Peter Gulia

I am thinking about what procedures (and perhaps plan-document provisions) an individual-account retirement plan might want for situations in which the plan continues periodic payments to a participant for many months (or even a few years) after the participant’s death. Imagine a situation like this. (This is based on a real situation, but I changed a few facts to protect the employer/administrator’s confidences, and to simplify the legal issues.) In 2017, Jack was 62, eligible to retire, and did retire. Although the plan precludes a life-contingent annuity, the plan allows other periodic payments (subject to minimum-distribution provisions no more restrictive than as needed to meet IRC § 401(a)(9)). Using the recordkeeper/trustee’s form (which the employer/administrator adopted), Jack instructed payment, by direct-deposit electronic funds transfer, of $3,000 every month, to be paid on the first banking day of each month. (Jack never had a spouse.) In 2017-2020, all goes well. On January 9, 2021, Jack dies. Then, no one told the employer/administrator, the recordkeeper/trustee, or Jack’s bank about Jack’s death, and none of them had any knowledge of Jack’s death. On January 4, 2022, Martha (Jack’s friend, but not a relative) informs the recordkeeper/trustee about Jack’s death, and furnishes the death certificate, Jack’s will, and a probate court’s letters testamentary that appoint Martha as Jack’s personal representative. The trustee promptly turns off Jack’s periodic-payment instruction. But before this, the plan made, and Jack’s bank accepted, twelve payments ($36,000) after Jack’s death. The employer/administrator checks Jack’s plan beneficiary designation; it names someone who is not a legatee or beneficiary under Jack’s will, and has no apparent relation to any of them. Here are my questions for BenefitsLink neighbors, hoping some have experience with this problem: 1) Must the plan try to get the $36,000 from the bank? 2) If the plan tries and the bank refuses, how strong or weak would the bank’s defenses be in the plan’s lawsuit to recover the $36,000? 3) If the plan does not get the money from the bank (and no one otherwise restores Jack’s account), how strong or weak is the designated beneficiary’s claim that the plan fiduciaries’ actions deprived the beneficiary of money the beneficiary otherwise would get? Because the plan’s participants include a few thousand retirees, the employer/administrator presumes the problem of periodic payments continuing after a participant’s death (until the recordkeeper/trustee is notified) is recurring. A) What procedures might help manage this problem? B) Could a plan-document provision legitimate after-death payments to a participant (if no surviving spouse has any ERISA § 205 right)? (The employer uses no IRS-preapproved document. Also, the employer’s frequent mergers and acquisitions would set up an opportunity to get an IRS determination on whatever text the employer might add.) C) Would a plan-document provision be wise or unwise? Any further suggestions?

Oops. On these BenefitsLink discussion boards, many commenters assume a plan is ERISA-governed unless the originating post says or suggests the plan is a church plan, a governmental plan, or something else. Thank you for helping us with some learning about some non-ERISA plans for U.S. government employees. And although Maryland has never been my client, other States are (or have been), and I might be able to help if you face an issue about a plan for a State’s employees.

It might be unwise to answer a participant’s inquiry until the plan’s sponsor or fiduciary decides whether to allow or preclude the plan’s investment in the fund. Whichever plan fiduciary decides whether to designate or allow the fund as an investment alternative might consider, with its lawyer’s advice, at least these questions: 1) Do the plan’s governing documents permit or preclude investment in the fund? 2) Do the fund’s governing documents permit or preclude investment by an ERISA-governed plan? 3) If the fund’s governing documents do not preclude the plan’s investment, would the fund’s manager admit the plan as an investor? 4) Is the fund organized under the law of a State of the United States of America? Or is the fund organized under another nation’s law? 5) Is the fund’s general partner or other manager organized under the law of a State of the United States of America? Or is the manager organized under another nation’s law? 6) If the retirement plan invests, would the indicia of ownership of all plan assets be maintained within the jurisdiction of the district courts of the United States? 7) Would the fund meet conditions for treatment as a venture capital operating company? 😎 If the retirement plan invests, would investments by benefit-plan investors be insignificant? 9) If the retirement plan invests, would this preclude an incentive fee the fund’s manager desires? 10) If the retirement plan invests, would this preclude a carried-interest arrangement the fund’s manager desires? 11) If the retirement plan invests, would this enable the fund to obtain a portfolio investment the fund otherwise could not obtain? 12) Has the plan’s fiduciary received its lawyer’s written advice that the plan’s investment in the fund would not result in any nonexempt prohibited transaction. 13) Could the availability of the fund as an alternative for participant-directed investment be imprudent because some participants might lack a practical capability to evaluate the investment? 14) Are the plan’s trustee, administrator, and other fiduciaries ready to administer participant-directed investment in the fund using the currently contracted services of the administrator’s recordkeeper and third-party administrator? 15) Would the plan or its fiduciary limit the portion of an individual’s account for which a participant, beneficiary, or alternate payee may direct investment in the fund? 16) If not, could a restraint on redemptions of fund units or partnership interests make impractical any aspect of the plan’s operations (including allocations of plan-administration expenses to individuals’ accounts)? 17) Could a restraint on redemptions of fund units or partnership interests restrain how frequently a directing individual may change investments, and so defeat a fiduciary’s ERISA § 404(c) defense? A concern about self-dealing (or exempting it) is just one of many points to consider.

The Employee Benefits Security Administration’s publication, QDROs: The Division of Retirement Benefits Through Qualified Domestic Relations Orders, is not a rule or a regulation. No one need obey it. Here’s the statute: ERISA § 206(d)(3), unofficially compiled as 29 U.S.C. § 1056(d)(3) http://uscode.house.gov/view.xhtml?req=(title:29%20section:1056%20edition:prelim)%20OR%20(granuleid:USC-prelim-title29-section1056)&f=treesort&edition=prelim&num=0&jumpTo=true. A pension plan’s administrator might consider whether an order that refers to a contingency the occurrence on nonoccurrence of which the administrator would not know from the plan’s records alone is an order that “clearly specifies . . . the number of payments or period to which such order applies[.]” Likewise, an administrator might consider whether such an order “does not require a plan to provide any type or form of benefit, or any option, not otherwise provided under the plan[.]” A lawyer advising a participant or a proposed alternate payee, or a mediator seeking to facilitate an agreement, might consider how a pension plan’s administrator might react to a domestic-relations order.

The due date for a plan’s Form 5500 report on 2021 is August 1. The typical extended due date is October 17. 26 C.F.R. § 301.7503-1 https://www.ecfr.gov/current/title-26/chapter-I/subchapter-F/part-301/subpart-ECFRdf766a4800b6a98/subject-group-ECFRb33b9dd84d207a0/section-301.7503-1

With some holidays regularly on a Monday and others observed on a Friday or Monday, 2022’s calendar results in ten or eleven three-day weekends for many workers. For most, our due date for 2021 personal income tax returns is April 18. For residents of Maine or Massachusetts, it’s April 19. For retirement, health, and other employee-benefit plans, the due date for a plan’s Form 5500 report on 2021 is August 1. The typical extended due date is October 17. For details, read my 2022 chart [attached] about how Federal and State governments and the New York Stock Exchange observe holidays. 2022 holidays recognized in public law in the United States of America.pdf

EBP, Bob the Swimmer, and Luke Bailey, thank you for your thoughts. EBP, the adviser keeps up. Although retired from fee-paying work, she volunteers her services to small charitable endowments. To support that work, she maintains subscriptions with Morningstar and other investment-information publishers. Bob, I like the idea of getting the committee some other (and independent) sources of information. Although neither the charity nor its retirement plan committee is my client, we recognize that after the retirement plan is launched, attracts elective deferrals, and grows plan assets, the charity’s retirement plan committee should replace the volunteer adviser with a legally responsible adviser. For now, the investment-advice volunteer hopes the committee could (if it ever needs to) defend its decision to accept the volunteer’s investment advice by showing that a fiduciary acting with the care, skill, prudence, and diligence ERISA § 404(a)(1)(B) requires but “under the circumstances then prevailing” would have done no better (because there was no money to pay an adviser). Luke, thank you for mentioning that an indemnity might be compensation. The volunteer’s engagement letter can disclaim every exculpation, exoneration, and indemnification (including a right to an advance or reimbursement of attorneys’ fees) the plan might provide. (We’ll do it in the letter because we won’t have control of the plan’s governing document.) Likewise, the engagement letter can disclaim every indemnification the charity’s governing documents or Delaware law might provide. Although a litigator might assert (if the need ever arises) an absence of one or more elements described in 29 C.F.R. § 2510.3-21(c)(1)(ii)(B), I’ll mention these but won’t feature it in my written advice. Among a few reasons: (1) Even if 31 C.F.R. § 10.33 and § 10.37 don’t govern my advice, I won’t ground a conclusion on a fact or assumption I suspect is implausible. (2) I don’t want to bog down my advice with unnecessary details about whether a court would find that (i) the statute is ambiguous, (ii) the 2020 rule reinstated the 1975 rule, (iii) the 1975 rule is a permissible interpretation of the statute, and (iv) a court must or should defer to the agency’s interpretation. The volunteer adviser does not fear responsibility, and would not fear liability about her own advice. Rather, she wants to be ready (if the need ever arises) to argue she had no responsibility to “make[] reasonable efforts under the circumstances to remedy [another fiduciary’s] breach” because she never was an ERISA-defined fiduciary. If she cannot get reasonable comfort that her advice does not make her a fiduciary, she might not volunteer.

When a plan’s administrator engages an independent qualified public accountant, the administrator decides whether to engage the IQPA for a full-scope examination, or to limit the IQPA’s scope by providing that the IQPA need not examine information certified by a regulated bank or insurance company. 29 C.F.R. § 2520.103-8 https://www.ecfr.gov/current/title-29/subtitle-B/chapter-XXV/subchapter-C/part-2520/subpart-C/section-2520.103-8#:~:text=ECFR%20CONTENT-,%C2%A7%202520.103%2D8,-Limitation%20on%20scope Unless the employer securities are publicly and regularly traded on a national securities exchange, it’s unlikely a bank will certify enough information about the employer securities. If the ESOP has bank-custodied investments beyond employer securities, an administrator might (if the rule’s conditions are met) limit an independent accountant’s scope regarding those other assets.

Bird, thanks. Anyone with a different view? And if, for 401(a)(9) purposes, someone is a 5%-owner if she had more than 5% in capital interests or in profits interests as at any date during the year, do employers furnishing information to a recordkeeper or third-party administrator know that this how to apply the rule?

If one applies the rule Kevin C cites, there is a remaining curiosity about exactly when in the referred-to year one determines whether a participant is a 5%-owner. One of the rule’s elements is simplified if the plan year is the calendar year. Thus: “For purposes of section 401(a)(9), a 5-percent owner is an employee who is a 5-percent owner (as defined in section 416) with respect to the . . . year in which the employee attains age 70½ [72].” 26 C.F.R. § 1.401(a)(9)-2/Q&A-2(c) https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR6f8c3724b50e44d/section-1.401(a)(9)-2. A 5%-owner is one who owns more than 5% of the capital or profits interest in the employer. But when in the year? The first day of the year? The last day of the year? Something else? For a partnership (or a limited-liability company treated as a partnership for Federal income tax purposes), a partner’s interests can change as often as the partnership accounts for its partners’ interests. BenefitsLink neighbors, what is your experience about how and when the “more than 5%” is counted? Or does a third-party administrator not know this because the TPA relies on the employer’s yes-or-no (or on-or-off) indicator about whether an individual is a 5%-owner?

QDROphile, thank you for your further thoughts, which again help me. As mentioned in the originating post, I recognize that whichever fiduciary decides the retirement plan’s menu of investment alternatives must evaluate, according to ERISA § 404(a)’s duties, whether it is prudent to consider the advisor’s advice. The without-fee advisor doesn’t lack experience or credentials. Before her recent retirement, she worked over 35 years in retirement investment consulting. She is a CFA® (Chartered Financial Analyst) charter-holder. The charity considered engaging a currently registered investment adviser, but the charity has no budget to pay anything for a retirement plan. It’s impractical to pay a fee from the plan’s assets, because the plan is a start-up with $0 now. I considered the named fiduciary’s capability to evaluate the advisor’s advice. I did so to evaluate whether anyone might assert plausibly that the advisor was, practically, the real decision-maker. (That finding might make even an uncompensated advisor a fiduciary.) The three members of the charity’s retirement plan committee have post-secondary degrees (A.B. M.A. / B.S. M.B.A. / A.B. J.D. LL.M.), and all have deep charitable-sector finance experience. None has investment experience beyond personal investment in mutual funds. (The charity’s § 403(b) plan will use only mutual funds.) An assertion that the advisor was the de facto decision-maker is a risk. In my written advice, I’ll explain this risk, and methods the advisor might use to guard against it. QDROphile, you are right to caution me not to let enthusiasm for helping a charity’s workers overtake clear-minded thinking about exposures and risks.

Thank you, QDROphile, Bird, and Belgarath, for your helpful thinking. While I dislike many lawyers’ use of pro bono to describe the category, many professionals consider a moral responsibility to volunteer one’s service, without fee, to those who would not be a paying client but need the service. Some investment advisors similarly volunteer uncompensated services. I had thought about whether an opportunity for referrals, or even good will, might be indirect compensation that invokes ERISA § 3(21)(A)(ii). First, the circumstances of the charity, its employees, those who serve on its governing board, and its donors are such that it’s unlikely any of them ever would become any advisor’s paying client. Further, the advisor is unregistered, and so cannot accept a paying client. (Because she is retired, she will remain unregistered.) This also makes recognition or good will something that won’t result in compensation. Thank you for helping me think this through. You have given me a Christmas present I value much more highly than others.

I hope BenefitsLink neighbors will help me provide without-fee legal advice to someone who would, without fee, provide her investment advice to a charitable organization’s ERISA-governed retirement plan. The advisor would render advice about (but not decide) investment alternatives for an individual-account plan that provides participant-directed investment. The advisor would have no authority, discretionary or even non-discretionary, to implement her advice. The advisor is not registered with the Securities and Exchange Commission or any State’s regulator because she is not, “for compensation, engage[d] in the business of advising others[.]” Investment Advisers Act of 1940 § 202(a)(11), 15 U.S.C. § 80b–2(a)(11) (emphasis added). Under ERISA § 3(21)(A)(ii), “a person is a fiduciary with respect to a plan to the extent . . . (ii) he renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan[.]” The Labor department’s and courts’ interpretations have set up the idea that a commission or other compensation paid or provided, however indirectly, by a third person can be compensation that invokes ERISA § 3(21)(A)(ii). But this advisor will get no fee, and cannot get a commission or other payment from a third person. Also, this advisor will get no fee or other compensation for any service beyond investment advice. How comfortable should I be in advising that the advisor is not the retirement plan’s fiduciary? Is there any gap or flaw in reasoning that, absent a fee, the advisor is not the plan’s fiduciary? I recognize that whichever fiduciary decides the retirement plan’s menu of investment alternatives must evaluate, according to ERISA § 404(a)’s duties, whether it is prudent to consider the advisor’s advice. I’ll appreciate any ideas from BenefitsLink neighbors.

Do the participant's circumstances support a hardship or unforeseeable-emergency distribution (whichever, if either, the plan provides)?

Even if the Internal Revenue Service wants to end or deactivate an electronic account the IRS suspects might no longer be used (and it’s not obvious why the IRS should want this), one wishes the IRS would at least give notice two or three months before the end.

The quoted text is an example of a provision designed to allow two or more plans, each with its separate plan trust, to invest together using a master or collective trust. That a trustee of a plan’s trust is empowered to use such a master or collective trust does not excuse any plan trust’s trustee from duties about separate accounting. Further, one would want service agreements with a recordkeeper, a third-party administrator, and other service providers to show separateness of the plans (and each plan’s trusts).

Internal Revenue Code of 1986 (26 U.S.C.) § 7701(a)(20) provides: “For the purpose of applying the provisions of section 79 with respect to group-term life insurance purchased for employees, for the purpose of applying the provisions of sections 104, 105, and 106 with respect to accident and health insurance or accident and health plans, and for the purpose of applying the provisions of subtitle A [income taxes] with respect to contributions to or under a stock bonus, pension, profit-sharing, or annuity plan, and with respect to distributions under such a plan, or by a trust forming part of such a plan, and for purposes of applying section 125 with respect to cafeteria plans, the term ‘employee’ shall include a full-time life insurance salesman who is considered an employee for the purpose of chapter 21 [FICA].” For FICA taxes, “a full-time life insurance salesman” is treated as if she were an employee. IRC § 3121(d)(3)(B). Following this, a service recipient is not precluded from including its nonemployee full-time life insurance salespersons from the service recipient’s IRC § 401(a) retirement plan. The Internal Revenue Manual recognizes this. IRM 4.23.5.7.4.1 (11-22-2017) https://www.irs.gov/irm/part4/irm_04-023-005r#idm139946602957840. For plan design, you might test whether excluding such a deemed employee from a plan’s nonelective contribution, matching contribution, or elective-deferral contribution would cause the plan to fail to meet one or more coverage or nondiscrimination conditions. In my experience, excluding them might not tax-disqualify a plan because life insurance salespersons tend to be highly-compensated employees.

That an employer or service recipient classifies insurance producers as statutory employees for reporting compensation on Form W-2 does not necessarily mean such a worker is eligible to participate under a particular retirement plan, or even that one is an employee as the plan defines it, or as ERISA § 3(6) defines it. If your question is about whether these workers are or could be participants, Read The Fabulous Document. If your question is about how excluding these workers might affect coverage, non-discrimination, and other conditions of tax-qualified treatment under Internal Revenue Code of 1986 § 401(a), one would look to those rules.

What default provision (if any) does the written plan state for a participant who has an opportunity to elect but does not? If there is such a provision, might the employer use plan-provided discretion about the plan’s administration to find that “2099” was no election? These are only questions, and I don’t suggest any conclusion. Get your lawyer’s advice.

Some plans’ administrators might use a disclosure regime conceptually like your description, but with different means, by following the Labor department’s rule for a participant’s, beneficiary’s, alternate payee’s, or other covered individual’s implied assent (by not generally opting-out) to notice-and-access electronic disclosures. Among many conditions, the regime requires that the individual furnished, or was assigned, an electronic address (which remains operable). https://www.ecfr.gov/current/title-29/subtitle-B/chapter-XXV/subchapter-C/part-2520/section-2520.104b-31 If you consider it, get your lawyer’s advice about meeting the rule’s conditions and requirements.

Has anyone explained to the broker that those who don't play well with others are less likely to get referrals?

Thank you for the helpful information I was looking for. (When I was inside counsel to a recordkeeper, an employer's payments seldom followed the loan-repayment schedule. Not satisfied with what the software did, the operations people asked me(!) to invent a rule for crediting the payments. I don't remember what we did.)

About #3, perhaps Brian Gilmore has seen what some employers are doing?

Without doubting the wisdom of BenefitsLink mavens’ yuck and double-yuck observations, I’d like to understand why something is impractical or difficult. (I have great respect for those who work in recordkeeping operations.) If one or more methods for refinancing a participant loan are described in the tax-law regulations, one might think mainstream recordkeeping software would be programmed so a user could use those methods. Am I ignorant about the software? Or if the software can do it, are there other reasons it’s impractical or difficult?

But only if the problems are uncovered before the employer gets rid of them.