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  • BC Network
    Thursday, July 14, 2016

    Governmental Buildings and MoneyAfter more than nine years of deliberations, the IRS has finally released proposed regulations governing all types of deferred compensation plans maintained by non-profit organizations and governmental entities.

    In issuing these regulations, the IRS reiterates its long-standing theme that these regulations are intended to work in harmony with, and be supplemental to, the 409A regulations. However, the IRS provides little guidance on how these regulations interact with each other.  The following discussion focuses on 3 key aspects of the new guidance: the severance exemption, the substantial risk of forfeiture requirement, and leave programs.

    As with the 409A regulations, the 457 regulations exempt severance pay plans from the rules and taxes applicable to deferred compensation. The 457 regulations apply similar criteria with one notable exception: they do not apply the 401(a)(17) compensation limit in determining the “two times” dollar cap on amounts that can be paid pursuant to an exempt severance pay plan.  Practitioners in the for-profit arena currently believe they enjoy wide latitude in restructuring severance arrangements that are exempt from 409A.  It would not appear that practitioners will have that same latitude for severance arrangements that are exempt from 457, unless the arrangements also satisfy the severance pay exemption under 409A, particularly with regard to the dollar cap limit.

    Historically, the proposed 457 rules afforded greater flexibility with respect to what is considered a substantial risk of forfeiture, particularly in the context of non-competes and rolling risks of forfeiture. The regulations restrict, but do not eliminate this flexibility by establishing requirements that must be satisfied for non-competes and rolling risks of forfeitures to create a substantial risk of forfeiture.  Despite the fact that there is wide latitude in restructuring short-term deferral arrangements in the for-profit arena, these restrictions will limit the ability to  restructure short-term deferral arrangements when using non-competes or rolling risks of forfeiture without taking into consideration whether any restructuring would constitute a separate transgression of the 409A rules.

    Finally, the proposed 457 regulations raise the possibility that many leave programs, especially those maintained by governmental entities, could be suspect as deferred compensation arrangements. A paid leave program may be considered suspect if it allows large amounts of leave to be accumulated over the course of many years.  In our experience, this is not an uncommon design for many governmental and educational leave programs.  If the IRS does not retreat from this position, many such employers may need to reassess the structure of their leave programs.  The position taken in the proposed 457 rules might also give for-profit employers some pause as to whether the IRS might take a view that overly liberal leave programs may be subject to 409A requirements as deferred compensation.

    Notwithstanding the long-awaited guidance afforded by these regulations, practitioners and plan sponsors would have welcomed greater guidance with respect to the interaction of the 409A and 457 rules. For instance, the rules could have better addressed where and how the 409A rules claw back some of the greater flexibility historically provided by the proposed 457 rules.  In the absence of guidance, some of that greater flexibility may turn out to be illusory – and the IRS will have failed to adequately highlight the pitfalls that await those that rely upon the greater flexibility afforded 457 arrangements.  Such failure to adequately address the interaction of the regulations raises some troubling questions and possible traps for the unwary.

    Wednesday, January 22, 2014

    As a follow up to our post on November 1, 2013, regarding changes to the qualified plan limits for 2014, we’ve issued a Client Alert providing the qualified plan limits for 2014 (as well as 2011 – 2013) in tabular form.

    We’ve also reproduced the limits table below for ease of reference:

    Type of Limitation

    2014

    2013

    2012 

    2011

    Elective Deferrals (401(k), 403(b), 457(b)(2) and 457(c)(1))

    $17,500

    $17,500

    $17,000

    $16,500

    Section 414(v) Catch-Up Deferrals to 401(k), 403(b), 457(b), or SARSEP Plans (457(b)(3) and 402(g) provide separate catch-up rules to be considered as appropriate)

    $5,500

    $5,500

    $5,500

    $5,500

    SIMPLE 401(k) or regular SIMPLE plans, Catch-Up Deferrals

    $2,500

    $2,500

    $2,500

    $2,500

    415 limit for Defined Benefit Plans

    $210,000

    $205,000

    $200,000

    $195,000

    415 limit for Defined Contribution Plans

    $52,000

    $51,000

    $50,000

    $49,000

    Annual Compensation Limit

    $260,000

    $255,000

    $250,000

    $245,000

    Annual Compensation Limit for Grandfathered Participants in Governmental Plans Which Followed 401(a)(17) Limits (With Indexing) on July 1, 1993

    $385,000

    $380,000

    $375,000

    $360,000

    Highly Compensated Employee 414(q)(1)(B)

    $115,000

    $115,000

    $115,000

    $110,000

    Key employee in top heavy plan (officer)

    $170,000

    $165,000

    $165,000

    $160,000

    SIMPLE Salary Deferral

    $12,000

    $12,000

    $11,500

    $11,500

    Tax Credit ESOP Maximum balance

    $1,050,000

    $1,035,000

    $1,015,000

    $985,000

    Amount for Lengthening of 5-Year ESOP Period

    $210,000

    $205,000

    $200,000

    $195,000

    Taxable Wage Base

    $117,000

    $113,700

    $110,100

    $106,800

    FICA Tax for employees and employers

    7.65%

          7.65%

         7.65%

         7.65%

    Social Security Tax for employees

    6.2%

    6.2%

    4.2%*

    4.2%*

    Social Security Tax for employers

    6.2%

    6.2%

    6.2%

    6.2%

    Medicare Tax for employers and employees

         1.45%

         1.45%

         1.45%

    1.45%

    Additional Medicare Tax**

    0.9% of comp > $200,000

    0.9% of comp > $200,000

    -

    -

    *This figure reflects a 2% reduction in the rate of tax for employees pursuant to the Tax Relief Act of 2010

    **For taxable years beginning after 12/31/12, an employer must withhold Additional Medicare Tax on wages or compensation paid to an employee in excess of $200,000 in a calendar year.

    Monday, January 6, 2014

    Given the migratory nature of society these days, it is not uncommon for an employee benefit plan to accumulate significant sums of money attributable to the accounts of lost participants.  For a number of States, the assets attributable to lost participants are an attractive revenue source.  Utilizing their unclaimed property statutes, many States attempt to seize these funds so they can add them to the State’s coffers.

    Most employee benefit plans subject to ERISA can sidestep this potential leakage of plan assets through the use of clear plan language that expressly provides for the forfeiture of amounts from the accounts of participants who are determined to be lost after some predetermined period. The language should also provide that those forfeited funds will be utilized either through a reduction of the sponsor’s contribution obligation or their application to reduce plan expenses.  The Department of Labor has unequivocally concluded that such plan provisions are to be honored irrespective of unclaimed property statutes that might otherwise dictate a contrary result. Most plans that provide for the forfeiture of the accounts of lost participants further provide that those accounts will be restored if the lost participants are later found.

    Employee benefit plans that are not subject to ERISA and, therefore, do not benefit from  ERISA preemption, can be designed to sidestep unclaimed property statutes with plan provisions that provide for forfeitures before the shortest applicable escheat period runs.

    An exception to this approach, however, applies to employee benefit plans that are funded with insurance (even if subject to ERISA).  Both the Department of Labor and courts have sided with the States regarding the application of their unclaimed property statutes based on the insurance exception to preemption under ERISA’s statutory scheme.  Further, the provisions of ERISA do not appear to preclude an employee benefit plan from voluntarily turning over assets attributable to lost participants to a State’s unclaimed property department.  We believe the better use of such plan assets provide for their utilization to reduce plan expenses or to reduce the sponsor’s contribution obligation rather than letting them escheat.

    Monday, January 14, 2013

    After a long wait, an updated Revenue Procedure for the Employee Plans Compliance Resolution System (EPCRS) was released in the form of Rev. Proc. 2013-12.  The new Revenue Procedure makes some important changes to the EPCRS.

    As many plan sponsors know, the EPCRS includes the self-correction program (SCP), which requires prescribed corrections but does not require submission to the IRS; the voluntary correction program (VCP), which requires both prescribed corrections and submission to and approval by the IRS; and correction of problems discovered on audit (Audit CAP).

    The purpose of the updated Revenue Procedure is to improve some features of the EPCRS and clarify others, based in large part on comments from the employee benefits community.  The IRS expects to make more changes of this type in the future, also based on comments from the employee benefits community.  Generally speaking, the IRS was responsive to many of the concerns raised by the employee benefits community and addressed them in a helpful manner in the revised EPCRS.

    The biggest news is that 403(b) plans, are now eligible for EPCRS.  In particular, 403(b) plan sponsors can now use VCP to correct failure to adopt a written 403(b) plan on time.

    Correction procedures are also provided on an experimental basis for 457(b) plans, primarily for governmental 457(b) plans, in a new program separate from the EPCRS.

    Other new or revised procedures in the EPCRS include:

    • SCP correction of recurring excess annual additions under Section 415(c) of the Internal Revenue Code in plans with elective deferrals and non-elective non-matching employer contributions.
    • Correction of ADP and ACP test failures.
    • Correction of matching contributions and improper exclusions from safe harbor plans.  (Including, in some circumstances, the ability to make corrective matching contributions subject to vesting.)
    • Correction of mistakes and other problems that occur in administering distributions from single-employer defined benefit plans subject to Section 436 of the Code.
    • Correction of overpayments from defined benefit and defined contribution plans.  Additionally, in some cases, if a participant fails to repay the amount of an overpayment from a defined contribution plan, the plan sponsor does not have to make the plan whole.
    • Procedures for trying to locate lost plan participants.  (Which needed to be updated after the IRS closed its letter-forwarding program for VCP applications, as we previously discussed.)
    • Revamped forms and procedures for VCP applications, including two new mandatory VCP forms, Forms 8950 and 8951, that are currently only available in draft form from the IRS.
    • Reduced fees for late plan amendments discovered in the determination letter process.

    The IRS also requested comments on the potential for EPCRS revisions to address additional topics, such as:

    • Administrative errors in implementing Roth contribution elections.
    • Administrative errors in implementing automatic deferral elections under 401(k) plans.

    The effective date of the new rules is April 1, 2013, but plan sponsors can elect to apply them any time after December 31, 2012.

    What do you think is the most helpful change made by the new EPCRS?

    Related Links

    Revenue Procedure 2013-12

    Brief IRS Summary of Changes Made by Rev. Proc. 2013-12

    IRS 14-Page Summary of Changes Made by Rev. Proc 2013-12

    IRS Topical Index of Rev. Proc. 2013-12

    IRS Webpage on Correcting Plan Errors

     Disclaimer/IRS Circular 230 Notice

    Wednesday, October 31, 2012

    It’s time to ensure year-end qualified plan deadlines are satisfied. Below is a checklist designed to help employers with this process.

    A.      QUALIFIED PLAN AMENDMENTS

    The deadline for adopting the amendments listed below is the last day of the plan year beginning on or after January 1, 2012.  For calendar year plans, the deadline is December 31, 2012.  Note that some of the provisions became effective and required operational compliance prior to 2012.  Plan sponsors should review their plans’ administration to ensure that the plans have been operated in compliance with the applicable provision.

              1.      DEFINED BENEFIT PLANS

    □        Code § 436 Funding Based Benefit Restrictions.  The Pension Protection Act of 2006 (“PPA”) added Section 436, which imposes restrictions on distributions and benefit accruals based on the funding status of a defined benefit plan, to the Internal Revenue Code (“Code”).  Plans that do not meet certain funding targets must limit benefit accruals, cannot be amended to increase benefit liabilities, and must limit certain forms of benefit payments.  These provisions are effective for plan years beginning after December 31, 2007.  In Notice 2011-96, the IRS extended the due date for adopting the amendment to the last day of the plan year beginning on or after January 1, 2012 and provided sample language for the amendment.

    □        Cash Balance and Hybrid Plans.  PPA made several changes affecting cash balance and hybrid pension plans, including requiring three-year vesting and prohibiting interest credits at an interest crediting rate that exceeds a market rates of return.  Recently the IRS issued guidance (Notice 2012-61) that extends the deadline for adopting amendments implementing the interest crediting and market rate of return requirements, the vesting requirements, but not the lump sum “whipsaw” in Code § 401(a)(13)(A).  The extended deadline is the last day of the plan year before the plan year when regulations implementing the interest rate requirements become effective, which is not expected to be earlier than January 1, 2014.  Amendments would not be required until 2013 at the earliest.

              2.      GOVERNMENTAL PLANS

    Governmental plans (as defined in Code § 414(d)) must adopt several provisions added by the Heroes Earnings Assistance and Relief Tax Act of 2008 (“HEART”) and the Worker, Retiree and Employer Recovery Act of 2008 (“WRERA”) by the last day of the plan year beginning on or after January 1, 2012 (December 31 for calendar year plans).

    □        HEART Act Changes

    • Death Benefits:  Effective for deaths occurring on or after January 1, 2007, plans must provide beneficiaries of a participant who dies while performing qualified military service with the same death benefits that would have been available to the beneficiaries (other than benefit accruals during qualified military service) as if the participant had been employed on his or her date of death.
    • Military Differential Pay:  The plan must include military differential pay made by the plan sponsor after December 31, 2008 as compensation for purposes of applying statutory limits and other qualification requirements, such as the limits on annual contributions or benefit accruals under Code § 415 or the nondiscrimination requirements under Code §§ 401(a)(4), 401(k), and 401(m).

    □        Waiver of Required Minimum Distributions.  WRERA modified the minimum distribution requirement by waiving any required minimum distributions for 2009.  The amendment implementing the waiver is required by the last day of the 2012 plan year (December 31 for calendar year plans).

    □        Direct Rollover by Non-Spouse Beneficiary.  For plan years beginning after December 31, 2010, all plans, including governmental plans, must permit non-spouse beneficiaries to directly roll over an eligible rollover distribution.  The rollover by the non-spouse beneficiary may be made only to an IRA that is treated as an inherited IRA under Code § 402(c)(11).  The amendment is required by the last day of the 2012 plan year (December 31 for calendar year plans).

    B.      REQUIRED ANNUAL NOTICES

    Plan sponsors should ensure that the required annual notices, if applicable, should be sent to participants and beneficiaries on a timely basis.

    □        Section 401(k) Safe Harbor Notice.  All participants in a safe harbor 401(k) plan must receive an annual notice that describes the safe harbor contribution and certain other plan features.  The notice must be given by December 1 for calendar year plans and for non-calendar year plans not fewer than 30, and not more than 90, days before the first day of the plan year.

    □        Section 401(k) Automatic Enrollment Notice.  If the plan provides that employees will be automatically enrolled, the plan administrator must give eligible employees an annual notice that describes the circumstances in which eligible employees are automatically enrolled and pay will be automatically contributed to the plan.  The notice must be given by December 1 for calendar year plans and for non-calendar year plans not fewer than 30 days before the first day of the plan year.

    □        Qualified Default Investment Notice.  A defined contribution plan that permits participants to direct the investment of their account balances may provide that if the participant does not give an affirmative investment direction, the portion of the account balance for which affirmative investment direction was not given will be invested in a qualified default investment.  Plan sponsors must give the annual notice by December 1 for calendar year plans and for non-calendar year plans at least 30 days prior to the beginning of the plan year.

    NOTE:  A safe harbor 401(k) plan can incorporate two or more of the notices described above, as applicable, in a single notice.

    □        Defined Benefit Plan Funding Notice.  An annual notice describing the plan’s funded status for the past two years, a statement of the plan’s assets and liabilities and certain other information relating to the plan’s funded status must be furnished to participants within 120 days after the end of the plan year.  For calendar year plans, the deadline is April 30.  The deadline for small plans that cover fewer than 100 participants is the due date for the plan’s Form 5500.

    Disclaimer/IRS Circular 230 Notice

     

    Monday, October 22, 2012

    Last week, the IRS updated various qualified plan limits for 2013 to reflect increases in the cost of living.  A table of those limits, along with a listing of limits from prior years, is below.

    Disclaimer/IRS Circular 230 Notice

     

    Monday, October 15, 2012

    Have you recently received fee disclosures from your plan service providers?  Do you know the total compensation your service providers receive for their services?  Are you aware how these costs impact plan participants?  Are these fees reasonable?

    All plan fiduciaries, including governmental plan fiduciaries, have the duty to make sure fees paid for services are reasonable. However, until now, there hasn’t been any formal regulatory disclosure requirement governing service provider compensation. In 2012, the Department of Labor (DOL) finalized fee disclosure rules applicable to ERISA plans.  Generally, these rules were issued to assist plan sponsors and fiduciaries in determining whether plan-related fees are reasonable for and to provide transparency for plan fiduciaries and participants.  Although these fee disclosure rules only apply to ERISA-governed private sector plans, governmental plans should consider following these new rules as a fiduciary best practice.

    The DOL fee disclosure rules consists of two disclosure requirements: (1) the service provider fee disclosure, and (2) the participant-level fee disclosure.

    Service Provider Fee Disclosure

    Generally, the service provider fee disclosure requires “covered service providers” (such as recordkeepers, brokerage services, investment advisors, investment fund and managers, etc.) to provide sponsors of defined benefit plans and defined contribution plans a disclosure of their fees and services. In general, the service provider fee disclosure requires:

    • A description of services to be provided pursuant to the contract or arrangement;
    • Information on whether the services provided to the plan by the provider are done in a fiduciary capacity or as a investment advisor;
    • A description of all compensation received by the provider in connection with the services, including all direct compensation from the plan and all indirect compensation from sources other than the plan (e.g., commissions, soft dollar fees, 12b-1 fees, sub-transfer agency fees, revenue sharing);
    • Descriptions of annual operating expenses (e.g., expense ratio) of investment alternatives and other information in the control of the service provider that is considered investment-related information which must be provided automatically under the participant-level fee disclosure discussed below; and
    • A description of any compensation that the service provider expects to receive in connection with the termination of the contract or arrangement and how any prepaid amounts will be calculated and refunded upon such termination.

    The plan sponsor fee disclosure regulation is designed to provide plan sponsors the information needed to determine the reasonableness of fees and compensation received by service providers to the plan.

    Participant-Level Fee Disclosure

    The participant-level fee disclosure rules only apply to individual account or defined contribution plans.  The disclosure is designed to inform participants of all fees they are paying under the plan. Most recordkeepers and third-party service providers are providing plan sponsors with the disclosures and information to comply with this rule. To comply, plan sponsors must provide participants with plan-related information such as:

    • General plan information, including investment instructions and restrictions;
    • An explanation of fees and expenses charged for general plan administrative services;
    • A description of fees and expenses that may be charged to or deducted from the participant’s account based on the actions taken by the participant; and
    • Revenue sharing arrangements must be disclosed to participants. However, specific revenue sharing amounts do not have to be broken out.

    The following investment-related information must be disclosed to participants automatically with respect to each investment option offered under the plan:

    • Historical investment performance data;
    • Benchmark information, including the name and returns of an appropriate benchmark over 1-, 5- and 10-year periods;
    • Total annual operating expenses expressed both as a percentage of assets (expense ratio) and as a dollar amount per $1,000 invested; and
    • A website address to a website containing additional information regarding the investment alternatives.

    Best Practices for Governmental Plans

    Although the DOL fee disclosures rules do not apply to governmental plans, the rules establish a framework that governmental plan sponsors and fiduciaries should consider following as a best practice.  As a matter of best practices, governmental plan sponsors and fiduciaries should consider doing the following:

    1.         Government plans should request the same information required by the DOL fee disclosures from their service providers.  If a governmental plan fiduciary receives pushback on providing this information, there may be a problem and the fiduciary may want to consider putting the services out to bid.

    2.         Once the fee disclosure information is provided, plan fiduciaries should read, understand, and evaluate the information in order to determine that the fees identified in the disclosures are reasonable and that the services being provided and paid for are appropriate and necessary for the administration of the plan.  This does not mean that every plan should pay the lowest possible amount for services, but rather that the fiduciaries must determine that the fees being paid are reasonable with respect to the quality of necessary services being provided.  When determining reasonableness of fees, fiduciaries should consider such aspects as quality of services, costs, complexity of the plan, and needs of the participants.  This analysis may require the assistance of an investment advisor who should be able to benchmark the fees by comparing them to fees charged to plans by other providers for similar services or by conducting an actual or hypothetical request for proposal.

    3.         Governmental plans should consider providing a participant-level fee disclosure to 401(a), non-ERISA 403(b), and 457(b) participants similar to the participant-level disclosures required for ERISA plans.  As with ERISA plans, service providers should be able assist with these disclosures.

    4.         To the extent governmental plans and fiduciaries follow the DOL rules, those plans and fiduciaries should continue to follow the DOL fee disclosure guidance as a matter of best practices to help demonstrate that they are satisfying their fiduciary responsibilities to plan participants.

     

    Disclaimer/IRS Circular 230 Notice

    Tuesday, May 8, 2012

    The IRS and Treasury Department recently issued Notice 2012-29, which provides new guidance for the final “normal retirement age” regulations relating to governmental plans. The Notice provides that the IRS and the Treasury intend to further extend the effective date for governmental plans to comply with the final regulations to annuity starting dates that occur in plan years beginning on or after the later of:

    • January 1, 2015, or
    • the close of the first regular legislative session of the legislative body with the authority to amend the plan that begins on or after the date that is three months after the final regulations are published in the Federal Register.

    The Notice also provides that the IRS and Treasury will make two important clarifications in the final regulations:

    • The final regulations will clarify that governmental plans that do not provide for in-service distributions before age 62 do not have to have a definition of normal retirement age that complies with the final regulations or even define normal retirement age; and
    • The final regulations will expand the age-50 safe harbor rule, which currently applies only for plans in which substantially all of the participants are qualified public safety employees, to also apply to a group substantially all of whom are qualified public safety employees. This means that a governmental plan could satisfy the normal retirement age requirement by using a normal retirement age as low as 50 for qualified public safety employees, and a later normal retirement age that otherwise satisfies the requirements in the final regulations for other participants.

    Governmental plan sponsors may rely on Notice 2012-29 for the extension until the final normal retirement age regulations are amended. The IRS and Treasury Department are requesting comments by July 30, 2012, relating to this guidance, as well as information on the overall retirement patterns of other employees in government service to assist them in determining the earliest age that is reasonably representative of the typical retirement ages for such employees.

    Related Links

    IRS Advanced Notice of Proposed Rulemaking on Definition of Governmental Plan

    IRS Phone Forum on Governmental Plan Proposed Guidance

    Disclaimer/IRS Circular 230 Notice