Possible Year-End Deadline for Retirement Plans of Plan Sponsors Involved in a 2017 Corporate Transaction
Generally, employee benefit plans of members of the same controlled group must satisfy certain requirements of the Internal Revenue Code on an aggregated basis (e.g., retirement plan nondiscrimination and coverage testing). Following a corporate transaction, such as a merger or a stock or an asset sale, the benefit plans of the buyer and seller may differ significantly. In order for plan sponsors to have a period of time post-closing to determine how best to structure their benefit plans going forward, Code Section 410(b)(6)(C) provides transition relief by permitting the plans to choose to be operated and tested separately, if certain requirements are met, such as coverage under the plan not being materially modified during a transition period. The transition period begins on the transaction’s closing date and, generally, ends on the last day of the first plan year beginning after the year in which the transaction occurred or, if earlier,… Continue Reading
In Notice 2018-91, the IRS published the Required Amendments List for 2018, which lists statutory and administrative changes in plan qualification requirements that (i) are first effective in the plan year in which the list is published and (ii) may require a plan amendment. This year’s list did not include any such items. Nevertheless, a required amendment that was listed in the 2016 Required Amendments List must be adopted (if applicable to an employer’s plan) by December 31, 2018. That required amendment relates to restrictions on accelerated distributions from underfunded single-employer, collectively-bargained defined benefit plans due to a plan sponsor’s bankruptcy. Additional information on the 2016 Required Amendments List is available on our prior blog post. View Notice 2018-91
The IRS recently announced cost-of-living adjustments for 2019. Below is a list of some of the key annual limits that will apply to qualified retirement plans in 2019: Compensation limit used in calculating a participant’s benefit accruals: increased to $280,000. Elective deferrals to 401(k) and 403(b) plans: increased to $19,000. Annual additions to a defined contribution plan: increased to $56,000. Catch-up contributions for employees aged 50 and over to 401(k) and 403(b) plans: remains unchanged at $6,000. Annual benefit limit for a defined benefit plan: increased to $225,000. Compensation dollar limit for defining a “key employee” in a top heavy plan: increased to $180,000. Compensation dollar limit for defining a “highly compensated employee”: increased to $125,000. View the full list of 2019 plan limits in Notice 2018-83.
The IRS’s Tax Exempt and Government Entities Division (“TE/GE”) recently issued its Compliance Program Letter for 2019, which lists TE/GE’s compliance priorities for the 2019 calendar year. Those priorities include issuing additional guidance under the Tax Cuts and Jobs Act (the “Act”), which was enacted in December 2017, and expanding its use of Pay.gov and secure messaging with taxpayers and practitioners in the TE/GE’s employee plans program. The letter does not list any specific guidance topics to be addressed under the Act or provide that guidance is forthcoming on Internal Revenue Code changes enacted by the Bipartisan Budget Act of 2018, such as changes to the hardship distribution rules. The letter does, however, state that if additional issues are identified in the future, TE/GE will modify its list of priority items to ensure that TE/GE remains focused on the highest priority items. View the 2019 Compliance Program Letter.
As we enter the last quarter of 2018, plan sponsors should ensure that all required plan amendments will be made to their tax-qualified retirement plans by the applicable deadlines and that the plan administrator is prepared for any changes in administrative procedures that will be required as of January 1, 2019. As a practical matter, plans should be amended for any applicable changes as soon as practicable to conform the plan document (and its summary plan description) to match the plan’s administration.
Consider Periodic Internal Plan Audits to Ensure Proper Application of Plan’s Definition of “Compensation”
A frequent, but often times avoidable, operational error for retirement plans is the failure to use the proper definition of compensation for various purposes, including, without limitation, calculating employee deferrals and employer contributions. A retirement plan’s definition of compensation typically includes dozens of components that all must be properly coded in the plan sponsor’s payroll system as eligible or ineligible plan compensation. Plan sponsors should periodically compare the plan’s definition of “compensation” to the employer’s payroll records to verify that the proper definition of compensation has been used for all plan purposes, including calculating employee deferrals and employer contributions. Performing such an audit can help identify any errors and help to minimize the amount of any corrective contributions and other fees and expenses that may be associated with correcting the error.
While many qualified retirement plans allow for the reimbursement of certain administrative expenses from plan assets, plan fiduciaries must ensure that plan assets are being used only to reimburse reasonable administrative expenses, and not expenses that could be considered personal or business expenses. This issue may arise in a variety of contexts, including, in particular, a plan’s reimbursement of travel expenses. The DOL has taken the position that no personal or business related expenses are payable from plan assets, even if the travel is related to the administration of the plan. The concern with using plan assets to reimburse travel expenses is being able to prove that the travel expenses relate solely to the administration of the plan, and are not merely a personal or business expense.
The recently enacted Bipartisan Budget Act of 2018 (the “Act”) modifies certain Internal Revenue Code provisions relating to hardship distributions from qualified retirement plans that (i) eliminate the requirement that a participant’s deferrals be suspended for six months following a hardship distribution, (ii) eliminate the requirement that participants take out all available plan loans before receiving a hardship distribution, and (iii) expand the sources available to fund hardship distributions to include QNECs and QMACs. These changes to the hardship distribution rules are effective for plan years beginning on or after January 1, 2019. In addition to the changes for hardship distributions, the Act provides additional relief for victims of the recent California wildfires that permits eligible plan participants to receive a distribution of up to $100,000, which will not be subject to the mandatory 20 percent income tax withholding or the 10 percent early withdrawal penalty. The participant may elect… Continue Reading
Anka Miscevic had a history of mental illness. While her husband Zelkjo was sleeping, she stabbed him in the chest and hit him over the head with a baseball bat, killing him. An Illinois state court found Anka not guilty by reason of insanity. The U.S. Court of Appeals for the Seventh Circuit, the first federal appellate court to address ERISA pre-emption of any state slayer statute, held that Illinois’s slayer statute was not pre-empted by ERISA. At the time of his death, Zeijko was a participant in a union pension fund. If a participant were married at the time of his or her death, the fund would pay a pre-retirement death benefit to the surviving spouse. If a participant were not married but had a minor child, the fund would pay a minor child benefit until the child turns 21. Both Anka and her minor child filed competing claims… Continue Reading
For submissions made on or after January 2, 2018, the user fee to correct a qualified plan operational failure under the IRS’s Voluntary Correction Program (“VCP”) will be based on the total amount of net plan assets rather than the number of participants in the plan. Net plan assets are generally determined using the amount listed on the most recent Form 5500 filed for the plan. Additionally, alternative or reduced fees for certain corrections have been eliminated. Therefore, in some cases fees will be significantly lower than under the prior fee schedule, but in other cases, they will be higher because the prior fee schedule based the fee on the number of affected participants, not the number of total participants. Below is the new, simplified fee schedule for VCP submissions, followed by the prior fee schedule. New Fee Schedule: Net Plan Assets VCP Fee • $0 to $500,000 … Continue Reading