Peter Gulia

If the plan has only yearly valuations each September 30, isn't a December 31 balance the same as the preceding September 30 balance?

Here’s a hyperlink to the August 2 bulletin in which that Revenue Procedure was published. https://www.irs.gov/pub/irs-irbs/irb21-31.pdf

Although it does nothing for situations of the kind BG5150 described, some new relief might help when one must interpret new law for which there is yet no official guidance. The Internal Revenue Service announced new policies about “[s]ignificant FAQs on newly enacted tax legislation[.]” Among them: Notwithstanding the non-precedential nature of FAQs, a taxpayer’s reasonable reliance on an FAQ (even one that is subsequently updated or modified) is relevant and will be considered in determining whether certain penalties apply. Taxpayers who show that they relied in good faith on an FAQ and that their reliance was reasonable based on all the facts and circumstances will have a valid reasonable cause defense and will not be subject to a negligence penalty or other accuracy-related penalty to the extent that reliance results in an underpayment of tax. See Treas. Reg. § 1.6664-4(b) for more information. In addition, FAQs that are published in a Fact Sheet that is linked to an IRS news release are considered authority for purposes of the exception to accuracy-related penalties that applies when there is substantial authority for the treatment of an item on a return. See Treas. Reg. § 1.6662-4(d) for more information. But that relief about a penalty applies only if the Treasury department and its Internal Revenue Service published no authority beyond the FAQs (at least none about the point for which the taxpayer says it relied on an FAQ). The new policy seems aimed as situations in which the only authority is Congress’s statute, and the only executive agency guidance is the FAQs. https://www.irs.gov/newsroom/irs-updates-process-for-frequently-asked-questions-on-new-tax-legislation-and-addresses-reliance-concerns https://www.irs.gov/newsroom/general-overview-of-taxpayer-reliance-on-guidance-published-in-the-internal-revenue-bulletin-and-faqs

Does your client’s plan still require a minimum distribution after age 70½ (not 72)? In BenefitsLink discussions, many commenters observe that a plan’s administrator must obey the plan’s governing documents, even if a document’s provision is more restrictive than what’s needed for the plan to tax-qualify. Imagine this not-so-hypothetical. A § 401(a) plan’s sponsor completed its cycle 3 restatement, using its third-party administrator’s current IRS-preapproved documents package. Those documents state the plan’s minimum-distribution provisions with no update for the SECURE Act. And instead of specifying the required beginning date by reference to Internal Revenue Code § 401(a)(9)(C), the basic plan document’s definitions section states: “‘Required Beginning Date’ means April 1 of the calendar year following the later of the calendar year in which the Participant attains age 70½ or the calendar year in which the Participant retires[.]” Although the adoption agreement allows a user some choices about the required beginning date, all those choices refer to age 70½. Nothing in the documents package suggests one must or may read 70½ as 72. Assume the plan’s sponsor has made no governing document beyond using the IRS-preapproved documents package. Imagine a severed-from-employment participant had her 70th birthday on June 1, 2021. Must the plan’s administrator begin her distribution by April 1, 2022? Or may the administrator interpret the plan not to compel a distribution until April 1, 2024? Would you (or could you) interpret the plan’s governing documents so the required beginning date is no sooner than as needed to meet Internal Revenue Code § 401(a)(9)(C), and so turning on age 72? If you might, what is your reasoning about why that’s a reasonable interpretation of the plan’s governing documents?

If the absorbed organization discontinues and terminates its 401(k) plan, no severance-from-employment is needed, and the plan pays its final distribution as an involuntary distribution (even to those participants who have not reached any retirement age). A single-sum final distribution paid or payable in money should be eligible for a rollover into any eligible retirement plan, including a 403(b) plan. No alternative defined contribution plan. A distribution may not be made under paragraph (d)(1)(iii) of this section [plan termination] if the employer establishes or maintains an alternative defined contribution plan. For purposes of the preceding sentence, the definition of the term “employer” contained in § 1.401(k)-6 [which further cross-refers to § 1.410(b)-9, which includes aggregations under sections 414(b), (c), (m), and (o)] is applied as of the date of plan termination, and a plan is an alternative defined contribution plan only if it is a defined contribution plan that exists at any time during the period beginning on the date of plan termination and ending 12 months after distribution of all assets from the terminated plan. However, if at all times during the 24-month period beginning 12 months before the date of plan termination, fewer than 2% of the employees who were eligible under the defined contribution plan that includes the cash[-]or[-]deferred arrangement as of the date of plan termination are eligible under the other defined contribution plan, the other plan is not an alternative defined contribution plan. In addition, a defined contribution plan is not treated as an alternative defined contribution plan if it is an employee stock ownership plan as defined in section 4975(e)(7) or 409(a), a simplified employee pension as defined in section 408(k), a SIMPLE IRA plan as defined in section 408(p), a plan or contract that satisfies the requirements of section 403(b), or a plan that is described in section 457(b) or (f). 26 C.F.R. § 1.401(k) 1(d)(4)(i) https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR6f8c3724b50e44d/section-1.401(k)-1#p-1.401(k)-1(d)(4)(i). In a situation of the kind described, some charities and practitioners might consider designing and documenting both plans so the default on a non-instructing participant’s involuntary final distribution is a rollover into the absorbing organization’s 403(b) plan. See 26 C.F.R. § 1.401(a)(31)-1/Q&A-7 https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR6f8c3724b50e44d/section-1.401(a)(31)-1. Although that is not a merger, it can have some practical effects that achieve an employer’s goal of maintaining one individual-account retirement plan. Some participants choose against a rollover, and some choose a rollover to a retirement plan other than the default. But I’ve seen situations in which 80% to 99% of the terminating plan’s amounts became rollover contributions (not a merger or transfer) to the “suggested” plan.

The portion you quoted (from the caution paragraph that ends the left column on page 5) is an explanation about 26 C.F.R. § 1.415(f)-1(a)(2)&(3). The IRS Publication also explains the rule of 26 C.F.R. § 1.415(f)-1(f), which my post illustrated. That’s on the same page in the second of three columns in the paragraph with the heading “Participation in a qualified plan”. While both those non-authoritative Publication bits are efforts to explain (loosely) the rule, it’s much easier (and much more informative) to read the actual rule (for which I furnished a hyperlink).

Yup, it reads like 1970s badly patched computer code.

Luke Bailey, thank you for your good help. No, this was not a trick question. I was editing a summary plan description. Within what’s feasible recognizing ERISA’s many legal and practical constraints, I strive to meet § 102(a)’s goal of an explanation that would “be understood” by an ordinary reader who puts in an ordinary effort. I wrote the SPD’s explanation of when a nonspouse beneficiary must receive the death distribution in one sentence. Because I seldom think about a plan’s provisions to meet Internal Revenue Code § 401(a)(9), I wanted to check that I wasn’t missing something. You confirmed what I was thinking.

About an “incidental” rule, consider Revenue Ruling 61-164, 1961-2 Cumulative Bulletin 58.

Internal Revenue Code of 1986 (26 U.S.C.) § 401(b)(2) provides: If an employer adopts a stock bonus, pension, profit-sharing, or annuity plan after the close of a taxable year but before the time prescribed by law for filing the return of the employer for the taxable year (including extensions thereof), the employer may elect to treat the plan as having been adopted as of the last day of the taxable year. 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

SECURE’s revision of Internal Revenue Code § 401(a)(9) distinguishes between an eligible designated beneficiary (a beneficiary who is: the decedent’s spouse, disabled, a chronically ill individual, no more than ten years younger than the decedent, or the participant’s child “who has not reached majority”) and a designated beneficiary who is not so classified. Imagine a § 401(a) plan provides that every kind of distribution is paid only as a single sum. And that a retirement distribution or death distribution is paid only as a single sum of the entire account. Assume the plan’s governing document does not otherwise require a beneficiary to take a distribution any sooner than is necessary to meet § 401(a)(9) to tax-qualify. With those provisions, is there any plan-administration purpose for which the plan’s administrator needs to know whether a beneficiary is an eligible designated beneficiary? Or must either kind of designated beneficiary get the death distribution by the end of the tenth calendar year that follows the year of the participant’s death?

C.B. Zeller’s point is in 26 C.F.R. § 1.415(f)-1(a)(2)&(3). And see 26 C.F.R. § 1.415(f)-1(f) for some wrinkles about § 403(b) contracts. For example, a § 415(c) limit counts annual additions to a § 403(b) contract and annual additions under a § 401(a) plan of an unaffiliated business the individual controls (more than 50%). An example is a physician who is an employee of a charitable hospital and is the shareholder of her separate professional corporation for another medical practice. Or a professor who is a university’s employee and is the member or proprietor of her consulting business. https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR686e4ad80b3ad70/section-1.415(f)-1

The exemption’s condition II(e) requires that “the amount received by the plan as consideration for the sale is at least equal to the amount necessary to put the plan in the same cash position as it would have been had [the plan] retained the contract [and] surrendered it[.]” https://www.govinfo.gov/content/pkg/FR-2002-09-03/pdf/02-22376.pdf A delivery of property other than money is not an amount. Even if a transaction might get an exemption from prohibited-transaction consequences, that does not relieve a fiduciary from any other responsibility. The plan’s acquisition of IBM shares might be a fiduciary’s breach.

At least for an individual-account retirement plan and for a non-owner participant, a participant subject to an involuntary minimum distribution (after the later of when the participant attains age 72 or retires) presumably ended employment and likely attained the plan’s normal retirement age. Such a participant likely is entitled to a distribution. Following C.B. Zeller’s note, isn’t the real question whether the plan’s provisions allow such a participant to take an amount less than her whole balance, or instead require that a voluntary distribution be a single sum of the entire account? And aren’t the answers to many questions found in the realm of RTFD—Read The Fabulous Document?

Another wrinkle: Sometimes people describe a source of potential coverage as health insurance when it is not. I have a credit-card-sized piece of plastic that bears a Blue Cross logo. Almost anyone who isn’t an employee-benefits practitioner calls it an insurance card. But if I read the reverse side’s fine print, that text warns: “Your health benefits are funded entirely by your employer. QCC Insurance Company provides administrative and claims payment services only.” Whatever State law or rule governs an insurer’s health insurance contract might not govern an ERISA-governed employee-benefit plan, at least not if the plan uses no health insurance contract (and no precedential court decision interprets ERISA to apply an insurance-law or model coordination-of-benefits rule in meaningfully similar circumstances). Courts’ decisions vary on questions about how to construe or interpret a governing document’s text, and about whether to infer, import, or invent a coordination-of-benefits provision.

About a § 403(b)(7) custodial account: The agency’s rule distinguishes between amounts attributable to elective deferrals and those that are not. Compare 26 C.F.R.§ 1.403(b)-6(c) with -6(d). https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/section-1.403(b)-6 Further, -(d)(2) provides: “[A] hardship distribution is limited to the aggregate dollar amount of the participant's section 403(b) elective deferrals under the contract (and may not include any income thereon), reduced by the aggregate dollar amount of the distributions previously made to the participant from the contract.” Different rules could apply regarding a § 403(b) annuity contract or a § 403(b)(9) retirement income account.

And get your ERISA lawyer's advice about whether a fiduciary role, however limited, requires ERISA fidelity-bond insurance.

A method is using a separate (and unassociated) accounting firm to retrieve (including getting from the IRS the employer’s income tax returns and payroll tax returns), fill-in, and reconstruct the unreported years’ records. (A plan’s administrator wants its independent qualified public accountant to maintain independence.)

Even with a perfect allocation of responsibilities between or among the administrators, remember that ERISA § 405(a) imposes some co-fiduciary responsibilities regarding any other fiduciary’s breach. If a fiduciary “has knowledge” of another fiduciary’s breach, the observing fiduciary must “make[] reasonable efforts under the circumstances to remedy the breach.” ERISA § 405(a)(3). In doing so, the observing fiduciary must use no less care, skill, prudence, and diligence than an experienced fiduciary would use.

And one hopes BenefitsLink readers recognize that I merely furnished pointers to some (but not all) relevant sources, and did not state any conclusion.

This four-page article https://backend.fisherbroyles.com/wp-content/uploads/2020/05/Canna401k.pdf mentions [on page 2] treating some expenses for retirement contributions as a cost-of-goods-sold adjustment, and some as indirect costs that must be capitalized for an inventory. Unstated is what I heard from young lawyers who work in accounting or dual-practice firms: The accountants help a client develop bookkeeping and accounting methods that, within generally accepted accounting principles, push more expenses into those tax-recognized categories. Page 4 describes some (but not all) difficulties about finding investment and service providers.

Some IRS-preapproved documents include a subsection about what is required for a distribution following a TEFRA § 242(b) election. If so, the plan’s administrator or other fiduciary would follow those provisions, even if they constrain the distribution more than is otherwise necessary for the plan to tax-qualify. And you’d want to apply TEFRA’s transition rule: The method of distribution elected under TEFRA § 242(b) “would not have disqualified [the] trust under paragraph (9) of section 401(a) of [the Internal Revenue] Code as in effect before the amendment made by [TEFRA § 242](a).” Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. No. 97–248, § 242 (Sept. 3, 1982), 96 Statutes at Large 324, 521 (1982) [cited page attached]. TEFRA section 242.pdf

If the plan compels an involuntary distribution and you have the estate’s taxpayer identification number, pay the required distribution (as ESOP Guy suggests). If the plan compels an involuntary distribution and you lack information needed for tax-information reporting, consider suggesting that the personal representative seek his or her lawyer’s advice about the representative’s personal liability for the estate’s loss that results from a failure to collect an amount due the estate and for an excise tax that could have been avoided.

Whether a claimant must or need not submit source documents to substantiate her hardship expense is governed by the particular claims procedures and other documents governing the particular plan.

Some (but not all) relevant sources include: 26 C.F.R. § 1.72-16 https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR807fc2326e73cb3/section-1.72-16 including its (b)(1)(ii): “The proceeds of a contract described in subdivision (ii) of this subparagraph will be considered payable indirectly to a participant or beneficiary of such participant where they are payable to the trustee but under the terms of the plan the trustee is required to pay over all of such proceeds to the beneficiary.” and its (c)(2)(ii): “The portion of the proceeds paid upon the death of the insured employee which is equal to the cash value immediately before death is not excludable from gross income under section 101(a). The remaining portion, if any, of the proceeds paid to the beneficiary by reason of the death of the insured employee—that is, the amount in excess of the cash value—constitutes current insurance protection and is excludable under section 101(a).” IRC § 402(c) 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 26 C.F.R. § 1.402(c)-2 https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/section-1.402(c)-2 including its Q&A-3(b)(3): “An eligible rollover distribution does not include . . .: [t]he portion of any distribution that is not includible in gross income[.]”