Proposed Required Minimum Distribution Regulations Clarify Application of Ten-Year Rule for Designated Beneficiaries
The IRS recently issued proposed regulations interpreting the changes in the required minimum distribution requirements resulting from enactment of the SECURE Act. Under the ten-year rule, a distribution of the participant’s entire interest must be made to a designated beneficiary who is not an eligible designated beneficiary within ten years after the death of the participant, regardless of whether the owner died before reaching his or her required beginning date. Among the proposed regulations, the IRS clarified that if a participant dies following his or her required beginning date, in addition to satisfying the ten-year rule, the participant’s benefit must also continue to be distributed to the beneficiary at least as rapidly as it was being distributed when the participant died. The IRS Proposed Regulations are available here.
The DOL issued guidance reminding responsible 401(k) plan fiduciaries of their ongoing duty to monitor investments and cautioning that the DOL “has serious concerns about the prudence of a fiduciary’s decision to expose a 401(k) plan’s participants to direct investments in cryptocurrencies, or other products whose value is tied to cryptocurrencies.” The DOL listed five reasons why cryptocurrency investments and their derivatives (collectively, “Crypto”) may not be a prudent selection at this time and threatened that 401(k) plan fiduciaries who allow Crypto as an investment option (even if through a brokerage window) “should expect to be questioned about how they can square their actions with their duties of prudence and loyalty.” Accordingly, 401(k) plan fiduciaries who are contemplating including or retaining Crypto as a plan investment option should factor this DOL guidance into their decision-making process. Compliance Assistance Release No. 2022-01 is available here.
In an effort to address shortcomings in auditing procedures and reporting raised by the DOL, in July 2019, the Auditing Standards Board of the American Institute of Certified Public Accountants issued a revised Statement on Auditing Standards No. 136 entitled, “Forming an Opinion and Reporting on Financial Statements of Employee Benefit Plans Subject to ERISA” (“SAS 136”). SAS 136 applies to plan financial statement periods ending on or after December 15, 2021. The updated audit standards imposed by SAS 136 add new audit procedures and significantly shift the burden for producing many plan-related documents to the plan sponsor. The new requirements will make it essential for plan sponsors to be able to produce quality, error-free records that demonstrate compliance in areas like compensation, deferrals, distributions, and vendors’ fees. Even before these new standards went into effect, it was often difficult for plan sponsors to produce such documentation, particularly when it… Continue Reading
In a time when most employees make their 401(k) plan elective deferral elections electronically, plan sponsors often do not think twice about maintaining records of employee deferral elections, since they expect their third party administrators (“TPAs”) will retain such electronic records. However, this confidence in the TPA’s records can be a trap for the unwary, as mistakes in the transmission of elections from the TPA to the employer’s payroll can easily occur, and the elections for long-standing employees may have been entered manually based on paper election forms that could have long since been misplaced (or destroyed in accordance with a TPA’s record retention policies). Further, if the plan sponsor has changed TPAs, the current TPA’s records for participants prior to the conversion are based on the records of the prior TPA and may no longer be accessible following conversion to the new TPA. A lack of reliable records can… Continue Reading
Recent IRS Snapshot Regarding Deemed Distributions for Participant Loans Reminds Employers of Risk of Plan Loan Errors
The IRS recently released an Issue Snapshot (the “Snapshot”) focusing on participant loans from retirement plans and when certain compliance errors could trigger deemed distributions with respect to such loans. Specifically, the Snapshot lists the following requirements, which if not satisfied, will cause a participant loan to be treated as a deemed distribution: Enforceable agreement requirement, which generally requires a participant loan to be a legally enforceable agreement (which may include more than one document) and the terms of the agreement demonstrate compliance with the applicable requirements of the Code. Maximum loan amount limit requirement, which generally limits the maximum amount of a participant loan to the amount specified under the Code. The Snapshot also noted the CARES Act allowed modifications to the loan limit for certain loans to “qualified individuals.” Repayment period requirement, which generally requires the repayment period of a loan be limited to five years, unless the loan… Continue Reading
The DOL, PBGC, and IRS (the “Agencies”) recently issued a Notice of Proposed Revision (the “Notice”) to update the Form 5500 Annual Return/Report filed for employee pension and welfare benefit plans. The DOL simultaneously issued a Notice of Proposed Rulemaking to implement the revisions proposed in the Notice. These proposed revisions primarily relate to certain statutory amendments to ERISA and the Code enacted as part of the SECURE Act and include other changes intended to improve Form 5500 reporting. Specifically, the Notice describes the following proposed revisions to the Form 5500 Annual Return/Report: Consolidation of the Form 5500 reporting requirement for defined contribution retirement plan groups by (i) adding a new type of direct filing entity called a “defined contribution group” reporting arrangement, and (ii) establishing a new reporting schedule for such arrangement; Modifications to reflect pooled employer plans as a type of multiple employer pension plan (“MEP”) and implement… Continue Reading
The IRS recently updated its Operational Compliance Checklist (the ?Ç£Checklist?Ç¥) to include qualification requirements that will become effective during the 2021 and 2022 calendar years. Examples of items added to the Checklist for 2021 and 2022 include, among other things: Final regulations relating to updated life expectancy and distribution tables used for determining minimum required distributions; The SECURE Act requirement that qualified cash or deferred arrangements must allow long-term employees (i.e., employees who work at least 500 but less than 1,000 hours per year for three consecutive 12-month periods beginning on or after January 1, 2021) to participate; and Temporary relief from the physical presence requirement for spousal consents under qualified retirement plans. The Checklist is only available online and is updated periodically to reflect new legislation and IRS guidance. The Checklist does not, however, include routine, periodic changes, such as cost-of-living increases, spot segment rates, and applicable mortality tables,… Continue Reading
The safe harbor rules for hardship withdrawals from a retirement plan permit such withdrawals for expenses and losses incurred by a participant due to a natural disaster declared by the Federal Emergency Management Agency (?Ç£FEMA?Ç¥) under the Robert T. Stafford Disaster Relief and Emergency Assistance Act, provided the participant?ÇÖs principal residence or principal place of employment at the time of the disaster was located in an area designated by FEMA for individual assistance related to that disaster. FEMA issued a series of disaster declarations as a result of the February 2021 winter storms that impacted portions of Texas, Louisiana, and Oklahoma. A list of counties that have been designated by FEMA for individual assistance in those states can be found on FEMA?ÇÖs website here. Those disaster declarations mean that affected participants may be eligible for hardship distributions from their 401(k) plan accounts. Plan sponsors with participants who live or work… Continue Reading
Companies sponsoring a 401(k) plan to help their employees save for retirement often form an investment committee to help select plan investments without realizing the duties that the committee assumes.?á To help prevent investment committee members from unintentionally breaching their fiduciary duties, companies periodically review their investment committee compliance and should keep complete records of appointments, policies, and procedures.?á The following investment committee checklist can be a starting point for this review: Review the underlying plan document to determine who it lists as the ?Ç£named fiduciary?Ç¥.?á Most plan documents provided by third party administrators list the ?Ç£plan sponsor?Ç¥ as the named fiduciary, which means the board of directors is the governing body responsible for acting as a fiduciary, absent a delegation of such fiduciary responsibility by the board of directors to a committee.?á If your plan lists the ?Ç£plan sponsor?Ç¥ as the named fiduciary and you have a committee selecting… Continue Reading
Federal Tax Withholding and Reporting Requirements for Distributions from a Qualified Retirement Plan to a State?ÇÖs Unclaimed Property Fund
Third party administrators for employer-sponsored qualified retirement plans often recommend to employers that unclaimed account balances for mandatory cash-outs of small amounts (under $1,000) be remitted to the unclaimed property fund for the participant?ÇÖs state of residence. The IRS recently clarified in Rev. Rul. 2020-24 that amounts remitted to a state?ÇÖs unclaimed property fund are subject to withholding under Section 3405 of the Internal Revenue Code (the ?Ç£Code?Ç¥) and, in the event the amounts distributed exceed $10, reporting under Section 6047 of the Code. A plan sponsor will not be treated as failing to comply with the withholding and reporting requirements with respect to payments made before the earlier of January 1, 2022 or the date it becomes reasonably practicable for the plan sponsor to comply with such requirements. An employer that sponsors a qualified retirement plan should discuss this guidance with their plan?ÇÖs third-party administrator to ensure that any… Continue Reading