Peter Gulia

Scanning quickly the House of Representatives’ 582-page report on H.R. 2954, I do not see anything that would, if the legislation is enacted, change the count of participants that determines “large plan” treatment for Form 5500 reports. This despite two lengthy provisions excusing some notices to “unenrolled participants”. Also, the bill includes a provision directing the Labor and Treasury departments and the Pension Benefit Guaranty Corporation to “review” reporting and disclosure requirements and report to Congress. HR 2954 CRPT-117hrpt283.pdf

But does everyone concur that the individual may do a rollover of the portion that, but for the rollover, would be includible in gross income? And is it okay to leave behind in the IRA the nondeductible-contributions amount?

If the thing a retirement plan’s trust owns is a share of a fund of an SEC-registered investment company, one could report it on line 1c(13). But the plan’s administrator should confirm exactly the nature of the thing the plan’s trust owns. Some things people describe as ETF shares might not be registered investment company shares. If the ETF shares or interests are held in a brokerage-window account, the plan’s administrator might consider this alternate reporting: Note. For the 2021 plan year, plans that provide participant-directed brokerage accounts as an investment alternative (and have entered pension feature code ‘‘2R’’ on line 8a of the Form 5500) may report investments in assets made through participant-directed brokerage accounts either: 1. As individual investments on the applicable asset and liability categories in Part I and the income and expense categories in Part II, or 2. By including on line 1c(15) the total aggregate value of the assets and on line 2c the total aggregate investment income (loss) before expenses, provided the assets are not loans, partnership or joint-venture interests, real property, employer securities, or investments that could result in a loss in excess of the account balance of the participant or beneficiary who directed the transaction. Expenses charged to the accounts must be reported on the applicable expense line items. Participant-directed brokerage account assets reported in the aggregate on line 1c(15) should be treated as one asset held for investment for purposes of the line 4i schedules, except that investments in tangible personal property must continue to be reported as separate assets on the line 4i schedules. Form 5500 Instructions page 35 https://www.dol.gov/sites/dolgov/files/EBSA/employers-and-advisers/plan-administration-and-compliance/reporting-and-filing/form-5500/2021-instructions.pdf. This is not advice to anyone.

I would not assume an IRC § 415(c) excess. Rather, if no annual addition was credited to the individual account of the zero-compensation participant, there is no § 415(c) excess. If the $10,000 (with other 2021 nonelective contributions, if any) is allocated among eligible participants proportionately by 2021 compensation, there would be no annual addition credited to the zero-compensation participant’s individual account. If the plan restores to the employer the $10,000 (or $10,000 adjusted for loss), there might be no contribution, and so no annual addition credited to the zero-compensation participant’s individual account. Lou S., what do you think: Is it believable that an employer in January 2022 did not know that it had not paid its employee wages in 2021? How much room is there to interpret what the employer did as a mistake of fact?

If the employer contributed $10,000 to the plan and did not subtract that amount from any participant’s wages (and has not recorded the amount as at least a conditional debit against the participant’s earned income), shouldn’t the contribution remain in the plan’s assets unless the plan’s administrator finds the employer paid the contribution because of the employer’s or plan administrator’s mistake of fact? If the contribution remains in the plan (and is not an elective deferral credited to a particular participant’s account), what are the plan’s provisions for allocating such a contribution among participants’ accounts? Might the participant have been (for 2021) a partner, member, or other self-employed individual? If so, might she have earned income for 2021? Might her 2021 earned income yet be undetermined because the partnership’s, disregarded entity’s, or proprietorship’s 2021 income tax return is not yet completed? If treating this participant as a self-employed individual does not explain the situation, what do BenefitsLink neighbors think about whether mistake-of-fact allows the plan to return the employer’s money? Is it believable that an employer in January 2022 did not know that it had not paid its employee wages in 2021? If an amount is restored to the employer on an ERISA § 403(c) mistake of fact, a typical plan document provides that a gain attributable to the mistaken-contribution amount is not returned to the employer. Or a loss attributable to the mistaken-contribution amount reduces the amount to be returned. See Rev. Rul. 91-4, 1991-1 C.B. 57.

HCE, returning to your query: “We have been asked if we can process a QDRO provided to us after the death of the [alternate payee].” If a court order that might be a domestic-relations order is submitted to an ERISA-governed retirement plan’s administrator, that the order is submitted after a proposed alternate payee’s death might not, by itself, excuse the administrator from responsibility to decide whether the order is a DRO and, if so, a QDRO. The more challenging questions are: If an order specifies payments to an alternate payee who is no longer alive, is the order a QDRO? If an order specifies payments to an alternate payee’s named beneficiary or other successor-in-interest, is the order a QDRO? If a DRO may specify a successor-in-interest for an alternate payee’s portion, must the successor be someone who qualifies as the participant’s spouse, former spouse, child, or other dependent? If the administrator finds that the order’s payee otherwise could be a proper alternate payee, does the order specify the name and mailing address of that alternate payee? If the administrator finds that the order’s payee could be a proper alternate payee, might the order otherwise fail to qualify because it calls for “[a] type or form of benefit, or [an] option, not otherwise provided under the plan”? Beyond carefully reading the plan and the statute, an administrator might want its lawyer’s advice. Further, whether the administrator’s decision is thumbs-up or thumbs-down, an administrator might explain in a careful writing, whether immediately furnished to claimants or not, a thorough reasoning for the decision. Such a writing might improve the administrator’s defenses on a challenge. (A challenge might come from the participant or a would-be alternate payee, whichever is disappointed or frustrated by the administrator’s decision).

Consider this: T-13 Q. For purposes of defining a key employee, who is an officer? A. Whether an individual is an officer shall be determined upon the basis of all the facts, including, for example, the source of his authority, the term for which elected or appointed, and the nature and extent of his duties. Generally, the term officer means an administrative executive who is in regular and continued service. The term officer implies continuity of service and excludes those employed for a special and single transaction. An employee who merely has the title of an officer but not the authority of an officer is not considered an officer for purposes of the key employee test. Similarly, an employee who does not have the title of an officer but has the authority of an officer is an officer for purposes of the key employee test. In the case of one or more employers treated as a single employer under sections 414(b), (c), or (m), whether or not an individual is an officer shall be determined based upon his responsibilities with respect to the employer or employers for which he is directly employed, and not with respect to the controlled group of corporations, employers under common control or affiliated service group. A partner of a partnership will not be treated as an officer for purposes of the key employee test merely because he owns a capital or profits interest in the partnership, exercises his voting rights as a partner, and may, for limited purposes, be authorized and does in fact act as an agent of the partnership. The next Q&A, T-14, states: “There is no minimum number of officers that must be taken into account.” But the reasoning in T-13 suggests that the minimum is one, even if the one might not be a human or might not be a plan-eligible employee. The trustees or other fiduciaries of the ESOP might not, because of that role, be officers of the ESOP-owned corporation or company. But somehow the organization must have a way to operate. Someone—although he, she, or it might not be an employee—has authority to obligate the corporation or company. Also, T-15 explains that an organization other than a corporation has officers (in the sense provided for the top-heavy rule). 26 C.F.R. § 1.416-1 https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR686e4ad80b3ad70/section-1.416-1

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