I was professionally raised in an era where retirement plan law was considered very much as a sub-specialty; and a backwater one at that. Even in law school, the tax professors did not teach the retirement tax sections, saying that it was so specialized that it would be of little use or interest to the tax law student. Even my eventual ERISA mentor, the late Roger Siske (of Sonneschein, now Denton’s),  used to joke that that the “deal” lawyers in his firm would only bring him out of the closet minutes before the closing of a corporate deal-often ending up with late-minute (and disruptive) surprises.

A lot has changed since then. When President Ford signed ERISA into law on Labor Day, September 2, 1974,*  he noted that “From 1960 to 1970, private pension coverage increased from 21.2 million employees to approximately 30 million workers. During this same period, assets of these private plans increased from $52 billion to $138 billion. And they are now increasing at a rate of $12-15 billion a year. It will not be long before such assets become the largest source of capital in our economy.”

President Ford’s statement was prescient. That $138 billion number? Well, the Investment Company Institute, the main mutual fund trade group in Washington DC, issued last month its retirement report for the 2020 fourth quarter with $22.7 trillion attributable to retirement plan assets alone, which is virtually the same size of the the market capitalization of the companies traded on the New York Stock Exchange as of years’ end 2020,  reported to have been $24.49 trillion.  Adding in the 12.2 trillion held in IRAs, these assets constitute over 2/3 of the reported value  of all publicly traded securities in the US., at  $50.9 trillion.

What does this mean? Well, it means that when the DOL or the IRS sneezes, so to speak, the capital markets have no choice but to listen. If you are wondering why the DOL’s rules regarding Economic, Social and Governance Investing (ESG) garnered a lot of attention, or why its proxy voting rules actually generated excitement, it is because of the practical influence those rules have on the operation of the U.S. capital markets. If you ever wondered why the prohibited transaction rules need to be taken seriously (other than the obvious, legal reasons), its that this massive sort of capital generates massive sorts of investment and distribution income-the payment and receipt of substantial portions of which will be governed by these rules. With this, of course, comes an ever increasing bar of attorneys and consultants needed to address these growing complexities. What a change a few decades will make; I would guess that law students hear little about retirement law being a sub-specialty any longer….

This influence seems to be  rarely discussed and, in practice, it seems to operate as in a sort of shadow-like way over  the larger economic world which we can  so easily otherwise dismiss or ignore when we  are focusing on our own “little,” discrete  techie issues.  But the influence is there, and has the hallmarks of being substantial.


*My thanks to Wayne McClain for sharing this photo, which he found on his way to looking up other things……

Mike Webb,  (formerly of Cammack Retirement, now being part of Captrust) who has been one of the true 403(b) thought leaders in the country for a number of years, runs a podcast series called called “Revamping Retirment.”  Mike wanted to have a conversation with me about annuities. We do talk about 403(b)’s in the video, of course, but also of many other annuities issues, like  the reluctance of sponsors to take up lifetime income, the value of annuities as well as their problems as they are currently being sold in the market. This resulted  in a refreshing  21 minutes or so of great conversation-watch out J.D. Carlson and his gang at Retireholics! Watch and listen to the Annuity Conversation here.

I hope you enjoy, but I do warn you: in the video, I’m in my full COVID-Beard #2….


The minute differences between 403(b) plans and 401(k) plans are often inconvenient, at best, and sometimes they produce serious conundrums in plan administration which can be difficult to resolve.

Prominent among these is the issue of “small amount” cash-outs from 403(b) plans. The ability to cash out small amounts for terminated participants is especially important for a number of “small plan” filers, who are on the cusp of having to comply with the large plan audit rules because of long lost terminated employees with individual contracts who are still counted int the plan’s census-even after eliminating those you can under Rev. Proc. 2007-71.

Consider this. Reg 1.403(b)-7(b)(5) provides that “In accordance with section 403(b)(10), a section 403(b) plan is required to comply with section 401(a)(31) (including automatic rollover for certain mandatory distributions) in the same manner as a qualified plan.”   So, 403(b) plans regularly adopt the mandatory cash out provisions, under which terminated participants are cashed out of their benefits of $1,000 or less, and amounts of less than $5,000 are directly rolled over to an IRA. Simple enough, one would think.

However, there is a significant technical issue: what do you do when  these “small amounts” are held either in individual contracts where the employer has no control, or in certificates under group annuity contracts where the terms of the contract which require participant consent to any distribution.  This has the potential to create a “form and operation” problem if the document simply requires a force-out (using, for example, the IRS’s 403(b) LRM language), but the investment contract does not permit  the plan administrator to either cash out or rollover out those amounts? It also raises the question on how do you reduce your terminated participant accounts to avoid an audit?

  • You could try to distribute the annuity contract (or now the custodial account). That would satisfy the $1,000 rule, but would fail the rule governing amounts between $1,000 and $5,000, which requires a rollover. This is because the distribution of an annuity contract or a custodial account is not a rollover.
  • You could, instead, draft language (as many have done) which apply the mandatory cash out rule only in instances where the underlying investment vehicle permits the sponsor to liquidate the assets. This seems to address the “no employer discretion” rule the IRS applies in applying the force-out rule, but this does not address the small filer problem.

This really means is that you need look to an entirely different method other than 401(a)(31)(B) to manage these small amounts, to the extent that there is no employer ability to force a cash distribution from a contract.

The analysis is an interesting one.  You start with the basic premise: under ERISA, forcing the small distribution from a plan before retirement age is generally not permitted without a statutory exception. ERISA Section 203(e) covers this. It specifically permits the mandatory distribution of an accrued benefit of less than $5,000. ERISA, however,  does not require the distribution to be in cash, nor  that it  be accomplished through a rollover, nor does it require uniform treatment for all participants or prohibit employer discretion.  This means that it is permissible to force an in-kind distribution of a “small” annuity contract from the plan under ERISA.

For Code purposes,  given that annuity distributions  (or selective distribution) will fail 401(a)(31)(B), is there anything else in the Code that would prevent you from taking these steps when you actually are creating your own, uniquely designed  distribution rule to which 401(a)(31(B) does not apply?  It appears that you can do this because of one of the those basic differences between 401(a) and 403(b):   411(a)(11)(A) (which is the Code’s “anti-alienation” rule) prohibits a forced distribution except, in pertinent part,  as provided under 401(a)(31)). However, 411 does not apply to 403(b) plans. There is no “anti-alienation” rule under the Code which applies to 403(b) plans.   The closest thing to “anti-alienation” in the Code which applies to 403(b) plans is 403(b)(1)(C), which only requires that “the employees rights under the contract are nonforfeitable.”  By distributing an annuity contract, or selectively distributing amounts from contracts where the employer has a right to liquidate, a plan meets the 403(b) rule.

Therefore, making a distribution of a small annuity contract (or selectively liquidating) seems to be a viable  solution to this problem.

There are a few details to make this all work, of course, (for example, there could be  plan document issues); and I’m not sure the IRS has ever considered this issue. There is always the possibility that the IRS could take a more limited view of things.  But I’m not sure there’s another solution to this issue, short of guidance on how the cash out rule applies in these circumstances.


The title I’ve used for this blog is a bit unusual, because the term “plan aggregation” is not yet commonly used within the retirement industry. But this is the underlying common element between Multiple Employer Plans, Pooled Employer Plans, “Groups of Plans” and other industry efforts at providing scale of sorts to the small, plan market. If you think about it, this should also refer to the ever growing Collective Investment Trust (CIT, which, btw would include ETFs-which are funded using CITs) market, which generally has the effect using scale to drive down prices for the smaller plan.

None of the MEPS, PEPS, GoPs or CITs are silver bullets in and of themselves; but instead they are all tools to an end with substantially different features. But they all do commonly use the aggregated power of a collection of plans of unrelated employers to provide (each in different measure) advantageous investment pricing and selection; professional fiduciary services; and reduced compliance costs to a sorely underserved market.

Benefit professionals have been trying  to familiarize themselves with each of these arrangements, but this is not particularly a simple task. This is reflective of the fact that successful operation of MEPS, PEPs and GoPs  are  heavily dependent on technology which is not easy to either build or maintain. They actually require a high level of sophistication and a substantial investment in technology to effectively accomplish their tasks.  This “meptech” is at the heart of it all,  used for the unique sort of data collection, manipulation, consolidation and control which is fundamental to success with these platforms. This means, for example, the decision to serve a  Pooled Plan Provider should not be undertaken lightly, as I’m afraid that some new PPPs are doing. Even the legal structures necessary for the running of any of these arrangements are unfamiliar to most.

So, with that introduction, there a couple of  “meptech” developments worth noting. I am hopeful to occasionally post developments here from time to time as they arise.

  • Finding Pool Plan Providers. The DOL began making the Pooled Plan Provider applications available to the general public, with little fanfare, in its Form 5500 finder. There is a drop-down box called “Search Type” at top of the Form 5500 filing search site which allows you to select “Registration for Pooled Plan Provider.” To find all of the Pooled Plan Providers, go to the bottom of the page and type in the range under “Filing Received Date” November 25, 2020 (the date the first PPP registration was filed)  and Today’s date. You can download each P3’s registration statement there.
  • Section 202 “Group of Plan’s” to the forefront.  The Secure Act amended the Form 5500 rules under Code Sections 6058 and ERISA Section 104 to permit unrelated employers to file an “aggregated” Form 5500 beginning with the 2022 plan year, and required publication of regulatory guidance by January 1, 2022. The GoP  had not received a lot of press in the hoopla leading up to the creation of PEPs, but the requirements that regs be developed (and the January 1, 2022 plan year 5500 effective date) has brought it to the forefront. Conceptually, the GoP is much like the MEP and the PEP, requiring much of the same sort of “meptech” data aggregation technology, but without the difficulties of merging and spinning off of plans under MEPs and PEPs. What this means is that Plans will eventually have 3 valuable alternatives from which choose, should they be considering joining an aggregation arrangement.

Take a few minutes to read  closely the definition of a GoP at SECURE Section 202:

PLANS DESCRIBED.—A group of plans is described in this subsection if all plans in the group— (1) are individual account plans or defined contribution plans (as defined in section 3(34) of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1002(34)) or in section 414(i) of the Internal Revenue Code of 1986); (2) have— (A) the same trustee (as described in section 403(a) of such Act (29 U.S.C. 1103(a))); (B) the same one or more named fiduciaries (as described in section 402(a) of such Act (29 U.S.C. 1102(a))); (C) the same administrator (as defined in section 3(16)(A) of such Act (29 U.S.C. 1002(16)(A))) and plan administrator (as defined in section 414(g) of the Internal Revenue Code of 1986); and H. R. 1865—630 (D) plan years beginning on the same date; and (3) provide the same investments or investment options to participants and beneficiaries. A plan not subject to title I of the Employee Retirement Income Security Act of 1974 shall be treated as meeting the requirements of paragraph (2) as part of a group of plans if the same person that performs each of the functions described in such paragraph, as applicable, for all other plans in such group performs each of such functions for such plan.

A few interesting notes on GoPs.  403(b) plans can be in a GoP, where they cannot be in a PEP; that ERISA and non-ERISA plans can be in the same GoP; the “one bad apple rule” isn’t an issue with a GoP; and that none of the MEP “commonality and control” rules apply to the GoP.

The federal government’s response to widespread personal tragedy has nearly always involved adjusting the rules to retirement plans. So many of these rule changes come at benefit professionals with great speed and little guidance, yet we need to make them work. This is because the work we do is critically important to people’s lives, though we rarely see it because of the focus on making the damnable rule changes somehow fit into our already overburdened processes and systems.  This impact also shows up when the tragedy is personal and not just societal.  So I invite you to reflect,  during this holiday season of celebration, on the actual, real, individual impact  of what we do. Beyond the administrators, the lawyers, the actuaries, the accountants, the publishers, and the consultants is buried very real meaning.

I first posted this story in 2009, labelling it “ERISA and Mom.” Many of you may recognize it. Its lessons are enduring, and worthwhile an occasional remembrance. Hopefully, it may help remind us of things we often let pass, and give us some measure of perspective around what we do and for what we have to be thankful.

On the rare morning when the breeze would blow in from the east, from the river, the orange dust from the prior night’s firings of the open hearth furnaces at Great Lakes Steel would settle onto the cars parked in the street. My Mom’s father worked there; my Dad’s father was a furnace brick mason at Detroit Edison; my father a tool and die maker at Ford’s Rouge Plant, not far down the road. Yes, I am a native Detroiter-and from Downriver, no less.

ERISA wonks such as ourselves tend to get lost in the press of details which seem to flow non-stop from our regulators and legislators in D.C. It is this background that reminds me that it is sometimes helpful to step back and see the personal impact of the things we do, even on the plant floor.

A few years back, a good friend of mine who ran the retirement plan operations of a large insurance company asked me to speak about ERISA to a meeting of his administrative processing staff. At the time they were still struggling with some of the more difficult administrative processes related to the QJSA and QPSA rules. Here’s what I told them:

My father died at the Rouge Plant in 1970, after 20 years with the company. Back then, the normal form of benefit under a defined benefit plan was a single life annuity, covering the life of only the employee. There was no such thing yet as a qualified joint and survivor annuity or a qualified pre-retirement survivor’s annuity. This meant that my father’s pension died with him. My mother was the typical stay-at-home mother of the period who was depending on that pension benefit for the future but was left with nothing. With my father’s wages topping at $13,000 annually and five kids at home, there was also little chance to accumulate savings.

The Retirement Equity Act of 1984 (a copy of which I still keep in my office) was designed to change all of that. By implementing the requirement of a spousal survivor annuity, a whole class of non-working spouses received protection which was desperately needed. So in that speech to my friend’s administrative staff, I asked them to take a broader view-if just for a moment- of the important task they were being asked to implement. It was valuable social policy with real, human effect which they were responsible for pulling off, and they should take a measure of pride in the work they were doing.

My point is that there are very important, and very personal, consequences often hidden in the day to day “grunge” of administering what often seems to be nonsensical rules.

It is in this spirit which we do give thanks for our blessings, including the opportunity to be in a profession where the law really does matter to people’s lives and can make a difference.


I like to tell people that there is a backstory to the 2012 Advisory Opinion MEP letter request of ours which was roundly rejected by the DOL, at a time when the whole idea of unrelated employers partaking in a single plan was widely met with skepticism. I guess I need to be careful, though, in its telling, being reminded by the last verse of Robert Frost’s “Road Not Taken” of the embellishment of the stories we tell of our choices “ages hence”…..

“I shall be telling this with a sigh
Somewhere ages and ages hence:
Two roads diverged in a wood, and I—
I took the one less traveled by,
And that has made all the difference.”

Nonetheless, it’s still pretty amazing what has happened since, as there appears now to be an entire industry growing around the notion of these sorts of plans. Pooled Employer Plans become a real thing as of the first of the year, though there is still one heckuva paucity of guidance related to them. Many of you may now be pressed as to the question of whether or not you or your clients should choose this road.   I had published a version of the following back in January, but it seems timely to provide it again (in slightly different form), as a hopefully useful tool when you try to weed through your own assessment of these arrangements. It is a Glossary we had put together, which is more topical now as ever.  Keep this as a (hopefully) handy guide when you find yourself caught in the middle of a conversation about “PooledEmployer Plans” and need to quickly summarize the different MEP types:

1.  MEP: This is your plain vanilla, traditional “Multiple Employer Plan.” Yes, they will still exist after all is said and done, and if you have a MEP that meets all of the pre-SECURE Act rules regarding “commonality and control” (including the regs which also describe PEO MEPs (see # 6) and Association MEPs (see #5)), you don’t need to do anything-EXCEPT that the (i) plan terms must provide for a simplified “One Bad Apple” (or unified plan rule, see #8) and (ii) there are new Form 5500 reporting requirements.

2.  PEP:  A PEP is a “Pooled Employer Plan.” Simply put, it’s a still MEP, (I guess you should call it a PEP MEP), but one that doesn’t fulfill the “commonality” requirement under #1.  Instead, the PEP will qualify as a MEP as long as it has something called a “Pooled Plan Provider” (a PPP, see #3). Yes, the MEP that’s a PEP will also (i) have to have a simplified “One Bad Apple” (or unified plan rule, see #8) rule in its terms, and (ii) have special Form 5500 reporting requirements. The PPP (see #3) is not actually a sponsor or a lead employer (there really is none) and each participating employer is a “co-sponsor.”

PS: IRAs can be in PEP MEP, too.

3.  PPP: A PPP is the “Pooled Plan Provider” that has to be hired by the PEP in order to qualify as a MEP. A PPP is a “person” (it really can be anybody: TPA, and insurance company, a mutual fund management firm, a broker, or even just an individual!) that is

  • “a” named fiduciary (which simply means it is named as a fiduciary in the plan documents) which accepts full responsibility, in writing, for the plan meeting the terms of ERISA and the Code;
  • registers with the DOL as such, before becoming a PPP;
  • the participating employer agrees to provide to the PPP the info needed to properly operate the plan; and
  • the PPP makes sure all parties handling plan assets are bonded.

The PPP is actually just a “super” service provider to the Plan, which is jointly hired by all of the participating employers (and the logistics of that is a hoot!), who has to file a registration from with the DOL. The PPP and the articulating employers are each a sort of “responsive plan fidcuiary as that term is used by 408(b)(2). A traditional MEP (see #1), by the way, doesn’t qualify as a PEP. And until the DOL and IRS issue guidance on how you do a PEP, you can operate under a good faith basis after the effective date.

4.  Group of Plans: Now this one s gets very little press, but it is may well eventually be a “bigger deal” than PEPs. A Group of Plans is neither a MEP nor a PEP MEP.  It’s just a bunch of unrelated employers who can file a “combined” Form 5500 if they have the same:

  • Trustee,
  • Plan administrator,
  • Plan year, and
  • Investments or investment options.

The idea of a GOP is that if you don’t meet the MEP rules under #1, and you have no interest in joining a PEP under #2 by using a program put together by a PPP under #3, you can still get economies of scale by entering into common contractual/ fiduciary arrangements with unrelated employers- by filing a single 5500 in the same way a MEP or PEP MEP can. This option does not become available, however, until after 12/31/2021. The question is whether or not you delay jining a PEP in order to join a Group of Plans-which can be lot less hassle than a PEP or MEP.

5. ARP: This is an acronym for the “Association Retirement Plan.” This term was coined by the DOL’s 2019 regulation on MEPs. All it does is refer to the traditional MEPs (see #1), under which the DOL somewhat expanded the definition of what constitutes an “association” (and therefore still  has a “commonality”requirement, though in slightly expanded form). The ARP survived  r the SECURE Act.

6. PEO MEP:  The “bona fide Professional Employer Organization” was permitted by the 2019 DOL MEP reg to sponsor a traditional MEP (see #1) as long as it meets certain, specialized criteria. The PEO mEP also survived the SECURE Act.  A PEO which questions whether they actually meet that specialized criteria may want to consider operating as a PEP MEP instead.

7. Corporate MEP:  This is another new MEP term coined by the DOL in its 2019 reg, and which still exists after the SECURE Act. It simply refers to those plans which had once covered all the members of a controlled group, and the controlled group became “uncontrolled”(my term!) by a change in ownership;  or refers  to those closely associated groups (such as affiliated service groups) which are covered by the same plan.  The DOL recognizes that these may or may not meet the ARP rules (see #5), and typically not the PEO MEP rules (see #6), but something needs to be done about them. They have asked for comments on what to do with them.  A PEP (see #2) may actually be much better suited for these circumstances than by going the “Corporate MEP” road.

8.  Unified Plan Rule, or “One Bad Apple Rule”:This also has no acronym, but is worth putting in this glossary. The IRS put out extensive rules which would relieve MEP participating employers of the fear of on bad acting employer from “disqualifying” the plan for all the other participating employers. The IRS coined the term “unified plan rule,” I assume because “One Bad Apple” sounds too goofy to be in a reg. In any event, it was a complex set of rules which were proposed by the IRS. SECURE completely gutted that proposal, simply saying that to qualify for this relief, the plan must merely provide for a process to disgorge the “bad apple” from the plan. Both a MEP and a PEP can take advantage of this rule.

9.  Open MEPs®. Prior to the Secure Act, this term referred to at least two different things: either a MEP of unrelated employers, or a MEP that was treated as a single plan under the Tax Code, but also as multiple plans under ERISA. Yes, they are still around, but shouldn’t be-they simply don’t work. Because a plan of unrelated employers will now work as a “PEP,” , I would expect the term PEP to supplant it’s use.


The DOL’s new ESG rules may have a curious impact on some church related organizations which utilize faith based standards in their retirement plan investments. Their ability to continue do may now turn on the manner in which they handle their status as a “church plan.” It arises because the ESG rules will NOT apply to “non-electing” church plans, as ERISA does not apply to churches unless they affirmatively choose it to do so.

First some background.

Defining “Church” under the Code and ERISA has always been (dare I say) a bit “mystifying.” Yes, we all are comfortable with the church plan status of a place of worship which adopts a plan for its “ministers” and employees. But making this determination for those organizations which express some religious bond with those places of worship can be akin to trying to count the number of angels which dance on the head of the pin.

Neither the Code or ERISA well define a “church.” The IRS has made a game try at it, informally (though not through regulation, God Forbid!), in its Publication 1828.

Here’s characteristics the IRS says that “churches” commonly have:

• distinct legal existence;
• recognized creed and form of worship;
• definite and distinct ecclesiastical government;
• formal code of doctrine and discipline;
• distinct religious history;
• membership not associated with any other church or denomination;
• organization of ordained ministers;
• ordained ministers selected after completing prescribed courses of study;
• literature of its own;
• established places of worship;
• regular congregations;
• regular religious services;
• Sunday schools for the religious instruction of the young; and
• schools for the preparation of its ministers.

The IRS uses all the facts and circumstances, including the above, in making a “church” determination.  The IRS disclaims any attempt to evaluate the content of whatever doctrine a particular organization claims is religious, “provided the particular beliefs of the organization are truly and sincerely held by those professing them and the practices and rites associated with the organization’s belief or creed are not illegal or contrary to clearly defined public policy.”

Then the Code complicates things by identifying churches further by applying “church” status to  certain organizations associated with “churches,” identifying “Qualified Church Controlled Organization” (which we loving refer to as QCCOs), and even what is a “Non-Qualified Church Controlled Organization “(or Non-QCCO), stating that in order to be related to a church the organization needs to share common religious ground with a church.

ERISA doesn’t ever define really directly church either. It is only in its definition of church plans, where it circularly defines a church as an organization which is a church or an organization which is “controlled by or associated with a church”, which it then defines “associated with” as having a common religious bond with a church. It then defers the IRS’s definitions in its Advisory Opinions.

The recent spate of litigation over church plans (about  whether the plans and sponsors were subject to ERISA’s participant protection rules and minimum funding rules) even takes the complications to another level.  Eventually, even  the Supreme Court punted, narrowly deciding the matter on whether or not a no-church organization could adopt a church plan covering ministers and church employees (the case being Stapleton v. Advocate Health care). We have had a more recent court of Appeals case finally taking up the issue, however, in Medina v Catholic Health care initiatives, but even that is provides narrow guidance.

So it is no surprise that some religiously affiliated  organizations approach this issue gingerly, often simply electing  not to deal with this issue at all. We have found over the years that some of these organizations choose to treat their plans as ERISA plans without resolving whether not they really are, often even going as far as filing the Form 5500.  It is worthy to note that simply filing a 5500 does NOT trigger  ERISA status, because Reg 1.410(d)-1 requires a very specific statement be filed in order to do so.

The publication of the ESG rules may well  force the “church status” issue front and center once again for some organizations. Where the prior “church plan” disputes which have been litigated have been focused on defined benefit plan funding and did not seem to bother DC plans, the new ESG rules are squarely pointed at DC plans. A number of  organizations affiliated with churches make socially related investments for their retirement plans as a matter of course. Though the final ESG rule does provide some key relief for such organizations, the rule now focuses the attention of these orgs on their status of “church plans” under ERISA. They may have been willing to bite the bullet in the past and, for example,  file Form 5500s just because it was easier than directly dealing with the issue. But the ESG rule strikes at the heart of their mission, and they may not wish to change the way they invest. Some orgs may need to reconsider whether to now face this issue. Such organizations do have the chance to now reverse their earlier choices and claim church plan status if it now serves their needs.

We spend a lot of our time focusing on ERISA’s “Prohibited Transaction” rules, which extensively cover the manner in which compensation is paid under retirement plans, and how it is disclosed. Lurking darkly in the background behind all of our  discussions of fee disclosure and how the prohibited transaction rules apply under 408(b)(2), however, is something most of us in the benefits world typically pay little attention to: the U.S. Criminal Code.

We all have a general knowledge that kickbacks and racketeering schemes of any sort are illegal.  But many do not realize that there is a specific “anti-kickback” rule applying to ERISA plans that is NOT found in ERISA, but instead under criminal law.  I invite you to read the following-  and perhaps **gasp** at its breadth. I try to avoid citing the entire section of any statute, but the language of this one is so striking (and so unfamiliar to most of us, and not referenced in most benefits books), I thought it would provide useful reading. This section, by the way, only applies to ERISA plans:

18 USC §1954. Offer, acceptance, or solicitation to influence operations of employee benefit plan

Whoever being—

(1) an administrator, officer, trustee, custodian, counsel, agent, or employee of any employee welfare benefit plan or employee pension benefit plan; or

(2) an officer, counsel, agent, or employee of an employer or an employer any of whose employees are covered by such plan; or

(3) an officer, counsel, agent, or employee of an employee organization any of whose members are covered by such plan; or

(4) a person who, or an officer, counsel, agent, or employee of an organization which provides benefit plan services to such plan

receives or agrees to receive or solicits any fee, kickback, commission, gift, loan, money, or thing of value because of or with intent to be influenced with respect to, any of the actions, decisions, or other duties relating to any question or matter concerning such plan or any person who directly or indirectly gives or offers, or promises to give or offer, any fee, kickback, commission, gift, loan, money, or thing of value prohibited by this section, shall be fined under this title or imprisoned not more than three years, or both:

Provided, That this section shall not prohibit the payment to or acceptance by any person of bona fide salary, compensation, or other payments made for goods or facilities actually furnished or for services actually performed in the regular course of his duties as such person, administrator, officer, trustee, custodian, counsel, agent, or employee of such plan, employer, employee organization, or organization providing benefit plan services to such plan. 

The language of the statute is broad, and looks at first glance to be able to cover a number of poorly designed compensation schemes or service arrangements. We all know that doing something as foolish as buying a plan sponsor a car in order to keep its 401(k) business would clearly step over the line. But there are some other, maybe more familiar, arrangements which could raise some issues.

Take, for example, a sales rep which has no service agreement with a plan and who is compensated solely by commissions as permitted under PTE 84-24, and the rep otherwise has no service agreement with the plan sponsor. Let us say this rep gets word that a 401(k) client is considering moving its business to a different vendor (and a different sales rep). The rep approaches the clients and offers to pick the TPA fees of the plan if the plan continues to purchase the investment products through him.  It is clear that this kind of arrangement won’t be  problem when it is made properly part of a negotiated service agreement.   But in this example, with a sales rep without a 408(b)(2) service agreement – a problem?

Another example could be “tying” arrangements, where (for example) a bank has a client’s 401(k) plan as well as holding a corporate loan with the plan sponsor.  The plan sponsor notifies the bank that it is moving its 401(k) to another institution. The bank responds by threatening to call the loan, or not to extend any future credit if the 401(k) plan is moved- a problem?

This is a criminal statute. Unlike the “civil law” ERISA prohibited transaction rules where “intent” doesn’t matter,  “scienter” (that is, intent) is still a critical element, so that helps limit the broad language of the statute.  But still the word is caution.  Compliant compensation schemes are difficult enough to design, given the prohibited transaction rules and the 408(b)(2) regs. But don’t forget about the non-ERISA criminal rules when addressing these issues.

If, by the way, you find yourself in these sorts of circumstances, it would be helpful to go talk to your lawyer.



Gary Lesser, co-editor of the Aspen Publisher’s 457(b) Answer Book, gave us a heads up about the IRS’s new resource page for sponsors (and IRS tips for auditors) on the impact of 457(b) failures, published September 25. Benefitslink  (this links to its excellent news archives) also reported, along with that,  the IRS’s 457(b) guidance on correcting elective deferrals. 

The resource guide and correction of excesses  guidance look to be  very useful tools. They not only link to the statute and each of the regs, they also link to the IRS Manual sections on 457(b) plans. They do have their limitations (such as providing no guidance on how one corrects failures in tax-exempt’s 457(b)plan), but it should be a permanent part of the practitioner’s research tool list.

It does remind us all that the failure of a 457(b) for a tax-exempt plan makes that plan subject to 457(f). What it also does not say is that the 457(f) program is subject to 409A, and that most 457(b) plans will generally NOT comply with the 457(f)/409A requirements, which then, in turn triggers that 409A penalty regime.

Here’s a copy of the IRS webpage on the impact on non-compliance:

457(b) Plan of Tax Exempt Entity – Tax Consequences of Noncompliance

IRC Section 457 provides rules for nonqualified deferred compensation plans established by eligible employers.  State and local governments and tax exempt organizations are eligible to maintain a 457 plan.  There are two types of 457 plans, eligible plans that satisfy IRC Section 457(b) requirements, and ineligible plans that are subject to IRC Section 457(f).

An eligible 457(b) deferred compensation plan sponsored by a non-governmental tax-exempt entity (“457(b) tax exempt plan”) that fails one or more of the requirements of IRC Section 457(b) becomes an ineligible plan subject to IRC Section 457(f).  This Issue Snapshot explores the tax consequences to the participants and employer when a 457(b) tax exempt plan becomes an ineligible plan governed by IRC Section 457(f).

IRC Sections and Treas. Regulations

Resources (Court Cases, Chief Counsel Advice, Revenue Rulings, Internal Resources)



Reg. Section 1.457-2(b)(1) defines the term “annual deferrals” as the amount of compensation deferred under an eligible plan, whether by salary reduction or by nonelective employer contributions, made during the taxable year.  In an eligible 457(b) plan, contributions are counted as “annual deferrals” in the taxable year of the deferral or, if later, the year in which the amount contributed is no longer subject to a substantial risk of forfeiture.

Reg.  Section 1.457-3 provides that an eligible plan is a written plan established and maintained by an eligible employer that is maintained, in both form and operation, in accordance with the requirements of Reg. Sections 1.457-4 through 1.457-10.

Reg.  Section 1.457-4(a) provides that, in the case of an eligible plan maintained by a tax exempt entity, annual deferrals that satisfy the requirements of paragraph (b) (relating to the deferral agreement) and paragraph (c) (relating to the maximum deferral limitations) are excluded from the gross income of a participant in the year deferred and are not includible in gross income until paid or made available to the participant.

Reg.  Section 1.457-9(b) provides that a plan of a tax exempt entity ceases to be an eligible plan on the first day that the plan fails to satisfy one or more of the requirements of Reg. Sections 1.457-3 through 1.457-8 and 1.457-10.  These requirements relate to form, annual deferral limitations, the timing and taxability of distributions, and funding.

IRC Section 457(f) and Reg. Section 1.457-11 provide the tax treatment of participants if the plan is not an eligible plan.  Specifically, IRC Section 457(f)(1) provides that:

In the case of a plan of an eligible employer providing for a deferral of compensation, if such a plan is not an eligible deferred compensation plan, then—

(A) the compensation shall be included in the gross income of the participant or beneficiary for the 1st taxable year in which there is no substantial risk of forfeiture of the rights to such compensation, and
(B) the tax treatment of any amount made available under the plan to a participant or beneficiary shall be determined under section 72 (relating to annuities, etc.).

Tax Consequences to the Employee

As indicated above, when an eligible 457(b) plan of a tax exempt organization fails to meet the requirements of IRC Section 457(b), amounts deferred under the plan become subject to IRC Section 457(f) and Reg. Section 1.457-11 beginning on the first day of the failure.  Such amounts are includible in the participant’s or beneficiary’s gross income in the first taxable year in which there is no substantial risk of forfeiture.  Earnings on the deferred amounts are includible in gross income in the first taxable year in which there is no substantial risk of forfeiture and determined as of that date.  See Reg. Section 1.457-11(a)(2).  All other amounts are includible in gross income when paid or made available to the participant under IRC Section 72 relating to annuities.  See Reg. Section 1.457-11(a)(3) and (a)(4).

The following example illustrates the taxability of nonvested, nonelective contributions made to an ineligible plan under IRC Section 457(f).

Example (1):  A tax exempt organization maintains a 457(b) plan.  In 2014, the plan fails to comply with the requirements of IRC Section 457(b) and becomes a 457(f) plan.  In 2015, a $3,000 nonelective contribution is made on behalf of a participant.  The $3,000 contribution is not vested.  In 2018, the $3,000 and $200 in earnings thereon become vested.  The $3,000 contribution and $200 in earnings are taxable to the participant in 2018.  Subsequent earnings on these amounts are includible in gross income when paid or made available (provided that the participant’s or beneficiary’s interest in the assets is not senior to that of the employer’s general creditors).

Example (1) shows that amounts deferred are taxable under the tax exempt 457(f) plan when they become vested and include earnings calculated through to the date of vesting.  Subsequent earnings are taxable when paid or made available.  This means that the earnings may be taxable before they are actually distributed.

If the plan in Example (1) had remained an eligible tax exempt 457 plan, the $3,200 would be considered an annual deferral in 2018 due to the vesting schedule.  The deferral and earnings would not be includible in gross income until paid or made available to the participant.

Annual deferrals made through salary reduction are vested when made; therefore, by definition there is no substantial risk of forfeiture at the time they are contributed.  Thus, if the deferrals in Example (1) were made by salary reduction to a plan that was determined to be a tax exempt 457(f) plan, these amounts would be taxable in the year deferred.  Subsequent earnings on the deferrals would be taxable when paid or made available if the participant’s interest is not senior to the interests of the employer’s general creditors.  Under IRC Section 72, the distributions from the 457(f) plan are treated as having “basis” only to the extent the deferred compensation has been included in gross income of the participant.  See Reg. Section 1.457-11(c).

When an agent discovers a failure causing an eligible tax exempt plan to become an ineligible tax exempt plan under IRC Section 457(f), the participants’ Form 1040 returns that are not closed by the statute of limitations should be adjusted.  The statute of limitations on assessments relating to a participant’s Form 1040 is generally three years from the later of the due date of the return (including extensions) or the date the return is filed.  Generally, the relevant year for determining the statute is the later of the date of the deferral or the date the amount is no longer subject to a substantial risk of forfeiture.  A participant’s Form 1040 for open years should be adjusted by all amounts deferred under the plan, plus any earnings through to the date the substantial risk of forfeiture lapses.  If the statute of limitations has expired, no tax adjustment can be made and no basis would be earned.  Any remaining amounts would be taxable when made available or distributed.  Distributions from ineligible plans (and eligible plans) maintained by a tax exempt entity cannot be rolled over.  See Reg. Sections 1.457-7(b) and 1.457-11.  Any attempted rollovers from such a plan to an eligible retirement plan are considered excess contributions and are subject to the excise tax under IRC Section 4973.

Tax Consequences to the Employer

Annual deferrals (elective and non-elective) made to a 457(b) tax exempt plan are taxed as of the later of when the services are performed or when there is no substantial risk of forfeiture of the rights to such amounts.  See IRC Section 3121(v)(2).  Salary deferrals that are immediately vested are subject to FICA when the services are performed.  Annual deferrals under a 457(b) plan are not subject to income tax withholding at the time of the deferral.  Rather, the employer is responsible for income tax withholding when amounts are paid or made available.

Similar to a tax exempt 457(b) plan, FICA taxes apply to deferrals made to a tax exempt 457(f) plan as of the later of when the services are performed or when the amount is no longer subject to a substantial risk of forfeiture.  See IRC Section 3121(v)(2).  Thus, if the deferrals became vested when the plan was eligible, they should already have been taxed under FICA.  If FICA was paid at the time of deferral, there are no tax consequences to the employer and the Form 941 need not be adjusted.  Deferrals under a 457(f) plan must be reported as income taxable wages in the first year in which there is no substantial risk of forfeiture.

Summary of Tax Consequences

Any vested deferrals made in years the plan is a 457(f) plan that have an open statute are taxable to the participant which may require a discrepancy adjustment to the Form 1040.  The individual will have a tax basis in the taxed amount.

If deferrals become vested in a year in which the plan is a 457(f) plan, earnings on the deferrals should be calculated through to the date of vesting to determine the amount includible in gross income for the year.

Other amounts, such as earnings subsequently earned, are includible in gross income when paid or made available.

Any attempted rollovers to an IRA of amounts distributed from a 457(f) plan (or a tax exempt 457(b) plan) are excess contributions that are subject to IRC Section 4973 excise taxes.

Under a 457(f) tax exempt plan, amounts are subject to federal income tax withholding when they are no longer subject to a substantial risk of forfeiture.

Issue Indicators or Audit Tips

  • Under the most recent Revenue Procedure 2019-19 update to the Employee Plans Compliance Resolution System (“EPCRS”), the Service generally will accept on a provisional basis – generally for plans that are sponsored by governmental entities described in IRC Section 457(e)(1)(A) – submissions relating to 457(b) plans outside of EPCRS but using standards that are similar to those that apply with respect to Voluntary Correction Program filings under sections 10 and 11 of the revenue procedure.  By contrast, 457(b) plans that are sponsored by a tax exempt entity described in IRC Section 457(e)(1)(B) and that provide an unfunded deferred compensation plan established for the benefit of top hat employees of the tax exempt entity generally are not subject to correction under EPCRS unless, for example, the plan was erroneously established to benefit the entity’s nonhighly compensated employees and the plan has been operated in a manner that is similar to a qualified retirement plan.
  • The plan document may state when amounts deferred become vested.  Many 457(b) plans are silent on vesting because deferrals are fully vested when made.
  • A tax exempt employer that maintains a 457 plan files a W-2 rather than a Form 1099-R.


Page Last Reviewed or Updated: 25-Sep-2020


ERISA’s Prohibited Transaction rules really are not well understood by much of the retirement plan market, yet they have a broad insidious affect anyone who is in the business. Simply put, no one can get paid from a plan’s assets, and no one’s compensation can be connected in any way to a plan’s assets, unless there is a specific prohibited transaction exemption which permits it.

There are thousands of exemptions, if you count the “individually” granted exemptions which the DOL is empowered to issue. The ones which have the most significant impact are the class exemptions, of which there really are two types: those issued by the DOL, and those provided by the statute. Of these, the most pervasive is probably the “408(b)(2)” service provider exemption, and even that is often misunderstood. Under that rule, no service provider can receive compensation in connection with services provided to a plan unless that compensation is “reasonable” as defined by the regulation issued under 408(b)(2).

Those 408(b)(2) regulations are, to my mind, among the most effective regs ever published by the DOL. They are relatively short, precisely written, yet written in such a way to cover that wide range of products and services which are available to plans.

408(b)(2), however, is often confused with its regulatory sibling, 404(a)-5,** which is not a prohibited transaction rule: 404(a)-5 is merely a rule which requires that participants regularly receive certain investment disclosures. Though failure to provide those disclosures are a fiduciary breach, there are no specific statutory penalties for failing to meet the 404(a)(5) rules. Failing 408(b)(2), on the other hand, results in a prohibited transaction which may require the return of compensation received and the assessment of a tax (or the potential of a penalty, for 403(b) plans….).

A common misunderstanding between 408(b)(2) and 404(a)(5) is the nature of the requirements: 408(b)(2) requires the service provider’s contract with the plan’s fiduciary contain certain, specific terms. It does NOT require that those fees be disclosed to participants, nor does it require annual disclosure. It is simply a business matter between the fiduciary and the service provider. The only time a follow-up “disclosure” is ever required is if there is a material change in the contract’s terms (including the service fee), and then that disclosure is only required to be made to the plan fiduciary (though there are certain parts of 408(b)(2) which  rely upon parts of 404(a)(5)). Back in 2012 when the rule was first put into place, we all had to make a “transition” 408(b)(2) disclosure to all fiduciaries, but that was merely a one-time requirement. Unfortunately, the jargon related to that transition rule still hangs around. 408(b)(2) is, at its heart, a rule which requires specific, enduring contract terms. It is not a disclosure rule.

Where it really gets confusing is that if that service provider’s fee is charged against a participant’s account, that charge is then required to be disclosed to plan participants. But this requirement comes from 404(a)-5, not 408(b)(2), which is a very meaningful distinction: failure to disclose a fee charged against a participant’s account under 404(a)-5 may be a fiduciary breach, but it does not otherwise cause a potentially expensive failure in the prohibited transaction exemption under 408(b)(2).

The prohibited transaction rules really act as a governor on how plans operate, but they are almost hidden, in many ways, because most of the rules are not found in the plan document rules themselves. They do, however, have a deep impact on how things are run.

**Note:For brevity purposes, my reference to “404(a)-5” is really a reference to DOL Reg 2550.404(a)-5, and not to a section of ERISA itself. My reference to 408(b)(2), on the other hand, is a reference to ERISA Section 408(b)(2).