Qualified Retirement Plans
The Internal Revenue Service (IRS) has announced employers’ new responsibilities under the Heroes Earnings Assistance and Relief Tax Act of 2008 (Heroes Act). (P. L. 110-245, June 17, 2008) Plans do not have to be amended for Heroes Act changes until the last day of their plan year beginning in 2010, although some of the provisions have earlier effective dates.
For deaths (or disabilities as applicable) occurring on or after January 1, 2007:
- Survivors of plan participants who die while performing qualified military service are entitled to any additional plan benefits that they would have received had the participants resumed employment and then died. Examples: Accelerated vesting, ancillary life insurance benefits, or other survivor benefits that are contingent on the participant’s death while employed. (Code Section 401(a)(37))
- For plan benefit accrual purposes under the Uniformed Services Employment and Reemployment Rights Act (USERRA), employers may amend their plans to provide that if participants die or become disabled while performing qualified military service, they will be treated as having returned to employment on the day before death or disability and then terminated on the date of death or disability. Employers may elect to provide either partial or full benefits, but must provide the same level of benefits to all similarly situated individuals in a nondiscriminatory manner. For purposes of determining the amount of matching contributions in a plan that matches employee elective deferrals, individuals are treated as having contributed based upon their average deferrals for the 12 months immediately preceding their qualified military service. (Code Section 414(u)(9))
- Favorable tax rules are extended for “qualified reservist distributions” made to individuals ordered to active duty any time after September 11, 2001. These rules were scheduled previously to expire for distributions made after 2007. Example: A distribution from a salary deferral account in an employer-sponsored plan (or from an IRA) is exempt from the additional 10 percent tax on premature plan withdrawals and the distribution can be contributed to an IRA when the active duty ends. (Code Section 72(t)(2)(G)(iv))
Provision effective June 18, 2008:
- The Flexible Savings Account plan (FSA plan) balances of reservists called or ordered to active duty for a period in excess of 179 days may be cashed out after June 17, 2008. These amounts, called qualified reservist distributions, if made available by the FSA plan, must be paid out during the period beginning on the date the call or order to active duty is made and ending on the last day on which reimbursements could otherwise be made under the FSA plan for the plan year that includes the date of the call or order. (Code Section 125(h))
Provisions effective on January 1, 2009:
- Individuals receiving differential wage payments from an employer are treated as employed by that employer, and the employer’s plan may provide benefits to the individual based on the differential wage payments. The benefits must be provided to all similarly situated individuals in a nondiscriminatory manner and the differential wage payments are treated as compensation for purposes of making individual retirement account (IRA) contributions. (Code Section 414(u)(12)(A))
- Individuals performing service in the uniformed services while on active duty for at least 30 days are treated as having been severed from service for purposes of receiving a distribution of elective deferrals from a Code Section 401(k), 403(b), or 457(b) plan. Individuals who take such distributions cannot make salary deferral contributions until six months after the distribution date. (Code Section 414(u)(12)(B))
The U.S. Department of Labor (DOL) has added new audit guidance to its Fiduciary Investigations Program concerning gifts and entertainment provided to fiduciaries of Employee Retirement Income Security Act (ERISA) plans. (DOL Fiduciary Investigation Program, Section 12, August 4, 2008) DOL presumes that a fiduciary’s acceptance of meals, gifts, entertainment, or expenses associated with educational conferences is a possible fiduciary violation. If such items come to the attention of a DOL examiner, the examiner is instructed to review the facts and circumstances to determine whether receipt of the gifts or other consideration was a prohibited transaction under ERISA Section 406(b)(3). That section prohibits a fiduciary from receiving any consideration for his personal account from any party dealing with the plan in connection with a transaction involving plan assets.
DOL may open an investigation based upon information obtained by its field offices or when directed by the national office. Cases may be opened based upon allegations of fiduciary violations deemed worthy of investigation from plan participants, plan officials, employees, employee benefit plan practitioners, the general public, or other governmental agencies. An investigation also may be opened on the basis of a review of plan files, the plan’s annual report, media information, or from any other “applicable targeting approach.”
Some de minimis exceptions are noted in the new guidance, including gifts or other consideration with an aggregate annual value of less than $250 and subsidized attendance at worthwhile educational programs when certain conditions are satisfied, including approval by an independent fiduciary pursuant to a written policy similar to a corporate ethics policy.
The Employee Plans Compliance Resolution System (EPCRS) has been updated by IRS. (Revenue Procedure 2008-50). EPCRS permits plans to correct a broad range of problems by correcting the problem within required time periods and, in certain instances, paying a fee to the IRS for the opportunity to do so. The modifications in the latest version of EPCRS include:
- The Self-Correction Program (SCP) expands the definition of plan loan failure and lengthens the time period for SCP correction under certain situations where the plan has already come under IRS examination. SCP correction methods are added for issues pertaining to catch-up contributions and failure to include eligible employees in a 401(k) plan. The requirements for submitting determination letter applications when correcting certain plan failures by plan amendment also are clarified.
- The Voluntary Compliance Program (VCP) is expanded to include streamlined handling of nine categories of plan failures (up from three) and a standardized application form for this kind of filing. A sample application form is included for all other filings.
We mention these changes in some detail as a reminder to you that EPCRS is available and can be a very useful, proactive means to correct plan errors that could otherwise jeopardize the plan’s compliance with the law and its tax qualification. It is available for retirement plans that are qualified under Code Section 401(a), 403(b) tax-deferred annuity plans, simplified employee pensions (SEP), and savings incentive match plans for employees in the form of individual retirement accounts (SIMPLE IRAs).
IRS will treat a child of parents who are divorced, separated, or living apart as the dependent of both parents for purposes of Code Sections 105(b) (exclusion from income of medical care expense reimbursement including self-funded health care plans); 106(a) (exclusion from income of employer payment of health insurance premiums); 132(h)(2)(B) (exclusion from income of certain fringe benefits that qualify as no additional cost services or qualified employee discounts); 213(d) (allowance of deduction for medical expenses of the taxpayer and his or her spouse and dependents); 220(d)(2) and 223(d)(2) (allowance of deduction from gross income for distributions from Archer Medical Savings Accounts (MSAs) and Health Savings Accounts (HSAs) if the distributions are used to pay qualified medical expenses of the account beneficiary and his or her spouse and dependents). (Revenue Procedure 2008-48). The definition of dependent under Section 152 of the Internal Revenue Code was significantly revised for all Code purposes by the Working Families Tax Relief Act of 2004 (WFTRA). Code Section 152(e), as revised by WFTRA, provides a special rule for certain children whose parents are divorced, separated, or living apart. Under the special rule, a child may be treated as a dependent of the noncustodial parent only if the custodial parent releases the claim to the tax exemption available under the Code for the child. Under the law as in effect before WFTRA, children of divorced and separated parents could be treated as dependents of both parents under certain health coverage and fringe benefit rules in the Code. There was no requirement that the custodial parent release the claim to the tax exemption.
The final regulations issued in July 2008 regarding Code Section 152(e) indicated that if the custodial parent did not release the claim to the tax exemption, then only the person entitled to claim the child as a tax exemption may treat the child as a dependent for applicable health coverage and certain fringe benefit purposes.
Revenue Procedure 2008-48 provides that the IRS will treat as dependents certain children whose parents are divorced, separated, or living apart for purposes of the Code provisions noted above, most importantly those provisions pertaining to employer-provided medical expense reimbursement and group health insurance. The guidance applies to taxpayers who: (1) are divorced, legally separated under a decree of divorce or separate maintenance, legally separated under a written separation agreement, or live apart for the last 6 months of the calendar year, and (2) are the parents of a child who receives more than one-half of the child’s support during the calendar year from the child’s parents, is in the custody of one or both parents for more than one-half of the calendar year, and is a qualifying child or qualifying relative of one of the child’s parents. The Revenue Procedure is effective immediately and also may be applied for tax years beginning after December 31, 2004 under certain circumstances. The Revenue Procedure does not explain the source of its legal authority to create this exception to Code Section 152(e) as revised by WFTRA.
The deadline for compliance with the nonqualified deferred compensation rules of Code Section 409A is December 31, 2008. Section 409A establishes requirements for nonqualified deferred compensation plans (broadly defined to include plans, contracts, and programs of many kinds) comparable to Code requirements for tax-qualified retirement plans. Substantially all such arrangements will need to be amended to comply with the new law by the year-end 2008 deadline. Failure to adopt appropriate amendments prior to the end of 2008 will subject participants in nonqualified deferred compensation plans, contracts, or programs to additional taxes and penalties.
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
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