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Retirement Plans Year-End Action Items

The following non-exhaustive list describes year-end action items and the annual notices for retirement plans, which generally must be distributed within a reasonable time prior to the start of the plan year. For calendar year plans, providing the notices outlined below by December 1, 2017 will meet this requirement in most cases. Safe Harbor 401(k) Notice: For 401(k) plans that are designed to comply with the safe harbor requirements of the Internal Revenue 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 Internal Revenue Code’s qualified automatic contribution provisions Eligible Automatic Contribution Arrangement Notice: For plans that are designed to comply with the Internal Revenue 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… Continue Reading

IRS Announces 2018 Qualified Retirement Plan Limits

The IRS recently announced cost-of-living adjustments for 2018. Below is a list of some of the key annual limits that will apply to qualified retirement plans in 2018: Compensation limit used in calculating a participant’s benefit accruals: increased to $275,000. Elective deferrals to 401(k) and 403(b) plans: increased to $18,500. Annual additions to a defined contribution plan: increased to $55,000. 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 $220,000. Compensation dollar limit for defining a “key employee” in a top heavy plan: remains unchanged at $175,000. Compensation dollar limit for defining a “highly compensated employee”: remains unchanged at $120,000. The full list of 2018 plan limits can be found in IRS Notice 2017-64.

IRS Issues Regulations and Guidance Updating Mortality Tables and Procedures for Using Substitute Mortality Tables

On October 3, 2017, the IRS issued final regulations updating the mortality tables that most defined benefit pension plan sponsors must use when calculating lump-sum benefits for participants and determining annual funding obligations. In addition, the final regulations provide updated procedures for sponsors of large defined benefit plans to use when applying to the IRS to use substitute mortality tables based on actual plan mortality experience. In conjunction with the regulations, the IRS issued Notice 2017-60, which explains the new mortality tables, and Revenue Procedure 2017-55, which explains and supplements the changes to the requirements for using substitute mortality tables. The regulations apply to plan years beginning on and after January 1, 2018. The final regulations are available here. Notice 2017-60 is available here. Rev. Proc. 2017-55 is available here.

IRS Extends Nondiscrimination Relief for Closed Defined Benefit Plans through 2018

In Notice 2017-45, the IRS extended the temporary nondiscrimination relief that it provided in Notice 2014-5 for plan years beginning before 2019. Notice 2014-5 permits certain employers that sponsor a “closed” defined benefit plan and a defined contribution plan to demonstrate that the aggregated plans comply with the nondiscrimination requirements of Section 401(a)(4) of the Internal Revenue Code on the basis of equivalent benefits, even if the aggregated plans do not satisfy the current conditions for testing on that basis. A “closed” defined benefit plan for purposes of these Notices provides ongoing accruals but was amended before December 13, 2013, to limit those accruals to some or all of the employees who participated in the plan as of a certain date (i.e., is frozen to new participants). View IRS Notice 2017-45. View IRS Notice 2014-5.

IRS Issues Model Amendments for Bifurcated Payment Forms for Defined Benefit Plans

In Notice 2017-44, the IRS issued model amendments to describe the method of bifurcation for defined benefit plans that offer bifurcated benefit distribution options (i.e., partial lump sum and partial annuity distributions). Bifurcated benefits could arise if a plan that offered a lump sum option wished to offer participants the additional option of taking part of the benefit in a lump sum and part as an annuity. View IRS Notice 2017-44.

IRS Issues Guidance on Changes to Opinion Letter Program for Pre-Approved Plans

In Revenue Procedure 2017-41, the IRS modified requirements for pre-approved plans to receive continuing favorable opinion letters on periodic submission cycles. Importantly, the programs for “master and prototype” plans and “volume submitter” plans are combined and replaced with a single program involving standardized and nonstandardized plans. This new program expands the type of plans that can receive an opinion letter. Some of the major changes include allowing employee stock ownership plans (ESOPs) to have 401(k) features and allowing cash balance plans with an interest rate based on the actual return on plan assets (but not on the actual return on a subset of plan assets). In addition, the beginning and ending submission dates for the third cycle for defined contribution plans are modified to begin on October 2, 2017, and end on October 1, 2018. View Revenue Procedure 2017-41.

Second Circuit Upholds Equitable Reformation in Connection with Intentionally Concealing Wear-Away Period from Plan Participants

Foot Locker converted its traditional pension plan to a cash balance plan. In doing the conversion, Foot Locker provided smaller initial benefits which resulted in a wear-away period until the new plan’s benefits actually equaled the value of the traditional pension plan’s accrued benefits. Foot Locker went to great lengths to conceal the wear-away from participants, including in the subsequent SPD that excluded any description of the wear-away or any indication that the conversion would cause a benefits freeze. Consequently, participants were not aware that their benefits had been frozen. The district court found violations of ERISA §§ 102 and 404(a) and equitably reformed the plan under ERISA § 502(a)(3). On appeal, Foot Locker did not challenge the ERISA violations but argued the district court erred in (i) holding the participants’ claims were not barred by the applicable statute of limitations; (ii) holding that individualized proof of detrimental reliance was… Continue Reading

Supreme Court Holds that Church Plan Exemption Applies to Church-Affiliated Hospital Retirement Plans

In an eight to zero decision, the U.S. Supreme Court held that ERISA’s church plan exemption applies to plans maintained by a church-affiliated organization whose principal purpose is the administration or funding of a retirement plan covering employees of a church or a church-affiliated organization (which the Court dubbed principal-purpose organizations), even if the retirement plan was not originally established by a church. Church plans are generally exempt from ERISA, including its fiduciary and minimum funding requirements. Multiple lower courts previously held that the church plan exemption did not apply to the retirement plans of Advocate Healthcare Network, Dignity Health, and St. Peter’s Healthcare System, which are church-affiliated healthcare systems, because their plans were not originally established by a church, but rather by the healthcare systems. Applying a plain-text reading of the statute and noting that the federal government had long agreed the exemption applied to such retirement plans, the Supreme Court… Continue Reading

Puerto Rico Tax Amendments Impact Highly Compensated Employees and Contribution Limits

A new legislative act in Puerto Rico, Act No. 9-2017 (the “Act”) amends the Puerto Rico tax code and the Trust Act of 2012, affecting qualified retirement plans and impacting highly compensated employees (“HCEs”). Among several changes, the Act fixes a new dollar threshold for HCEs at $150,000 (previously $120,000 (which is the same as in the U.S.)). The new HCE dollar threshold is fixed and now classifies corporate officers based on that threshold as well (the Act no longer requires employers to treat corporate officers as HCEs regardless of their pay). The Act also modifies the limits on per-participant contributions to defined contribution plans. The Act will limit contributions to the lesser of 25 percent of “net income” (which is currently undefined) and $75,000. This change modifies the per-participant contribution limit which is currently the same under both the Puerto Rico and U.S. tax codes (i.e., the lesser of 100… Continue Reading

Missing or Unresponsive Participants and Required Distributions from Qualified Retirement Plans

It is often difficult for retirement plans to maintain current addresses for terminated participants. If distributions are not made (or are not permitted) at the time of a participant’s employment termination, the plan is required to make sure distributions are taken or begin either at the plan’s normal retirement date or when the participant reaches age 70 ½, depending on the plan’s terms. If the plan does not comply with the plan’s distribution requirements, the plan risks disqualification. When discovered, on audit or otherwise, the plan must correct the noncompliance which often involves paying fees or penalties to avoid plan disqualification. To avoid these problems, employers should take the following steps: Examine your plan to determine when distributions are required. Many plans require the participant to file a claim to begin their benefits and do not require distributions to begin at normal retirement date. In those circumstances, distributions must begin… Continue Reading

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