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IRS Permits Lump Sum Window Programs for Retirees in Pay Status

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

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When participants in qualified retirement plans are no longer current employees of the plan sponsor, it can be challenging to ensure that the contact information in the plan’s records is up to date and accurate.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

Puerto Rico Treasury Announces Qualified Retirement Plan Limits for 2019

The Puerto Rico Department of the Treasury recently issued Circular Letter Internal Revenue No. 18-21 (the “Circular”), which announced applicable qualified retirement plan limits for 2019, as required by the Puerto Rico Internal Revenue Code of 2011, as amended (the “PR Code”). For plans qualified only in Puerto Rico, the limits on elective deferrals, catch-up contributions, and after-tax contributions all remain unchanged for 2019, while the limits on annual benefits, annual contributions, plan compensation, and the highly compensated employee threshold all increased for 2019. For plans qualified in both Puerto Rico and the U.S. (including the Federal Government Thrift Plan), the limits on catch-up and after-tax contributions remain unchanged for 2019, while the limits on elective deferrals, annual benefits, annual contributions, plan compensation, and the highly-compensated employee threshold, all increased for 2019. The applicable plan limits are as follows: Annual Benefit Limit (All Defined Benefit Plans): $225,000 (increased from $220,000)… Continue Reading

PBGC Adds Fiduciary Breaches to Mediation Program

In 2017, the PBGC introduced a program that offered voluntary mediation with certain termination liability collection and Early Warning Program cases. The program was made permanent and was expanded to include fiduciary breach cases in 2019. Mediation is offered to eligible plan sponsors either with the demand letter (for fiduciary breach cases) or at the outset of mediation (for Early Warning Program cases) or after review of the information disclosed to the PBGC under 29 C.F.R. § 4062.6 (for termination liability cases). View the PBGC Mediation Program.

Second Circuit Allows “Stock-Drop” Case Against IBM to Proceed

In the recent case of Jander v. Retirement Plans Committee of IBM, the U.S. Circuit Court of Appeals for the Second Circuit ruled in favor of a group of IBM retirement plan participants who alleged that plan fiduciaries had breached their duty to prudently manage the assets of the IBM Company Stock Fund, an ESOP governed by ERISA. The case was filed after IBM’s stock price declined by more than $12 per share in 2014, following an announcement that IBM would pay $1.5 billion to offload its struggling microelectronics business. Plaintiffs alleged that IBM failed to publicly disclose enormous losses being incurred by the microelectronics business and had continued to report an inflated value for the business (which, in turn, resulted in an artificially high IBM stock price). The district court dismissed the suit, ruling that the plaintiffs had failed to state a duty-of-prudence claim under ERISA because a prudent… Continue Reading

Possible Year-End Deadline for Retirement Plans of Plan Sponsors Involved in a 2017 Corporate Transaction

Generally, employee benefit plans of members of the same controlled group must satisfy certain requirements of the Internal Revenue Code on an aggregated basis (e.g., retirement plan nondiscrimination and coverage testing). Following a corporate transaction, such as a merger or a stock or an asset sale, the benefit plans of the buyer and seller may differ significantly. In order for plan sponsors to have a period of time post-closing to determine how best to structure their benefit plans going forward, Code Section 410(b)(6)(C) provides transition relief by permitting the plans to choose to be operated and tested separately, if certain requirements are met, such as coverage under the plan not being materially modified during a transition period. The transition period begins on the transaction’s closing date and, generally, ends on the last day of the first plan year beginning after the year in which the transaction occurred or, if earlier,… Continue Reading

IRS Publishes 2018 Required Amendments List

In Notice 2018-91, the IRS published the Required Amendments List for 2018, 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 did not include any such items. Nevertheless, a required amendment that was listed in the 2016 Required Amendments List must be adopted (if applicable to an employer’s plan) by December 31, 2018. That required amendment relates to restrictions on accelerated distributions from underfunded single-employer, collectively-bargained defined benefit plans due to a plan sponsor’s bankruptcy. Additional information on the 2016 Required Amendments List is available on our prior blog post. View Notice 2018-91

IRS Announces 2019 Qualified Retirement Plan Limits

The IRS recently announced cost-of-living adjustments for 2019. Below is a list of some of the key annual limits that will apply to qualified retirement plans in 2019: Compensation limit used in calculating a participant’s benefit accruals: increased to $280,000. Elective deferrals to 401(k) and 403(b) plans: increased to $19,000. Annual additions to a defined contribution plan: increased to $56,000. 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 $225,000. Compensation dollar limit for defining a “key employee” in a top heavy plan: increased to $180,000. Compensation dollar limit for defining a “highly compensated employee”: increased to $125,000. View the full list of 2019 plan limits in Notice 2018-83.

IRS Tax Exempt and Government Entities Division Issues 2019 Compliance Program Letter

The IRS’s Tax Exempt and Government Entities Division (“TE/GE”) recently issued its Compliance Program Letter for 2019, which lists TE/GE’s compliance priorities for the 2019 calendar year. Those priorities include issuing additional guidance under the Tax Cuts and Jobs Act (the “Act”), which was enacted in December 2017, and expanding its use of Pay.gov and secure messaging with taxpayers and practitioners in the TE/GE’s employee plans program. The letter does not list any specific guidance topics to be addressed under the Act or provide that guidance is forthcoming on Internal Revenue Code changes enacted by the Bipartisan Budget Act of 2018, such as changes to the hardship distribution rules. The letter does, however, state that if additional issues are identified in the future, TE/GE will modify its list of priority items to ensure that TE/GE remains focused on the highest priority items. View the 2019 Compliance Program Letter.

Hardship Withdrawals

The Bipartisan Budget Act of 2018 (the “Budget Act”) contains changes that will impact 401(k) plans that offer hardship withdrawals. Effective January 1, 2019, the following key changes to the Internal Revenue Code’s hardship withdrawal rules become effective: Permissible Contribution Sources Expanded: The contribution sources from which hardship withdrawals are permitted have been expanded to include qualified nonelective contributions (“QNECs”), qualified matching contributions (“QMACs”), 401(k) safe harbor plan contributions, and earnings on such QNECs, QMACs, and employee deferrals (including post-1988 earnings on elective deferrals). Loan Exhaustion Requirement Eliminated: Participants may take a hardship withdrawal without first having to take out all nontaxable loans available under the plan. Six Month Suspension Requirement Eliminated: Plan administrators are no longer required to suspend a participant’s elective deferrals for six months following a hardship withdrawal. Although the IRS has not yet issued explanatory guidance regarding these changes, plan sponsors need to decide now how… Continue Reading

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