Category Archives: 401(k)

New IRS Amendment Info on Supreme Court’s Decision on Same-Sex Marriage for 401k’s

On Friday (April 4, 2014), the IRS issued Notice 2014-19, addressing how the U.S. Supreme Court’s decision on same-sex marriage in U.S. v. Windsor and IRS Rev. Rul. 2013-17 affects retirement plans and pension plans, including 401(k) plans. Notice 2014-19 is 7 pages long.

Last year, When the IRS issued Rev. Rul. 2013-17, the Service left a number of questions unanswered for qualified plans, including how far back Windsor should be applied, and whether plan sponsors need to adopt an amendment to comply with Windsor. This led to a lot of debate, especially over whether, when and how plans should/could/must apply Windsor retroactively. After all, when the U.S. Supreme Court decides something is unconstitutional, and has always been unconstitutional, that ruling normally applies back to the inception, not to a specific date. As a practical matter, which is not suppose to factor in when correcting unconstitutionality, asking retirement and pension plans to review every distribution, loan, and spousal consent obtained since the Defense of Marriage Act was signed into law in 1996, and making correcting distributions when warranted, would be an immense burden on our industry (again, how difficult, time-consuming and expensive for an industry to correct an unconstitutionality should be irrelevant).

In Q&A-2 of Notice 2014-19, the IRS tells us that “a retirement plan will not be treated as failing to meet the requirements of section 401(a) merely because it did not recognize the same-sex spouse of a participant as a spouse before June 26, 2013″. I’m not sure what the federal court system will do with this pronouncement, but it is what the IRS has given us to work with for now. I think best practices for any qualified plan this year is to update all spousal consents and beneficiary forms.

As for if/when amendments must be adopted, Q&A-8 of Notice 2014-19 says “the deadline to adopt a plan amendment pursuant to this notice is the later of (i) the otherwise applicable deadline under section 5.05 of Rev. Proc. 2007-44, or its successor, or (ii) Dec. 31, 2014.”

On May 8, 2014 from 2pm to 3:40pm, we are holding a live web seminar to discuss Notice 2014-19. We have divided this seminar into 2 parts of 50 minutes each to allow attendees to earn 1 CE credit if they want to attend only 1 part.

In Part 1 of this live web seminar, we discuss the requirement of Q&A-8 of Notice 2014-19 which states that some plans may need to adopt an amendment by the later of: (1) the deadline under section 5.05 of Rev Proc 2007-44; or (2) Dec. 31, 2014, including discussing how to determine what plans may need to adopt this amendment, the deadline to adopt the amendment, how to determine which deadline applies, what a sample amendment may say, and how the restatement period which just started for defined contribution plans affects this amendment since the language in IRS pre-approved PPA prototype and volume submitter defined contribution plan documents was approved prior to the release of Notice 2014-19.

In Part 2 of this live web seminar, we discuss how IRS Notice 2014-19 addresses various issues which the IRS states the decision in Windsor caused for qualified plans, including discussions of Internal Revenue Code section 401(a)(11) qualified joint and survivor annuities (QJSA) spousal consent rules; the spousal consent rules of Code section 417(a)(4) for plan loans; the spousal consent rules of Code section 401(a)(11)(B)(iii) for designating a beneficiary for purposes of QJSAs and QPSAs; the surviving spouse rules for required minimum distributions under Code section 401(a)(9); and the attribution rules of Code section 1563(e)(5) for determining whether a spouse is treated by the IRS as owning shares owned by the other spouse for purposes of determining whether corporations are members of a controlled group under Code section 414(b).

The cost to attend our live web seminar on Notice 2014-19 is $50 for each individual, which includes both Part 1 and Part 2. Individuals registered for our 16 Credit Hours for $195 seminar package can attend as part of their package at no additional charge. Group packages are available.

You can reserve a seat in this seminar, or see what live web seminars we have coming up, here.

This seminar is 100 minutes long and is designed to meet ASPPA’s and NIPA’s requirements for 2 CPE credits. This IRS has approved this program for 2 CPE credits for Enrolled Retirement Plan Agents and Enrolled Agents.

Today in ERISA History

Jan. 2, 2013 – The American Taxpayer Relief Act of 2012 (ATRA ’12), Public Law 112-240, is signed into law by President Barack Obama.

Code section 402A(c)(4) was added to the Internal Revenue Code by Section 2112 of the Small Business Jobs Act of 2010, Public Law 111-240. It permitted 401(k), 403(b) and 457(b) plans which already included a qualified Roth contribution program to allow employees to roll over amounts from their accounts other than designated Roth accounts to their designated Roth accounts in the plan as long as certain conditions are met. These types of rollovers become known as in-plan Roth rollovers. One of those conditions is that the amount must satisfy the rules for distribution (it had to be an “otherwise distributable amount”) and it had to be a Code section 402(c)(4) eligible rollover distribution.

Section 902 of ATRA ’12 changes Code section 402A(c)(4) by adding subsection (E), which allows a plan with a qualified Roth contribution program to permit an in-plan Roth rollover of an amount that is not otherwise distributable under the plan. This change removes one of the conditions for in-plan Roth rollovers imposed by Section 2112 of the Small Business Jobs Act of 2010.

On Dec. 11, 2013, the IRS releases Notice 2013-74, providing guidance on the how section 902 of ATRA ’12, with new Code section 402A(c)(4)(E), expands in-plan Roth rollovers.

The Dept. of Labor Addresses When Bankruptcy Meets ERISA

When Bankruptcy Meets ERISA is not the latest Gary Marshall film or the sequel to Sleepless in Seattle, it is the very real mess created when a plan sponsor files Chapter 7 bankruptcy. In the last month, there has been so much written about Hostess disappearing, and almost nothing written about Hostess’ pension plan disappearing, which I think is the real Hostess story – it is not about a future without Twinkies, but about the men and women who made the Twinkies facing a future where Hostess made their vested retirement benefits disappear. Unfortunately, Hostess is not alone. Over the last several years, there are a number of companies, and one U.S. Territory (the Northern Mariana Islands Retirement Fund) which have looked to a bankruptcy court to resolve their underfunded pension issues.

Since the first step to solving a problem is recognizing that it exists, the Dept. of Labor has taken the lead on this one ahead of the bankruptcy courts. Last week, the Dept. of Labor released new proposed regulations updating the Abandoned Plan Program, in part to address this situation. The preamble states:

“Pursuant to these proposed amendments, chapter 7 plans would be considered abandoned upon the Bankruptcy Court’s entry of an order for relief with respect to the plan sponsor’s bankruptcy proceeding. The bankruptcy trustee or a designee would be eligible to terminate and wind up such plans under procedures similar to those provided under the Department’s current Abandoned Plan Regulations. If the bankruptcy trustee winds up the plan under the Abandoned Plan Program, the trustee’s expenses would have to be consistent with industry rates for similar services ordinarily charged by qualified termination administrators that are not bankruptcy trustees. The proposed amendment to the class exemption would permit bankruptcy trustees, as with qualified termination administrators under the current Abandoned Plan Regulations, to pay themselves from the assets of the plan (a prohibited transaction) for terminating and winding up a chapter 7 plan under an industry rates standard.”

The regs are a little long but well worth reading, and it is great to see the DOL tackle this issue. I’m hoping the bankruptcy courts recognize that winding up a qualified plan is not something a bankruptcy trustee can pick up on the fly, and that the bankruptcy trustees will be permitted to bring in ERISA experts on terminating plans and distributing the assets.

401(k) Hardship Distributions to Repair Storm Damage from Sandy

With so much damage caused by Hurricane Sandy, many people will be exploring every possibility, including their 401(k) plan account balance, to pay for repairs. Hardship distributions are an optional provision in 401(k) plans, meaning that 401(k) plans can permit hardship distributions but they are not required to permit hardship distributions. So the first step is checking the plan document to see if the plan permits hardship distributions.

If the 401(k) permits hardship distributions, Treas. Reg. 1.401(k)-1(d)(3)(iii)(B)(6) says one of the reasons a 401(k) plan can make a hardship distribution is:

“(6) Expenses for the repair of damage to the employee’s principal residence that would qualify for the casualty deduction under section 165 (determined without regard to whether the loss exceeds 10% of adjusted gross income).”

In a Retirement Plans FAQs Regarding Hardship Distributions posted on the IRS’ website, the IRS says:

“8. Are there special hardship distributions available for hurricanes and natural disasters?

Generally, there are no special rules for hardship distributions on account of hurricanes or other natural disasters. You should follow the regular hardship distribution rules and show that you have an immediate and heavy financial need and, in some cases, have exhausted other resources. Your plan will list the specific criteria it uses to determine if a participant is eligible for a hardship distribution. Expenses for repairing damage to an employee’s principal residence may automatically qualify.

Occasionally, when a hurricane or other natural disaster is especially devastating, legislation is passed that provides for special plan distributions and loans that would otherwise not be available to employees. For example, in 2005 a law was passed to help individuals and businesses affected by Hurricane Katrina.

See Tax Relief in Disaster Situations and Publication 547, Casualties, Disasters, and Thefts, for disaster area relief.”

Tax Consequences of 401(k) Plan Disqualification

I had a great question today – what happens when the IRS disqualifies a 401(k) plan?

What they really wanted to know is what happens to the non-elective contributions made by the employer into the plan, and how would a plan disqualification affect them (the person asking the question wears 2 hats when it comes to his 401(k) plan – he is both the plan sponsor and one of the participants in the plan.)

While most answers can be found by reading the plan document, this is not true when is comes to the tax consequences of plan disqualification. Most plan documents will say something about how the contributions made by the employer can be returned to the employer if the plan fails to initially qualify, but most plan documents do not address the specifics of the tax consequences of plan disqualification.

One of the reasons why this is true is that the tax consequences of plan disqualification can vary depending on who is asking the question, because the tax consequences of plan disqualification affect employees, employers, and the plan’s trust differently.

The IRS has put together a great website discussing this issue. It includes examples, such as this example about the tax consequences of plan disqualification on an employee:

Example: Pat is a participant in the XYZ Profit-Sharing Plan. The plan has immediate vesting of all employer contributions. In calendar year 1, the employer makes a $3,000 contribution to the trust under the plan for Pat’s benefit. In calendar year 2, the employer contributes $4,000 to the trust for Pat’s benefit. In calendar year 2, the IRS disqualifies the plan retroactively to the beginning of calendar year 1.

Consequence 1: General Rule – Employees Include Contributions in Gross Income
Generally, an employee would include in income any employer contributions made to the trust for his or her benefit in the calendar years the plan is disqualified to the extent the employee is vested in those contributions.

In our example, Pat would have to include $3,000 in her income in calendar year 1 and $4,000 in her income in calendar year 2 to reflect the employer contributions paid to the trust for her benefit in each of those calendar years. If Pat was only 20% vested in her employer contributions in calendar year 1, then she would only include $600 in her calendar year 1 income.

Exceptions: There are exceptions to the general rule (see IRC section 402(b)(4)):

  • If one of the reasons the plan is disqualified is for failure to meet either the additional participation or minimum coverage requirements (see IRC sections 401(a)(26) and 410(b)) and Pat is a highly compensated employee (see IRC section 414(q)), then Pat would include all of her vested account balance (any amount that wasn’t already taxed) in her income. A non-highly compensated employee would only include employer contributions made to his or her account in the years that the plan is not qualified to the extent the employee is vested in those contributions.
  • If the sole reason the plan is disqualified is that it fails either the additional participation or minimum coverage requirements, and Pat is a highly compensated employee, then Pat still would include any previously untaxed amount of her entire vested account balance in her income. Non-highly compensated employees, however, don’t include in income any employer contributions made to their accounts in the disqualified years in that case until the amounts are paid to them.
    Note: Any failure to satisfy the nondiscrimination requirements (see IRC section 401(a)(4)) is considered a failure to meet the minimum coverage requirements.”

Today in ERISA History

Aug. 23, 1984 – The Retirement Equity Act of 1984 (REA), Pub. L. 98-397, is signed into law by President Ronald Reagan. REA made a number of significant changes which have become a part of our daily plan language, including QDROs, QJSA, and Code secton 417.

President Reagan’s statement when signing REA included these comments:

“Existing pension rules, when originally enacted, did not fully anticipate the dual roles many women have come to play as both members of the paid labor force and as wives and mothers during periods of full-time work in the home. Provisions in many pension plans now operate in ways that fail to recognize paid work performed by women at certain periods in their lives and penalize them for time spent in childrearing. To address this inequity, the Retirement Equity Act lowers the age limits on participation and vesting, permitting more pension credits to be earned during the early working years when women are most likely to be employed. The legislation also eases break-in-service rules so that parents who bear children and stay home to care for them in the early years will no longer lose the pension credits they previously earned while working.

The Retirement Equity Act also clarifies that each person in a marriage has a right to benefit from the other’s pension. No longer will one member of a married couple be able to sign away survivor benefits for the other. A spouse’s written consent now will be required on any decision not to provide survivors’ protection. The legislation also helps assure that when a vested employee dies before retirement, the employee’s surviving spouse will benefit from the pension credits the employee has earned, and it restricts considerably the latitude now allowed pension plans to impose additional conditions on survivors’ benefits. Survivors’ benefits will be paid automatically in more instances than now. In addition, the bill makes it clear that State courts can allocate pension rights in divorce cases and other domestic relations settlements.”

The Internal Revenue Manual also contains a summary of REA and its impact on qualified plans.

Today in ERISA History

Aug. 20, 1996 – President Bill Clinton signs the Small Business Job Protection Act of 1996, Pub. L. 104-188. It made a number of significant changes to qualified plans, such as creating the SIMPLE 401(k) plan, repealing the family aggregation rules that were contained in Code section 414(q)(6), shorting the 10-year vesting period to 5 years, and adding alternative ways of satisfying Code section 401(k) nondiscrimination tests which created the current generation safe harbor 401(k) plans.

For those of you who like plan document trivia, the Small Business Job Protection Act of 1996 is the “S” in GUST.

President Clinton made a short speech when he signed SBJPA.

A 401(k) Participant’s Tale of 404(a)(5) Fee Disclosure

In A 401(k) Fee Secret Revealed, Anne Tergesen writes about receiving her first 404(a)(5) fee disclosure notice. She is still a participant in a former employer’s 401(k) plan, and her 404(a)(5) fee disclosure notice says she paid 0.08% for the investments she selected for her 401(k) account.

Her former employer is the McGraw-Hill Companies. A quick check of Brightscope shows this plan has over 20,000 participants with just over $2 billion in assets in 2010.

Senator Proposes New Type of 401(k) Plan

During the 2-year life of a Congressional session, many bills are introduced and few are worth actually following. On July 27, 2012, Sen. Tom Harkin (D-IA) proposed a new type of 401(k) plan which is worth keeping an eye on. No details are available yet other than a 10-page report he released on July 27, 2012, and a quick check of Thomas.gov today did not find the text of a bill introduced by Sen. Harkin containing these proposals. The reason this is worth mentioning is that Sen. Harkin is the Chairman of the Senate Committee on Health, Education, Labor and Pensions, which is where 90% of the bills about retirement, pensions and ERISA go after they are introduced. While any Senator can introduce a bill about pensions, retirement and/or ERISA, the real work doesn’t start until the bill is referred to the Senate Committee on Health, Education, Labor and Pensions.

The 10-page report proposes creating Universal, Secure and Adaptable (USA) Retirement Funds, a private pension plan containing both elective deferrals and non-elective contributions which would be pooled and professionally managed with the fund overseen by a board of trustees. Distributions would be available through a lifetime income benefit funded by a participant’s total amount of contributions adjusted for investment performance over time with low-wage workers eligible for refundable retirement savings credits contributed directly to the fund. Employers would have no fiduciary responsibility for employees who participate in this plan.

For those of you who have been working with 401(k)s for a while, some of these proposals may sound familiar. When the idea of a solo 401(k) was first floated many years ago, the original proposal included many of these ideas, including allowing individuals to participate without assessing fiduciary responsibility to their employers. I’ll follow-up with more details when the bill is introduced and as information becomes available.

Dept. of Labor Revises 404(a)(5) Fee Disclosure Guidance

I have to confess that the DOL’s 404(a)(5) regulations are not among my favorite. There is something about these regulations that make my eyes glaze over, and yet I know I will face more questions from family members at Thanksgiving about these regulations than about anything else happening in plan-land this year. Just when I thought I had read everything to do with these regulations, the Dept. of Labor issued a revised Field Assistance Bulletin 2012-02 yesterday (July 30, 2012), designated as Field Assistance Bulletin 2012-02R. It supersedes Field Assistance Bulletin 2012-02 which was issued on May 7, 2012. (Spoiler Alert: The DOL did not extend the Aug. 30, 2012 disclosure deadline.)

It is interesting that the DOL decided to supersede FAB 2012-02 and issue FAB 2012-02R because FAB 2012-02R only contains 2 changes from FAB 2012-02.

First, Q&A-30 from FAB 2012-02 has been deleted from FAB 2012-02R. Q&A-30 said:

Q-30: A plan offers an investment platform consisting of a large number of registered mutual funds of multiple fund families into which participants and beneficiaries may direct the investment of assets held in or contributed to their individual accounts. Although the plan fiduciary selected the platform provider, the fiduciary did not designate any of the funds on the platform as “designated investment alternatives” under the plan. Is this platform itself a designated investment alternative for purposes of the regulation?

A-30: Paragraph (h)(4) of the regulation specifies that a brokerage window or similar arrangement is not a “designated investment alternative.” A platform consisting of multiple investment alternatives would not itself be a designated investment alternative. Whether the individual investment alternatives are designated investment alternatives depends on whether they are specifically identified as available under the plan. As the Department explained in the preamble to the final regulation (75 FR 64910), when a plan assigns investment responsibilities to the plan’s participants and beneficiaries, it is the view of the Department that plan fiduciaries must take steps to ensure that participants and beneficiaries are made aware of their rights and responsibilities with respect to managing their individual plan accounts and are provided sufficient information regarding the plan, including its fees and expenses and designated investment alternatives, to make informed decisions about the management of their individual accounts. Although the regulation does not specifically require that a plan have a particular number of designated investment alternatives, the failure to designate a manageable number of investment alternatives raises questions as to whether the plan fiduciary has satisfied its obligations under section 404 of ERISA. See generally Hecker v. Deere, 569 F.3d 708, 711 (7th. Cir. 2009). Unless participants and beneficiaries are financially sophisticated, many of them may need guidance when choosing their own investments from among a large number of alternatives. Designating specific investment alternatives also enables participants and beneficiaries, who often lack sufficient resources to screen investment alternatives, to compare the cost and return information for the designated investment alternatives when they are selecting and evaluating alternatives for their accounts.

Further, plan fiduciaries have a general duty of prudence to monitor a plan’s investment menu. See Pfeil v. State Street Bank, 671 F.3d 585, 598 (6th Cir. 2012). If, through a brokerage window or similar arrangement, non-designated investment alternatives available under a plan are selected by significant numbers of participants and beneficiaries, an affirmative obligation arises on the part of the plan fiduciary to examine these alternatives and determine whether one or more such alternatives should be treated as designated for purposes of the regulation.

Pending further guidance in this area, when a platform holds more than 25 investment alternatives, the Department, as a matter of enforcement policy, will not require that all of the investment alternatives be treated, for purposes of this regulation, as designated investment alternatives if the plan administrator—

    (1) makes the required disclosures for at least three of the investment alternatives on the platform that collectively meet the “broad range” requirements in the ERISA 404(c) regulation, 29 CFR § 2550.404c-1(b)(3)(i)(B); and
    (2) makes the required disclosures with respect to all other investment alternatives on the platform in which at least five participants and beneficiaries, or, in the case of a plan with more than 500 participants and beneficiaries, at least one percent of all participants and beneficiaries, are invested on a date that is not more than 90 days preceding each annual disclosure.

Second, the DOL added Q&A-39 to FAB 2012-02R. It says:

Mutual Fund Platforms and Brokerage Windows

Q39: A plan offers an investment platform that includes a brokerage window, self-directed brokerage account, or similar plan arrangement. The fiduciary did not designate any of the funds on the platform or available through the brokerage window, self-directed brokerage account, or similar plan arrangement as “designated investment alternatives” under the plan. Is the platform or the brokerage window, self-directed brokerage account, or similar plan arrangement a designated investment alternative for purposes of the regulation?

A39. No. Whether an investment alternative is a “designated investment alternative” (DIA) for purposes of the regulation depends on whether it is specifically identified as available under the plan. The regulation does not require that a plan have a particular number of DIAs, and nothing in this Bulletin prohibits the use of a platform or a brokerage window, self-directed brokerage account, or similar plan arrangement in an individual account plan. The Bulletin also does not change the 404(c) regulation or the requirements for relief from fiduciary liability under section 404(c) of ERISA or address the application of ERISA’s general fiduciary requirements to SEPs or SIMPLE IRA plans. Nonetheless, in the case of a 401(k) or other individual account plan covered under the regulation, a plan fiduciary’s failure to designate investment alternatives, for example, to avoid investment disclosures under the regulation, raises questions under ERISA section 404(a)’s general statutory fiduciary duties of prudence and loyalty. Also, fiduciaries of such plans with platforms or brokerage windows, self-directed brokerage accounts, or similar plan arrangements that enable participants and beneficiaries to select investments beyond those designated by the plan are still bound by ERISA section 404(a)’s statutory duties of prudence and loyalty to participants and beneficiaries who use the platform or the brokerage window, self-directed brokerage account, or similar plan arrangement, including taking into account the nature and quality of services provided in connection with the platform or the brokerage window, self-directed brokerage account, or similar plan arrangement.

The Department understands plan fiduciaries and service providers may have questions regarding the situations in which fiduciaries may have duties under ERISA’s general fiduciary standards apart from those in the regulation. The Department intends to engage in discussions with interested parties to help determine how best to assure compliance with these duties in a practical and cost effective manner, including, if appropriate, through amendments of relevant regulatory provisions.

To make these changes, and the Final 404(a)(5) Regulations, easier to understand, we’ve put together a new e-book – A Compendium of the Final 404(a)(5) Fee Disclosure Regulations. It includes a copy of Labor Reg. 2550.404a-5 organized by topic along with the DOL’s guidance and explanations about this regulation in an easy-to-follow format. We’ve also created a self-study module around the Compendium so you can earn 2 ntinuing education credits for learning about 404(a)(5) as you read the e-book.