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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.

New IRS Guidance on Participant Loan Cure Periods

In a recent Chief Counsel Advise Memorandum, the IRS analyzed two factual scenarios in which a 401(k) plan participant missed certain loan payments. In the first scenario, the participant missed two consecutive installment payments, which were due in separate calendar quarters. Payments made subsequent to the missed payments were deemed to “cure” the prior missed payments, which resulted in a rolling cure period that would extend to the end of the calendar quarter following the quarter in which the last installment payment was made. Ultimately, the participant made a payment to the plan that included an amount for the two prior missed payments as well as the payment then due. Because all missed payments were cured within the applicable cure period, the IRS concluded that no deemed distribution of the loan proceeds had occurred. In the second scenario, the participant missed three consecutive payments, which were all due in the… Continue Reading

IRS provides Retirement Plan Loan and Hardship Distribution Relief for Harvey Victims

The IRS has released Announcement 2017-11 providing relief from some of the loan and hardship distribution requirements under qualified retirement plans (including Code Section 401(a) and 403(b) plans) for the period of August 23, 2017 through January 31, 2018. The relief applies to employees or former employees either (i) whose principal residence on Aug. 23 was in one of the Texas counties identified by FEMA for individual assistance because of Hurricane Harvey, or (ii) whose place of employment on Aug. 23 was in one of those counties. The relief also applies if the employee’s or former employee’s “lineal ascendant or descendant, dependent, or spouse” lived or worked in one of those counties on Aug. 23. This relief will also apply to those living or working in other areas FEMA may identify for individual assistance in Texas or other states due to damage from Harvey. For a list of the counties… Continue Reading

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.

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

DOL Final Rule Implements 60-Day Delay of New Fiduciary Duty Rule

The DOL recently published final rules that implement a 60-day delay in the effective date of the new fiduciary duty rule and related exemptions that the DOL proposed last March. Both the DOL and IRS previously announced enforcement relief from the new fiduciary duty rule in the event the DOL did not publish these final rules prior to April 10, 2017 (the enforcement relief is now moot since the final rules were published prior to that date). The final rules confirm that the new fiduciary duty rule’s effective date has been pushed back from April 10, 2017 to June 9, 2017. The 60-day delay is intended to give the DOL time to reconsider the fiduciary duty rule and to determine whether it may adversely affect the ability of individuals to gain access to retirement information and financial advice. View the final rules.

IRS Releases Memo Addressing Hardship Withdrawal Substantiation Requirements for 403(b) Plans

The IRS recently released a memorandum (the “403(b) Memo“) directed to its Employee Plan Examinations agents regarding the documentation they should obtain from plan administrators in order to determine whether distributions from 403(b) plans were made on account of an immediate and heavy financial need. The 403(b) Memo follows a similar memorandum that was recently released by the IRS that related to hardship substantiation requirements for 401(k) plans (the “401(k) Memo“). The 403(b) Memo states that since hardship distributions from a 403(b) plan are subject to the same rules that apply to such distributions from a 401(k) plan, 403(b) plan administrators and recordkeepers should follow the same steps as outlined in the 401(k) Memo to substantiate a participant’s claimed hardship, namely the plan administrator or recordkeeper should, prior to making the distribution, (1) obtain source documents from the employee substantiating the hardship or (2) obtain a summary of the information… Continue Reading

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