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IRS as Creditor

Is the account balance of a 401(k) plan participant protected from an IRS tax levy?

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with an advisor in Alabama is representative of a common inquiry involving 401(k) plans and IRS tax levies.

Highlights of Discussion

Unfortunately, no it is not. If the participant has an unpaid tax liability the IRS has the authority to levy against his or her 401(k) plan account balance [ Reg. § 1.401(a)-13(b)(2)].  In fact, any qualified retirement plan or IRA [including traditional, Roth, savings incentive match plan for employees (SIMPLE) or simplified employee pension (SEP) plan IRAs] may be subject to an IRS tax levy.

11.6.3 of the IRS’s Internal Revenue Manual (IRM) provides instructions and strict procedures when an IRS tax levy involves assets in retirement plans (as opposed to retirement income under 5.11.6.2 of the IRM). The IRM instructs agents to levy on retirement accounts only after considering the following questions.

1) Does the taxpayer have property other than retirement assets that may be available for collection first?

2) Has the taxpayer exhibited “flagrant” conduct? (See example next.)

EXAMPLE:  Jake, who has an outstanding tax liability with the IRS, continues to make voluntary contributions to retirement accounts while asserting his inability to pay the amount he owes to the IRS.   The IRS could deem this conduct as flagrant.

3) Are the retirement plan assets  necessary to cover the tax payer’s essential living expenses?

4) Does the taxpayer have “present rights” to receive the retirement plan assets?

EXAMPLE:  Amanda has money in a 401(k) plan, but cannot withdraw it until she experiences a distribution triggering event as listed in the plan document. An IRS levy may identify her 401(k) plan balance, but the money cannot be paid over until Amanda can withdraw it under the terms of the plan.

Logistically, the IRS will use Form 668-R, Notice of Levy on Retirement Plans for levying retirement plan assets.  When money is withdrawn from a retirement account to satisfy an IRS levy the taxpayer would include any pre-tax amounts in his or her taxable income for the year. Fortunately, an exception to the 10% additional tax on early distributions for taxpayers under age 59 ½ applies if the money was withdrawn because of a notice of levy served on the retirement account.

Conclusion

In most cases, 401(k) plan assets are protected from creditors—unless the creditor is the IRS.  However, IRS agents are instructed to levy against retirement plan assets only as a last resort.  Any taxpayer addressing an IRS tax levy should seek guidance from an experienced tax professional or attorney experienced in this area.

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Lead Employer Leaves MEP

“If the lead employer in a MEP wants to leave the arrangement, does that mean the MEP is terminated?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with an advisor in Massachusetts is representative of a common inquiry involving multiple employer plans (MEPs).

Highlights of Discussion

If the Lead Employer (a.k.a., the Controlling Member or Plan Sponsor) wants to leave a MEP, that does not mean the MEP is automatically terminated. Check the terms of the governing plan document to see if there is a process for a Lead Employer or Participating Employer (i.e., any employer who participates in the MEP) to leave the arrangement.

For example, a review of one plan document revealed the Lead Employer has some options as to how to leave the MEP.

  1. The Lead Employer could terminate the MEP.  In this case, the document states: “The Lead Employer may terminate this Plan at any time by delivering to the Trustee and each Participating Employer a written notice of such termination.” If the entire MEP is terminated, all participants become 100% vested in their assets (if a vesting schedule applies).
  2. The Lead Employer could withdrawal from the MEP.  The document states: “Upon thirty (30) days written notice to the other party, either the Lead Employer or Participating Employer may voluntarily withdraw from the Plan.”

Under a withdrawal, the MEP is not terminated. The MEP could remain intact but would have to be amended to designate a new Lead Employer. If none of the Participating Employers wanted to take on the role of the Lead Employer, each could withdraw from the MEP and set up its own individual plans and transfer assets to their respective new plans.

Conclusion

A Lead Employer may have options for leaving the MEP aside from plan termination. Be sure to check the terms of the plan document to see what alternatives—such as withdrawal—may be available.

 

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Investment Advice Fiduciary, PTE 2020-02 and Enforcement Deadlines

“I read that the DOL is delaying the release of its regulations regarding the definition of investment advice fiduciary. Does that mean the enforcement of prohibited transaction exemption (PTE) 2020-02 is also delayed?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from California is representative of a common inquiry related to the Department of Labor’s (DOL’s) definition of investment advice fiduciary.

Highlights of Discussion
While it is true the DOL is delaying until the end of 2022 the release of its notice of proposed rulemaking (NPRM) with respect to the definition of the term “fiduciary” for persons who render investment advice to plans and IRAs for a fee, the enforcement deadlines for PTE 2020-02 remain the same for those following the PTE. The final enforcement deadline for the last elements of PTE 2020-02 was July 1, 2022.

For a little background, a final DOL regulation, effective July 7, 2020, officially reinstated the original 1975 Five-Part Test for determining investment advice fiduciary status. An investment advice fiduciary must follow a PTE in order to receive pay for advice given. PTE 2020-02 provided further interpretive guidance on the Five-Part Test and included a process for avoiding a prohibited transaction involving the provision of investment advice for a fee. Other PTEs also address the receipt of fees for advice.

PTE 2020-02 originally took effect February 16, 2021. Later, the DOL implemented a “nonenforcement policy” under Field Assistance Bulletin (FAB) 2018-02 until December 20, 2021, for those who diligently and in good faith complied with the “Impartial Conduct Standards.” FAB 2021-02 further extended the nonenforcement policy through January 31, 2022. The three Impartial Conduct Standards mandate that advice be given
• In the best interest of the retirement investor,
• At a reasonable price,
• Without any misleading statements.

After January 31, 2022, investment advice fiduciaries following PTE 2020-02 are required to continue to follow the Impartial Conduct Standards and
• Acknowledge in writing their fiduciary status under ERISA and the Internal Revenue Code;
• Describe in writing the services to be provided and any material conflicts of interest that may exist;
• Adopt policies and procedures prudently designed to ensure compliance with the Impartial Conduct Standards and that mitigate conflicts of interest; and
• Conduct an annual retrospective review of their compliance with the requirements and produce a written report that is certified by one of the financial institution’s senior executive officers.

The DOL delayed enforcement of PTE-2020-02’s specific requirements for rollover advice until July 1, 2022. On and after that date, if the advice involves a rollover recommendation, then advisors must
• Document the reasons that a rollover recommendation is in the best interest of the retirement investor; and
• Disclose the justification for the rollover in writing to the retirement investor.

Conclusion
PTE 2020-02 and the (anticipated) proposed rules regarding the definition of investment advice fiduciary are separate DOL pronouncements. The DOL is delaying the release of its proposed rules with respect to the definition of investment advice fiduciary until the end of 2022. However, that delay does not affect the enforcement deadlines for PTE 2020-02.

 

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