Luke Bailey

Agree with all of the above. Difficult issues (besides self-dealing) are what to do about management fees and the plan asset rule (e.g., staying under 25% plan investment).

Peter, I've done a fair amount of research into exclusive benefit for governmental plans, although not in the area of garnishment. I don't think the IRS has opined a lot on the issue generally. The regs seem clear enough and don't come at the issue so much from the point of view of "you have to do everything you can to support the participant," but more from the technical angle that you simply can't spend plan assets on anything other than benefits and administration. I think that helps because arguably paying a debt of the participant is paying a benefit. In the case of garnishment there's an interesting twist because 401(a)(13) does not apply to governmental plans so they are not required to have an anti-alienation provision, although some do and presumably those that do should be interpreted under state law. So your participant here is grasping at exclusive benefit where if he or she were in a private plan they would be pointing to anti-alienation. As demonstrated by the PLR cited by Lois Baker, the IRS and courts have seemed to give broad leeway to MVRA where a federal crime is implicated. All the cases I recall have allowed the garnishment on the basis that MVRA is a federal law and shows a strong public policy for victims' restitution. The last article in this issue of the NAPPA newsletter may help: https://www.reinhartlaw.com/wp-content/uploads/2019/05/Johnson_NAPPAReport_April-2019.pdf

I agree with Mojo. Would have to have a municipal bankruptcy in a state that permits application of the federal bankruptcy code (not all do) and there would be negotiations. If you're really interested you might want to review all that happened in Detroit a decade ago. I believe some of the cases are still ongoing.

They stole that from Socrates.

C.B. Zeller, thanks. I was unaware of the issue. I did not read the underlying PLR, but Ms. Ferenczy's article seems to summarize it well. She includes the following in her conclusion: The position of the PLR is contrary to that which has been stated informally on other occasions, including ASPPA’s Annual Conference Q&A Sessions. [Emphasis supplied.] Nonetheless, the PLR may represent the current thinking of the IRS on this topic, and those who are including compensation of 401(k)‐only participants in the IRC §404(a)(3) deduction limitation should be on alert that this may be problematic if the plan is audited by the IRS. One possible solution might be to provide a minimum employer allocation in order to bring in that participant's compensation for the deduction limits. Bird's $1 contribution is an example of the minimum contribution referred to in the last sentence of the above excerpt from Ms. Ferenczy's article. The PLR does not seem right to me. Folks who only defer are beneficiaries under the plan. Check. The language "such elective deferrals shall not be taken into account in applying any such limitation to any other contributions" seems intended to mean that the deferrals don't crowd other contributions, e.g. profit sharing, out from under the 25% of compensation limit, not that the compensation of folks who only have deferrals doesn't count. Congress said, "such elective deferrals shall not be taken into account...," not "the compensation of the participants making those elective deferrals shall not be taken into account."

That would be my recommendation too, EBP. I think Bill Presson's thought is correct that this is required, so would not be erring on side of participant. The loss is the direct result of a fiduciary's breach of its duty of care in administering the plan. Look, if you are requiring them to take the money out then you can't treat them like a participant for 404(c), probably. Not sure there is any case out there where that has been litigated, though. One might be able to argue that if they didn't qualify as participants ERISA doesn't even apply, but if that's the case the legal claims of the participants will be even stronger under state law.

Ultimately, so's the dollar, Mojo, just a piece of paper. Now there is the Fed, and the IRS, and banks, etc., that add credibility to that perception, but ultimately it's a perception. BTC is capped at 21 million total. That's all that can be mined. I know this is hard for a normal person to comprehend, but I'm pretty sure that the answer to your question is you have to posit a society/economic situation in, say, 10 years, where no one wants to take anything for their stuff but BTC, because the only folks who have money after the dollar collapse are the bitcoiners, and none of them want to take anything else other than BTC. That's the value proposition. There can't be any other. It has to replace the dollar to have long-term value. In other words, a virtual "Galt's Gulch."

MoJo, I really liked all of your post. Will comment only on the above. I'm pretty sure that you've put your finger on it, but let's give the crypto believers their due. I'm pretty sure that the Bitcoin maximalists have placed bets on BTC because (a) they believe that what they like to call "fiat" currencies (the biggest one being the dollar) will at some point experience runaway inflation and be worthless, e.g. as happened to the mark in Weimar Germany, and (b) BTC essentially has a high moat and will be the sole survivor. Maybe also Ethereum. But it can't be more than that, otherwise you have something akin to fiat crypto, i.e. no cap on available tokens. I think they're that far out there. Think Ayn Rand in a Mad Max world.

Peter, I think pretty much everyone who's looked at that has concluded that because Notice 2014-21 says that crypto is "property" and not an actual 'coin," and because it is intangible, it's safe to hold in, e.g., an IRA, without violating 408(m) as currently written. Cold wallet storage raises a custody issue, however, that you have to be careful in handling, e.g. by holding through an exchange rather than directly in your wallet. There is a whole business niche catering to crypto IRAs. I have found that the best place to find info on it is Youtube, but of course it's not all good. Could. They might, but at least until recently there have been some powerful, bipartisan folks in the Senate who are trying to position their various localities as "crypto valley." Crypto has some good lobbyists.

Peter, I guess my final comment on this will be to take pity on our poor Federal government. (Wow, never thought I'd say that!) People have lost a lot with BTC. Maybe if they hang in, they'll get it back, I guess , agrguably, but in the meantime there are large losses. Sixty-six percent from the peak. For now, price is sticking at about $20k. Folks are already saying about this, "Where was the SEC?" (Of course they should be saying, "Where was the CFTC.") At some point, folks will say, "Where was Congress?" Government being government. I don't think you can blame them on this one.

So Belgarath, IRS had actually imposed large penalties on my client. That is what got their attention. As others have referenced, the letter we wrote did state that we had "reasonable cause" for not filing, even though we had filed previously. IRS eventually agreed that no penalties were due for not filing a form that was not required and frankly they don't want, right, because if they target a governmental plan for any sort of action based on an issue with 5500 it's just a waste of everyone's time.

Isn't this the same as the still unresolved issue of whether a plan sponsor has a fiduciary duty to not include a brokerage window if it concludes that some of the participants can't handle it? Some would argue that 404(c) absolves the plan sponsor from any fiduciary duty to restrict choice, as long as good choices are unrestricted, right? And I don't think it's clear they're wrong. Some folks (I'm pretty sure a minority of knowledgeable people outside the crypto business) think crypto is a great investment. A lot of others think it's like tulip bulbs in the 17th century. There's just really nothing else like it that folks can put money into. Clearly, the senators are in the latter group. At some point Congress will have to legislate in order to impose anti-money laundering controls and get capital gains collected on crypto transactions. Maybe they will authorize Treasury to move forward with a digital dollar as well. Maybe the senators are laying the groundwork for including in that legislation a prohibition on using crypto in retirement plans, just like there is currently a prohibition on cars, wine, and other collectibles. Just add crypto to 408(m).

I don't think they're saying that Fidelity is a fiduciary, Peter. For Fidelity its a business decision that Fidelity wanted to clear an ERISA law hurdle just to lower their own business risk. The senators are just pointing out that Fidelity doesn't need to do it, i.e. could make a business decision not to. Lots of other platforms won't do it. The senators don't want Fidelity to do it, and they're telling them that. The DOL did as much in their advice to actual plan fiduciaries. It's government/public policy, and politics, not ERISA law. Who will look right will depend on where the invention of a missing Japanese mathematician or amateur mathematician who may or may not actually exist stands a year from now. The closest thing to BTC (and it's not that close) is currency futures. How many plans have that as an investment option for up to 20% of your account?

That has been my thought as well, Lou S.

No. The IRS does have a rule for this, Lou S. See Treas. Reg. 1.402(g)-1(e)(8). The Roth excess deferrals, when they come out, are not qualified Roth distributions and cannot be rolled over to a Roth IRA. I have no knowledge as to whether this is uniformly administered correctly.

What does the 401(k) plan say? It may say you reduce the 401(k) balance, leaving you to have to make up an administrative rule. Plans used to contain elaborate provisions that described which plans would reduce first in a multiple plan situation, but due to changes in EPCRS that allow you to correct operationally like any other plan error those have gone out of fashion.

I had a similar situation about a year ago. An employer that was governmental filed a late 5500 for their 403(b) plan on the advice of their platform vendor's rep. I corresponded with IRS and told them that the employer was governmental and should not have filed. Took a few months, but the IRS abated all penalties. The Service Center person with whom I spoke prior to sending letter seemed to understand that penalties should not have been assessed if form should not have been filed. Employer has stopped filing.

Right. If the plan meets the regulations requirement for exclusion from ERISA under 29 CFR 2510.3-3(b) (which is a little complicated, but very mechanical, and basically comes down to one-person or one-couple ownership of a corporation, or a partnership, and in either case with no non-owner employees), then it is not subject to any ERISA requirement.

I have not gone back to the instructions, but based on Peter's excerpts it seems possible to interpret this as saying "if the name has changed [during the reporting year]." i would probably not change it or complete Line 4 until the 5500 for the year in which the change occurred.

Although it would be great if plan documents and/or written procedures dealt with this up front (and many do), I don't think it would be a plan failure to withhold taxes and amounts that had been elected, e.g. health plan contributions, before 401(k). The 401(k) plan is just one claimant among several others with lawful claims on the paycheck, e.g. Uncle Sam for FITW and FICA, state tax withholding, short-term disability, health plan, cafeteria plan. They all have legal claims on the money and the precedence among them should be based on the employer's reasonable triage of these claims, which would probably put the 401(k) plan last. You will probably want to amend the document pronto, however, if it can be read not to allow such flexibility, but I have never seen a plan document that would put deferrals ahead of taxes or other lawful claims. At worst, the wording is simply oblivious to this foreseeable practical issue. To paraphrase someone's statement regarding the Constitution (think if was Marshall), "It's a 401(k) plan, not a suicide pact."

I'm not aware of any in Texas. I would be shocked if any state's laws actually addressed this, but of course you should check the law for the state you're in as well as any collective bargaining agreements, EBECatty.

Most plans are going to use the W-2 or withholding safe harbor. I would say if it's on the employee's W-2 for 2022 and if it is currently subject to FICA and FITW, you should count it as comp.

That's a good point, Bri. That would allow you to just convert. But of course a SIMPLE 401(k) is not quite as simple as a SIMPLE IRA, so there would be a trade-off.

PS, maybe someone else on this board knows, but I don't. With a 401(a) plan, the plan sponsor generally has the power to amend the plan into another type of plan (but not from DB to DC or vice versa), or to cause the plan to be merged into another plan. Here, you're talking really about terminating the K plan and requiring rollovers to the IRAs. Of course, the employer could suggest to the employees that they do that, but I am unaware of an ability to require it. Why does the plan sponsor care? When the K plan terminates everyone will be fully vested, of course. Why is it important to the plan sponsor that the SIMPLE start out with the K dollars, rather than just starting afresh and letting participants roll to their SIMPLE IRAs if they want?

Sure, EBECatty. Thanks for such an interesting question.