The US Department of Labor has been extremely active in recent years as the federal agency investigating compliance with and enforcing the fiduciary responsibility provisions of the Employee Retirement Income Security Act of 1974, as amended (ERISA). These investigations have frequently resulted in findings of fiduciary breach and monetary recoveries for ERISA retirement plans. Please see our recent LawFlash on this topic, and reach out to the LawFlash authors or your Morgan Lewis contacts if you have additional questions.
The Internal Revenue Service (IRS) issued an important update late last month to the Employee Plans Compliance Resolution System (EPCRS) in Revenue Procedure 2019-19. The IRS provided a helpful summary of the changes. The most significant changes in the updated EPCRS, which took effect as of April 19, 2019, involved the expansion of the Self-Correction Program (SCP) to allow the correction of certain plan document and operational errors by plan amendment and to correct certain loan failures, obviating the need for plan sponsors to file Voluntary Correction Program (VCP) applications (and to pay the required user fees) for these failures.
In Revenue Procedure 2019-20, the Internal Revenue Service (IRS) provides for a limited expansion of the determination letter program for certain limited categories of individually designed retirement plans – certain “statutory hybrid plans” and “merged plans” as described in more detail below.
As background, the IRS in 2016 formally limited the availability of the determination letter program for individually designed retirement plans to the plan’s initial qualification and then upon its termination. The IRS’s decision was a blow to sponsors of individually designed plans that had come to rely on the determination letter program for purposes of confirming periodically that a plan’s written form satisfied the applicable tax-qualification requirements of the Internal Revenue Code. The decision was particularly difficult for sponsors of older and larger defined benefit pension plans (many of which included complicated benefit formulae and/or legacy provisions from previously merged plans); such plans are ill-suited for being maintained on a third-party provider’s prototype or volume submitter document.
The Employee Benefits Security Administration (EBSA) at the US Department of Labor (DOL) compiles statistics every year to measure its activities as the agency responsible for investigating and enforcing the fiduciary duties under ERISA. Statistics for the agency’s 2018 fiscal year enforcement activities affirm that EBSA’s enforcement program remains extremely active, with a particular focus on terminated vested participant investigations.
It is apparent from the extensive investigation of defined benefit plans on the part of the US Department of Labor (DOL) that the DOL is quite focused on timely payment of plan benefits to participants. The DOL is interested not only in when benefits begin, but in how a participant is made whole when benefits begin after normal retirement age. A defined benefit plan must generally increase a normal retirement benefit actuarially where payment begins after a participant’s normal retirement age. The Internal Revenue Code (Code) and underlying regulations, however, allow a plan to pay instead the normal retirement benefit amount plus make-up payments in some instances. In light of the DOL’s scrutiny in this area, it may be wise for plan sponsors to review pertinent plan provisions and operation to make sure they comply with applicable rules.
On March 6, the Internal Revenue Service (IRS) issued Notice 2019-18, which would allow sponsors of defined benefit pension plans to offer retirees in pay status the opportunity to elect a lump sum payment in lieu of continued annuity payments. This development represents an about-face for the IRS, which abruptly shut down retiree lump sum windows in 2015—seemingly forever—when it indicated its intention to propose regulations under the required minimum distribution (RMD) rules of Internal Revenue Code Section 401(a)(9) that would specifically prohibit retiree lump sums.
The Tax Cuts and Jobs Act (TCJA) amended Section 217 of the Internal Revenue Code (Code) to suspend the deduction for moving expenses from 2018 through 2025. This change has a subtle yet meaningful impact on many tax-qualified retirement plans.
When testing qualified plans for compliance with the Code’s coverage and nondiscrimination requirements, plans are required to use a definition of “compensation” that complies with Code Section 414(s). The default definition of compensation in Section 414(s) is “compensation” as it is defined in Code Section 415(c)(3), which includes nondeductible moving expenses, but excludes deductible moving expenses. The TCJA makes all moving expenses “nondeductible,” which means that all moving expenses should be included in compensation for plans that use the default Section 415 definition for testing purposes.
Contributions to individual retirement accounts (IRAs) for a given year are due by the tax return filing deadline for that year, excluding extensions. For most IRA owners, the deadline for making their 2018 IRA contributions is Monday, April 15, 2019. However, for IRA owners who live in Maine or Massachusetts, the deadline is Wednesday, April 17, 2019.
The IRS on December 4 released Notice 2018-95, which provides transition relief to tax-exempt 403(b) plan sponsors that may not have complied with the “universal availability” rule for part-time employees.
Background on Universal Availability Rule. Code Section 403(b) contains a “universal availability” eligibility rule, which generally provides that all of a tax-exempt employer’s employees must be eligible to make elective deferrals to the employer’s 403(b) plan. This rule only applies to employee elective deferrals and does not require that a tax-exempt employer make employer non-elective or matching contributions available to all employees. There are limited exceptions to the universal availability rule such that an employer can still exclude certain groups of employees from the opportunity to make elective deferrals – including non-resident aliens, students, and employees who normally work fewer than 20 hours per week. However, the exclusions must be applied consistently and to all similarly situated employees. So, for example, if one or more part-time employees who work fewer than 20 hours per week are permitted to make employee elective deferrals, then all similarly situated part-time employees must be given the same opportunity.
Now that two weeks have passed since the Internal Revenue Service released its proposed hardship regulations, most defined contribution plan sponsors have determined which changes to their plan's hardship programs (if any) will be effective beginning January 1, 2019 (for calendar year plans), and which changes will be postponed. One of the changes that we see being almost universally adopted as early as possible is the elimination of the six-month suspension of contributions following a hardship withdrawal. However, there are two consequences of this removal of the suspension requirement that are sometimes overlooked:
- Communication with Participants. Plans have different procedures to end hardship suspensions—some automatically reinstate contribution elections and others require participants to make new elections following the suspension. In either case, a plan administrator removing the suspension before the six months would otherwise elapse (e.g., January 1, 2019) should consider letting participants know about the change before the end of this year so that the participants do not miss out on making a new deferral election (or are not surprised when a deferral election is automatically reinstated). But even in cases where no change is being made to existing hardships, if the plan is eliminating the suspension for new hardships taken in 2019, the plan administrator should consider notifying participants who apply for hardship withdrawals during these final weeks of 2018 of the imminent change in the plan’s hardship withdrawal rules. In addition, as many plans have outsourced management of the hardship withdrawal program to a recordkeeper or other manager, plan administrators are encouraged to discuss a communication strategy with their recordkeepers or other managers (e.g., affirmatively reaching out to participants, including a description of the change with hardship request forms).
- Nonqualified Plans. Often overlooked in discussions on eliminating the suspension requirement following hardship withdrawals is the impact this change has on nonqualified deferred compensation plans. By way of background, the suspension requirements in the current hardship regulations (before modification by the proposed regulations) require that participants be suspended from making contributions into all plans sponsored by the plan sponsor, which includes nonqualified plans. In order to accommodate this requirement, the applicable Treasury Regulations governing nonqualified deferred compensation plans subject to Internal Revenue Code Section 409A expressly allow a plan to provide for the cancellation of an otherwise irrevocable nonqualified plan deferral election following a hardship withdrawal. Some nonqualified deferred compensation plans are drafted to provide for the cancellation of a deferral election only if such cancellation is required under the rules governing the defined contribution plan. Other nonqualified deferred compensation plans mandate the cancellation of a deferral election following any hardship withdrawal, regardless of the circumstances. The proposed hardship regulations were silent as to whether a nonqualified deferred compensation plan can continue to cancel deferral elections following a hardship withdrawal. Considering that effective January 1, 2019, suspensions following hardship withdrawals will no longer be required, plan sponsors with nonqualified plans may wish to review the suspension language in their nonqualified deferred compensation plans to determine whether any changes need to be made in light of the proposed regulations.
If you have any questions about these changes or what they mean to your plans, please feel free to reach out the authors or your Morgan Lewis contact.