It is nice to be able to come back up for air and take the time to write again. Conni and I are both fine, by the way. The only COVID hardship we seem to be personally dealing with now, fortunately, is lack of sleep…..Oh, and yes, for those inclined, you will be able to listen to this post as a podcast by going to the sidebar-which, by the way, also discuss my 18 year old sourdough starter….

IRS’s Notice 2020-50 is actually a nice piece of work by IRS and Treasury, as the CARES Act terms really had to be unpacked piece by piece. The drafters had to resolve a number of issues, and they did so in helpful detail.

There is so much detail in there, you probably could write a a chapter on the actual implementation of all of those elements addressed. What I thought may be useful to discuss is what happens when an employer chooses NOT to offer the CRD relief under the CARES Act. A surprising number of employers have taken this approach. But the employer’s decision is not the final word on this matter, because the statute grants participants specific tax benefits regardless of the sponsor’s choice. So what does this actually mean for participants?

  • Employer chooses not to permit CRD distributions at all.

Consistent with its past position on disaster related distributions, IRS and Treasury have taken the position that an employer can choose to whether or not offer CRD distributions from the plan. Though I believe they could have legitimately taken the other position (that is, the employer had no choice), this is clearly the more conservative approach. Wisely, however, IRS has also said, that the employer must  uniformly deny (or offer) CRD treatment under the plan.

Notice 2020-50 also made it clear that the employer cannot prevent the participant from claiming CRD tax treatment on (most) distributions the participant otherwise does take during the relief period, even where the employer has chosen not to “opt” for CRD relief. Thus, most participant distributions (except for things like corrective distributions) will be exempt from the 10% penalty tax, will be eligible to be taxed ratably over 3 years, and be able to rollover that amount. Even hardship distributions or RMDs, which typically cannot be rolled over, will still be eligible for rollovers- even taxation from defaulted loan offsets will be afforded this treatment (but not deemed distributions from defaulted loans which have not been offset).

It does not appear that the participant has to file a CRD certification with the plan administrator to get this favorable tax treatment, they just have to be able to prove they meet the (newly expanded, thank you!) CRD standards.

Obnoxiously, the employer can still file a 1099-R with the notation saying that this is an early distribution with no exception-and the 20% will be withheld-but the participant can offset this by filing the 8915-E.

  • CRD Rollovers

Even if the employer does not extend CRD coverage under the plan, if the plan accepts rollovers, it will still have to accept the rollovers back into the plan of distributions the participant has treated as CRD. All the recalcitrant employer can do to stop these rollovers is to cease all rollovers

  • Employer doesn’t expand CRD to $100,000.

Even if the sponsor doesn’t offer CRDs, or limits them below $100,000, the participant still has an individual limit of treating distributions from all other plans as CRDs. So, for example, where the employee maintains an 401(k) account with a former employer (or, as is often the case in the 403(b) market, maintains contracts from all sorts of former employers) they can still take distributions from those accounts and claim CRD treatment on the first $100,000 from those account-even without employer approval of CRD treatment.

  • Employer does not institute loan payment suspension

I had blogged on this point of loan suspensions earlier this year.This one is interesting, and I invite you to take a close look: The employer does not have to extend the loan limits under the CRD rules, and the IRS has taken the position that the employer does not have to suspend the requirements that loan payments still be made even though both the statute and Notice 2020-50 state that the due date for loans payments through December 31, 2020 “shall” be delayed for one year. But the  Notice does not specifically address this issue of what happens when an employer fails to suspend, given the mandatory nature of the law.

What we are left with, I think, is something like this: assume that the participant fails to make a payroll-based loan repayment because they have short paychecks with insufficient funds to repay the required loan amount, yet the employer chose not to suspend the loan repayment rules. It would seem that, for tax purposes, there will not be a taxable deemed distribution, because CAREs extended that due date. However, if the plan, by its terms, forced a default because of this shortfall in payment- and then forced an offset of the participants account-it then becomes a taxable event. This loan offset then, it would seem, be treated as a CRD distribution which has the waiver of the 10% penalty, a 3year ratable taxation and the right to rollover the amount back into the plan.

Got it?

With this blog, we take the next step into the Podcast world, where we describe  the CARES impact Length of Service Awards programs (called “LOSAPs) under 457(e)(11). The Podcast is more extensive than the written word below, and I recommend you give it a try. I also rant a bit on it about  current state of confusion in the implementation of the CRD rules.  Listen to the Podcast here. It’s only about 7 1/2 minutes long.

First, what is a LOSAP? It a retirement type of arrangement under 457(e)(11). They act as a sort of gratuitous payment arrangement which local fire districts adopt under either state or local laws the deferral of a payment of up to $6,000 per year for volunteers providing fire fighting and prevention services, emergency medical services, and ambulance services. They really are odd programs, a sort of amalgamation of a number of different rules. Cheryl Press authored a very useful PLR on these programs, which I invite you to review. I’m also providing a link to one of the leading LOSAP programs which is available nationally, at

So now, as COVID-19 inexorably moves out of the large cities to smaller and rural communities, it is these volunteers who will be faced with the extraordinary tasks arising from handling people affected by the virus. These volunteer departments have minuscule budgets, and are unlikely to have the resources to get all of the equipment they will need to handle COVID.

It follows that these volunteers will be impacted, some seriously so.

The typical LOSAP will permit a withdrawal for “unforeseen emergencies.” Yet the new CARES Act distribution rules provides no relief for these distributions. The CARES Act does not allow the tax on LOSAP distributions to be spread over three years, like it does for the tax on distributions from other kinds of retirement plans. There is also no ability for the firefighter to repay the amount of those distributions back to the plan, as the CARES Act allows to be done for other types of retirement plans.

LOSAPs have existed under the radar for years. But these volunteers are about to be in the forefront now, and so will their LOSAP programs.

Listen to the LOSAP Podcast here.

If you prefer to LISTEN to this blog as a podcast, go to our new Podcast player to listen, this one is 10 minutes long.  We are introducing our new podcast site soon.  Let us know what you think!

We know that all parties involved in plan administration are struggling with the question of whether the employer or the participant have the CARES Act rights to 1) an extension of loan amounts (I think it’s the employers choice); 2) the right to suspend loan repayments (I think it’s the participants right, not the employers-can you imagine the ramifications of an employer choosing  a taxable default and 10% penalty, even if by default?); 3) the right to take a non-restricted CRD distribution (again, I think it’s the participant’s choice); and 4) the right to non-RMD treatment (again, I think it’s the participants choice and the tax impact is automatic).

But beyond these difficult questions (yes, I admit to getting my two cents in on each of these points) is the application of ERISA’s fiduciary rules to the determination of the status  of a participant as being eligible for CARES’ relief (let’s call it a COVID participant).

You are eligible to be a COVID participant (thus eligible for the relief) if:

  1.  you are diagnosed with the virus;
  2.  your spouse or dependent is diagnosed with such virus, or
  3. (in the exact words of the statute)are  “an individual who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or 25 operated by the individual due to such  virus or disease, or other factors as determined by the Secretary of the Treasury.”

I think we would all agree that the determination of whether or not an individual qualifies as a COVID participant would usually be  a determination that requires the exercise of discretion by a fiduciary, under ERISA Section 3(21).

As you also know, however, the CARES’ participant certification rule adds an odd twist into the mix:

“EMPLOYEE CERTIFICATION.—The administrator of an eligible retirement plan may rely on an employee’s certification that the employee satisfies the conditions of (the above rules)  in determining whether any distribution is a coronavirus-related distribution.”

Here’s where the problem seems to come in:  there is a bit of ambiguity in the third condition of eligibility: nowhere does it specifically mention the impact of the loss of employment or reduction in hours of the spouse of the participant in the calculation of what are the causes of the participant’s adverse financial circumstances.

Consider the following scenarios:

Case #1. A participant is still employed but has a reduction in hours which reduces her pay so she can’t make the rent. This clearly is an “adverse financial consequence,” and, as long as she certifies to this, she will get a Coronavirus related distribution (CRD)-along with the 3 years spreading of tax, the right to repay, and a waiver of the 10% tax penalty.

Case #2. A participant is still fully employed, is working at home due to a state order; but her husband has lost his job. They now cannot afford the rent, and she suffers an adverse financial consequence-indeed, she will have no place to work if they lose their apartment. She certifies that she has an adverse financial circumstance from being quarantined. Does the plan pay, as a CRD? There is a bit of contention on this point.

A few things to think about when answering that question:

  • A fiduciary doesn’t need to make that determination of COVID status. It is entitled to rely on the certification. Note that the statute does not impose even a “reasonable basis” or any other such standard.
  • Yet, directing payments out of a plan is still a fiduciary act, even with the certification. Only fiduciaries can authorize the payment of these funds.
  • The DOL has long held that the fiduciary has the obligation to override a participant’s decision, if it is imprudent. So isn’t the real question, then, whether or not the fiduciary should reject the participant certification?

Here’s where ERISA may be useful, absent guidance from the Treasury or the DOL. The fiduciary must act

with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.

Wouldn’t a fiduciary who relies upon the certification of the participant be judged by this standard? When you apply “under the circumstances then prevailing” standard, would not a fiduciary be hard pressed to challenge the certification especially given the pandemic and the remedial nature of the statute?

A fiduciary who challenged the certification based on the lack of specific spousal language in the statute will be faced with some hurdles. It would be denying a benefit, and would need to defend that through the ERISA claims and appeals process. Then the severe consequences of challenging the certification-and denying the certification- should also give a fiduciary pause. Denying it means that the participant may then not even be able to access the funds to prevent eviction.  Or even if that person is “lucky” enough to qualify for a typical hardship while still being employed:

  • there is a mandatory tax withholding of 20% on the withdrawal, so more funds will need to be withdrawn to make the rent payment;
  • the withdrawal will be fully taxed next April, at a time where there still may be financial struggles in recovering from this mess;
  • it is subject to the 10% penalty tax; and
  • the losses are permanent, as there is no right to repay those withdrawals to the plan.

It would seem that given the high stakes and the exacerbation of a participant’s adverse circumstances which would be caused by the denial, a fiduciary would be hard pressed to reject the certification.

A reasonable case could be made that the fiduciary not reject such a certification. But this decision is not without some risk: the IRS could claim-if Treasury fails to clarify the position, or fails to exercise its authority to “fill in” the missing spousal language under its authority granted under the statute,  that the CRD under these circumstances  was either a plan document or an operational error. That “error” would then need to be fixed under EPCRS, including VCP. That is the risk.

Somehow, it is difficult to accept that the IRS would dictate a correction under EPCRS which would force the return of the CRD or the treatment of the CRD as a standard hardship withdrawal under these circumstance.

None of this is easy. All of this is heartbreaking. And very real.

One of the benefits from posting a techie blog for a dozen years or so is the tremendous value from other serious techies weighing in on what I write.

Robert Richter, now of ARA and chief editor of the EOB, has weighed in my posting on the suspension of the due date of loan repayment. I had posited that it is effectively is the participants choice, as the specific language of the statute declares that  “such due date shall be delayed for 1 year” -when combined with the need of the participant to certify COVID status-effectively means an employee has the right to continue payments or not. I also suggested that the language of the statute means that the employer has no authority to impose a due date. He pointed out that the IRS may end up not agreeing, if past is prescient.

I have Robert’s permission to share his e-mail to me (he is in the process of doing a piece for ARA orgs on who has what choices under the CARES Act). Note, in particular, his light-hearted (though serious) note of caution at the end….

“The law appears to make the loan suspension mandatory. But…when you look at how the IRS interpreted the same provision that was in KETRA (note: the Katrina Emergency act), we have the following from Notice 2005-92. I think it’s reasonable to rely on that interpretation and conclude that it’s optional, not mandatory. But I do think IRS guidance on this is needed ASAP:

B. Suspension of payments and extension of term of loan. A special rule applies if a qualified individual has an outstanding loan from a qualified employer plan on or after August 25, 2005. Section 103(b) of KETRA provides that, for purposes of § 72(p), in the case of a qualified individual with a loan from a qualified employer plan outstanding on or after August 25, 2005, if the due date for any repayment with respect to the loan occurs during the period beginning on August 25, 2005, and ending on December 31, 2006, such due date shall be delayed for one year. In addition, any subsequent repayments for the loan shall be appropriately adjusted to reflect the delay and any interest accruing for such delay, and the period of delay shall be disregarded in determining the 5-year period and the term of the loan under § 72(p)(2)(B) and (C). Thus, an employer is permitted to choose to allow this delay in loan repayments under its plan with respect to a qualified individual, and, as a result, there will not be a deemed distribution to the individual under § 72(p).

Wash your hands, don’t touch your face and resist the urge to touch your retirement account.”

So, here’s what we have:

  • The statute seems to make the suspension mandatory; yet
  • As noted in my last blog, there’s a legal problem with this, given loans are existing, valid contracts under state law; so
  • Did the IRS recognize this issue and try to fix it by claiming that the employer has the choice, because of its ability to change the loan policy under the plan?
  • You know that there will be “curmudgeonly” employers out there who will NOT approve the suspension. I, personally, would think that the IRS could not tax that loan as being defaulted, even though it was reported as such on a 1099.
  • Finally, Robert’s exhortation is among my favorite so far in this COVID season! Thanks!


This blog has been updated by a June 22 post found by clicking here

The structure and the language used by the drafters of the CARES Act in their crafting of the new participant loan repayment suspension rules seem to be both rare and stunningly broad: they appear to actually mandate, as a matter of federal law, that each loan repayment due through December 31, 2020  by COVID qualifying participants be suspended for one year. Interestingly enough, the language does not appear to prevent  ongoing loan repayments from being made should the participant choose to do so-the plan just may not be able to impose a due date on those payments from COVID participants. And, as a practical matter, the need for the COVID participant to self certify status as such  may actually turn this into an elective exercise on the participants behalf.  A challenge for administrators is how you accommodate the suspension with the desire to permit repayments at the same time?

The suspension is actually a big deal. Section 2202(b)(2) of the CARES act, which mandates the suspension, did not fool with the amortization schedules, or the timing and taxation of defaults under  Section 72(p) of the Tax Code, which is the section which governs the tax aspects of loans. In fact, it did not even amend Section 72(p) at all.  Nor did it amend any part of ERISA Section 408(b)(1), which hold the ERISA rules governing loans.

No, it avoided technical changes to either of these statutes and went instead went to the heart of things: it actually appears to legally modify the loan agreement between COVID participants and the plan.

Remember the actual legal structure of the participant loan: it must be a legally enforceable agreement between the plan and the participant, on commercially reasonable terms. When a participant signs a loan application (electronically or otherwise), that person agrees to the terms of that loan contract (which is reflected in the plan’s loan policy). To do what CARES did, that is to actually change the “pay date” of the loan under that legally enforceable agreement, that agreement must somehow be changed. This change can be accomplished in one of 3 ways: mutual agreement by the participant and the plan to amend the terms of the agreement (which would take forever to do); (2) unilateral action by the plan, if it so had the right to do so under its loan documents (which is highly unlikely); or (3) a law mandated change.

This suspension of payments is a law- mandated change. But here’s the very curious thing about the change: these particular contracts are enforceable under state law, not federal law, and those contracts can clearly be changed as a matter of state law. But how does federal law now step in to mandate this change otherwise reserved to the states?

One way it seems to works is by way of the ERISA preemption clause, ERISA Section 514.  ERISA will preempt state laws insofar as they “relate to” any ERISA-covered employee benefit plan. One of the three elements that the Courts have recognized as fulfilling the “relates to” preemption standard is any law which  “binds employers or plan administrators to particular choices or precludes uniform administrative practice, thereby functioning as a regulation of an ERISA plan itself.” (See New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Ins. Co., 514 U.S. 645, 658-660 (1995)). This type of change seems to fall well within this rule, giving Congress the right to change a participant loan agreement.

So keep all this in mind when detailing your approach to the loan suspension: your underlying loan policy contract appears to have been changed by federal law. Yes, the payment section of the loan policy will need to now be eventually changed, pursuant to the plan amendment clause of that section of CARES,  but note that the amortization schedules in the Code did not actually change (note also that, interestingly,  CARES did not actually change  the language of 72(p) or 408(b)(1) when dealing with the $100,000 limit and the 50% rule). You will also need to discover a way to handle volitional payments, I would think, as well. But this analysis does leave open the question on how a non-ERISA loan can be modified by federal law. I would hope that the general clauses in those loan agreements  may well be able to be read broad enough to reasonably being able to incorporate this change…..

A side note on 403(b) plans: though this rule change is going to be a nightmare to administer for payroll based 401(k) and 403(b) loan programs, the legacy 403(b) “policy”loan program will be served nicely by this rule-it almost makes me think that the drafters of these rules had these participants in mind when drafting the law. The typical 403(b) policy loan is “self-billed,” that is, the participant actually mails in (or has deducted from their bank account) every month or every quarter  their loan payment. The participant just needs to stop making those payments, and the insurer just needs to prevent the loan’s default (and then figure out how to deal with the new re-amort schedule adding in the interest accrued during the suspension).

A Note of Caution: These thoughts are only applicable to the  repayment delay rules, not to the increase of loan limits. Though I may cover that in another blog, it appears that the increase in loan limit is volitional on behalf of the sponsor, IMHO. 

This is not a matter of economic theory, this is a reality. Employees losing their jobs will need to withdraw from their  defined contribution accounts balances which have been  depleted by crashing markets,  pulling out whatever is left of what they have managed to save while they were employed.

Yes, at times like these, the impact of the auto-enroll efforts show their true value as there is some money there for those who would otherwise not have it but for auto-enroll. But the ugly side of things is also a reality, something that Congress avoided addressing during the Great Recession: those unemployed who must withdraw from their plan accounts just to survive will still be subject to the 10% early distribution penalty tax.  As we learned in 2009 and 2010, this effect only becomes apparent come tax time, when it becomes due regardless of the application of the marginal rate or deductions. So, even if income was so little as to pay little or no tax, the 10% penalty still applies.

It is a regressive tax, on top of everything else, which had the practical effect during the Great Recession of having  the unemployed fund-even if in the smallest part- the financial assistance to large  financial orgs which received substantial government support. Most should have difficulty with this sort of fiscal policy.

It seems that if policy makers want to have an impactful effect, suspend this tax on the unemployed during this crisis. I would not disagree with  my economist friends who may now caution against this seemingly rash move; to consider its long term impact; and to be concerned about the depletion of long term retirement savings. I am particularly sensitive to these concerns, of course, and they are valid. I would suggest, however,  that the 10% penalty has little impact on a participant’s decision to withdraw retirement savings when they have little other choice but to withdraw the funds.  I would also argue that there will be a significant number of unemployed participants in this position.

So come next April, those most deeply disadvantaged will be faced with an untenable choice between paying the rent, buying food, or suffering the ire of the IRS when the penalty cannot be paid. Not only is there the pure financial hit,  but there is the hidden emotional burden as well- introduced to their lives through a government imposed fear at a time when there is likely little capacity to bear it.

There is also the policy question of imposing a recessive tax during a crisis like this which, like during the Great Recession, funds in part other financial assistance programs.

It  becomes a question of how to balance competing (and valid) interests, but I suspect the widespread impact of that 10% penalty may weigh in favor of its temporary suspension.

Three things in particular struck me about the SECURE Act:

  • First was the lack of immediate, significant impact on the employer maintaining plans. There are a number of details which their vendors-and the regulators- need to address soon, but for most plan sponsors? It really is a big ho-hum.
  • Second was the sheer number of novel concepts that was introduced by the Act: PEPs, Groups of Plans, Birth and Adoption Rules, Portability of lifetime Income, lifetime Income disclosure, and several other new concepts that simply did not exist before the Act. Unlike the vast majority of retirement laws being passed in the past couple of decades which modified existing rules; SECURE brings new concepts in, wholesale.
  • Third, and perhaps most important, is the volume of small, odd, technical  details to which attention needs to be paid. This statute is a technocrat’s dream. So much in there actually raises fundamental  infrastructure issues of the sort we rarely see. We are all familiar with the 80/20 rule, with the caution of not letting perfection become the enemy of good. Well, these “oddities” raise the exact inverse of the 80/20 rule: through my long years in retirement product development,  the highest risk of failure arises from the lack of understanding of how the smallest of details can tank a multi-million dollar project. The “80” may sound good conceptually and structurally, but it is in the implementation of the detail in the “20” which will determine the success of the project. The SECURE  Act is rife with such detail.

I use two of the “details” to make the case. The first has to do with the portability of lifetime income options, something which is not exactly a “hot topic” for most plan sponsors yet. But it IS important for those developing products in this space. One little mentioned detail in these rules is the fact that “insurance” is not required for portability, even though that is the only way currently to “guarantee” lifetime income. This opens the door to innovative lifetime income products such as tontines (yes, that of Michael Caine’s and Dudley Moore’s movie “The Wrong Box,” on the nefarious side of this topic; and I first mention tontines in an old blog) and other innovative products now being seriously considered by some “disrupters.”  This minor detail may eventually provide one of the key elements necessary for   an entire new industry.

The second example is of importance to those currently considering the development of a PEP for the beginning of next year.  In another little mentioned detail,  the trustee of the PEP must be “responsible for collecting contributions to, and holding the assets of, the plan and require such trustees to implement written contribution collection procedures that are reasonable, diligent, and systematic.”  This is actually a big deal. Directed trustees, insurance companies and other custodians have, for years, been pushing back against efforts by the DOL to make them somehow accountable for monitoring late elective deferrals from employers, and to engage in some sort of notice or collection procedure against recalcitrant employers. This new detail appears now to make a PEP trustee responsible for actively enforcing the timeliness of deposits of elective deferrals from those employers participating in a PEP. That responsibility will be “table stakes” if one is to establish a PEP, and the seriousness of this obligation should not be overlooked.

There is much in the SECURE Act like these two examples; there are a number of stories behind the words of the statute which will make for interesting “telling” as they are implemented.


We’ve probably all had our fill of the innumerable webinars and other productions related to the SECURE Act.  But we are likely to hear more as the statute is “unpacked.” You see, the SECURE Act is really a bit unusual when compared to other major pieces of retirement plan legislations in the past  like PPA, GUST or  EGTRRA, because it introduces a significant number of new technical concepts without a whole lot of detail. Many of the  provisions do not have real immediate affects on the day to day operation of an employer’s plan (though those changes will be impactful down the road). Think, in particular, of terms like the Lifetime Income Portability Rules, and how they might work; or how to pull off the distribution of the 403(b) custodial contract; or just was does that “fiduciary safe harbor” on the purchase of annuity contracts mean, in practice, to my plans?

The one topic which seems to be on the forefront of a significant number of professionals, however, is the attempt to make sense of the new MEP and PEP rules. This is especially so because they follow so closely on the Association Retirement Plan regs finalized by the DOL and the “Unified Plan (“bad apple”) rule proposed by the IRS.  These commentators seem to be taking a common misstep, however:  it seems like (with rare exception) that each of these analyses are missing the assessment of the use of the “Group of Plans,”or “GoP”, in relation to MEPs and PEPs.

What is a “Group of Plans”which I’m referring to as a “GoP” and for which- as Mark Iwry points out- the “o” is NOT capitalized (and I suppose they could be called “Section 202 Arrangements”  after Section 202 of the SECURE Act which introduced the concept), and why does it matter?

The answer is pretty straightforward: technology enabled plan aggregation (ok, ok, I’ll admit, there’s nothing simple about “technology aided aggregation,” but at least the concept is simple). First, you ask why you would want to do a MEP or a PEP in the first place? Well, its because you want all of those things that scale brings: centralized, cost-effective fiduciary expertise; institutionally priced investments down-market; consolidated plan administration; and a few other things.  MEPs and PEPs both clearly bring those things, but they are not the “silver bullet” answer to bringing scale. There is also an alternative that those involved in these things should consider if they bring the same results.

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.

After you read it  you may want to say “good grief!” Technology today permits anyone who wants to make the appropriate investment in data aggregation to effectively mimic a MEP or a PEP, with the sole difference being that you could not get around the notion that each of the “aggregated plans” would have to file a separate Form 5500 because, unlike a PEP or MEP, they are each still individualized plans. Sec 202 takes care of that: as long as you are a defined contribution plan  (note the breadth of the definition picks up 403(b) plans, and permits non-ERISA and ERISA plans to join the same program); have the same trustee/custodian; and have the same investment options, you can file a single consolidated Form 5500 for all plans in that same arrangement. Now, there are a number of key elements that need to be put into play to make this work, including negotiating with the investment vendors, but it really falls into the sweet spot of many TPAs who often oppose the PEP or MEP.

A GoP needs no “bad apple” rule; it does not suffer from the trials of having to disgorge a plan from the central plan; and you need not be concerned about the impact dealing with the ambiguity of the rules surrounding MEPS and PEPs-and we all are well familiar with the way single plans work….

So, before leaping into the MEP/PEP abyss, first ably review whether a GoP suits your needs better.

PUBLISHER’S NOTE: If you don’t want to miss  future blogs (and there are a number of them coming, including on the SECURE Act),  enter your e-mail address above the button above my picture in the sidebar and press “subscribe,” and each new article will be e-mailed to you when I post them. For those reading this on a site like Linked-In, where there is no “subscribe” button, go to www. and subscribe there. No, that e-mail is not shared with anyone.


Not a lot of attention is being given in the” benefits press” to Section 109 of the SECURE Act, which enables something called “Portability of Lifetime Income Options.” But it  is one of those fundamental building blocks with which -regrettably or not, depending on your view of things- all benefit professionals and all plan sponsors will have to eventually deal. Given that it is effective now, there is some urgency in understanding this thing. One of the challenges is that annuities within Defined Contribution plans are not generally well understood, so I invite you to explore the blogs which show up in  “Lifetime Income” under the “Topics” drop down menu in the sidebar of this webpage. This may prove to be a valuable resource to you.

Background of the “Portability Issue”

First, some background. For all the attention lifetime income has been getting in the marketplace over the past few years, annuities have had surprisingly little take up with employers. Some claim it’s because of the fiduciary concerns, which is why we have SECURE Section 204 (which has a fiduciary safe harbor for the purchase of annuities), but I doubt that was as big as a problem as others would make it out to be. I think its really much simpler: people neither like or understand insurance products, and don’t trust insurance companies. Industry experts themselves have boiled this down to “Four I’s”- Irrevocability, Inflexibility, Inaccessibility and Invisibility-to which I added a fifth- Immobility.” Check out two dated but still effective blogs which describe this in more detail at  Part 1 and Part 2. No, I did not complete the blog on “Immobility, ” but that is what Section 109 is all about.

You see, lifetime income guarantees can really only currently be provided by state-licensed insurance companies issuing annuity contracts and by governmental programs(though there are efforts underway to change that, thus the quirky language in the Act is designed to accommodate these innovative product efforts). Annuity guarantees, however, are not generic (each insurance company’s terms and pricing are each a bit different), nor are they terribly liquid.  When there is a plan transition, lets say a merger; or where the insurance product falls out of fiduciary grace with the sponsor; or when a participant leaves the plan sponsor and wants to continue to add to the annuity in their own IRA; there are really limited options. Too often, the only solution would be to liquidate the annuity and then repurchase another. The problem is that annuities are designed (and priced)  to be held for a lifetime, and early termination often results in a loss of value through a variety of termination charges (these charges, by the way, enable more favorable pricing on the active annuity).

Section 109 actually fixes this problem. For the participant who does not have a distributable event, but the plan ceases its relationship with the insurer for whatever reason, Section 109 permits that participant to maintain that annuity by taking an “in-kind” distribution of it. The participant can hold it (and it still has the attributes of a 403(b), 401(k) or 457(b) plan, as the case may be), or by converting it into an IRA (the term “qualified plan distributed annuity” has been the term used in the past. It looks like SECURE is now calling them a “‘qualified plan distribution annuity contract” or QPDAC, I suppose).  For the participant who leaves the employer, contributions might still be made to it if the participant is eligible for IRA contributions by converting the QPDAC to an IRA, or it can be be rolled over into another qualified plan (should the plan permit it).

You can see how this rule is going to have widespread impact. These are incredibly substantial changes, for which there is yet little guidance-and little familiarity with in the market.

The Plan Document Problem

There’s a lot to be done to get up to speed on the QPDAC. The first, and most fundamental, issue is that these things only work when they are treated as an in-kind distribution of a plan investment, as opposed to a benefit provided under the plan. This means, for example, plan document language which only permits a “lump sum cash distribution” won’t work; but  language which permits either a simple “lump sum distribution” or a more specific “in-kind distribution of an annuity contract” will work. It would be a serious mistake to build annuity payment options into the plan’s benefit terms as, for a variety of reasons, it will seriously screw up the DC plan.

The second immediate drafting issue is the application of the joint and survivor annuity rules. If you draft it wrong, you will end up having those difficult rules apply to all the distributions under under the plan. Take a look at my blog here which should help you out there.

There will now much detail to work through.