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[UPDATED] New Year’s Resolution for 403(b) Plan Sponsors

[UPDATED] New Year’s Resolution for 403(b) Plan Sponsors

January 14, 2020

Authored by: Denise Erwin and Sarah Bhagwandin

UPDATE:

The IRS has posted the following information regarding extension of the deadlines for 403(b) plans a(see complete posting here).   The IRS is extending the last day of the initial remedial amendment period for Section 403(b) plans from March 31, 2020, to June 30, 2020. Plan sponsors now have until June 30, 2020, to update their pre-approved and individually designed 403(b) plan documents.

ORIGINAL POST:

Previously we posted on our blog about a deadline looming in the distance for 403(b) plan sponsors to adopt a pre-approved plan document.  Now that 2020 has arrived, the deadline is just around the corner and imminent action is required.

As you may know, if a plan sponsor retroactively adopts a pre-approved plan by the last day of the remedial amendment period on (3/31/2020), it will automatically be deemed to have corrected any form defects in the plan document it previously adopted and will be considered to be in compliance with applicable plan document requirements back to January 1, 2010.

This opportunity is important because although an individually designed plan can be amended to correct any form defects prior to the end of the remedial amendment period, the IRS has opted against establishing a determination letter program for 403(b) plans at this time.  As a result, adoption of a pre-approved plan document is the only way to obtain assurance from the IRS that a 403(b) plan document is fully compliant.

For more background and our suggested Action Steps, see our Read More

IRS Expands Determination Letter Program for Mergers of Qualified Plans Following Corporate Transactions

The IRS recently reversed course on the availability of the determination letter program for merged qualified retirement plans – thereby providing new alternatives for integrating qualified retirement plan benefits in the context of corporate transactions.

Merged Plan Relief:  Rev. Proc. 2019-20, released on May 1, 2019, expands the IRS’ determination letter program for individually designed qualified retirement plans (e.g., defined benefit plans or defined contribution plans) that result from a merger of two or more qualified retirement plans following a corporate merger, acquisition or other similar business transaction (a “Merged Plan”).  The newly expanded program will be available beginning September 1, 2019 and continuing on an ongoing basis.

Eligibility:  To be eligible for the determination letter program:

  • The Merged Plan must be a combination of two or more qualified retirement plans maintained by previously unrelated entities (i.e., entities that are not members of the same controlled group under Section 414 of the Internal Revenue Code);
  • The plan merger must occur no later than the last day of the first plan year that begins after the effective date of the corporate merger, acquisition or other similar business transaction (the “Corporate Transaction”); and
  • A determination letter application for the Merged Plan must be submitted by the last day of the first plan year that begins after the effective date of the plan merger.

Pre-approved or prototype qualified retirement plans are not explicitly covered by the procedure  — additional IRS guidance will be needed to determine the applicability

2019 Qualified Plan Limits Released

The Internal Revenue Service released the 2019 dollar limits for retirement plans, as adjusted under Code Section 415(d). We have summarized the new limits (along with the limits from the last few years) in the chart below.

Type of Limitation

2019 2018 2017 2016 2015 Elective Deferrals (401(k), 403(b), 457(b)(2) and 457(c)(1)) $19,000 $18,500 $18,000 $18,000 $18,000 Section 414(v) Catch-Up Deferrals to 401(k), 403(b), 457(b), or SARSEP Plans (457(b)(3) and 402(g) provide separate catch-up rules to be considered as appropriate) $6,000 $6,000 $6,000 $6,000 $6,000 SIMPLE Salary Deferral $13,000 $12,500 $12,500 $12,500 $12,500 SIMPLE 401(k) or regular SIMPLE plans, Catch-Up Deferrals $3,000 $3,000 $3,000 $3,000 $3,000 415 limit for Defined Benefit Plans $225,000 $220,000 $215,000 $210,000 $210,000 415 limit for Defined Contribution Plans $56,000 $55,000 $54,000 $53,000 $53,000 Annual Compensation Limit $280,000 $275,000 $270,000 $265,000 $265,000 Annual Compensation Limit for Grandfathered Participants in Governmental Plans Which Followed 401(a)(17) Limits (With Indexing) on July 1, 1993  

$415,000  

$405,000  

$400,000  

$395,000  

$395,000 Highly Compensated Employee 414(q)(1)(B) $125,000 $120,000 $120,000 $120,000 $120,000 Key employee in top heavy plan (officer) $180,000 $175,000 $175,000 $170,000 $170,000 Tax Credit ESOP Maximum balance $1,130,000 $1,105,000 $1,080,000 $1,070,000 $1,070,000 Amount for Lengthening of 5-Year ESOP Period $225,000 $220,000 $215,000 $210,000 $210,000 Taxable Wage Base $132,900 $128,400 $127,200 $118,500 $118,500 IRAs for individuals 49 and below $6,000 $5,500 $5,500 $5,500 $5,500 IRAs for individuals 50 and above $7,000 $6,500 $6,500 $6,500 $6,500 FICA Tax for employees and employers 7.65% 7.65%

A Mistake a Day: Top 5 401(k) Compliance Mistakes & Best Practices

Last week, we discussed four of the five most common compliance mistakes made by 401(k) plan administrators and fiduciaries, the potential liability associated with such mistakes, and steps you can take to avoid making them yourself.

On Monday, we discussed failures to timely update plan documents.

On Tuesday, we discussed an SPD’s failure to accurately describe the terms of a plan.

On Wednesday, we discussed a plan’s definition of compensation.

On Thursday, we discussed delinquent contributions.

We hope you enjoyed this refresher on best compliance practices.  For our last post in this five-part series, we discuss a topic that never goes out of style…

Plan Governance

Description

Plan governance generally encompasses the oversight policies and procedures that plans enact to ensure good process and operational compliance. The following discussion addresses two specific aspects of plan governance—those which are among the most commonly neglected.  Fortunately, these requirements for good plan governance are also extremely easy to satisfy.

Potential Liability

Errors stemming from poor plan governance can result in plan operational failures with potential consequences ranging from minor to loss of a plan’s qualified status.  To the extent poor plan governance stems from or results in a fiduciary breach, fiduciaries may be held personally liable.

Examples

Fiduciary Training. Plan fiduciaries should receive regular and thorough training on best practices in plan governance. Common errors resulting from a failure to receive such training include failure to properly establish and engage

A Mistake a Day: Top 5 401(k) Compliance Mistakes & Best Practices

This week, we are discussing the five most common compliance mistakes made by 401(k) plan administrators and fiduciaries, the potential liability associated with such mistakes, and steps you can take to avoid making them yourself.

On Monday, we discussed failures to timely update plan documents.

On Tuesday, we discussed an SPD’s failure to accurately describe the terms of a plan.

On Wednesday, we discussed a plan’s definition of compensation.

In this, our penultimate post, we discuss the most common mistake of all: delinquent contributions.

Delinquent Contributions

Description

Employers are required to contribute employees’ elective deferrals to the plan on the earliest date that the contributions can reasonably be segregated from the employer’s general assets, and in no event later than the fifteenth (15th) business day of the month following the month in which the participant contributions are withheld or received by the employer. The Department of Labor takes the position that this rule requires the employer to deposit elective deferrals into the plan trust as soon as reasonably practicable – which would in virtually all cases be significantly sooner than the above described outside limit. An employer’s deposit history may establish a basis for what is possible. When employers contribute withheld amounts later than the time frame described above, the contributions are considered delinquent.

Potential Liability

When an employer mixes an employee’s contribution to a 401(k) plan with its general assets longer than necessary, it engages in a prohibited transaction. To

A Mistake a Day: Top 5 401(k) Compliance Mistakes & Best Practices

Welcome to the third installment of this series! This week, we are discussing the five most common compliance mistakes made by 401(k) plan administrators and fiduciaries, the potential liability associated with such mistakes, and steps you can take to avoid making them yourself. Each day we will discuss a new compliance mistake. So far, we have discussed failures to timely update plan documents and an SPD’s failure to accurately describe plan terms. Today we discuss a plan’s definition of compensation.

Wrong Definition of Compensation

Description

401(k) plans may use different definitions of compensation for different purposes. For instance, plans may use any definition of compensation for certain purposes, but must use one of two statutory definitions of compensation found in the Internal Revenue Code (“IRC”) for certain other purposes. For example, (i) the IRC § 415 definition of compensation must be used when calculating the employer’s deduction for contributions and determining which employees are considered highly compensated, and (ii)  the IRC § 414 definition of compensation must be used for safe harbor plans and for determining if a plan meets nondiscrimination requirements. An operational failure occurs when the administrator uses a definition of compensation other than the definition specified in the plan documents. Even if the definition used for the calculation is legally permissible, the definition must match the definition contained in the plan’s terms.

Potential Liability

If the error is discovered by the plan sponsor, it may generally be corrected as described below. 

A Mistake a Day: Top 5 401(k) Compliance Mistakes & Best Practices

This week, we are discussing the five most common compliance mistakes made by 401(k) plan administrators and fiduciaries, the potential liability associated with such mistakes, and steps you can take to avoid making them yourself. Each day we will discuss a new compliance mistake. Yesterday, we discussed failures to timely update plan documents. Today, we are discussing an SPD-related failure. Check in through the end of the week for more compliance mistakes!

SPD Fails to Accurately Describe Plan Terms

Description

A Summary Plan Description (“SPD”), by definition, must accurately summarize a plan. This means that all descriptions in the SPD must accurately describe the terms of the underlying plan document.

Potential Liability

If an SPD includes different provisions than the corresponding plan document, a court may enforce the provisions of the SPD rather than those of the plan. The facts that a plaintiff must prove to receive this relief varies from circuit to circuit.

Examples

The plan requires that a participant be employed on the last day of the plan year to receive a matching contribution.  The SPD indicates that participants will receive a matching contribution regardless of whether they are in the employer’s employment on the last day of the year. The SPD does not accurately describe the of plan’s eligibility provisions.

The Fix

Regularly review the SPD for consistency with applicable plan terms and plan operation.

A Mistake a Day: Top 5 401(k) Compliance Mistakes & Best Practices

Mistakes are all too easy to make, but fortunately, they are also easy to prevent! This week, we are discussing the five most common compliance mistakes made by 401(k) plan administrators and fiduciaries, the potential liability associated with such mistakes, and steps you can take to avoid making them yourself. Each day we will discuss a new compliance mistake, so stay tuned.

Failure to Timely Update Plan Document

Description

Statutes and regulations establishing qualification requirements change relatively frequently. Plans must be modified to conform to the requirements as required by each statute and regulation.

Potential Liability

Potential liability will differ based on the statute or regulation in question. In some circumstances, failure to timely adopt legislative and/or regulatory changes may result in disqualification of the plan.

Examples

Most recently, the Department of Labor updated the regulation governing the process for disability claims. The new regulations provide participants with enhanced rights, and require, among other things, that claims administrators provide claimants with more thorough descriptions and information supporting their denial of benefits. If a plan fails to conform to the regulations, claimants will be deemed to have exhausted all of their administrative options immediately, meaning that they may file a lawsuit without following the plan’s disability claims appeal procedures.

The Fix

Most 401(k) sponsors rely on their benefits lawyer, plan provider or plan administrator to keep them apprised of new documentation requirements.  In the absence of such an arrangement, plan sponsors should check on an annual basis to determine whether there

HSA Eligibility for Retirement-Age Individuals

Employers who offer high deductible health insurance plans to their employees typically also offer Health Savings Accounts (“HSAs”). HSAs allow employees to pay for uninsured medical expenses with pre-tax dollars and are set-up under Internal Revenue Code Section 223. HSAs are subject to annual contribution limits—single individuals may contribute up to $3,450 for 2018, families may contribute up to $6,900 for 2018, and individuals over the age of 55 may contribute an extra “catch-up contribution.” In most years, determining an employee’s maximum allowable contribution to an HSA is straightforward—an employee is either covered by a high deductible health plan or not, their spouse or dependent(s) are either covered by a high deductible health plan or not, and the employee is either at least age 55 or younger. However, in the year that an individual turns 65, determining the maximum allowable HSA contribution can become tricky. Read on to learn more about this complicated issue!

Background

HSAs may only be used by “eligible individuals,” as defined in Internal Revenue Code Section 223(c)(1). To qualify as an eligible individual, an individual must be enrolled in a high deductible health insurance plan. In addition, to be an “eligible individual,” an individual may not be enrolled in any other health plan, including Medicare. Eligibility to contribute to an HSA is determined on a month-to-month basis, so if an individual enrolls in any other non-high deductible health plan, that individual ceases being an eligible individual for the HSA in that month and for the remaining

Deadline Looming in the Distance for 403(b) Plans: What Plan Sponsors Should Be Doing Now

Last year when the IRS announced that the initial remedial amendment period for 403(b) plans will end March 31, 2020, the natural reaction to this very important (but rather remote) deadline was to immediately put it on the to-do list, somewhere near the bottom, where it has been languishing ever since.  If this describes your reaction, you are certainly not alone.

We think it is a good time to move this to the front burner and take some action.  As you may recall, 403(b) plan sponsors were required to adopt a written plan document for existing 403(b) plans on or before December 31, 2009.  At the time, there were no pre-approved 403(b) plans and no determination letter program was available for 403(b) plan sponsors to gain assurance that the document satisfied the requirements of section 403(b) and applicable regulations.  In order to provide a system of reliance for 403(b) plans, the IRS announced the commencement of a 403(b) pre-approved plan program and, on March 31, 2017, it issued the first opinion letters and advisory letters for prototype and volume submitter plan documents under the program. If a plan sponsor retroactively adopts a pre-approved plan by the last day of the remedial amendment period, it will automatically be deemed to have corrected any form defects in the plan document it previously adopted and will be considered to be in compliance with applicable plan document requirements back to January 1, 2010.

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