Middle Tennessee Employee Benefits Council Virtual Breakfast Meeting

Join Findley’s Tom Swain and Cory Panning for the Middle Tennessee Employee Benefits Council Virtual Breakfast Meeting where they will present a strategic approach for building a financial well-being program that engages employees, helping them achieve better control of their financial lives and better planning and action for their retirement. 

Friday, September 18, 2020

8AM-9AM CT

Retirement Readiness Starts with Financial Wellbeing: A Strategic Approach for Building Your Financial Well-Being Program – Check it out!

How To Successfully Navigate A DOL ESOP Investigation

“Dear Sir or Madam…our office has scheduled a review of the above captioned plan to determine compliance with the provisions of ERISA.” A formal notice from the Department of Labor (DOL) can bring a sense of unease to any employee stock ownership plan (ESOP) practitioner. However, by developing an understanding of why DOL ESOP investigations occur and familiarizing oneself with the DOL’s audit practices, navigating one will be less ominous.

What Is A DOL ESOP Investigation?

The DOL enforces the federal laws of retirement plans under the Employment Retirement Income Security Act of 1974 (ERISA). ERISA provisions grant the DOL authority to conduct investigations of ESOPs and, unlike those conducted by the Internal Revenue Service (IRS), it has the discretion to investigate and reinvestigate any plan it so chooses. Because ESOPs fall under the governance of ERISA, fiduciary duty is required to those who administer, manage, or control plan assets and any ESOP fiduciary is required to act solely in the best interests of the plan’s participants.

Beginning in 2005, the DOL’s ESOP review project initially focused on the valuation of privately-held employer securities purchased by the ESOP.  Even more so today, ESOP trustees are under continued scrutiny from the DOL regarding this subject matter. The trustee must continually demonstrate due diligence in analyzing the transaction and determine that the valuation procedures considered when authorizing the share purchase result in the trust’s payment of no more than fair market value (i.e. “adequate consideration”). Ultimately, the DOL monitors whether participants are being overcharged for the stock acquired by the plan. Failure of any ESOP trustee to uphold this duty may result in them being held liable for making the ESOP trust whole, as evidenced by an increase of monetary settlements in recent court rulings.

How To Successfully Navigate A DOL ESOP Investigation

Why Was Our ESOP Selected?

Because the DOL does not detail their selection process, understanding why your ESOP is under investigation remains unclear. They commence for various reasons, including through referrals from other government agencies or media sources, via plan participant complaints, through computer generated targeting (e.g. collecting information on Form 5500), or by random audit. Many of the investigations do not occur until after a fiduciary breach occurs and the severity of any infraction will determine any company/civil penalties or criminal proceedings. Additionally, DOL enforcement agencies typically provide little advance notice, so knowing how to respond before an investigation begins is critical.

What Can We Expect?

The formal investigation process begins after receipt of a notification letter from a DOL regional office. This letter requests an abundance of plan documentation, including:

  • Plan and trust document
  • ESOP board minutes and correspondence
  • ESOP allocation report
  • ESOP trust statements
  • Copies of Form 5500
  • ESOP loan documents
  • Payroll data
  • Service provider agreements

This information must be provided to the investigator within a certain deadline, although extensions may be granted. It is good practice for a company to establish a point of contact (i.e. ERISA legal counsel) to help aid in the information exchange process. This helps to avoid disruptions, maintains organization, and ensures all requested materials are reviewed and properly addressed. Once all requested documentation is received, the DOL conducts on-site visits comprised of in-person interviews, including key personnel, plan fiduciaries, and those involved with the day-to-day operations of the ESOP. During this stage, it is crucial that legal counsel represent those being interviewed since they can detail what to expect and inform those interviewed of their rights during the process.

What Happens Next?

At the end of the audit period, the DOL must decide whether to take any further action. This phase of the DOL ESOP investigation may take several months and, during that time period, the DOL may discontinue communication with the contact person. Ideally, an investigation ends with receipt of a “no action” letter, meaning the DOL has found no improprieties during its audit. To the extent that the DOL ESOP investigation uncovers violations of ERISA, they will issue a Voluntary Compliance Letter. The letter generally details the facts gathered by the DOL during the investigation, outlines the violations that they have uncovered, and invites discussions related to the remedy of such violations. The DOL may also insist on entering into a written settlement agreement, of which, civil penalties may be imposed. Should settlement not be amenable to both parties, the DOL may also provide the IRS with their findings, which may impose further penalties or excise taxes.

In summary, one should not underestimate the seriousness of a DOL ESOP investigation or the resulting outcome. In the interest of transparency, the department does provide online access to its enforcement manual, detailing their internal audit guidelines and checklists. With a thorough review of these documents and an understanding of the general steps of an ESOP DOL investigation, any plan sponsor can successfully navigate one.

Questions regarding the process of ESOP investigations? Contact the Findley consultant you normally work with or Aaron Geibel in the form below.

Published August 28, 2020

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SOA Releases Public Plan Mortality Tables (Pub-2010)

The first mortality tables specifically for public-sector retirement plans were released by the Society of Actuaries (SOA) in early 2019. Prior to 2019, there were no publicly available mortality tables for public sector plans despite the general consensus that mortality experience for public-sector retirement plans differs from those of private pension plans. The current mortality assumptions used by public plans vary considerably, and many plans must rely on tables that were created using data for private pension plans such as RP-2000 or RP-2014.

The Importance of Mortality Tables

Using the right mortality table for your plan, whether it’s one of the Pub-2010 tables or another table, is very important. As mortality improves, people live longer and receive benefits for a longer period of time which increases the cost of your plan. In order to measure this cost and to fund your plan enough to pay future benefits, you need to choose an appropriate mortality assumption that reflects expectations. If you are using an outdated mortality table or one that doesn’t fit your plan’s population, your liability could be much larger than you realize. Your future contributions could increase significantly, or your plan may be unable to pay future benefits.

SOA Releases Public Plan Mortality Tables

Pub-2010 Mortality Tables

The new mortality tables, referred to as “Pub-2010”, are not a single table but a set of 94 tables. The SOA analyzed multiple factors that affect mortality rates, and the published tables use combinations of these factors:

  • Gender (male/female)
  • Job category (teacher/public safety employee/general employee)
  • Employment status (active employee, deferred vested participant, retiree, survivor)
  • Health status (healthy/disabled)
  • Income level (above/below median)

Plan Characteristics to Consider

Job category and income level were the two most statistically significant factors. You should pay special attention to job categories when considering using these tables.

The SOA did not release a combined table using data from all job categories, because the experience varied significantly between the categories. If your plan covers multiple categories, your Findley consultant could help you consider either valuing the groups using separate mortality tables or constructing a combined table that reflects the demographic breakdown of your specific population.

Not all plans may be able to easily divide their participants into these categories. For example, a plan for a regional transit authority with primarily blue-collar workers such as bus drivers may not be able to use these tables, since their workers do not easily fit into any of these job categories. The below-median Pub-2010 table for general employees is an option, but the RP-2014 Blue Collar table may be more appropriate.

Impact of New Tables

Using these tables is likely to increase the measurement of your liability, depending on your current mortality table and the demographics of your plan. Based on the study, teachers have the longest expected lifespan; liabilities for teachers are expected to be higher using the Pub-2010 tables than using the RP-2014 White Collar table. General employees have mortality rates in the Pub-2010 tables similar to those of the RP-2014 White Collar table. As expected, public safety employees have the highest mortality of the three groups, more similar to the RP-2000 table projected with Scale BB.

Income level is also a big determinant of mortality. The study population showed that lower income people had higher mortality rates than higher income people and had a shorter lifespan. If your plan is primarily composed of lower or higher paid employees, you should consider using the below or above median tables, respectively.

Location, Location, Location

The SOA was also expected to release tables based on geographic region. Ultimately, data based on geographic region was not used, because it was much less statistically significant than other factors and the data was not uniform across the geographic regions. If you expect your plan to have mortality rates that differ greatly from the national average, your Findley consultant can use the mortality information from the Center for Disease Control (CDC) to help develop adjustment factor(s) for geography. The CDC has mortality rates by census region, state, and county. If most of your participants live in one county that has a much higher mortality rate than the national average, you could scale the Pub-2010 tables by a factor in order to more closely model your plan population’s expected mortality.

What Now

Now that there are public plan tables available, you and your actuary need to consider adopting them or have a sufficient explanation as to why they are not appropriate. Keep in mind that there’s a lot of flexibility to tailor the tables to best match your plan’s population. You should discuss this with your plan actuary and your auditor. For further information and questions, contact Catie Barger in the form below.

Published August 17, 2020

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Coronavirus Crisis Workforce Reduction Can Adversely Affect Retirement Programs

The coronavirus pandemic continues to ripple across the country and many organizations face several unprecedented, difficult decisions surrounding their workforce and the use of cash. While payroll-reducing strategies may be necessary during this time of substandard revenue, they may also present other costs or hurdles in the company’s pension, retiree medical, and retiree life insurance programs. Significantly changing employee demographics can trigger unexpected accounting, cash flow, and compliance issues that could be an unwelcome surprise given current market conditions.

State mandated stay-at-home orders not only reduce the ability for consumers to purchase, but also the need for employees to produce. For many industries, this means downsizing workforces and payroll at record levels via layoffs, furloughs, reductions in force, and salary cuts. However, in this time where management decisions are focused on the best positioning of their organization from “crisis” to “rebound” mode, it is important that pension and retirement programs are not placed on the back burner. 

Coronavirus Crisis Workforce Reduction Can Adversely Affect Retirement Programs

Identify and Prepare for Potential Consequences

A proactive analysis of an organization’s workforce reduction program, as well as the group of employees impacted, may help identify and prepare for the impact of some of these potential unintentional consequences due to coronavirus:

Curtailment Accounting Under U.S. GAAP

Curtailment accounting may be initiated when more than 5-10% of the plan’s active participants are impacted by a workforce reduction event such as layoffs or forced termination, or a reduction or elimination of future benefit accruals. The curtailment impact is an immediate recognition of a portion of unrecognized prior service costs and could also prompt an interim re-measurement at the time of the event, likely unfavorable given the current market environment. Curtailment accounting can increase the “below the line” expense for accounting for pension, retiree medical, and retiree life insurance plans under U.S. GAAP.

Settlement Accounting Under U.S. GAAP and Cash Concerns for Pension Plans Offering Lump Sums

Settlement accounting is set into motion when lump sum payouts exceed the service cost and interest cost components of net periodic pension cost during the fiscal year. This may be increasingly likely as laid off participants may access their pension benefits for their own financial security. The settlement impact is an immediate recognition of unrecognized gains and losses, and similar to curtailments, could also cause an interim re-measurement at the time of the event. 

In addition, while payroll reducing strategies may be advantageous for cutting current expenses, pension plans that offer lump sums upon termination could end up in a situation where the plan requires more cash in the future. Paying an increased number of lump sums to participants could force the pension plan to raise cash by selling equities at a time when the market is significantly depressed. Selling equity at market lows may inhibit the pension plan’s ability to recover in the long term. 

Benefit Enhancements and Plant Shutdown Liability under PBGC and ERISA

Benefit enhancements and plan shutdown liability may be triggered when either a facility closure impacts more than 15% of the plan sponsor’s active participants benefitting in any pension or defined contribution plan; or if the pension plan document provides for special shutdown benefits in any size closure. Special, enhanced shutdown benefits that can increase pension plan liability and plan costs may be required to protect employees close to retirement if defined in the plan document. In addition, the Pension Benefit Guaranty Corporation (PBGC) may require special reporting and accelerated cash contributions under ERISA 4062 for some underfunded pension plans. The PBGC also may require a special report under ERISA 4043 if the number of active participants is significantly reduced for any reason.

Vesting Enhancements under IRS Partial Pension Plan Termination

A partial pension plan termination may occur when more than 10-20% of the plan’s active participants are impacted by closing a facility or division, or from any higher turnover due to economic factors. Partial pension plan termination requires the plan sponsor to grant immediate vesting eligibility or face Internal Revenue Service (IRS) disqualification in the pension plan. This is ultimately an IRS decision based on facts and circumstances and might be avoided if the reduction is structured to furlough (not typically a formal separation) rather than permanently terminate employees. 

Increased Liability and Cash Requirements for Unfunded Retiree Medical Plans

Eliminating participants who are retirement eligible can lead to a spike in retiree medical claims costs and liabilities. Unfunded retiree medical plans “pay as you go” and do not have back-up trust assets to use toward claims in the event more participants begin retiree medical plan benefits sooner than expected. Retiree medical plans with early eligibility may be responsible for benefits over a much longer period than expected at a time when rates charged by insurers may also be increasing. Together, plan sponsors may see increased claim costs in 2021, as well as higher liability and net periodic benefit costs in fiscal 2021.

IRS Compliance Concerns Related to Passing Pension Plan Non-discrimination Testing

There is a likelihood for increased difficulty in obtaining favorable non-discrimination testing (NDT) results when there is a significant change in the demographics of the plan’s active employees. For example, NDT results will be less favorable when non-highly compensated employees (NHCEs) are forced to terminate at higher rates than highly compensated employees (HCEs) and also when salaries for NHCEs are reduced at higher levels than HCEs. Alternatively, workforce reductions impacting HCEs at higher rates could improve testing results.

Violation of Union Agreements and Debt Covenants

While not tied exclusively to workforce reductions, any decision that deviates from normal practice has a potential to violate established agreements with union contracts and debt covenants. Keep in mind, relief permitted by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) may not be permitted under current arrangements.

Minimum or Variable Interest Credit Rates for Cash Balance Plans

While interest crediting rates have already been set for most cash balance plans with calendar plan years, if low interest rates persist it could mean a significant drop in the crediting rate for 2021, possibly requiring the minimum interest crediting rate to apply. In addition, plans using variable interest crediting rates may see negative returns, making non-discrimination testing more difficult.   

Seek Guidance

The bottom line is this: the coronavirus crisis continues to evolve and any workforce strategy decision should be pursued with guidance from your actuary, auditor, or legal counsel. Early analysis may help your company prepare for retirement program concerns that may arise from implementation of the selected cost-saving payroll strategy. Contact your Findley consultant to discuss any workforce reduction program you may be considering to ensure all relevant issues are addressed.

Questions? For more information, contact the Findley consultant you normally work with, or contact Debbie Sichko at debbie.sichko@findley.com, or 216.875.1930

Published April 13, 2020

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Breaking Down the Secure Act – Required Minimum Distributions

Benefits experts are still poring through the SECURE Act’s various mandated provisions, optional provisions, and effective dates, some of which may be retroactive. This series of articles will break down the implications that the Act has for existing tax-qualified retirement plans. This article will focus on the Act’s impact on required minimum distributions (RMDs) for both defined benefit and defined contribution plans. Related articles will address (1) changes that impact 401(k) and other defined contribution plans only, (2) changes for defined benefit plans only; and (3) other changes to the retirement plan landscape.

Remedial Amendment Period

Plan sponsors generally have until the last day of the 2022 plan year to adopt amendments that reflect the Act’s required revisions.  For calendar year plans the last day is December 31, 2022. Governmental plans have until the 2024 plan year to amend. Remember that operational compliance is still required during the period from the effective date for the Act’s required changes and the date the plan is amended.

Delay of Lifetime RMDs – MANDATORY

Prior law: Distributions from an eligible employer retirement plan must be made by April 1 of the calendar year following: (a) the calendar year in which the participant turns age 70-1/2, or (b) for a participant who is not a 5% owner, the calendar year in which he or she terminates employment after age 70-1/2.

Under the Act: The required age for RMDs is raised from 70-1/2 to 72. Participants who are not 5% owners and who work beyond the required age for RMDS, under the Act still don’t trigger RMDs until the calendar year in which they retire. The Act did not change the way in which 5% owners are determined. In addition, post-death distributions to a participant’s surviving spouse are not required to begin before the calendar year in which the participant would have obtained age 72 (formerly 70-1/2). 

Effective date: The new age applies to employees who turn age 70-1/2 after December 31, 2019; that is, for those born after June 30, 1949. For those born on or before June 30, 1949 (already obtained age 70-1/2 prior to January 1, 2020), the prior law applies.

What to do and when: Plan sponsors should work with their service providers to track two populations: those born on and before June 30, 1949 (for whom age 70-1/2 is the RMD trigger date), and those born after that date (for whom age 72 is the RMD trigger date). Distributions of RMDs for the latter population therefore need not begin until April 1 of the calendar year following the year they attain age 72.

This change to tax-qualified retirement plans will necessitate updates to distribution forms, SPDs, 402(f) notices, and participant communications.

Post-Death RMDs are accelerated – MANDATORY

Prior law: In general, distributions are permitted to be paid annually over the beneficiary’s life expectancy. In general, if the participant died before RMDs began, distributions could be made at various times, provided the entire account was distributed by the end of the fifth year following the participant’s year of death.

Under the Act:  Following the death of the participant, distributions must generally be made by the end of the 10th calendar year following the year of death. The determination of the 10-year period is presumably calculated in the same way that the 5-year period was calculated. Payments can be made over the beneficiary’s life expectancy provided the beneficiary is an “eligible designated beneficiary”, which can be the surviving spouse, a disabled/chronically ill individual, a minor child of the participant or a beneficiary no more than 10 years younger. Prior rules still apply to a beneficiary that is not a “designated beneficiary”.

Effective date: The rule regarding the acceleration of post-death RMDs is effective for deaths that occur after December 31, 2019. Special delayed effective dates apply to collectively bargained and governmental retirement plans. 

What to do and when: Sponsors of tax-qualified retirement plans should be working with their service providers to implement these rules now.

This change will impact beneficiary designation forms, distribution forms, SPDs and other participant/beneficiary communications.

Special Note for Defined Benefit Pension Plans

The Act does not change actuarial increases required by Internal Revenue Code 401(a)(9)(C).  For individuals who continue working and choose to retire late, a defined benefit plan must provide actuarial increases beginning at age 70-1/2.  

General Thoughts

Commentators anticipate IRS guidance to provide self-correction relief for plans that fail to implement the new rules correctly during the remedial amendment period and clarify the Act’s impact on current regulations. Tax-qualified plan sponsors considering an amendment prior to the remedial amendment deadline, for the sake of clarity for itself and its service providers, may want to wait to see how further guidance may affect that amendment.

Questions? Please contact the Findley consultant you regularly work with or Sheila Ninneman at Sheila.Ninneman@findley.com, or 216.875.1927.

To learn more about the passage of the Secure Act and changes to retirement plans, click here

Published March 19, 2020

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Are You Looking for Missing Participants?

The Department of Labor (DOL) continues to focus on missing participants in retirement plans. In recent years, the DOL, in conjunction with the Employee Benefits Security Administration (EBSA), has been auditing retirement plans and reinforcing the actions that plan sponsors must take to locate lost participants and pay the benefits due to them.

“There’s really no more basic fiduciary duty than the duty to operate the plan for the purpose of paying benefits, so falling down here is a serious matter,” explained Preston Rutledge, Assistant Secretary of Labor for EBSA, while speaking at a policy conference. “We can’t just look the other way.”

While formal guidance is primarily directed at terminating plans, DOL auditors still expect sponsors of active, ongoing plans to be routinely searching for missing participants. As mentioned in Pension & Invesments, Plan sponsors under DOL investigation have reported surprising positions taken by some DOL auditors, including:

  • Failure to find a missing participant is a breach of fiduciary duty.
  • A plan which forfeits funds back to the plan until a participant is found is engaging in a prohibited transaction.
  • Sponsors must document their efforts to find missing participants and should try different search methods every year.
missing participants for retirement plans

These Searches Make Sense

Aside from the DOL’s focus, there are a number of practical reasons plan sponsors should address lost participant accounts:

  • There are large amounts of money at issue. In fiscal 2018, the DOL reported recovering $807 million for terminated, vested participants in retirement plans.
  • Missing participants may prevent payment of required minimum distributions (RMDs), which may result in penalties to the employer and participant.
  • Missing participants may prevent payment of death benefits. This is another important reason to maintain up-to-date beneficiary election data.
  • Missing participants may prevent payment of annual cash-out distributions for balances under $5,000. When processed timely, these cash-outs help reduce the number of accounts for which the employer is paying its recordkeeping service.
  • Missing participants may delay plan terminations, requiring another year of audit and governmental filings.

In addition, sponsors should address uncashed checks on a consistent basis to avoid prohibited transactions related to income earned by the trustee on uncashed check accounts. While many recordkeepers and trustees issue periodic reports alerting the sponsor of outstanding checks, the sponsor must conduct an address search or request that those checks be reissued.

Current Guidance

While the retirement industry awaits formal guidance addressing active plans, plan sponsors can refer to prior guidance issued for terminating plans. This guidance offers recommended steps to document attempts to locate missing participants.

The DOL released Field Assistance Bulletin (FAB) 2014-01 listing the fiduciary duties related to missing participants in terminating 401(k) plans (and other defined contribution plans). It requires plan fiduciaries to take all of the following steps to search for missing participants:

  1. Send a notice by certified mail.
  2. Check related plan and employer records.
  3. Contact the participant’s named beneficiary.
  4. Use free internet search tools (such as search engines, public record databases, obituaries, and social media).
  5. If the fiduciary does not find the missing participant during the required steps above, the fiduciary must consider additional search methods that may involve fees (such as, fee-based Internet search services, commercial locator services, or credit reporting agencies). Sponsors may take into account the size of the account balance and may charge associated fees against the account.

Since 2014, other agencies have released similar guidance. The IRS issued a Memorandum in 2017 for when its Employee Plans (EP) examiners should not enforce penalties for missed RMD payments. This memo required the plan to take virtually the same search steps before concluding it would not or could not pay an RMD.

Similarly, when the Pension Benefit Guarantee Corporation (PBGC) expanded its Missing Participants Program to terminating 401(k) plans in 2018, it pointed to the guidance under FAB 2014-01 for its requirement to conduct a “diligent search” before reporting or transferring missing participant accounts to the PBGC.

Handling Small Balances

Many sponsors have adopted distribution provisions to promptly pay out terminated employees with small balances, which can help prevent participants from losing track of their accounts in the first place. The IRS requires balances between $1,000 and $5,000, which are distributed without the participant’s consent, to be rolled into a default IRA. Therefore, most 401(k) plans will only force-pay balances under $1,000 as true cash-out distributions. Even when these cash-outs are paid annually, some of the smallest checks may go uncashed, and end up on the list of “missing participants” to be dealt with another way.

Retirement Clearinghouse, LLC (RCH) recently received approval from the DOL for its Auto-Portability Program, which may help connect participants with their old accounts. This service identifies when an individual with a default IRA has opened a new plan account with a new employer. If the participant does not respond to two letters of notification, RCH then automatically transfers the default IRA into the new plan account. This way, the account follows the participant – even when they take no action. The DOL has given RCH a prohibited transaction exemption (for five years) on fees collected for facilitating rollovers of small balances.

Best Practices

It’s important to be diligent in monitoring the plan for uncashed checks or nonresponsive participants. The DOL has made it clear that this is a fiduciary duty of the plan sponsor. Service providers often can help identify accounts that may need special attention, so sponsors should coordinate efforts to establish proper procedures and designate an individual or team to ensure necessary follow-up efforts are taken

Consider the following questions. Do you:

  • Have a formal procedure for identifying missing participants?
  • Conduct a full plan review for missing participants at least annually? (Consider timing this review with another annual process, such as annual cash-out distributions.)
  • Review uncashed check reports from the trustee? (These are typically made available on a monthly or quarterly basis.)
  • Conduct address searches for returned checks?
  • Document the steps that are taken annually to locate missing participants?

Questions? Contact the Findley consultant you normally work with, or contact Laura Guin, CPC at 615.665.5420 or Laura.Guin@findley.com

Published March 18, 2020

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Year-End Spending Bill includes the SECURE Act and other Retirement Plan Changes

Featured

With the passage of the 2020 federal government spending bill less than a week before Christmas, Congress has gifted us with the most significant piece of retirement legislation in over a decade. This newly enacted legislation incorporates the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) that was overwhelmingly passed by the House of Representatives earlier this year but never considered by the Senate. The spending bill even has a few additional retirement-related tidbits that were not part of the SECURE Act.

Here are some of the key changes:

Frozen Defined Benefit Plan Nondiscrimination Testing

Currently- Defined benefit plans that were frozen to new hires in the past and operate with a grandfathered group of employees continuing to accrue benefits have ultimately run into problems trying to pass nondiscrimination or minimum participation requirements as the group of benefiting employees became smaller and normally higher paid. This problem for frozen defined benefit plans has been around for a while and the IRS has been providing stop-gap measures to deal with it every year.

Effective as of the date of enactment of this legislation and available going back to 2013 – plans may permit the grandfathered group of employees to continue to accrue benefits without running afoul of nondiscrimination or minimum participation rules so long as the plan is not modified in a discriminatory manner after the plan is closed to new hires. This special nondiscrimination testing relief also extends to:

  • defined benefit plans that close certain plan features to new hires,
  • defined contribution plans that provide make-up contributions to participants who had benefits in a defined benefit plan that were frozen.

Increasing the 10% Limit on Safe Harbor Auto Escalation

Currently – a safe harbor 401(k) Plan with automatic enrollment provisions cannot automatically enroll or escalate a participant’s contribution rate above 10%.

Effective for Plan Years beginning after Dec. 31, 2019 – the 10% cap would remain in place in the year the participant is enrolled but the rate can increase to 15% in a subsequent year.

Simplifying the Rules for Safe Harbor Nonelective 401(k) Plans

Currently – All safe harbor plans must provide an annual notice prior to the beginning of the year that provides plan details and notifies employees of their rights under the plan. Also, any plan sponsors that want to consider implementing a safe harbor plan generally must adopt the safe harbor plan provisions prior to the beginning of the plan year.

Effective for Plan Years beginning after Dec. 31, 2019 – the notice requirement for plans that satisfy the safe harbor through a nonelective contribution has been eliminated. Also, sponsors can amend their plan to become a nonelective safe harbor 401(k) plan any time up until 30 days prior to year-end. The safe harbor election can even be made as late as the end of the next year if the plan sponsor provides for at least a 4% nonelective contribution.

Open Multiple Employer Plans (Open MEPs)

CurrentlyMultiple employer plans (MEPs) are legal and actually quite common, but a couple of limitations have stunted the development of a concept called open MEPs. An open MEP is a situation where the employers within the MEP are not tied together through a trade association or some common business relationship. In 2012 the DOL issued an Advisory Opinion provided that a MEP made up of unrelated employers that did not have “common nexus” must operate as a separate plan for each of these unrelated employers and not as a single common plan. This advisory opinion took away much of the perceived advantages of operating an open MEP. Additionally, the IRS has followed a policy that provides if one employer within the MEP makes a mistake, that the error can impact the qualified status of the entire plan; this is known as the “one bad apple” rule, this policy is clearly a negative selling point for any plan sponsor that might consider signing up to participate in a MEP.

Effective for Plan Years beginning after Dec. 31, 2020 – the “common nexus” requirement and the “one bad apple” rule are eliminated. The new open MEP rules provide for a designated “pooled plan provider” that would operate as the MEPs named fiduciary and the ERISA 3(16) plan administrator. The open MEP will be required to file a 5500 with aggregate account balances attributable to each employer. These changes are expected to create a market for pooled plans that will offer efficient retirement plan solutions to smaller plan sponsors.

Required Minimum Distribution Age Now 72

Currently Required Minimum Distribution from a qualified plan or IRA must begin in the year the participant turns 70 ½.

Effective for Distributions after 2019, with respect to individuals who attain 70 ½ after 2019. – This is a simple change to age 72 for computation purposes, but note the effective date means that if the participant is already subject to RMD rules in 2019 they remain subject to RMDs for 2020 even though the person may not be 72 yet. Also, plan sponsors should be aware that distributions made in 2020 to someone that will turn 70 ½ in 2020 will not be subject to RMD rules and therefore would be eligible for rollover and subject to the mandatory 20% withholding rules.

Increase Retirement Savings Access to Long-Term Part-Time Workers

Currently– Plans can exclude employees that do not meet the 1,000 hours of service requirement

Effective for Plan Years beginning after Dec. 31, 2020 – Plans will need to be amended to permit long-term part-time employees who work at least 500 hours over a 3 year period to enter the plan for the purpose of making retirement savings contributions. The employer may elect to exclude these employees from employer contributions, nondiscrimination, and top-heavy testing.

Stretch IRAs are Eliminated

Currently– If Retirement plan or IRA proceeds are passed upon death to a non-spouse beneficiary; the beneficiary can set up an inherited IRA and “stretch” out payments based upon the beneficiary’s life expectancy. Depending upon the age of the beneficiary and the size of the IRA this strategy potentially provided significant tax advantages.

Effective for distributions that occur as a result of deaths after 2019 – Distributions from the IRA or plan are generally going to need to be made within 10 years. There are exceptions if the beneficiary is (1) the surviving spouse, (2) disabled, (3) chronically ill, (4) not more than 10 years younger than the IRA owner or plan participant, or (5) for a child that has not reached the age of majority, the ten year rule would be delayed until the child became of age.

Increased Penalties for Failure to File Retirement Plan Returns and Other Notices

Current Penalty Structure:

Failure to file Form 5500$25 per day maximum of $15,000
Failure to report participant on Form 8955-SSA$1 per participant, per day maximum of $5,000
Failure to provide Special Tax Notice$10 per failure up to a maximum of $5,000

New penalty structure:

Failure to file Form 5500$250 per day maximum of $150,000
Failure to report participant on Form 8955-SSA$10 per participant, per day maximum of $50,000
Failure to provide Special Tax Notice$100 per failure up to a maximum of $50,000

Other Retirement Plan Changes Effective for Years Beginning After December 31, 2019

  • Phased retirement changes – defined Benefit Plans can be amended to provide voluntary in-service distributions begin at age 59 ½, down from the current age 62 requirement.
  • Start-up credits – the cap on tax credits that small employers (up to 100 employees) can get for starting up a new retirement plan has gone up from $500 to $5,000.
  • Auto-Enroll credits for small employers – small employers can get an additional $500 tax credit for adopting an automatic enrollment provision.
  • More time to adopt a plan – currently a qualified plan must be adopted by the end of the employer’s tax year to be effective for that year. The new rule will permit a plan to be adopted as late as the due date of the employer’s tax return for the year.
  • Plan annuity provisions – in recognition that defined contribution plans typically do not offer lifetime income streams two changes have been added to encourage in-plan annuity options.
    • A fiduciary safe harbor standard that if followed, would protect plan sponsors from potential liability relating to the selection of an annuity provider.
    • Plans may permit tax-advantaged portability of lifetime income annuity options from one plan to another.
  • 403(b) changes include providing a mechanism for the termination of a 403(b) custodial account and clarification that non-qualified church controlled organizations (e.g. hospitals and schools) can participate in Section 403(b)(9) retirement income accounts.
  • Penalty free distribution for birth or adoption expenses – up to $5,000 could be distributed from a defined contribution or 403(b) plan to cover costs relating to birth or adoption of a child.
  • Special tax penalty relief and income tax treatment for distributions for qualified disaster distributions from qualified plans up to $100,000.  Additionally, plan sponsors can permit the $50,000 participant loan limit to be increased to $100,000 with increased repayment periods for participants that suffered losses in a qualified disaster area.

Other Changes with a Delayed Effective Date

  • Lifetime income disclosure – this provision will require a defined contribution plan to provide all participants with an annual statement that discloses the projected lifetime income stream equivalent of the participant’s account balance.  This requirement will become effective for benefit statements furnished one year after applicable DOL guidance has been issued that will be necessary to provide the prescribed assumptions and explanations that will be used to create this disclosure.
  • Combining 5500 – IRS and DOL have been directed to permit a consolidation of Form 5500 reporting for similar plans. Defined contribution plans with the same trustee, same-named fiduciary and same plan administrator using the same plan year and same plan investments may be combined into one 5500 filing. This is scheduled to begin no later than January 1, 2022, for 2021 calendar plan year filings.

What to Do Now

Obviously the SECURE Act is bringing a lot of changes to retirement plans. Many of the operational aspects to this new retirement legislation will need to be implemented immediately, in particular, tax withholding related items that will change in 2020 will necessitate plan sponsors and their recordkeepers act immediately to review tax withholding and distribution processes. Plans do have until the end of the 2022 plan year to adopt conforming amendments to their documents. The amendment deadline is the 2024 plan year for governmental plans.

If you have any questions about the SECURE Act and this new retirement plan legislation we encourage you to contact the Findley consultant you normally work with, or contact John Lucas at 615.665.5329 or John.Lucas@findley.com.

Published December 23, 2019

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Two of a Kind? Not All 457(b) Plans Are the Same

You may already know there are significant differences between a 457(b) plan sponsored by a governmental entity and a 457(b) plan sponsored by a tax-exempt organization. But do you know what they are? It can be confusing for plan sponsors because the plans are so similar and articles on the subject of 457(b) plans do not always point out the distinctions.

How All 457(b) Plans Are Alike

A 457(b) plan is a deferred compensation plan that permits certain employers or employees to contribute money for retirement on a tax-deferred basis. Internal Revenue Code (Code) Section 402(g) provides the contribution limit (402(g) Limit) which for 2019 is $19,000. Earnings on these contributions are also tax-deferred. A 457(b) plan is not subject to coverage or nondiscrimination testing.

If you are familiar with 401(k) plans, you’ll recognize many of the other common requirements or provisions described below that apply to both tax-exempt and governmental 457(b) plans.

  • Documentation: the plan must be in writing.
  • Catch-up contributions: a participant may be permitted to elect to increase salary reductions for the final three years before reaching normal retirement age up to the lesser of
    1. two times the applicable dollar limit ($38,000 for 2019), or
    2. the applicable dollar limit plus the sum of unused deferrals in prior years provided the prior deferrals were less than the applicable deferral limits (not counting any age 50 catch-up contributions (permitted only in governmental plans)).
  • Deferral election timing: the election to make contributions through salary reduction must be made before the first day of the month in which the compensation is paid or available.
  • 402(g) Limit: employer and employee contributions in the aggregate are measured against the 402(g) Limit.
  • Hardship distributions: these are permitted if the distribution is required as the result of an unforeseeable emergency beyond the participant’s or beneficiary’s control, all other sources of financing have been exhausted and the amount distributed is necessary to satisfy the need (and the tax liability arising from the distribution).
  • Required minimum distributions: Code Section 401(a)(9) rules apply.
  • Distributable events: these include attainment of age 70½, severance from employment, hardships, plan termination, qualified domestic relations orders, and small account distributions (with a minor difference).

How Governmental and Tax-Exempt 457(b) Plans Differ

The differences between a tax-exempt 457(b) plan and a governmental 457(b) plan include:

  • Eligible employees: governmental plans can include any employee or independent contractor who performs services for the employer while tax-exempt plans can only make select management or highly compensated employees eligible.
  • Automatic enrollment: governmental plans may provide for automatic enrollment while tax-exempt plans may not.
  • Roth contributions: governmental plans may provide for the designation of Roth contributions for all or a portion of salary reductions while tax-exempt plans may not permit Roth contributions.
  • Catch-up contributions: governmental plans may permit age 50 catch-up contributions ($6,000 in 2019) while tax-exempt plans may not.
  • Correction of excess deferrals: governmental plans must distribute any excess contribution (plus income) as soon as practicable after the plan determines that an amount is in excess while tax-exempt plans must distribute the excess by April 15 following the close of the taxable year in which the excess deferral was made.
  • Loans: governmental plans may permit loans while tax-exempt plans may not.
  • Contributions to a trust: governmental plans are permitted to contribute to a trust while tax-exempt plans are not.
  • Rollovers: governmental plans may provide for rollovers to other eligible retirement plans (401(k), 403(b), governmental 457(b), and IRAs) while tax-exempt plans may not.
  • Taxation: for governmental plans, taxation is at the time of distribution, while for tax-exempt plans, taxation is at the earlier of when amounts are made available or distributed.
  • Statutory period for correction of plan failures: governmental plans have until the first day of the plan year beginning more than 180 days after notice from the Internal Revenue Service regarding failure to meet applicable requirements while such correction period is not available to tax-exempt plans.
  • Correction programs: a governmental plan can apply for a closing agreement with a proposal to correct failures that will be evaluated under EPCRS standards while such corrections are generally not available to tax-exempt plans.

If you sponsor a 457(b) plan, you may want to review your plan design to make sure it provides the available optional features you want for your employees. In addition, you’ll want to make sure that the plan is compliant as written and in operation.

Questions? Please contact the Findley consultant you regularly work with or Sheila Ninneman at Sheila.Ninneman@findley.com, 216.875.1927.

Posted January 15, 2019

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IRS Issues Proposed Regulations on Hardship Distributions

Just in time for 2019, the IRS has complied with a directive it was given by Congress in the Bipartisan Budget Act of 2018 (BBA 2018) and provided needed guidance on changes to 401(k) hardship withdrawal rules. These changes increase a participant’s access to hardship withdrawals and eliminate some burdensome administrative requirements. The guidance was issued in the form of proposed regulations. However, given the need 401(k) plan sponsors have to address these issues, it is reasonable to assume that the final regulations will not change much. Below is a summary of the guidance.

Deemed Immediate and Heavy Financial Need Safe Harbor

In determining whether a participant has incurred a hardship that would permit a withdrawal from a 401(k) plan, most plans follow the IRS safe harbor rules for determining what constitutes a deemed immediate and financial need. The newly proposed regulations modify this safe harbor list of expenses by:

  • adding “primary beneficiary under the plan” as an individual for whom qualifying medical, educational, and funeral expenses may be incurred. This updates the regulations to include a change made by the Pension Protection Act of 2006 that the IRS did not address in previous guidance.
  • modifying the expense listed in existing regulations that relates to damage to a principal residence that would qualify for a casualty deduction under Code Section 165 to eliminate, for this purpose, the new limitations to casualty loss deduction rules added by the Tax Cuts and Jobs Act, which required that the loss be attributable to a federally declared disaster.
  • adding a new type of expense to the list relating to expenses and losses incurred as a result of certain disasters if the participant’s principal residence or principal place of employment is in a federally declared disaster area.

Special applicability rule. Under a special applicability provision, the revised list of safe harbor expenses may be applied to distributions made on or after a date that is as early as January 1, 2018.

Distribution Necessary to Satisfy Financial Need Safe Harbor

Most 401(k) plans follow the IRS safe harbor rules for determining whether a distribution is necessary to satisfy the participant’s financial need rather than relying on the more complicated facts and circumstances test. Before 2019, IRS guidance provided that plans using this safe harbor had to:

  • require a participant first take out any plan loan that was available, and
  • suspend 401(k) contributions for a period of 6 months after a participant’s hardship withdrawal.

BBA 2018 specifically instructs the IRS to eliminate these two requirements from the safe harbor standard. The IRS responded to this directive by replacing the safe harbor and the facts and circumstances tests with one general standard for determining whether a distribution is necessary to satisfy a participant’s financial need. Under this new general standard:

  • a hardship distribution may not exceed the amount of an employee’s need (including any amounts necessary to pay any federal, state, or local income taxes or penalties reasonably anticipated to result from the distribution);
  • the employee must have obtained other available distributions under the employer’s plans; and
  • the employee must show that he/she has insufficient cash or other liquid assets to satisfy the financial need. A plan administrator may rely on such representation unless the plan administrator has actual knowledge to the contrary. The requirement to obtain this representation only applies to a distribution made on or after January 1, 2020.

Further information on suspensions – Although BBA 2018 makes the elimination of the 6-month hardship suspension effective January 1, 2019, the IRS clearly recognizes the administrative burden that some plans will face to implement system changes. Therefore, the IRS provides plan sponsors some flexibility in implementing the elimination of hardship suspensions as follows:

  • Plans may be amended to eliminate hardship suspensions on or after January 1, 2019.
  • The plan amendment may provide that all suspensions be immediately lifted (including for participants whose hardship suspension began in the second half of 2018). Alternatively, a plan may require that participants under a 6-month suspension have to complete that suspension period.
  • All plans must eliminate the 6-month suspension by January 1, 2020.

Expanded Sources for Hardship Distributions

The proposed regulations expand the sources of contributions that a plan may make available for a hardship withdrawal. After 2019, the amounts available may include QNECs, QMACs, safe harbor contributions, and earnings on all amounts available (including earnings on elective deferrals), regardless of when contributed or earned. This expansion of sources of funds available for hardship withdrawal is not a requirement. Plan sponsors may want to continue to limit the type of contributions available and whether earnings on those contributions are included.

403(b) Plans

The IRS generally extends these new hardship rules to 403(b) plans while noting that BBA 2018 did not actually amend Section 403(b)(11). Since Congress did not change the 403(b) plan rules, the IRS takes the position it has no authority to make certain changes to 403(b) plan rules. This results in a couple of operational differences between 401(k) and 403(b) plans with respect to these hardship changes:

  • Income attributable to 403(b) plans continues to be ineligible for hardship withdrawals; and
  • QNECs and QMACs that are held in a custodial account are not eligible for hardship withdrawal.

Applicability Dates

The proposed regulations generally apply to distributions made in plan years beginning after December 31, 2018. Certain special applicability rules are discussed above for (1) the safe harbor list of expenses and (2) suspensions.

The elimination of suspensions is the only required change made by these regulations and it must be done by January 1, 2020. The other rules that expand access to hardship withdrawals are optional provisions the plan sponsor can choose to change or leave as they are.

Plan Amendments

The IRS expects that if the proposed regulations are finalized as they have been proposed, plan sponsors will need to amend their plans’ hardship distribution provisions. Revenue Procedure 2016-37 specifies the deadline for amending a disqualifying provision. For example, for an individually designed plan that is not a governmental plan, the deadline for amending the plan to reflect a change in qualification requirements is the end of the second calendar year that begins after the issuance of the Required Amendments List that includes the change. A plan provision that is not a disqualifying provision, but is integrally related to a plan provision that is a disqualifying provision, may be amended by the same deadline applicable to a disqualifying provision. The annual Required Amendments List is generally issued each December.

A plan amendment that is related to the final regulations, but does not contain a disqualifying provision, including a plan amendment reflecting (1) the change to Code Section 165 (relating to casualty losses) or (2) the addition of the new safe harbor expense (relating to expenses incurred as a result of certain federally declared disasters), will be treated as integrally related to a disqualifying provision. Therefore, all amendments that relate to the final regulations will have the same amendment deadline.

Proposed Regulations, Subject to Change

This IRS guidance is in the form of proposed regulations that are subject to change. The IRS has requested public comments on the proposed regulations and will schedule a public hearing, if requested in writing by any person that timely submits written comments.

Questions? Contact the Findley consultant you normally work with or John Lucas at john.lucas@findley.com, 615.665.5329.

Posted November 30, 2018

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Reminders of What’s New for Plan Sponsors in 2019

Retirement and health and welfare plan sponsors have a relatively short list of employee benefit changes that begin on or around January 1, 2019. However, some changes were announced so long ago that they could be easily forgotten; here’s a refresher.

For Sponsors of Disability Welfare Plans and Retirement Plans that Provide Disability Benefits

Background

New claims procedures regulations for disability benefits claims, after multiple delays, have finally been set. The Department of Labor (DOL) requires that the new procedures apply to disability claims that arise after April 1, 2018. The rules generally give disability benefit claimants the same level of procedural protections that group health benefit claimants have after the enactment of the Affordable Care Act (ACA). Its aim is to protect disability claimants from conflicts of interest; ensure claimants have an opportunity to respond to evidence and reasoning behind adverse determinations; and increase transparency in claims processing.

What Do Plan Sponsors Need to Do

For most plan sponsors, ERISA claims procedures are described in their summary plan descriptions. That means that the new disability benefit claims procedures require a summary of material modifications. Certain other plan sponsors will want to consider amending their plans to provide that the disability determination under their plan is made by a third party, such as the Social Security Administration or their long-term disability benefits insurer. Plan sponsors are advised to adopt any necessary amendments on or before the last day of the plan year that includes April 2, 2018. For calendar year plans, the amendment deadline is December 31, 2018.

For Sponsors of Retirement Plans

Hardship Withdrawals

Background

Both the December 2017 Tax Cuts and Jobs Act (TCJA) and the February 2018 Bipartisan Budget Act (BBA) made important changes to hardship withdrawals, which can be provided in 401(k), 403(b), and 457(b) retirement plans. The TCJA change made hardship withdrawals more difficult to get for casualty losses, because the damage or loss must be attributable to a federally declared disaster. For more information see our article here. BBA changes generally make hardship withdrawals much more attractive and easier to administer by eliminating certain hurdles for plan participants.

What Changed for Plan Participants

Plan participants no longer need to take the maximum available loan under the plan before requesting a hardship withdrawal for plan years beginning in 2018 (January 1, 2018 for calendar years). Effective on the first day of the applicable plan year beginning in 2019 (January 1, 2019 for calendar year plans), BBA eliminated the rule requiring that employees who take a hardship distribution must cease making salary deferrals for six months. In addition, BBA created a new source of funds for hardship withdrawals— any interest earned on salary deferrals. These hardship withdrawal changes are described here.

What Do Plan Sponsors Need to Do

The TCJA change to hardship withdrawals is an administrative one that impacts internal procedures.  However, BBA changes to hardship withdrawals are likely to require a plan amendment to be adopted on or before the end of the 2019 plan year (December 31, 2019 for calendar year plans), and a summary of material modifications to be issued soon thereafter.

402(f) Special Tax Notices

Background

On September 18, 2018, the Internal Revenue Service (IRS) issued updated model notices to satisfy the requirements of Internal Revenue Code (Code) Section 402(f). The modifications are the result of the TCJA, which extended the time within which a participant can roll over the amount of a plan loan offset to effect a tax-free rollover of the loan offset amount. The new extended period applies to accrued loan amounts that are offset from a participant’s account balance at either plan termination or the termination of employment. A detailed description of these changes and links to the new model notices can be found here.

Defined Benefit Plan Restatements

In March 2018, the IRS released Announcement 2018-15, stating that it intends to issue opinion and advisory letters for preapproved master and prototype (M&P) and volume submitter (VS) defined benefit plans that were restated for plan qualification requirements listed in the 2012 Cumulative List. An employer that wants to use a preapproved document to restate its defined benefit plan will be required to adopt the plan document on or before April 30, 2020.

403(b) Plan Restatements

The deadline to restate preapproved 403(b) M&P and VS plans is March 31, 2020, according to Revenue Procedure 2017-18. 403(b) plans can be sponsored by a tax-exempt 501(c)(3) organization (including a cooperative hospital service organization defined under Code Section 501(c)), a church or church-related organization, and a government entity (but only for its public school employees). For more detailed information, see our article here.

VCP Applications

On September 28, 2018, the IRS issued Revenue Procedure 2018-52, which provides that beginning April 1, 2019, the IRS will accept only electronic submissions to its Voluntary Compliance Program (VCP) under the Employee Plans Compliance Resolution System (EPCRS). The new procedure modifies and supersedes Revenue Procedure 2016-51, which most recently set forth the EPCRS, a comprehensive system for correcting documentary and operational defects in qualified retirement plans. Revenue Procedure 2018-52 provides a 3-month transition period beginning January 1, 2019, during which the IRS will accept either paper or electronic VCP submissions.

2019 Plan Limits

In Notice 2018-83, the IRS issued the cost-of-living adjusted limits for tax-qualified plans. A number of these limits were increased from 2018 levels. For a detailed listing of these limits, see our article here.

For Sponsors of Health Plans

The IRS issued Revenue Procedure 2018-34 in May 2018, which sets the 2019 affordability threshold for the ACA employer mandate at 9.86 percent. Coverage is affordable only if the employee’s contribution or share of the premium for the lowest cost, self-only coverage for which he or she is eligible does not exceed a certain percentage of the employee’s household income (starting at 9.5 percent in 2014, and adjusted for inflation). See our detailed article here.

For Sponsors of High Deductible Health Plans (HDHPs)

In May 2018, the IRS announced in Revenue Procedure 2018-30 the 2019 limits for contributions to Health Savings Accounts (HSAs) and definitional limits for HDHPs. These inflation adjustments are provided for under applicable law. For a more detailed description of the increases, see our article here.

What Do Plan Sponsors Need to Do

Plan sponsors should review their employee benefit plans to determine if any of them are affected by the changes listed above.

Questions?

Please contact the Findley consultant you regularly work with or Sheila Ninneman at Sheila.Ninneman@findley.com or 216.875.1927.

Posted November 12, 2018

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