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Documentation Hardship for Hardships (and Participant Loans, Too)

May 22, 2015

Authors

benefitsbclp

Documentation Hardship for Hardships (and Participant Loans, Too)

May 22, 2015

by: benefitsbclp

What is the IRS thinking about when it announces that plan sponsors, even those using a qualified TPA/recordkeeper, should maintain the records for hardship distributions and participant loans?

401(k) plans particularly (although this applies to other types of qualified plans that permit participant loans) have been marketed and promoted to would-be participants as flexible retirement saving arrangements – so flexible that you can take your money back out without a problem either by borrowing it or by taking a hardship distribution. Depending on your perspective, this flexibility may be anathema to the notion of retirement savings, i.e., long-term savings and investing.   America’s 401(k) saving structure is, in this respect, more “flexible” than arrangements in most other countries that have similar plan structures. The unfortunate result of this sort of flexibility is “leakage” – about which officials at Treasury and Labor seem concerned.

So, to beg the obvious question, did

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Florida Stamp Tax

September 26, 2014

Authors

Richard Arenburg

Florida Stamp Tax

September 26, 2014

by: Richard Arenburg

FloridaIf your 401(k) plan maintains a participant loan program, you may discover that you have compliance concerns thanks to a relatively obscure Florida tax statue. 

Under its revenue laws, Florida imposes a document tax on loan transactions that are made, signed, executed, issued, or otherwise transacted in the State.  The Florida Department of Revenue has specifically ruled that 401(k) plan loans are subject to the tax.  The law further provides that no state court may enforce the provisions of a promissory note if the document tax is not paid. 

We believe it would be a challenge to sustain a position that the Florida statute is preempted by ERISA.  A failure to pay the tax, therefore, could mean that a 401(k) plan is extending loans that are not adequately

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Qualified Plan Loans – Repayment Upon Termination of Employment Can Be a Hardship

April 25, 2014

Authors

benefitsbclp

Qualified Plan Loans – Repayment Upon Termination of Employment Can Be a Hardship

April 25, 2014

by: benefitsbclp

The situation involved in Private Letter Ruling 201407027 illustrates that a participant can be caught between a rock and hard place when a qualified plan loan must be repaid upon termination of employment.

Administering qualified plan loan repayments following a participant’s termination of employment can be burdensome for employers.  Most plans provide that a qualified plan loan must be repaid upon termination of employment to avoid a situation in which the employer must arrange for loan repayments other than through payroll deduction.  Some plan recordkeepers provide post-termination loan administration services, but since loan administration errors can be costly and time-consuming to fix, employers tend to prefer requiring repayment upon termination of employment.

A plan loan which satisfies all the requirements under Section 72(p) of the Internal Revenue Code does not cause a taxable event at the time the loan proceeds are distributed from the plan.  In addition,

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Correcting 401(k) Plan Loans Under EPCRS

July 2, 2013

Authors

Denise Erwin and Chris Rylands

Correcting 401(k) Plan Loans Under EPCRS

July 2, 2013

by: Denise Erwin and Chris Rylands

Participant loans from 401(k) plans must satisfy certain rules under section 72(p) of the Internal Revenue Code (the “Code”) to prevent the loan from being treated as a taxable distribution (sometimes called a “deemed distribution”).  The amount of the loan generally cannot exceed 50% of the participant’s vested account balance up to a maximum of $50,000 (with reductions for certain previous outstanding loans), the participant must be required to make level amortized payments at least quarterly, and the loan term may not exceed five years from the date the loan is funded unless the participant uses the loan to purchase his or her primary residence (in which case a longer period from the date of funding is allowed).

It is not uncommon for plan sponsors to discover that one or more of these rules have not been followed in administering the plan.  Failures to follow the terms of

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IRS Audit Trends & Issues

February 25, 2013

Authors

Chris Rylands and Lisa Van Fleet

IRS Audit Trends & Issues

February 25, 2013

by: Chris Rylands and Lisa Van Fleet

Continuing our series of posts reporting on the recent TE/GE meetings, today we focus on the audit trends and issues that the IRS officials in attendance identified.  In addition to providing insight on the IRS’s focus, the list serves as a good compliance checklist for plan sponsors.  Are you making these errors?  If so, you can (and should) fix them now before the IRS comes knocking.

Areas of Focus. At the outset, it’s helpful to know where the IRS is looking for trouble, so you can have some idea where agents are coming from when you get the dreaded audit letter.  The officials at TE/GE gave these insights:

  • Most audits are focused on 3 or 4 particular issues depending on the market segment (i.e., the business of the employer) and the size of the plan (generally less than 100 participants is a small plan while other plans
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Are You Doing a Quarterly Loan Checkup?

February 13, 2013

Authors

Chris Rylands

Are You Doing a Quarterly Loan Checkup?

February 13, 2013

by: Chris Rylands

With a down economy, many employers are seeing an increase in loan requests from retirement plan participants.  With an increase in loan requests comes an increase in loan administrative concerns.  In fact, IRS officials have informally stated that they are seeing an increase both in loan applications and in loan defaults.

One way to help head off administrative issues at the pass is to do a quarterly loan checkup.  Plan sponsors should check with their third party recordkeepers on a quarterly basis to check on the status of any loans for which payment is not current.  Ideally, this checkup should occur a month or six weeks before the end of the calendar quarter to allow time to correct any loans that could inadvertently go into default (such as when a plan sponsor fails to process loan repayment elections due to a payroll error).

Plan sponsors may

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DoL Representative Sheds Light on Enforcement Priorities

February 1, 2013

Authors

benefitsbclp

DoL Representative Sheds Light on Enforcement Priorities

February 1, 2013

by: benefitsbclp

A representative from the Atlanta Regional Office for the Department of Labor recently spoke at an Atlanta Bar Association luncheon and provided some insight into the Employee Benefits Security Administration’s enforcement priorities and some other interesting facts:

  • With regard to the need for fiduciary training that we wrote about previously, the representative confirmed that investigators generally only require proof of training if the plan sponsor/administrator has agreed to receive training as part of a settlement agreement following an audit.  However, they generally will inquire as to whether the plan sponsor/administrator has had fiduciary training as part of a routine audit.
  • The representative also confirmed that EBSA has started to audit for health care reform compliance (at least for the provisions that are currently effective).
  • They are also looking at HIPAA compliance for both plan sponsors and service providers, and particularly HIPAA portability (e.g., creditable
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Update: Is Prime + 1% a Reasonable Interest Rate for Qualified Plan Loans? Fiduciary Diligence is Necessary

January 8, 2013

Authors

benefitsbclp

Update: Is Prime + 1% a Reasonable Interest Rate for Qualified Plan Loans? Fiduciary Diligence is Necessary

January 8, 2013

by: benefitsbclp

As reported by BNA Pension and Benefits Daily on December 19, 2012, an Internal Revenue Service (“IRS”) official again confirmed in a December 18 webcast that the Prime rate + 1% may not be a reasonable interest rate under the Internal Revenue Code prohibited transaction rules which apply to loans from qualified plans. We discussed previous remarks by IRS officials some time ago.

In recent years, plan administrators typically set the interest rate for plan loans as the Prime rate + 1% in effect on the first of the month during which the loan is originated (or a similar set date).  The IRS official indicated that there is no safe harbor under the rules for Prime rate + 1%, Prime rate + 2%, or any other rate.  Instead, plan fiduciaries charged with establishing the rate should periodically perform due diligence to determine prevailing rates

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Is Prime + 1% a Reasonable Interest Rate for Qualified Plan Loans?

September 26, 2011

Authors

benefitsbclp

Is Prime + 1% a Reasonable Interest Rate for Qualified Plan Loans?

September 26, 2011

by: benefitsbclp

In a phone forum held on September 12, 2011, Internal Revenue Service (“IRS”) officials were reported by BNA Pension and Benefits Daily in a September 13, 2011 article by Florence Olsen as indicating that the Prime rate + 1% may not be a reasonable interest rate under the Internal Revenue Code prohibited transaction rules which apply to loans from qualified plans. For corrections and audit purposes, the IRS may be looking to the Prime rate + 2%. In recent years, plan administrators typically set the interest rate for plan loans as the Prime rate + 1% in effect on the first of the month during which the loan is originated (or a similar set date). If a participant can not secure a loan in the open market with an interest rate of Prime + 1%, the IRS official indicated that the Prime rate + 2% may be a

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