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.
Category: Pension Benefits
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.
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.
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 Limitation | 2016 | 2015 | 2014 |
| 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-Employed | 12.40% | 12.40% | 12.40% |
| SECA (Med. HI Portion) For Self-Employed | 2.9% | 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 |
PBGC Issues Updated Final Rule on Reportable Events
On September 11, 2015, the Pension Benefit Guaranty Corporation (PBGC) published final rules updating its existing regulations and guidance for pension plans and plan sponsors regarding when and how they need to report various corporate and plan events to the PBGC. The updated rule is intended to make reporting more efficient and effective, to avoid unnecessary reporting requirements, and to conform PBGC’s reportable events regulation to changes in the law.
Changing the waiver structure
Under the regulation’s long-standing waiver structure for reportable events, which primarily focused on the funded status of a plan, PBGC often did not get reports it needed; at the same time, it received many reports that were unnecessary. This mismatch occurred because the old waiver structure was not well tied to the actual risks and causes of plan terminations, particularly the risk that a plan sponsor will default on its financial obligations, ultimately leading to an underfunded termination of its pension plan.
The final rule provides a new reportable events waiver structure that is more closely focused on risk of default than was the old waiver structure. Some reporting requirements that poorly identify risky situations — like those based on a supposedly modest level of plan underfunding — have been eliminated; at the same time, a new low-default-risk “safe harbor” — based on company financial metrics — is established that the PBGC believes better measures risk to the pension insurance system. This sponsor safe harbor is voluntary and based on existing, readily-available financial information that companies already use for many business purposes.
The final rule also provides a safe harbor based on a plan’s owing no variable-rate premium (VRP) (referred to as the well-funded plan safe harbor). Other waivers, such as public company, small plan, de minimis segment, and foreign entity waivers, have been retained in the final rule, and in many cases expanded, to provide additional relief to plan sponsors where the risk of an event to plans and the pension insurance system is low.
With the expansion in the number of waivers available in the final rule, PBGC estimates that 94 percent of plans covered by the pension insurance system will qualify for at least one waiver of reporting for events dealing with active participant reductions, controlled group changes, extraordinary dividends, benefit liability transfers, and substantial owner distributions.
Revised definitions of reportable events
The rule simplifies the descriptions of several reportable events and makes some event descriptions (e.g., active participant reduction) narrower so that compliance is easier and less burdensome. One event is broadened in scope (loan defaults), and clarification of another event has a similar result (controlled group changes). These changes, like the waiver changes, are aimed at tying reporting burden to risk.
Conforming to changes in the law
The Pension Protection Act of 2006 (PPA) made changes in the law that affect the test for whether advance reporting of certain reportable events is required. This rule conforms the advance reporting test to the new legal requirements.
Mandatory e-filing
The rule makes electronic filing of reportable events notices mandatory.
IRS Announces Significant Reduction in Determination Letter Program
On July 21, 2015, the IRS announced changes to the favorable determination letter program for qualified retirement plans. Employers that sponsor individually designed plans should take a close look at whether they can state their plans on a pre-approved plan document, particularly a volume submitter document, for the reasons explained in this post.
Most significantly, the IRS will eliminate the staggered 5-year determination letter remedial amendment cycles for individually designed plans as of January 2017. This means that, effective as of January 1, 2017, sponsors of individually designed plans will only be permitted to submit a determination letter application for qualification in two circumstances:
- upon initial plan adoption; and
- upon plan termination.
In addition, effective immediately, the IRS will no longer accept determination letter applications for individually designed plans that are submitted off-cycle, except for new plans and for terminating plans.
Implications for Plan Sponsors
These changes to the determination letter program increase the risk that document failures may get into, and remain for a long period of time in, plan sponsor’s qualified retirement plans. For example, a failure to adopt a required amendment to the plan document, which ordinarily would have been discovered and corrected in connection with the staggered 5-year determination letter remedial amendment cycle, could now persist for years or even decades before being discovered. Plan terminations will likely become more difficult, time consuming and costly if such errors are not discovered until the Plan submits for a favorable determination upon termination.
Plans that are stated on a pre-approved document (such as a volume submitter or prototype plan document) will continue to receive IRS opinion letters on the language in those plans. In addition, plan sponsors who adopt a volume submitter plan and make limited modifications to the approved specimen plan, which does not create an individually designed plan, will still be able to get a favorable determination on their plans every six years. These plans will thereby avoid the above risks.
For this reason, employers that sponsor individually designed plans should closely evaluate whether they can convert their plans to a pre-approved plan document, with a goal of completing the transition by January 1, 2017. Many individually designed plans may be able to fit onto a volume submitter plan with minor modifications, which will allow those sponsors to continue receiving a favorable determination lettre on their plan every six years.
Additional Guidance Expected from the IRS
The IRS has asked for comments, and expects to issue further guidance, regarding how it can assist plan sponsors that wish to convert individually designed plans to pre-approved plans.
We should also expect some changes to the IRS’s EPCRS correction program, to help correct errors that inevitably will increase as a result of this curtailment in the favorable determination letter program.
In addition, the IRS is considering ways to make it easier for plan sponsors that continue to sponsor individually designed plans to comply with the qualified plan document requirements, including:
- providing model amendments,
- not requiring certain plan provisions or amendments to be adopted if and for so long as they are not relevant to a particular plan (for example, because of the type of plan, employer, or benefits offered),
- or expanding plan sponsors’ options to document qualification requirements through incorporation by reference.
IRS Ends Lump Sum Risk Transferring Programs in Defined Benefit Plans
Treasury Department and the IRS announced today in Notice 2015-49 that they intend to amend the required minimum distribution regulations under Code Section 401(a)(9) to address the use of lump sum payments to replace annuity payments being paid by a qualified defined benefit pension plan.
The revised regulations will provide that qualified defined benefit plans generally are not permitted to replace any joint and survivor, single life, or other annuity currently being paid with a lump sum payment or other accelerated form of distribution. These amendments to the regulations will apply as of July 9, 2015.
Background
Section 401(a)(9) prescribes required minimum distribution rules for a qualified plan under Code Section 401(a). Under the regulations, a defined benefit pension plan cannot permit a current annuitant to convert their annuity payments to a lump sum or otherwise accelerate those payments, except in a narrow set of circumstances specified in the regulations, such as in the case of retirement, death, or plan termination. In addition, the regulations permit annuity payments to increase “[t]o pay increased benefits that result from a plan amendment.”
A number of defined benefit plan sponsors have amended their plans pursuant to this “plan amendment” exception to provide a limited period during which certain retirees who are currently receiving joint and survivor, single life, or other life annuity payments from those plans may elect to convert that annuity into a lump sum that is payable immediately. These arrangements are sometimes referred to as lump sum risk-transferring programs because longevity risk and investment risk are transferred from the plan to the retirees.
In 2012, the IRS issued Private Letter Rulings to General Motors and Ford specifically approving such programs for those companies. See PLR 201228045 and PLR 201228051. While Private Letter Rulings do not apply to anyone other than the person to whom they are issued, many employers found support in those PLRs for their risk transfer programs. With the change in the regulations announced today, those PLRs no longer provide any support.
Conclusion
The Treasury Department and the IRS have concluded that a broad exception for increased benefits that would permit lump sum payments to replace rights to ongoing annuity payments (of the kind approved in the two 2012 PLRs) would undermine the intent of the required minimum distribution regulations. Therefore, the exception for changes to the annuity payment period provided in the regulations (as intended to be amended) will not permit acceleration of annuity payments to which an individual receiving annuity payments was entitled before the amendment, even if the plan amendment also increases annuity payments.
IRS Expands Pre-Approved Plan Document Program to Include Cash Balance Plans and ESOPs
On June 8, 2015, the IRS issued Revenue Procedure 2015-36, which announces the IRS expansion of its pre-approved plan program to include cash balance plans and employee stock ownership plans (ESOPs). With this expansion, master & prototype and volume submitter plan providers can apply for opinion and advisory letters for cash balance plans by October 30, 2015, and for ESOPS during the defined contribution application period beginning February 1, 2017.
While this presents opportunities for ESOP sponsors to streamline their plan documentation, it is not without risks. As Cindy Shupe warned back in 2013, use of pre-approved documents can increase the risk of non-compliance if plan sponsors assume that use of a pre-approved document will ensure compliance with the complicated ESOP financing and prohibited transactions rules. Therefore, while we encourage ESOP sponsors to consider adopting a pre-approved plan document in the next cycle, we also encourage early conversations with ERISA counsel to evaluate the viability and implications of doing so. In addition to the above compliance issues, Employers currently maintaining individually designed ESOPS that intend to adopt a pre-approved plan (when available) will need to complete Form 8905, Certification of Intent To Adopt a Pre-approved Plan, before the end of their plan’s current 5-year remedial amendment cycle.
DOL Provides Timing Relief for Fee Disclosures in Participant-Directed Individual Account Plans
On March 19, 2015 the Department of Labor issued final rules that give retirement plan administrators a two-month window in which to provide annual fee disclosures to plan participants. Under existing regulations, plan administrators must provide fee disclosures to participants in plans with individually directed accounts at “at least once in any 12-month period, without regard to whether the plan operates on a calendar or fiscal year basis”. This 12-month rule presents some administrative difficulty because Plans that provide the disclosures in the same month every year could easily run afoul of the regulatory language if their disclosures are not done on the exact same day of the month each year.
The new rule replaces “12-month period” with “14-month period”, giving plan administrators a two month window each year in which to make the disclosures The new rules will become effective on June 17, 2015 (unless the DOL gets significant adverse comments on the rule, which is not expected). In the meantime, the DOL indicates that for enforcement purposes plan administrators can rely on the new rule immediately.
DOL to Propose New Fiduciary Rules
The White House today announced that in the coming months, the Department of Labor will propose a new fiduciary rule that, according to the announcement, will:
- Expand the types of retirement investment advice subject to ERISA’s fiduciary standards.
- Continue to allow private firms to set their own compensation practices by proposing a new type of exemption from limits on payments creating conflicts of interest that is more principles-based than the current rules. The exemption will still permit many common forms of compensation, such as commissions and revenue sharing, whether paid by the client or the investment firm.
- Allow advisers to continue to provide general education on retirement saving across employer-sponsored plans and IRAs without triggering fiduciary duties.
The DOL will issue a Notice of Proposed Rulemaking (NPRM) in the coming months. Then there will be a comment period before the final rule is issued.