Lifetime Income Disclosure - owner only plans

Is the Lifetime Income Disclosure needed for an owner-only 401(k) plan?  I would think (hope) not.  These often involve one broker account and thus the disclosure will not generate from an institutional record keeper.

Tom

Pretty sure that's an ERISA requirement, so it wouldn't be applicable for owner-only scenarios.

agree

The lifetime-income disclosure is an element of an ERISA title I command for a pension-benefit statement.

ERISA § 105(a)(2)(D), unofficially compiled as 29 U.S.C. § 1025(a)(2)(D) http://uscode.house.gov/view.xhtml?req=(title:29%20section:1025%20edition:prelim)%20OR%20(granuleid:USC-prelim-title29-section1025)&f=treesort&edition=prelim&num=0&jumpTo=true

This ERISA provision does not apply to:

a plan that is not an individual-account plan,

a one-participant or no-employee plan,

a governmental plan (including a public-schools employer’s plan),

a church plan (if the plan did not elect to be ERISA-governed), or

a voluntary-only § 403(b) plan if the employer’s involvement is so limited that there is no plan for ERISA title I’s purposes.

On 7/19/2022 at 2:18 PM, Peter Gulia said:

a one-participant or no-employee plan,

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.

On 7/19/2022 at 3:18 PM, Peter Gulia said:

The lifetime-income disclosure is an element of an ERISA title I command for a pension-benefit statement.

ERISA § 105(a)(2)(D), unofficially compiled as 29 U.S.C. § 1025(a)(2)(D) http://uscode.house.gov/view.xhtml?req=(title:29%20section:1025%20edition:prelim)%20OR%20(granuleid:USC-prelim-title29-section1025)&f=treesort&edition=prelim&num=0&jumpTo=true

This ERISA provision does not apply to:

a plan that is not an individual-account plan,

a one-participant or no-employee plan,

a governmental plan (including a public-schools employer’s plan),

a church plan (if the plan did not elect to be ERISA-governed), or

a voluntary-only § 403(b) plan if the employer’s involvement is so limited that there is no plan for ERISA title I’s purposes.

I'm seeing conflicting info - and I'm sure I'm overwhelmed and confused.  If we have a pooled-account plan (NO participant direction of investments), do we or don't we have to furnish a LIS?  I've seen both answers "yes" and "no".  THANKS!

Sorry, just opened the link you posted Peter Gulia, and see 1(A)(ii) below.  What is the definition of "account"?  It's a money type within a qualified retirement plan, right?  Like "Safe Harbor Non-Elective" or "Salary Deferrals" would be accounts?

So even if a plan has ONLY a Pooled account in which all participants' assets are held, we have to furnish a LIS once per year?  I think I just answered my question from a few minutes ago, but would appreciate a smarter person than I to confirm.

An individual-account plan is ERISA title I’s lingo for the kind of plan that the Internal Revenue Code calls a defined-contribution plan.

ERISA § 3(34) [29 U.S.C. § 1002(34)]: The term “individual account plan” or “defined contribution plan” means a pension plan which provides for an individual account for each participant and for benefits based solely upon the amount contributed to the participant’s account, and any income, expenses, gains and losses, and any forfeitures of accounts of other participants which may be allocated to such participant’s account.

ERISA § 105’s command for a lifetime-income illustration applies without regard to whether a plan provides or omits participant-directed investment.

A twist to this discussion that I am grappling with, and am wondering what others would do. 

Sole proprietor John Doe with no employees establishes a one-participant plan on 1/1/2020 and makes contributions to a self-directed brokerage account (SDBA) with Brokerage Company. He later hires a couple of employees that become eligible for the plan on 1/1/2022. The employees aren't keen on the $250 fee for maintaining a SDBA and choose to invest their contributions into mutual funds with Mutual Fund Company. Mutual Fund Company includes the lifetime income illustrations on their quarterly participant statements, but Brokerage Company does not. We serve as the TPA for the plan, and John Doe is asking for our opinion as to whether he is required to generate a lifetime income illustration for his own account. John would rather not be bothered with it, and if it were up to him he wouldn't spend the $X in additional fees that he'll be charged for generating LII statements. 

Based on my understanding of the LII requirements, John is required to get a LII. That seems crazy under the circumstances, and I'm wondering if I'm missing something that would obviate the need for that to happen. Any thoughts/comments are appreciated.

Perhaps John Doe might consider a choice of some different ways:

1)  John pays BadgerDon or another capable service provider to generate the illustrations.

2)  John, without a service provider, generates the yearly illustrations.

3)  John disobeys ERISA’s command, estimating that John’s expense for the civil penalties and other consequences, discounted for the probabilities of detection and enforcement, and with adjustments for time values of money, is less than the expense of #1 or cost of #2

4)  John spins off from the ERISA-governed plan the assets and obligations allocable to John’s account into a new plan designed to exclude employees (other than John, or another deemed employee). John would evaluate whether the extra burden or expense of administering this second plan—including coverage and other testing to be combined with the first plan, and Form 5500 reports on the second plan—might exceed the expense of #1 or cost of #2.

Further, John’s expense or cost even for evaluating these choices might exceed the expense of #1 or cost of #2.

1 hour ago, Peter Gulia said:

Further, John’s expense or cost even for evaluating these choices might exceed the expense of #1 or cost of #2.

Yeah this. We don't do a la carte LIIs so the whole discussion is foreign to me.

Peter: Thanks for your reply. While I concur with your comments, the options owner John is left with seem like a silly result. Certainly not the first time I've had to deal with a silly pension law, and I guess I just need to wash down the bad taste with a cool drink.

Thanks again.

Is the guy under 67 years old?  And as sponsor and possibly trustee can he readily view the employees' statements?  Because couldn't the guy just apply the same "current account balance to eventual annuity amount" ratio on someone's mutual fund company statement, and write himself a note as the Plan Administrator to essentially serve as his LII? 

(That would be the napkin-note evidence to provide the DOL under the investigation which couldn't possibly arise over this....)

Bri: Yes, yes, and yes to your questions. Whether the napkin-note passes muster with the DOL in anyone's guess. 

Which raises another question I'm not sure about: does anyone know what the penalty would be for not providing a LII?

45 minutes ago, BadgerDon said:

Bri: Yes, yes, and yes to your questions. Whether the napkin-note passes muster with the DOL in anyone's guess. 

Which raises another question I'm not sure about: does anyone know what the penalty would be for not providing a LII?

 

Isn’t there required language for the LII… similar to the SAR, AFN, etc.  The required language may be just as, or even more important, than the actual  annuity amount.  In which case, as Bri says, using any other participant’s LII to get the annuity factor should be good enough for this purpose.  And of course, use the required language.