Which State’s law governs your client’s retirement plan?

If you have a moment on a summer afternoon, I’d welcome your sharing of information and experiences.

For a small-business retirement plan that is not ERISA-governed (because all participants, including eligibles, are self-employed individuals):

Do you know which State’s law governs your client’s plan?

Does your client know which State’s law governs one’s plan?

How often is the governing law not an adoption-agreement choice?

How often does a service provider cause the plan to specify a State law the service provider prefers?

Have you ever seen a situation in which the State law governing the plan matters?

Lazing on a sunny afternoon …

Does this small plan have a trust? Is the location of the trust or trustee, or choice of law provisions in the trust instrument, relevant to the applicable state law to the trust or the plan?

In a matter I advised on (now concluded):

Pennsylvania law governs the plan. (That did not result from an adoption-agreement choice.)

North Dakota law governs the trust agreement.

New York law governs the recordkeeper’s service agreement.

None of those choices of law resulted from anything about where the plan sponsor is or was organized or has or had a location.

I’m not seeking help for a particular matter.

Rather, I wonder how much small-business owners are aware of a choice of State law governing a retirement plan.

And about circumstances in which a choice of State law can matter.

Your illustrated heads-up is great, but but probably not very helpful where/when it would help most, which validates your point about general ignorance about the matters. I doubt that such plans are chosen with the benefit of consideration of the applicability or potential effect of state law. I propose that plans are chosen because of marketing or recommendation by providers (or recommendation by a provider) or colleagues, none of whom have any depth of concern for the personal needs of the sponsors or participants, and without legal advice (because who needs it? and  it is an apparently pointless expense). Also, any difference in material outcomes because of state law may be speculative at the time of adoption (what could go wrong?), and would not be much of a factor in decisions among options, if any.

Disclaimer: I have very little experience with this segment (non-ERISA small business retirement plans); I am blowing at least some smoke.

It usually comes down to the plan document and adoption agreement. If the governing state is not clearly chosen there so first check the document governing law provision rather than assume its based on the owner residence or business location.

QDROphile, your intellectual rigor and keen powers of observation more than compensate for whatever experience you (or I) might lack with that subsegment of small-business retirement plans.

While perhaps understandable, it’s sad that a plan’s choice-of-law comes from a person that is not a party to the plan, has no responsibility to administer the plan, and asserts that it provides no advice.

Peter,

First and foremost, coming right back at you with your typical advice (or suggestion, in light of your usual disclaimer), Read the Glorious Plan Document!

As far as choice of law provisions in plan documents and trust agreements, I would tend to think that those would most likelyi be controlling. I am relatively confident that the plan/trust choice of law provision would prevail over the recordkeeping agreement choice of law provision. 

My hesitation lies in the fact that some state laws are known to reach very unusual results or have twists and nuances that can turn that generalization on its head. While most states would be thrilled to honor a choice of law provision saying that their state's law applies, some might have a contrary provision to avoid forum shoppin if the employer has no nexus to that state. If the plan is adminitered, the employer is headquartered and there is a substantial busines presence in one state over the others, it is highly likely that a choice of law clause for that state would likely prevail. 

Otherwise, it may be advisable to delve into the particulars of the state law in question. I know, from my own experience, that Pennsylvania has some uniquely arcane twists that appear in nearly no other state. Some states are pioneers in adapting new concepts in their laws (primarily through legislation) while other stattes are among the last to change anything.

My bottom line suggestion is to tread very carefully through the snake-infested pit and patchwork of state law.

Agree with herman34, to determine the governing state for a specific plan, I would recommend reviewing the plan's Adoption Agreement, particularly Appendix A, to confirm whether an alternative state law election was made. The prototype document itself establishes only the default rule, which is usually the employer's principal state of domicile.

rocknrolls2, one wishes every plan sponsor had the presence of mind to RTFD, or to engage you or another adviser.

The sadnesses of a retirement plan’s sponsor not considering, and often not being usefully aware of, some of a plan’s provisions can result from an owner who signs documents with no advice and little reading. (In the matter I worked on recently, I was engaged, for one discrete point, only after the one owner/participant’s death and after it was too late to change troublesome provisions.)

ErnieG, although I don’t doubt that you’re fairly describing documents you know, not all sets of IRS-preapproved documents have an adoption-agreement or appendix item for specifying a user’s choice of a governing State law. Further, not every basic plan document sets up a governing-law provision, whether default or nonvariable, by referring to something about a plan sponsor or employer. At least one widely used set of IRS-preapproved documents sets up for a plan’s governing law “the laws of the state in which the Pre-approved Document Provider is located[.]”

States’ laws can differ on points that matter in how a retirement plan is administered, or even who gets a benefit.

Whether a court might follow, might overlook or ignore, or might countermand a document’s choice of law also might suffer differences.

And there might be difficulties about personal or property jurisdiction, and about legal or equitable remedies.

I recognize this choice-of-law point might matter only for plans that are not ERISA-governed.

I assume you are concerned with how the Plan operates, and not whether or not the Plan must adhere to the registration, tax, criminal, etc. laws of the State(s) in which it operates.  If I am correct, once you can conclude that ERISA does not preempt state law you are halfway home. 

I have never met a Plan that was not created by either Federal, state, county, city, municipal, town, International law or the law of some other governmental entity.  I am asked to prepare QDROs with respect to Plans created overseas who are required to accept a QDRO that would be acceptable if the Plan was a US Plan. . The HOA for the subdivision where I live has a 401(k) for it's employees (swimming pool,clubhouse and grass cutting) and they use a pro forma ERISA document.  Our Montgomery County, Maryland, Police and Firefighters Pension Plan is set forth in detail in the  County Code, and does not provide QJSA or QPSA to former spouses unless the cop/firefighter retired before divorce and elected survivor benefits in which event the election survives the divorce.  Public school teachers in Montgomery County participate in a State Pension Plan, a County Supplemental Pension Plan, and can opt into a ERISA 401(k), 403(b) or 457(b).  The state of Maryland has 12 pension plan and another on the way all governed by Maryland Statutes and regulations.  See  https://sra.maryland.gov/members/benefit-handbooks/

The Prince Georges County Crossing Guards and the Washington County Free Library operate under the Maryland State Retirement and Pension System and the Maryland Code of Maryland Regulations (COMAR) - https://regs.maryland.gov/us/md/exec/comar/22. 

Unions and Church sponsored facilities make up pension and retirement plans what routine demonstrate no understanding of the difference between the shared interest allocation and the separate interest allocation of pension benefits. 

And every one of those plans will say something like,"This Pension/Retirement Plan hall be read, interpreted and enforced in accordance with the "State Personnel and Pensions Article of the Annotated Code of Maryland and Title 22 of the Code of Maryland Regulations". 

The first thing we learned in law school about corporations was that they were very likely to be incorporated in Delaware for three reasons:  (i) Delaware law was very favorable to whatever it is that Corporations want to as its governing Articles of Incorporation; (ii) Delaware has accumulated a very well regarded body of Corporate law; and, (iii) low or no corporate taxes.  But that has nothing to do with the law governing the retirement and welfare plans they will adopt and sponsor under ERISA, or by "The  Doghouse" - best steak sub anywhere in I-95 between DC and NYC - under the law of the State of Delaware or New Castle County or Historic New Castle City. 

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In order to understand your issue I would need to know the issue.  I cannot imagine that any Plan can be created without being approved by IRS in order to provide the umbrella for deferred taxability. And I don't think it matter who the TPA or Recordkeeper is.   

 David