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CARES Act Retirement Plan Funding Relief

“With all the recent rule changes, did Congress provide any funding relief for retirement plan sponsors?”   

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Kansas is representative of a common inquiry related to plan funding relief.

Highlights of the Discussion

  • There is some relief for certain defined benefit (DB) plans, and for money purchase pension plans, but not for other types of defined contribution plans. The limited relief is to help sponsors of single employer pension plans handle the “one-two punch” of decreased revenue flows and devalued plan investments.
  • Under the newly enacted Coronavirus Aid, Relief, and Economic Security (CARES) Act, sponsors of single employer pension plans may delay payment of their 2020 contributions until January 1, 2021. This would include quarterly payments due in 2020 as well. (See Section 3608 on p. 133 of the CARES Act.)
  • If a pension plan sponsor delays contributions for 2020, it must increase the amount of each required contribution by any interest accrued during the period between the original due date for the contribution and the payment date, at the effective rate of interest for the plan year which includes such payment date.

Conclusion

The CARES Act included several provisions that affect qualified retirement plans. One such provision gives pension plan sponsors some funding relief for 2020.

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Layoffs and Partial Plan Terminations

“Because of the current economic uncertainty, my client, a small business owner, may have to lay off a sizable portion of her workforce, with the hope of rehiring the individuals sometime down the road. How could this affect the 401(k) plan for the business?”   

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Pennsylvania is representative of a common inquiry related to plan terminations

Highlights of the Discussion

  • Many business owners are in the same unsteady boat as your client right now. It is important for them to consider that when a significant number or percentage of employees who are participating in a business’s qualified plan are terminated and/or are no longer eligible to participate in the plan, a “partial termination” may have occurred in the eyes of the IRS. More simply put, the IRS could view the portion of the plan that covered the terminated employees as closed, while the other portion remains active.
  • Similar to a situation involving a complete plan termination, the IRS requires that all participants covered under the portion of the plan deemed terminated become 100% vested in matching and other employer contributions if the contributions were subject to a vesting schedule [IRC §411(d)(3) and Treasury Regulation 1.411(d)-2]. (Of course, employee salary deferrals cannot be subject to a vesting schedule00so they are always fully vested.)
  • Failure to fully vest the affected participants in their employer contributions to which they are entitled as of the termination date could result in underpayments from the plan when distributions to these individuals occur. These underpayments could, potentially, cause the IRS to disqualify the plan if the error is not corrected. This vesting failure can be corrected using the Employee Plans Compliance Resolution System.
  • Whether a partial termination exists may not be an easy call. The IRS makes it clear that the determination of a partial plan termination is based on the facts and circumstances of the particular scenario [Treasury Regulation § 1.411(d)-2(b)]. However, within Revenue Ruling 2007-43, the IRS provides the following guidance in helping to determine if a partial plan termination has occurred.

 

  1. The IRS presumes there is a partial termination when an employer reduces its workforce (and plan participation) by at least 20%. This presumption is rebuttable, however. For example, if the situation is such that the turnover rate is routine for the employer, that favors a finding that there is no partial termination (See Rev. Ruling 2007-43).
  2. The turnover rate is calculated by dividing employees terminated from employment (vested or unvested) by all participating employees during the “applicable period.”
  3. The applicable period is generally the plan year, but can be deem longer based on facts and circumstances. An example would be if there are a series of related severances of employment the applicable period could be longer than the plan year.
  4. The only severance from employment that is not factored in determining the 20% are those that are out of the employer’s control such as death, disability or retirement.
  5. Partial plan termination can also occur when a plan is amended to exclude a group of employees that were previously covered by the plan or vesting is adversely affected.
  6. In a defined benefit plan, partial plan termination can occur when future benefits are reduced or ceased.

 

  • The IRS adopted the 20% guideline in Rev. Proc. 2007-43 from a 2004 court case Matz v. Household International Tax Reduction Investment Plan, 388 F. 3d 577 (7th Cir. 2004), which, ironically, was dismissed in 2014 after its fifth appeal [Matz v. Household Int’l Tax Reduction Inv. Plan, No. 14-2507 (7th Cir. 2014)]. The greater than 20% presumption threshold still stands under the IRS’s revenue ruling.
  • If a partial termination may be an issue, a plan sponsor may seek an opinion from the IRS as to whether the facts and circumstances amount to a partial termination. The plan sponsor can file, IRS Form 5300, Application for Determination for Employee Benefit Plan with the IRS to request a determination of partial plan termination. According to the Instructions to Form 5300, one should follow the instructions under line 4a for Partial Termination Request.
  • Regarding the question on terminated employees who are later rehired, any new employer contributions to the plan after rehire would be subject to the plan’s vesting schedule. The IRC and regulations merely require full vesting for the amount in the plan as of the date of the partial plan termination. Consequently, if a terminated employee leaves behind his or her plan balance and is later rehired, the plan would have to apply two vesting schedules.

Conclusion

Based on the given facts and circumstances, a company could be deemed to have a partial plan termination. The participants affected by the partial plan termination must become 100% vested upon termination. Plan sponsors should monitor their companies’ turnover rates to ensure they are not experiencing a partial plan termination and, if they are, ensure affected former participants receive proper distributions from the plan.

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Reducing or Suspending 401(k) Safe Harbor Contributions Mid-Year

“My client is a business owner and has a standard 401(k) safe harbor plan.  Under what circumstances, if any, may he reduce or eliminate the company’s mandatory safe harbor contribution during the plan year?”   

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Washington is representative of a common inquiry related to 401(k) safe harbor plans.

Highlights of the Discussion

Under limited circumstances, and according to final Treasury Regulations, a sponsor of a 401(k) safe harbor plan may amend the plan during the current year to reduce or suspend the company’s safe harbor contribution—either the matching or nonelective contribution.

A removal or reduction of a safe harbor contribution mid-year is permitted if the employer either

  1. Is operating under an economic loss for the year (See Internal Revenue Code Section (IRC 412(c)(2)(A);

or

  1. Included a statement in the safe harbor notice given to participants before the start of the plan year that the employer
  • May reduce or suspend contributions mid-year;
  • Will give participants a supplemental notice regarding the reduction or suspension; and
  • Will not reduce or suspend employer contributions until at least 30 days after receipt of the supplemental notice.

Supplemental Notice

If a reduction or suspension will occur, the supplemental notice must explain 1) the consequences of the suspension or reduction of contributions; 2) how participants my change their deferral elections as a result; and 3) when the amendment takes effect.

Other Procedural Requirements

The employer must also

  1. Give participants a reasonable opportunity after they receive the supplemental notice and before the reduction or suspension of employer contributions to change their contribution elections;
  2. Amend the plan to apply the actual deferral percentage (ADP) and/or actual contribution percentage (ACP) Tests for the entire plan year; and
  3. Allocate to the plan any contributions that were promised before the amendment took effect.

Conclusion

With the proper set up, or as a result of economic loss, sponsors of 401(k) safe harbor plans may reduce or suspend employer matching or nonelective safe harbor contributions mid-year.

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403(b) Plan RAP Coming to an End March 31

“Is there some kind of amendment deadline coming up with respect to 403(b) plans?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Ohio is representative of a common inquiry related to 403(b) governing plan documents.

Highlights of the Discussion

Yes, March 31, 2020, is the last day most 403(b) plan sponsors of both 403(b) pre-approved plans and 403(b) individually designed plans have to correct any plan provisions that fail to meet the requirements of Internal Revenue Code Section (IRC §) 403(b) (see Revenue Procedure 2017-18).[1]  Sponsors can use this “remedial amendment period” or RAP to add required provisions or correct defective provisions to ensure the form of the plan is satisfactory.

The correction can be accomplished by

1) Adopting a 403(b) pre-approved plan by March 31, 2020, that has a 2017 opinion or advisory letter; or 2) Amending their individually designed plan by March 31, 2020, to incorporate the corrected language.

The program allows an eligible employer to retroactively correct defects in the form of its written 403(b) plan back to the first day of the plan’s remedial amendment period, which is the later of:

  • January 1, 2010, or
  • the plan’s effective date.

EXAMPLE:

Plan A, adopted a 403(b) effective January 1, 2011, doesn’t contain language limiting participants’ annual additions to the IRC §415(c) limit. No participant has exceeded the 415(c) limit since the start Plan A started (i.e., January 1, 2011).

Because Plan A doesn’t include language for the 415(c) limit, Plan A doesn’t comply with the requirements as to plan form. The plan sponsor must correct the plan’s form by adopting a corrective plan amendment by March 31, 2020. The amendment must be effective retroactively to the start of Plan A’s remedial amendment period, which is January 1, 2011.

For defects in form that occur after March 31, 2020, 403(b) sponsors should follow Revenue Procedure 2019-39. 403(b) plans sponsors who didn’t adopt a written plan before December 31, 2009, can use the 403(b) Voluntary Program Submission Kit to correct this error.

Conclusion

403(b) plan documents must comply with regulations as to their form. If they don’t, plan sponsors must ensure the plan is amended to bring it into compliance. The initial RAP to correct the written form of a 403(b) plan ends March 31, 2020. For errors after this date, follow Rev. Proc. 2019-39.

[1] Note:  Rev. Proc. 2019-39 provides a limited extension of the initial remedial amendment period for certain form defects.

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Missed Deferrals without a QNEC

“Does the IRS always require a plan sponsor to provide a qualified nonelective contribution (QNEC) as a means to correct a plan error where a participant was not given the opportunity to defer into the 401(k) plan when otherwise eligible to do so?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Colorado is representative of a common inquiry related to missed deferral elections.

Highlights of the Discussion

Generally, a QNEC is required to correct a missed deferral election.  However, there are two specific scenarios that do not require the plan sponsor to make a QNEC. They apply when the error is caught early.

The first scenario involves an affirmative election 401(k) or 403(b) plan. A QNEC is not required if the failed deferral election does not go beyond three months from the time it should have been implemented. Under the IRS’s safe harbor correction method, no QNEC is required if the plan satisfies the following conditions.

  1. Correct deferrals begin no later than the first payment of compensation made on or after the last day of the three-month period that begins when the failure first occurred for the affected eligible employee. However, if the affected participant notified the plan sponsor of the failure within the first three months, deferrals must begin after the first payment of compensation made on or after the end of the month after the month of notification.
  2. The plan sponsor provides a notice to the affected eligible employee not later than 45 days after the date on which correct deferrals begin.
  3. If the eligible employee would have been entitled to additional matching contributions had the missed deferrals been made, the plan sponsor must make a corrective matching allocation (adjusted for earnings) on behalf of the employee equal to the matching contributions that would have been required under the terms of the plan as if the missed deferrals had been contributed to the plan.

The second scenario involves an automatic enrollment or automatic escalation plan. This correction applies when there has been a failure to implement an automatic enrollment feature and/or failure to implement an affirmative election for a participant who would otherwise be subject to the automatic enrollment feature. Here, no corrective QNEC is needed for missed deferrals as long as the contribution error does not extend past 9 ½ months after the end of the year (i.e., October 15th for a calendar year plan).  However, if the plan sponsor was notified of the failure within 9 ½ months by the affected eligible employee, correct deferrals must begin no later than the first payment of compensation made on or after the last day of the month after the month of notification. The 45-day notice and matching contribution requirement mentioned above also apply.

Regarding the content of the notice, it must

  1. Give general information regarding the failure;
  2. Affirm that correct contributions to the plan have begun;
  3. Affirm that missed matching contributions have or will be made;
  4. Explain that the participant may increase his or her deferral percentage to make up for the missed deferral opportunity; and
  5. Provide the name of the plan and contact information.

Of course, the plan sponsor would have to implement practices and procedures to avoid the mistake in the future.

For more information on these “caught early” corrections and for correction steps for failures outside of these time frames (where a QNEC would be required), please refer to IRS Revenue Procedure 2019-19, and the 401(k) Plan Fix-It Guide .

Conclusion

There are circumstances under which a plan sponsor may not have to make a QNEC to a 401(k) plan in order to correct a missed deferral opportunity. Plan sponsors should evaluate each missed deferral case carefully in order to apply the appropriate IRS correction method and avoid such failures in the future.

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American Depositary Receipts and Shares

“My client is asking me about ADRs and whether he can invest in them through his 401(k) plan. Can you explain, please?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Indiana is representative of a common inquiry related to 401(k) plan investments.

Highlights of the Discussion

Think of an ADR as similar to a stock certificate that represents ownership of a share in a company. An ADR, which stands for American Depositary Receipt, is a negotiable certificate that represents an ownership interest in American Depositary Shares (ADSs). ADSs are shares of a non-U.S. company that are held by a U.S. depository bank or custodian outside the US, and made available for sale on a US stock exchange or over-the-counter market.

ADRs are registered in the US with the Securities and Exchange Commission (SEC), trade in US dollars and clear through US settlement systems, allowing ADR holders to avoid transacting in a foreign currency. Transactions are generally performed by brokers and other types of investors who are active in foreign securities markets. According to the SEC, the stocks of most foreign companies that trade in the US markets are traded as ADRs.

It is possible that a 401(k) plan could offer the ability to invest in ADRs, however, a plan sponsor must first decide whether such an investment option would be prudent from a fiduciary stand point to offer in the plan and, if so, make sure there is accommodating plan language.

Investors who may be interested in ADRs should learn all they can and consult with a financial advisor regarding specific questions. The SEC has introductory information on ADRs in its Investor Bulletin: American Depositary Receipts.

Conclusion

ADRs represent shares of foreign companies traded in US dollars on US exchanges. It is a popular and streamlined way to invest in non-US companies. For additional background information, please see the following material:

SEC Regulation of American Depositary Receipts

 

 

 

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Boost to Plan Start Up Tax Credit

“Can you explain the recent changes to the tax credit for employers that start new retirement plans?”   

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Colorado is representative of a common inquiry related to tax credits for starting retirement plans.   

Highlights of the Discussion

The Further Consolidated Appropriations Act, 2020 included a provision from the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) that modifies the amount of tax credit a small employer may receive for qualified costs incurred as a result of setting up a new retirement plan for 2020 and later years. Eligible employers (defined later) may be able to qualify for up to a $5,000 tax credit (previously up to $500) for each of the first three years of a plan’s existence.

An eligible employer[1] is one that

  • Had 100 or fewer employees who received at least $5,000 in compensation for the preceding year;
  • Had at least one plan participant who was a nonhighly compensated employee; and
  • In the three tax years before the first year the business is eligible for the credit, the employees were not substantially the same employees who received contributions or accrued benefits in another plan sponsored by the employer, a member of a controlled group, or a predecessor.

The new law increases the credit by changing the calculation of the flat dollar amount limit on the credit to the greater of 1. or 2. below:

  1. $500 OR
  2. The lesser of
  • $250 multiplied by the number of nonhighly compensated employees of the eligible employer who are eligible to participate in the plan OR
  • $5,000.

As a result, for each of the first three years, the credit could be at least $500 and up to $5,000, depending on the number of nonhighly compensated employees covered by the plan. Employers claim the credit using. Form 8881, Credit for Small Employer Pension Plan Startup Costs (to be updated for the increased credit amount).

The term qualified startup costs means any ordinary and necessary expenses of an eligible employer which are paid or incurred in connection with the

  1. Establishment or administration of an eligible employer plan, or
  2. Retirement-related education of employees with respect to such plan.

Eligible plans include an IRC Sec. 401(a) qualified plan, a 403(a) annuity plan, a simplified employee pension (SEP) plan or a savings incentive match plan for employees of small employers (SIMPLE) IRA plan.

The law also creates a separate, new tax credit for the first three years of up to $500 for small employers that add an automatic enrollment feature to a 401(k) or SIMPLE IRA plan.

Conclusion

For 2020 and later years, the incentive for small businesses to establish new retirement plans for their workers has become more lucrative from a tax perspective.

[1] IRC Sec. 45E

 

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SECURE Act Increases Late Filing Penalties

“What are the new higher penalties under the SECURE Act for companies that fail to timely file 401(k) plan reports and notices?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Massachusetts is representative of a common inquiry related to penalties for late plan filings.

Highlights of the Discussion

The Further Consolidated Appropriations Act, 2020 included provisions from the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) that materially increased penalties for plan sponsors that fail to file certain reports and notices in a timely manner. The following penalties apply to filings and notices required to be provided after December 31, 2019.

 

Form or Notice Penalty Assessed for Late Filings after 12/31/2019 Pre-SECURE Act Penalties
Failing to timely file Form 5500[1] Up to $250 per day, not to exceed $150,000 per plan year $25 a day, not to exceed $15,000 per plan year
Failing to timely file Form 5310-A Up to $250 per day, not to exceed $150,000 per plan year $25 a day, not $15,000 per plan year
Failing to file Form 8955-SSA Up to a daily penalty of $10 per participant, not to exceed $50,000 A daily penalty of $1 per participant, not to exceed $5,000
Failing to file Form 5330 The lessor of $435 or 100% of the amount of tax due The lesser of $330 or 100% of the amount due
Failing to file Form 990-T The lessor of $435 or 100% of the amount of tax due The lesser of $330 or 100% of the amount due
Failing to provide income tax withholding notices up to $100 for each failure, not to exceed $50,000 for the calendar year $10 for each failure, not to exceed $5,000

 

Conclusion

Beginning in 2020, plan sponsors face much stiffer IRS penalties for not complying with plan reporting requirements as a result of law changes.

[1] The SECURE Act did not change the DOL’s penalty of up to $2,194 per day for a late Form 5500 filing.

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Returning Contributions under a Mistake of Fact

My client made an excess contribution to his 401(k) plan. A provision in his plan document states, ‘Any contribution made by the Employer because of a mistake of fact must be returned to the Employer within one year of the contribution.’  When can a plan sponsor take back a contribution made to a plan based on a mistake of fact? 

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from California is representative of a common inquiry related to plan errors.

Highlights of the Discussion

The circumstances under which a contribution can be returned timely to a plan sponsor are limited under ERISA Sec. 403(c)(2):

  1. The contribution was made because of a mistake of fact provided it is returned to the employer within one year;[1]
  2. The contribution was made on the condition that the plan is qualified and it is subsequently determined that the plan did not qualify; or
  3. The contribution was made on the condition that it was deductible.

Rev. Rul. 91-4,[2] provides that a qualified pension plan may contain a provision authorizing return of employer contributions made because of a “mistake of fact” as provided in section 403(c)(2)(A) of ERISA.

Focusing on the meaning of mistake of fact, neither the Internal Revenue Code nor ERISA (or regulations there under) define “mistake of fact” for purposes of qualified retirement plans. Through private letter rulings the IRS has revealed it views this exception as “fairly limited.” Consider the following excerpt from IRS Private Letter Ruling (PLR) 9144041:

“Mistake of fact is fairly limited. In general, a misplaced decimal point, an incorrectly written check, or an error in doing a calculation are examples of situations that could be construed as constituting a mistake of fact. What an employer presumed or assumed is not a mistake of fact.”

Plan sponsors have attempted to zero in on the meaning of mistake of fact through the request of private letter rulings. For example, in PLR 201424032, the IRS concluded that an excess contribution made to the plan based on the incorrect asset value was made because of a mistake of fact. An “erroneous actuarial computation” was a mistake of fact in PLR 201228055. A “mistaken belief about the number of participants and beneficiaries” in the plan constituted a mistake of fact in PLR 201839010.

Before correcting an excess contribution to a retirement plan, plan officials should consider all available correction methods, including those outlined in the IRS’s Employee Plans Compliance Resolution System found in Revenue Procedure 2019-19.

Conclusion

While it may be permissible to return an excess employer contribution as a result of a mistake of fact, bear in mind, such mistakes are very narrowly defined by the IRS.

[1] Within six months for a multiemployer plan

[2] Revenue Ruling 91-4 Internal Revenue Service 1991-1 C. B. 57

Section 401.-Qualified Pension, Profit-sharing and Stock Bonus Plans

26 CFR 1.401-2: Impossibility of diversion under the trust instrument.

Reversions; remedial amendments. Circumstances under which reversions of employer contributions to a quali­fied plan are discussed. Rev. Rul. 77-200 superseded and Rev. Rul. 60-276 obsoleted.

Rev. Rul. 91-4

PURPOSE

The purpose of this revenue ruling is to obsolete Rev. Rul. 60-276, 1960-1 C.B. 150, and to supersede Rev. Rul. 77-200, 1977-1 C.B. 98, for reversions occurring on or after December 22, 1987, the date of enact­ment of section 9343 of the Omnibus Budget Reconciliation Act of 1987 (“OBRA 87”), Pub. L. 100-203.

ISSUE

Under what circumstances may a qualified pension, profit-sharing or stock bonus plan permit reversion of employer contributions?

FACTS

A plan permits reversion of em­ployer contributions under the condi­tions described in section 403(c)(2) of the Employee Retirement Income Se­curity Act of 1974 (“ERISA”), Pub. L. 93-406, as amended by section 9343(c) of OBRA 87.

LAW AND ANALYSIS

Section 401(a)(2) of the Internal Revenue Code of 1986 generally re­quires a trust instrument forming part of a pension, profit-sharing or stock bonus plan to prohibit the diversion of corpus or income for purposes other than the exclusive benefit of the employees or their beneficiaries. Sec­tion 403(c)(1) of ERISA contains a similar prohibition against diversion of the assets of a plan.

Section 403(c)(2) of ERISA, for which there is no parallel provision in the Internal Revenue Code, generally provided, prior to its amendment by OBRA 87, that the general prohibi­tion against diversion does not pre­clude the return of a contribution made by an employer to a plan if: (1) the contribution is made by reason of a mistake of fact (section 403(c)(2)(A); (2) the contribution is conditioned on qualification of the plan under the Internal Revenue Code and the plan does not so qualify (section 403(c)(2)(B)); or (3) the con­tribution is conditioned on its deduct­ibility under section 404 of the Code (section 403(c)(2)(C)). The return to the employer of the amount involved must generally be made within one year of the mistaken payment of the contribution, the date of denial of qualification, or disallowance of the deduction.In Rev. Rul. 60-276, the Service held that a provision permitting the reversion of the entire assets of a plan on the failure of the plan to qualify initially under the Code would be allowed. In Rev. Rul. 77-200, the Service held that plan language pro­viding for the return of employer contributions under the circumstances specified in section 403(c)(2)(A) and (C) of ERISA could also be included in a plan intended to qualify under the Internal Revenue Code.

The Tax Court, in Calfee, Halter, & Griswold v. Commissioner, 88 T.C. 641 (1987), held that a plan may qualify under section 401(a) of the Code if it permits reversions under pre-OBRA 87 section 403(c)(2)(B) of ERISA, even if such reversions are not limited to initial qualification of a plan. In reaching this conclusion, the Tax Court assumed that the standards and guidelines in Title I of ERISA were applicable in interpreting the Code.In enacting section 9343 of OBRA 87, Congress legislatively overturned the holding in Calfee, Halter, & Gris­wold. It amended section 403(c)(2)(B) of ERISA to provide for the return of employer contributions under that section only if: (1) the return of the contribution is conditioned on initial qualification of the plan; (2) the plan received an adverse determination with respect to its initial qualification; and (3) the application for determina­tion is made within the time pre­scribed by law for filing the employ­er’s return for the taxable year in which such plan was adopted, or such later date as the Secretary of the Treasury may prescribe. Section 9343 also provided that, except to the ex­tent provided by the Code or the Secretary of the Treasury, Titles I and IV of ERISA are not applicable to interpreting the Code. Both amendments were effective on the date of enactment of OBRA 87, De­cember 22, 1987.

Section 1.401(b)-1 of the Income Tax Regulations provides a remedial amendment period for disqualifying provisions. Any such section 401(b) remedial amendment period is a later date as the Secretary may prescribe for filing the application for determi­nation.

HOLDING

Pursuant to this revenue ruling, language providing for a return of contributions in the circumstances specified in section 403(c)(2)(A), (B) and (C) of ERISA, as amended by OBRA 87, may be included in a plan intended to qualify under the Internal Revenue Code. Thus, plans that are amended to include such language will not fail to satisfy section 401(a)(2) of the Code solely as the result of such an amendment. For example, a plan provision permitting the reversion of the entire assets of the plan on the failure of the plan to qualify initially under the Internal Revenue Code will be allowed only under the circumstances described in section 403(c)(2)(B) of ERISA.The determination of whether a reversion due to a mistake of fact or the disallowance of a deduction with respect to a contribution that was conditioned on its deductibility is made under circumstances specified in section 403(c)(2)(A) and (C) of ERISA, and therefore will not ad­versely affect the qualification of an existing plan, will continue to be made on a case by case basis. In general, such reversions will be per­missible only if the surrounding facts and circumstances indicate that the contribution of the amount that sub­sequently reverts to the employer is attributable to a good faith mistake of fact, or in the case of the disallow­ance of the deduction, a good faith mistake in determining the deductibil­ity of the contribution. A reversion under such circumstances will not be treated as a forfeiture in violation of section 411 (a) of the Code, even if the resulting adjustment is made to the account of a participant that is partly or entirely non-forfeitable.

The maximum amount that may be returned to the employer in the case of a mistake of fact or the disallow­ance of a deduction is the excess of (1) the amount contributed, over, as relevant, (2) (A) the amount that would have been contributed had no mistake of fact occurred, or (B) the amount that would have been con­tributed had the contribution been limited to the amount that is deduct­ible after any disallowance by the Service. Earnings attributable to the excess contribution may not be re­turned to the employer, but losses attributable thereto must reduce the amount to be so returned. Further­more, if the withdrawal of the amount attributable to the mistaken or nondeductible contribution would cause the balance of the individual account of any participant to be reduced to less than the balance which would have been in the account had the mistaken or nondeductible amount not been contributed, then the amount to be returned to the employer must be limited so as to avoid such reduction. In the case of a reversion due to initial disqualifica­tion of a plan, the entire assets of the plan attributable to employer contri­butions may be returned to the em­ployer.

EFFECTIVE DATEPlans have until the end of the section 401(b) remedial amendment period to be amended retroactively to conform with OBRA 87. Operation of a plan in a manner inconsistent with section 403(c)(2)(B) of ERISA, as amended by section 9343 of OBRA 87, on or after December 22, 1987, the effective date of section 9343, will cause the plan to fail to satisfy sec­tion 401 (a) of the Code.

EFFECT ON OTHER REVENUE RULINGS

Rev. Rul. 60-276 is obsoleted. Rev. Rul. 77-200 is superseded for rever­sions of employer contributions ocurring on or after the date of enact­ment of section 9343 of OBRA 87.

 

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SECURE RMDs

“I have a client who has a 401(k) plan and an IRA. She turned age 70½ in 2019. How do the changes to required minimum distribution (RMD) rules affect her?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Minnesota is representative of a common inquiry related to required minimum distributions.

Highlights of the Discussion

The short answer is that she is unaffected by the increase in the age at which RMDs must begin as a result of recent law changes. The increase in the RMD age (from 70 ½ to 72) as enacted under provisions from the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) is effective for individuals turning 70 ½ after December 31, 2019. (See Sec. 114 on page 623 of Further Consolidated Appropriations Act, 2020.)

Because your client turned 70 ½ in 2019, as an IRA owner, her required beginning date (RBD) for taking her first RMD remains April 1, 2020. Her RBD for the RMD due from her 401(k) plan is subject to the specific provisions of the plan, and would be April 1, 2020, if her plan does not include the special language that allows certain participants to delay their RBD until April 1 following the year they retire. The delayed RBD provision that some plans offer allows still-working participants who do not own more than five percent of the business to delay their RBD until April 1 of the year following their retirement.

Keep in mind that a 50 percent penalty tax could apply if a person fails to take his or her RMD on a timely basis.

Conclusion

The new rule that delays a person’s RBD until April 1 following the year he or she turns age 72 applies to distributions required to be made after December 31, 2019, with respect to individuals who attain age 70 ½ after such date.

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