IRS Announces More Changes to its Determination Letter Program

On June 29, 2016, the IRS updated its determination letter program for individually designed tax qualified retirement plans, making a number of significant changes, mostly having to do with (1) when individually designed plans must be amended to comply with changes in the law and other guidance, and (2) when those plans may request a favorable determination letter.

The bottom line for sponsors of individually designed plans is that they will need to amend their plans as frequently as annually to incorporate changes in the law, starting with required changes the IRS identifies in 2016, which will need to be made before December 31, 2018.

Background

Rev. Proc. 2007-44 provided a 5-year remedial amendment cycle (RAC) system for individually designed plans to request a determination letter generally every 5 years. Under that system, plans had to adopt interim amendments by the end of the year in which the amendments became effective. Plans would then have to make final conforming amendments at the end of their 5-year RAC cycle.

In Announcement 2015-19 the IRS stated that the RAC system would end, and a replacement system for the IRC Section 401(b) period would be created. Revenue Procedure 2016-37 ends the RAC system and replaces it with a new approach to the remedial amendment period.

When must individually designed plans be amended?

Interim amendments will no longer be required for individually designed plans. Instead, an individually designed plan’s Code Section 401(b) remedial amendment period for required amendments will be tied to a Required Amendment List (RA List) issued by the IRS, unless legislation or other guidance states otherwise. The RA List is the annual list of all the amendments for which an individually designed plan must be amended to retain its qualified plan status.

IRS will publish the RA List after October 1 of each year. Generally, plan sponsors must adopt any item placed on RA List by the end of the second calendar year following the year the RA List is published. For example, plan amendments for items on the 2016 RA List generally must be adopted by December 31, 2018.

Discretionary amendments will still be required by the end of the plan year in which the plan amendment is operationally put into effect.

What About Operational Compliance?

Revenue Procedure 2016-37 doesn’t change a plan’s operational compliance standards. Employers need to operate their plans in compliance with any change in qualification requirements from the effective date of the change, regardless of the plan’s 401(b) period for adopting amendments. To assist employers, IRS intends to provide annually an Operational Compliance List to identify changes in qualification requirements that are effective during a calendar year.

When may a plan apply for a Determination Letter?
Under Revenue Procedure 2016-37, a plan sponsor can request a determination letter only if any of these apply:

  • The plan has never received a letter before
  • The plan is terminating
  • The IRS makes a special exception

Other Implications

The new determination letter program makes the consequences of failing to timely amend a Plan potentially more dangerous, because the failure could continue for many years before being identified.  Therefore, sponsors of individually designed plans that still have the option of converting to a volume submitter or prototype document should revisit that question now.

In addition, if your plan remains individually designed, you ought to incorporate into your annual compliance schedule a check of the RA List in the fall of each year.

Finally, all tax qualified retirement plan sponsors (whether their plan is individually designed or volume submitter or prototype) should incorporate into their annual compliance schedule  a check of the IRS Operational Compliance List, to ensure they are operating their plan in compliance with law changes.

DOL Adjusts ERISA Penalties

The Department of Labor, Employee Benefits Security Administration has issued interim final rules increasing certain DOL compliance penalties effective as of August 1, 2016.  The highlights are:

  • The maximum penalty for failure or refusal to file the Form 5500 annual report is increasing from $1,100 per day to $2,063 per day
  • Failure to furnish information to the DOL under ERISA Section 104(a)(6 will now carry penalties equal to $147 per day (up from $110 per day)
  • The maximum penalty for failing to provide a summary of benefits and coverage for a group health plan is increasing from $1,000 to $1,087 per failure
  • Numerous miscellaneous penalties are increasing from $100 per day to $110 per day, including
    • Certain violations of the Genetic Information Nondiscrimination Act (GINA), such as establishing eligibility rules based on genetic information or requesting genetic information for underwriting purposes, and
    • An employer’s failure to inform employees of CHIP coverage opportunities
  • The penalty for failure to provide benefit statements to certain former participants and beneficiaries in a retirement plan are increasing from $11 per employee to $28 per employee
  • The penalties for failure to furnish a blackout notice (when participants are precluded from changing investment instructions, taking a loan or a distribution) are increasing from $100 per day to $131 per day

Why are the Penalties Being Increased Now? In 2015, Congress passed the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015 (2015 Inflation Adjustment Act) as part of the Bipartisan Budget Act of 2015. The new law directs agencies to adjust their civil monetary penalties for inflation.

Will the Penalties be Adjusted again in the Future? The law requires federal agencies to adjust their civil monetary penalties for inflation by July 1, 2016. After this initial “catch-up” adjustment, the agencies must adjust their civil monetary penalties annually for inflation.

When are the New Penalty Amounts Effective? The new civil penalty amounts are applicable only to civil penalties assessed after August 1, 2016, whose associated violations occurred after November 2, 2015, the date of enactment of the 2015 Inflation Adjustment Act.

More…

The interim final rule

EBSA Fact Sheet, including full chart showing all the new penalty amounts

IRS Issues Proposed Regulations Clarifying and Modifying the Final 409A Regulations

IRS has issued proposed regulations that would clarify or modify certain specific provisions of the final regulations under section 409A, including revisions to the rules regarding the calculation of amounts includible in income under section 409A.  The proposed regulations:

(1) Clarify that the rules under section 409A apply to nonqualified deferred compensation plans separately and in addition to the rules under section 457A.

(2) Modify the short-term deferral rule to permit a delay in payments to avoid violating Federal securities laws or other applicable law.

(3) Clarify that a stock right that does not otherwise provide for a deferral of compensation will not be treated as providing for a deferral of compensation solely because the amount payable under the stock right upon an involuntary separation from service for cause, or the occurrence of a condition within the service provider’s control, is based on a measure that is less than fair market value.

(4) Modify the definition of the term “eligible issuer of service recipient stock” to provide that it includes a corporation (or other entity) for which a person is reasonably expected to begin, and actually begins, providing services within 12 months after the grant date of a stock right.

(5) Clarify that certain separation pay plans that do not provide for a deferral of compensation may apply to a service provider who had no compensation from the service recipient during the year preceding the year in which a separation from service occurs.

(6) Provide that a plan under which a service provider has a right to payment or reimbursement of reasonable attorneys’ fees and other expenses incurred to pursue a bona fide legal claim against the service recipient with respect to the service relationship does not provide for a deferral of compensation.

(7) Modify the rules regarding recurring part-year compensation.

(8) Clarify that a stock purchase treated as a deemed asset sale under section 338 is not a sale or other disposition of assets for purposes of determining whether a service provider has a separation from service.

(9) Clarify that a service provider who ceases providing services as an employee and begins providing services as an independent contractor is treated as having a separation from service if, at the time of the change in employment status, the level of services reasonably anticipated to be provided after the change would result in a separation from service under the rules applicable to employees.

(10) Provide a rule that is generally applicable to determine when a “payment” has been made for purposes of section 409A.

(11) Modify the rules applicable to amounts payable following death.

(12) Clarify that the rules for transaction-based compensation apply to stock rights that do not provide for a deferral of compensation and statutory stock options.

(13) Provide that the addition of the death, disability, or unforeseeable emergency of a beneficiary who has become entitled to a payment due to a service provider’s death as a potentially earlier or intervening payment event will not violate the prohibition on the acceleration of payments.

(14) Modify the conflict of interest exception to the prohibition on the acceleration of payments to permit the payment of all types of deferred compensation (and not only certain types of foreign earned income) to comply with bona fide foreign ethics or conflicts of interest laws.

(15) Clarify the provision permitting payments upon the termination and liquidation of a plan in connection with bankruptcy.

(16) Clarify other rules permitting payments in connection with the termination and liquidation of a plan.

(17) Provide that a plan may accelerate the time of payment to comply with Federal debt collection laws.

(18) Clarify and modify the proposed rules regarding the treatment of deferred amounts subject to a substantial risk of forfeiture for purposes of calculating the amount includible in income under section 409A.

(19) Clarify various provisions of the final regulations to recognize that a service provider can be an entity as well as an individual.

Proposed 409A Regulations

Related Post Regarding Proposed 457 Regulations

IRS Issues Long-Awaited Proposed 457 Regulations

IRS has issued proposed regulations prescribing rules under section 457 of the Internal Revenue Code for the taxation of compensation deferred under plans established and maintained by State or local governments or other tax exempt organizations.

The proposed regulations include rules for determining when amounts deferred under these plans are includible in income, the amounts that are includible in income, and the types of plans that are not subject to these rules.  Significant provisions in the proposed regulations include:

  • Guidance on what constitutes a bona fide vacation leave, sick leave, compensatory time, severance pay, disability pay, and death benefit plan, which are treated as not providing for a deferral of compensation for purposes of section 457
  • Guidance regarding plans paying solely length of service awards to bona fide volunteers (or their beneficiaries) that also are treated as not providing for a deferral of compensation for purposes of section 457.
  • Amendments to existing regulations to reflect statutory changes that allow an eligible governmental plan to include a qualified Roth contribution program, and requiring eligible governmental plans to include provisions that where a participant dies while performing qualified military service, the survivors of the participant generally are entitled to any additional benefits that would have been provided under the plan if the participant had resumed and then terminated employment on account of death

Bona Fide Severance Pay Plans

The rules for a bonafide severance pay plan are very similar to the rules for separation pay plans in the final section 409A regulations.

  • First, the benefits provided under the plan must be payable only upon a participant’s involuntary severance from employment or pursuant to a window program or voluntary early retirement incentive plan.
  • Second, the amount payable under the plan with respect to a participant must not exceed two times the participant’s annualized compensation based upon the annual rate of pay for services provided to the eligible employer for the calendar year preceding the calendar year in which the participant has a severance from employment (unlike the 409A regulations, there is no cap on how high this amount can go).
  • Third, pursuant to the written terms of the plan, the severance benefits must be paid no later than the last day of the second calendar year following the calendar year in which the severance from employment occurs.

Bona Fide Disability Pay Plan

The proposed regulations provide that a bona fide disability pay plan must meet three conditions, which mirror the 409A definition of Disability):

  • The participant is unable to engage in substantial gainful activity by reason of a medically determinable physical or mental impairment that can be expected to result in death or last for a continuous period of not less than 12 months
  • The participant is, by reason of any medically determinable physical or mental impairment that can be expected to result in death or last for a continuous period of not less than 12 months, receiving income replacement benefits for a continuous period of not less than three months under an accident or health plan covering employees of the eligible employer; or
  • The participant is determined to be totally disabled by the Social Security Administration or the Railroad Retirement Board.Short Term DeferralsThe proposed regulations provide that a deferral of compensation does not occur with respect to any amount that would be a short-term deferral under the 409A regulations, substituting the definition of a substantial risk of forfeiture provided under the 457 proposed regulations for the definition under § 1.409A-1(d). There is considerable overlap between the definition of substantial risk of forfeiture for purposes of section 457(f) and the definition of substantial risk of forfeiture for purposes of section 409A.

    As with the 409A regulations, under the proposed 457 regulations, if a plan provides that entitlement to an amount is conditioned on an involuntary severance from employment without cause, the right is subject to a substantial risk of forfeiture if the possibility of forfeiture is substantial.

Income Inclusion Under 457(f)

The proposed regulations provide that if a 457 plan of an eligible employer provides for a deferral of compensation for the benefit of a participant or beneficiary and the plan is not an eligible plan (i.e. is is an ineligible plan subject to Code Section 457(f)), the compensation deferred under the plan is includible in gross income as of the later of

  • the date the participant or beneficiary obtains a legally binding right to the compensation or,
  • if the compensation is subject to a substantial risk of forfeiture, the date the substantial risk of forfeiture lapses.

The proposed regulations also provide general rules for determining the present value of compensation deferred under an ineligible plan.  These rules are similar to the rules for determining present value in the proposed section 409A regulations.   One difference is that income inclusion under the proposed 457 regulations is determined as of the date the substantial risk of forfeiture lapses, whereas income inclusion under section 409A is determined as of the end of the service provider’s taxable year.

Proposed 457 Regulations

Related Post Regarding Proposed 409A Regulations

Fiduciaries Ultimately Prevail in Tibble v. Edison

On remand from the United States Supreme Court, which held in May 2015 that ERISA imposes on retirement plan fiduciaries an ongoing duty to monitor investments, even absent a change in circumstances, the 9th Circuit Court of Appeals recently affirmed the district court’s original judgment in favor of the employer and its benefits plan administrator on claims of breach of fiduciary duty in the selection and retention of certain mutual funds for a benefit plan governed by ERISA.

The court of appeals had previously affirmed the district court’s holding that the plan beneficiaries’ claims regarding the selection of mutual funds in 1999 were time-barred. The Supreme Court vacated the court of appeals’ decision, observing that federal law imposes on fiduciaries an ongoing duty to monitor investments even absent a change in circumstances.

On remand, the panel held that the beneficiaries forfeited such ongoing-duty-to-monitor argument by failing to raise it either before the district court or in their initial appeal. While the fiduciaries ultimately prevailed in this case, the lesson for fiduciaries remains clear: You have an ongoing duty to monitor the investment options in your retirement plans.

Tibble v. Edison International (9th Cir., 2016)

Full Text of the Supreme Court Decision in Tibble v. Edison International (2015)

7th Circuit Holds Only a Church Can Establish an ERISA-Exempt Church Plan

On March 17, 2016 the 7th Circuit Court of Appeals joined the 3rd Circuit in holding that a network of hospitals and health care locations that is affiliated with a church cannot establish an ERISA-exempt church plan. Stapleton v. Advocate Health Care Network (7th Cir. 2016).

In Stapleton, several current and former employees of the church-affiliated hospital claimed that the organization failed to comply with ERISA’s vesting, reporting and disclosure, funding, trust, and fiduciary rules. The 7th Circuit Curt of Appeals agreed.

This issue is bubbling up all over the country. District Court cases have decided the question both ways. There is a case pending before the Ninth Circuit that held at the District Curt level that an affiliate cannot establish a church plan. Rollins v. Dignity Health, 19 F. Supp. 3d 909, 917 (N.D. Cal. 2013), appeal filed, No. 15-15351 (9th Cir. Feb. 26, 2016). The employer in Rollins faces up to $1.2 billion in funding obligations if it loses the case.

District court cases in several other states have help the other way – that affiliated organizations can establish a church plan.  The only two Court of Appeals cases to decide the question have ruled that the affiliated organization cannot establish a church plan. See Stapleton and Kaplan v. St. Peter’s Healthcare Sys., 810 F.3d 175 (3d Cir. 2015).

If you an organization affiliated with a church that is relying on the church plan exemption from ERISA’s vesting, reporting, disclosure, funding, trust, and fiduciary rules, you ought to review that decision with ERISA counsel.

Plan Imposed Limitations Period Must be in Benefit Denial Notice

The First Circuit recently ruled that it will not enforce a plan-imposed deadline for filing a lawsuit because the deadline was not set forth in the plan’s benefit denial notices. Santana-Diaz v. Metropolitan Life Ins. Co. (1st Cir. 2016).  This case reiterates the importance of including any plan specific limitations period for filing suit in the Summary Plan Description and in all benefit denial notices and appeal determinations.

IRS Gives Individually Designed Plans an Additional Year to Convert to Pre-Approved Plan Documents

IRS has announced in Notice 2016-03 that it will extend the deadline for an employer to restate an individually designed plan onto a current pre-approved defined contribution plan document (which is based on the 2010 Cumulative List), and to apply for a determination letter, if otherwise permissible, from April 30, 2016, to April 30, 2017. The extended deadline will also apply with respect to any defined contribution pre-approved plan that is first adopted on or after January 1, 2016.  This extension will facilitate a plan sponsor’s ability to convert an existing individually designed plan into a current defined contribution pre-approved plan.

The extension does not apply for a plan that is adopted as a modification and restatement of a defined contribution pre-approved plan that was maintained by the employer prior to January 1, 2016.  An employer that adopted a defined contribution pre-approved plan prior to January 1, 2016, continues to have until April 30, 2016 to adopt a modification and restatement of the defined contribution pre-approved plan within the current 6-year remedial amendment cycle for defined contribution plans and to apply for a determination letter, if permissible.

icon Notice 2016-03

icon 2010 Cumulative List of Changes in Plan Qualification Requirements

DOL and IRS Releases Updated Form 5500 Series for 2015

DOL and IRS recently posted the new 2015 Form 5500, Form 5500-SF, and a draft of the 2015 Form 5500-EZ. Of significance is the “IRS Compliance Questions” added to the various forms and schedules:

  • Schedules H and I add two new compliance questions about unrelated business taxable income and in-service distributions.
  • Schedule R adds ten new compliance questions in five areas: (1) ADP and ACP testing; (2) coverage testing and plan aggregation; (3) recently adopted plan amendments; (4) the type of plan (whether individually designed or preapproved); and (5) plans maintained in U.S. territories.
  • Form 5500-SF adds the above compliance questions and one additional question about whether required minimum distributions were properly made to 5% owners who are still employed and are were 70-1/2  or older.
  • Form 5500-EZ adds most of the above questions, except the testing and coverage questions, which do not apply to single person plans.

2015 Form 5500 series and Instructions

Draft 5500-EZ and Instructions

IRS Updated Plan Limits for 2016

IRS has announced the retirement plan and employee benefits limits for 2016. Most of the limits are unchanged. The exception is the HSA Maximum Contribution for Family increased $100 to $6,750.  Here is a chart showing the limits for 2014 through 2016:

Type of Limitation201620152014
415 Defined Benefit Plans$210,000$210,000$210,000
415 Defined Contribution Plans$53,000$53,000$52,000
401(k) Elective Deferrals, 457(b) and 457(c)(1)$18,000$18,000$17,500
401(k) Catch-Up Deferrals$6,000$6,000$5,500
SIMPLE Employee Deferrals$12,500$12,500$12,000
SIMPLE Catch-Up Deferrals$3,000$3,000$2,500
Annual Compensation Limit$265,000$265,000$260,000
SEP Minimum Compensation$600$600$550
SEP Annual Compensation Limit$265,000$265,000$260,000
Highly Compensated$120,000$120,000$115,000
Key Employee (Officer)$170,000$170,000$170,000
Income Subject To Social Security Tax  (FICA)$118,500$118,500$117,000
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-Employed12.40%12.40%12.40%
SECA (Med. HI Portion) For Self-Employed2.9%2.90%2.90%
IRA Contribution$5,500$5,500$5,500
IRA catch-up Contribution$1,000$1,000$1,000
HSA Max Single/Family$3,350/6,750$3,350/6,650$3,300/6,550
HSA Catchup$1,000$1,000$1,000
HSA Min. Annual Deductible Single/Family$1,300/2,600$1,300/2,600$1,250/2,500