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  • BC Network
    Thursday, October 20, 2016

    old-way-new-wayWith the looming end of the determination letter program as we know it, the IRS has issued an updated Revenue Procedure for the Employee Plans Compliance Resolutions System (EPCRS). Released on September 29, 2016, Rev. Proc. 2016-51 updates the EPCRS procedures, replaces Rev. Proc. 2013-12 and integrates the changes provided in Rev. Proc. 2015-27 and Rev. Proc. 2015-28. The updated revenue procedure is effective January 1, 2017 and its provisions cannot be used until that date. Rev. Proc. 2013-12, as modified by Rev. Proc. 2015-27 and Rev. Proc. 2015-28, should be used for any corrections under the EPCRS for the remainder of 2016. Highlights from the new revenue procedure are outlined below.

    Changes

    • Determination Letter Applications. Determination letter applications are no longer required to be submitted as part of corrections that include plan amendments. The new revenue procedure also clarifies that any compliance statement for a correction through plan amendment will not constitute a determination that the plan amendment satisfies the qualification requirements.
    • Favorable Letter Requirements. A qualified individually designed plan submitted under the Self Correction Program (SCP) will still satisfy the Favorable Letter requirement when correcting significant failures even if its determination letter is out of date.
    • Fees. The Voluntary Correction Program (VCP) fees are now user fees. Effective January 1, 2017 a plan sponsor must refer to the annual Employee Plans user fees revenue procedure to determine the applicable VCP user fees.
    • Model Forms. The model forms for a VCP submission (Forms 14568-A through 14568-I) can now be found on the IRS website.
    • Audit CAP Sanctions. The method used to determine Audit Closing Agreement Program (Audit CAP) sanctions has been revised. Sanctions will no longer be a negotiated percentage of the Maximum Payment Amount (MPA), but will be determined by the IRS on a “facts and circumstances” basis. The MPA will be one factor used to determine a sanction. Generally, sanctions will not be less than VCP fees.
    • Refunds. The IRS will no longer refund half of the user fee if there is disagreement over a proposed correction in an Anonymous Submission.

    Incorporations

    • The provisions of Rev. Proc. 2015-27, which clarify the methods that may be used to correct overpayment failures, modify the SCP for Code Section 415(c) failures to extend eligibility to certain plans with repeated corrections of excess annual additions so long as elective deferrals are returned to affected employees within 9½ months after the end of the plan’s limitation year, and lower the fees for certain VCP submissions, have been incorporated.
    • The provisions of Rev. Proc. 2015-28, which modify EPCRS by adding safe harbor correction methods for employee elective deferral failures in both 401(k) and 403(b) plans, have also been incorporated into Rev. Proc. 2016-51.
    Friday, October 7, 2016

    where-are-youFor many years, the PBGC has been helping reunite missing participants with their benefits under single-employer defined benefit plans. Now, a new PBGC proposed rule may open up the program to missing participants under other terminated plans.

    Under this proposed rule, terminated defined contributions plans may choose to transfer benefits of missing participants to the PBGC or to establish an IRA to receive the transfer and send information to the PBGC about the IRA provider.   The PBGC will attempt to locate the missing participants and add them to a searchable database. The PBGC notes that once the program is established, it may issue guidance making the reporting requirement mandatory for defined contribution plans as authorized under section 4050 of ERISA.

    The PBGC will accept the transfer of accounts of any size. If a plan sponsor chooses to transfer accounts to the PBGC, it must transfer the accounts of all missing participants.  There will be no fee for transfers of $250 or less. For transfers above that amount, a one-time flat fee will apply which the PBGC indicates will not exceed its costs associated with the program.  Initially, the fee has been set at $35.

    This newly-proposed voluntary program for defined contribution plans has certain limitations. For instance, it would only be available to locate missing participants upon plan termination.  It would not be available to locate missing participants for ongoing plans.  For example, the program would not be available to find missing participants in connection with a plan correction under EPCRS.  In addition, although the program would be available to many types of single-employer and multiemployer defined contribution plans, including abandoned plans, it would not be available to governmental plans and church plans.

    The proposed rule also establishes a similar voluntary program for terminated professional service defined benefit plans with 25 or fewer participants and a mandatory program for terminated multiemployer plans covered by title IV of ERISA, similar to the existing program for single-employer defined benefit plans.

    Finally, the proposed rule contains numerous changes to the existing rules. Most notable for defined contribution plans, the proposed rule modifies the criteria for being “missing” to include distributees of defined contribution plans who fail to elect a form or manner of distribution although their whereabouts are known.  The PBGC notes that this change is consistent with existing DOL regulations which currently treat such individuals similarly to individuals who cannot be found for purposes of the safe harbor for terminated defined contribution plans.  For terminating defined benefit plans, it would include distributees subject to mandatory “cash-out” who do not return an election form.  According to the PBGC, it can be difficult to find the benefits of non-responsive distributees after they have been transferred to IRAs.  It hopes to address this problem by bringing non-responsive distributees “into the PBGC fold” with its centralized governmental repository and pension search capability.   Defined benefit plan distributees whose benefits are not subject to a mandatory cash-out provision would only be considered missing if the plan did not know their whereabouts.   In making this distinction, the PBGC indicates that individuals with benefits that are not subject to cashout enjoy rights and features not available to those whose benefits may be cashed out and, absent an election, their benefits will be annuitized, preserving those rights and features.  In addition, for title IV plans the identity of the insurer issuing the annuity must be provided to the PBGC if their whereabouts are unknown.

    Other changes include more detailed requirements for diligent searches for defined benefit plans similar to those already required of defined contribution plans by DOL guidance, simplification of the existing rules and assumptions used for valuing benefits to be transferred to the PBGC, and changes in the defined benefit plan rules for paying benefits to missing participants and their beneficiaries.

    The new rule is generally proposed to be effective for plan termination dates after calendar 2017. In addition to the proposed rule, the PBGC has issued a set of FAQs as well as draft forms with instructions for each of the proposed programs.  Additional information can be found on the PBGC website here.

    Friday, September 23, 2016

    griefWhen the IRS announced that it would virtually eliminate the determination letter program for individually designed retirement plans, many practitioners moved through the classic Kübler-Ross five stages of grief (see the picture at the right).  Some have yet to finish.  In Announcement 2016-32, the IRS requested comments on how these plans can maintain compliance going forward since determination letters are no longer available.

    As a general rule, the IRS used to deny plans the ability to incorporate tax code provisions by reference (rather than reciting them wholesale in the plan), except for a very short list available here.  The IRS is asking if there are additional provisions that would also be appropriate to incorporate by reference.  This would avoid the need to reproduce these provisions wholesale and run the risk of a minor foot fault if the language did not line up.  It would also help avoid the need to update plans for law changes, in some cases.

    Additionally, much to the anger of many practitioners, the IRS has historically sometimes required a plan to include provisions that were not applicable to the plan.  For example, there are special diversification requirements for plans that hold publicly-traded employer stock, yet the IRS has required them even for private companies.  One wonders if the IRS actually observed numerous situations where privately held corporations became public companies and then failed to amend those of their plans that held employer stock.  What a scourge on the individually designed plan world this must have been!  The IRS would like to know if there are other provisions that could possibly be avoided and the likelihood that the plan sponsor will actually amend the plan when the provision becomes applicable.  While there may be a few of these provisions out there, there likely aren’t enough to make a significant difference in the length of individual designed plans or to stem the tide of faulty individually designed plans.

    For those employers who still want the comfort of an IRS letter of some kind, they could bargain with a company that offers a pre-approved plan.  However, there are challenges to switching to a pre-approved prototype or volume submitter plan, and the IRS wants to know about them.  For example, employers with unique plan designs or multiple different benefit formulas may not be able to fit under a particular pre-approved form.  Under the rules applicable to those plans, too much variation from the pre-approved form destroys the ability to rely on the letter and turns the plan into an individually designed plan (which can’t then get a determination letter).

    What might depress practitioners most is that the above areas are the only ones the IRS came up with as possibilities.  For example, it would make sense to let plans apply for a determination letter when there is a plan merger.  The IRS has historically requested the documents of plans that were merged into a plan under determination letter review.  Without allowing this, the IRS will end up not reviewing a plan until it is terminated.  At that time, the Service may be asking for plans that were merged from 20 or more years ago.  That level of recordkeeping would be prohibitive for some plan sponsors.  Additionally, if the IRS found an error at that time, it could be extremely difficult to fix.  Therefore, allowing a complete review of the plan when it is a party to a plan merger would be highly valuable. Additionally, since plans will be permitted to obtain a determination letter on initial adoption, a limited determination approval process might be available to review amendments to the already approved plan rather than the entire plan again.

    The Service will accept comments in writing on or before December 15.  Service employees responsible to draft the rules may also read this post, so feel free to leave your comments below.

    Friday, September 9, 2016

    certified-with-ink-padAs retirement plan professionals know, certain distributions from plans and IRAs to taxpayers can be rolled over to another plan or IRA within 60 days. Of course, sometimes 60 days is just not enough and the IRS recognizes that, having permitted a seemingly innumerable number of private letter rulings granting extensions.  These often occur where a financial advisor gave bad advice or made some kind of mistake or where some tragedy worthy of a blues or country song (or worse) befell the taxpayer that made it impossible to complete the rollover in 60 days.

    The IRS has had a small cottage industry the last decade or so of granting private letter rulings extending the 60-day period for these rollovers.  But now, they’ve decided to let plans and IRAs just take the taxpayer’s word for it.

    Under a new revenue procedure, taxpayers can now self-certify as to the reason that they need more time.  Now, taxpayers can’t just certify for any reason.  They have to have missed the 60-day period because of one or more of the following reasons:

    • An error on the part of the financial institution receiving the rollover or making the distribution
    • The distribution was made in the form of a check and the check was misplaced and never cashed (“I put the check where I knew I’d remember it. It was right next to my keys.”)
    • The distribution was deposited into and remained in an account that the taxpayer mistakenly thought was a retirement plan or IRA (“but this email said that it was an eligible plan and the money would also help the deposed prince of Nigeria…”)
    • The taxpayer’s primary residence was severely damaged (but not a vacation home, it seems)
    • A member of the taxpayer’s family died
    • The taxpayer or a member of his or her family was seriously ill
    • The taxpayer was incarcerated
    • Restrictions were imposed by a foreign country (does not include mandates from the deposed prince of Nigeria)
    • A postal error occurred (“I told them to address it to Santa Claus at the North Pole…”)
    • The distribution was made on account of a tax levy, but the proceeds of the levy were returned
    • The financial institution making the distribution delayed providing information that the receiving plan or IRA needed to complete the rollover, despite the taxpayer’s reasonable efforts to obtain the information (e.g., phone calls, emails, bad reviews on Yelp maybe?)

    There are other conditions too. The taxpayer has to make the contribution as soon as practicable once the identified impediment is no longer holding up the process.  A contribution within 30 days after the issue is resolved is treated as meeting this requirement.

    The good news for plans and IRA custodians is that they can rely on the certification unless they have actual knowledge that the excuse is not real. So they don’t have to have the same lie detector skills as parents or teachers.

    Of course, the IRS also reserves the right to verify this on audit. We are left to wonder how some of these will be verified.  For example, how does the IRS plan to prove that the taxpayer didn’t misplace a check?  Nonetheless, if the IRS finds that the self-certification was inappropriate, taxpayers will be subject to additional taxes and penalties.

    It’s worth noting that some “explanations” still don’t fly, even under this broad relief. Ignorance of the law is still no excuse (“I didn’t know I only had 60 days.”).  Also, an inability to count to 60 properly is not going to be enough to get someone off the hook.

    The IRS plans to modify the Form 5498 (which reports IRA contributions) to report any contributions received after the 60-day deadline, which will help let the IRS know whom to audit.

    For employers, this ruling may result in some questions from their third party administrators. Most rollovers to qualified plans are likely made in direct trustee-to-trustee transfers, which are not a part of this ruling.  Because of that, the questions are likely to be few, but there could be some.  For example, if an employee comes forward with a self-certification that does not clearly fit into the list, but is close, the TPA may request that the plan administrator (which may be the employer or someone there) make a decision about whether the certification is sufficient.  Practically, however, certifications outside this specific list should not be accepted.

    The IRS has provided other resources on this issue as well which are available at the links below:

    – IRS Webpage – Accepting Late Rollover Contributions

    IRS frequently asked questions

    Friday, August 12, 2016

    IRSAs we previously reported, the IRS had said last year that determination letter program for retirement plans would largely be going away. Rev. Proc. 2016-37 includes information with respect to the future of the determination letter program.  As highlighted in a recent IRS webcast, a noteworthy development is that “subject to IRS resources” that post-initial determination letters may be available after 2017 in specified circumstances:

    (1) significant law changes,

    (2) new plan designs, and

    (3) Plan types that can’t convert to a pre-approved format.

    Number 3 means complex plans that do not fit on a pre-approved document may, ‘subject to IRS resources’ as published annually, be able to be submitted for a ruling under the determination letter program.  Therefore, complex individually designed plans may still have hope that the IRS will continue to rule on their qualified status.

    There were two other key points in the webcast.  First, the IRS will publish a “required amendments” list and that employers will have until the end of the second calendar year after the date the list is published to amend their plans.  Second, there will also be an operational compliance list issued annually that will be accessible on the IRS website, not published. The purpose of the operational list is to focus on the operation of the plan prior to the date of adoption of the amendment.  These lists will include information that is prospective only and will not include information from prior annual lists.

    Tuesday, July 5, 2016

    Part-time and full-time job working businessman business man conceptTypically, when a participant receives annuity payments from a defined benefit pension plan where he or she has a basis in the benefit (what Code Section 72 calls an “investment in the contract”), a portion of the payment is treated as a recovery of that basis. Therefore, it is not taxable to the participant.  That portion is determined under the rules of Code Section 72.  The most common way in which an employee has basis in his or her benefit is by making after-tax contributions.  Currently, this is more common in governmental defined benefit plans than other plans.

    However, it was not clear how these basis recovery rules worked in the context of phased retirement distributions. The IRS recently issued Notice 2016-39 to address the treatment of payments made by a qualified defined benefit pension plan to an employee during phased retirement.  Phased retirement is the period during which an employee begins to take distributions of a portion of his or her retirement benefits from a plan while continuing to work on a part-time basis.  During these periods, it may be difficult for the plan to do the typical calculation under Code Section 72.  Additionally, the employee may be continuing to accrue additional benefits, which would further complicate the calculation.

    The Notice provides that if certain conditions are met, the payments will not be considered amounts received as an annuity for purposes of Code Section. This means that, if the employee made after-tax contributions to the plan or otherwise has a basis in his or her benefit, then a portion of the payment will be treated as basis recovery and will be excluded from income using the calculation rules under Code Section 72(e)(8) described in the Notice.

    The Fix

    According to the Notice, any payments received by an employee from an applicable plan will not be treated as received from an annuity if all the following conditions are met:

      1. The employee begins to receive a portion of his or her retirement benefits when he or she enters phased retirement and begins part-time employment;
      2. The employee will not begin receiving his or her full retirement benefits until ceasing employment and commencing full retirement at an indeterminate future date. For this purpose, a date is “indeterminate” as long as it can be changed. Since the employee and employer can always agree to a later date, nearly every date will be indeterminate for this purpose;
      3. The plan’s obligations to the employee are based in part on the employee’s continued part-time employment, which impacts both the duration of the phased retirement benefits and the amount of additional retirement benefits the employee accrues during the phased retirement period. In other words, the plan only pays phased retirement benefits as long as the employee is part-time and the employee’s part-time status affects the employee’s ability to accrue benefits under the plan (although the Notice does not appear to say how it affects the accrued benefit); and
      4. Under the terms of the plan, the employee cannot make an election as to the form of the phased retirement benefit to be paid during phased retirement. Instead, the employee must elect a distribution option at full retirement that applies to the employee’s entire retirement benefit, including the portion that commenced as phased retirement benefits. In other words, the employee’s benefit at full retirement must be reduced by the actuarial equivalent of the amount received during phased retirement.

    Any amounts that are not received as an annuity will be subject to the special basis recovery rules in the Notice. Specifically, the amount excludible from the employee’s gross income will be a portion of each payment, calculated by multiplying the amount of the payment by the ratio of the employee’s investment in the contract (i.e., the employee’s basis) to the present value of the employee’s accrued benefit. The Notice provides that the basis recovery fraction may be fixed at the time payments begin under a phased retirement program. This avoids the need to redo the calculation as the employee makes additional contributions to the plan.

    The IRS also issued Revenue Procedure 2016-36, which provides that this Notice will not apply to amounts received from a non-qualified contract.

    Wednesday, June 15, 2016

    200270748-001The United States Department of Labor recently issued a Final Rule updating the Fair Labor Standards Act (the “FLSA”) that includes an increase in the standard salary level and that will take effect December 1, 2016. Under the FLSA, certain employees may be exempted from overtime pay for working more than 40 hours per week if their job duties primarily involve executive, administrative, or professional duties and their salary is equal to or greater than the required salary levels.

    Among other changes made by the Final Rule, the threshold salary levels have been dramatically increased and will continue to be automatically updated every three years in the future. Prior to the Final Rule, the standard salary level was $455/week or $23,660/year.  As of December 1, 2016, the standard salary level will be $913/week or $47,476/year.  Highly compensated employees are subject to a less stringent job duties test than lower compensated employees; the salary threshold for highly compensated employees was $100,000 and will increase to $134,004.

    The Final Rule also revises prior FLSA regulations by permitting up to ten percent (10%) of the salary thresholds to be met with nondiscretionary bonuses and incentive compensation (including commissions).

    Employers may face many other decisions in addition to whether to increase pay or limit overtime hours as a result of the Final Rule. Many employers offer certain benefits, like long-term disability or paid time off, to employees on the basis of whether the employee is exempt or non-exempt under the FLSA.  As employees’ classifications change, their benefits will change accordingly unless employers decide to make corresponding changes to benefits eligibility.

    Employers will also need to revisit their retirement plans to confirm whether overtime pay is eligible for employer contributions, including matching contributions; if so, employers should plan ahead for increased contributions. Further, if overtime pay is excluded, employers should be aware of potential nondiscrimination testing issues (as a result of non-highly compensated employees becoming newly eligible for and receiving overtime pay).

    Finally, increased overtime costs may require employers to reduce other employee benefits or require greater employee contributions for such benefits to stay on budget for the year. Regardless of its exact impact on your business, the Final Rule is sure to require some changes.  Start planning now; December 1st will be here before you know it!

    Monday, June 6, 2016

    Gavel and ScalesIt was bound to happen. For several years, the plaintiffs’ bar has sued fiduciaries of large 401(k) plans asserting breach of their duties under ERISA by failing to exercise requisite prudence in permitting excessive administrative and investment fees.  It may be that the plaintiffs’ bar has come close to exhausting the low-hanging lineup of potential large plan defendants, and, if a recent case is any indication, the small and medium-sized plan fiduciaries are the next target.  See, Damberg v. LaMettry’s Collision Inc., et al. The allegations in this class action case parallel those that have been successful in the large plan fee dispute cases. Now that the lid is off, small and medium sized plan fiduciaries should be forewarned of the need to employ solid plan governance to avoid, or at least well defend, a suit aimed at them.

    Exceptional plan governance means that, at a minimum, plan sponsors (and designated fiduciaries) should consider the following items to help demonstrate that they are primarily operating their plans to the benefit of participants and their beneficiaries and then to reduce liability exposure for themselves:

    • Understand and exercise procedural prudence – process, process, process
    • Identify plan fiduciaries and know their roles and duties
    • Seek and obtain fiduciary training for all plan fiduciaries
    • Adopt a proper plan committee charter or similar document
    • Appoint fiduciaries and retain service providers prudently and monitor them
      • Know the difference between a 3(16), 3(21) and a 3(38) fiduciary and make prudent decisions with respect to retaining them
      • Utilize a qualified administrative committee of no fewer than three members that meets regularly and memorializes its decisions properly
    • Utilize a corporate trustee/custodian
    • If you adopt an investment policy statement (as you probably should), follow it
    • Understand and properly evaluate plan fees and 408(b)(2) disclosures and services and service contracts
    • Monitor plan administration
    • Memorialize actions taken and the reasons for doing so
    • Retain a qualified independent investment advisor (although it may not make financial sense for small plan sponsors to pay for this service)
      • Engage in periodic comparisons of fees and services being charged for similar plans (RFPs, RFIs, benchmarking)
      • Address participant concerns promptly and, if necessary, seek advice of counsel in responding to participant complaints
    • Understand and evaluate a proper operational structure for your plan
      • Know the difference between a bundled structure and an unbundled one – with a really good record keeper
      • Appreciate the nature of services to be provided
      • Evaluate cost to participants and reasonable of fees for needed services
      • Determine cost that the plan sponsor is willing to share
      • Identify parties that will be making statements regarding the plan and its operation (like the plan’s TPA) and how there is control to avoid misstatements
      • Determine responsibility for keeping plan documents current and confirm that it is ongoing
      • Determine responsibility for claims processing and confirm that it is ongoing
    • Verify that a proper ERISA bond is in place
    • Procure fiduciary insurance
    • Seek assistance of counsel as needed
    • Evaluate the investment platform regularly, and, if a brokerage window is made available, be certain to understand it, how it works, and what its limitations might be
    • Assure 404(c) compliance, if applicable
    • Understand target date funds and how they work in your plan
    • Establish solid internal controls
      • Review current systems to confirm segregated responsibilities and that the IT systems being used for the plan (particularly payroll) are effective
      • Confirm that those maintaining plan records are knowledgeable
      • Confirm “good transfers” regularly
      • Make certain that the proper definition of compensations is being used for example, by reviewing payroll coding against the plan document
      • Be certain someone is responsible to verify data, particularly for nondiscrimination testing

    While this list does not address every possible governance practice, following the applicable items appropriately should result in good plan governance. It will also be of value to your participants by demonstrating that you have their best interests at the forefront of plan operation. Additionally, the result should be better liability protection for you and the other plan fiduciaries. While the list may seem daunting, once you understand each of the steps and implement them, it will become easier and, with regularity, can become second nature.

    Wednesday, March 16, 2016

    Piggy Bank in CrosshairsOne might be led to believe that the current administration is in favor of expanding retirement savings opportunities. After all, the DOL has somewhat apologetically subverted ERISA to allow the States to sponsor employer-based savings plans.  And the President’s recently proposed budget endeavors to provide a national retirement savings program. (See page 135 of the General Explanations of the Administration’s Fiscal Year 2017 Revenue Proposals) So why then would the IRS reverse two decades of regulation that favors cross-tested plans in small businesses, an action that might cause many small employers to terminate their qualified plans or amend them to reduce the employer contribution to employee’s accounts?

    Some background may be in order. Cross-tested defined contribution plans are allowed to test equivalent benefit accrual rate (EBAR) groups separately using the ratio percentage test or the average benefits test. Unlike testing for coverage, application of the average benefits test here does not include testing for a reasonable business classification. This has permitted cross-tested plans to create small rate groups each of which meets the modified average benefits test and permits greater relative nonelective contribution (NEC) amounts for HCEs. Typically, the average benefits test for cross-testing finds that the EBARs for HCEs are the same or less than the EBARs for NHCEs. Notwithstanding this EBAR comparison, this allows for a sizeable difference in nonelective contribution allocation rates that benefit the HCEs who are often older and certainly more highly compensated. To take advantage of this otherwise seeming-to-discriminate structure, the plan must provide a gateway NEC of at least 5% of compensation for all eligible NHCEs, a rather generous employer minimum contribution. This trade-off was seen as a fair differentiation that would allow small business owners the opportunity to “skew” contribution allocation rates in their favor while at the same time providing their employees with a meaningful account addition. This has led to adoption of thousands of cross-tested plans benefitting many NHCEs around the country.

    The proposed rule upends the trade-off. By adding the reasonable business classification requirement to the average benefits test for cross-testing purposes (and, of course, leaving the gateway contribution in place), the IRS, in proposed regulation §1.401(a)(4)-13, will force many cross-tested plans to use the ratio percentage test at a far greater cost since the small rate group approach will be eliminated. That will require an increase in the EBARs for the NHCEs in order for a larger rate group to pass the ratio percentage test if the EBAR for the specified HCE is static. That will require a greater NEC for NHCEs, an increased cost that many small businesses simply cannot afford or will not want to contribute for other business reasons (like the high cost of health insurance). And the average benefits test will not be palatable since small rate groups that often include only one NHCE will not be based on a reasonable business classification. A reasonable business classification is based on “all the facts and circumstances . . ., is reasonable and is established under objective business criteria that identify the category of employees who benefit under the plan. Reasonable classifications generally include specified job categories, nature of compensation (i.e., salaried or hourly), geographic location, and similar bona fide business criteria. An enumeration of employees by name or other specific criteria having substantially the same effect as enumeration by name is not considered a reasonable classification.” Treas. Reg. §1.410(b)-4(b). Of course, a “facts and circumstances” test often presents an unknown, one that small businesses are not likely to embrace.

    So, why, after all these years, would the IRS change the rule to make it more expensive to sponsor a cross-tested plan, possibly causing many small employers to amend their plans to eliminate NECs or even terminate their plans? The answer may lie in looking at who most adopts these plans. Although there are no available statistics, it is commonly understood that many, possibly the majority of, cross-tested plans have been adopted by professional practices including those dastardly doctors and lawyers, seemingly high earners that the IRS may believe want nothing more than to take advantage of their employees. If the rule is finalized, the affect will likely be a reduction in the size of employer contributions to the accounts of those NHCEs fortunate enough to be participants in cross-tested plans. The impact of the new rule would seem to be contrary to the policy goal of expanding coverage for NHCEs. When looking at annual contribution limits under current law and the President’s goal of limiting the size of a tax-favored account (see the Proposal beginning on page 167 of the General Explanations of the Administration’s Fiscal Year 2017 Revenue Proposals) that would prevent the doctors and lawyers from getting a perceived too large a share of the tax advantage, it doesn’t seem to make policy sense to disrupt a plan structure that provides the gateway contribution for NHCEs.

    Update: If you want to contact Treasury or your Congressional representative to tell them what you think of this change, you can go to http://savemyplan.org/.

    Monday, March 14, 2016

    Missing ParticipantThe Department of Labor (“DOL”) has recently implemented an initiative to investigate the manner in which defined benefit plans of large employers comply with the required minimum distribution rules set forth in Section 401(a)(9) of the Internal Revenue Code (“Code”). The initiative is focused on the extent to which large employers have processes in place to (i) locate missing plan participants, (ii) inform deferred vested participants that a benefit is payable, and (iii) commence benefit payments in a timely fashion by each participant’s “required beginning date” (generally, the April 1 following the later of the calendar year in which the participant reaches age 70½ or the calendar year in which the participant terminates employment).

    In light of the DOL’s audit initiative, employers will want to assure that they have procedures in place to (i) locate missing plan participants, (ii) inform terminated vested participants regarding their right to elect benefits, and (iii) commence benefit payments on or before each participant’s required beginning date. In addition, employers will want to confirm that such procedures are consistently followed in practice, and that documentary evidence regarding compliance is being maintained and preserved. For example, employers will want to retain evidence of all certified mailings to terminated vested participants and lost participants, as well as efforts made through locator services to locate lost participants.

    Outside of audit concerns, implementing and consistently following such procedures may help to minimize the risk that participants will be faced with excise taxes for not having their required minimum distributions timely distributed. Under Section 4974 of the Code, any participant who is not paid his or her required minimum distribution for a given year may be liable for an excise tax equal to 50% of amount that should have been paid out as a required minimum distribution for the year. Although this excise tax has been around for quite some time, it may be (unwelcome) news to participants who are past their required beginning dates. If, after implementing procedures, it is determined that there are participants who are delinquent on their required minimum distributions, an employer may be able to correct these missed distributions through the IRS’s Employee Plans Compliance Resolution System (“EPRCS”) and have the excise tax waived by the IRS.