Peter Gulia

Yes, I too as a Vanguard customer received notices. But if a retirement plan used a custodian and recordkeeper unassociated with Vanguard, such a plan was dependent on whatever notice (if any) the recordkeeper furnished.

Many have reasoned that default choices should aim on the side of what can be changed. But that’s one of many principles some use in setting default choices. Here’s a reason that might point in a Roth-ing direction: A participant who takes a hardship or early distribution might receive lower income (and so, a lower 10% “penalty” tax on a too-early distribution, and perhaps lower marginal income tax rates) to the extent that the hardship or early distribution is allocable to a Roth subaccount. Whichever way an employer sorts out these and other employee-benefit choices, I assume an employer may specify provisions as its plan’s creator or settlor, and so not as the plan’s fiduciary.

EPCRSGuru and Pam Shoup, thank you for your helpful information. Pam Shoup, I too see that an investment adviser might consider it a smart courtesy to inform its client about fund changes. The employer/administrator that asked for my advice about correcting the fallout from missing Vanguard’s change (and started me thinking about these kinds of situations) uses no investment adviser.

Yes, I’m aware many small-business retirement plans operate with little or no internal resources of the employer that serves as the plan’s administrator (and often the plan’s only fiduciary). And I’ve had hands-on experience doing the unautomated work you describe. In the 1980s, I worked in allocating a plan’s subtrusts’ investment results by hand, doing calculations on a hand-held calculator, posting journals’ entries and offsetting entries in old-fashioned ledger books, and typing participants’ statements on an IBM Selectric typewriter. A need for the work you describe should suggest to a resource-constrained fiduciary that it’s imprudent to allow the off-system investment alternatives that result in a need for that work. I certainly don’t fault TPAs. If anything, many TPAs provide advice about what an employer/administrator is missing. And while one waits for an employer to change a plan’s investment alternatives and administration: If a June 30, 2022 account balance isn’t available, why not run the first lifetime-income illustration on the December 31, 2021 balance?

Congress enacted the statute in 2019, and the Labor department published the rule on September 18, 2020 (more quickly than Congress directed). Employers have had more than two years in which one could have asked service providers whether they will offer a service to help an employer/administrator meet its duty. And service providers have had at least the past eighteen months in which one could have designed or bought software and designed work methods to generate the illustrations. But if the worry is that a plan’s administrator might not know (or communicate) a participant’s account balance until months after the date of the account balance, that’s not a weakness in the government’s rulemaking. That’s a weakness in the plan’s administration. I’m aware a TPA or other service provider might feel frustrated in dealing with a client or customer that doesn’t prudently administer its plan. I look for solutions. Ideas I’ve mentioned here are just a few of many ways an employer/administrator might recover from its inattention.

EBSA’s nonrule guidance says June 30, 2022 is the latest quarter-yearly close that ends with time for a delivery before September 18, 2022. But a plan’s administrator might want its lawyer’s advice about whether a summertime or autumn revision of a previously delivered March 31, 2022, December 31, 2021, or September 30, 2021 benefit statement to add a corresponding lifetime-income illustration could suffice to meet ERISA § 105(a)(2)(B)(iii). Perhaps a plan's administrator might find that delivering (before September 18, 2022) a stale illustration generated on a not-most-recent account balance might be less wrong than delivering no illustration.

Another BenefitsLink discussion raises the same worry. In that discussion, I hinted that some practitioners might consider it enough that an illustration generated from a participant’s June 30, 2022 balance is delivered before September 18, 2022. For the background and explanation, see https://benefitslink.com/boards/index.php?/topic/69012-lifetime-income-illustrations/.

Leaving aside the merits of which is a better plan-design choice: To support the discussion WCC seeks, it might help to distinguish between choices an employer makes as its plan’s sponsor (non-fiduciary), and decisions the employer makes as the plan’s administrator (fiduciary). If a plan’s governing plan document specifies the automatic-contribution provision, including whether that contribution is Roth or non-Roth, is that choice a settlor provision? If that choice between a Roth or non-Roth automatic contribution is specified in the plan’s governing document, is the plan administrator’s responsibility limited to obeying the plan document? If the plan’s administrator must do something more than just obey the plan document, what exactly must the administrator consider? Under what circumstances must a plan’s administrator disobey the plan document and put the automatic contributions in the other tax treatment? What facts would a participant need to allege to set up a plausible claim that the plan administrator’s decision not to disobey the plan document harmed the participant? Would that claim be negated or weakened by a finding that the participant had, initially and continually, a power to undo the plan-specified default choice? Do answers to these questions suggest an employer may make its plan-design choice between Roth or non-Roth automatic contributions by focusing on which treatment better helps the implied-assent participants, without too much fear about liability grounded on a fiduciary’s responsibility (if any) to disobey the plan document?

Following Vanguard’s announcements about renaming and reorganizing Vanguard Prime Money Market Fund as Vanguard Cash Reserves Federal Money Market Fund, a recordkeeper and the custodian it works with processed the changes for their retirement plan customers—without advance notice to those plan sponsors. A retirement plan’s sponsor/administrator received no prospectus or other fund document from any Vanguard service provider. (That happens because a fund’s duty is to deliver a document to its record shareholder. Even if a fund might volunteer to send some communications to beneficial owners, often a fund cannot do so because it might lack names and addresses for beneficial owners.) About this reorganization of a Vanguard fund, neither the custodian nor the recordkeeper asked for their customer’s approval or acceptance, not even as an implied-assent “unless you instruct us otherwise” email. Further, neither the custodian nor the recordkeeper did anything even to inform a plan’s sponsor/administrator about the change before processing it. (Arguably, a diligent fiduciary ought to have asked a question after reading the first employer report that showed the new fund name.) I recognize the practical needs for a recordkeeper and custodian to follow a fund’s change (if the plan’s sponsor/administrator has not delivered a different instruction). But is it usual for a recordkeeper to process a fund’s change with no advance notice? Is this the common practice for all or most recordkeepers? Or do some provide more service? If a recordkeeper’s standard service does not include informing employers about fund changes, in what circumstances is it feasible to negotiate an extra service?

An arrangement in which one service provider absorbs or embeds another service provider’s fee might be an exempt prohibited transaction if: each service provider discloses to each responsible plan fiduciary all details of the arrangement, at least as required under ERISA’s 408b-2 rule [29 C.F.R. § 2550.408b-2 https://www.ecfr.gov/current/title-29/subtitle-B/chapter-XXV/subchapter-F/part-2550/section-2550.408b-2]; each service provider discloses the further information any responsible plan fiduciary requests; each service provider discloses the further information needed for each responsible plan fiduciary’s approval to be prudently informed; each responsible plan fiduciary is independent of all service providers involved in the arrangement; none of the service providers involved in the arrangement advises any plan fiduciary about whether to approve the arrangement; each responsible plan fiduciary approves the arrangement as obeying the plan’s governing documents, providing each service provider no more than reasonable compensation, not putting the plan in a disadvantageous arrangement, and otherwise prudently pursuing the plan’s exclusive purpose. A responsible plan fiduciary would want its lawyer’s advice about how thoroughly and carefully a proposed arrangement meets those and other conditions. A service provider evaluating whether it is willing to participate in such an arrangement would want its lawyer’s advice about whether the proposed arrangement meets all conditions of ERISA § 408(b)(2) and each further prohibited-transaction exemption the service provider wants to rely on.

Another BenefitsLink discussion raises the same worry. https://benefitslink.com/boards/index.php?/topic/69012-lifetime-income-illustrations/ ERISA imposes the new requirement on a plan’s administrator. For a typical single-employer retirement plan, the employer is the plan’s administrator. If an employer did not ask its own employee-benefits lawyer, an employer might be unaware of the new requirement. When an employer/administrator learns of the new requirement (and that no recordkeeper offers a service to meet it), the administrator likely would seek a service from its third-party administrator.

About timeline questions: If the plan has “participants self-directing in brokerage accounts”, presumably the plan provides participant-directed investment. If so, ERISA § 105(a)(1)(A)(i) calls for statements at least quarter-yearly, rather than yearly. Even if one relies on EBSA’s non-rule guidance, relating a lifetime-income illustration to a statement for a period ended September 30, 2022 would be too late. Rather, the guidance assumes a June 30, 2022 statement is the latest that enables a plan’s administrator to furnish the required disclosure in a 12-month period from the rule’s September 18, 2021 effective date. (If a plan furnishes monthly statements, one might consider a July or August statement.) To meet CDA TPA’s worry about whether necessary information will have been gathered when someone must generate a lifetime-income illustration and someone must furnish it, a plan’s administrator might want its lawyer’s advice about when the required disclosure must be delivered. Would an illustration generated from a participant’s June 30, 2022 balance delivered before September 18, 2022 be enough to meet ERISA § 105(a)(2)(B)(iii)? This post asks a question a plan’s administrator might explore with an expert lawyer’s help. It might not reflect advice I would provide if a client asks. Consider also that ERISA § 105(a)(2)(B)(iii) is just one aspect of a much wider set of a plan administrator’s duties to communicate information a statute prescribes or the fiduciary knows (or a prudent fiduciary using the caution, care, skill, and diligence ERISA § 404(a)(1) requires would know) a participant or beneficiary needs to protect her interests. And returning to Micheleciz’s question about some illustrations a plan’s administrator has not contracted another service provider to compile: Is it a good (or bad) idea for a TPA to offer a service of compiling lifetime-income illustrations? Which facts or circumstances make it a good idea? Which facts or circumstances make it a bad idea? If you prefer to provide your service in a non-discretionary format so the TPA is not a fiduciary (or at least not for that service), what instructions would you want from the plan’s administrator so you could defend that you did not exercise any discretion?

A court likely would find not preempted a State’s general sales tax that applies widely with no particular hook to employee benefits. For one exposition of that idea, read https://cases.justia.com/federal/appellate-courts/ca6/12-2264/12-2264-2016-07-01.pdf?ts=1467388843. Unless a particular precedent of the U.S. Supreme Court (or at least the Federal circuit in which the matter would litigate) fits and controls your client’s situation, there usually are arguments that point in another direction. And even if a precedent controls, one might argue that the precedent is incorrect. If a big-enough amount of the would-be tax calls for the analysis, the plan’s fiduciary would—perhaps with your law firm’s advice—estimate the probability-discounted refund the plan could win against the estimated expenses of litigating the plan’s refund claim. Even if the State’s law provides an award on a showing that the government’s position was not merely incorrect but also lacked a good-faith argument, a fiduciary likely should run a cost-benefit analysis assuming no order for the government to reimburse any portion of the taxpayer’s attorneys’ fees. Even if the circumstances otherwise call for cost-benefit analysis about whether to assert the non-application of the tax, your client might want first your advice about whether the sales tax is imposed on the seller, or on the buyer (with a requirement for the seller to collect and pay over the tax). If the sales tax is imposed on the buyer, there might be little or nothing for that person to litigate.

A trustee can be a directed trustee only if the trust agreement provides, somehow, that the trustee is “subject to the direction of a named fiduciary who is not a trustee[.]” ERISA § 403(a)(1). For such an allocation of fiduciary responsibilities to be effective under ERISA §§ 402-405, the identity of that directing fiduciary must be information a reader could get by following the trail of documents that govern the plan and appointments made under those documents. And anyhow, a competent bank, trust company, or other person agreeing to serve as a directed trustee would insist on identifying its directing fiduciary, if only to protect the directed trustee. Typically, a directed-trustee agreement specifies which person is the directing fiduciary. A typical provision is that the plan’s administrator is the directing fiduciary. By signing or accepting a directed-trustee agreement, a plan’s administrator or other directing fiduciary confirms its responsibility.

David Rigby is right: Whatever courtesy a bank, insurance company, or other IRA custodian might extend to a beneficiary is the custodian’s choice. BruceM’s question invited us to consider what might happen if the beneficiary persists in his unwillingness to claim a distribution. That a beneficiary the custodian notified has not claimed a distribution three years after the IRA owner’s death suggests at least some possibility that the unwillingness to claim a distribution might persist a little longer. Even if this BenefitsLink discussion is only academic, it helped me think about weaknesses in tax law’s minimum-distribution conditions and in States’ abandoned-property laws.

A further observation about the IRA BruceM describes: The IRA custodian might have no obligation to pay a minimum distribution. IRAs a human holds as an original owner are not aggregated with IRAs the human holds as a beneficiary. Likewise, IRAs a human holds as a beneficiary of one decedent are not aggregated with IRAs the human holds as a beneficiary of other decedents. And Roth and non-Roth IRAs are treated as distinct sets. A human might have two or more non-Roth IRAs (or two or more Roth IRAs) he holds as a beneficiary of one decedent. An absence of a distribution from a particular IRA does not by itself mean a minimum-distribution requirement was not met. An IRA custodian reports minimum-distribution information to a holder, but providing an involuntary distribution is not a condition of an account’s or annuity’s tax treatment as an IRA. Many IRA custodial agreements do not provide such an involuntary distribution. But an IRA custodial agreement allows, whether expressly or by implication, an involuntary distribution as needed to obey a State’s abandoned-property law.

Nate S., Dare Johnson, and Bob the Swimmer, thank you for your further information.

If an Individual Retirement Account’s terms and administration allow a disclaimer (not all do), a custodian likely would recognize only a disclaimer that, besides meeting all conditions to be valid under a relevant State’s law, also meets all conditions to be recognized under Internal Revenue Code of 1986 § 2518. Among other conditions, the disclaimer document must be delivered to the IRA custodian no later than nine months after the date of the participant’s death (or the date the beneficiary attains age 21, whichever is later). 26 C.F.R. § 25.2518-2(c)(1) https://www.ecfr.gov/current/title-26/chapter-I/subchapter-B/part-25/subject-group-ECFRac39af22636eabc/section-25.2518-2#p-25.2518-2(c)(1). In the Internal Revenue Service’s view, an amount paid over to a State’s abandoned-property administrator is subject to Form 1099-R tax-information reporting and IRC § 3405 Federal income tax withholding (to the extent of an amount not previously so treated). Rev. Rul. 2020-24 https://www.irs.gov/pub/irs-drop/rr-20-24.pdf Rev. Rul. 2019-19 https://www.irs.gov/pub/irs-drop/rr-19-19.pdf Rev. Rul. 2018-17 https://www.irs.gov/pub/irs-drop/rr-18-17.pdf The facts BruceM describes suggest the IRA custodian might treat the son as the person entitled to the unclaimed benefit. If so, and if the IRA custodian tax-reports, the Internal Revenue Service (and perhaps State and local tax authorities) might presume the son received income.

Belgarath, thank you. Has anyone seen, even second-hand, a situation in which the IRS challenged a retirement benefit or contribution because it was determined on compensation the IRS asserted was not really section 415 compensation?

A State’s abandoned-property law often measures an abandonment period from when a retirement account became distributable. Even if an IRA’s custodian does not treat earlier events or facts as starting an abandonment period, a custodian might treat a beneficiary’s IRC § 401(a)(9) required beginning date as making his share distributable. I don’t know whether some IRA custodial agreements grant the custodian an administrative power to pay an unrequested, but required, distribution as a transfer to a non-IRA account with the custodian or its affiliate. Or perhaps some custodians interpret such a power as incidental to the custodianship’s minimum-distribution provision. Yet, it might be impractical to implement such a power if the custodian lacks enough information, including the taxpayer identification number, about the would-be beneficiary. If one’s curiosity is more than academic or intellectual, one might Read The Fabulous Document. But in my experience, a typical IRA custodial agreement is unlikely to state enough details to inform a reader about what the custodian will do in the situation described.

Mary is the 100% shareholder of an S corporation she uses to provide her personal services to her clients. The corporation has no employee or other worker beyond Mary. Mary is a young 63. Mary intends to sell her client list to a buyer. The buyer will do an assets purchase. Mary keeps her corporation. The clients choose whether to get services from the buyer. Clients are free to leave any time, without cause, and without significant notice. Because of this, the deal terms obligate Mary to remain available and devote reasonable time and effort to help the buyer keep Mary’s former clients. This obligation continues for 2022-2026. After the deal closes, Mary is considering doing no work except the light touches needed to meet her hand-holding obligation. Unless her tax lawyer (not me) tells her there is a better way, Mary anticipates receiving the buyer’s payments in Mary’s corporation. Each year, the corporation would receive enough money to pay Mary wages, perhaps up to the IRC § 401(a)(17) limit, and pay pension funding and retirement contributions as generous as the actuary and third-party administrator I refer-in design and advise as proper. In setting compensation for an S corporation’s shareholder-employee, usually the worry is that the IRS might challenge the compensation as unreasonably below the value of that worker’s services. But does the IRS ever challenge a salary as too high? Could the IRS argue that $305,000 is too big a paycheck for someone whose only work is a few calls to calm down a jittery former client and persuade them to stay with the buyer? Or are there reasons why my question imagines more difficulty or risk than there really is? And what other issues should I be thinking about?

A plan’s administrator might consider both courses of action—using one’s claims procedure and (if one suspects the inquirer seems likely to continue unpleasantly) mentioning EBSA. A written denial would include “[r]eference to the specific plan provisions on which the determination is based[.]” 29 C.F.R. § 2560.503-1(g)(1)(ii). https://www.ecfr.gov/current/title-29/subtitle-B/chapter-XXV/subchapter-G/part-2560/section-2560.503-1#p-2560.503-1(g)(1)(ii) If an unhappy inquirer calls EBSA (many don’t bother), a Benefits Advisor often asks the plan’s administrator to volunteer information that might help resolve an inquiry. Furnishing the written denial should make it easy for a Benefits Advisor to close the inquiry. EBSA’s work method doesn’t call for a Benefits Advisor to evaluate the correctness of a decision; rather, the focus is on whether a plan’s administrator responded to a request for information or a claim. And if a claimant has been informed about her rights, EBSA treats that as enabling the inquirer to pursue her rights. MoJo’s practical pointer sometimes helps when one works in a recordkeeper or TPA (especially if it is exposed to participants’ inquiries) and the relationship with the plan’s administrator isn’t close enough for the service provider to guide the administrator’s conduct.

The discussion seems to have concluded that a corrective distribution may be allocated between the distributee’s non-Roth and Roth subaccounts (if the plan’s governing document authorizes this, or at least does not preclude this). Imagine a plan’s employer/administrator offered the distributees a choice for how to allocate one’s corrective distribution. But to meet BG5150’s concern about allowing some processing time before a due date, the administrator set yesterday March 7 as a cutoff for such a direction. Today, the employer/administrator asks for your suggestion on the best default allocation for the distributees who didn’t specify a choice. What do you suggest? Imagine further the employer/administrator says: “I don’t want to hear your we-don’t-give-tax-or-legal-advice speech. You told me the plan’s document allows any way we want to do it, so none of them is legally wrong. Just tell me what you think is best.” What allocation do you suggest? And why?

The business owner might want her lawyers’ and accountants’ help to evaluate bilateral and multilateral tax treaties regarding her current domicile, current part-year residences, and current sources of income, and, if different, older-age domicile, residences, and sources of income. While many treaties have provisions meant to limit double taxation, not all do. And timing and accounting differences can result in imperfect application of the treaties’ provisions. Further, the owner/participant might consider current and potential currency restrictions and other difficulties.

First, if you haven’t already done so, check whether the distribution from the defined-benefit pension plan is rollover-eligible. While you know that law, many participants have mistaken assumptions. Also, the participant should check whether the governmental 457(b) plan allows Roth contributions to designated Roth accounts, and whether the plan allows an in-plan Roth rollover. Not all plans provide this. Even if tax law might permit this participant’s desired move to Roth treatment in one transaction, a participant depends on the receiving plan’s recordkeeper’s practical ability and willingness to make the records that support the desired tax treatment. One suspects a recordkeeper might prefer the two-step. Anyhow, the participant should ask the recordkeeper what to do so the processing would get the desired result.