what to say in a 402(f) notice if the sender doesn't know whether the plan is tax-qualified?

[Peter Gulia]

I'd like to see what BenefitsLink people think about the following hypothetical situation.

A person serves as an administrator of a retirement plan for the limited purpose of instructing the recordkeeper and insurer to pay final distributions. The former employer ceased operations many years ago. If the employer kept records of the plan's administration, they are long gone. The termination administrator, based on her experiences, suspects that the plan might be tax-disqualified, but lacks evidence to prove or disprove whether the plan is qualified.

Given this uncertainty, the termination administrator does not want to send a standard 402(f) notice because she does not want to take responsibility for even an implied statement that the plan is tax-qualified. Rather, the administrator would prefer to edit the notice, adding the following:

This notice describes Federal income tax treatments and rollover opportunities that could apply if the Plan qualifies for tax treatment under Internal Revenue Code section 401(a). The termination administrator will obey the Plan's terms that allow you to instruct that your distribution be paid to an eligible retirement plan. However, the termination administrator does not know whether the Plan is tax-qualified. If the Plan is not tax-qualified, this notice's explanations of Federal income tax treatments and rollovers would be incorrect.

Assuming that the termination administrator isn't worried about dealing with inquiries (she'd answer them all by saying that the notice speaks for itself), are there downsides to using the disclaimer and warning?

[QDROphile]

Has the plan administrator (or a predecessor) taken an implied position that the plan is qualified by not reporting income in prior years as a result of the disqualification? Should the implied position be reported, if only to explain that if the plan were disqualified in some prior year, some or all of the amounts actually distributed this year should have been reported in an ealier year? If enough years have passed, some recipients may wish to take advantage of the statute of limitations. If the administrator is able to punt, shouldn't the administrator step up with full information, or at least a warning about the possible additional complexities, to allow the individuals to make informed choices?

[Guest Sieve]

If this plan was meant to be tax-qualified, can't the administrator tell whether appropriate amendments have been made? Or are documents missing?

If documents are available, wouldn't the administrator want to cause the plan to be amended and submitted under VCP in order for it to retain its tax-qualified status?

How are 1099-Rs going to be issued? Are rollovers going to be permitted?

[rcline46]

I agree with Sieve. The termination administrator (is this a QTA?) should make every effort to determine qualification status of the plan - look on Freeerisa or free5500 for old filings, etc. This IRS filing to get into compliance allows the IRS to waive compliance fees, and the DOL will waive 5500s for a QTA.

So I think the first question is whether this person is a QTA, and the second is why not try to get the plan 'requalified'. Fees are allowed to be paid from assets.

[Peter Gulia]

The hypothetical termination administrator (not a QTA) is managing a situation in which the Plan lacks enough money to pursue an IRS correction. Even if the IRS were to impose no sanction and proceed without a user fee, using a professional's time would consume the Plan's modest assets, leaving nothing to distribute to participants.

On Sieve's question, the payor (an insurance company) expects to 1099 the distributions under an assumption that it does not know that the plan is not qualified. The termination administrator believes that she may interpret the plan (i) to include an IRC 401(a)(31) provision that would have been adopted had the employer not abandoned the plan, and (ii) to interpret that provision as requiring a payment directly to the eligible retirement plan specified by the distributee if the plan's final distribution is such that it would be an eligible rollover distribution if the plan is 401-qualified.

The question that remains is whether it's appropriate for the termination administrator to inform a distributee that a payment to an eligible retirement plan might not be a rollover.

[Guest Sieve]

The trouble I have with the proposed approach is that any "rollover" to a qualified plan jeopardizes the accepting plan's qualified status (since disqualified assets cannot be rolled in). Likewise, rollover to an IRA of disqualified plan assets is not permitted, resulting in excess IRA contributions and imposition of appropriate individual excise taxes. An assumption of qualification by the 1099 provider doesn't change the fact of disqualification.

There appears to be no question but that this plan is not qualified. If the employer ceased operations years ago, then what likelihood is there that mandatory amendments would have been completed timely (certainly the TPA knows whether PPA was timely)? And those amendment failures are disqualifying defects correctable only through VCP. Without VCP, I don't see how the TPA or payor (absent tax fraud) can honestly believe that it can correct disqualification by calling the plan qualified and acting as if it is, or forgiving the disqualification to aid employees. Professional fees for correction of language defects shouldn't cost much under the current simplified VCP process (a few thousand dollars), and can come from plan assets, so I'd correct.

If I were the TPA, I'd not permit a direct rollover (due to the clear disqualification), and would take the supportable position that a current 1099 is being issued (or for 2009, when PPA was not adopted), showing income includability, because prior records are not available. Then I'd revise the 402(f) notices along the lines that you suggest, indicating that the plan is not qualified and/or letting the employee take his/her own chances. I might even get a waiver form each particpant that they know the plan is disqualified. This is not a good result, but why should the TPA take the responsibility of calling a disqualified plan qualified--that seems like tax fraud to me.

But, then, I'm conservative, and others may see little downside to your approach.

[Peter Gulia]

Sieve, thank you for helping me think about this. (By the way, the terminator administrator's idea that I described isn't my idea, and doesn't reflect my advice.) Your thought about the interests of a receiving plan that might accept a contribution in reliance on a participant's incorrect statement that the paying plan is a qualified plan is especially helpful.