Ever since defined contribution plans have come to dominate the retirement plan landscape, both plan sponsors and policymakers have grappled with how to help employees take a lifetime’s worth of savings and convert it into a sustainable source of retirement income. One way to help participants meet retirement income needs is to integrate guaranteed income products into defined contribution plan lineups. Fiduciaries have expressed concern, however, about potential liability they may face for the selection of annuity providers. The SECURE Act, signed into law by President Donald Trump on December 20, 2019, may help allay those concerns.
The SECURE Act—potentially the most impactful benefits legislation since the Pension Protection Act of 2006—was included in the bipartisan spending bill signed into law on December 20, 2019. The SECURE Act includes provisions that affect tax-qualified retirement plans and individual retirement accounts. Other provisions of the spending bill affect executive compensation and healthcare benefits.
We will continue to update you on the effects of the SECURE Act. Our current publications include the following:
- SECURE Retirement Legislation Becomes Law: Overview of Provisions Affecting Retirement Plans
- SECURE Act Increases Access to Retirement Plans with ’Pooled Employer Plans’
- The Good News and Really Bad News for IRA Owners Under the SECURE Act – Next Steps for IRA Providers
- SECURE Act Provides RMD Statement Relief for IRA Providers
Keep an eye out for upcoming LawFlashes on other key aspects of the SECURE Act and how the spending bill impacts employee benefits and tax-deferred savings.
Tax laws have long required that qualified retirement plans timely adopt written plan documents and amendments. But what evidence must a plan sponsor provide to an IRS auditor to prove that they have timely adopted a written plan document and required amendments? The IRS recently addressed this question in Chief Counsel Memorandum 2019‑002 (the CCM), which advises that absent extraordinary circumstances, “. . . it is appropriate for IRS exam agents and others to pursue plan disqualification if a signed plan document cannot be produced by the taxpayer.”
The primary question addressed in the CCM was whether a taxpayer can argue that, based on Val Lanes Recreation Center Corp. v. Commissioner, T.C. Memo 2018-92, it meets its burden to have an executed plan document by producing an unsigned plan and evidence of a pattern and practice of signing plan documents. The IRS’s answer as outlined in the CCM is: No, at least not in the absence of extraordinary circumstances.
Sponsors of single‑employer defined benefit (DB) pension plans could be subject to higher-than-usual minimum funding contribution requirements over the next several years, for at least two reasons. First, the interest rates that many plan sponsors use to calculate such contributions (referred to as “MAP‑21” interest rates due to the 2012 legislation that originally provided interest rate stabilization for minimum funding purposes) may decline starting in 2020. Second, an economic recession and corresponding stock market decline is increasingly possible. In anticipation of potential minimum contribution increases, DB plan sponsors should consider whether they may be able to defer their minimum funding obligations at some point in the near future by obtaining a minimum funding waiver from the Internal Revenue Service (IRS).
In recent years, there has been an upward trend of regulators focusing on the issue of retirement plan participants not collecting retirement benefits upon reaching retirement age (and we have previously covered the final rule on the missing participants program on this blog). Although there are many reasons why individuals delay collection, in some cases, the individuals are not starting their benefit payments because they are “missing”—meaning the administrators of their retirement plans cannot locate them or the plans lack critical identifying information to locate them.
Morgan Lewis associate Samantha Kapnek co-authored this article.
On December 4, the Internal Revenue Service (IRS) issued Notice 2019-64, which contains the 2019 Required Amendments List for individually designed tax-qualified retirement plans. As background, the IRS issues its Required Amendments List each year to identify statutory and administrative changes to the tax qualification rules that may require sponsors of individually designed retirement plans to amend their plans to comply with the changes. In general, the deadline for adopting any required amendments on the list is the end of the second calendar year after the list is issued.
The 2019 list identifies the following changes that may require amendments to an individually designed retirement plan:
As concerns continue regarding the possibility of an economic downturn, plan sponsors should be aware of the effects that two potential downturn events could have on their qualified plans.
Substantial Cessation of Operations (Section 4062(e) Event)
Where there is a substantial cessation of operations at a facility, an employer maintaining a qualified defined benefit plan may be subject to certain notice requirements and termination liability rules. A substantial cessation of operations occurs when a permanent cessation of operations at a facility results in the loss of employment by employees at the facility who constitute more than 15% of all employees who are eligible under the plan.
Closed defined benefit plans—i.e., defined benefit plans that are frozen to new participants but that allow existing “grandfathered” participants to continue to accrue benefits—are nearly certain to face challenges in passing nondiscrimination testing. This is because, over time, the grandfathered group that continues to accrue benefits is likely to become disproportionately highly compensated as a result of their longer service and the absence of shorter-service employees participating when they are first hired.
Recent decisions by the US Court of Appeals for the Ninth Circuit have reinvigorated the debate over whether mandatory individual arbitration provisions are enforceable with respect to ERISA claims and, if so, whether these provisions are worth including in your ERISA plan document. In Dorman v. Charles Schwab Corp., the Ninth Circuit affirmed that provisions in plan documents requiring individual arbitration of ERISA claims could be arbitrable, a contrast to the Munro v. University of Southern California decision in July 2018. To learn about these changes, please read our LawFlash.
As we look forward to 2020, we bring you a few key takeaways on the hot topics and trends that individuals operating in the employee benefits space are watching in health and welfare, plan sponsor considerations, executive compensation, fiduciary, and fringe benefits.