Peter Gulia

The linked-to memo, addressed to some IRS employees, describes a line-drawing about circumstances in which “the questions of whether the plan provides meaningful benefits and whether the plan exists primarily to benefit shareholders should be raised when reviewing determination[-]letter applications.” Also, the memo’s context assumed “a newly established defined benefit plan [for which] there are no prior rates of accrual under the plan with which to compare current benefit accruals.” Might a practitioner’s analysis be somewhat different for an ongoing plan that is a few years out from its first year?

That mariemonroe posted a query under a forum about executive compensation and Internal Revenue Code of 1986 § 409A suggests that the issues might be different than those one might consider for a § 401(a) retirement plan.

A few points the plan’s administrator might want its lawyer’s advice on: Read carefully the administrator’s procedure for handling domestic-relations orders. Ordinarily, a path is to follow the procedure (except to the extent that the procedure is contrary to ERISA’s title I, or contrary to the plan). If the administrator does not follow the procedure, it might consider putting in writing (with its lawyer’s help) the administrator’s fiduciary reasoning for not following the procedure. I heard in a recent ASPPA CE course that some administrators’ procedures call for not paying immediately on an order the administrator decided is a QDRO, instead waiting some number of days (for example, 30 or 60 days) selected to make it somewhat likely that the order is final and nonappealable. This is not advice to anyone.

As BenefitsLink now shows, the IRS extends relief from "physical presence" before a notary or plan representative through December 31, 2022. Employee Benefits: News, Regs, Analysis, Laws, Surveys and Policy (benefitslink.com)

Without remarking on the lawyer’s opinion described. Nate S, if your firm is a TPA or other service provider regarding the plan, consider getting an indemnity for doing what your service recipient asks. Not only the plan’s administrator (which one imagines is the ESOP-owned corporation) but also the humans who act for it should defend and indemnify the TPA (and all its further indemnitees) against all losses, liabilities, and expenses that arise out of or relate to following the plan administrator’s instructions. Get your lawyer’s advice on the details of the text. And if there is any doubt about what BRF, other testing, or other service the plan’s administrator instructs the TPA to perform or omit, get everything in the written instruction that sets up the indemnities.

For the situation the inquirer describes, I imagine getting a separation order that meets the rule’s conditions might be little or no quicker than getting a divorce. If a plaintiff or petitioner asks for the court’s order finding that the spouses are separated and asks that the court grant that order without or before granting a divorce, a judge might ask why. On hearing an explanation about undoing the spouse’s right not to consent to the participant’s pension election, a judge might find it would be unfair to grant such a separation order without first having divided the spouses’ marital property. If the separation order is unneeded for a noneconomic purpose (the spouses already are practically living apart), pursuing a divorce might be more straightforward.

Thanks. Your next-to-last sentence describes some of what I seek if I act for or advise the plan's top-level fiduciary. But it sometimes is protective or helpful for the top-level fiduciary to lack authority, instead getting involved only when ERISA 405(a)(3) requires efforts to prevent or remedy the co-fiduciary's breach. If I advise the 3(16) provider, I suggest considering all the ways the provider might be called to respond to something, do cost accounting on those activities, and use the information in quoting the fee. Many kinds of costs can be lessened if the 3(16) provider can use scale and efficiencies in a way the plan's sponsor/administrator might not achieve.

My focus is not on what the law of the property rights is, but rather about the burden and expense of responding to a creditor that seeks something. So, here’s a not-so-hypothetical question that might help illustrate that point: Imagine a “3(16)” agreement allocates to that service provider responsibility and discretionary authority to decide all claims, and to direct the directed trustee and its custodian to pay claims the 3(16) administrator approved. Does this mean the 3(16) administrator responds to claims of bankruptcy trustees and commercial creditors (and does so within the fee the agreement provides)? Or does a 3(16) agreement provide that responding to those claims is not allocated to the 3(16) administrator, and remains with the hiring plan administrator?

That a participant’s spouse is imprisoned does not by itself end the marriage. That a participant’s spouse is imprisoned might not by itself mean the spouse abandoned the participant. Even if it does, that circumstance might excuse a spouse’s consent only if “the participant has a court order to [the] effect” that the spouse abandoned the participant “within the meaning of local law”. 26 C.F.R. § 1.401(a)-20/Q&A 27. You mention that the participant has not communicated with her spouse “for years”. But does anything prevent her from asking him for his consent to her qualified election? If there is time before the due date for the participant to submit her election, the participant might sue for divorce. If a court grants the divorce and it is effective when the participant submits her qualified election, the then former spouse’s consent might not be needed. Without a consent or a divorce, the plan would pay the qualified joint and survivor annuity the participant elects. Or, if the participant does not elect, the default QJSA the plan provides. Before considering anything, the plan’s administrator should get its lawyer’s advice about what the plan provides. The plan might be more restrictive than what ERISA and the Internal Revenue Code might allow a plan to provide. Before you present any information to your customer, you’ll want to follow Ascensus’ guidance about how to avoid giving tax or legal advice. My explanation here is not advice to anyone.

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?