The Internal Revenue Service (the “IRS”) recently updated the retirement plan “Fix-It” guides (the “Guides”) published on its website. The Guides provide tips on how to identify, correct, and avoid common mistakes in retirement plans. There are separate Guides for each of the following types of retirement plans: 401(k), 403(b), SEPs, SIMPLEs, and SARSEPs. E ach guide provides (i) an overview of the rules for each type of plan and the Employee Plans Compliance Resolution System, (ii) a description of the most frequent errors found by the IRS for each type of plan, and (iii) guidance on how to find, fix, and avoid the most common errors. Copies of the Guides are available here.
One provision of the Act permits participants in a defined contribution plan, such as a 401(k) plan, to convert or transfer funds from a traditional IRA account in the plan into a Roth account in the plan without penalty, if the plan so permits. The transfer would not be subject to the 10 percent penalty on early distributions, such as if the participant is under age 59½, and would not violate the prohibition on such a plan not making a distribution before certain events occur. Contributions to a traditional 401(k) account are tax-deferred with the participant paying ordinary income tax when the money is ultimately distributed in retirement. In contrast, contributions to a Roth 401(k) account are taxed upfront with the subsequent distributions in retirement made tax free. Such in-plan Roth transfers could be beneficial to plan participants who expect to retire in a higher tax bracket as well as… Continue Reading
11th Circuit Affirms that Unpaid Employer Contributions are Not Plan Assets Absent Clear Plan Language to the Contrary
ERISA’s regulations expressly provide that employee contributions withheld from an employee’s wages are “plan assets” even if the employer never remits the contributions to its employee benefit plan. Yet, there is no corresponding provision relating to unpaid employer contributions. Courts generally hold that unpaid employer contributions are not plan assets unless clear language in the plan indicates otherwise, such as provisions indicating that employer contributions are plan assets when “due” or “owing.” Nevertheless, the employer may still be liable to the benefit plan for the unpaid contributions under contract law depending upon how the plan provision is worded. The 11th Circuit recently reaffirmed this proposition in an unpublished case where a participant in the employer’s 401(k) plan sued for breach of fiduciary duty because the employer used its employer contribution funds to pay its payroll taxes rather than remitting the funds to the 401(k) plan. The court held that there… Continue Reading
The IRS announced on December 7 that it is eliminating proposed penalty notices relating to Form 5500 filings in an effort to reduce processing costs, eliminate notices, and comply with notice and system standards. The IRS will no longer send the following notices: CP 213N: Proposed Penalty Notice for Late Filing of Form 5500, Annual Return/Report of Employee Benefit Plan; and CP 213I: Proposed Penalty Notice for Incomplete Filing of Form 5500. The IRS will continue to send notice CP 283: Penalty Charged on Your 5500 Return, if a Form 5500 is filed late or is incomplete. The IRS announcement is here.
Presumption of Reasonableness Standard Does Not Apply at Pleading Stage and SEC Filings Incorporated by Reference in a Summary Plan Description are Fiduciary Communications
Plan participants sued claiming breach of fiduciary duty relating to an employee stock ownership plan (“ESOP”) offered as one investment option in the employer’s defined contribution, participant directed retirement plan. The trial court dismissed the suit for failure to state a plausible claim for relief. The 6th Circuit reversed the dismissal, holding that (1) the presumption of reasonableness standard applied to an ESOP fiduciary’s decision to remain invested in employer securities does not apply at the pleading stage and (2) SEC filings, when incorporated by reference into a Summary Plan Description (“SPD”), are a fiduciary communication under ERISA. First, the court clarified that the presumption of reasonableness standard is not appropriately applied at the pleading stage because the presumption can be overcome “when applied to a fully developed evidentiary record.” The court reasoned that while ERISA 404(a)(2) generally abrogates an ESOP fiduciary’s duty to diversify investments, the fiduciary is not… Continue Reading
An executive complained to the company’s internal accountants regarding money withheld from his paycheck not being deposited in a timely manner into his retirement and health savings accounts within the time period required by the Employee Retirement Income Security Act (ERISA). Over the next few months, the executive made several complaints with other officers of the company, but did not file a written complaint. The executive finally received a check to make up for the missed deposits plus interest, but was soon thereafter terminated prior to expiration of his employment agreement. The executive filed suit under ERISA Section 510, which prohibits retaliation “against any person because he has given information or has testified or is about to testify in any inquiry or proceeding relating to ERISA.” The district court granted the company’s motion for summary judgment and held that Section 510 did not cover the executive’s complaints because an “inquiry”… Continue Reading
The following non-exhaustive list of annual notices for retirement plans must be distributed within a reasonable time prior to the start of the plan year. For calendar year plans, providing them by December 1 will meet this requirement. Safe Harbor 401(k) Notice – for 401(k) plans that are designed to comply with the safe harbor requirements of the Internal Revenue Code (the “Code”). Automatic Enrollment Notice – for any plan that includes automatic enrollment provisions. Qualified Automatic Contribution Arrangement Notice – for plans that are designed to comply with the Code’s qualified automatic contribution provisions. Eligible Automatic Contribution Arrangement Notice – for plans that are designed to comply with the Code’s eligible automatic contribution provisions. Qualified Default Investment Alternative (“QDIA”) Notice – for plans with participant-directed investments that include a QDIA in which a participant’s account will be invested if the participant fails to make an investment election. Distribute Summary… Continue Reading
The Internal Revenue Service announced the 2013 cost-of-living adjustments on October 18, 2012. Here are some of the key limits for 2013 that will affect employer qualified retirement plans: The Code section 402(g) limit on elective deferrals for employees who participate in 401(k) and 403(b) plans will increase from $17,000 to $17,500. The Code section 415(c) limit for annual additions under defined contribution plans will increase from $50,000 to $51,000. The Code section 414(v) catch-up contribution limit for employees aged 50 and over who participate in 401(k) and 403(b) plans will remain unchanged at $5,500. The Code section 415(b) annual benefit limit under a defined benefit plan will increase from $200,000 to $205,000. The Code section 416(i) dollar limit on compensation for defining a key employee in a top heavy plan will remain unchanged at $165,000. The Code section 414(q) dollar limit on compensation for defining a highly compensated employee… Continue Reading
The U.S. Department of Labor (DOL) recently announced that is has launched a new website with resources for consumers regarding the new 401(k) fee disclosures. The new website is intended help individuals with 401(k) type plans to see what they are paying in fees and expenses to invest their retirement savings in order to understand the impact of such fees. The DOL’s new website can be found here.
The IRS recently issued Revenue Procedure 2012-35, which, effective August 31, 2012, discontinues the IRS letter forwarding program for retirement plans. Under Revenue Procedure 94-22, plan administrators, plan sponsors, and qualified termination administrators of abandoned plans under the Department of Labor’s Abandoned Plan Program attempting to locate missing plan participants were permitted to make a written request to the IRS to use its letter forwarding program. Under the new revenue procedure, the IRS will no longer provide letter-forwarding services to locate such missing plan participants. The letter-forwarding program is now limited to situations in which a person is trying to locate a taxpayer to convey a message for a “humane purpose” or in an emergency situation. This revenue procedure applies to requests postmarked on and after August 31, 2012. Retirement plan sponsors should review their plan provisions and administrative procedures for locating missing plan participants and make any needed changes… Continue Reading