Business of Benefits

Business of Benefits

The Unusual Matter of 403(b) Ethics

Posted in 403(b)

When preparing to present a webinar for the NTSA on its Professional Code of Conduct (which is shared by ASPPA and NAPA as well), I was struck by the conundrum the “mismatching” of the 403(b) rules can cause the pension professional, as well as the lawyer, registered rep and CPA, under their ethical rules.

I have long discussed the non-sensical nature of many of the rules which now apply to 403(b) plans, while also applauding the regulatory efforts of the agencies to attempt to address them. Try as they might, however, there is a fundamental problem with attempting to regulate 403(b) arrangements as employer plans: they are functionally designed under the Tax Code as individual retirement plans, much as the manner in which IRAs are designed.  Consider just a sampling: the vast majority of these contracts and accounts are actually owned by the plan participant, and only those participants can choose their investments and direct distributions from those contracts. The RMD rules are designed in the same manner as IRAs. The 402(g) limit is a personal, not plan, limit. 415 limits are combined with those of an unrelated org, if the participant controls one of the organization’s plans in which he or she participates.  Prior to the 2007 tax regulation changes, they were completely portable retirement arrangements, providing an answer to the question of retirement plan leakage which typically occurs otherwise when employees change jobs.

This is just a sampling. Those with long experience in this area can come up with quite a list, themselves.

So it really isn’t a surprise that particularly sensitive conundrums, unique to the nature of the 403(b) space,  arise when  attempting to apply professional ethics rules to often unresolvable 403(b) issues, with occassionally the result of exposing  small, charitable organizations to all manner of liabilities.

A lesson for us all is to make sure we are well familiar with our professional codes of conducts when giving advice in this difficult arena. The simple, seemingly “right” answer for the client often is not.

If you are interested, you can purchase a replay of the webinar starting August 1st at this link.  It really isn’t pretty.

403(b) Policy Loan’s Continued Form 5500 Reporting Problem

Posted in Uncategorized
Gordian Knot

One of the more intractable issues with which ERISA 403(b) plans sponsors must deal with every year arises from the “policy loans” issued by insurance carriers under the 403(b) annuity contracts held under the plans. There is simply no good way to report these loans on the Form 5500, and the newly proposed Form 5500 changes do not address this ongoing gnat of an issue.

A policy loan is a quirky financial arrangement which has existed, literally, for generations in the 403(b) market.  They are based upon the insurance industry’s historical practice of loaning money to their policyholders. How they actually work is that the insurance company makes a loan to a 403(b) contract holder in accordance with the same loan rules which apply to any other plan loan under the Code and ERISA, and then reserves an amount under the related annuity account equal to the amount of the outstanding loan. Often, for a number of practical reasons, the reserved amount may actually exceed the amount of the loan. As the loan is paid back, the corresponding amount reserved under the contract is also released. It is considered “borrowing against the policy.”

Compare this to the “plan loan,” which is typical under a 401(k) plan and has growing popularity in the 403(b) market. The plan itself makes a loan to the participant. Technically, the borrowing participant elects to invest its assets in a “loan account”, whose sole asset is the promissory note between the participant and the plan. As the loan is repaid (and funds deposited in other investment accounts of the participant), the value of the loan account decreases.

Here’s the problem: loans are required to be reported on the Form 5500 financial statement, and are carried under the Form 5500 rules as a separate asset of the plan (under the newly proposed 5500 rules, it will be carried as a receivable instead of an investment). This works well for the “plan loan,” as it just shows up as an asset of the plan on Schedule H line 1(c)(8).   However, a policy loan is reported much differently. Even though you have taken out a loan, no cash for the loan has ever come out of the plan itself. The funds have come from the insurance company’s coffers.

The reserve amount in the annuity contract related to the policy loan still shows up as an invested asset under the contract (typically reported under line 1(c)(14)). If you actually then report the amount of the outstanding “policy loans” on line 1(c)(8), the result is a double-counting of the loan amount as an asset, and your books will be sorely out of balance.

A plan can’t just ignore the loan, as such policy loans are considered plan loans under the Code. But you can’t report them on the participant loan section of the Form 5500, either, without causing serious accounting problems.

The answer is that few accounting firms know how to deal with it, and the issue is often just ignored-that is, the policy loan is just never reported. I find that the better solution is probably to footnote the loans in the audited financial statement, for large plans, and this seems to fulfill the reporting obligations. But the auditor will need to buy into this.

For small plans, the problem is not as acute. Participant loans are reported as a “specific asset” under Part 1, 3(e), a section which does need to be included in the total assets.  IT be interesting to see, however, if policy loans are actually regularly reported here, or just ignored.

It really is a Gordian Knot which we must prove every year can’t be untied.


Auditing Distributed 403(b) (and 401(a)) Contracts

Posted in 403(b), Lifetime Income, Plan Administration

The IRS took a significant step when it specifically  recognized the termination of a 403(b) plans as being a “distributable event” in its 2007 regulations. This then permitted, for the first time,  plans to distribute the assets of any 403(b) funds otherwise subject to distribution restrictions (like the elective deferrals in an annuity contract and any contribution to a custodial account) upon plan termination. As some of you may recall, 403(b) plan terminations were never recognized as a distributable event prior to those regulatory changes.

A 403(b) plan termination (just like a 401(k) plan termination) is not complete until all of the assets in the plan are distributed, which must be generally accomplished within 12 months of the initiation of the termination. 403(b) plans, of course, have a unique problem with this rule. How do you distribute assets where the employer has no authority to distribute the assets in that 403(b) contract, either by virtue of the contract reserving to the individual participant the right to direct a distribution or where there is no surrender value in a contract (such as in an “annualized” contract)?  The answer is a pretty straightforward one: the IRS permits the terminating plan to actually “distribute” the contract itself to the participant, instead of requiring the contract to be “cashed out.” We generally refer to this as an “in-kind” distribution.*

This is all fine and dandy until (as it seems in most things 403(b)) you pay close attention to the details: how in the world do you effectuate an in-kind distribution of an annuity contract?

From a strictly legal viewpoint, this really is a pretty straight forward task: the duly authorized officer of the organization, in proper exercise of authority granted by the organization, terminates the plan and directs the in-kind distribution of those annuity contracts. The organization then provides documentation of that corporate action to the insurer, with directions to remove the organization from its records as the plan sponsor. The insurer then deals directly with the participant in the same manner as it deals with an IRA holder.  Being a distribution,  all of the ERISA and Tax Code rules related to consents,** approvals and notices need to be followed. Many of the  large 403(b) vendors now have procedures in place to administratively handle these “in-kind” distributions.

But then along comes Bob Lavenberg and Megan Stern, of BDO,  probably one of the few auditing firms in the country with a high level of 403(b) audit sophistication. Bob, in particular, has been causing me (well deserved) heartburn for years with his insightful analysis of these quirky 403(b) issues.

Bob and Megan asked me what seems to be a simple question: how do you audit a 403(b) in-kind distribution? There is no financial transaction, no cash changes hands, there is no change in investments. It really is only a nominal change in the records of the insurer. Yet, somehow, GAAP requires that the “transaction” be verified.

Well, there is no answer, yet, to this question, which means the industries (that is, auditors, insurers, and lawyers) will be pressed for finding  a standardized approach for bringing audit certainty to this process. It even becomes a bigger issue than 403(b)s: QLACs and other distributed annuity contracts are all able to be distributed as “in-kind” distributions from 401(a) plans as well, and there is no acceptable  “recordkeeping” method to audit.

Until then, auditors will be hard pressed to validly document these sorts of distributions.


*Note that the IRS has taken the position that only annuity contracts can be distributed “in-kind”, and not individually owned custodial accounts. The language of neither the statute or the regulations appear support this position but, until the IRS changes that position, there is some risk in attempting an “in-kind” distribution of a custodial account.

**Note there are special rules related to when spousal consents are required on annuity contract distributions. See Rev. Rul. 2012-03.


MEPS Aren’t What They Are Seem; Alternative More Efficient at Achieving Scale

Posted in Multiple Employer Plans, Uncategorized

The DOL caused a minor stir (minor, particularly when compared to the Fiduciary Rule reactions) when it  effectively gave the States a “pass” on the rules which otherwise prohibit unrelated employers from joining a single multiple employer plan. Interpretive Bulletin 2509.2015-02, allows States to set up these platforms without worrying about the “commonality” imposed by DOL’s rules (for a discussion on commonality take a look in the archives at my prior MEP blogs). A state sponsored MEP meets the commonality requirement because, according to the DOL, the “state has a unique representational interest in the health and welfare of its citizens that connects it to the in-state employers that choose to participate in the state MEP and their employees, such that the state should be considered to act indirectly in the interest of the participating employers.”

What drove this decision was the desire to support the States in their efforts at expanding retirement plan coverage, where such efforts have generally been encountering difficulty in a deadlocked Congress. MEP platforms  provide “scale” to small employers, giving them access to investments and expertise that small plans typically cannot get on their own. So, the wider use of MEPs should serve to increase retirement plan coverage, especially where it is mandated by a State.

Causing the stir was that the Interpretive Bulletin effectively reserves the ability to offer  these widely available MEPs to the states:  privately offered MEPs cannot avail themselves of the States’ “unique representative interest” in order to meet the commonality rule. This have given further impetus to the bi-partisan efforts in Congress change the DOL rules to permit the private market to offer these MEP platforms.

It seems, however, that the MEPs patina of “retirement plan nirvana” may really be rust in disguise, and all of these legislative efforts may not really be necessary to improve coverage-and the hoopla about State MEPs may not mean much at all. As much as I believe in the value of MEPs for related organizations, if you look closely at the details, achieving scale for unrelated employers through MEPs comes at an unnecessary price. First and foremost, they are hard to do (and I seriously wonder if any State will have the ability to properly run one, even when relying on outside vendors). The recordkeeping is difficult; employers can be surprised by the way vesting rules apply; care has to be taken in the allocation of authority;  it is tough and risky to disgorge bad acting players; and there are still a number of unresolved issues in their administration and in the manner fiduciary rules apply.  Though EPCRS grants significant relief in correcting errors, the MEP sponsor still needs to price for it having to pay for the errors of the participating members. In short, MEPS carry inherent risk for the MEP organizer and the participating employer.

A more effective alternative at providing scale than the MEP platform, and one which really is made possible by technology, is what the DOL describes in its MEP IB  as the “Prototype Approach,” versions of which are apparently being considered by several states.

The chosen platform’s ultimate goal is efficient scale to expand coverage, not blind commitment to the MEP platform itself. It is possible under the “Prototype Approach” to mimic all but one “scale” element of the MEP.  We can, and do, create a package that combines all of the MEP elements of common plan documents, service agreement, fiduciary allocation, and  investment platforms into a  standardized program for unrelated employers which provides scale like a MEP. It provides those small plans the buying power and access to expertise which are at the heart of MEPs, doing so without that platform’s inherent difficulties.  For example, each plan is still legally a single plan, where the underwriters (nor the other plans in the pool) bears the risk of disqualification; and the dealing with a difficult participating employer is straightforward.

The sole disadvantage is the filing of a 5500 for each plan,  and an audit for each of the large plans.  With a simple regulatory change to the Form 5500 rules which would permit a single joint filing not unlike a Group Insurance Arrangement, a change which is well within the authority of the DOL under  29 CFR 2520.104-23(a)(2), “Prototype Plans”  would, in all respects, be a better tool for achieving scale and expanding coverage than MEPs. And unlike MEPs for unrelated employers-which can effectively only be offered by the States after the IB (mentioned above)-the private market can offer these platforms.

Best of all, this change to enhance the Prototype platform would not require complex legislation change, or a whole new scheme of interpretive regulation which would inevitably be required bound to follow. It would alsoprovide enhanced regulatory oversight in a way that cannot be provided over MEPs.



DOL and Lifetime Income

Posted in Lifetime Income

Even with all of the interest in the Fiduciary Rule, the DOL is still paying attention to lifetime income-so much so that the Qualified Longevity Annuity Contract (the “QLAC”, established by the IRS) was granted broad relief under the Rule. This relief is so favorable that one of the claims being brought in the 5 different lawsuits against the DOL related to the Rule is that non-QLAC annuities should be getting the same treatment.

So, retirement security through DC lifetime income is still an issue that is front and center. Evan Giller and I spoke before the ERISA Advisory Council last year on steps the DOL could take to facilitate DC Lifetime Income, and we “translated” those remarks into an academic article in the  Journal of Retirement.  Click on that link to see what we think might work.  The publisher is allowing access though July 15, so read it and print it out now. It may be helpful.

403(b) and the Fiduciary Rule

Posted in 403(b), Fiduciary Issues
Vintage magnifying glass  on old letter background

As in all things 403(b), it seems, retirement rules of generally applicability take unusual twists when applied to 403(b)plans. This really all is still connected to the fact that the 403(b) lineage goes back to several generations of retirees,where they served as highly successful individual retirement arrangements. Today, we still have much to learn from the details of those pre-2007 plans (that is, prior to the fundamental changes brought in by the unnecessarily expansive 403(b) IRS regulations issued that year).

The DOL’s fiduciary rule is not saved from that same  problem. A close look reveals  interesting twists in the manner in which the rule affects  (or doesn’t at all!)  403(b) plans, which simply do not apply to other participant directed defined contribution plans. Two really are the most obvious:

Non-ERISA 403(b) plans.

Arguably, the plan participants most exposed to inappropriate product placement are those in public school plans.  Yet, these participants  are  excluded from much of the fiduciary rule’s protections, except where an adviser makes the recommendation to rollover those funds to an IRA. This is the same for state university 403(b) plans, as well as non-ERISA 403(b) plans for private tax exempt orgs-including “non-electing” church 403(b) plans (churches can elect to be covered by ERISA). Why? Because these plans  are not subject to ERISA, and 403(b) plans are excluded from Code Section 4975 (which is the prohibited transaction section under the Tax Code which makes the DOL rules apply to non-ERISA IRAs). This non-application really does have the potential to have a number of ancillary effects on those products, which constitute a significant percentage of the marketplace. I would also think it would serve as further incentive for the DOL to limit the application of the 403(b) “safe harbor” rules which are otherwise used to prevent ERISA’s application to certain 403(b) plans.

Individually controlled 403(b) contracts.

More complicated is establishing the manner in which the Fiduciary Rule and its related Best Interest Contract Exemption apply to the significant chunks of the 403(b) marketplace where the individual, not the plan, controls the plan investments, and where the participant is much more like an IRA investor.  One needs to closely detail the manner in which the terms of “ERISA Investors,”  “Retail Fiduciaries” and “Retirement Investors” apply, where the plan fiduciaries do not control the individual account investments. For example, financial service companies and advisors have relief when dealing Retirement Investors, but how does this really apply when the decision making authority is the 403(b) participant?

There are large numbers of “legacy” contracts, where there is no employer effectively involved in the 403(b) contract at all, though they are still technically part of the plan under ERISA.  Think of those contracts excluded by the plans under Rev Proc 2007-71 (and from reporting under the 5500 by the DOL). They are still technically covered by the Fiduciary Rule, and the BIC, but the employer has no relationship with the vendor (and often not even with  the participant).  Add to this the issue of distributed contracts, where the employer no longer has any involvement in the 403(b) contract, and the annuity contract is no longer being part of the ERISA plan.  Many of these type of contracts still generate compensation to those who advise on them.

One impact this is surely to have is to encourage employers to no longer permit contributions to these legacy contracts without substantial relationships with the vendor. As we work through to a better understanding, my guess there will be a number of interesting side effects on this market brought by these new rules.



Tax Code Will Permit Merger of 403(b) and 401(a) Church Plans

Posted in 403(b)
Muckross Abbey

Much has happened since we’ve last posted a blog-upon some of which we could hopefully lend some helpful comments. The press of year end business (a problem which we are delighted to have!) and spending precious family time around the holidays made it difficult to get to those things thoughtfully. We look forward to working through that “issues stack” over the next few months.

Yes, we have had the DOL issue guidance on state MEPS, and on state mandated IRAs; there has been a notable SEC No-Act on 403(b) plans; there has been continued church plan litigation; and even a few 457(b) issues. 2015 really did have a notable fourth quarter.

It is, however, an extraordinary and fundamental changes introduced to church 403(b) plans by the PATH Act is worth first noting: the Tax Code will now permit the merger of 401(a) and 403(b) plans of churches; and the “transfer” of assets between the two types of plans will be permitted.

403(b)/401(a) mergers has been an ongoing issue in the tax-exempt marketplace: consultants and advisors trying to clear up the often messy retirement plan structures of their not-for profit clients continue to be stymied by the inability to merge these two types of plans. Not only could these plans not be merged, but there is no way to do a “plan to plan transfer” between them. The only way to accomplish any sort of “transfer” was for there to be a distribution from one of the plans which could be “rolled” into the other. One preferred method is to terminate the 401(a) plan with a default “deemed” rollover election (yes, this is permitted by 1.401(a)(31), Q7) into the 403(b) plan.

The PATH Act will eventually change all of that for church Plans. “Under rules prescribed by the Secretary,” church 403(b) and 401(a) plans (of the same church) will be able to either merge or transfer assets between them, effectively using the same “merger and transfer” rules currently in place for 401(a) plans. The good news is that this rule uses the the broad definition of “church” under 414(e)(3), which includes “steeple” churches and organizations associated with or controlled by churches-which will include such organizations as hospitals and universities.  (see our church plan blog for a description of the types of churches).

Don’t go racing to merge your church plans yet, however. We will need to wait for the IRS to issue guidance before that can be done.  But the door will  be open at some point.

One of the questions that the IRS will need to answer in guidance is how the Rev Proc 2007-71 applies. That revenue procedure permitted employers to exclude from its plan certain pre-2005 contracts (and, under certain circumstance, certain pre-2009 contracts), so it will be important to see if the IRS excludes those old contracts for merger purposes. Note also that there will be some serious complications under ERISA for those “electing church plans,” which have elected to be covered by ERISA. What really makes the new rules work so well is that the typical 414(e)(3) church will not be governed by ERISA, which will make the merger/transfer much simpler.

The PATH Act also introduced a few more changes to church 403(b) plans. It preempted state payroll laws which may otherwise prevent a church from auto-enrolling participants in a 403(b) plans (the existing auto-enroll rules did not cover church 403(b) plans); there is a controlled group/aggregation rule clarification; collective trust guidance; and grandfathered 403(b) DB guidance. Click here for a copy of  the  PATH Act Church Rules .

On a personal note, Conni took the picture above, of the 600 year old Muckross Abbey in Killarney National Park in Ireland. We were surprised when we happened upon some very old gravestones there of part of my Irish half’s family (I’m also half Hungarian).

MEP and the Common Paymaster: A Siren’s Call

Posted in Multiple Employer Plans
Siren's Call

There’s a continual siren’s call in the marketplace, enticing many to believe that the DOL’s seminal MEP Advisory Opinion, 2012-04 has limited applicability to arrangements like a PEO sponsored MEP. Like the siren’s call, such statements by these promoters are alluring, but potentially dangerous.

In that Advisory Opinion, the DOL made it clear that the Opinion would apply to MEPs the limited definition of what constitutes an “employer” that the DOL had historically applied to MEWAs (which are “multiple employer welfare arrangements,” which had been the source of long standing abuses).  2012-04 stands for the proposition that employers participating in a MEP must have a both a common employment bond between them, and that those employers must directly or indirectly control the MEP. There seem to be a number of arrangements which will have that bond, such as industry associations that were not formed for benefits purposes; franchise arrangements; commonly owned companies that don’t quite constitute a controlled group; and industry focused employment arrangements in a limited geographical area.

But the siren’s song’s lyrics are that the AO left open the question of whether or not a MEP is available under a PEO without these sorts of bonds, even claiming that making a PEO’s MEP available on an a la carte basis (the so-called “ASO” business) is permissible. The most recent version of that “song” which demonstrates the lengths to which parts of the market will go involves common paymaster services.  Employers, the siren says, that each hire the same company to serve as its payroll agent each then form a DOL-compliant common employment bond with the others of that payroll agent’s customers.

This is a pretty absurd argument. It would be similar to an attorney claiming that clients which each appoint the lawyer as agent to deal with the IRS on retirement plan matters  under a Power of Attorney have a common employment bond.

MEPs are very valuable tools for the right circumstances, and there can be some PEOs which do fit within the DOL’s guidelines.  There remains a possibility for legislative relief as well. Even better, though, is that there are non-MEP aggregation arrangements which can be a valuable alternative to MEPs.  It is risky behavior, however, to attempt to manufacture an employment bond that doesn’t really exist-especially when there are viable alternatives.

I will be speaking at ASPPA’s Annual Meeting next week at the Gaylord in National Harbor.  Adam Pozek and I will doing a presentation on Taking Over a MEP on Tuesday at 4:15; I will be manning the Speaker’s Corner at 6:15 on Sunday; and facilitating a PEO session at 10 on Tuesday and a “when you should offer a MEP” at 2:30 on Tuesday. Come by and say hi!


Website Privacy Policies and the Federal Trade Commission’s Authority over Retirement Plans

Posted in Cybersecurity, Fiduciary Issues, General Comment, Plan Administration

As if there aren’t all ready far too many acronyms in our business with which to deal, a recent third circuit court case on website privacy policies and cyber security tells us we may yet have another.

Remembering that ERISA does NOT preempt the application of other federal law (like the SEC, Anti-Money Laundering, and the Patriot Act rules-just to name a few), which we continue to learn to integrate into our practices, we now may find ourselves needing to deal with the Federal Trade Commissions standards as well.

The issue arises from something as innocuous as the website privacy policies which are so commonplace on retirement plan vendor websites (you know, those things know one ever reads or pays attention to). Well, it appears to matter to the Federal Tead Commission.

Cybersecurity and data privacy issues are a growing concern for retirement plans and their vendors. There has been much written about these issues recently, and we have always felt that there really is an ERISA  fiduciary standard that applies to the handling of a plan’s data.

Well, it looks like the federal courts now will recognize the FTC’s authority to govern such matters as well.  Here’s how it works:

  • The Federal Trade Commission Act prohibits “unfair or deceptive acts or practices in or affecting commerce,” under 15 U.S. Code § 45.
  • An unfair trade practice is one which “causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits to consumers or to competition.”
  • The FTC has taken the position that cybersecurity practices fall within its jurisdiction under this clause.

This all came to head in the case of FTC-v.-Wyndham-Worldwide, where the FTC brought suit against Wyndham for its misleading data privacy policy, and its faled data privacy practices. These failed practices lead to serious data breaches. In the court’s ruling , they found that Wyndham “unreasonably and unnecessarily” exposed consumer’s electronic data to unauthorized data and theft, while misrepresenting their security practices in its privacy policy.

There is quite a “list of horribles” in which Wyndham engaged, including its failing to

  • adopt “adequate information security policies and procedures;”
  • use “readily available security measures”—such as firewalls—to limit access between Wyndham’s other corporate networks; and
  • employ “reasonable measures to detect and prevent unauthorized access” to its computer network.

What should we take from all of this, on the retirement plan side? Consider knowing what’s in your privacy policy;  do what you say you are doing in the policy; and consider adopting reasonable cybersecurity practices.


Employee Asset Protection and State Auto-IRA Programs

Posted in Auto-IRA, Complex Prohibited Transactions

State based auto-IRA programs continue to pick up steam, and may soon become prominent features of the retirement security landscape. Granted, there are a number of legal and logistical issues which need to be resolved before they can be fully implemented, but things are moving quickly.

So it is timely to discuss participant protections under these programs. A successful program must necessarily incorporate ways to protect employee deposits. The holding of employee deposits are not much of a concern, as employee deposits will be held in IRAs protected by highly regulated, commercial custody companies-as in any IRA program.  The real challenge will be the protection of employees’ payroll based deposits in getting to the IRA.  Any payroll based deposit program is subject to the vagaries of an employer’s cash flow, and this will be a particularly acute problem in the small employer marketplace (which just happens to be the target market of the state auto-IRA efforts).

States, however, resist the application of ERISA (and its attendant protections) to their auto-IRA arrangements. It is generally believed in the States that the burdens imposed by full fledged ERISA regulation would make auto-IRA virtually impossible to implement, and would be their death knell.  The DOL has pledged its support in finding a workable solution to this problem, and it has a proposed reg pending at OMB.

Does this mean that auto-IRA participants then would be left unprotected if ERISA doesn’t apply? Actually, I think not. There is a variety of state law criminal and civil causes of actions which can be taken against bad acting employers who don’t make timely deposit of auto-IRA. But, almost surprisingly, there is the possibility that the DOL and the IRS still may have jurisdiction over these deposits under (of all things) the Tax Code’s prohibited transaction rules-even if ERISA does not apply.

This is how it may work:  IRAs are subject to the prohibited transaction rules under Code Section 4975.  This shouldn’t concern an employer who timely deposits auto-IRA contributions to the custodian. At some point, however, it may be possible that an employer who delays making the IRA deposit might be will be actually be deemed to be holding an IRA asset- under the same rules that an employer holding onto 401(k) deposits for too long will be deemed to be impermissably holding onto plan assets. Why? because the DOL has jurisdiction over the prohibited transaction rules (even those under Tax Code Section 4975), and there really doesn’t appear to be any basis for a  legal distinction under its rules between holding on to 401(k) deposits for too long and holding on to IRA deposits for too long.

If the the employer is still holding on to IRA payroll deduction at the time it becomes an IRA asset,  the employer then would become become a custodian of the IRA asset.  This, in turn, makes the employer a “disqualified person” under 4975, and makes it liable for the prohibited transaction taxes for using those late deposits for its own purposes.

Yes, this is strange territory, and there will be those who will reasonably disagree with whether or not the PT rules should apply in this manner. But it is also a reasonable position, and one which lends an important element of ERISA-like protection without some of the unnecessary burdens.