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IRS Announces Final Regulations Implementing New Hardship Distribution Requirements

The IRS recently published final regulations addressing changes enacted by the Tax Cuts and Jobs Act of 2017, the Bipartisan Budget Act of 2018, and other prior changes to the tax code. The final regulations do not contain any substantive differences to the proposed regulations issued by the IRS in November 2018. The new final regulations: • Permit, but do not require, hardship distributions from a participant’s elective contributions, QNECs, QMACs (including safe harbor matching contributions), and any earnings on those amounts, regardless of when they were contributed or earned. • Prohibit plans from containing a requirement that a participant may not contribute to the plan for any period of time following a hardship distribution (in other words, eliminate the six-month suspension rule). • Eliminate the requirement that a participant take out all available plan loans before receiving a hardship distribution (although plans may continue to contain such a requirement).… Continue Reading

IRS: Retirement Plan Distributions are Taxable Even if a Participant Refuses to Cash a Distribution Check

In Revenue Ruling 2019-19, the IRS clarified that a plan participant’s refusal to cash a distribution check after she received it does not (i) permit her to exclude the amount of the distribution from her taxable income, (ii) alter her employer’s duty to withhold all applicable taxes from the distribution, or (iii) alter her employer’s duty to report the taxable income on a Form 1099-R. While this Revenue Ruling addresses the treatment of plan distributions when a participant receives, but refuses to cash, a distribution check, the ruling does not address other situations in which a distribution check is not cashed, such as in the case of missing participants. The ruling states that the IRS and Treasury are continuing to analyze such issues and may publish related guidance in the future. Revenue Ruling 2019-19 is available here.

Practice Tip: Warning Signs Your Plan May Have a Missing Participants Problem

When participants in a qualified retirement plan terminate employment with the plan sponsor, it can be challenging to ensure that their contact information in the plan’s records is kept up to date and accurate. Inaccurate contact information is problematic for a variety of reasons, including potentially causing an operational failure when such participants do not receive distribution of their plan benefits by their required distribution date, as well as increasing the possibility of fraud when a participant’s information is sent to the wrong address. In addition, a plan sponsor’s failure to make reasonable efforts to locate missing participants would be a breach of their fiduciary duties of loyalty and prudence. Often, the first indication that a participant may be missing is that mail sent to their last known address is returned undeliverable or their distribution checks are returned or remain uncashed. In addition, a plan sponsor should check to see… Continue Reading

IRS Opens Determination Letter Program to Merged Plans and Hybrid Plans

In Revenue Procedure 2019-20, the IRS extended the determination letter program, effective as of September 1, 2019, to include merged plans resulting from a corporate merger or similar transaction. For a merged plan to be eligible for a favorable determination letter, (i) the date of the plan merger must occur no later than the last day of the first plan year beginning after the plan year that includes the closing date of the corporate transaction, and (ii) the determination letter application must be submitted between the date of the plan merger and the last day of the first plan year beginning after the date of the plan merger. In addition, the IRS will accept determination letter applications for individually designed statutory hybrid plans during a 12-month window beginning on September 1, 2019. As always, the IRS will continue to process determination letter applications for initial plan qualification and for qualification… Continue Reading

IRS Expands Self-Correction Program Under EPCRS

The IRS recently published Rev. Proc. 2019-19, which sets forth the most current consolidated statement of the correction programs under the IRS’s Employee Plans Compliance Resolution System (“EPCRS”). Pursuant to the new guidance, which became effective April 19, 2019, eligible plan sponsors may use the self-correction program (“SCP”) component of EPCRS to correct certain failures that were previously only correctable under the voluntary correction program (“VCP”) or Audit CAP components of EPCRS. Unlike VCP and Audit CAP, SCP does not require any filings or payments to the IRS. The amended SCP now includes procedures for correcting certain plan document failures and for correcting certain participant loan failures (including defaulted plan loans). Rev. Proc. 2019-19 also expands the circumstances under which certain operational failures may be corrected by plan amendment under SCP. View Rev. Proc. 2019-19. View a summary of the key changes to the SCP component of EPCRS.

IRS Publishes Updated Operational Compliance Checklist

The IRS recently published an updated Operational Compliance Checklist (the “Checklist”), which lists changes in qualification requirements that became effective during the 2016 through 2019 calendar years. Examples of items added to the Checklist for 2019 include, among other things: Changes to the hardship distribution rules enacted by the Bipartisan Budget Act of 2018, such as eliminating the requirement to first take out all available plan loans and expanding the types of contributions eligible for distribution Proposed regulations enacting certain other changes to the hardship distribution rules, such as eliminating the six-month contribution suspension requirement and expanding the safe harbor list of expenses deemed to constitute an immediate and heavy financial need The extension of temporary nondiscrimination relief for closed defined benefit 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… Continue Reading

Practice Tip – Missing Participants Remain a Significant Concern for Retirement Plan Sponsors

When participants in qualified retirement plans are no longer current employees of the plan sponsor, it can be challenging to ensure that the contact information in the plan’s records is up to date and accurate. However, inaccurate contact information in the plan’s records is problematic for a variety of reasons, including causing operational failures when participants do not receive distribution of benefits by the plan’s required distribution date and increasing the possibility of fraud when a participant’s information is sent to the wrong address. Plan administrators should review their procedures for locating missing participants and ensure that they are (1) consistent with available guidance from the IRS and the DOL, (2) appropriate for the plan and its participant population, and (3) being followed consistently by the plan administrator or its delegate. Plan administrators should also document any steps undertaken to locate missing participants. The plan’s procedures should also address how… Continue Reading

Federal Government Shutdown Impacting IRS Employee Plans Functions

The federal government shutdown is affecting IRS operations relating to determination letter filings and submissions under the Employee Plans Compliance Resolution System, among other things. According to page 94 of the IRS Lapsed Appropriations Contingency Plan in effect at the time of the shutdown (the “Contingency Plan”), only three employees in the IRS TEGE Employee Plans department are authorized to continue working through the shutdown to ensure statute protection and continued processing of remittances. Attempts to contact the IRS general assistance line for determination letter filings result in the following automated message: Welcome to the Internal Revenue Service. Live telephone assistance is not available at this time. Normal operations will resume as soon as possible. You may continue to use our self-service tools… View the Contingency Plan.

IRS Announces Proposed Regulations Implementing New Hardship Distribution Requirements

The IRS recently published proposed regulations addressing changes enacted by the Tax Cuts and Jobs Act of 2017, the Bipartisan Budget Act of 2018, and other prior changes to the tax code. Specifically, the proposed regulations: Permit, but don’t require, hardship distributions from a participant’s elective contributions, QNECs, QMACs (including safe harbor matching contributions), and any earnings on those amounts, regardless of when they were contributed or earned Eliminate the requirement that a participant take out all available plan loans before receiving a hardship distribution (although plans may continue to contain such a requirement) Prohibit plans from containing a requirement that a participant may not contribute to the plan for any period of time following a hardship distribution (in other words, eliminate the six-month suspension rule). If a suspension is still being applied as of January 1, 2019 for a prior hardship distribution, a plan may eliminate the suspension as… Continue Reading

IRS Provides New Guidance Under Code Section 162(m)

In December 2017, under the Tax Cuts and Jobs Act, Congress broadened the $1 million deduction limitation under Code Section 162(m) for a public company’s top executives by, among other things, broadening the scope of “covered employees” and eliminating the performance-based compensation exception. The more restrictive Code Section 162(m) generally applies for tax years after 2017, but certain arrangements in existence on November 2, 2017, may be grandfathered. On August 21, 2018, the IRS issued new guidance on Code Section 162(m) under IRS Notice 2018-68 (the “Notice”). Notably, the Notice provides guidance with respect to the grandfathering relief (including the impact of negative discretion and what constitutes a material modification), and provides guidance on the expanded scope of who is a “covered employee” (and will remain a covered employee). The Notice leaves open for comment several issues, including, the rule which allows certain newly public companies to limit the application… Continue Reading

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