Qualified Retirement Plans
Calendar-year 401(k) plan sponsors may be facing a confusing array of year-end notice requirements. As the summaries of the typical notice requirements below indicate, notices required for the 2009 calendar year must be provided by December 1, 2008.
Safe Harbor 401(k) Notice (Internal Revenue Code of 1986 (Code) Section 401(k)(12))
A safe harbor 401(k) plan provides for minimum fully vested employer matching or nondiscretionary employer contribution amounts that exempt the 401(k) plan from discrimination-testing requirements pursuant to Section 401(k)(12) of the Code.
Qualified Automatic Contribution Account (QACA) Notice (Code Section 401(k)(13))
A QACA provides for automatic enrollment at predetermined employee contribution rates and is always tied to either a safe harbor 401(k) plan design or to an alternative required employer-matching contribution rate that exempts the 401(k) plan from discrimination-testing requirements. Employee contributions may be made without the employee having provided investment directions so the plan must provide for a default investment option (typically a qualified default investment alternative (QDIA).
Eligible Automatic Contribution Arrangement (EACA) (Code Section 414(w))
An EACA is typically very similar to a QACA but specifically permits a participant to withdraw automatic contributions made within 90 days after the first automatic contribution and must use a QDIA as its default investment option.
QDIA (Employee Retirement Income Security Act (ERISA) Section 404(c)(5))
A QDIA is a default investment option designated by the plan administrator that meets the requirements of ERISA Section 404(c)(5). A QDIA may be utilized by any eligible individual account plan that provides for participant-directed investments. It is most typically used in plans that also must provide one or more of the notices described above.
A sample combined QACA and QDIA Notice, which is readily adaptable as a safe harbor 401(k) plan notice, is available from the Internal Revenue Service (IRS) at: http://www.irs.gov/pub/irs-tege/sample_notice.pdf.
The sample requires detailed knowledge of the applicable terms of the plan.
The Cycle C January 31, 2009 deadline is approaching. January 31, 2009 is the deadline for individually designed plans sponsored by employers with federal tax identification numbers ending in three or eight to request updated determination letters from the IRS (there are exceptions to this rule; for example, for plans sponsored by controlled group members). This is referred to as the Cycle C filing deadline.
Calendar-year qualified plans also should take note of the deadlines for making necessary amendments. All qualified plans are required to keep the written plan document current during the period leading up to the cycle-filing deadline applicable to them and during the five-year period between those deadlines, established by Revenue Procedure 2007-44. To keep current means adopting interim and discretionary amendments in writing on a timely basis.
An example of an interim amendment for the 2008 plan year is an amendment necessary to conform the terms of the plan to the final regulations under Code Section 415 final regulations, effective for plan years beginning on or after July 1, 2007. This is an “interim amendment” because the Code Section 415 limits set forth in the plan must match the final regulations as in effect from time to time. An interim amendment is timely adopted if adoption occurs by the due date of the plan sponsor’s federal tax return for the taxable year that contains the date on which the provision’s remedial amendment period begins. This means, for a calendar year company that extends its 2008 tax return to September 15, 2009, the deadline for updating the plan’s benefit limitations under Section 415 is September 15, 2009.
An example of a discretionary amendment for the 2008 plan year is an amendment to allow Roth 401(k) contributions beginning in 2008. This is a “discretionary amendment” because it is optional. Discretionary amendments must be adopted not later than the last day of the plan year in which they are initially effective.
In practical terms, each individually designed plan must be reviewed once a year, before plan year end, to determine whether any discretionary amendments are needed. That also is an appropriate time to prepare the list of any required interim amendments that need to be adopted by the tax return filing deadline.
Section 403(b) final regulations are effective January 1, 2009. The most immediate requirement is that each 403(b) plan must be maintained pursuant to a written plan by January 1, 2009. Many 403(b) plans will already have plan documents, particularly those that receive employer contributions and are already complying with ERISA requirements. It is the non-ERISA 403(b) plans that present the greatest challenge since many of them are not maintained pursuant to a plan document.
The IRS has issued guidelines regarding rollovers as business start-ups (ROBS). In a ROBS program, a qualified-plan participant with a large account balance incurs a severance from employment with his current employer and then makes a rollover contribution to a qualified plan set up by a shell corporation the same individual has previously created. The individual owning the rollover account then directs his or her rollover account to invest in the common stock of the shell corporation that is the “employer” sponsoring the new qualified plan. The shell corporation uses the funds to go into business, typically employing the individual who made the rollover as its president. The shell corporation thus evolves into a legitimate business operation that sponsors a qualified plan in which one of its participants owns qualifying employer securities, a proper plan investment.
We are seeing many such creative attempts to use qualified-plan money or individual retirement account (IRA) rollover accounts to facilitate entrepreneurial activity of the owner of the account. ROBS is a bit more blatant than most. We believe that the point of the IRS memorandum is, essentially, to let the public know that they do not like the ROBS strategy and will examine it closely when the opportunity presents itself. It isn’t clear that the IRS has a compelling legal argument that the ROBS technique literally violates tax laws, although the IRS is emphatic that it violates the intent of the applicable laws because the participant gains the use of his or her qualified account balance without paying any taxes on it. The IRS warns that ROBS also might violate ERISA fiduciary and prohibited transaction laws, although those laws are enforced by the U.S. Department of Labor, which has not yet taken a position on ROBS.
Foley is not describing ROBS because we want to encourage its use. We do think the IRS memorandum offers insight into how the IRS views the use of qualified plan and IRA account balances to facilitate entrepreneurial activities of the account owner.
A newly enacted federal law adds a one-year group health plan continuation coverage requirement for ill or injured post-secondary education students who are covered as dependent children. (Pub. L. 110-381, October 9, 2008, known as “Michelle’s Law”) The law also requires group health plans to provide notice of the requirements for this coverage continuation and any notice regarding any requirement for certifying student status. The law is not effective until 2010 for calendar-year plans. The statute does not coordinate with Consolidated Omnibus Budget Reconciliation Act (COBRA) requirements, so comprehensive regulations will be needed prior to the law’s effective date.
The United States Court of Appeals for the Seventh Circuit holds that amendments to ERISA benefit plans must be in writing. (Orth v. Wisconsin State Employees Union Council 24, 7th Cir., No. 07-2778, 10-22-2008) Judge Posner’s decision notes that, since ERISA plans must be maintained in writing, any changes to the plans also must be in writing. While plan sponsors are often meticulous regarding amendment of their qualified plans, in part because the review of plan amendments by the IRS makes this necessary, plan sponsors may act with less formality with respect to health and welfare plans.
The Mental Health Parity Act (MHPA) is made permanent and extended as part of the Emergency Economic Stabilization Act of 2008 (EESA). The original MHPA generally required group health plans to apply the same annual and lifetime dollar limits to mental health benefits as were in effect for medical and surgical benefits. The law was never made permanent but had its expiration date repeatedly extended. With the enactment of EESA, the MHPA is made permanent and is extended to require coverage for substance abuse disorders and to put restrictions on previously permitted differences such as deductibles, co-payments, and limits on frequency of treatment and number of visits.
The documentation for all nonqualified deferred compensation plans and arrangements must be in compliance with the requirements of Code Section 409A by December 31, 2008. If you have any plans, programs, or arrangements that provide for payment of nonqualified deferred compensation that have not yet been reviewed for compliance with Code Section 409A, immediate action is required to meet this deadline.
The IRS announced a new ruling policy on Code Section 409A nonqualified deferred compensation plans and arrangements. (Revenue Procedure 2008-61) The IRS has announced that it will no longer issue private letter rulings on the application of Code Section 409A rules to nonqualified deferred compensation plans. The new policy is effective September 25, 2008.
The IRS has indicated that it will issue a notice waiving the requirements of “Code Y” reporting for 2008 of amounts deferred under Code Section 409A. An IRS spokesperson stated that, “Currently, you should not be concerned about having to report nonqualified deferred compensation” in Box 12 of form W-2. Proposed regulations will be issued, the spokesperson said, in the “relatively near future” on how to calculate the amounts that would be included in income due to a failure to meet Code Section 409A requirements. It is expected that the same regulations will serve as the basis for reporting compliant amounts of nonqualified deferred compensation using Code Y starting with 2009.
Legal News is part of our ongoing commitment to providing legal insight to our employee benefits clients and colleagues. If you have any questions about or would like to discuss these topics further, please contact your Foley attorney or any of the following individuals:
Katherine L. Aizawa
Christopher S. Berry
Lloyd J. Dickinson
Gregg H. Dooge
Carl D. Fortner
Robert E. Goldstein
Samuel F. Hoffman
Sarah B. Krause
Harvey A. Kurtz
Belinda S. Morgan
Isaac J. Morris
Greg W. Renz
Leigh C. Riley
Timothy L. Voigtman
Michael H. Woolever