Category Archives: amendments

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

Aug. 10, 1993 – President Bill Clinton signs the Omnibus Budget Reconciliation Act of 1993 (OBRA), Pub. L. 103-66. OBRA ’93 requires most qualified plans to adopt a mandatory amendment, known as the OBRA Amendment or the 401(a)(17)/401(a)(31) Amendment, to incorporate 2 changes to plan document language.

The first change, effective Jan. 1, 1994, required a change to the plan’s definition of compensation, adjusting the annual compensation limit to $150,000 as adjusted by the Commissioner for increases in the cost of living in accordance with Code section 401(a)(17).

The second change, effective Jan. 1, 1993, required a change to the plan’s direct rollover provision to allow distributions made on or after Jan. 1, 1993 to be paid directly to an eligible retirement plan specified by the distributee.

Additionally, for group health plans, OBRA ’93 defined qualified medical child support orders and required plans to provide benefits in accordance with such orders. It also expanded the definition of dependent to include dependent children placed with participants or beneficiaries for adoption.

Today in ERISA History

May 16, 2008 – The Heroes Earnings Assistance and Relief Tax Act of 2008 (HEART Act), Pub. L. 110-245, is introduced in the House by Rep. Charles Rangel (D-NY) on May 16, 2008. It is signed into law by President George W. Bush on June 17, 2008.

In a strange twist of history, these 3 days in May generated 3 different required amendments and restatements to qualified plans:

May 14, 1996 – the Small Business Job Protection Act of 1996 (SBJPA), Pub. L. 104-188, is introduced in the U.S. House of Representatives. It is signed into law on Aug. 20, 1996, and becomes incorporated into the GUST generation of pre-approved prototype and volume submitter plan documents.

May 15, 2001 – the Economic Growth Tax Relief and Reconciliation Act of 2001 (EGTRRA), Pub. L. 107-16, is introduced in the U.S. House of Representatives. It is signed into law on June 7, 2001. Changes to the Internal Revenue Code and ERISA made by EGTRRA create the need to restate the GUST generation of pre-approved prototype and volume submitter plan documents onto new pre-approved prototype and volume submitter plan documents which become known as the EGTRRA generation of plan documents.

May 16, 2008 – the HEART Act is introduced in Congress. Changes made by the HEART Act create the need for almost all qualified plans to adopt a mandatory HEART Act amendment.

Fail-Safe Provisions in Plan Document not Always a Good Idea

While I like a good fail-safe provision as much as the next ERISA geek, it is not always the most cost-efficient way to correct a nondiscrimination or coverage failure. The attorney who taught me how to write plan documents used to say – just because a plan document CAN contain a provision doesn’t mean that it always SHOULD contain that provision. When it comes to whether a cross-tested profit sharing plan should contain fail-safe language, the IRS said it best in Quality Assurance Bulletin FY-2001 No. 2, Jan. 25, 2001:

“It may be helpful to mention to the employer that by deleting the fail-safe provision, the corrective amendment procedures under Treasury Regulations section 1.401(a)(4)-11(g) can be utilized more efficiently. In other words, by deleting the provision, the employer will have the flexibility of deciding which test and optional rules to use in satisfying the nondiscrimination or coverage requirement. The use of a fail-safe provision eliminates this flexibility and may lead to the use of a method in satisfying IRC section 401(a)(4) or 410(b) that is not the most cost effective to the employer and the plan.”

This part of QAB FY-2001 No. 2 popped into my mind today as I worked on an -11(g) amendment. Treas. Reg. 1.401(a)(4)-11(g) can be a powerful tool to correct coverage or nondiscrimination failures. It permits a plan to be amended after the end of the plan year to retroactively increase accruals or allocations for employees who benefited under the plan during the plan year, or grant accruals or allocations to individuals who did not benefit during the plan year, so the plan can satisfy the minimum coverage requirements to Code section 410(b), the nondiscriminatory amount requirement of Treas. Reg. 1.401(a)(4)-1(b)(2), or the nondiscriminatory plan amendment requirement of Treas. Reg. 1.401(a)(4)-1(b)(4). An -11(g) amendment can also be used to make a benefit, right, or feature available to employees to whom it was previously not available so the plan can satisfy the nondiscriminatory current availability requirement of Treas. Reg. 1.401(a)(4)-4(b).

The language of Treas. Reg. 1.401(a)(4)-11(g) contains very specific requirements which should be reviewed before deciding whether an -11(g) amendment can be utilized to correct a failure, including a timing requirement that the amendment is adopted by the 15th day of the 10th month after the close of the plan year in order to be taken into account for the preceding plan year. Additionally, Treas. Reg. 1.401(a)(4)-11(g) requires that the employee actually benefits from the correcting contribution (see my earlier post – Making a Bad Situation Worse: An -11g Corrective Amendment Allocating to a Non-Vested Terminated Employee).

Just in Time – The IRS Issues an Extension and a Sample Amendment for Code sec. 436

Just when the mad scramble to adopt last minute Code section 436 amendments was about to begin, the IRS has issued another extension, accompanied by a sample amendment.

Notice 2011-96, released Nov. 29, 2011, extends the deadline to adopt an interim amendment for Code section 436 to the latest of:

1) the last day of the first plan year that begins on or after Jan. 1, 2012;

2) the last day of the plan year for which Code section 436 is first effective for the plan, or

3) the due date (including extensions) of the employer’s tax return for the tax year (determined in accordance with section 5.06(2) of Rev. Proc. 2007-44, in the case of a tax-exempt employer) that contains the first day of the plan year for which Code section 436 is first effective for the plan.

This extends the previous deadline, which was contained in Notice 2010-77. It required that an amendment containing the Code section 436 provisions be adopted by the last day of the first plan year that began on or after Jan. 1, 2011 (meaning Dec. 31, 2011 for calendar year plans).

Hats off to the IRS for also giving us a sample Code section 436 amendment in Notice 2011-96. The sample amendment captures the complexity of Code section 436 while granting relief for plans that adopt the sample amendment by the deadline. It also addresses several potential issues that may be caused by adopting the amendment, including potential 411(d)(6) issues.

The IRS states that sponsors of pre-approved prototype and volume submitter plans may adopt the amendment on behalf of the pre-approved plans’ adopting employers, so if you are using a prototype or volume submitter defined benefit plan, it is worth checking with your plan document provider to see if they will be adopting a Code section 436 amendment at the sponsor level. The same goes for word-for-word sponsors of prototype and volume submitter defined benefit plans, who should check with their plan document provider to see if they will be offering a customized sample amendment, keeping in mind that the IRS is specifically limiting the amount of customizing that can be done to this amendment. Sponsors of individually designed plans, such as cash balance and DBK plans, will need to adopt the amendment directly.

It is also worth noting that the IRS sample amendment contains a number of optional provisions, so even if your plan document provider is adopting the amendment at the sponsor level, you may still want to adopt a Code section 436 amendment for each plan in order to utilize some of the optional provisions not contained in the sponsor-level amendment.

8th Circuit Decides Signed Letter to Participants Plus SPD Equals Amendment

In Halbach v. Great-West Life & Annuity, No. 07-3865/07-3867 (CA8 April 13, 2009), the 8th Circuit Court of Appeals recently addressed what constitutes a valid amendment to an employee welfare benefit plan. In 2004, Great-West provided a package of medical coverage to both active employees and former employees who were also receiving long-term disability benefits. That package included health, vision, dental, and prescription drug benefits, and life insurance coverage.

In late 2004, Great-West decided to cease providing medical coverage to the long-term disability claimants, and mailed all participants a letter advising them of the changes to the plan effective January 1, 2005. Specifically, the letter stated:

    “effective December 31, 2004, ‘medical benefits will no longer be continued for current or future Long Term Disability claimants.’ Further, the letter stated that ‘due to the change in the 2005 benefit package, your health coverage will terminate December 31, 2004, and you will be offered the option to elect coverage under COBRA.”

The letter was signed by one of Great-West’s officers. Along with the letter, Great-West mailed all participants an unsigned summary plan description (SPD).

The participants who were former employees also receiving long-term disability benefits brought a lawsuit against Great West, claiming that the letter did not constitute a valid amendment to the plan. The Court found that it did constitute a valid amendment to the plan. In making this determination, the Court looked at the language in the plan document, which stated:

    “5.1 Amendment of the Plan. The Company reserves the right at any time or times to amend the provisions of teh Plan to any extent and in any manner that it may deem advisable, by a written instrument signed by an officer of the company; provided, however, that no such modification shall divest a Participant of benefits under the Plan to which he has become entitled prior to the effective date of the amendment.”

Applying this language, the Court found that the letter and the SPD, when reviewed together in harmony with each other, constituted a valid amendment to the Plan because it was a written instrument signed by an officer of the company.

The former employees also claimed that benefits were vested at the time Great-West made its decision to eliminate them, and, as such, Great-West violated the plan’s terms by discontinuing them.

The Court stated that, unlike pension benefits, ERISA does not mandate vesting for employee welfare benefit plans. Because of this, the only way the benefits discontinued by Great-West could have become vested is if the plan document provided vesting for these benefits. The Court found, after reviewing Section 5.1, that the plan language was ambiguous as to whether Great-West intended to vest these benefits. For this reason, the Court reversed the district court’s grant of summary judgment, and remanded the case for a trial on the issue of whether the welfare benefits were vested.

[tag]pension protection act, ppa, vesting, amendment, halbach, Great-West, 8th Circuit, ERISA[/tag]

Massive Fines for Failure to Timely Amendment

VCP fine for not timely adopting a 401(a)(31)(B) amendment: $375
Audit CAP fine for not timely adopting a 401(a)(31)(B) amendment: $3,000
Audit fine for not timely adopting a 401(a)(31)(B) amendment: $45,000
Timely amending your plan: Priceless

Recently, it seems that the IRS auditors have been running a governmet fundraiser by imposing inordinately large fines for small missed tack-on amendments. Just today, I received a call from a fellow attorney. For the last 18 years, he has been funding a small profit sharing plan for his retirement. Like clockwork, each year he timely files his Form 5500EZ and signs the forms and amendments he received from his third party administrator. In 2005, his third party administrator died. It took him a couple of months to find a new third party administrator but he did so in time to timely file his Form 5500EZ for that year.

About a year ago, he receives a notice that his plan is under audit. He wasn’t worried. He felt he had done everything correctly. The only two participants in the plan were him and his wife, who has answered the phones, made his coffee and typed all of the paperwork at his office since he graduated from law school and passed the bar 18 years ago.

The auditor found one problem. In 2005, the IRS required all qualified plans to adopt an amendment which changed the plan document language to comply with Code section 401(a)(31)(B) and Notice 2005-5. This amendment is also known as the Automatic Rollover Amendment. The change provided that once an employee terminated employment, the employer could cash the employee out of the plan without the employees permission if the employee had an account balance of less than $1,000. If the terminated employee had a balance of more than $1,000 but less than $5,000, the employer could cash the terminated employee out of the plan without their permission by setting up an IRA and rolling their account balance into the IRA.

With Notice 2005-5, the IRS required all qualified plans to adopt an amendment for this change by the end of the plan year which began on or after January 1, 2005. For calendar year plans, this meant that the amendment had to be signed by December 31, 2005. In December of 2005, the IRS issued Notice 2005-95, which extended the deadline for adopting this amendment until the later of December 31, 2005 or the due date, including extensions, for filing the income tax return for the employer’s taxable year which included March 28, 2005. With the prior third party administrator dying in 2005, this amendment somehow was missed.

In Revenue Procedure 2008-50, the IRS issued guidance for how to bring plans back into compliance once a mandatory amendment is not timely signed. If the attorney or the new third party administrator had realized that the plan was missing the Automatic Rollover amendment from 2005, the plan could have been brought back into compliance by paying a $375 fine and filing an application with the IRS’ Voluntary Compliance Program (VCP). The VCP program can only be utilized to bring a plan back into compliance before the IRS discovers the mistake. Because this mistake was discovered by an IRS auditor, the VCP program was unavailable to bring this plan back into compliance.

If the plan had filed for a determination letter, and the missing amendment had been discovered by the IRS during the determination letter review, the IRS would have allowed this plan to pay a $3,000 fine, sign the amendment, and the plan would have been brought into compliance.

Instead, once the plan is audited and the IRS auditor discovers the missing amendment, the auditor applies a formula based upon the number of years the plan has been out of compliance and the total dollar amount in the plan. For this attorney’s plan, the IRS auditor decided that the appropriate fine is $45,000. The attorney has been given the choice of paying $45,000 or having the plan disqualified. At age 62, if the plan is disqualified, he won’t be able to start saving for retirement again.

The greater question he is pondering is how does this fine make sense because failing to sign this amendment had no impact on any participant in the plan because no employees were cashed out of the plan pursuant to Code section 401(a)(31)(B) ever, much less cashed out between 2005 and now.

[tag]pension protection act, ppa, automatic rollover, amendment, notice 2005-5, 401(a)(31)(B), IRS, fine, penalty, ERISA[/tag]