The Rosenbaum Law Firm P.C. Blog

A 401(k) plan with multiple participating employers hosts several problems. The first is recognizing any control group or affiliated service group rules that treat such a plan for compliance purposes as a single plan or a multiple employer plan.

The second biggest problem I’ve seen of late is the failure of the plan sponsor to properly execute participation agreements for the employers that are participating in the plan. I’ve had to submit plans to the Internal Revenue Service Voluntary Compliance Programs to retroactively execute participation agreements for employers that had adopted the Plan years later.

It’s just another mistake that can be costly and easily avoided.

The Internal Revenue Service issued guidance in Notice 2024-55 on applying exceptions to the 10% excise tax under Internal Revenue Code (IRC) Section 72(t) for emergency personal expense distributions and domestic abuse victim distributions.

Internal Revenue Code (IRC) Section 72(t)(1) usually imposes an additional 10% early-withdrawal tax on a distribution from a qualified retirement plan, unless the distribution qualifies for one of the exceptions listed in IRC Section 72(t)(2).

IRC Section 72(t)(2) provides several exceptions to the 10% additional tax, including exceptions for distributions such as attainment of age 59 ½, disability, and early retirement or death.

SECURE 2.0 Act amended IRC Section 72(t) by adding exceptions to the 10% additional tax.

IRC Section 72(t)(2)(I) provides a new exception to the 10% additional tax for a distribution from a qualified plan to an individual for emergency personal expenses.

Emergency personal expense distributions are subject to three limitations:

1. not more than one distribution per calendar year may be treated as an emergency personal expense distribution by any individual;

2. an individual may treat a distribution as an emergency personal expense distribution in any calendar year up to a maximum of $1,000; and

3. rules that limit taking subsequent emergency personal expense distributions.

The amendment to IRC Section 72(t)(2) applies to emergency personal expense distributions made after Dec. 31, 2023. In determining whether a participant is eligible for an emergency personal expense distribution, an administrator of an applicable retirement plan may rely on a participant’s written certification that he or she is eligible for such a distribution, just like they can do with a hardship. If a participant treats the distribution as an emergency personal expense distribution in any calendar year, no amount of any subsequent distribution can be treated as an emergency personal expense distribution during the next three calendar years unless (1) the previous emergency personal expense distribution is fully repaid, or (2) the aggregate of the individual’s elective deferrals and employee contributions to the plan after the previous emergency personal expense distribution is at least equal to the amount of the previous emergency personal expense distribution that has not been repaid.

Under Notice 2024-55, an applicable eligible retirement plan must accept the repayment of an emergency personal expense distribution from an individual if the plan permits emergency personal expense distributions.

IRC Section 72(t)(2)(K) provides a new exception to the 10% additional tax for an eligible distribution to a domestic abuse victim. A domestic abuse victim distribution is includible in gross income but is not subject to the 10% additional tax. Under IRC Section 72(t)(2)(K)(ii), an individual may receive a distribution from an applicable eligible retirement plan of up to $10,000 (indexed for inflation) without the 10% additional tax being applied if the distribution qualifies as a domestic abuse victim distribution.

A “domestic abuse victim distribution” is defined as any distribution from an applicable eligible retirement plan to a domestic abuse victim if made during the 1 year beginning on any date on which the individual is a victim of domestic abuse by a spouse or domestic partner. The IRS states that an individual may, at any time during the 3 years beginning on the day after the date on which the distribution was received, repay any portion of a domestic abuse victim distribution (up to the entire amount of the domestic abuse victim distribution) to an applicable eligible retirement plan in which the individual is a beneficiary and to which a rollover can be made.

Any distribution that an employee or participant certifies as a domestic abuse victim distribution will be treated as meeting the distribution restriction requirements.

According to Vanguard, hardship distributions are up and that’s not a good sign.

The number of hardship withdrawals per 1,000 savers soared about 40% in 20023 and has doubled since 2021.

The main reason people were raiding their retirement accounts was to avoid losing their homes.

Withdrawals totaled 72 for every 1,000 savers in 2023 or an average of six per month. Fewer than 4% of savers took a hardship withdrawal during the year.

PNC Financial Services Group Inc. won their lawsuit brought by their employees, that accused them of paying excessive recordkeeping fees for their 401(k) plan.

Federal Judge Christy Criswell Wiegand in the Western District of Pennsylvania said that expert witness, Ty Minnich, hired by employees to discuss 401(k) recordkeeping fees did not use “reliable methodology” in concluding that the plan fees were unreasonable.

In 2014, the plan’s base recordkeeping fee was $46.55 per participant, and it declined to $32 per participant by January 2022, according to the case documents.

PNC had argued that Minnich’s testimony was not reliable because his opinion was based solely on his experience without using any reproduceable or traceable process. The judge agreed.

The PNC Inventive Savings plan contains about $8.1 billion in assets and 80,335 participants, according to the most recent Form 5500 filing.

Fisher Investments announced that they will be spinning out an independent 401(k) solutions division.

Fisher Investment 401(k) Solutions will become an independent firm named Fisher Retirement Solutions to be run by CEO Nathan Fisher, son of Fisher Investments founder and CEO Ken Fisher.

The retirement group had $4.75 billion in assets under management for over 1,600 retirement plans.

Scrivener’s error is a mistake made by someone who is writing or copying something down, like a typo or a misspelling. It’s also a losing argument for most mistakes in a retirement plan document.

Intent is a nice idea. It’s a reminder of where you want to spend your attention and energy. The problem with intent is that if you had intended to exclude certain classifications of employees and the plan document didn’t do that, no time machine can make you fix that error. People who should have been excluded are included if the plan document was quiet on their ineligibility. That means you will have to make corrective contributions to employees you wanted to exclude from 401(k) participation. A retroactive amendment to exclude them, won’t pass muster with the Internal revenue Service and it certainly won’t pass muster with the Department of Labor.

Milliman beat back claims that it breached a duty by retaining in-house target risk funds in its 401(k) plan.

At issue were some Milliman-owned, proprietary allocation funds, a suite of target risk funds (the Unified Trust Wealth Preservation Strategy Target Growth Fund, Unified Trust Wealth Preservation Strategy Target Moderate Fund, and Unified Trust Wealth Preservation Strategy Target Conservative Fund. The lawsuit claimed that the funds were launched in November 2012, with no track record, and that by the end of 2013, the Millman Plan was the sole investor in the Moderate and Conservative Funds and represented about 97% of the assets of the Aggressive Fund.

The Judge concludes that Milliman employed a prudent process in deciding to keep the proprietary Funds in the Plan. The Judge said the plaintiff failed to proffer evidence that there was a breach of the fiduciary process and that using the proprietary funds was a breach of the duty of loyalty.

I think I learned in American politics that first semester in Stony Brook that if men were angels, there would be no need for government. If people did the right thing, there would be no need for government regulation.

I’m happy that the new fiduciary rule will limit the abuses that I saw when it came to rollovers to an Individual Retirement Account when a broker would push a high-fee product that wasn’t in the participant’s best interest, instead of keeping the money in the plan or a cheaper investment solution. I know the abuse because I got hoodwinked into rolling over a 401(k) account balance once to an unlisted REIT, that was then the focus of a class action lawsuit. The kicker is when the broker switched brokerage firms, tried to get my business, and then started to deride the REIT he sold me at the other firm.

When it comes to retirement savings anything connected with retirement plan assets, should require a fiduciary standard.

A federal judge in Northern California stated HP Inc. doesn’t violate the Employee Retirement Income Security Act (ERISA) by using forfeited 401(k) money to pay contributions it’s required to make to the plan, by dismissing a proposed class action.

HP had argued that “settled law expressly allows the use of forfeited amounts to reduce employer contributions,” pointing to two Treasury regulations for that view. In addition, HP cited a “new” proposed Treasury regulation that affirmed the right to use forfeitures to pay administrative expenses, to increase participant benefits, OR to reduce employer contributions.

The judge rejected the plaintiff’s theory that using forfeitures to offset contributions instead of paying administrative expenses is a breach.

The ERISA Industry Committee (ERIC) is pushing back on the Department of Labor (DOL) ask to require retirement plans to provide what it calls excessive amounts of participant information for its SECURE 2.0-mandated “Retirement Savings Lost and Found” database.

ERIC has pushed on the DOL to redraft its proposed guidance implementing the Lost and Found database. ERIC is an industry group that represents large employers. ERIC says DOL is asking for plans to provide too much information outside the scope of SECURE 2.0. In addition, ERIC claims the proposal raises significant privacy concerns and questions about efforts to coordinate with the Internal Revenue Service (IRS) to access existing information needed to build the database.

I don’t like being volunteered to do things, so I can understand why any employer doesn’t want to provide information to the DOL.