Peter Gulia

Artie M, your experience shows why it matters that a plan’s fiduciary, with its lawyer’s advice, decides how strict or friendly to set hardship standards and fact-finding. Now, a plan’s sponsor or administrator may set § 401(k)(14)’s self-certifying claim as the plan’s claims procedure. https://benefitslink.com/boards/topic/81251-which-recordkeepers-have-implemented-self-certifying-hardship-claims/#comment-356756

In 2007, the Treasury department elevated the restorative-payment construct from nonrule guidance to a Treasury rule. And (adopting my comment) widened the circumstances in which the construct applies. 26 C.F.R. § 1.415(c)-1(b)(2)(ii)(C) https://www.ecfr.gov/current/title-26/part-1/section-1.415(c)-1#p-1.415(c)-1(b)(2)(ii)(C). There need not be an actual or even threatened liability; it’s enough that there is a “reasonable risk of liability”. Also, the restoration may be paid or provided by a person other than the fiduciary that arguably breached its responsibility. Allocating a return of investment-advisory fees to the account or accounts the fees had been charged against should meet the rule’s condition that “participants who are similarly situated are treated similarly with respect to the [restorative] payments.” This is not advice to anyone.

Thank you for your thought-provoking pointer to some opportunities. Among them, a plan sponsor’s settlor plan provision might leave the plan’s administrator no or little discretion. That might help defeat a claim of a kind fmsinc alludes to—a spouse’s or former spouse’s claim that the plan’s administrator exercised a discretion in a way that made it too easy for a participant to get an approval of a false claim. Whatever might be a fiduciary’s responsibility, it applies only to the extent of the fiduciary’s discretionary choices. And ERISA § 404(a)(1)(D) calls a fiduciary to obey the plan’s governing documents. This is not advice to anyone.

A retirement plan’s fiduciary typically negotiates a service provider’s compensation in the aggregate, not regarding any particular participant, beneficiary, or alternate payee. To the extent that a plan’s governing documents do not specify an allocation of plan-administration expenses, a retirement plan’s fiduciary allocates a plan’s expenses among accounts considering, widely, all the plan’s people or classes of them, but not a particular individual circumstance. A distribution-processing fee could in some circumstances be an element of a service provider’s reasonable compensation. And charging a distribution-processing fee against the individual accounts of distributees could in some circumstances be an aspect of prudent ways to allocate expenses among a plan’s participants, beneficiaries, and alternate payees. An allocation of distribution-processing fees that does not omit involuntary distributions is used with many plans. I’m unaware of any court opinion that considers the point. EBSA’s bulletin does not state, at least not expressly, that charging a distribution-processing fee is improper. Or that charging it without regard to the amount of the distributee’s account balance or distribution is improper. And the bulletin includes this example or illustration: “Benefit Distributions. Some plans provide for the imposition of benefit-distribution charges on the participant to whom the distribution is being made. These charges may be assessed for benefit distributions paid on a periodic basis ({for example}, monthly check-writing expenses). ERISA does not specifically preclude the allocation of reasonable expenses attendant to the distribution of benefits to the account of the participant or beneficiary seeking the distribution.” Department of Labor Employee Benefits Security Administration, Allocation of Expenses in a Defined Contribution Plan, Field Assistance Bulletin 2003-3 (May 19, 2003), https://www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/field-assistance-bulletins/2003-03. (I express no view about whether the bulletin is a sound interpretation of the statute or any law.) It might seem awkward to charge a fee to process a distribution that results in no money payable to the distributee. For a participant with a $200 balance, is it meaningfully less awkward to charge a $100 fee that results in a net distribution of $100 and, perhaps, after withholding toward Federal and State income taxes, a net payment of about $75? Even if the involuntary distribution is as much as $7,000, is it fair to charge someone who had not asked for a distribution? Or might a fiduciary’s duty of impartiality call in some circumstances for not letting some distributees escape a charge imposed on others? In a typical arrangement, a responsible plan fiduciary decides whether fees are reasonable, and decides how to charge fees among individuals’ accounts. The fiduciary is responsible for its exercises of discretion.

A plan fiduciary might be reluctant to send money back to the investment-advisory firm because that firm might change its mind about the adjustment it provided. For that or another reason, a plan fiduciary might prefer getting the money from the plan-sponsor company. The company might add to the mistakenly deposited amount an amount that follows a good-faith estimate of interest or the time value of money for the use of the money that did not belong to the company. If the company and the plan fiduciaries are agreed on a correction, they might do one write-up to document the correction. If there is a nonexempt prohibited transaction, a disqualified person, never the plan, owes the excise tax. So, the company might decide whether it files or omits an excise tax return. This is not advice to anyone.

Thank you! When the plan’s sponsor/administrator has specified self-certifying: Does a recordkeeper process the hardship claims without bothering the plan’s administrator? Is an approve-or-deny decision as binary as the form (whether electronic or paper) is good-order completed and signed, or isn’t?

Which recordkeepers have implemented self-certifying hardship claims? Which have not? What’s the deal with: Ascensus? ADP? Paychex? Empower? Voya? John Hancock? Principal? Fidelity? Vanguard? TIAA? Others? If there is a choice, does a recordkeeper suggest a default norm? If so, is the default self-certifying, review by the recordkeeper, or review by the plan’s administrator.

Artie M.’s explanation that an expense already paid might no longer be an immediate need likely is a mainstream interpretation of a plan’s provision that follows the Treasury’s rule. But some deciders of hardship claims are not so strict. Some reason an employee might have paid a recognized expense without foreseeing how it would affect the employee’s ability to meet other expenses. A financial controller thinks about which expense to pay in what order, including considering expenses to be paid from particular budgets. Many working people don’t think that way, and some administrators reason they shouldn’t be expected to. An ordinary person might pay an emergency expense using money that normally would go to recurring expenses, letting some go past due while waiting for an insurance recovery or a hardship reimbursement. I’ve seen claims procedures under which an expense already paid is recognized for a hardship if it was paid in a recent few months. Some of those procedures were designed by lawyers who knew one’s client’s procedure is certain to be examined by the Internal Revenue Service. A fiduciary designing a claims procedure might balance a need to be reasonably confident that decisions on hardship claims do not tax-disqualify the plan with being reasonably responsive to participants’ claims for a hardship that meets the plan’s provision. A fiduciary that otherwise would lack expertise should want its lawyer’s advice. This is not advice to anyone.

If a plan sponsor wants its plan to provide that a hardship is determined by relying on the claimant’s certification (to the extent I.R.C. § 401(k)(14) or § 403(b)(7)(D) permits): Must or should that provision be stated in the plan documents? Or is it enough that the plan’s administrator’s claims procedure, distinct from the plan documents, states the self-certification regime? Also, even if a procedure would be enough, is there any disadvantage to putting the provision in the plan documents’ adoption agreement? I welcome all BenefitsLink neighbors’ views.

If the participant not only owns it but also lives in it as his principal residence: If the plan provides this hardship need, the participant might consider: “Expenses for the repair of damage to the employee’s principal residence that would qualify for the casualty deduction under [Internal Revenue Code] section 165 (determined without regard to section 165(h)(5) and whether the loss exceeds 10% of adjusted gross income)[.]” 26 C.F.R. § 1.401(k)-1(d)(3)(ii)(B)(6) https://www.ecfr.gov/current/title-26/part-1/section-1.401(k)-1#p-1.401(k)-1(d)(3)(ii)(B)(6).

Is the grandmother's residence also the participant's principal residence?

What amount does the participant seek? What expense does the participant claim as his (perhaps including his grandmother's) hardship need? A conservatorship by itself might not make the incapacitated person the conservator's dependent. If the plan provides the Treasury regulations' deemed hardship needs, some of them might apply regarding the participant's primary beneficiary's expenses. This is not advice to anyone.

Looks like I might have guessed wrong in classifying the situation asked about. As BG5150, RatherBeGolfing, CuseFan, and I suggest, a benefit is not forfeitable because the accrued benefit is small. But many plans do what ratherbereading mentions. If the plan provides a small-balance involuntary distribution, the participant is severed from employment, and her account balance is no more than the cash-out level the plan specifies (whether $7,000, $5,000, $1,000, or $200), the administrator obeys the plan and instructs the involuntary distribution. If the account balance is $199 and the distribution-processing fee charged against the individual’s account is $75, that results in a net payment (before withholding for taxes) of $124. To follow TPApril’s example, if the distribution-processing fee to be charged is $100, but the account balance is $90, that might result in a net payment of $0.00. But it is a distribution, even if the distributee sees no money. (Some recordkeepers abate a fee so, as applied regarding a particular distributee, the fee is no more than distributee’s before-charge account balance. Also, some recordkeepers set the charge, if not the fee, so a net payment for the involuntary distribution never is less than $1, $5, or $10. Some do this so routine processing will make records showing that the distribution was paid.) If the plan’s administrator has segregated a forfeiture merely because an accrued benefit is small, each of the plan’s fiduciaries might want its or her lawyer’s advice.

I guessed TPApril didn’t intend to describe a forfeiture, at least not in the legal sense that ERISA § 203 (or Internal Revenue Code § 411) uses the constructs of nonforfeitable and forfeitable benefits. If what’s asked is about a situation in which a benefit is treated as forfeitable because the accrued benefit is small, I too would share BG5150’s question about what the documents governing the plan provide. And that includes interpreting a plan not to provide a forfeiture of a benefit ERISA § 203 commands to be nonforfeitable. Let’s hope TPApril clarifies which situation is asked about—a forfeiture, or an involuntary small-balance “cash-out” distribution.

BG5150, I guess the situation TPApril describes is about a small-balance (< $7,000) involuntary distribution after a participant is severed from employment. If so, TPApril asks about situations in which an account might be so small that a charge for a distribution-processing fee depletes the account, resulting in no net payment. As my note suggests, a plan’s fiduciary (or a service provider helping a plan’s fiduciary) might consider what communication could inform a distributee that the involuntary distribution was made.

If the employer paid the plan’s obligations before documenting an interest-free loan to the plan (and meeting all conditions of the prohibited-transaction exemption), the plan might have no obligation to repay the employer. About whether to reimburse an employer, a prudent fiduciary might want one’s lawyer’s advice about whether paying money when the plan has no obligation would be an exclusive-purpose breach. Each of the plan’s trustee and, if a different person, the plan’s administrator might want its or her lawyer’s advice about whether a fiduciary must or should decline to reimburse the employer until there is a solution that protects the plan’s fiduciaries. The employer might want its lawyer’s advice about whether the employer engaged in a nonexempt prohibited transaction, and whether the employer must or should file an excise-tax return (even if the PT has been corrected). Likewise, the employer might want its lawyer’s or certified public accountant’s advice about how to determine the “amount involved” in a prohibited transaction. There might be a pull toward not getting a lawyer’s help and informally resolving the situation. But recall some TPAs’ saying: “Don’t let the client’s problem become your problem.” Be ready to show that you did not give tax or other legal advice (unless you’re licensed and engaged to provide advice). And to prove that your services were only as instructed by the plan’s administrator and trustee. This is not advice to anyone.

Assuming the plan provides an involuntary distribution (and assuming a plan fiduciary had decided to allocate the distribution-processing fee uniformly to accounts involuntarily distributed): The plan’s administrator might consider no less communication than for a similar distribution that results in a net payment. That might include a § 402(f) explanation, even if the net amount of an eligible rollover distribution is $0.00. (Some service providers and plan administrators do not set up a $0.00 net payment as a reason to suppress a § 402(f) explanation that otherwise is called for.) (Be mindful that the IRS’s 2026 text, unedited, could confuse a reader. The awkwardness begins with the opening sentences: “You are receiving this notice because you are eligible to receive a payment from the [INSERT NAME OF PLAN] (the “Plan”) that you can transfer (roll over) to an IRA or another employer plan. This notice is intended to help you decide whether to roll over the payment (or some portion of it).”) After the quarter-year closes, an account statement ought to show the charge against the individual’s account and the resulting $0.00 balance. Beyond statute-prescribed communications, an administrator or its service provider might deliver—before the distribution is made—a one-paragraph explanation that the distribution-processing charge lowers the distributable account balance to $0.00. Will the payer deliver a Form 1099-R that shows the $0.00 distribution? To protect fiduciaries regarding later claims, one might consider how to preserve evidence that the involuntary distribution was made, and that it resulted in the distributee receiving the benefit she was entitled to. This is not advice to anyone. Have service providers developed a regime I’m unaware of?

Is there any reason the company would not open a new bank account?

Consider also legal and practical differences between the two audiences of disclosures: A service provider’s 408b-2 disclosure to the responsible plan fiduciary can be the service agreement itself, with no separate document. But a 404a-5 disclosure to a directing participant, beneficiary, or alternate payee calls, practically, for a distinct writing beyond the service agreement. Is a sales tax charged against the plan’s assets but not allocated particularly to the individual distributee who caused the sales tax to be incurred? If not charged particularly, is the plan's expense for sales tax generally allocated among all individuals’ accounts, including those who did nothing that incurred a sales tax?

George Morrison, thank you!

EBP, thank you for "cracking the code" for me.

Consider amending the documents governing the plan so they provide what the plan sponsor wants. Before writing an amendment, evaluate whether an otherwise desired provision might result in a tax-disqualifying discrimination in favor of highly-compensated employees. This is not advice to anyone.

Thank you! If the designer of the IRS-preapproved documents now or soon (before 2026 ends) offers a SECURE amendment: May a plan sponsor use such an amendment without defeating reliance on the IRS’s opinion letter on the IRS-preapproved documents? Is there a Revenue Procedure or some other IRS guidance that allows this?

I’m now reviewing a draft of a plan’s restatement. (The draft is not from the recordkeeper, nor my firm.) The IRS-preapproved documents lack items to specify which of SECURE 2022’s optional provisions the plan includes or omits. For whatever plan amendment ought to be done by December 31, 2026, the plan sponsor (following its internal business reasons) wants to do everything now. What’s an effective way to document the plan’s SECURE 2022 optional provisions (without defeating reliance on the IRS’s opinion letter on the IRS-preapproved documents)? Or is the plan sponsor’s preference to document now its SECURE 2022 provisions unwise?

If the IRS-preapproved documents are insufficient to express the plan sponsor’s desired provision, is it feasible to do a plan amendment that would state the desired provision?