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.
DOL Publishes FAQs on Employer Retirement Plan Obligations to Reemployed Service Members Under USERRA
The DOL recently published a series of frequently asked questions (“FAQs”) on its website that provide general guidance to employers on their retirement plan obligations to reemployed service members under the Uniformed Services Employment and Reemployment Rights Act of 1994 (“USERRA”). Among other things, the FAQs address (i) what military service must be credited for purposes of determining retirement benefits, (ii) an employer’s obligation to make retirement plan contributions while an employee is on a qualifying military leave of absence, and (iii) an employee’s right to make up missed contributions when he or she is reemployed following a qualifying military leave of absence. The FAQs are available here.
A recent decision from the U.S. Court of Appeals for the Fifth Circuit highlights that a qualified domestic relations order (“QDRO”) can be valid and enforceable even if it is issued after a participant’s death. In Miletello v. RMR Mechanical, Inc., the Fifth Circuit affirmed an award to the former spouse of a deceased 401(k) plan participant, even though (i) the QDRO in favor of the former spouse was not entered into until over a year after the participant’s death, and (ii) the participant was married to a new spouse at the time of his death. Importantly, a divorce settlement executed by the former spouse and the decedent before his death explicitly provided for the award from the 401(k) plan and contemplated that the former spouse would obtain a QDRO to receive the 401(k) plan assets. A copy of the Fifth Circuit’s opinion is available here.
A frequent, but often times avoidable, operational error for retirement plans is the failure to use the proper definition of “compensation” for various plan 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 either eligible or ineligible plan compensation. One such component that is frequently misclassified is the value of employee equity awards, such as stock options and restricted stock. Accordingly, 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 relevant plan purposes. Performing such an audit can help identify any errors and minimize the amount of corrective contributions and other fees or expenses that may be associated with correcting the error.
The U.S. Department of Labor has released updated model Summary Annual Reports (“SARs”) for retirement plans and for welfare benefit plans that are subject to ERISA. Generally, a plan that is required to file an annual Form 5500 is also required to distribute a SAR to plan participants and beneficiaries within nine months from the end of the plan year. View the updated model SAR for welfare plans. View the updated model SAR for retirement plans.
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
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.
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
Under Section 401(a)(9)(A) of the Internal Revenue Code, qualified employer-sponsored retirement plans must commence payment of required minimum distributions to a participant by no later than the participant’s “required beginning date” (“RBD”). A participant’s RBD is defined as April 1 of the calendar year following the later of (i) the calendar year in which the participant attains age 70.5 or (ii) the calendar year in which the participant retires from the employer-plan sponsor. However, the “still-working” exception in the second clause of the previous sentence does not apply to a “five-percent owner” of the employer. Additionally, special rules apply for making required minimum distributions to beneficiaries of deceased participants. With April 1, 2019 around the corner, the following list contains a few reminders for employers regarding required minimum distributions: Once a participant has commenced required minimum distributions from the plan, the participant must continue to receive them even if the… Continue Reading
Section 401(a)(9) of the Internal Revenue Code provides that, by the required beginning date, an employee’s accrued benefit in a tax-qualified retirement plan must either be paid in full or commence to be distributed as a nonincreasing annuity. The Treasury Regulations issued under Code Section 401(a)(9) contain an exception to the nonincreasing annuity requirement which permits increases due to a plan amendment that increases plan benefits. Some practitioners have interpreted the exception to permit sponsors to amend a plan to offer a lump sum window program to retirees already in pay status (i.e., the option for a retiree to convert the unpaid portion of her existing annuity into a one-time, lump-sum payment during a specified window period). In Notice 2015-49, the IRS announced its intent to amend the Treasury Regulations to expressly prohibit defined benefit plans from offering such lump sum window programs to retirees in pay status. In Notice… Continue Reading