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IRS Provides Favorable New Guidance on Safe-Harbor 401(k) Plans
02/01/2016
By: Jason Lacey

The IRS has provided much-anticipated (and welcome) guidance on mid-year amendments to safe-harbor 401(k) plans. This is favorable guidance that provides greater flexibility to employers that sponsor safe-harbor plans.

Brief Background

Safe-harbor 401(k) plans are excused from performing some nondiscrimination tests in exchange for meeting specified criteria, including providing a minimum employer contribution (either a matching contribution or nonelective contribution) and providing eligible employees with a notice each year. Prior guidance from the IRS (mostly informal) has indicated that employers generally could not make mid-year amendments to safe-harbor plans (unless expressly authorized by the IRS) or would risk losing safe-harbor status for that year. This presumption against mid-year amendments appeared to include amendments to plan provisions that did not relate specifically to safe-harbor status.

A Change in the Presumption

New guidance from the IRS reverses the prior presumption that any mid-year amendment to a safe-harbor plan was prohibited unless expressly permitted. Instead the guidance says that most mid-year amendments are permissible, so long as notice and election requirements are met in cases where the change affects the required content of the safe-harbor notice. Specifically, the guidance provides:

“A change made to a safe harbor plan or to a plan’s required safe harbor notice content does not violate the requirements of [the safe-harbor rules] merely because the change is a mid-year change, provided that (i) if it is a mid-year change to a plan’s required safe harbor notice content, the notice and election opportunity conditions [described in the guidance] are satisfied, and (ii) the mid-year change      Continue Reading...

 
IRS Releases 2015 COLAs for Benefit Plans
12/02/2014
By: Jason Lacey

The IRS has released the annual cost of living adjustments for various benefit-plan limits. The adjusted amounts will apply for 2015. Here are the highlights:

  • Retirement plan elective deferrals (402(g) limit) - $18,000 ($500 increase)
  • Retirement plan catch-up contributions - $6,000 ($500)
  • Annual additions to a defined contribution plan (415 limit) - $53,000 ($1,000 increase)
  • Definition of highly compensated employee - $120,000 ($5,000 increase)
  • Annual compensation limit (401(a)(17) limit) - $265,000 ($5,000 increase)

For individuals age 50 and older, these increased limits represent the ability to electively contribute up to $24,000 to a 401(k) plan, 403(b) plan, or governmental 457(b) plan during 2015. 

Inflation-adjusted amounts for high deductible health plans (HDHPs) and health savings accounts (HSAs) were released earlier this year (see prior post here).

 
IRS Provides Guidance on Treatment of Same-Sex Spouses In Retirement Plans
04/04/2014
By: Jason Lacey

The IRS released its long-anticipated guidance today on the impact of the Windsor case to qualified retirement plans. The guidance resolves a potentially thorny issue on retroactive recognition of same-sex marriages and clarifies when plans must adopt any amendments required to comply with Windsor. Here are the highlights:

Retroactivity Permitted But Not Required. Plans are not required to recognize same-sex marriages for any period before June 26, 2013 (the date of the Windsor decision). They are permitted to designate an earlier date as of which same-sex marriages will be recognized for plan purposes, although the guidance observes that recognizing same-sex marriages for all purposes as of a date earlier than June 26, 2013 may trigger requirements that are difficult to implement retroactively and may create unintended consequences, so caution must be exercised. 

Amendments May Not Be Necessary. A plan must be amended to reflect the outcome in Windsor only if the plan terms are inconsistent with Windsor. For example, a plan that defines a spouse as only a person of the opposite sex would be inconsistent with the outcome in Windsor. But a plan that merely uses the term "spouse" or "lawful spouse" without limiting it to persons of the opposite sex may be ok.

Amendment Timing. To the extent an amendment is required, it generally must be adopted by December 31, 2014. (Special rules may apply for non-calendar-year plans and governmental plans.)

Health and Welfare Plans Unaffected. This guidance addresses only retirement plans and does not impact health and welfare plans. 

The IRS's notice (Notice      Continue Reading...

 
IRS Finalizes Amendments to 401(k) Safe Harbor Regulations
11/22/2013
By: Jason Lacey

In new final amendments to the 401(k) safe harbor regulations (here), the IRS has provided some additional flexibility on mid-year reductions or suspensions of safe harbor contributions but also has added some new requirements. The regulations apply to amendments adopted after May 18, 2009, except that the additional requirements for mid-year reductions or suspensions of safe harbor matching contributions apply for plan years beginning on or after January 1, 2015.

Background. Safe harbor 401(k) plans are exempt from certain nondiscrimination testing requirements but must meet specific requirements related to employer contributions and vesting and must provide an annual notice. The employer contribution requirement is satisfied through either a matching contribution or a "nonelective" contribution. Safe harbor plan provisions generally must be adopted at or before the beginning of a plan year and must remain in effect for the entire plan year.

Because safe harbor plan provisions must remain in effect for the entire plan year, employers generally have been prohibited from reducing or suspending safe harbor contributions in the middle of a plan year. A limited exception has been available for safe harbor matching contributions, which could be reduced or suspended with at least 30 days advance notice, so long as participants were given an opportunity to change their deferral elections. Before 2009, however, safe harbor nonelective contributions could not be reduced or suspended during the plan year. Proposed regulations issued in 2009 permitted a narrow exception allowing for reduction or suspension of safe harbor nonelective contributions in cases of substantial      Continue Reading...

 
IRS Releases Initial Guidance on Same-Sex Spouses
08/29/2013
By: Jason Lacey

We have been anticipating guidance from the IRS on the treatment of same-sex spouses for tax and benefit purposes in light of the Supreme Court's overturning of DOMA, and here it is.

Married Anywhere. Rev. Rul. 2013-17 (here) says that a same-sex couple validly married anywhere (including in a foreign country) will be recognized as married for federal tax purposes, even if their marriage is not recognized under the law of their home state. In other words, it’s a state-of-celebration rule, not a state-of-residence rule.

All Tax Purposes. The rule applies for all tax purposes, including employee benefits. So in addition to filing joint tax returns, same-sex spouses may obtain tax-free coverage for each other under health or cafeteria plans and are entitled to spousal rights under 401(k) and other qualified retirement plans. Also, medical expenses incurred by one spouse in a same-sex marriage will qualify for reimbursement from a flexible spending account or health savings account maintained by the other spouse. Recognition of the same-sex marriage may present an issue for participants in dependent care assistance plans, because the spouse's income and employment must now be taken into account.

Retroactivity. Individuals in existing same-sex marriages may go back and claim a refund for taxes on any imputed income that resulted from coverage of a same-sex spouse or children of a same-sex spouse under a health or cafeteria plan. Employers may also be able to obtain refunds of employment taxes imposed on imputed income. The refunds are limited to years for which the statute      Continue Reading...

 
DOL Addresses ERISA Accounts for Defined Contribution Retirement Plans
07/15/2013
By: Jason Lacey

In a recent advisory opinion, the DOL has addressed - for perhaps the first time in published guidance - a key issue related to "ERISA accounts" established by service providers for 401(k) and other defined contribution retirement plans.

Background. Service providers to defined contribution retirement plans often receive revenue sharing payments with respect to the plan's investments. As part of their service agreements, these service providers may agree to give a portion of those revenue sharing payments back to the plan in the form of an "ERISA account" or "ERISA budget account." Amounts credited to the ERISA account are often used by the plan or plan sponsor to pay expenses associated with plan administration, such as auditing fees and plan communication costs. 

The structure of the ERISA account varies from agreement to agreement. Some ERISA accounts are held on the service provider's books. Some ERISA accounts are held as a separate account within the plan's trust arrangement. In either case, there has been some question as to whether or when amounts credited to the ERISA account are treated as "plan assets" for purposes of ERISA. 

Plan Assets When Plan Actually Receives Them. The recent advisory opinion describes an arrangement in which the ERISA account is held on the service provider's books as part of its general assets until it is directed by a plan fiduciary to deposit those amounts into a plan account. On those facts, the opinion concluded that the amounts credited to the ERISA account likely did not become plan      Continue Reading...

 
Supreme Court Invalidates DOMA
06/26/2013
By: Jason Lacey

In a closely watched and sharply divided opinion today, the Supreme Court invalidated the federal Defense of Marriage Act (DOMA) and its directive that only opposite-sex spouses may be recognized as spouses for purposes of federal law. Although the details and impact of the decision are still being parsed and evaluated, the bottom line is that same-sex couples who are recognized as validly married under state law are entitled to be recognized as spouses for purposes of federal law.

Brief Background. The case involved a same-sex couple, Edith Windsor and Thea Spyer, who had been married in Canada and whose marriage was recognized as valid under New York law, where they lived. Ms. Spyer died and left her estate to Ms. Windsor, who was required to pay federal estate tax because, under DOMA, she could not rely on an estate tax exception that allows for tax-free transfers of property between spouses at death. She sued for a refund of the taxes, claiming DOMA was unconstitutional.

The Court’s Analysis. Five of the nine Supreme Court justices agreed that DOMA was unconstitutional because it violated the equal protection rights of same-sex individuals who were recognized under state law as validly married. The Court essentially said that if a same-sex couple and an opposite-sex couple are treated the same under state law, they are constitutionally entitled to equal treatment under federal law.

Implication for Employee Benefit Plans. The case has many implications for employee benefit plans. For health plans, qualifying same-sex spouses that are covered under      Continue Reading...

 
Forgot to File Form 5500? There's an App For That.
02/15/2013
By: Jason Lacey

Most employee benefit plans that are subject to ERISA are required to file Form 5500. This includes both retirement plans (including most 403(b) plans) and welfare-benefit plans, although many welfare-benefit plans covering fewer than 100 participants are exempt.

The failure to file Form 5500 can result in serious penalties. The DOL currently assesses a penalty of $300 per day, up to $30,000 per year for a failure to file Form 5500. Ouch.

But there is good news. The DOL maintains a voluntary compliance program that allows employers to correct a failure to file Form 5500 and pay a substantially reduced fee. Even in cases where there have been failures to file Form 5500 over multiple years, the maximum fee under the program is only $4,000. That's still a lot of money, but it's better than staring down something approaching a 6-digit penalty.

The program was recently updated (see here). The technical details of how the program works and what has changed will not be of interest to most of you. But it's a good time to remind ourselves the program exists - and should be used whenever possible.

 
Hurricane Sandy Relief for Retirement Plan Loans and Hardship Distributions
11/21/2012
By: Jason Lacey

The IRS has issued guidance temporarily relaxing certain requirements related to loans and hardship distributions from 401(k), 403(b), and governmental 457(b) plans, in an effort to make those funds more readily available to individuals affected by Hurricane Sandy. The new rules apply to loans and hardship distributions made between October 26, 2012 and February 1, 2013, if they are made for the purpose of assisting plan participants or their family members who live or work in a Sandy-related federally declared disaster area.

As described in an IRS news release:

“This broad-based relief means that a retirement plan can allow a Sandy victim to take a hardship distribution or borrow up to the specified statutory limits from the victim’s retirement plan. It also means that a person who lives outside the disaster area can take out a retirement plan loan or hardship distribution and use it to assist a son, daughter, parent, grandparent or other dependent who lived or worked in the disaster area.”

Highlights of the specific relief provided:


Plan Amendment. Plans can make qualifying loans or hardship distributions before the plan document has been formally amended to allow for loans or hardship distributions, so long as an amendment is made by the end of the first plan year beginning after December 31, 2012.
Broader Hardship Standards. Hardship distributions can be made for any Sandy-related hardship, not just the “safe harbor” hardship standards typically relied upon.
Relaxed Documentation Requirements. Documentation and procedural requirements related to hardship distributions      Continue Reading...

 
Retirement Plan Cost-of-Living Adjustments Released for 2013
10/29/2012
By: Jason Lacey

The IRS has released its annual cost-of-living adjustments for retirement plans for 2013. Among the highlights:

  • The annual limit on elective contributions (other than catch-up contributions) to a 401(k), 403(b), or 457(b) plan has increased to $17,500.
  • The annual limit on catch-up contributions (for plan participants age 50 or older) remains the same at $5,500.
  • The maximum amount of annual additions that may be made to a defined contribution plan (the "415 limit") has increased to $51,000.
  • The maximum amount of compensation that may be taken into account for the year (the "401(a)(17) limit") has increased to $255,000.
  • The compensation threshold for identifying certain highly compensated employees remains the same at $115,000.

Separately, the Social Security Administration announced that the Social Security taxable wage base will increase to $113,700 for 2013 - up from $110,100 in 2012. In addition to affecting certain retirement-plan contributions, this impacts the amount of wages and earned income that are subject to the Social Security portion of the FICA and SECA taxes.

 
On the Radar: Cycle B Retirement Plan Restatements
09/24/2012
By: Jason Lacey

As the crisp fall air settles in, our thoughts turn to pumpkins, hayrack rides, apple cider - and, of course, retirement plan restatements. This year, it's Cycle B plans that must be restated and filed with the IRS for a fresh determination letter. If your EIN ends in a 2 or a 7 and you sponsor an individually designed retirement plan, you're up. The deadline to file with the IRS is still a few months away (January 31, 2013), but it's a good time to start getting everything in order, so you can beat the last-minute rush.

Not sure if you have an individually designed plan? All ESOPs and cash-balance pension plans are individually designed, and many traditional defined-benefit pension plans are too. But most plans maintained on a pre-approved "prototype" or "volume submitter" plan document are not considered individually designed and do not need to be submitted to the IRS at this time. This covers many (but not all) 401(k) and profit-sharing plans. Your retirement plan service provider or legal counsel can help you understand what type of plan you have, if you're not sure.

 
Now Approaching the Station: August 30 Deadline for Initial 401(k) Participant Fee Disclosures
08/21/2012
By: Jason Lacey

The August 30 deadline for initial annual disclosures under the DOL's participant-level fee-disclosure regulation is fast approaching. Employers with participant-directed 401(k) plans should be putting the final touches on their notices (or confirming that their service providers have done so) and making sure all systems are "go" for distributing them by next Thursday.

If you need a refresher, take a look at the DOL's fact sheet on the final rule, as well as our prior coverage (here).

 
DOL Withdraws Controversial Guidance on Participant-Level Disclosures in 401(k) Plans with Brokerage Windows
08/01/2012
By: Jason Lacey

The Department of Labor has withdrawn the controversial "Q&A-30" in Field Assistance Bulletin 2012-02, which would have required some investment-specific disclosures regarding fees and expenses in 401(k) plans that offered only a brokerage window, self-directed brokerage account, or similar arrangement and did not designate any specific investment options beyond the brokerage platform. In an amended bulletin (Field Assistance Bulletin 2012-02R), the DOL replaced Q&A-30 with a new Q&A-39 that does not require any investment-specific disclosures in brokerage-window-only plans, but does contain strong language warning plan fiduciaries that merely offering a brokerage window to participants may not be fully consistent with the general fiduciary obligations imposed by ERISA.

As brief background, the DOL's participant-level fee-disclosure regulation (which goes into effect this year) requires specific annual and quarterly disclosures to participants in most participant-directed 401(k) and other individual-account plans regarding plan-level and investment-level fees and expenses. (The initial disclosures are due by August 30, 2012, for calendar-year plans.) The investment-level information applies only to investments that are "designated investment alternatives." A brokerage window is not a designated investment alternative. So the regulation generally has been read to mean that no investment-level disclosures are required in a plan that does not have any designated investment alternatives but rather offers participants a brokerage window or self-directed brokerage account through which investments may be made in a large number of publicly available investment securities.

Q&A-30 went beyond that by nonetheless requiring investment-level disclosures in brokerage-window-only plans with respect to investment options that were either designated      Continue Reading...

 
DOL: "Open MEP" is Not a Single ERISA Plan
06/14/2012
By: Jason Lacey

The Department of Labor (DOL) has opined that a large 401(k) plan covering over 9,800 employees of 500 different employers is not a single retirement plan, but rather is a collection of separate plans established by each participating employer.

The plan was set up as a "multiple employer plan" and referred to as an "open MEP" because the employers adopting the arrangement were not related to each other by ownership, industry, or any other unifying factor. The DOL concluded this lack of "genuine organizational relationship" among the employers was fatal to the intended treatment of the plan as a single plan.

Although this opinion does not impair the tax-qualified status of open MEPs, it does mean that employers participating in open MEPs will be required to separately comply with the standards imposed under ERISA, such as the plan document, summary plan description, and Form 5500 requirements. In addition, each employer is treated as a fiduciary under ERISA and is charged with, among other things, prudently selecting and monitoring investment and service providers, including the sponsor of the open MEP and its affiliated service providers.

In light of this opinion, employers considering an open MEP should carefully evaluate the extent to which participation in the plan will, in fact, relieve it of responsibilities it otherwise has as an employer offering retirement benefits to its employees.

 


Authors
Don Berner Image
Don Berner, the Labor Law, OSHA, & Immigration Law Guy
Boyd Byers Image
Boyd Byers, the General Employment Law Guy
Jason Lacey Image
Jason Lacey, the Employee Benefits Guy
Additional Sources
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