Compliance Corner Archives
Retirement Updates 2018 Archive
On Dec. 4, 2018, the IRS released Notice 2018-95, clarifying 403(b) plan eligibility requirements. As background, 403(b) plans are subject to a universal availability rule which requires employers to offer the 403(b) plan to all their employees. There is an exception that allows employers to exclude part-time employees who are expected to work less than 20 hours per week if they work less than 1,000 in their first year and in any year that the person worked less than 1,000 hours per week in the immediately preceding plan year.
Many employers read those rules to allow for an employer to potentially stop 403(b) plan deferrals for a part-time employee that might have been in the plan before, but later had a year where they worked less than 1,000 hours. However, the IRS released model 403(b) plan language in 2013 and 2015 that made it clear that they don’t acknowledge that reading of the rule. Instead, the IRS recognizes a “once in, always in” rule that mandates that a part-time employee that gains eligibility cannot lose it later, even if they work less than 1,000 hours in a subsequent year.
Notice 2018-95 provides relief to employers that subscribe to the incorrect reading of the rule. Specifically, as long as those employers correct their practice by Jan. 1, 2019, they will not be held accountable for failing to comply with the universal availability rule for the years preceding 2018. Keep in mind, though, that they will need to offer any part-time employees that were improperly excluded the opportunity to contribute to the plan in 2019.
403(b) plan sponsors that have improperly excluded part-time employees should work with their TPA or other service provider to come into compliance, including amending plan documents if necessary.
On Nov. 20, 2018, the IRS released the Instructions for the 2018 Form 5500-EZ. The instructions came after the Form 5500-EZ was released on Sept. 25, 2018. As a reminder, Form 5500-EZ is used by a one-participant retirement plan or a foreign retirement plan that does not file electronically on Form 5500-SF.
One of the changes to this year’s forms is that the title of the form has been changed to indicate that the form may be used for foreign plans. Additionally, the codes for plan characteristics on line 8 have been updated to reflect the IRS changes for pre-approved plans.
While many employers outsource the preparation and filing of these forms, employers should also familiarize themselves with the new requirements and work closely with vendors to collect the applicable information.
On Nov. 14, 2018, the IRS published a proposed rule that changes the requirements that must be met for a participant to take a hardship distribution. The proposed rule incorporates some of the changes to hardship distributions that were made through congressional action (such as through the Tax Cuts and Jobs Act).
As background, the current 401(k) rules impose a number of limitations on participants seeking a hardship distribution. Namely, participants that take a hardship distribution can’t make elective deferrals to that 401(k) for a period of six months after receiving the distribution. They also must exhaust all available plan loans before taking a hardship distribution. Additionally, hardship distributions currently can’t be taken from earnings on elective deferrals, qualified matching contributions (QMACs) or qualified nonelective contributions (QNECs).
Among other things, this proposed rule modifies those requirements. Specifically, participants will be able to take a hardship distribution even if they have not exhausted all plan loans. They will also be allowed to continue contributing to their 401(k) after they take a hardship distribution. Likewise, the proposed rule would allow participants to draw hardship distributions from QMACs and QNECs (if their employer plan sponsor chooses to allow it).
In addressing the necessity of a given hardship distribution, the proposed rule would require participants to certify in writing or electronically that the participant has no other liquid assets available to satisfy the need for the hardship distribution.
Similar to other guidance, the proposed rule also extends the hardship relief necessary for participants that are victims of Hurricane Florence or Michael.
The rule would mostly become effective in plan years beginning after 2018. The elimination of the six month ban on elective deferrals must take place by 2020.
In summary, these rules encapsulate the recent congressional changes to 401(k) and 403(b) plans hardship distributions. Employers should familiarize themselves with these rules for hardship distributions.
On Nov. 1, 2018, the IRS issued Notice 2018-83, which relates to certain cost-of-living adjustments for a wide variety of tax-related items, including retirement plan contribution maximums and other limitations for tax year 2019.
For 2019, the elective deferral limit for employees who participate in 401(k), 403(b), most 457 plans and the federal government’s Thrift Savings Plan increases to $19,000 (up from $18,500 in 2018).
Additionally, the catch-up contribution limit for employees age 50 and over who participate in any of those plans remains at $6,000. The annual limit for Savings Incentive Match Plan for Employees (SIMPLE) retirement accounts will increase from $12,500 to $13,000.
The annual limit for defined contribution plans under Section 415(c)(1)(A) increases to $56,000 (from $55,000), and the annual limit on compensation that can be taken into account for contributions and deductions increased from $275,000 to $280,000. The threshold for determining who is a “highly compensated employee” (HCE) increases to $125,000 (from $120,000).
The annual benefit for a defined benefit plan under Section 415(b)(1)(A) increased from $220,000 to $225,000, and the dollar limitation concerning the definition of key employee in a top-heavy plan and the limitation on IRA contributions increased from $175,000 to $180,000.
Cost-of-living adjustments are effective Jan. 1, 2019. Sponsors and administrators of benefits with limits that are changing will need to determine whether their plans automatically apply the latest limits or must be amended (if desired) to recognize the changes. Any changes in limits should also be communicated to employees.
On Oct. 23, 2018, the DOL released a proposed rule that expands access to multiple employer plans (MEPs). As background, in Aug. 2018 Pres. Trump issued an executive order directing the DOL to propose rules that would make it easier for small employers to band together to offer retirement plans. (We discussed this executive order in the Sept. 5, 2018 edition of Compliance Corner.) This proposed rule does that by redefining the term “employer” under ERISA to allow certain employer groups and associations or PEOs to sponsor defined contribution retirement plans.
Specifically, if the group/association or PEO met the requirements laid out in the proposed rule, then ERISA would apply to the multiple employer plan on the plan level. This means that the individual employers would not be responsible for complying with the different ERISA requirements, such as the Form 5500 filing requirement and the fidelity bonding requirement. Instead, the plan would be responsible for meeting the bulk of ERISA’s requirements.
In order to meet the proposed rules’ requirements to offer a MEP, a group or association of employers has to meet multiple requirements. Interestingly, those requirements are quite similar to the requirements laid out in the new rules for association health plans. (See our article in the June 26, 2018 edition of Compliance Corner.) The proposed rules require the following for a MEP that wants to form under the new rules:
- There must be a formal organizational structure that’s controlled by its employer members with at least one substantial business purpose outside of providing a retirement plan.
- The members of the group or association must share a commonality of interest, which would be met if the members are in the same trade, industry, line of business or profession, OR if the members are in the same state or metropolitan area.
- The members must employ at least one participant and participation must only be offered to employees and former employees.
- The group or association must not be a financial services company such as a bank, trust company, insurance issuer or broker-dealer.
PEOs will also be able to avail themselves of this rule if they meet certain requirements. Specifically, PEOs could sponsor a MEP if they perform “substantial employment functions” for their members. The rule lists nine different criteria for determining if a PEO performs substantial employment functions. The DOL will automatically recognize Certified PEOs (as defined by the IRS) and any PEO that meets five of the nine criteria as performing substantial employment functions for the employer members.
The rules also clarify when working owners can participate in these MEPs. Working owners, such as sole proprietors and other self-employed individuals, can participate as long as they provide enough services to their company to have wages at least equal to the cost of group health plan coverage offered by the group or association.
The DOL will accept comments on the proposed rules through Dec. 24, 2018.
While this rule is intended to offer small employers more and less burdensome options for offering retirement plans to their employees, any size of employer may join one of these groups or PEOs. For more information on how this proposed rule might affect your company’s benefit options, please contact your advisor.
On Sept. 26, 2018, the IRS published the 2018 draft form related to Form 8955-SSA, Annual Registration Statement Identifying Separated Participants with Deferred Vested Benefits. As background, Form 8955-SSA is used to report information about participants who separated from service during the plan year and are entitled to deferred vested benefits under the retirement plan.
The information in this form is given to the Social Security Administration (SSA), and the SSA provides that information to separated participants when they file for Social Security benefits.
On Oct. 4, 2018, the IRS also released the 2018 draft instructions for the Form 8955-SSA. They don’t highlight any changes in the updated forms.
Employers should review this draft form in preparation for filing the 2018 Forms 8955-SSA.
On Sept. 28, 2018, the IRS released Revenue Procedure 2018-52, which incorporates changes to the Employee Plans Compliance Resolution System (EPCRS). As background, EPCRS allows retirement plan sponsors to take IRS-sanctioned steps to correct administrative and operational failures in plans. This Rev. Proc. modifies and supersedes Rev. Proc. 2016-51.
This Rev. Proc. mainly updates guidance to include the changes made to the EPCRS procedures over the last few years. Most notably, the IRS will now require employers submitting voluntary correction program (VCP) applications to do so electronically via www.pay.gov. In transitioning to this policy, the IRS will begin to accept the electronic applications on Jan. 1, 2019. However, employers will be allowed to file electronically or file a paper submission until March 31, 2019.
This Rev. Proc. is effective Jan. 1, 2019. Employers seeking to take advantage of the EPCRS should familiarize themselves with this guidance to ensure they understand the changes in the process.
On Sept. 18, 2018, the IRS released Notice 2018-74, which provides guidance on updating the safe harbor notice required to be sent to plan participants receiving eligible rollover distributions. As background, the IRC requires certain qualified retirement plans (namely 401(a), 403(a), 403(b) and 457 plans) to provide participants with a notice in advance of the participants receiving eligible rollover distributions. Among other things, the safe harbor notice does the following:
- Explains the IRC rules for rollovers
- Notifies the participant that they may transfer their funds to any qualified retirement account
- Discusses the various tax implications of a rollover
Notice 2018-74 modifies prior Notice 2017-74 to include changes to the retirement plan tax rules that occurred as a result of last year’s tax reform and other regulatory changes. Specifically, the guidance provides two appendices employers can utilize to provide updated notices. Appendix A includes appropriately updated model notices in case the employer would simply like to replace their previous safe harbor notice. Appendix B provides instructions on how an employer can amend their current notice to reflect the changes in the law and regulations.
While the notice does not give a specific date by which employers should implement the change, it’s best for employers to replace or update the notice accordingly so they can provide employees with the most current information.
On Sept. 7, 2018, the IRS released a draft of the 2019 Form 1099-R for distributions from pensions, annuities, retirement or profit-sharing plans, IRAs and insurance contracts. This form is sent to participants who withdraw or transfer funds from a number of sources related to retirement and other qualified plans. It reports the gross amount of the distribution, the taxable amount reportable as income and the federal and state withholding amounts. So, each person who withdraws at least $10 from a retirement account, such as a traditional IRA, must receive a Form 1099-R.
The 2019 draft forms are virtually unchanged from the 2018 Form 1099-R. Keep in mind that the draft forms should not be filed for 2019; instead, the IRS will publish final forms at a later date. Even though Forms 1099-R are routinely prepared by the fund custodian of the retirement and qualified plans, employees may have general questions involving the employer’s retirement plans or about the purpose of the form. Employers should familiarize themselves with these forms.
On Aug. 31, 2018, Pres. Trump issued the Executive Order on Strengthening Retirement Security in America (“the Order”). The Order seeks to expand access to workplace retirement plans for American workers and reduce the regulatory burdens and complexity associated with sponsoring a retirement plan.
Specifically, the Order directs the DOL to examine policies which would allow more small employers to band together to provide retirement plans through the use of multiple employer plans (MEPs). It further directs the DOL to promulgate rules that would redefine ‘employer’ under ERISA, in an effort to allow more employers to participate in MEPs. Currently, unrelated employer groups that wish to band together to offer retirement plans must meet stringent requirements concerning their relation to each other. The Order makes it clear that the Administration would like to amend those rules to allow for more small and mid-sized businesses to have access to MEPs. (Any subsequent changes in this regard would likely be very similar to the changes made to allow for more employers to participate in association health plans for health and welfare benefits.)
The Order also directs the DOL to review actions that could be taken to make notices and distribution requirements less costly and burdensome. There are a number of disclosures that are required for retirement plans, and while the Order doesn’t specify which disclosures could potentially be changed or altered, it does seem to be aimed at reducing the number of disclosures or making them less complex. Additionally, the Order explicitly mentions that the DOL’s review should explore the potential for broader use of electronic delivery as a way to distribute the necessary disclosures.
Finally, the Order instructs the Treasury to review the life expectancy and required minimum distribution tables to determine if they should be changed to reflect current mortality data. As background, retirees must withdraw minimum amounts of money from their retirement account beginning at age 70 ½. In essence, the Order directs the Treasury to review updated information to determine if the age of 70 ½ is still appropriate or should be increased.
Although the Order ultimately signals the administration’s policy on these topics, it’s likely that the DOL and IRS will promulgate the rules requested by the President. Until those rules are finalized, the current rules remain in place and employers should continue to follow them. We will provide updated information as the rules are published in their proposed and finalized forms.
Donald J. Trump. “Executive Order on Strengthening Retirement Security in America.” www.whitehouse.gov (Previously linked website content is no longer available.)
On Aug. 17, 2018, the IRS issued private letter ruling 201833012 (the “PLR”). The PLR addressed an individual plan sponsor’s desire to amend their 401(k) plan to include a program that allows matching contributions to be made for employees that are repaying student loans. The design endorsed in the PLR is meant to allow employees who cannot afford to both repay their student loans and defer into the 401(k) at the same time the ability to avoid missing out on the “free money” being offered by their employer in the 401(k) plan.
Specifically, the plan sponsor requesting the PLR sought IRS permission to implement a design in which a nonelective employer contribution equal to 5 percent of an employee’s compensation could be made for every 2 percent the employee paid to student loans. Additionally, the PLR states that the program could allow a participant to both defer into the 401(k) and make a student loan repayment at the same time, but they would only receive either the match or the nonelective employer contribution — not both for the same pay period. However, if an employee enrolled in the student loan repayment program and later opted out without hitting the 2 percent threshold necessary for a nonelective employer contribution, they would be eligible for matching contributions for the period in which they opted out and made deferrals into the 401(k) plan.
The IRS also confirmed that such a design wouldn’t violate the contingent benefit prohibition under the IRC. As background, the contingent benefit prohibition essentially states that the only benefit that can be conditioned upon an employee’s elective deferrals is a matching contribution. In response to the plan sponsor’s request, the IRS ruled that the proposed design doesn’t violate the contingent benefit prohibition, therefore allowing nonelective employer contributions to be made when employees pay student loans. While the IRS gave their opinion regarding the contingent benefit prohibition, they stated definitively that all other qualification rules (such as testing and coverage) would remain operative.
Keep in mind, though, that a PLR is directed to a specific taxpayer requesting the ruling, and it’s applicable only to the specific set of facts and circumstances included in the request. That means other retirement plan sponsors cannot rely on the PLR as precedent. It’s not a regulation or even formal guidance. However, it provides insight into how the IRS views certain arrangements. While any plan sponsor that wants to replicate this design could likely assume that they would not run afoul of the contingent benefit prohibition, they would be most protected by seeking the assistance of outside counsel in designing their program.
Any employer plan sponsor considering adding a student loan repayment program to their benefits package should contact their plan advisor for additional information.
Jason E. Levine. “Private Letter Ruling 201833012.” IRS Static Files Directory »
On Aug. 3, 2018, in Meiners v. Wells Fargo & Company, et al. No. 17-2397 (8th Cir., Aug. 3, 2018), the U.S. Court of Appeals for the Eighth Circuit (the Court) ruled in favor of retirement plan fiduciaries, requiring plaintiffs to meet a high bar in order to prove imprudent selection of investment funds (which is a violation of ERISA’s rules for fiduciaries).
As background, the plaintiffs in this class action case alleged that their plan sponsor had breached their ERISA fiduciary duties of loyalty and prudence by offering twelve of Wells Fargo’s Target Date Funds (TDFs) for investment in the plan. The plaintiffs alleged that these funds were more expensive (due to higher fees) and underperformed compared to other funds available to the plan. Specifically, they pointed to other funds offered by Vanguard and Fidelity which were less expensive, and identified one of the Vanguard funds that performed higher than the Wells Fargo TDFs.
Before the case came before the Court, the Federal District court had granted Wells Fargo’s motion to dismiss the case. On review, the Court agreed with the District court, and upheld the dismissal of the plaintiffs’ claim of imprudence on Wells Fargo’s part. Essentially, the Court concluded that the plaintiffs failed to sufficiently plead facts indicating that Wells Fargo’s TDFs were underperforming.
In fact, the court noted that it was not enough that the plaintiffs pointed to the one Vanguard fund that outperformed the Wells Fargo TDFs, especially when the District Court found that the Vanguard fund in question had a different investment strategy. Additionally, the Court reasoned that the mere existence of cheaper funds was not proof of imprudence. Ultimately, the Court held that the plaintiffs failed to offer a meaningful benchmark of funds that would prove the offering of the Wells Fargo TDFs to be imprudent.
This case makes it clear that plaintiffs who want to claim imprudence based on investment fund offerings that are proprietary, more expensive or underperforming must meet the burden of providing a meaningful benchmark by which to measure the funds in question. While this case was adjudicated in favor of the employer, retirement plan sponsors should also consider their own fiduciary responsibilities and whether or not their choices of investment funds would be considered prudent.
The IRS emphasizes the importance of annually reviewing the operating requirements for a company’s retirement plan. They have designed checklists specifically for this purpose: Publication 4284 for Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) IRAs and Publication 4285 for Simplified Employee Pensions (SEPs). Both checklists have recently been revised to reflect 2018 indexed limits.
A SIMPLE IRA is a retirement plan available to small employers. SIMPLE IRAs require an employer contribution, and both employer and employee contributions are made to an individual retirement account (IRA) or annuity set up for each employee. The checklist reminds employers of the relevant operating requirements including:
- They cannot have more than 100 employees who earned at least $5,000 in the previous year.
- They cannot sponsor another type of retirement plan in addition to the SIMPLE IRA.
- The required employer contribution is either two percent of the employee’s compensation or a three percent matching contribution.
- Employee deferrals must be deposited as soon as possible but no later than 30 days following the months in which the employee would have otherwise received the money.
A SEP is a plan in which all eligible employees are permitted to participate, including part-time employees. Contributions are deposited to IRAs for each employee. The checklist reminds employers of the relevant operating requirements including:
- Employees of related businesses must be included in plan participation.
- Employer contributions to a SEP must be the same percentage of compensation for each employee.
- All contributions are limited to the lesser of 25 percent of compensation or $55,000 (for 2018).
On July 13, 2018, the IRS released the 2018 Form 1099-R for distributions from pensions, annuities, retirement or profit-sharing plans, IRAs, insurance contracts, etc. This form is sent to participants who withdraw or transfer funds from a number of sources related to retirement and other qualified plans. It reports the gross amount of the distribution, the taxable amount reportable as income and the federal and state withholding amounts. So, each person that withdraws at least $10 from a retirement account, such as a traditional IRA, must receive a Form 1099-R.
The 2018 final forms are generally unchanged from the draft Form 1099-R updated in June 2018. Highlights of the changes include:
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"Date of Payment" is a new box on the form, adjacent to the "Account Number" box.
- This box shows the date of payment for reportable death benefits under Section 6050Y
- New instructions were also added to the "Instructions for Recipients" for this box
- Under "Instructions for Recipient," the "Qualified Plans" section is now known as "Qualified Plans and Section 403(b) plans."
- Under "Instructions for Recipient," Box 1 instructions add language for reportable death benefits
- Under "Instructions for Recipient," Box 5 adds language for life insurance contracts under Section 6050Y
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Under "Instructions for Recipient," Box 7 has two new codes:
- Code C: Reportable death benefits under Section 6050Y
- Code M: Qualified plan loan offset
There are also two notable changes to the underlying law that impacts the form. One change is that re-characterizations of conversions cannot be made in 2018 or later. Specifically, a conversion of a traditional IRA to a Roth IRA, and a rollover from any other eligible retirement plan to a Roth IRA, made after Dec. 31, 2017, cannot be re-characterized as having been made to a traditional IRA. The second change relates to disaster distributions that were made to employees affected by certain natural disasters that occurred in 2016 and 2017.
Employers should become familiar with the changes made to the 2018 forms. Even though 1099-R forms are routinely prepared by the fund custodian of the retirement and qualified plans, employees may have general questions involving the employer’s retirement plans or about the purpose of the form.
On July 20, 2018, the IRS issued final regulations amending the definitions of qualified matching contributions (QMACs) and qualified nonelective contributions (QNECs) relating to certain qualified retirement plans that contain cash or deferred arrangements or that provide for matching contributions or employee contributions.
The final regulations are virtually unchanged in comparison to the proposed regulations (which were proposed in January 2017). Under these regulations, employer contributions to a plan would be able to qualify as QMACs or QNECs if they satisfy applicable nonforfeitability and distribution requirements at the time they’re allocated to participants’ accounts, but they need not meet these requirements when they’re contributed to the plan. This change allows amounts held as forfeitures in a 401(k) plan to be used to fund QNECs and QMACs.
The final regulations are effective on July 20, 2018, and apply to plan years beginning on or after that date. However, the IRS will allow taxpayers to rely upon these rules in earlier periods.
Employers maintaining tax-qualified plans that contain cash or deferred arrangements or provide for matching contributions or employee contributions should take note of these proposed changes.
The IRS has released an updated version of Form 4419, dated June 2018. The form is used to request authorization from the IRS to transmit certain information returns electronically through the Filing Information Returns Electronically (FIRE) system. FIRE is used to file the following forms electronically with the IRS: Forms 1042-S (Foreign Person’s U.S. Source Income Subject to Withholding), 1097 (Bond Tax Credit), 1098 (Mortgage Interest Statement), 1099 (Miscellaneous Income), 3921 (Exercise of an Incentive Stock Option Under Section 422(b), 3922 (Transfer of Stock Acquired Through an Employee Stock Purchase Plan Under Section 423(c), 5498 (IRA Contribution Information), 8027 (Employer’s Annual Information Return of Tip Income and Allocated Tips), 8955-SSA (Annual Registration Statement Identifying Separated Participants with Deferred Vested Benefits) and W-2G (Certain Gambling Winnings).
Importantly, FIRE is not used to file Forms 1094-C, 1095-C, 1094-B or 1095-B, which are filed through the Affordable Care Act Information Return (AIR) system.
In order to transmit files electronically through FIRE, the filer must have appropriate software, a capable service provider or an in-house programmer that will create the file in the proper ASCII format. The Form 4419 must be submitted at least 45 days before the due date of the return to allow time for approval and a Transmitter Control Code to be assigned.
The updated version is substantially the same as the previous version, but filers must take care to use the most recent version of the form.
Form 4419 (Previously linked website content is no longer available.)
On June 21, 2018, the United States Court of Appeals for the Fifth Circuit issued an order officially vacating the DOL's Fiduciary Rule. This action comes after the government failed to file an appeal (with the Fifth Circuit or the US Supreme Court) in the U.S. Chamber of Commerce v. DOL case. As a reminder, we discussed this case in the March 20, 2018 edition of Compliance Corner.
The fact that the Rule has been vacated means that the prior five-part test that was used to determine if an investment adviser was a fiduciary is back in place. Specifically, the original regulations identified investment fiduciaries using a test in which the fiduciary:
- Renders advice as to the value of securities
- Does so on a regular basis
- Renders advice pursuant to a mutual agreement
- Gives advice which serves as the primary basis for investment decisions
- Provides individualized advice
It's also possible that the DOL could choose to promulgate new rules. While they have issued a non-enforcement policy for any financial institutions that have relied on the Best Interest Contract (BIC) Exemption and other Rule-related prohibited transaction exemptions (PTEs), the DOL has acknowledged that the Rule being vacated has resulted in a compliance gap that might need to be overcome by new regulations. In other words, investment advisers that are making conflicted investment advice will still need a way to comply with ERISA, even though the Rule and its PTEs have gone away. Until the DOL proposes new rules, advisers who rely on the BIC or other PTEs will be safe from DOL enforcement.
Keep in mind, also, that the SEC has now presented its own rule and some states have even proposed regulations that would mirror the Rule. So it seems clear that the Rule will still affect the retirement industry in some ways.
Although this order seems to end a years-long journey that saw the creation and ultimate demise of this Rule, we will continue to follow any developments concerning the fiduciary status of investment advisers and employer plan sponsors who provide retirement plans.
On July 3, 2018, the IRS released updated model submission forms for its Voluntary Correction Program (VCP). The updated model forms (now dated June 2018) include: Form 14568-B (Other Nonamender Failures and Failure to Adopt a 403(b) Plan Timely), Form 14568-E (Plan Loan Failures including Qualified Plans and 403(b) Plans), and Form 14568- H (Failure to Pay Required Minimum Distributions Timely).
As background, the VCP is a self-correction program that allows an employer to apply to correct mistakes in either the plan document language or plan operations. The updated forms are used in conjunction with Form 1568 –The Model VCP Compliance Statement.
When needed, employers should use the updated model forms going forward. Please note that not all of the VCP model forms have been updated. Those that weren’t, seem to have been last updated in either August 2016 or September 2017.
For additional information about the VCP and the related forms, visit: https://www.irs.gov/retirement-plans/voluntary-correction-program-general-description
On May 18 and 30, 2018, the IRS released eight new Issue Snapshots (with six released on the earlier date and two released on the later date). As background, Issue Snapshots represent the IRS’s periodic research summaries on tax-related issues.
Here are the issues presented and a summary of their content:
- Plan Forfeitures Used for Qualified Nonelective and Qualified Matching Contributions – This snapshot discusses the recent changes to the rules governing qualified nonelective contributions (QNECs) and qualified matching contributions (QMACs). Specifically, it examines the fact that plan forfeitures can now be contributed as QNECs and QMACs.
- Vesting Schedules for Matching Contributions – Matching contributions are subject to different vesting requirements. This snapshot discusses the different vesting requirements for matching contributions to a defined contribution plan.
- Qualification Requirements for Non-Electing Church Plans under IRC Section 401(a) – This snapshot identifies and discusses the IRC regulations that a church plan must follow if they sponsor a qualified plan. It also identifies the pre-ERISA requirements church plans must follow.
- Borrowing Limits for Participants with Multiple Plan Loans – Last year, the IRS issued guidance on the limits applied when a participant has multiple plan loans in a given year. This snapshot explains that guidance and gives examples of its application.
- Treatment of 401(a)(17) Limitation in Defined Contribution Plan in a Short Plan Year – This snapshot discusses how to adjust the IRC compensation limit in a short plan year, such as an amended or terminating plan year.
- Treatment of 415(c) Dollar Limitations in a Short Limitation Year – This snapshot explains how to adjust the annual contribution limit for a defined contribution plan that experiences a short plan year (either in an initial, amended or terminating plan year).
- Spousal Consent Period to Use an Accrued Benefit as Security for Loans – IRS regulations require that qualified plans with qualified joint and survivor annuities (QJSAs) obtain the consent of a participant’s spouse prior to the participant’s use of plan assets as security for a loan. This snapshot clarifies that plans may use a 180-day period for obtaining spousal consent.
- How to Change Interest Crediting Rates in a Cash Balance Plan – This snapshot addresses how to credit rates on account balances in a cash balance plan. (This is a defined benefit plan issue.)
Plan sponsors should review these snapshots for a better understanding of the IRS guidance on these issues.
On May 7, 2018, the DOL released Field Assistance Bulletin (FAB) No. 2018-02. This FAB addresses the DOL’s non-enforcement policy now that the Fiduciary Rule (the Rule) has been vacated by the U.S. Court of Appeals for the Fifth Circuit. As background, the Fifth Circuit vacated the Rule in a 2-1 decision in U.S. Chamber of Commerce v. DOL. We discussed that opinion in the March 20, 2018, edition of Compliance Corner.
The revocation of the Rule took place after the DOL failed to appeal the Fifth Circuit’s decision by May 7, 2018. In this FAB, the DOL acknowledges that the revocation of the Rule left many institutions uncertain about how advisors would avoid engaging in prohibited transactions when the Best Interest Contract Exemption (BICE) and other prohibited transaction exemptions (PTEs) that were created along with the Rule became null and void.
The FAB announces that the DOL will continue its non-enforcement policy related to the Rule. Specifically, the DOL won’t pursue any prohibited transaction claims against investment advisor fiduciaries who are “working diligently and in good faith to comply with the impartial conduct standards” set by the BICE and other PTEs. Those investment advisors can also choose to rely on any other available exemptions for relief. Interestingly, though, the FAB doesn’t address the rights or obligations of other parties; so there might still be private rights of action that can be pursued against advisors who offer conflicted advice.
This FAB makes it seem quite unlikely that the DOL is going to continue to pursue the Rule in its current form. Although they’d have until June 13, 2018 to appeal the Fifth Circuit’s decision to the U.S. Supreme Court, the DOL’s non-enforcement policy makes it seem that they won’t do so. Instead, the DOL has expressed that it will evaluate the need for additional prohibited transaction relief.
It’s also important to note that, in April, the SEC came out with its own proposed best interest rule, which incorporates a number of aspects of the Rule and the BICE. In fact, their rule requires registered investment advisers and broker-dealers to act in the best interest of their customers and to mitigate certain conflicts of interest.
Employer plan sponsors won’t see much change in anything now that the Rule has been revoked and the DOL has announced a non-enforcement policy. Many advisers and broker-dealers have already taken steps to comply with the Rule and likely won’t switch back to the processes in place before the Rule. We’ll continue to follow this issue, though, and we’ll share any additional information that might affect plan sponsors.
On March 30, 3018, the IRS published Informational Letter 2018-0001, which responds to an inquiry as to why a 401(k) hardship distribution could not be made to pay off a child’s college student loan.
In the letter, which is a response to a Congressional inquiry, the IRS explains that 401(k) plans are intended for employees to contribute part of their pay toward retirement. To help ensure that funds in the plan are available at retirement, early withdrawals from a 401(k) plan are allowed only in cases of hardship.
As background, a 401(k) retirement plan may, but is not required to, provide for hardship distributions. The 401(k) regulations provide that a hardship distribution can only be made if the employee (or spouse or dependent) has an immediate and heavy financial need and the distribution is necessary to satisfy the financial need. If a 401(k) plan provides for hardship distributions, it must provide the specific criteria used to make the determination of hardship. For example, a plan may provide that a hardship distribution can be made only for medical or funeral expenses, but not for the purchase of a principal residence or for payment of tuition and educational expenses.
In the response, the IRS highlights that the “payment of tuition, related educational fees, and room and board expenses, for up to the next 12 months of post-secondary education” is a permissible hardship under the 401(k) regulations. However, paying off student loans would not qualify, because it’s not payment for the next 12 months of post-secondary education. The letter concludes with the possible alternative of getting a loan from the plan. A loan, unlike the hardship distribution, would be tax-free, and the participant could have up to five years to repay it.
Please note: IRS Information Letters are generally advisory and have no binding effect on the IRS. For employers, the IRS letter serves as a good reminder that the intent of a 401(k) plan is to help an employee make payments toward retirement. If a 401(k) plans allows for hardship distributions, the plan operations should strictly align with the plan terms so that the intent of the 401(k) plan may be preserved.
On March 14, 2018, the IRS published Rev. Prov. 2018-19, which decreases the fee imposed on terminating plans that request a determination letter. As background, upon plan termination, plan sponsors can request a determination letter from the IRS, which will identify whether the plan is qualified at the time of termination.
Earlier this year, the IRS set the fee for this determination letter at $3,000 (as reflected in Rev. Proc. 2018-4). However, pursuant to Rev. Proc. 2018-19, the fee is now being lowered to $2,300, effective Jan. 2, 2018. Notably, employers who have already paid the $3,000 fee will be refunded $700 by the IRS.
Employers should keep this change in mind if they’re looking to request a determination letter upon plan termination.
On March 15, 2018, the U.S. Court of Appeals for the Fifth Circuit (the Court) vacated the fiduciary rule (the Rule) in a 2-1 decision in U.S. Chamber of Commerce v. DOL, 5th Circ., No. 17-10238. As background, the Rule amended ERISA's definition of "fiduciary" by considering a larger subset of communications to be investment advice that renders the person providing that advice a fiduciary.
The plaintiffs in U.S. Chamber of Commerce v. DOL, which were all financial service industry groups, were the first to file suit against the DOL. They challenged the Rule on multiple grounds, including allegations that the Rule is inconsistent with ERISA, that the DOL is overreaching by using the Rule to regulate services and providers that aren't covered under ERISA, and that the DOL imposed legally unauthorized contract terms to enforce the Rule. Although the district court disagreed with the allegations and held in favor of the DOL, the Fifth Circuit agreed with many of the plaintiff's allegations and vacated the Rule in its entirety.
In launching into a background of the Rule, the Court pointed out that the Rule was fundamentally transforming "over fifty years of settled and hitherto legal practices in a large swath of the financial services and insurance industries." The Court went on to discuss the congressional history of ERISA and highlight the definition of "fiduciary" that was in place before the Rule.
Ultimately, the Court found that the DOL was expanding the scope of the regulations in "vast and novel ways" and, in doing so, the DOL was overstepping its authority by seeking to "rewrite the law that is the sole source of its authority." They essentially held that it wasn't Congress's intent to render any person who renders any investment advice for a fee a fiduciary; instead, the DOL's 1975 regulations reflect the idea that "investment advice for a fee" reflects an intimate relationship of trust between advisor and client.
Additionally, the Court argued that the DOL's imposition of the Rule failed the Chevron doctrine. As background, the Chevron doctrine draws upon the U.S. Supreme Court precedence in the Chevron U.S.A. v. Natural Resources Defense Council, Inc., which essentially provided a two-part test in determining if the courts must defer to federal agencies in their application of the law. The first part of the test determines whether Congress was clear on the issue in question. If Congress was clear, then the agency must defer to Congress's intent. If the Congressional statute was unclear or ambiguous, then the second part of the test is to determine if the agency's interpretation is based on a permissible construction of the statute.
Considering the Chevron doctrine, the Court found the DOL's imposition of the Rule to be unreasonable, even if there was an assumption that Congress was unclear. Further, the Court held that the DOL's creation of the Best Interest Contract Exemption (BICE) was an abuse of power that was only necessary to "blunt the overinclusiveness of the new definition" of fiduciary. Not only did they find the BICE to be proof of the unreasonableness of the Rule, but they also held that in promulgating the BICE, the DOL was creating a private right of action against advisors where Congress had not allowed one.
Since the Court found it impossible to separate the Rule from the BICE, they deemed the whole rule unreasonable and vacated it in toto.
Although this ruling seems to represent the demise of the Rule, it's important to note that there's now a split in the circuit courts. As we've reported on in this edition of Compliance Corner, the U.S. Court of Appeals for the Tenth Circuit ruled in favor of the Rule a few days before this ruling was published (in Mkt. Synergy Grp., Inc. v. U.S. Dep't of Labor).
Furthermore, although the court vacated the Rule in its entirety, there are still procedural limitations that give time for additional action by the DOL. The DOL has the following choices. They could:
- Appeal the case to the Fifth Circuit for an en banc hearing (which would be in front of the full Fifth Circuit) and even appeal the case all the way to the U.S. Supreme Court.
- Do nothing and let the rule become vacated after the appropriate procedural stays have been exhausted.
- Attempt to amend the rule in a way that addresses the Fifth Circuit's concerns and salvages a portion of the Rule.
It's hard to know how they'll proceed. On one hand, the Trump administration seems opposed to the Rule as written (as evidenced by their attempts to review it and delay it). On the other hand, many in the industry have already begun to comply with the rule and accept its standards. Only time will tell how the DOL chooses to proceed.
On March 13, 2018, the U.S. Court of Appeals for the Tenth Circuit issued a ruling upholding the DOL's fiduciary rule (the Rule). As background, the Rule was adopted by the DOL in April of 2016, and it amended ERISA's definition of "fiduciary" by considering a larger subset of communications to be investment advice that renders the person providing that advice a fiduciary. Additionally, the DOL introduced new prohibited transaction exemptions (PTEs) and amended others in order to permit common compensation structures and to cover certain types of transactions. The PTEs that were central to this case are the new Best Interest Contract Exemption (BICE) and PTE 84-24, which allows an exemption for commissions paid to insurance brokers in connection with a plan's purchase of insurance or annuity contracts.
In this case, Market Synergy Group (MSG) alleged that the DOL didn't follow the Administrative Procedure Act (APA) in promulgating the Rule. Specifically, they claimed that the DOL had arbitrarily excluded fixed indexed annuities (FIAs) from being covered under PTE 84-24 (opting instead to cover them through the BICE). They also claimed that the DOL didn't provide adequate notice of that decision and that the DOL's actions would cost MSG roughly 80 percent of their revenue (as their business revolved around working with independent marketing organizations to distribute FIAs). MSG asked the district court for a preliminary injunction, which the district court denied.
On appeal to the Tenth Circuit, MSG again asserted that the DOL had violated the APA. However, the Tenth Circuit found that the DOL provided adequate notice and didn't arbitrarily treat FIAs differently from fixed annuities or fail to consider the economic impact of the Rule on the FIA industry. As such, the Tenth Circuit affirmed the district court's ruling in favor of the Rule.
Although the Tenth Circuit joined other circuit courts in upholding the Rule, the Rule was vacated by the Fifth Circuit less than a week after this ruling. As such, it's hard to know what impact these circuit decisions have on the Rule. We'll continue to follow the developments and report on them in future editions of Compliance Corner.
Market Synergy Group Inc. vs. DOL (Previously linked website content is no longer available.)
On Feb. 23, 2018, the IRS issued a memorandum to employee plans auditors that discusses the steps an employer should take in attempting to locate missing plan participants. As background, the memo specifically addresses how to locate missing participants who may be due required minimum distributions from their 403(b) plan. However, the IRS guidance is also helpful for any situation where an employer must locate participants for purposes of distributing benefits.
Keep in mind, though, that this guidance is virtually identical to the guidance provided to auditors examining 401(k) plans and any issues with required minimum distributions. (We reported on that guidance in the Nov. 14, 2017 edition of Compliance Corner.)
The memo specifies that IRS auditors won't challenge employers for a failure to make certain employee distributions if they did all of the following:
- Searched for alternative contact information in plan, plan sponsor and publicly available records for directories
- Used a commercial locator service, credit reporting agency or a proprietary internet search tool for locating individuals
- Sent mail via United States Postal Service to the last known mailing address and attempted contact "through appropriate means for any address or contact information," which includes email addresses and telephone numbers
These requirements line up with prior DOL guidance on the subject of locating missing participants, and so 403(b) employer plan sponsors who take such steps to locate employees would likely be considered to have met their search obligations as imposed by both the DOL and IRS. The guidance became applicable after Feb. 23, 2018.
Memorandum (Previously linked website content is no longer available.)
On Feb. 6, 2018, the IRS announced in a news release (IR 2018-19) that the Tax Cuts and Jobs Act (i.e., the 2017 Tax Reform Law reported on in the Jan. 9, 2018, edition of Compliance Corner, or the TCJA) doesn’t affect the tax year 2018 dollar limitations for retirement plans announced in IR 2017-177 and detailed in Notice 2017-64 (reported on in the Oct. 31, 2017, edition of Compliance Corner).
As background, the tax law provides dollar limitations on benefits and contributions under qualified retirement plans, and it requires the Treasury Department to annually adjust these limits for cost-of-living increases. Those adjustments are made using procedures that are similar to those used to adjust benefit amounts under the Social Security Act.
Since the TCJA made no changes to the section of the tax law limiting benefits and contributions for retirement plans, the qualified retirement plan limitations for tax year 2018 previously announced in IR 2017-177 and detailed in Notice 2017-64 remain unchanged.
The 2017 Tax Reform Law also specifies that contribution limits for IRAs, as well as the income thresholds related to IRAs and the saver’s credit, are to be adjusted for changes in the cost of living using procedures that are used to make cost-of-living adjustments that apply to many of the basic income tax parameters.
Although the new law made changes to how these cost-of-living adjustments are made, after taking the applicable rounding rules into account, the amounts for 2018 remain unchanged.
On Feb. 9, 2018, Congress passed and Pres. Trump signed H.R. 1892, the Bipartisan Budget Act of 2018 (The Budget Act), creating Public Law No. 115-123. Several provisions affect qualified retirement plans, including 401(k) plans. Here are some highlights:
Hardship Distribution Rules. The Budget Act eases the requirements for taking a hardship distribution from a 401(k) plan. As background, plan participants may request distributions when faced with certain financial hardships. Under current rules, hardship distributions aren’t available from certain contributions or from earnings on elective deferrals, because participants must first exhaust available plan loans prior to taking a hardship distribution. Moreover, the safe harbor rules require plan participants to forgo new contributions for six months following the distribution.
Effective for plan years beginning in 2019, qualified nonelective contributions (QNECs), qualified matching contributions (QMACs), and earnings will be available for hardship distributions. So, in the future, participants don’t have to take a loan before requesting a hardship distribution. Additionally, the IRS has been directed to provide new regulations eliminating the six-month prohibition on new contributions.
Relief for California Wildfires. The Budget Act provides relief for victims of the 2017 California wildfires (must be within the declared disaster area) that’s similar to that provided to victims of Hurricanes Harvey, Irma and Maria in 2017 (see our Oct. 17, 2017, edition of Compliance Corner on the Disaster Tax Relief and Airport and Airway Extension Act of 2017).
On distributions, the 10 percent penalty tax wouldn’t apply to qualified distributions taken by individuals whose principal residence is in a declared disaster area and who sustained an economic loss due to the hurricane. These non-penalized distributions must be taken between the California wildfire start date and Jan. 1, 2019, and are limited to an aggregate of $100,000 (whether received in one or more taxable years). Such distributions can be repaid (in whole or in part) through contributions to the retirement plan. Repayments would be treated as timely rollover contributions, which has the effect of deferring taxation. Instead of repayments, individuals can elect to spread the applicable distribution taxation over a three-year period.
The legislation also provides a special rule relating to hardship withdrawals taken within certain specified dates to build or buy a house in the California wildfire disaster area (but only if the withdrawals weren’t used to build or buy the house because of the wildfires). Specifically, all or a part of the hardship withdrawal amount may be repaid or contributed to an eligible retirement plan.
For loans taken between the passage of this law and Dec. 31, 2018, the legislation increases the plan loan limit to $100,000, or 100 percent of an individual’s vested account balance. To take advantage of the increased plan loan limit, the individual must have a principal residence in the disaster area and must have suffered an economic loss. Also, such individuals may delay for one year the due date for outstanding loan payments.
Retirement plan sponsors should review their plan designs and work with employees who may have been impacted by the California Wildfires. Ultimately, employers may need to work with outside counsel to ensure the relief described above is properly administered.
In January 2018, the IRS updated Publication 571, entitled “Tax-Sheltered Annuity Plans (403(b) Plans) For Employees of Public Schools and Certain Tax-Exempt Organizations.” This publication is designed to help tax filers better understand 403(b) plans and the related tax rules.
Specifically, the publication provides information that will help individuals determine the amounts that can be contributed to their 403(b) plans (in 2017 and 2018), identify excess contributions, understand the basic rules for claiming the retirement savings contribution credits and understand the basic distribution rules.
Although the updates to the Publication mainly describe the increased contribution and tax credit limits, this publication would be helpful to any employer that sponsors a 403(b) plan.
On Dec. 28, 2017, the IRS published 2017 instructions related to Form 8955-SSA, Annual Registration Statement Identifying Separated Participants with Deferred Vested Benefits. As background, Form 8955-SSA is used to report information about participants who separated from service during the plan year and are entitled to deferred vested benefits under the retirement plan.
The information in this form is given to the Social Security Administration (SSA), and the SSA provides that information to separated participants when they file for Social Security benefits.
Employers should review these instructions in preparation for filing the 2017 Forms 8955-SSA.
On Jan. 9, 2018, in an unpublished opinion, the U.S. Court of Appeals for the Ninth Circuit dismissed a class action suit filed against Hewlett-Packard (HP). As background, the plaintiffs in Laffen v. Hewlett-Packard Co. alleged that HP fiduciaries had breached their fiduciary duties by allowing plan participants to buy and hold HP stock that was artificially inflated. The plaintiffs specifically alleged that HP should have discontinued offering HP stock in the plan or should have at least warned participants of the risks associated with investing in HP stock. After the case was dismissed by the district court, the plaintiffs appealed that decision to the Ninth Circuit.
The Ninth Circuit followed suit and dismissed the case, holding that the plaintiffs failed to prove their argument that HP stock was artificially inflated. Additionally, the Ninth Circuit relied upon the precedent set by the Supreme Court in Fifth Third Bancorp v. Dudenhoeffer in finding that a prudent fiduciary in the same circumstances as HP could have viewed the discontinuance of offering HP stock as likely to cause more harm than good.
So ultimately, the Ninth Circuit dismissed the case because the plaintiffs failed to allege an alternative action that HP could have taken (other than discontinuing HP stock as an investment option).
Although this case was unpublished (and, therefore, cannot serve as precedent), employers can take solace in the fact that the bar for plaintiffs to succeed in these stock drop cases is still high.
On Jan. 2, 2018, the IRS released Bulletin 2018-1 which contains Revenue Procedures 2018-1 and 2018-4, both of which provide guidance related to employee benefit plans.
First, Rev. Proc. 2018-1 updates the procedures to determine employment status on Form SS-8 electronically. As background, employers file Form SS-8 to request a determination of the status of a worker under the common law rules for purposes of federal employment taxes and income tax withholding. Rev. Proc. 2018-1 also clarifies the rules regarding user fee refunds and amounts that must be paid when eligibility for a reduced fee depends on the result of the ruling. Further, the procedure says that www.pay.gov has become the exclusive means for paying fees that are required by this revenue procedure.
Second, Rev. Proc. 2018-4 applies to determination letters for different types of employee benefits plans (including 401(k) plans) and transactions, and for private letter rulings on various issues. This procedure has been updated to include changes made to the pre-approved plan program. Also, it provides guidance for pre-approved plans that are still subject to the procedures in previous Rev. Proc. 2015-36 since they are being submitted for cycles before their third six-year remedial amendment cycle. The procedure gives the user fees for submissions under the revised pre-approved plan program, adjusts the user fee structure for the IRS’s Voluntary Correction Program (VCP) and increases the fee for determinations as it relates to terminating plans. Changes have been made which affect requests for relief from retroactive disqualification, including a requirement that requests be submitted to the agent or specialist assigned to the case, as well as the removal of some procedural protections.
In addition, retirement plan sponsors should be aware that Rev. Proc. 2018-4 changes the way VCP user fees are calculated. Previously, these fees were based on the number of plan participants. Now they will be based on plan assets.
Therefore, plan sponsors should familiarize themselves with these IRS Revenue Procedures and make any necessary changes to applicable plans. Due to the complex nature of these procedures, outside counsel is recommended for employers with specific questions.
In the December 2017 issue of Employee Plans News, the IRS addressed several topics related to 401(k) plans.
First, the IRS now has a webpage that summarizes recent national disaster legislation, making it easier for plan participants to access retirement plan funds to recover from Hurricanes Harvey, Irma and Maria. The webpage describes relief available for early distributions, plan loan and repayment options, and retroactive plan term amendments.
Second, IRS Form 5300 underwent major revisions that became effective back on Jan. 1, 2017. Form 5300 is used to request a determination letter for an individually designed plan, which includes a 401(k) plan. The IRS warns that any applications submitted after Dec. 31, 2017 will be returned if the previous version of the form is used. Further, plan sponsors are reminded that requests for partial termination determinations may be submitted without regard to their ability to request a determination letter on plan documents.
Third, the IRS has updated the listing of required modifications (LRMs) for cash or deferred arrangements (CODAs) and defined contribution plans. The LRM is a collection of information that helps plan sponsors draft plans that comply with applicable laws and regulations. The updated defined contribution LRM makes adjustments in plan qualification requirements, regulations and guidance provided in the 2017 Cumulative List of Changes.
Lastly, other items in the newsletter include the release of advanced copies of Form 5500 for 2017, instructions for field agents regarding missing participants and beneficiaries, and updated instructions for electronically filing Form 8955-SSA (Publication 4810).
Plan sponsors of retirement plans should familiarize themselves with the information contained in the IRS newsletter (especially the various types of disaster-related relief affecting employee benefit plans) and make any necessary changes.
On Dec. 22, 2017, the Pension Benefit Guaranty Corporation (PBGC) issued final regulations that expand its Missing Participants Program (the Program) to defined contribution plans (such as 401(k) and other plans). As background, ERISA requires plan sponsors to distribute plan assets to participants upon termination. The problem with completing that process is often that the employer cannot find certain prior employees. The Program allowed defined benefit plan sponsors who had undertaken a diligent search for these missing employees to transfer the missing employees’ account balances to PBGC. PBGC would then provide those benefits to employees when they were found.
This new regulation broadens the Program to offer it to defined contribution plans, multiemployer plans, professional service plans with 25 or fewer participants, and other defined benefit plans that weren’t previously covered. So, beginning on Jan. 1, 2018, defined contribution plan sponsors that are terminating their plans have the option of transferring missing participants’ benefits to PBGC. PBGC will then provide a centralized benefits directory through which the missing participants can determine if benefits are being held for them.
The new regulations also streamline the program by changing the way that employers determine the amount of money that should be sent to PBGC, increasing protection of participants’ benefits and easing the transfer of benefits to PBGC.
Any employers considering whether they would like to access the PBGC Program should familiarize themselves with the Program to determine if doing so is appropriate.