Secure Act Makes Significant Changes to the Law Affecting Qualified Retirement Plans

The SECURE Act, signed into law on Dec. 20, 2019, includes a lot of tweaks to retirement law, including many that directly impact qualified retirement plans, as well as others that indirectly impact qualified plan participants. This post addresses the most significant such provisions.

The Setting Every Community Up for Retirement Enhancement Act (known as the “SECURE Act”) was signed into law on Dec. 20, 2019, and went into effect on Jan. 1, 2020. The law includes a lot of tweaks to retirement law, including many that directly impact qualified retirement plans, as well as others that indirectly impact qualified plan participants. This post addresses the most significant such provisions.

Primary Changes Directly Impacting Qualified Retirement Plans

Long-Term, Part-Time Employees Can Make Deferrals

The SECURE Act requires that plans permit employees who are at least age 21, have worked for at least three consecutive 12-month periods, and have completed at least 500 hours of service in those three years to make salary deferrals to the plan. As long as these individuals stay below 1,000 hours, they may be excluded from employer contributions (including top-heavy and gateway contributions), ADP testing, coverage testing, and other nondiscrimination testing. Because the law permits plans to ignore years of service prior to 1/1/2021 for the three-year period purposes, no employees will need to be permitted to defer under this provision before 2024.

Participant Statements Must Include Annuitization Information

The SECURE Act requires employers offering 401(k) and other qualified defined contribution plans to show employees not just the total balance in their account but also a projected monthly income in retirement based on that balance. The Department of Labor is expected to issue guidance for how plan sponsors should calculate projected monthly income, taking into account factors such as long-term contribution rates, investment performance and overall market growth. The DOL’s guidance will be complicated by the fact many plans have been doing this for years already. Hopefully, the DOL will not make such disclosures less useful. These disclosures aren’t required until 12 months after the DOL does everything it is required to do: i.e., issue guidance, issue model disclosure, and outline the required assumptions.

Required Minimum Distribution (RMD) Rules

The SECURE Act requires changes to the RMD rules to extend the required beginning date for living participants from the April 1 following the year in which the participant attains 70½ to such date following attainment of age 72. This change is generally effective for employees who reach age 70½ after 12/31/2019.

Form 5500 Late Filing Penalties Increasing ten-Fold

IRS penalties for late filed Forms 5500 will be increasing from $25 per day to $250 per day, and the maximum penalty per form (per plan year) increases from $15,000 to $150,000. This makes DOL’s Delinquent Filers Voluntary Correction Program (DFVC) (and, the IRS procedure for Forms 5500-EZ under Rev. Proc. 2015-32) far more valuable for late filers. The Form 8955-SSA penalties are also increasing ten-fold: from $1 per day per unreported participant to $10; and from a $5,000 maximum to $50,000. Finally, the obscure requirement that plan administrators file Form 8822-B to register a change in plan name or plan administrator name/address is also seeing enhanced penalties. The penalty for not filing that form will increase from $1 per day to $10, up to a maximum of $10,000 (up from $1,000). All of these changes are effective for returns due after 12/31/2019.

Distribution Related to Birth or Adoption

The SECURE Act permits Plans to allow participants who have or adopt a child after 2019 to take a distribution of up to $5,000 from the plan without having to pay the 10% premature distribution tax, if the distribution is made within one year of the birth or adoption. Further, the distributed funds may be repaid and treated like a rollover to a plan or IRA. There appears to be no deadline on repayment.

Extended Adoption Deadline for New Plans

The SECURE Act permits the adoption of new plans up to the tax return due date of the employer, including extensions. This rule is effective for plan years beginning after 12/31/2019. However, this applies only to employer contributions. Deferral provisions must be in place before the plan accepts elective deferrals. This will be a boon to the establishment of new plans, particularly for small employers whose owners may be looking for a way to reduce their tax burden in the immediately prior year.

Simplifying Safe Harbor 401(k) Plan Administration

The SECURE Act includes several provisions that will reduce the administrative burden for safe harbor 401(k) plans, including:

No safe harbor notice is required for a safe harbor plan that has only nonelective contributions. However, a nonelective contribution safe harbor plan that has matching contributions intended to fall within the ACP safe harbor must still give a safe harbor notice.
A safe harbor nonelective plan design (both regular and QACAs) may be adopted up to 30 days before the end of the plan year. This late adoption is not available for plans that have an ADP or QACA matching contribution at any time during the plan year.
A safe harbor nonelective plan design may also be adopted after the 30-day deadline and as late as the deadline for ADP refunds (generally the end of the plan year following the year for which the refunds are made), if the nonelective safe harbor contribution is increased from the normal 3% of compensation to 4%.

QACA Auto Escalation

The SECURE permits an increase in auto escalation in a QACA. The Act raises the 10% cap on the automatic escalation feature of QACAs after the first-year period, and replaces it with a 15% cap. This recognizes that 10% may not be a high enough rate of deferral for many participants. This is an optional provision (i.e. Plan Sponsors are not required to auto escalate to 15%, but may do so).

Pooled Employer Plans (Open MEPs) Encouraged

The SECURE Act gives a big boost to Open MEPs (now to be called “Pooled Employer Plans” or “PEPs”), effective for plan years beginning in 2021. The Act permits a “pooled plan provider” or “PPP” to sponsor a multiple employer plan for its clients.

The PPP is required to take responsibility as a named fiduciary, plan administrator, and the person who ensures that ERISA and Code requirements are met for the plan. The PPP is also required to make sure that all plan fiduciaries are properly bonded (and the new law makes it clear that bonding applies regardless of whether the fiduciary handles plan assets).

The SECURE Act provides that the PEP will not be disqualified because of a failure of an adopting employer to comply with the legal requirements. The adopting employer at issue, however, will be liable for qualification issues that affect its employees. The IRS will likely finalize its proposed rules, which permit the plan sponsor (the PPP under the Act) to eject the noncompliant part of the plan.

The law also reinforces that the adopting employer acts as a fiduciary in deciding to join a given PEP and for monitoring the PPP and other plan fiduciaries. In addition, unless the PEP has delegated investment management to someone else, the adopting employer is the investment fiduciary for its portion of the PEP. The law further provides that the PEP cannot apply “unreasonable” restrictions, fees, or penalties to employers or employees for ceasing participation, taking distributions, or otherwise transferring assets.

The SECURE Act leaves it to the Departments of the Treasury and Labor to issue regulations to flesh out the details of the new structure, and permits a good faith, reasonable interpretation of these rules until such guidance is issued.

Expect the big players in the retirement industry to roll out PEPs in the years to come. These arrangements will likely be attractive for start-up and small plans.

Other Changes Indirectly Affecting Qualified Plan Participants

Elimination of ‘Stretch’ IRAs, with some exceptions

“Stretch IRAs” have for years been a way of reducing the tax bill non-spouse beneficiaries pay when they inherit IRAs. These beneficiaries could “stretch out” their required minimum distributions (RMDs) over their lifetimes. This provided a lot of flexibility to plan the distributions in the most tax advantageous way. The SECURE Act eliminated “stretch” IRAs for those not deemed “eligible designated beneficiaries.” Anyone who is not an “eligible designated beneficiary” now must take full distribution of an inherited IRA within 10 years after the date of death.

Eligible designated beneficiaries, who can still stretch their RMDs, include:

Surviving spouses
Minor children, up to majority – but not grandchildren
Disabled people- under IRS rules
Chronically ill people
Individuals not more than 10 years younger than the IRA owner

Extension of IRA Eligibility

People over age 70½ can make deductible IRA contributions starting in 2020.

Effective Date and Deadline to Make Required Amendments

The SECURE Act was generally effective January 1, 2020. However, qualified plans will not be required to make amendments to comply with the SECURE Act until the last day of the plan year beginning on or after January 1, 2022. The law also permits the IRS to extend the amendment date further if required.

Full Text of the Secure Act BILLS-116hr1865enr Download

IRS Announces COLA Adjusted Retirement Plan Limitations for 2020

The Internal Revenue Service today released Notice 2019-59 announcing cost of living adjustments affecting dollar limitations for pension plans and other retirement-related items for tax year 2020.

Highlights Affecting Plan Sponsors of Qualified Plans for 2020

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 $19,000 to $19,500.
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 is increased from $6,000 to $6,500.
The limitation under Section 408(p)(2)(E) regarding SIMPLE retirement accounts is increased from $13,000 to $13,500.
The limit on annual contributions to an IRA remains unchanged at $6,000. The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000.
The limitation on the annual benefit under a defined benefit plan under Section 415(b)(1)(A) is increased from $225,000 to $230,000.
The limitation for defined contribution plans under Section 415(c)(1)(A) is increased in 2019 from $56,000 to $57,000.
The annual compensation limit under Sections 401(a)(17), 404(l), 408(k)(3)(C), and 408(k)(6)(D)(ii) is increased from $280,000 to $285,000.
The dollar limitation under Section 416(i)(1)(A)(i) concerning the definition of key employee in a top-heavy plan is increased from $180,000 to $185,000.
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 five year distribution period is increased from $1,130,000 to $1,150,000, while the dollar amount used to determine the lengthening of the five year distribution period is increased from $225,000 to $230,000.
The limitation used in the definition of highly compensated employee under Section 414(q)(1)(B) is increased from $125,000 to $130,000.

The IRS previously Updated Health Savings Account limits for 2019. See our post here.

The following chart summarizes various significant benefit Plan limits for 2018 through 2020:

Type of Limitation	2020	2019	2018
415 Defined Benefit Plans	$230,000	$225,000	$220,000
415 Defined Contribution Plans	$57,000	$56,000	$55,000
Defined Contribution Elective Deferrals	$19,500	$19,000	$18,500
Defined Contribution Catch-Up Deferrals	$6,500	$6,000	$6,000
SIMPLE Employee Deferrals	$13,500	$13,000	$12,500
SIMPLE Catch-Up Deferrals	$3,000	$3,000	$3,000
Annual Compensation Limit	$285,000	$280,000	$275,000
SEP Minimum Compensation	$600	$600	$600
SEP Annual Compensation Limit	$285,000	$280,000	$275,000
Highly Compensated	$130,000	$125,000	$120,000
Key Employee (Officer)	$185,000	$180,000	$175,000
Income Subject To Social Security Tax (FICA)	$137,700	$132,900	$128,400
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%	2.9%
IRA Contribution	$6,000	$6,000	$5,500
IRA Catch-Up Contribution	$1,000	$1,000	$1,000
HSA Max. Contributions Single/Family Coverage	$3,550/ $7,100	$3,500/ $7,00	$3,450/ $6,900
HSA Catchup Contributions	$1,000	$1,000	$1,000
HSA Min. Annual Deductible Single/Family	$1,400/ $2,800	$1,350/ $2,700	$1,350/ $2,700
HSA Max. Out Of Pocket Single/Family	$6,900/ $13,800	$6,750/ $13,500	$6,650/ $13,300

IRS Issues Final Hardship Regulations

The IRS has issued final regulations updating the section 401(k) and (m) regulations to reflect numerous statutory changes to the hardship distribution provisions under the Code.

Summary of Statutory Changes

Section 41113 of the Bipartisan Budget Act of 2018 directs the Secretary of the Treasury to modify § 1.401(k)-1(d)(3)(iv)(E) to (1) delete the 6-month prohibition on contributions following a hardship distribution and (2) make any other modifications necessary to carry out the purposes of section 401(k)(2)(B)(i)(IV).

Section 41114 of BBA 2018 modified the hardship distribution rules under section 401(k)(2)(B) by adding section 401(k)(14)(A) to the Code, which states that the maximum amount available for distribution upon hardship includes (1) contributions to a profit-sharing or stock bonus plan to which section 402(e)(3) applies, (2) QNECs, (3) QMACs, and (4) earnings on these contributions.

Section 41114 of BBA 2018 also added section 401(k)(14)(B) to the Code, which provides that a distribution is not treated as failing to be made upon the hardship of an employee solely because the employee does not take any available loan under the plan.

Section 11044 of the Tax Cuts and Jobs Act (TCJA), added section 165(h)(5) to the Code. Section 165(h)(5) provides that, for taxable years 2018 through 2025, the deduction for a personal casualty loss generally is available only to the extent the loss is attributable to a federally declared disaster (as defined in section 165(i)(5)).

Section 826 of the Pension Protection Act of 2006 (PPA ’06), directs the Secretary of the Treasury to modify the rules relating to hardship distributions to permit a section 401(k) plan to treat a participant’s beneficiary under the plan the same as the participant’s spouse or dependent in determining whether the participant has incurred a hardship. Notice 2007-7, 2007-5 I.R.B. 395, provides guidance for applying this provision.

Section 827(a) of PPA ’06 added to the Code section 72(t)(2)(G), which exempts certain distributions from the application of the section 72(t) additional income tax on early distributions. These distributions, made during the period that a reservist has been called to active duty, are referred to as “qualified reservist distributions,” and could include distributions attributable to elective contributions. Section 827(b)(1) of PPA ’06 added section 401(k)(2)(B)(i)(V) to the Code, which permits qualified reservist distributions to be made from a section 401(k) plan.

Section 105(b)(1)(A) of the Heroes Earnings Assistance and Relief Tax Act of 2008 (HEART Act), added section 414(u)(12) to the Code. Section 414(u)(12)(B)(ii) provides for a 6-month suspension of elective contributions and employee contributions after certain distributions to individuals performing service in the uniformed services.

Overview of the Regulatory Changes

Deemed Immediate and Heavy Financial Need

The final regulations modify the safe harbor list of expenses in existing § 1.401(k)-1(d)(3)(iii)(B) for which distributions are deemed to be made on account of an immediate and heavy financial need by:

(1) Adding “primary beneficiary under the plan” as an individual for whom qualifying medical, educational, and funeral expenses may be incurred;

(2) modifying the expense listed in existing § 1.401(k)-1(d)(3)(iii)(B)(6) (relating to damage to a principal residence that would qualify for a casualty deduction under section 165) to provide that for this purpose the limitations in section 165(h)(5) (added by section 11044 of the TCJA) do not apply; and

(3) adding a new type of expense to the list, relating to expenses incurred as a result of certain disasters.

Distribution Necessary To Satisfy Financial Need

Pursuant to sections 41113 and 41114 of BBA 2018, the final regulations modify the rules for determining whether a distribution is necessary to satisfy an immediate and heavy financial need by eliminating:

(1) any requirement that an employee be prohibited from making elective contributions and employee contributions after receipt of a hardship distribution and

(2) any requirement to take plan loans prior to obtaining a hardship distribution. In particular, the final regulations eliminate the safe harbor in existing § 1.401(k)-1(d)(3)(iv)(E), under which a distribution is deemed necessary to satisfy the financial need only if elective contributions and employee contributions are suspended for at least 6 months after a hardship distribution is made and, if available, nontaxable plan loans are taken before the hardship distribution is made.

The final regulations eliminate the rules in existing § 1.401(k)-1(d)(3)(iv)(B) (under which the determination of whether a distribution is necessary to satisfy a financial need is based on all the relevant facts and circumstances) and provide one general standard for determining whether a distribution is necessary.

Under this general standard, a hardship distribution may not exceed the amount of an employee’s need (including any amounts necessary to pay any federal, state, or local income taxes or penalties reasonably anticipated to result from the distribution), the employee must have obtained other available, non-hardship distributions under the employer’s plans, and the employee must provide a representation that he or she has insufficient cash or other liquid assets available to satisfy the financial need. A hardship distribution may not be made if the plan administrator has actual knowledge that is contrary to the representation.

The final regulations also provide that a plan generally may provide for additional conditions, such as those described in 26 CFR 1.401(k)-1(d)(3)(iv)(B) and (C) (revised as of April 1, 2019), to demonstrate that a distribution is necessary to satisfy an immediate and heavy financial need of an employee. However, the final regulations do not permit a plan to provide for a suspension of elective contributions or employee contributions as a condition of obtaining a hardship distribution.

Expanded Sources for Hardship Distributions

Pursuant to section 41114 of BBA 2018, the final regulations modify existing § 1.401(k)-1(d)(3) to permit hardship distributions from section 401(k) plans of elective contributions, QNECs, QMACs, and earnings on these amounts, regardless of when contributed or earned.

Section 403(b) Plans

Section 1.403(b)-6(d)(2) provides that a hardship distribution of section 403(b) elective deferrals is subject to the rules and restrictions set forth in § 1.401(k)-1(d)(3); accordingly, the new rules relating to a hardship distribution of elective contributions from a section 401(k) plan generally apply to section 403(b) plans.

However, because Code section 403(b)(11) was not amended by section 41114 of BBA 2018, income attributable to section 403(b) elective deferrals continues to be ineligible for distribution on account of hardship.

In addition, amounts attributable to QNECs and QMACs may be distributed from a section 403(b) plan on account of hardship only to the extent that, under § 1.403(b)-6(b) and (c), hardship is a permitted distributable event for amounts that are not attributable to section 403(b) elective deferrals. Thus, QNECs and QMACs in a section 403(b) plan that are not in a custodial account may be distributed on account of hardship, but QNECs and QMACs in a section 403(b) plan that are in a custodial account continue to be ineligible for distribution on account of hardship.

Applicability Dates

The changes to the hardship distribution rules made by BBA 2018 are effective for plan years beginning after December 31, 2018. The final regulations provide plan sponsors with a number of applicability-date options.

The final regulations provide that § 1.401(k)-1(d)(3) applies to distributions made on or after January 1, 2020 (rather than, as in the proposed regulations, to distributions made in plan years beginning after December 31, 2018).

However, § 1.401(k)-1(d)(3) may be applied to distributions made in plan years beginning after December 31, 2018, and the prohibition on suspending an employee’s elective contributions and employee contributions as a condition of obtaining a hardship distribution may be applied as of the first day of the first plan year beginning after December 31, 2018, even if the distribution was made in the prior plan year.

Thus, for example, a calendar-year plan that provides for hardship distributions under the pre-2019 safe harbor standards may be amended to provide that an employee who receives a hardship distribution in the second half of the 2018 plan year will be prohibited from making contributions only until January 1, 2019 (or may continue to provide that contributions will be suspended for the originally scheduled 6 months).

If the choice is made to apply § 1.401(k)-1(d)(3) to distributions made before January 1, 2020, the new rules requiring an employee representation and prohibiting a suspension of contributions may be disregarded with respect to those distributions. To the extent early application of § 1.401(k)-1(d)(3) is not chosen, the rules in § 1.401(k)-1(d)(3), prior to amendment by this Treasury decision, apply to distributions made before January 1, 2020, taking into account statutory changes effective before 2020 that are not reflected in that regulation.

In addition, the revised list of safe harbor expenses may be applied to distributions made on or after a date that is as early as January 1, 2018. Thus, for example, a plan that made hardship distributions relating to casualty losses deductible under section 165 without regard to the changes made to section 165 by the TCJA (which, effective in 2018, require that, to be deductible, losses must result from a federally declared disaster) may be amended to apply the revised safe harbor expense relating to casualty losses to distributions made in 2018, so that plan provisions will conform to the plan’s operation.

Similarly, a plan may be amended to apply the revised safe harbor expense relating to losses (including loss of income) incurred by an employee on account of a disaster that occurred in 2018, provided that the employee’s principal residence or principal place of employment at the time of the disaster was located in an area designated by the Federal Emergency Management Agency for individual assistance with respect to the disaster.

Plan Amendments

The Treasury Department and IRS expect that plan sponsors will need to amend their plans’ hardship distribution provisions to reflect the final regulations, and any such amendment must be effective for distributions beginning no later than January 1, 2020.

The deadline for amending a disqualifying provision is set forth in Rev. Proc. 2016-37, 2016-29 I.R.B. 136. For example, with respect to an individually designed plan that is not a governmental plan, the deadline for amending the plan to reflect a change in qualification requirements is the end of the second calendar year that begins after the issuance of the Required Amendments List (RAL) described in section 9 of Rev. Proc. 2016-37 that includes the change; if the final regulations are included in the 2019 RAL, the deadline will be December 31, 2021.

A plan provision that does not result in the failure of the plan to satisfy the qualification requirements, but is integrally related to a qualification requirement that has been changed in a manner that requires the plan to be amended, may be amended by the same deadline that applies to the required amendment.

The Treasury Department and IRS have determined that a plan amendment modifying a plan’s hardship distribution provisions that is effective no later than the required amendment, including a plan amendment reflecting one or more of the following, will be treated as amending a provision that is integrally related to a qualification requirement that has been changed:

(1) The change to section 165 (relating to casualty losses);

(2) the addition of the new safe harbor expense (relating to expenses incurred as a result of certain federally declared disasters); and

(3) the extension of the relief under Announcement 2017-15, 2017-47 I.R.B. 534, to victims of Hurricanes Florence and Michael that was provided in the preamble to the proposed regulations.

Thus, in the case of an individually designed plan, the deadline for such an integrally related amendment will be the same as the deadline for the required amendment (described above), even if some of the amendment provisions have an earlier effective date.

ERISA Benefits Law Attorney Erwin Kratz Named to the Best Lawyers in America© 2020

ERISA Benefits Law attorney Erwin Kratz was recently selected by his peers for inclusion in The Best Lawyers in America© 2020 in the practice area of Employee Benefits (ERISA) Law. Mr. Kratz has been continuously listed on The Best Lawyers in Americalist since 2010.

Since it was first published in 1983, Best Lawyers® has become universally regarded as the definitive guide to legal excellence. Best Lawyers lists are compiled based on an exhaustive peer-review evaluation. Lawyers are not required or allowed to pay a fee to be listed; therefore inclusion in Best Lawyers is considered a singular honor. Corporate Counsel magazine has called Best Lawyers “the most respected referral list of attorneys in practice.”

IRS Expands Determination Letter Program to Merged Plans and Statutory Hybrid Plans

The IRS has issued Rev. Proc. 2019-20, expanding its determination letter program to allow submissions by individually designed statutory hybrid plans and merged plans. Previously, the determination letter program was limited to applications for initial plan qualification and upon plan termination only. The IRS has indicated it will annually reconsider whether determination letters should be issued in other specified circumstances.

“Statutory hybrid plans” are defined benefit plans that use a hypothetical account balance (for example, a cash-balance plan) or an accumulated percentage of the participant’s final average compensation (for example, a pension equity plan) to establish a participant’s accrued benefit.

“Merged plans” are tax-qualified retirement plans resulting from the merger or consolidation of two or more plans of previously unrelated entities to form a single individually designed plan.

Applications by these plans will be permitted as follows:

Statutory Hybrid Plans. The determination letter program will be opened to statutory hybrid plans only for the 12-month period beginning September 1, 2019, and ending August 31, 2020. These plans will be reviewed for compliance with the 2017 Required Amendments List, and all previous lists.

Merged Plans. The determination letter program will be opened to merged plans on an ongoing basis, beginning September 1, 2019. To obtain a determination letter:

the plan merger must occur by the end of the first plan year beginning after the plan year in which the corporate merger, acquisition, or similar business transaction occurred; and
the application must be submitted during the period beginning on the date of the plan merger and ending on the last day of the first plan year beginning after the plan merger.

Merged plans will be reviewed based on the Required Amendments List issued during the second full calendar year before the submission, and all previous lists (including Cumulative Lists).

Any remedial amendment period that is open at the start of one of the submission periods described above will stay open until the end of the submission period. Plans will also get the benefit of the usual rule extending the remedial amendment period for a submitted plan until 91 days after a determination letter is issued.

Comment and Implications

For plan sponsors involved in corporate mergers, the provisions in Rev. Proc. 2019-20 will be particularly helpful. Determination letters protect against IRS challenges to plan provisions disclosed in a determination letter application. That protection can be especially important when an employer merges its own plan (which the employer may be reasonably confident meets the qualification requirements) with the plan of a previously unrelated employer. The 2016 changes to the determination letter program left many employers unable to request letters in that situation, increasing the risk of plan mergers. This concern can now be addressed through a determination letter application.

Sponsors of already-merged plans should also determine whether they can still submit a determination letter application. The September 1, 2019, opening date does not appear to preclude submissions of plan mergers that occurred before that date, as long as the applicable criteria are met.

IRS Expands Self-Correction Program

The IRS recently published Revenue Procedure 2019-19, which makes significant improvements to the Employee Plans Compliance Resolution System (“EPCRS”) corrections procedure for qualified retirement plans.

The updated EPCRS correction procedure comes after the IRS made other changes last year, which require correction applications to be filed electronically as of April 1, 2019. The updated EPCRS provides new ways that Plan Sponsors can self-correct Plan errors without having to file a formal correction with the IRS. This means more ways to correct without having to tell the IRS about the failure and without having to pay the voluntary Correction Program (VCP) fees.

What’s New?

The new procedure permits plans to self-correct failures occurring in two broad categories that previously required VCP filings: problems with participant loans and plan amendments.

Loan Failures

Generally, when a participant fails to repay his loan on time, the total principal and accrued interest of the loan becomes taxable income to the participant in the year of default, or after the end of a short “grace period” after the default. Previously, once that grace period had ended without repayment, a formal VCP application was the only way to prevent the full taxation, even if the failure occurred because the plan sponsor failed to start the intended automatic deduction for the loan repayment on its payroll system.

The new correction procedure allows self-correction of loan failures if the failure relates to:

A default on loan payments (if the five-year maximum repayment period has not expired);
Allowing participants to have multiple loans even though not permitted under the plan or loan procedure;
Providing a loan when the plan does not permit loans; or
The failure to obtain spousal consent (assuming that the spouse is now willing to provide that consent—if not, VCP is required to repair this failure).

If a defaulted loan is self-corrected under the new procedure, the loan is not treated as taxable income to the Participant. This new ability to self-correct these failures and avoid the tax consequences is a significant improvement to the EPCRS options. If the loan default happened so long ago that the maximum five-year repayment period has already expired, the self-correction program may still be used to allow the income to be taxable in the year of correction, rather than the year of default.

Two other loan failures listed above—providing loans when the plan does not permit them or failing to limit the number of loans a participant takes—would not produce taxable income to the participant, but could threaten the tax qualification of the plan. This problem can now be corrected through self-correction using a retroactive plan amendment.

Note: self correction is still not an option if a plan sponsor allows participants to take loans in amounts that exceed the legal limits (generally, $50,000 or 50% of the participant’s vested account), loans that have repayment periods in excess of the five-year limit (or the extended period allowed for home loans), or loans that do not provide for level, fully amortized payments. Such failures must still be corrected through a VCP application.

While the IRS considers loans corrected under VCP to be fully corrected for ERISA purposes, the Department of Labor (“DOL”) does not give that same deference to self-correction under EPCRS. Therefore, if the plan sponsor or participant wants to be sure that the loan does not represent a prohibited transaction or that excise taxes are not accruing, a separate filing under the DOL’s Voluntary Fiduciary Correction Program may be required.

Amendment Failures

Historically, most failures to amend a plan had to be corrected by filing a formal VCP application. There were three exceptions, all relating to operating the plan not in accordance with the plan provisions. These exceptions included:

allowing participants to enter the plan too soon (correct by amending the plan so that the eligibility requirements match what was already done);
allowing participants to take loans or hardship distributions where the plan did not permit those distributions (correct by amending the plan to permit loans or hardship distributions); and
failure to limit the compensation used for contribution allocations to the legal limit ($280,000 for 2019) (correct by amending the plan to increase the contribution for everyone to the amount needed to justify the allocation given to the highly paid person, when applying the compensation limit).

The new procedure allows self-correction by amendment in more situations.

Amendments to Match the Plan to Actual Operations or Late Adoption of Discretionary Amendments

Amendments may now be made to correct operational errors where the plan has been administered differently than the document provides or to correct the failure to timely adopt a discretionary amendment, if:

The amendment conforms the plan document to actual operations;
A benefit, right, or feature of the plan would increase as a result of the amendment;
The increase applies to all eligible employees; and
Providing the increase is consistent with the EPCRS correction principles.

Amendments to Cure Plan Document Failures

Amendments may also be used to self-correct plan documentation failures (i.e., failures relating to the inclusion of a provision that is prohibited or the omission of a provision required for plan qualification):

If the failure is a so-called “nonamender failure,” i.e., a failure to timely amend the plan. This includes a failure to timely adopt an interim amendment required by the IRS.
If the failure is that the sponsor of an individually designed plan (“IDP”) did not timely adopt an amendment needed to comply with an item that appeared on the Required Amendments List. Generally, the sponsor of an IDP must adopt such an amendment by the end of the second calendar year after the item first appears on the Required Amendments List.

Note: All corrections by amendment are significant failures. This means that, to self-correct these issues, the correction must be completed before the end of the second year following the year in which the error occurred.

IRS Announces COLA Adjusted Retirement Plan Limitations for 2019

The Internal Revenue Service today released Notice 2018-83 announcing cost of living adjustments affecting dollar limitations for pension plans and other retirement-related items for tax year 2019.

Highlights Affecting Plan Sponsors of Qualified Plans for 2019

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 $18,500 to $19,000. 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 limit on annual contributions to an IRA, which last increased in 2013, is increased from $5,500 to $6,000. The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000.
The limitation on the annual benefit under a defined benefit plan under Section 415(b)(1)(A) is increased from $220,000 to $225,000.
The limitation for defined contribution plans under Section 415(c)(1)(A) is increased in 2019 from $55,000 to $56,000.
The annual compensation limit under Sections 401(a)(17), 404(l), 408(k)(3)(C), and 408(k)(6)(D)(ii) is increased from $275,000 to $280,000.
The dollar limitation under Section 416(i)(1)(A)(i) concerning the definition of key employee in a top-heavy plan is increased from $175,000 to $180,000.
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 five year distribution period is increased from $1,105,000 to $1,130,000, while the dollar amount used to determine the lengthening of the five year distribution period is increased from $220,000 to $225,000.
The limitation used in the definition of highly compensated employee under Section 414(q)(1)(B) is increased from $120,000 to $125,000.
The limitation under Section 408(p)(2)(E) regarding SIMPLE retirement accounts is increased from $12,500 to $13,000.

The IRS previously Updated Health Savings Account limits for 2019. See our post here.

The following chart summarizes various significant benefit Plan limits for 2017 through 2019:

Type of Limitation	2019	2018	2017
415 Defined Benefit Plans	$225,000	$220,000	$215,000
415 Defined Contribution Plans	$56,000	$55,000	$54,000
Defined Contribution Elective Deferrals	$19,000	$18,500	$18,000
Defined Contribution Catch-Up Deferrals	$6,000	$6,000	$6,000
SIMPLE Employee Deferrals	$13,000	$12,500	$12,500
SIMPLE Catch-Up Deferrals	$3,000	$3,000	$3,000
Annual Compensation Limit	$280,000	$275,000	$270,000
SEP Minimum Compensation	$600	$600	$600
SEP Annual Compensation Limit	$280,000	$275,000	$270,000
Highly Compensated	$125,000	$120,000	$120,000
Key Employee (Officer)	$180,000	$175,000	$175,000
Income Subject To Social Security Tax (FICA)	$132,900	$128,400	$127,200
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%	2.9%
IRA Contribution	$6,000	$5,500	$5,500
IRA Catch-Up Contribution	$1,000	$1,000	$1,000
HSA Max. Contributions Single/Family Coverage	$3,500/ $7,000	$3,450/ $6,900	$3,400/ $6,750
HSA Catchup Contributions	$1,000	$1,000	$1,000
HSA Min. Annual Deductible Single/Family	$1,350/ $2,700	$1,350/ $2,700	$1,300/ $2,600
HSA Max. Out Of Pocket Single/Family	$6,750/ $13,500	$6,650/ $13,300	$6,550/ $13,100

ERISA Benefits Law Receives Recognition as a Top Tier Law firm in 2019 U.S. News – Best Lawyers® “Best Law Firms” Rankings

We are happy to announce that ERISA Benefits Law has again been recognized as a top tier law firm in the 2019 U.S. News – Best Lawyers® “Best Law Firms” rankings. The firm received a Tier 1 metropolitan ranking in Tucson, Arizona in Employee Benefits (ERISA) Law. We are grateful for the recognition of our peers, and the trust of our clients, as a niche ERISA and employee benefits law firm focused on providing the highest quality legal services at the most affordable rates anywhere.

The U.S. News – Best Lawyers “Best Law Firms” rankings are based on a rigorous evaluation process that includes the collection of client and lawyer evaluations, peer review from leading attorneys in their field, and review of additional information provided by law firms as part of the formal submission process.

ERISA Benefits Law attorney Erwin Kratz was recently selected by his peers for inclusion in The Best Lawyers in America© 2019 in the practice area of Employee Benefits (ERISA) Law. Mr. Kratz has been continuously listed on The Best Lawyers in America list since 2010.

Treasury and IRS Issue Final Regulations Amending the Definition of Qualified Matching Contributions and Qualified Nonelective Contributions

The Treasury and IRS have issued final regulations amending the definitions of qualified matching contributions (QMACs) and qualified nonelective contributions (QNECs) under regulations regarding 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 these new regulations, an employer contribution to a plan may be a QMAC or QNEC if it satisfies applicable nonforfeitability requirements and distribution limitations at the time it is allocated to a participant’s account, but need not meet these requirements or limitations when it is contributed to the plan.

History

On January 18, 2017, the Treasury Department and the IRS issued a notice of proposed rulemaking. Several comments on the proposed rules were submitted, and, after consideration of all the comments, the final rules adopt the proposed rules without substantive modification. However, the Treasury Department and the IRS determined that the distribution requirements referred to in the existing definitions of QMACs and QNECs in §§ 1.401(k)-6 and 1.401(m)-5 are more appropriately characterized as distribution limitations (consistent with the heading of § 1.401(k)-1(d)), and, accordingly, these definitions have been amended to refer to distribution limitations.

Implications of the New Rules

The new rule raises some questions relating to the application of Code section 411(d)(6) (protected benefits) in cases in which a plan sponsor seeks to amend its plan to apply the new rules. The application of section 411(d)(6) is generally outside the scope of these regulations. However, the IRS indicates in the discussion of the new rules that if a plan sponsor adopts a plan amendment to define QMACs and QNECs in a manner consistent with the final regulations and applies that amendment prospectively to future plan years, section 411(d)(6) would not be implicated.

In addition, in the common case of a plan that provides that forfeitures will be used to pay plan expenses incurred during a plan year and that any remaining forfeitures in the plan at the end of the plan year will be allocated pursuant to a specified formula among active participants who have completed a specified number of hours of service during the plan year, section 411(d)(6) would not prohibit a plan amendment adopted before the end of the plan year that permits the use of forfeitures to fund QMACs and QNECs (even if, at the time of the amendment, one or more participants had already completed the specified number of hours of service). This is because all conditions for receiving an allocation will not have been satisfied at the time of the amendment, since one of the conditions for receiving an allocation is that plan expenses at the end of the plan year are less than the amount of forfeitures. See § 1.411(d)-4, Q&A-1(d)(8) (features that are not section 411(d)(6) protected benefits include “[t]he allocation dates for contributions, forfeitures, and earnings, the time for making contributions (but not the conditions for receiving an allocation of contributions or forfeitures for a plan year after such conditions have been satisfied), and the valuation dates for account balances”).

Statutory Background

Section 401(k)(1) provides that a profit-sharing or stock bonus plan, a pre-ERISA money purchase plan, or a rural cooperative plan will not be considered as failing to satisfy the requirements of section 401(a) merely because the plan includes a qualified cash or deferred arrangement (CODA). To be considered a qualified CODA, a plan must satisfy several requirements, including: (i) Under section 401(k)(2)(B), amounts held by the plan’s trust that are attributable to employer contributions made pursuant to an employee’s election must satisfy certain distribution limitations; (ii) under section 401(k)(2)(C), an employee’s right to such employer contributions must be nonforfeitable; and (iii) under section 401(k)(3), such employer contributions must satisfy certain nondiscrimination requirements.

Under section 401(k)(3)(D)(ii), the employer contributions taken into account for purposes of applying the nondiscrimination requirements may, under such rules as the Secretary may provide and at the election of the employer, include matching contributions within the meaning of section 401(m)(4)(A) that meet the distribution limitations and nonforfeitability requirements of section 401(k)(2)(B) and (C) (also referred to as qualified matching contributions or QMACs) and qualified nonelective contributions within the meaning of section 401(m)(4)(C) (QNECs). Under section 401(m)(4)(C), a QNEC is an employer contribution, other than a matching contribution, with respect to which the distribution limitations and nonforfeitability requirements of section 401(k)(2)(B) and (C) are met.

Under § 1.401(k)-1(b)(1)(ii), a CODA satisfies the applicable nondiscrimination requirements if it satisfies the actual deferral percentage (ADP) test of section 401(k)(3), described in § 1.401(k)-2. The ADP test limits the disparity permitted between the percentage of compensation made as employer contributions to the plan for a plan year on behalf of eligible highly compensated employees and the percentage of compensation made as employer contributions on behalf of eligible nonhighly compensated employees. If the ADP test limits are exceeded, the employer must take corrective action to ensure that the limits are met. In determining the amount of employer contributions made on behalf of an eligible employee, employers are allowed to take into account certain QMACs and QNECs made on behalf of the employee by the employer.

In lieu of applying the ADP test, an employer may choose to design its plan to satisfy an ADP safe harbor, including the ADP safe harbor provisions of section 401(k)(12), described in § 1.401(k)-3. Under § 1.401(k)-3, a plan satisfies the ADP safe harbor provisions of section 401(k)(12) if, among other things, it satisfies certain contribution requirements. With respect to the safe harbor under section 401(k)(12), an employer may choose to satisfy the contribution requirement by providing a certain level of QMACs or QNECs to eligible nonhighly compensated employees under the plan.

A defined contribution plan that provides for matching or employee after-tax contributions must satisfy the nondiscrimination requirements under section 401(m) with respect to those contributions for each plan year. Under § 1.401(m)-1(b)(1), the matching contributions and employee contributions under a plan satisfy the nondiscrimination requirements for a plan year if the plan satisfies the actual contribution percentage (ACP) test of section 401(m)(2) described in § 1.401(m)-2.

The ACP test limits the disparity permitted between the percentage of compensation made as matching contributions and after-tax employee contributions for or by eligible highly compensated employees under the plan and the percentage of compensation made as matching contributions and after-tax employee contributions for or by eligible nonhighly compensated employees under the plan. If the ACP test limits are exceeded, the employer must take corrective action to ensure that the limits are met. In determining the amount of employer contributions made on behalf of an eligible employee, employers are allowed to take into account certain QNECs made on behalf of the employee by the employer. Employers must also take into account QMACs made on behalf of the employee by the employer unless an exclusion applies (including an exclusion for Start Printed Page 34470QMACs that are taken into account under the ADP test).

If an employer designs its plan to satisfy the ADP safe harbor of section 401(k)(12), it may avoid performing the ACP test with respect to matching contributions under the plan, as long as the additional requirements of the ACP safe harbor of section 401(m)(11) are met.

As previously defined in § 1.401(k)-6, QMACs and QNECs must satisfy the nonforfeitability requirements of § 1.401(k)-1(c) and the distribution limitationsof § 1.401(k)-1(d) “when they are contributed to the plan.” Similarly, under the independent definitions in § 1.401(m)-5, QMACs and QNECs must satisfy the nonforfeitability requirements of § 1.401(k)-1(c) and the distribution limitations of § 1.401(k)-1(d) “at the time the contribution is made.” In general, contributions satisfy the nonforfeitability requirements of § 1.401(k)-1(c) if they are immediately nonforfeitable within the meaning of section 411, and contributions satisfy the distribution limitations of § 1.401(k)-1(d) if they may not be distributed before the employee’s death, disability, severance from employment, attainment of age 59.5, or hardship, or upon the termination of the plan.

Background to the Rule Change

Before 2017, the Treasury Department and the IRS received comments with respect to the definitions of QMACs and QNECs in §§ 1.401(k)-6 and 1.401(m)-5. In particular, commenters asserted that employer contributions should qualify as QMACs and QNECs as long as they satisfy applicable nonforfeitability requirements at the time they are allocated to participants’ accounts, rather than when they are first contributed to the plan. Commenters pointed out that interpreting sections 401(k)(3)(D)(ii) and 401(m)(4)(C) to require satisfaction of applicable nonforfeitability requirements at the time amounts are first contributed to the plan would preclude plan sponsors with plans that permit the use of amounts in plan forfeiture accounts to offset future employer contributions under the plan from applying such amounts to fund QMACs and QNECs. This is because the amounts would have been allocated to the forfeiture accounts only after a participant incurred a forfeiture of benefits and, thus, generally would have been subject to a vesting schedule when they were first contributed to the plan. Commenters requested that QMAC and QNEC requirements not be interpreted to prevent the use of plan forfeitures to fund QMACs and QNECs. The commenters urged that the nonforfeitability requirements under § 1.401(k)-6 should apply when QMACs and QNECs are allocated to participants’ accounts and not when the contributions are first made to the plan.

In considering the comments, the Treasury Department and the IRS took into account that the nonforfeitability requirements applicable to QMACs and QNECs are intended to ensure that QMACs and QNECS provide nonforfeitable benefits for the participants who receive them. In accordance with that purpose, the Treasury Department and the IRS concluded that it is sufficient to require that amounts allocated to participants’ accounts as QMACs and QNECs be nonforfeitable at the time they are allocated to participants’ accounts, rather than when such contributions are made to the plan.

The Final Rules

Category: Qualified Plans