2024 Q4 Newsletter
Download the summary of Q4 legislative and regulatory updates from RLC.
IRS Notice 2024-63 Gives Guidance on Student Loan Matching Contributions
On August 19, 2024, the IRS released Notice 2024-63, providing guidance under SECURE Act 2.0 on an employee’s Qualified Student Loan Payment (QSLP) matching contributions in 401(k), 403(b), governmental 457(b) and savings incentive match plans for employees (SIMPLE) IRA plans. Among other items, the guidance, written in Q&A format, covers
QSLP qualification requirements,
Payment certification requirements,
Actual deferral percentage (ADP) testing, and
Timing of payments,
Tax year attribution.
The notice applies for plan years beginning after December 31, 2024. For plan years beginning prior to January 1, 2025, plan sponsors may rely on a good faith, reasonable interpretation of Section 110 of SECURE Act 2.0. Further guidance in the form of regulations and a model amendment is expected.
DOL Clarifies Application of 2021 Cybersecurity Guidance
On September 6, 2024, the DOL issued the EBSA’s Compliance Assistance Release No. 2024-01, clarifying that the cybersecurity guidance it issued in April, 2021, applies to all employee benefit plans subject to the Employee Retirement Income Security Act of 1974 (ERISA), including both employee pension benefit plans, (e.g., tax-qualified defined contribution and defined benefit retirement plans), and health and welfare plans. Consequently, employers, plan sponsors, fiduciaries and plan participants of employee pension benefit plans and health and welfare plans should follow the guidance and maintain strong cybersecurity practices.
In addition, the 2024 guidance references the following U.S. Department of Health and Human Services publications which are targeted to help health plans, and their service providers maintain good cybersecurity practices:
Health Industry Cybersecurity Practices
: Managing Threats and Protecting Patients
Technical Volume 1: Cybersecurity Practices for Small Healthcare Organizations
Technical Volume 2: Cybersecurity Practices for Medium and Large Healthcare Organizations
Plan sponsors may also want to consider adding cybersecurity matters as a regular item to their plan committee meeting agendas moving forward, analogous to processes in place with respect to adopting, following, and monitoring the terms of investment policy statements and the like. Further, vendor selection processes may also need to be adapted accordingly.
DOL Celebrates ERISA’s 50th Anniversary with a New Webpage
It was Labor Day 1974 when then-President Gerald Ford signed the Employee Retirement Income Security Act (ERISA) into law to help protect the health, retirement and other benefits of U.S. workers. In honor of ERISA’s 50th anniversary, the Department of Labor, the federal agency charged with enforcing ERISA, launched a website focused on the accomplishments of ERISA through the years. The webpage traces the history of ERISA and its protections of the health, retirement savings and other benefits plans of America’s workers. It also details how the department’s Employee Benefits Security Administration assists retirement plan beneficiaries and their families in claiming their benefits or reporting violations.
IRS Increases Some IRA and Plan Limits for 2025
A November 1, 2024, IRS notice (2024-80) includes the 2025 cost-of-living adjustments (COLAs) for IRA and retirement plan related dollar limits. Key numbers are shown in the tables below. For additional information see IRS News Release IR-2024-285.
IRS Issues Numerous Disaster Relief Notices in Wake of Devastating Events
Taxpayers and plan sponsors need to be aware of the many disaster relief news releases issued by the IRS in the past weeks and months. These releases often provide individuals and business owners more time to file tax returns, make tax payments and complete required reporting such as filing the various versions of IRS Form 5500, Annual Return/Report of Employee Benefits Plan. A cumulative list of these disaster relief notices can be found here Tax Relief in Disaster Situations.
For example, News Release FL-2024-10, issued October 11, 2024, grants tax relief for individuals and businesses in parts of Florida that were affected by Hurricane Milton that began on October 5, 2024. These taxpayers now have until May 1, 2025, to file various federal individual and business tax returns and make tax payments. The notice explains in more detail the specific actions that are affected. This relief also includes the filing of Form 5500 series returns, which are postponed for the affected areas through May 1, 2025, according to the notice.
IRS Provides 403(b) Plan Sponsors with Guidance on Long-Term, Part-Time Employee Rules
IRS Notice 2024-73 provides guidance for ERISA-covered 403(b) plans related to the long-term, part-time (LTPT) coverage rules introduced by SECURE Act 1.0 and updated by SECURE Act 2.0. An ERISA 403(b) plan is one where the employer provides contributions or in some other manner controls the plan. NonERISA 403(b) plans as well as governmental and nonelecting church plans are not subject to the LTPT rules.
Among other items, the notice clarified an ERISA 403(b) plan
Must give any LTPT-qualified employee the ability to make salary deferrals;
May retain an exclusion for part-time employees (e.g., employees who normally work less than 20 hours per week, who do not qualify as ERISA LTPT employees);
May exclude student employees from making elective deferrals; and
May exclude LTPT employees when determining whether the plan satisfies nondiscrimination requirements for matching contributions.
The IRS plans to issue additional guidance for LTPT rules, including proposed regulations for ERISA 403(b) plans. The notice also states the now proposed LTPT regulations for 401(k) plans, when finalized, will apply no earlier than to plan years beginning on or after January 1, 2026.
Legislative Update
As 2024 winds down, so has activity in Congress, but one pressing issue is a spending bill. The current three-month spending bill expires December 20, 2024. The current Congress will (to avoid a shutdown) have to pass legislation (temporary or more long-term) authorizing more spending on or before that date. It is (remotely) possible that some retirement policy legislation may be included in this effort, (e.g., SECURE 2.0 technical corrections).
Looking ahead, the new 119th Congress is scheduled to be sworn in on January 3, 2025, and President-Elect Trump will be sworn into office on January 20, 2025.
Many provisions of the 2017 “Tax Cuts and Jobs Act” (TCJA) are set to expire at the end of 2025, generating a tax increase for many individual taxpayers. The Joint Committee on Taxation estimates that extending current individual tax rules for another 10 years (the “budget window”) would increase “primary deficits” by $3.3 Trillion.
The new, incoming administration will have to reckon with a tax/fiscal challenge: Allow some or all of the TCJA cuts to expire (resulting in increased taxes for many individuals), find some new sources of revenue, or face a significant increase in the federal deficit.
In response, Congress may look for “revenue raisers” in the qualified plan system to offset the cost of continuing/making permanent the TCJA tax cuts, including further “Rothification” of 401(k) contributions, capping total account balances in qualified retirement savings vehicles, and closing the door on back door Roth conversions.
Plan Sponsors Win Two More Forfeiture Decisions
Plaintiffs have filed several cases in the past months claiming the use of 401(k) plan forfeitures to reduce employer contributions, rather than to reduce participant-paid plan expenses, violates the ERISA fiduciary duty to act solely in the best interests of the plan participants. To date, in these cases, we have three decisions granting defendants’ motion to dismiss – Hutchins v. HP Inc., US District Court for the Northern District of California (June 17, 2024), Naylor v. BAE Systems, Inc., US District Court for the Eastern District of Virginia (September 5, 2024) and Dimou v. Thermo Fisher, US District Court for the Southern District of California (September 19, 2024). And two decisions denying defendants’ motion to dismiss – Perez-Cruet v. Qualcomm Incorporated, US District Court for the Southern District of California (May 24, 2024) and in Rodriguez v. Intuit Inc., US District Court for the Northern District of California (August 12, 2024).
Except for Naylor (in which the court found that the plan document mandated the plan use forfeitures to reduce employer contributions), all of these cases involve plan documents that give the plan sponsor/sponsor fiduciaries discretion to use forfeitures either to reduce employer contributions or to pay plan expenses. Bottom line: The courts are divided on what rule should apply in that circumstance.
IRS Notice 2024-77 Addresses SECURE 2.0 Changes to Plan Overpayments
On October 15, 2024, the IRS published Notice 2024-77, providing guidance with respect to SECURE Act 2.0 changes to the treatment of “Inadvertent Benefit Overpayments.” The guidance in the notice applies with respect to overpayments and rollovers (regardless of the date of overpayment), on the date of issue. For overpayments/rollovers prior to that date sponsors/participants may “rely on a good faith, reasonable interpretation” of the statute.
Background
An inadvertent benefit overpayment is a payment that exceeded the amount payable under the terms of the plan or a limitation provided in the Internal Revenue Code (IRC) or regulations, and
Occurs despite the existence of established practices and procedures,
Is not egregious,
Does not relate to the diversion or misuse of plan assets, and
Is not directly or indirectly related to an abusive tax avoidance transaction.
Regarding plan overpayments, SECURE Act 2.0 changes permit 1) plan fiduciaries (subject to certain exceptions) to pursue recoupment/make corrective payments with respect to inadvertent benefit overpayments, and 2) plan participants receiving overpayments (in certain circumstance) to treat them as eligible rollover distributions.
Generally, where recoupment is either not sought or not obtained, the corrective payment previously required under the IRS’s Employee Plans Compliance Resolutions System (EPCRS) no longer applies. The exceptions to this rule include where the payment results in a
Payment that violates a defined benefit plan funding-based benefit restriction (IRC §436),
Compensation limit failure [IRC. §401(a)(17)], or
Contribution/benefit limit failure (IRC §415).
There will also be circumstances in which a corrective payment must be made with respect to a “related error.” The notice provides the following example: If a plan participant received an inadvertent benefit overpayment due to an incorrect allocation of a profit-sharing contribution under a plan, another plan participant may have received a benefit underpayment. In this case, the benefit underpayment would be considered an additional failure in need of correction, which may require a corrective payment.
Recoupment, self-correction still allowed
The new rules, however, still permit a plan to seek recoupment, subject to applicable restrictions under ERISA (e.g., no interest charged, recoupment is not sought from any beneficiary (including a spouse) and limits on reductions of future payments, threats of litigation, and use of collection agencies).
Moreover, a plan may “self-correct” by increasing past benefits if certain requirements are met, including compliance with applicable correction procedures and, provided that the correction does not violate the IRC compensation limit and benefit limits.
Rollovers
Generally, if the plan does not seek recoupment, the overpayment is treated as an eligible rollover distribution (“… if the payment would have been an eligible rollover distribution but for being an overpayment”). This treatment does not apply to an overpayment that is an IRC § 401(a)(17) or 415 failure” (as described previously). Where recoupment is sought, the participant must be notified that any unreturned portion is not eligible for tax-free rollover treatment.
Summary
Notice 2024-77, effective as of October 15, 2024, provides additional guidance on the changes related to how plan sponsors may handle inadvertent benefit overpayments. More guidance is still needed, and interested parties may submit comments on the notice to the IRS through December 16, 2024. Key points of understanding for plan sponsors:
Processes and procedures regarding recoupment/no recoupment of overpayments,
The current correction methods offered under EPRCRS if recoupment is sought,
What restrictions now apply if recoupment is sought, and
If the plan does not seek recoupment, the overpayment is treated as an eligible rollover distribution.