Benefits In Brief

Once again, amendment season is upon us. 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 curtain closes on 2011.

Following an October 20 announcement by the IRS and an October 19 announcement by the Social Security Administration, we now know most of the dollar amounts that employers will need to administer their benefit plans for 2012. And unlike the past two years, many of these amounts will actually be adjusted upward to account for inflation.

The Internal Revenue Service has announced that a new Form 8955-SSA (“Annual Registration Statement Identifying Separated Participants with Deferred Vested Benefits”) has replaced Schedule SSA to the Form 5500.

As we reported in our August 2010 article, sponsors of tax-favored retirement plans should keep in mind the many required amendments for which a 2010 year-end deadline is fast approaching. 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”).

On September 27, 2010, President Obama signed the Small Business Jobs and Credit Act of 2010 (the “Act”), which includes two provisions designed to promote retirement preparation (while raising revenue for the federal government). The first would permit Roth contributions to Section 457(b) plans maintained by state or local governments (a feature that is currently limited to 401(k) and 403(b) plans). The second would permit certain amounts in 401(k), 403(b) and governmental 457(b) plans to be converted to Roth accounts within the plan (i.e., an “in-plan” conversion option).

The IRS recently announced inflation-adjusted dollar limitations and cost-of-living adjustments applicable to qualified retirement plans in 2011. All of these limits remain unchanged from 2010. The Social Security Administration has made a similar announcement regarding Social Security premiums and benefits.

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.

Rounding out the final year of its first five-year cycle, the IRS has now opened its determination letter program for individually designed retirement plans to those plans falling within “Cycle E.” These are plans sponsored by employers whose employer identification number ends with either “5” or “0.”

As reported in our August 2009 article, tax-qualified retirement plans must be amended by the end of the 2009 plan year to reflect the mandatory changes enacted as part of the 2006 Pension Protection Act (“PPA”). For calendar-year plans, this PPA amendment deadline is December 31, 2009. (Governmental plans have an additional two years, and certain collectively bargained plans may enjoy an extension, as well.)

In September of this year, the IRS issued official guidance on how employers may convert unused leave under a bona fide sick leave, vacation leave, or paid-time-off (“PTO”) program into contributions to a qualified, defined contribution plan (such as a profit sharing or 401(k) plan). Revenue Rulings 2009-31 and 2009-32 provide a virtual “roadmap” for how the value of unused leave (that might otherwise be forfeited each year or paid out in cash on termination of employment) may be used as a basis for making additional employer contributions, or in some cases, employee elective deferrals, to such a plan.

Traditionally, the IRS has announced inflation-adjusted retirement plan limits in October, based on the inflation rate during the prior twelve-month period. This time, however, the IRS announcement was that these limits would not be decreased, despite an actual rate of deflation during the prior twelve months. Accordingly, virtually all of the dollar amounts under which retirement plans have been administered during 2009 will remain the same for 2010.

The IRS has finally updated the model “rollover notice” it issued in 2002. In fact, we now have two new models. Plan administrators will want to start using these new notices on or before January 1, 2010.

Under recent IRS guidance, sponsors of many defined contribution plans must decide, by November 30, 2009, how to handle required minimum distributions (“RMDs”) for the 2009 calendar year. Participants who have already received 2009 distributions that consisted of (or included) a 2009 RMD have until this same date to roll that RMD into an IRA or eligible retirement plan in a tax-free rollover.

Many 401(k) and other employer retirement plans allow participants to borrow from their accounts. These loans can carry a number of advantages, including ready availability and a reasonable rate of interest. Moreover, if properly structured, a participant loan can be obtained (and repaid) on a tax-free basis.

Earlier this year, the IRS finalized regulations it had proposed in November of 2007 on the subject of automatic enrollment in salary deferral plans.  These final regulations respond to a number of comments on the proposed regulations. 

If your company sponsors a retirement plan that is qualified under Section 401(a) or 403(a) of the Internal Revenue Code (such as a 401(k) plan, a profit sharing plan, or a defined benefit pension plan), your plan must periodically be amended for changes in the tax laws and/or the regulations governing such plans. Those changes include the final regulations under Code Section 415 (regarding the limit on annual additions to defined contribution plans and the limit on annual benefits payable under defined benefit plans).

Under the IRS’s determination letter program, all individually designed plans (i.e., those that are not maintained on either a prototype or volume submitter document) are on a 5-year cycle for renewing their determination letters.  Plans in “Cycle D” may now file their determination letter applications.  The deadline for filing these applications is January 31, 2010.

Section 401(k) plans are not required to offer annuity distribution options – and most do not. Instead, participants are typically offered a lump-sum payment and, perhaps, a range of installment options. Of those few 401(k) plans that do offer annuity options, only a tiny fraction of retirees select them.

Under the IRS’s determination letter program, all individually designed plans (i.e., those that are not maintained on either a prototype or volume submitter document) are on a five-year cycle for renewing their determination letters. Plans in “Cycle C” may now file their determination letter applications. The deadline for filing these applications is January 31, 2009.

A recent case from Kentucky illustrates the importance of careful drafting of the terms of a qualified domestic relations order (“QDRO”). In Braehler v. Ford Motor Co., U.A.W. Retirement Plan, the court dismissed a claim brought by the second wife of a former Ford employee for a portion of the survivor benefits provided by his retirement plan. As a result of the court’s decision, the first wife will continue to receive the entire survivor’s benefit, even though the retiree designated his second wife as his “surviving spouse” when he elected to take a joint and survivor annuity. This result demonstrates that if the terms of a QDRO are not carefully considered they may create unnecessary litigation and perverse outcomes, even when the intention of the parties is clear.

When the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”) created the concept of a “Roth 401(k) contribution,” things got off to a slow start. For one thing, it was not at all clear how the Roth IRA concept, which has been around for some time, would be transplanted to an employer-sponsored plan.

As we reported in our November issue of Benefits in Brief, many provisions of last year’s Pension Protection Act (“PPA”) became effective on January 1, 2007. The IRS has now issued a “grab bag”of guidance on certain of those provisions, primarily dealing with distribution issues.

In the context of final regulations concerning abandoned defined contribution plans (so-called “orphan plans”), the Department of Labor (“DOL”) has also clarified its 2004 guidance on the permissible means of distributing accounts of participants and beneficiaries who cannot be located at the time of a plan’s termination. Although these orphan plan regulations are primarily of interest to banks, insurers, and mutual fund companies that hold assets of abandoned plans, plan sponsors and administrators will also benefit from the regulations’ “missing participant” provisions.

The Department of Labor (“DOL”) recently issued guidance regarding the distribution and allocation of mutual fund settlement payments made to employee benefit plans and their participants. This guidance is directly related to SEC enforcement actions alleging late trading and market timing activities. As a result of these actions, numerous mutual funds have established settlement funds.

The Department of Labor and the Internal Revenue Service recently modified their voluntary correction programs to make it easier for plan sponsors and fiduciaries to remedy certain violations. The modifications affect the DOL’s Voluntary Fiduciary Correction Program (“VFCP”) and the IRS’s Employee Plans Compliance Resolution System (“EPCRS”).

The IRS has issued sample language by which a 401(k) plan sponsor may adopt a “Roth” feature for the plan. A Roth 401(k) feature allows employees to make after-tax contributions to the plan, but then receive a distribution of those contributions and earnings on a tax-free basis. This option may be of particular interest to younger employees, or to highly compensated employees who expect to remain in a relatively high tax bracket following their retirement.

Market timing and other short-term trading patterns impose costs on mutual funds by disrupting management, forcing funds to maintain excessive liquidity, and driving up tax expenditures. The SEC issued final rules on mutual fund redemption fees last year to curb these abuses.

Two recent private letter rulings by the Internal Revenue Service confirm that domestic partners – even when granted the same rights as married couples under state law – cannot be treated as spouses by retirement plans.  The IRS issued the private letter rulings to two governmental deferred compensation plans intended to be eligible under Tax Code Section 457(b). These plans were maintained in a state that grants registered domestic partners the same treatment as married couples.