Deadline Approaching for 2010 Plan Amendments
Lawrence Jenab, Tuesday, August 10, 2010 | Filed under: 401(k) Plans, 403(b) Plans, Determination Letters, Legislation, Pension Plans, Qualified Retirement Plans
It may be summer now, but sponsors of tax-favored retirement plans should keep in mind the many required amendments for which a year-end deadline is fast approaching. This article highlights some of the more important changes that sponsors must address before the sun sets on 2010.
The HEART Act
As we reported in our September 2008 article, most tax-favored retirement plans must be amended by the end of the 2010 plan year to reflect the mandatory provisions of the Heroes Earnings Assistance and Relief Tax Act of 2008 (the “HEART Act”). HEART Act changes for which amendments are required include:
- An enhanced survivor benefit; and
- New rules governing the treatment of military differential pay.
Many sponsors have already amended their plans for the HEART Act. But as we reported in our
March 2010 article, some plans may require a
second round of HEART Act amendments to address guidance issued by the IRS in
Notice 2010-15.
Delayed PPA Deadlines
As we reported in our December 2009 article, the amendment deadline for most changes required by the Pension Protection Act of 2006 (“PPA”) was the last day of the first plan year beginning on or after January 1, 2009. In Notice 2009-97, however, the IRS extended the deadline for three categories of PPA amendments until the last day of the 2010 plan year. The following changes are affected by this delay:
- For certain defined contribution plans that invest in employer stock, new diversification rights for participants;
- For defined benefit plans, new funding-based limits on distributions and benefit accruals; and
- For cash balance and other hybrid plans, a number of new vesting and other special rules.
PPA Changes for Non-Calendar-Year Plans
As noted above, for most PPA changes the amendment deadline for calendar-year plans was December 31, 2009. For fiscal-year plans, however, the deadline will fall within 2010 – on the last day of the first plan year that began in 2009.
Discretionary Amendments
In most cases, the deadline for adopting plan-design changes that do not reduce the rate of benefit accruals is the end of the plan year in which they take effect; i.e., such changes may be retroactive to the first day of the plan year. Thus, for most purposes, calendar-year plans must be amended to reflect 2010 design changes by no later than December 31, 2010.
Some design changes must be adopted, however, before the plan year in which they take effect. These include certain changes to safe-harbor 401(k) contributions, as well as certain reductions in the rate of pension accruals. For such design changes to be effective for the 2011 plan year, they must therefore be adopted by the end of the 2010 plan year. (These changes may also require the sponsor to issue participant notices before the amendment is effective.)
Direct Rollovers for Nonspouse Beneficiaries
As a part of the PPA, Congress amended the rollover rules to allow nonspouse beneficiaries to roll death benefits directly into an individual retirement account or annuity. In Notice 2007-7, the IRS interpreted this change as optional on the part of a plan. However, the Worker, Retiree and Employer Recovery Act of 2008 (“WRERA”), which included several technical corrections to the PPA, made clear that this was a mandatory change.
Accordingly, all Section 401(a) qualified retirement plans, Section 403(b) plans, and governmental Section 457(b) plans have been required to allow direct rollovers by nonspouse beneficiaries since January 1, 2010. In general, these plans must be amended to reflect this change by the end of the first plan year beginning in 2010.
Cycle E Filing Deadline
In addition to the changes discussed above, individually designed Section 401(a) qualified plans falling within “Cycle E” of the IRS’s determination letter program must be amended and restated — and have a determination letter application filed with the IRS — by January 31, 2011. The same is true for any governmental plan that chose not to submit a determination letter application during their regular cycle (Cycle C, which closed on January 31, 2009). This Cycle E deadline is unrelated to the plan year on which a plan operates.
As explained in our March 2010 article, a plan falls within Cycle E if the sponsoring employer’s tax identification number ends with either “5” or “0.” The many changes that must be incorporated into a Cycle E plan are listed on the IRS’s 2009 cumulative list of retirement plan changes. Accordingly, the sponsor of any Cycle E plan that has not already begun this review and amendment process should do so without further delay.
What Should Plan Sponsors Do?
The consequences of missing any of the amendment deadlines discussed above could be quite severe: the plan would lose its tax-favored status. Sponsors should therefore carefully review their documents to determine whether they have adopted conforming amendments by the applicable deadlines. Spencer Fane’s Employee Benefits Group is ready to assist sponsors in this review, as well as in drafting any necessary amendments.