Peter Gulia

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.

CuseFan, thank you for your thoughtful observations, especially about using some low-balance cash-out as a way to avoid address-change work. About keeping up with address changes, some of those burdens and methods follow characteristics of the employee population, including how tech-savvy or even digital-native they are; how much the plan uses email addresses, preferably neutral email addresses not of any employer; and how capable the recordkeeper is in using services to find and fill-in updated addresses.

Bird, thank you for your nice help. Others with further thoughts?

After a detour, we’ve now come full circle; kmhaab’s originating post mentioned why the plan’s sponsor desires the provision asked about: “Employer is trying to move away from a union pension with an hourly accrual rate.”

In some volunteer work for a charity designing a new retirement plan, here’s a question I’m thinking about. Assumptions The plan’s investment alternatives are Vanguard and other managers’ mutual funds, with superior share classes obtained through the (independent) recordkeeper’s and its custodian’s omnibus purchasing power. None of the funds pays over any revenue-sharing or other indirect compensation. The employer pays nothing toward plan-administration expenses. (The charity’s executive director and board chairperson both tell me they can’t get grants or fundraise for any contribution to, or expense of, a retirement plan, and can’t budget for either.) So, all expenses are charged to individuals’ accounts. The absence of an involuntary cash-out provision won’t risk putting the participant count near the number that would invoke a CPA’s audit of the plan’s financial statements. That’s so for at least the next few years. Beyond maintaining former employees’ goodwill (which the charity cares about), does such an employer have its own economic stake about whether low-balance participants involuntarily exit the plan, or may, by choice, remain in the plan? Are there factors I’m not thinking about? For a participant who has only her $3,000 account, which is better: Staying in the former employer’s plan, or choosing a rollover into an IRA? (To simplify the comparison, assume the individual has no next employer, or the next employer has no retirement plan.) Is the individual’s choice as simple (mostly) as comparing the account charge under the former employer’s plan to the account charge of the IRA the individual could or would buy? Or are there more factors to consider? Your thoughts?

Belgarath, you’re right that stating a plan provision in a way that doesn’t follow an adoption-agreement form’s instructions loses reliance on the IRS’s preapproval. Revenue Procedure 2017-41, 2017-29 I.R.B. (July 17, 2017) at its § 6.03(17) states: “Opinion letters will not be issued for . . . Plans that include blanks or fill-in provisions for the employer to complete, unless the provisions have parameters that preclude the employer from completing the provisions in a manner that could violate the [tax-]qualification requirements[.]” No comment about whether an allocation fits the preapproved document you mention.

The condition for a participant’s or an alternate payee’s address refers to a mailing address. ERISA § 206(d)(3)(C)(i). The address recited in an order need not be the address of a place where the participant or alternate payee resides. Further, the address need not be the person’s only mailing address. At least one court decision suggests it might be enough that the address is a mailing address at which the individual could receive mail. Mattingly v. Hoge, 260 F. App’x 776 (6th Cir. Jan. 8, 2008). I’m aware of four potential solutions: (1) The individual’s attorney-at-law is willing to receive the retirement plan’s mailings at the attorney’s law office, and is willing for that address to be stated in the court order. (2) A friend or relative is authorized to receive the plan’s mailings, and is willing for the address to be stated in the court order. (3) The individual is permitted to receive the plan’s mailings at his or her place of business, which is separate from the residence not to be revealed, and the employer is willing for the address to be stated in the court order. (4) The individual opens a post office box to receive the retirement plan’s mailings. Stating a participant’s or alternate payee’s Social Security number (SSN) or Individual Taxpayer Identification Number (ITIN) is not one of the enumerated conditions for a DRO to be a QDRO. ERISA § 206(d)(3)(C)(i), 29 U.S.C. § 1056(d)(3)(C)(i) 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. Nothing in ERISA § 206(d)(3) calls for any person’s guardian ad litem to sign an order. What matters is whether an order is the State domestic-relations court’s order. Whether a particular court or judge expects a person’s or her guardian’s signature is a matter of local law and procedure.

For a nonelective (not matching) contribution, there is a wide range of ways to allocate a contribution among participants’ accounts. I’m not seeing how an allocation that is a uniform amount for each hour worked would discriminate in favor highly-compensated employees or introduce a new difficulty in meeting coverage and nondiscrimination conditions. If the employer uses an IRS-preapproved document, you might check whether the desired allocation can be expressed within the adoption agreement’s contours or in some other way that does not lose reliance on the IRS’s preapproval (and does not contravene a collective-bargaining agreement).

Beyond confirming that Congress in 2019 enacted the change you describe, what information do you seek?

Are the S corporation and the partnership both participating employers under the same one plan?

C.B. Zeller and MoJo, thank you for all three bits of wonderfully helpful information. Do others have different business methods?

Whatever one likes or dislikes about the VFC program, I’m curious: Have recordkeepers and third-party administrators developed assembling a VFC submission into a standard service that is (or could be) routinely offered?

The condition BG5150 mentions is: “[II]F.(1) With respect to any transaction described in Section I. [the transactions one may correct under VFC], the applicant has not taken advantage of the relief provided by the VFC Program and this exemption for a similar type of transaction(s) identified in the current application during the period which is three years prior to submission of the current application.” The source is the 2006 amendment of class Prohibited Transaction Exemption 2002-51 https://www.govinfo.gov/content/pkg/FR-2006-04-19/pdf/06-3675.pdf.

Recognizing the practical reality Bird describes, some third-party administrators: confirm that the TPA did not advise using a W-2; inform one’s client about relevant tax law and the IRS’s view of it; invent a method for combining W-2 and K-1 amounts in some way that approximates the correct measure of compensation for one or more retirement plan purposes; remind one’s client that it owns the risk of whatever inaccuracy or incompleteness results from using the invented method.

Beyond points mentioned above, an allocation of plan-administration might not be a binary choice between an equal amount for each individual and amounts in proportion to individual accounts’ balances. For example: One might allocate expenses half by heads and half by balances. A client considered this because many bigger-balance participants, almost all 59½ and older, were exiting the employer’s plan to direct rollovers into (for them) less expensive IRAs. Or put a constraint on a lower-balance portion of the range. For example, divide an expense into equal amounts for those accounts charged, but don’t charge an account if its balance is less than $n,nnn. Or constrain what’s charged to a bigger-balance participant. For example, charge individuals’ accounts in proportion to balances, but no charge exceeds $nnn. BenefitsLink mavens who know much more math than I know could imagine more ways. I do not advocate any particular allocation. Rather, I mention only that choices might be wider than the two described in EBSA’s bulletin. Of course, a plan’s fiduciary must consider whether an allocation would be within the recordkeeper’s, third-party administrator’s, or other service provider’s contracted or available service. And even if that’s not a constraint, sometimes KISS—keep it simple, striver—might be prudent.

Returning to Ahuntingus’ originating question, Nate S’s explanation resolves it. No excise tax return is due for an excise tax that would have been no more than $100 if one submits under the Voluntary Fiduciary Correction program and meets VFC’s conditions, which include paying into the plan the amount that otherwise would have been the excise tax. (The conditions include showing EBSA an unfiled Form 5330 or a computation showing what would have been the excise tax.) This can get the relief of the related prohibited-transaction exemption. Under the 1978 Reorganization Plan, the Labor department has authority to make exemptions under Internal Revenue Code § 4975. Or, no VFC = no de minimis.

Based on the information Nate S describes, is there a difference between correcting under the Labor department's Voluntary Fiduciary Correction program and correcting without using that program?