Defined Contribution Plans – Page 3

Budget Act Relaxes Hardship Distribution Rules

The Bipartisan Budget Act of 2018, which was signed into law on Friday, February 9, 2018, changes the rules related to hardship distributions from qualified defined contribution plans, effective for Plan Years starting after December 31, 2018, in three significant ways:

The Act removes the requirement that Participants exhaust the ability to take any available loans under the plan before taking a hardship distribution.
The Act allows Participants to take a hardship distribution from their elective deferral contribution accounts, qualified nonelective contributions (“QNECs”), and qualified matching contributions (“QMACs”), as well as from earnings on those contributions. Previously, hardship distributions could only be taken from elective deferral contributions only, and not from any earnings on deferrals.
The Act repeals the rule prohibiting participants from making elective deferrals and other employee contributions for six months after taking a hardship distribution.

Employers that want to implement any or all of the above relaxations in the hardship distribution rules will almost certainly need to amend their plans. While I am generally not a fan of permitting hardship distributions in qualified plans, because they undermine the purpose of retirement savings and add administrative complexity, if your plan provides for hardship distributions you will probably want to incorporate these changes because they will simplify and streamline plan administration.

IRS Issues 2017 “Required Amendments List”

The IRS has issued the 2017 “Required Amendments List” for qualified plans. This is the second list issued since the IRS eliminated the five-year remedial amendment cycle and significantly curtailed the favorable determination letter program for individually designed plans. The IRS will issue a new List each year.

This new List, set forth in Notice 2017-72 contains amendments that are required as a result of changes in qualification requirements that become effective on or after January 1, 2017. The plan amendment deadline for a disqualifying provision arising as a result of a change in qualification requirements that appears on the 2017 List must be adopted by December 31, 2019.

The Required Amendments List is divided into two parts:

Part A lists the changes that would require an amendment to most plans or to most plans of the type affected by the particular change. Part A of the 2017 List contains two changes applicable to most plans of the type affected by the changes:

• Final regulations regarding cash balance/hybrid plans. Cash balance/hybrid plans must be amended to the extent necessary to comply with those portions of the regulations regarding market rate of return and other requirements that first become applicable to the plan for the plan year beginning in 2017. (This requirement does not apply to those collectively bargained plans that do not become subject to these portions of the regulations until 2018 or 2019 under the extended applicability dates provided in § 1.411(b)(5)-1(f)(2)(B)(3).)

Note: The relief from the anti-cutback requirements of § 411(d)(6) provided in § 1.411(b)(5)-1(e)(3)(vi) applies only to plan amendments that are adopted before the effective date of these regulations.

Note: See also Notice 2016-67, which addresses the applicability of the market rate of return rules to implicit interest pension equity plans.

• Benefit restrictions for certain defined benefit plans that are eligible cooperative plans or eligible charity plans described in section 104 of the Pension Protection Act of 2006, as amended (“PPA”)). An eligible cooperative plan or eligible charity plan that was not subject to the benefit restrictions of § 436 for the 2016 plan year under § 104 of PPA ordinarily becomes subject to those restrictions for plan years beginning on or after January 1, 2017. However, a plan that fits within the definition of a “CSEC plan” (as defined in § 414(y)) continues not to be subject to those rules unless the plan sponsor has made an election for the plan not to be treated as a CSEC plan.

• Final regulations regarding partial annuity distribution options for defined benefit pension plans (81 Fed. Reg. 62359). Defined benefit plans that permit benefits to be paid partly in the form of an annuity and partly as a single sum (or other accelerated form) must do so in a manner that complies with the § 417(e) regulations. Section 1.417(e)-1(d)(7) provides rules under which the minimum present value rules of § 417(e)(3) apply to the distribution of only a portion of a participant’s accrued benefit.

Section 1.417(e)-1(d)(7) applies to distributions with annuity starting dates in plan years beginning on or after January 1, 2017, but taxpayers may elect to apply § 1.417(e)-1(d)(7) with respect to any earlier period.

Note: The regulations provide relief from the anti-cutback rules of § 411(d)(6) for certain amendments adopted on or before December 31, 2017.

Note: Model amendments that a sponsor of a qualified defined benefit plan may use to amend its plan to offer bifurcated benefit distribution options in accordance with these final regulations are provided in Notice 2017-44.

Additional Background

In Rev. Proc. 2016-37, the IRS eliminated, effective January 1, 2017, the five-year remedial amendment/determination letter cycle for individually-designed qualified plans. After January 1, 2017, individually-designed plans will only be able to apply for a determination letter upon initial qualification, upon termination, and in certain other circumstances that the IRS may announce from time to time. See Announcement 2015-19.

To provide individually designed plans with guidance on what amendments must be adopted and when, the IRS announced that it would publish annually a Required Amendments List. The Required Amendments List generally applies to changes in qualification requirements that become effective on or after January 1, 2016. The List also establishes the date that the remedial amendment period expires for changes in qualification requirements contained on the list. Generally, an item will be included on a Required Amendments List only after guidance (including any model amendment) has been issued.

Where a required amendment appears on the List, then for an individually-designed non-governmental plan, the deadline to adopt the amendment is extended to the end of the second calendar year that begins after the issuance of the Required Amendments List in which the change in qualification requirements appear (i.e. until December 31, 2018 for items on the 2016 List; and until December 31, 2019 for items on the 2017 List.)

See our prior post regarding the 2016 Required Amendment List Here.

Updated Form 5500s Released for 2017

The U.S. Department of Labor’s Employee Benefits Security Administration, the IRS, and the Pension Benefit Guaranty Corporation (PBGC) have releasedadvance informational copies of the 2017 Form 5500 annual return/report and related instructions. The “Changes to Note” section of the 2017 instructions highlight important modifications to the Form 5500 and Form 5500-SF and their schedules and instructions.

Modifications are as follows:

IRS-Only Questions. IRS-only questions that filers were not required to complete on the 2016 Form 5500 have been removed from the Form 5500, Form 5500-SF and Schedules, including preparer information, trust information, Schedules H and I, lines 4o, and Schedule R, Part VII, regarding the IRS Compliance questions (Part IX of the 2016 Form 5500-SF).
Authorized Service Provider Signatures. The instructions for authorized service provider signatures have been updated to reflect the ability for service providers to sign electronic filings on the plan sponsor and Direct Filing Entity (DFE) lines, where applicable, in addition to signing on behalf of plan administrators.
Administrative Penalties. The instructions have been updated to reflect an increase in the maximum civil penalty amount under ERISA Section 502(c)(2), as required by the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015. Department regulations published on Jan. 18, 2017, increased the maximum penalty to $2,097 a day for a plan administrator who fails or refuses to file a complete or accurate Form 5500 report. The increased penalty under section 502(c)(2) is applicable for civil penalties assessed after Jan. 13, 2017, whose associated violation(s) occurred after Nov. 2, 2015 – the date of enactment of the 2015 Inflation Adjustment Act.
Form 5500/5500-SF-Plan Name Change. Line 4 of the Form 5500 and Form 5500-SF have been changed to provide a field for filers to indicate the name of the plan has changed. The instructions for line 4 have been updated to reflect the change. The instructions for line 1a have also been updated to advise filers that if the plan changed its name from the prior year filing(s), complete line 4 to indicate that the plan was previously identified by a different name.
Schedule MB. The instructions for line 6c have been updated to add mortality codes for several variants of the RP-2014 mortality table and to add a description of the mortality projection technique and scale to the Schedule MB, line 6 – Statement of Actuarial Assumptions/Methods.
Form 5500-SF-Line 6c. Line 6c has been modified to add a new question for defined benefit plans that answer “Yes” to the existing question about whether the plan is covered under the PBGC insurance program. The new question asks PBGC-covered plans to enter the confirmation number – generated in the “My Plan Administration Account system” – for the PBGC premium filing for the plan year to which the 5500-SF applies. For example, the confirmation number for the 2017 premium filing is reported on the 2017 Form 5500-SF.

Information copies of the forms, schedules and instructions are available online

IRS Announces 2018 COLA Adjusted Limits for Retirement Plans

The IRS has released Notice 2017-64 announcing cost‑of‑living adjustments affecting dollar limitations for pension plans and other retirement-related items for tax year 2018.

Highlights Affecting Plan Sponsors of Qualified Plans for 2018

The contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased from $18,000 to $18,500.
The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan remains unchanged at $6,000.
The limitation on the annual benefit under a defined benefit plan under Section 415(b)(1)(A) is increased from $215,000 to $220,000.
The limitation for defined contribution plans under Section 415(c)(1)(A) is increased in 2017 from $54,000 to $55,000.
The annual compensation limit under Sections 401(a)(17), 404(l), 408(k)(3)(C), and 408(k)(6)(D)(ii) is increased from $270,000 to $275,000.
The dollar limitation under Section 416(i)(1)(A)(i) concerning the definition of key employee in a top-heavy plan remains unchanged at $175,000.
The limitation used in the definition of highly compensated employee under Section 414(q)(1)(B) remains unchanged at $120,000.
The dollar amount under Section 409(o)(1)(C)(ii) for determining the maximum account balance in an employee stock ownership plan subject to a 5‑year distribution period is increased from $1,080,000 to $1,105,000, while the dollar amount used to determine the lengthening of the 5‑year distribution period is increased from $215,000 to $220,000.
The compensation amount under Section 408(k)(2)(C) regarding simplified employee pensions (SEPs) remains unchanged at $600.
The limitation under Section 408(p)(2)(E) regarding SIMPLE retirement accounts remains unchanged at $12,500.

The IRS previously Updated Health Savings Account limits for 2018. See our post here.

The following chart summarizes various significant benefit Plan limits for 2016 through 2018:

Type of Limitation	2018	2017	2016
415 Defined Benefit Plans	$220,000	$215,000	$210,000
415 Defined Contribution Plans	$55,000	$54,000	$53,000
Defined Contribution Elective Deferrals	$18,500	$18,000	$18,000
Defined Contribution Catch-Up Deferrals	$6,000	$6,000	$6,000
SIMPLE Employee Deferrals	$12,500	$12,500	$12,500
SIMPLE Catch-Up Deferrals	$3,000	$3,000	$3,000
Annual Compensation Limit	$275,000	$270,000	$265,000
SEP Minimum Compensation	$600	$600	$600
SEP Annual Compensation Limit	$275,000	$270,000	$265,000
Highly Compensated	$120,000	$120,000	$120,000
Key Employee (Officer)	$175,000	$175,000	$170,000
Income Subject To Social Security Tax (FICA)	$128,400	$127,200	$118,500
Social Security (FICA) Tax For ER & EE (each pays)	6.20%	6.20%	6.20%
Social Security (Med. HI) Tax For ERs & EEs (each pays)	1.45%	1.45%	1.45%
SECA (FICA Portion) for Self-Employed	12.40%	12.40%	12.40%
SECA (Med. HI Portion) For Self-Employed	2.9%	2.9%	2.90%
IRA Contribution	$5,500	$5,500	$5,500
IRA Catch-Ip Contribution	$1,000	$1,000	$1,000
HSA Max. Contributions Single/Family Coverage	$3,450/ $6,850	$3,400/ $6,750	$3,350/ $6,750
HSA Catchup Contributions	$1,000	$1,000	$1,000
HSA Min. Annual Deductible Single/Family	$1,350/ $2,700	$1,300/ $2,600	$1,300/ $2,600
HSA Max. Out Of Pocket Single/Family	$6,650/ $13,300	$6,550/ $13,100	$6,550/ $13,100

DOL Issues Additional Fiduciary Rule Enforcement Relief and FAQ Guidance

The DOL has issued temporary enforcement relief and FAQ guidance addressing the implementation of the DOL’s final fiduciary rule on investment advice conflicts and related prohibited transaction exemptions (PTEs) during the transition period beginning June 9, 2017 and ending January 1, 2018.

As background, the fiduciary rule and PTEs were effective June 7, 2016, with an initial applicability date of April 10, 2017. The applicability date was delayed 60 days to June 9, 2017. See our prior article here. In connection with the delay, the DOL amended the Best Interest Contract (BIC) exemption and the PTEs to provide transition relief that only requires adherence to the impartial conduct standards (including the best interest standard) through January 1, 2018.The standards specifically require advisers and financial institutions to:

(1) Give advice that is in the “best interest” of the retirement investor. This best interest standard has two chief components: prudence and loyalty:

Under the prudence standard, the advice must meet a professional standard of care as specified in the text of the exemption;
Under the loyalty standard, the advice must be based on the interests of the customer, rather than the competing financial interest of the adviser or firm;

(2) Charge no more than reasonable compensation; and

(3) Make no misleading statements about investment transactions, compensation, and conflicts of interest.

Highlights of the most recent transition guidance:

Temporary Enforcement Policy on Fiduciary Duty Rule (FAB 2017-02). The DOL announced on May 22, 2017 that it will not pursue claims during the transition period against fiduciaries who are “working diligently and in good faith” to comply with the new fiduciary rule and the related exemptions. The DOL also states that IRS confirms that FAB 2017-02 constitutes “other subsequent related enforcement guidance” for purposes of IRS Announcement 2017-4, which means that the IRS will not impose prohibited transaction excise taxes or related reporting obligations on any transactions or agreements during the transition period that would be subject to the DOL’s nonenforcement policy.

DOL FAQ Guidance on the Transition Period. The DOL also issued FAQs, which review the DOL’s “phased implementation approach”, and confirm that on June 9, 2017, firms and advisers who are fiduciaries need to alter their compensation practices to avoid PTEs or satisfy the transition period requirements under the BIC or another exemption. During the transition, firms should adopt policies and procedures they “reasonably conclude” are necessary to ensure that advisers comply with the impartial conduct standards. However, there is no requirement to give investors any warranty of their adoption, and those standards will not necessarily be failed if certain conflicts of interest continue during the transition period. Other highlights include a clarification that level-fee providers can rely on the BIC exemption during the transition period, and examples of participant communications and non-client-specific investment models that do not provide fiduciary advice. The guidance also indicates that the President’s mandated review (see our prior article here) has not been completed, but when it is, additional changes might be made to the rule or the PTEs.

DOL Delays Fiduciary Duty Rule for 60 Days and Invites Comments on Whether to Further Delay, Amend, or Withdraw the Rule

The U.S. Department of Labor (DOL) today announced a proposed extension of the applicability dates of the fiduciary rule and related exemptions, including the Best Interest Contract Exemption, from April 10 to June 9, 2017.

The announcement follows a presidential memorandum issued on Feb. 3, 2017, which directed the DOL to examine the fiduciary rule to determine whether it may adversely affect the ability of Americans to gain access to retirement information and financial advice. See our prior post, which explained that the President’s memorandum

..instructs the DOL to rescind or revise the rule . . . if it concludes for any other reason after appropriate review that the Fiduciary Duty Rule is inconsistent with the Administration’s stated priority “to empower Americans to make their own financial decisions, to facilitate their ability to save for retirement and build the individual wealth necessary to afford typical lifetime expenses, such as buying a home and paying for college, and to withstand unexpected financial emergencies”.

The DOL’s latest announcement invites comments that might help inform updates to the legal and economic analysis it conducted in originally issuing the rule (during President Obama’s term), including any issues the public believes were inadequately addressed in the prior analysis. The DOL has also invited comments on market responses to the final rule and the related Prohibited Transaction Exemptions (PTEs) to date, and on the costs and benefits attached to such responses. The comment period runs 45 days from today.

Upon completion of its examination, the DOL may decide to allow the
final rule and PTEs to become applicable, issue a further extension of the applicability date, propose to withdraw the rule, or propose amendments to the rule and/or the PTEs.

President Orders Review of Fiduciary Duty Rule

On February 3, 2017, the President issued a Presidential Memorandum on the Fiduciary Duty Rule, ordering the Department of Labor (DOL) to “examine the Fiduciary Duty Rule to determine whether it may adversely affect the ability of Americans to gain access to retirement information and financial advice”.

DOL Review

The memorandum directs the DOL to “prepare an updated economic and legal analysis concerning the impact of the Fiduciary Duty Rule”, considering whether the rule:

has harmed or is likely to harm investors due to a reduction in access to certain retirement savings offerings, retirement product structures, retirement savings information, or related financial advice;
has resulted in dislocations or disruptions within the retirement services industry that may adversely affect investors or retirees; or
is likely to cause an increase in litigation, and an increase in the prices that investors and retirees must pay to gain access to retirement services.

Possible Revision or Rescission

The memorandum also instructs the DOL to rescind or revise the rule if it makes an affirmative determination as to any of the above considerations, or if it concludes for any other reason after appropriate review that the Fiduciary Duty Rule is inconsistent with the Administration’s stated priority “to empower Americans to make their own financial decisions, to facilitate their ability to save for retirement and build the individual wealth necessary to afford typical lifetime expenses, such as buying a home and paying for college, and to withstand unexpected financial emergencies”.

Possible Delay

While the Memorandum does not directly delay the rule, the acting U.S. Secretary of Labor, Ed Hugler, responded to the President’s direction through a News Release stating that “The Department of Labor will now consider its legal options to delay the applicability date as we comply with the President’s memorandum.”

While it is still unclear whether the DOL will delay the rule, it is entirely possible, likely even, that the DOL will delay the rule within the next few weeks. It is also a good bet that the DOL will ultimately make some revisions to the rule, even if they do not rescind it entirely. In the meantime, financial advisors and others subject to the Rule will need to evaluate their compliance efforts so that they remain as nimble as possible in the face of he constantly shifting regulatory sands.

Plan Sponsors and Plan Administrators should note that neither the Fiduciary Duty Rule, nor the potential impending changes to the rule, directly impact their responsibilities as plan fiduciaries, other than how the rule impacts those providing financial advice to Plan Sponsors and Administrators.

DOL Conflict of Interest Final Rule Page

IRS Proposes Amendments to Definition of QMACs and QNECs – Allowing Broader use of Forfeitures

The IRS has issued proposed regulations that would amend the definitions of qualified matching contributions (QMACs) and qualified nonelective contributions (QNECs) applicable to certain qualified retirement plans that contain cash or deferred arrangements under section 401(k) or that provide for matching contributions or employee contributions under section 401(m).

Under the proposed 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 are allocated to participants’ accounts, but need not meet these requirements when they were originally contributed to the plan. The effect of this is that plan sponsors could use forfeitures from matching and profit sharing contributions (which were not fully vested when originally allocated to the Plan) to fund QMACs, QNECs and safe harbor contributions. Under existing IRS guidance, forfeitures cannot be used to fund such contributions (which are fully vested when made) because the original contribution was not fully vested at the time it was made.

Proposed Regulations

IRS Issues Updated Determination Letter Revenue Procedure

The IRS has updated and restated its revenue procedures governing determination letters for various types of employee benefit plans.

Rev. Proc. 2017-4 reflects the prior elimination of the five-year remedial amendment cycles for individually designed plans and includes other changes made to the determination letter program, including:

limited-scope determination letters on partial terminations if an employer is not otherwise eligible to request a determination letter;
determination letters on leased employees only if the employer is otherwise eligible to request a determination letter;
no determination letters on affiliated service groups; and
modified procedures for requesting relief from retroactive revocations of determination letters or letter rulings.

IRS Issues 2016 “Required Amendments List”

The IRS has issued its first “Required Amendments List” for qualified plans since it eliminated the five-year remedial amendment cycle, and significantly curtailed the favorable determination letter program for individually designed plans. The IRS will issue a new List each year.

This first List, set forth in Notice 2016-80 contains amendments that are required as a result of changes in qualification requirements that become effective on or after January 1, 2016. December 31, 2018 is the plan amendment deadline for a disqualifying provision arising as a result of a change in qualification requirements that appears on the 2016 List.

The Required Amendments List is divided into two parts:

Part A lists the changes that would require an amendment to most plans or to most plans of the type affected by the particular change. Part A of the 2016 List contains no changes applicable to most plans.

Part B lists changes that the Treasury Department and IRS do not anticipate will require amendments in most plans, but might require an amendment because of an unusual plan provision in a particular plan. Part B of the 2016 List contains a single change that may apply to certain collectively bargained defined benefit plans: Restrictions on accelerated distributions from underfunded single-employer plans in employer bankruptcy under Code § 436(d)(2), which was enacted as part of the Highway and Transportation Funding Act of 2014, P.L. 113-159, § 2003. Code Section provides (amendments made by P.L. 113-159, § 2003 in italics):

A defined benefit plan which is a single-employer plan shall provide that, during any period in which the plan sponsor is a debtor in a case under title 11, United States Code, or similar Federal or State law, the plan may not pay any prohibited payment. The preceding sentence shall not apply on or after the date on which the enrolled actuary of the plan certifies that the adjusted funding target attainment percentage of such plan (determined by not taking into account any adjustment of segment rates under section 430(h)(2)(C)(iv)) is not less than 100 percent.

Section 430(h)(2)(C)(iv) sets minimum and maximum and maximum rates for actuarial calculations of the funded status of defined benefit plans.

If a defined benefit plan incorporates the limitation of Section 436(d)(2) by reference to the statute or regulations (or through the use of the sample amendment in Notice 2011-96, which incorporated the statute and regulations), then no amendment to the plan would be required to comply with the changes.

Additional Background