IRS Finalizes Rules Permitting Use of Forfeitures to Fund Safe Harbor Contributions, QNECs, and QMACs
As we previously reported, on January 18, 2017, the IRS proposed amendments to regulations under Section 401(k) of the Internal Revenue Code that would permit the use of forfeitures to fund safe harbor contributions, qualified non-elective contributions (“QNECs”), and qualified matching contributions (“QMACs”). The IRS recently finalized the proposed amendments, effective as of July 20, 2018, without substantive changes. The prior regulations had provided that employer contributions could only qualify as safe harbor contributions, QNECs, or QMACs if they were non-forfeitable and not eligible for early distribution at the time they were contributed to the plan. The final regulations now provide that safe harbor contributions, QNECs, and QMACs be non-forfeitable and not eligible for early distribution at the time they are allocated to participants’ accounts. View the final regulations.
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.
Under the terms of many defined contribution plans, if a participant incurs a termination of employment, any outstanding loan will become immediately due and payable. If the participant is unable to repay the loan, the participant’s account balance will be offset by the amount of the outstanding loan, and this offset will be treated as a taxable distribution from the plan unless the participant contributes the amount of the loan offset to an eligible retirement plan (such as an IRA). As we previously reported on our blog, the Tax Cuts and Jobs Act, which was enacted on December 22, 2017, extended the period of time a participant has to make such a contribution from 60 days after the date of the offset to the due date (including extensions) for filing the participant’s federal income tax return for the year in which the plan loan offset occurred. Plan sponsors should confirm… Continue Reading
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
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
The PBGC issued a final rule on December 22, 2017, that expands the missing participants program from covering only terminated PBGC-insured, single-employer defined benefit plans to also covering defined contribution plans (“DC Plans”), such as 401(k) plans, PBGC-insured multiemployer plans, and non-PBGC-insured defined benefit plans sponsored by professional service organizations that terminate on or after January 1, 2018. Participation will be voluntary for DC Plans and professional service organization plans, and terminating DC Plans will have the option of transferring all missing participants’ benefits to the PBGC in lieu of establishing an IRA. There would be a one-time fee upon the transfer of assets to the PBGC, and thereafter participant accounts would not be reduced by ongoing maintenance fees. After a participant is located, the PBGC would pay his or her initial account balance with interest to the participant when located. View the PBGC’s Missing Participants Program webpage. View the… Continue Reading
In Notice 2017-72, the IRS published the Required Amendments List for 2017, 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 includes three items that relate to (a) certain market rate of return requirements for hybrid and cash balance plans, (b) benefit restrictions for certain defined benefit plans that are eligible cooperative plans or eligible charity plans, and (c) partial annuity distribution options for defined benefit plans. The deadline for adopting any required amendments described in this year’s Required Amendments List is December 31, 2019. View Notice 2017-72.
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
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.