Peter Gulia

Another BenefitsLink discussion includes my inquiry about whether an automatic-contribution arrangement is a benefit, a burden, or neutral. https://benefitslink.com/boards/topic/73902-is-auto-enroll-an-actual-feature/ To consider whether either kind of election regime—affirmative or default—might be a protected benefit for a plan’s vesting provisions, one might consider that under either regime a participant retains a right to elect for or against deferrals. This is not advice to anyone.

The Bureau of Labor Statistics slightly varied Labor’s shutdown plan to allow work on the Consumer Price Index measure as needed to set increases in Social Security payments. Today BLS announced September’s CPI measure. https://www.bls.gov/ But the IRS people who apply CPI measures to form the adjustments the Internal Revenue Code calls for won’t be available to work on this until after the government shutdown ends. Now that September’s CPI measure is announced, unofficial estimates might complete the arithmetic. Some of us observed in July some adjustments that would be within rounding bands, even if August’s and September’s inflation would be much higher than expected. Over the past dozen weeks, I’ve advised some clients to prepare for Thanksgiving arriving with the IRS not having released inflation-adjusted amounts.

The forms for an employee-benefit plan’s annual report ask questions designed to check some points about whether the plan’s fiduciaries meet their responsibility. Imagine a recordkeeper, third-party administrator, auditor, or other service provider now is thinking about a value-add for next year’s 5500 services. The idea: List all Form 5500, including Schedules, queries that ask something for which a report’s reader could use the response to detect or suspect a possible breach of a fiduciary’s responsibility. (Not a tax-qualification failure, unless it also involves some other breach of an ERISA fiduciary responsibility.) https://www.dol.gov/agencies/ebsa/employers-and-advisers/plan-administration-and-compliance/reporting-and-filing/form-5500 Isolating those Form 5500 queries in one list would aid a service provider’s review to spot responses that could lead to government or private enforcement. Let’s crowd-source the list, with each BenefitsLink neighbor noting one query. Don’t repeat a query already noted. Quicker responders might note the obvious queries; later responders are challenged to find more subtle queries. If enough of us add one item, we’ll collect a complete list. I volunteer to assemble the whole list, in a table format—with Form or Schedule, part, and line numbers; the query; and an explanation.

EBSA’s bulletin states only that the Labor department “will not pursue [a] violation[]” under the conditions the FAB describes. That nonenforcement policy does not excuse a fiduciary’s breach. If a retirement plan’s administrator has already found that the participant’s purported identifying number is false—and might suspect that the purported or ostensible name also is false, how would an administrator meet all five conditions (including having conducted a prudent search for the missing or nonresponsive participant)? How would a fiduciary have conducted a prudent search for someone whose identity is unknown? Even if the applicable State’s abandoned-property regime (to be chosen following the participant’s “last known address”) meets all nine conditions for an “eligible state fund”, how would a fiduciary using the experienced “care, skill, prudence, and diligence” ERISA § 404(a) requires form a finding that the abandoned-property regime “is a prudent destination for the participant’s or beneficiary’s retirement benefit payments”? (I’m not saying a fiduciary could not reason through to the finding, only that the reasoning might not be obvious.) I don’t suggest that anyone ask the Labor department for guidance. And I don’t suggest asking anything of Congress or of any executive agency.

Unless the pension plan defines a QDRO more generously than ERISA § 206(d)(3) requires, the plan’s administrator might consider (and get its lawyer’s and actuary’s advice on) the QDRO regime’s general principle that a QDRO does not provide a benefit the plan does not otherwise provide. If the plan’s only death benefit is (or was at the relevant time) a QPSA for a participant’s surviving spouse, what benefit could a court’s order attempt to provide to a participant’s former spouse who was not the participant’s spouse (or deemed surviving spouse) when the participant died? This is not advice to anyone.

After the Immigration Reform and Control Act of 1986, the problem of employments processed with false identifiers and resulting retirement plan accounts has persisted. This difficulty might be something for a SPARK working group to sort out.

ratherbereading, thank you for this vote of confidence. Even if the April 2023 discussion was about similar facts and circumstances, I didn’t suggest a particular conclusion, but rather that the plan’s administrator might want its lawyer’s advice. While I suggest that a person not alter, discard, or conceal records, that does not by itself suggest there is a duty to report a crime or other violation. Consider that, for a situation that involves matters beyond Federal tax law, evidence law might privilege lawyer-client confidential communications, but does not privilege communications with another kind of practitioner. Consider how a retirement plan’s administrator would identify that a potential distributee now is the same person as the one who earned the benefit. Beyond the false identification number, there might have been other false identifiers. This is not advice to anyone.

If the turn date is July 7, 2025 (and the relevant plan-accounting and limitation years have been the calendar year), might the fraction be six-twelfths, or perhaps a little more? Before getting into how to treat the 6 days/31 days [0.193548387] or 7 days/31 days [0.225806451] of July, one might consider how the plan’s administration counts compensation. For example, if the plan’s administrator has, for § 401(a)(17), § 401(k), § 402(g), § 415(c), and other provisions counted compensation by looking to compensation paid, rather than accrued, one might consider the pay periods and pay dates. See, for example, 26 C.F.R. § 1.415(c)-2(e)(1)(i) https://www.ecfr.gov/current/title-26/part-1/section-1.415(c)-2#p-1.415(c)-2(e)(1)(i). For example, if the employer has used a 24 pay cycle with two pay dates in each month—on the 15th and the last day of the month, there might be no July pay to count in the compensation measured for a § 415(c) limit. If so, might six months/12 months be a sensible fit? Or, if there was an early July pay date before the plan’s discontinuance, one might form a reasoned fraction that catches the general sense of § 1.415(j)-1(d)(3). This is not advice to anyone.

Thank you for this excellent reasoning. And I like it even more because it supports advice I gave almost 20 years ago in my first year of private law practice after recordkeeping. For those clients that ask for my advice on plan design, I’ve suggested 15 years. But I’m open to different or further analysis. Can anyone suggest circumstances or factors that would support a longer repayment period—for example, 30 years?

A loan a participant uses to buy her principal residence may set a repayment period longer than five years (within what the plan’s governing documents, often including a written policy or procedure, allow). But if the plan’s sponsor-administrator is listening to your advice, what maximum do you suggest? 50 years? 30 years? 20 years? 15 years? Something else? The longest repayment period the recordkeeper agrees to process? And whichever maximum you suggest, why do you prefer it over other possibilities?

If IRS people obey the IRS's shutdown plan, I don't see how the IRS would publish or even release inflation adjustments any sooner than after the shutdown ends. But if BLS releases Consumer Price Index measures Friday, many practitioners can do the arithmetic (or use someone else's) to set unofficial amounts.

You might consider a strategy in the other direction: Respond promptly, and let delays in the IRS use up some of the remaining statute-of-limitations period. Later, when the IRS requests the taxpayer’s consent to extend the statute-of-limitations period, you’ll have a bargaining chip. You might say your client will consent only after there is a written agreement for the IRS to abandon and close all but a specified set of remaining issues, narrowing any further examination to only those.

For the particular matter I’m now working on, I found my answer: An Ascensus recordkeeper agreement with an add-on for using Ascensus as the default-IRA provider says two IRAs—Roth and traditional. But is that way universal?

Assume a participant severs from employment with a nonforfeitable account less than $7,000 (and more than $1,000) and the plan provides an involuntary distribution. Despite that small size, the account includes both Roth and non-Roth subaccounts. (For example, elective deferrals were Roth and matching contributions were non-Roth.) Assume the participant, after the proper notices, does not specify her preference for the distribution, invoking the plan’s default rollover. Does a plan's administrator with its service provider pay separately the Roth and non-Roth amounts? Or does a plan’s administrator and its service provider pay one sum, and instruct the default IRA provide on the distinct Roth and non-Roth amounts? Does a default IRA provider separately account for the Roth and non-Roth amounts? Does a default IRA provider put this in two IRAs? Or in one IRA with subaccounts?

If the buyer seeks to manage the risk that the rule mentioned might apply and might tax-disqualify one or more plans or § 401(k) arrangements, the buyer might consider: Obtaining a law firm’s written opinion that, on the draft deal documents and plans’ documents and other assumed facts, the outcomes would be as casey72 suggests; and Buying tax insurance against a failure of the desired outcomes. This is not advice to anyone.

The statute’s exception refers to whether “the employer maintaining the plan normally employed more than 10 employees.” I.R.C. (26 U.S.C.) § 414A(c)(4)(B). Here’s the Treasury’s proposed interpretative rule: https://www.govinfo.gov/content/pkg/FR-2025-01-14/pdf/2025-00501.pdf. To count the number of employees the employer “normally employed”, the proposed interpretation cross-refers to 26 C.F.R. § 54.4980B–2/Q&A–5. I see nothing that excuses from the count employees covered by a collective-bargaining agreement. But a plan’s sponsor or administrator might want its lawyers’ advice about whether one should interpret an implied delay of § 414A’s tax-qualification condition if implementing an automatic-contribution arrangement now would breach a currently effective collective-bargaining agreement or otherwise violate labor-relations law. Until the applicability date of an effective final rule, one might rely on a reasonable interpretation of the statute. Even if a consultant otherwise is comfortable providing advice about tax law, one might be reluctant to advise about tax law that’s affected by labor-relations law. This is not advice to anyone.

Consider that a lawyer’s inquiry to EBSA now (during a government shutdown) likely could be ineffective because an EBSA employee who could provide useful information might be precluded from working for EBSA. Instead, a lawyer and her assistants might use the time before the government shutdown ends to gather facts, research relevant law, and refine arguments before one presents an inquiry. This is not advice to anyone.

I have not encountered a situation in which either a § 3(38) investment manager or a § 3(21) investment adviser was involved in preparing or reviewing a 404a-5 disclosure. Imagining your hypo, a smart lawyer might suggest her client limit the scope of the lawyer’s advice to whether, following ERISA § 404(a)(1)(B), the administrator reasonably may rely on the investment adviser’s advice, assuming the administrator would get the adviser to confirm in writing that its advice includes considering whether each comparator is “an appropriate broad-based securities market index” regarding the investment alternative for which it would be a comparator. If the administrator loyally and prudently selected the investment adviser, that and other surrounding facts and circumstances might make it reasonable for the administrator to rely on such an adviser’s advice about the fact-related question. While a relying fiduciary must not unquestioningly accept advice, a fiduciary using no less care than a similarly situated, experienced, and prudent fiduciary would use might find no fault in the advice. If the plan’s administrator does not limit the scope of the lawyer’s advice (and the lawyer accepts the task), a lawyer must provide her candid advice. If a plan’s administrator sees differences in its investment adviser’s and its lawyer’s advice, the administrator should discern—with whatever further advice the administrator gets—each better-reasoned finding. Or, with her client’s consent, a lawyer might discuss with the investment adviser its advice, and either might consider how to reevaluate and harmonize one’s advice. This is not advice to anyone. I suspect many of our BenefitsLink neighbors wonder why we’re thinking about situations that in their experience occur rarely, or perhaps never. In my work, it’s real.

In form, the rule applies on the filer—the employer, and not directly on a submitter. (Although other rules might apply regarding a submitter.) Consider some law sources: Form 5500-EZ Instructions: Mandatory electronic filing. A filer must file the Form 5500-EZ electronically using the EFAST2 Filing System for plan year beginning on or after January 1, 2024 if the filer is required to file at least 10 returns of any type with the IRS, including information returns (for example, Forms W-2 and Forms 1099), income tax returns, employment tax returns, and excise tax returns, during the calendar year that includes the first day of the applicable plan year. If a filer is required to file a Form 5500-EZ electronically but does not, the filer is considered to have not filed the form even if a paper Form 5500-EZ is submitted. See Treasury Regulations section 301.6058-2 (T.D. 9972) for more information on mandatory electronic filing of employee retirement benefit plan returns. Consider that an information return required under Internal Revenue Code of 1986 § 6058 is filed not only by the plan’s administrator but also by the employer. Here’s the rule: 26 C.F.R. § 301.6058-2 https://www.ecfr.gov/current/title-26/section-301.6058-2. Definition of filer. For purposes of this section, the term filer means the employer or employers maintaining the plan and the plan administrator within the meaning of section 414(g). 26 C.F.R. § 301.6058-2(d)(3)(ii) https://www.ecfr.gov/current/title-26/part-301/section-301.6058-2#p-301.6058-2(d)(3)(ii). The rule’s example shows how an owner+spouse business might file at least ten tax returns. 26 C.F.R. § 301.6058-2(e)(1) https://www.ecfr.gov/current/title-26/part-301/section-301.6058-2#p-301.6058-2(e)(1). Here’s another illustration: A 100% shareholder of a professional corporation does not employ her spouse. Yet, that employer with only one shareholder-employee might file for each year at least ten Federal tax returns: Form 1120-S (1), Form W-2 (1), Form 940 (1), Form 941 (4), Form 945 (1), Form 1099-R (1) [for a yearly rollover from her § 401(a) plan into an IRA], and Form 5500-EZ (1). Rather than sort for which clients might file fewer than ten tax returns for a particular year, a third-party administrator might prefer the efficiency of preparing all clients’ Form 5500-EZ returns in electronic form. We might not know whether EBSA’s or the IRS’s software is smart enough to count all tax returns filed under an employer identification number. Yet, even if a practitioner advises about nonenforcement or nondetection on other points, I’m not readily seeing why a client might risk it for Form 5500-EZ.

Paul I, thank you for confirming what I suspected about how a service provider might display an index without evaluating whether it is “appropriate” to the supposed comparison. (I see as rational some recordkeepers’ business decisions to do the task that way.) I’ve seen recordkeeper-assembled 404a-5 disclosures with foolish comparisons. For example, comparing: a global stock fund (which invests about half in US stocks) to an index of only non-US stocks; an emerging-markets fund to a developed-markets index; a US small-cap fund to the S&P 500 index (which is at least large-cap); a short-term Treasuries fund to an aggregate bond index; a US real-estate fund to a global stock index; a US value fund to a blend index. And some “benchmarks” I’ve seen used as a comparator for target-year funds involve no recognition of the asset allocation the fund targets. While I see the 404a-5 disclosures as often useless noise and sometimes harmful, here’s a trap. Even if many plans’ administrators accept without question a recordkeeper-assembled 404a-5 disclosure, a few ask for advice. If a plan’s administrator asks its lawyer for advice about whether a suggested format for a 404a-5 disclosure meets 29 C.F.R. § 2550.404a-5(c)-(d), including 29 C.F.R. § 2550.404a-5(d)(1)(iii) about “an appropriate broad-based securities market index”, the lawyer must pretend the Labor department’s interpretive rule generally has a purpose, and that the particular condition has a purpose. How else could one give advice about whether a displayed index is an “appropriate” index? While I do it often, it’s at least awkward to invite a plan’s fiduciary to evaluate whether the expenses of following a Labor department interpretation would be a loyal and prudent use of the retirement plan’s assets.

When it’s practically achievable, I prefer making a target-year fund’s comparator a composite of index returns, weighted to the fund’s target allocations. To make this fair, the target allocations are those previously stated in each fund’s offering documents. For each asset class, the composite names its widely recognized index. But am I right in guessing some recordkeepers don’t do this in assembling a 404a-5 disclosure?

The Instructions for Form 5500-EZ describe its construct of a one-participant plan in the present tense. The instructions do not specify an as-of date on which to measure whether a plan was or wasn’t (or is or isn’t) a one-participant plan. That the instructions tell a filer to use a year-end amount to determine, if the administrator prefers, a distinct option about whether the plan’s (or all plans’) assets exceed $250,000 does not mean the instructions specify the year-end as the time to measure whether the plan is or was a one-participant plan. Absent some further guidance, a plan’s administrator might be reluctant to report a plan as a one-participant plan if it was not a one-participant plan throughout the whole year. This is not advice to anyone.

For ERISA-governed individual-account retirement plans that provide participant-directed investment, many such plans’ administrators furnish disclosures to follow 29 C.F.R. § 2550.404a-5. That rule calls one to show specified comparisons of a designated investment alternative’s past-performance returns to those of “an appropriate broad-based securities market index[.]” 29 C.F.R. § 2550.404a-5(d)(1)(iii) https://www.ecfr.gov/current/title-29/part-2550/section-2550.404a-5#p-2550.404a-5(d)(1)(iii). Although Congress in 2022 directed the Secretary of Labor to “promulgate regulations” about a benchmark one may use when an investment alternative “contains a mix of asset classes”, no such rule has been made or even proposed. Recognizing that (at least for smaller plans) many recordkeepers and third-party administrators assemble 404a-5 disclosures with little or no guidance from a customer plan administrator, what are service providers using as the benchmark for target-year funds?

If the plan covered a nonowner employee or former employee during some part of the to-be-reported-on year, was the plan ERISA-governed (for at least that part of the year)? ERISA § 3(1)-(3), 29 U.S.C. § 1002(1)-(3); 29 C.F.R. § 2510.3-3 https://www.ecfr.gov/current/title-29/section-2510.3-3 If so, wouldn’t the plan’s administrator continue reporting on Form 5500-SF, at least until reporting the first year that has no coverage of any nonowner (at any time during the to-be-reported-on year)?

About the originating question—May an employer’s group health plan require an examination as an eligibility condition for covering an employee’s spouse?: Is ambiguous law a bad thing, or a good thing? BenefitsLink neighbors, what are your observations?