contingencies letter looking only at my billing entries. If there is no entry in my fee statements, I must not have given “substantive attention” to whatever might have been or became a potential loss contingency.

Just curious, does an amendment—whether of a plan document, or of a separate trust document—to remove a trustee (and perhaps appoint another) incur a fee? Or is this routine processing with no incremental fee?

R Griffith, thank you for your observations.

After the Schlicter fiduciary-breach lawsuits began in December 2006, for a while I kept my own internal records. But the increases in complaints overwhelmed the time I could devote to keeping score. Now that the cases number over a thousand (with about 100 to 200 new cases in each of recent years), it would be a big lift to develop a scorecard. I read the officially and commercially published court decisions. I selectively read some complaints, and some settlement agreements. I continually update my written advice on how to be less attractive as a target. Not counting employer-securities cases, I remember only three ERISA fiduciary-breach actions with a trial—ABB, Kraft Foods II, and Edison. (But which did I not remember?} ABB commenced on December 29, 2006; went to trial over five years later in 2012; endured several more rounds, including two appeals trips; and settled in 2019 (after 12¼ years’ litigation).

For the fiduciary-breach lawsuits that been in the news for the past 15½ years, has anyone done a scorecard on how many, or what percentage, were: completely dismissed? won by the plaintiffs? won by the defendants? settled?

You might begin by using your Bloomberg Law, LEXIS, or Westlaw subscription to read the reported and unreported but commercially published decisions in Neil v. Zell, Case No. 08-CV-6833 in the United States court for the Northern District of Illinois. While there are many reports, some essentials are these: Neil v. Zell, 2008 WL 11342700 (C.D. Cal. Nov. 17, 2008) (transferring case to Illinois where the ESOP was administered, most of the evidence was found, and the operative agreements called for the application of Illinois law). Neil v. Zell, 677 F. Supp. 2d 1010 (N.D. Ill. Dec. 17, 2009 amended Mar. 11, 2010) (dismissing some claims, and denying dismissal of other claims) (complaint alleged enough to assert a claim that GreatBanc breached its fiduciary responsibility). Neil v. Zell, No. 08 C 6833, 2010 WL 3167293 (N.D. Ill. Aug. 9, 2010) (“Tribune [Company] is not a party to this case, so the court cannot order relief that would involve repayment of funds that originated with Tribune.”) (“if Zell and EGI-TRB are shown to have participated in a fiduciary breach or to have engaged in a transaction prohibited by ERISA, barring them from having fiduciary responsibility over the ESOP might constitute appropriate equitable relief.”). Neil v. Zell, 753 F. Supp. 2d 724, 731 (N.D. Ill. Nov. 9, 2010) (analyzing ERISA §§ 407(d), 408(b)(3), 408(e), and Internal Revenue Code of 1986 §§ 409(l), 4975, 26 C.F.R. §§ 54.4975-7, 54.4975-11) (For a person to be subject to equitable relief regarding a prohibited transaction, it is enough that the person “had actual or constructive knowledge of the deal's details”; one need not show the actor knew, or even ought to have known, that the transaction was a prohibited transaction). Neil v. Zell, 767 F. Supp. 2d 933, 50 Empl. Benefits Cas. (BL) 2801 (N.D. Ill. Feb. 28, 2011) (denying GreatBanc partial summary judgment to limit restoration). Neil v. Zell, 275 F.R.D. 256, 259 (N.D. Ill. Mar. 4, 2011) (granting motions to certify the class and appoint plaintiffs’ counsel as class counsel). Ex-Tribune Workers Reach $32 Million Deal In ERISA Lawsuit Involving Buyout of ESOP, Bloomberg Law Benefits & Executive Comp, Aug. 23, 2011, 12:00 AM.

For a spouse’s consent to an election against a survivor annuity or naming a beneficiary other than the participant’s spouse, the IRS has relaxed the physical-presence condition and allows—from January 1, 2020 through June 30, 2022—a remote witnessing that uses live audio-video technology and meets all requirements and conditions under the State law that applies to the notary or, for a plan representative, meets controls specified in the IRS’s notice. IRS Notice 2021-40; 2021-28 I.R.B. 15 (July 12, 2021); Notice 2021-3, 2021-2 I.R.B 316 (Jan. 11, 2021); Notice 2020-42, 2020-26 I.R.B. 986 (June 3, 2020). Do we guess the IRS will let this relief expire with June 30? Or does anyone predict another extension?

Bifurcated mess, just for BenefitsLink friends’ curiosity: Which spouse asked the court to grant a bifurcated divorce? Did the participant ask? Or did the would-be alternate payee ask? Did the spouses together assent to the bifurcated divorce? Or did the court grant it despite a spouse’s opposition? For ERISA practitioners who might not know the concept, a bifurcated or divisible divorce is “[a] divorce whereby the marriage itself is dissolved but the issues incident to the divorce . . . [which might include dividing property] are reserved until a later proceeding.” Divorce, divisible divorce, Black’s Law Dictionary 603 (11th ed. 2019). California Family Code § 2337 https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?sectionNum=2337.&lawCode=FAM California Rules of Court https://www.courts.ca.gov/cms/rules/index.cfm?title=five&linkid=rule5_390 Since (at least) the mid-1980s, family lawyers’ mainstream guidance is that a spouse who might want some portion of the other’s pension should oppose bifurcation because a divorce defeats one’s pension rights as a spouse or surviving spouse.

The Form 5500 report’s attachment you mentioned states: “The lnsperity 401(k) Plan is a single employer plan which is operated consistent with the requirements for a “Multiple Employer Retirement Plan” as defined in Revenue Procedure 2002-21. Revenue Procedure 2002-21 defines a “Multiple Employer Retirement Plan” as a defined contribution plan (including a plan that includes a cash or deferred arrangement described in section 401(k)) intended to satisfy the requirements of section 401(a) or section 403(a), and section 413(c), under which each Client Organization is “treated as” an employer.” It seems Insperity might assert that the plan is a multiple-employer plan within the meaning of the Revenue Procedure’s special definition, but is not “a plan maintained by more than one employer” described in Internal Revenue Code § 413(c) and is not other than a single-employer plan defined in ERISA § 3(41). The Revenue Procedure’s definitions § 6.02 states: “The term ‘Multiple Employer Retirement Plan’ means a defined contribution plan (including a plan that includes a cash or deferred arrangement described in § 401(k)) intended to satisfy the requirements of § 401(a) or § 403(a), and § 413(c), under which each CO [client organization] is treated as an employer. Rev. Proc. 2002–21, 2002-19 I.R.B. 911, (May 13, 2002) https://www.irs.gov/pub/irs-irbs/irb02-19.pdf

The filed Form 5500 report is a public record. Unless your client is the PEO or some investment or service provider named in the report, you might attach the report here without revealing a secret or confidence of your client. Reading the report might help us consider whether there is some reasonable interpretation to support the reporting you observed.

Liz Hallam, thank you for your further information.

MoJo makes the sensible point that a TPA might not need its auditor’s review of some other person’s controls. So, let’s ask these questions: If a TPA often or sometimes works with data when the data is on the TPA’s system (rather than in the custodian’s, recordkeeper’s, or employer/administrator’s system), should such a TPA engage a data-security audit (focused on what would be on the TPA’s system)? Even if a TPA always works with data sitting only on someone else’s system, should such a TPA nonetheless engage a data-security audit about the TPA’s controls for identifying the TPA’s users and safeguarding a user’s powers to access others’ systems?

EBECatty, thank you for this excellent help.

It’s typical for a recordkeeper to get assurance reports of the kinds MoJo describes. But is an assurance report about data security typical for a third-party administrator (one that’s not part of, and not affiliated with, a recordkeeper)?

Just curious, if the employer adopts the CPA’s tax-return preparation, does it affect anything in the pension plan’s administration or the actuary’s valuations?

Some governmental employers allocate a matching contribution under a § 401(a) plan on a participant’s deferral under a § 457(b) plan. Does any provider’s IRS-preapproved document allow a user to specify this within the adoption agreement’s check-the-boxes (or allowed fill-in) choices? If not, how the IRS would respond to a Form 5307 application in which this point is the only variation from the preapproved document?