Defined benefit plan

IRS Priority Guidance Plan Update Includes Retirement Items

The IRS has issued its semi-annual update to the agency’s 2019-2020 Priority Guidance Plan, in which it describes guidance projects in the current fiscal year. Many have been on the Priority Guidance Plan for some time. A number of the guidance items deal with retirement savings arrangements, including the following.

  • Final regulations on withholding when payments are made to a non-U.S. address (proposed regulations issued in May 2019)
  • Comprehensive IRA regulations
  • Final regulations updating life expectancy and distribution period tables for required minimum distributions; a notice of proposed rulemaking was issued in November 2019
  • Final hardship distribution regulations (proposed regulations issued November 2018)
  • Guidance on student loan payments and their interplay with qualified retirement plans and 403(b) plans
  • Guidance related to several IRS Tax-Exempt and Government Entities programs, including the EPCRS plan correction program, pre-approved plan program, and determination letter program
  • Regulations on the definition of “governmental plan”
  • Final regulations on normal retirement age under governmental plans (proposed regulations issued January 2016)
  • Regulations on church plans
  • Regulations on aggregation of affiliated service groups (Internal Revenue Code Section (IRC Sec.) 414(m)
  • Final regulations updating minimum-present-value requirements for defined benefit pension plans (proposed regulations issued in November 2016)
  • Regulations updating rules for service credits and vesting (IRC Sec. 411)
  • Hybrid defined benefit plan regulations addressing annuity conversion factors and interest credits


IRS Issues 2020 Cumulative List for Pre-Approved DB Plan Documents

The IRS has issued Notice 2020-14, in which the IRS provides the 2020 Cumulative List of Changes in plan qualification requirements that must be reflected in pre-approved defined benefit (DB) pension plan documents.

The 2020 Cumulative List enumerates specific items that the IRS has identified for review when determining whether a DB plan that is filing for an opinion letter has been properly updated. The IRS notes that the 2020 Cumulative List includes statutory changes enacted and regulatory provisions issued between October 1, 2012, and December 1, 2019.

IRS Updates Determination Letter and VCP Submission Information

The IRS has issued Revenue Procedure (Rev. Proc.) 2020-4, which updates 2019 guidance on determination letter and Voluntary Correction Program (VCP) submission procedures. Changes from the prior year Rev. Proc. 2019-4 include the following.

Section 3.04 is revised to state that a determination letter issued regarding the qualified status of a retirement plan will include a determination on the exempt status of any related trust or custodial accounts (does not include an adopting employer of a pre-approved plan).

Section 3.06(2) is revised to change an “Appeals Office” reference in Rev. Proc. 2019-4 to now read “Internal Revenue Service Office of Appeals (Independent Office of Appeals),” with corresponding changes made throughout Rev. Proc. 2020-4.

Section 6.02 is revised to provide a list of applicable documents that should be submitted to enable the Service to more efficiently process determination letter requests.

Section 8.02 notes that determination letter requests for certain hybrid (defined contribution and defined benefit) plans will be accepted through August 31, 2020, and certain individually designed merged plans on an ongoing basis.

Section 9.07 removes a former cautionary statement that a favorable determination for a plan executing a de-risking of its pension obligations by lump sum distribution does not constitute a determination of federal tax consequences.

Sections 30.07 and 31.03 are revised to note that user fees under VCP must be paid electronically using, and that the Service no longer accepts paper VCP submissions.

Section 31 is revised to update mailing addresses.

Last Minute Funding Action by Congress Sets the Stage for Major Savings and Health Changes

In these final days of the 2019 congressional session, as lawmakers negotiated to avert a shutdown of federal government functions and to authorize spending for the coming fiscal year, a number of tax-advantaged savings and health care-related changes found their way into the legislative mix. The majority are provisions found in legislation passed earlier in 2019 by the House of Representatives, in the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which is legislation that was not taken up by the Senate.

The process is still unfinished. The House of Representatives and Senate must approve the appropriations package, and President Trump must sign it into law.  But indications are that leaders of both parties in both houses of Congress, as well as the Trump administration, are in support of the proposals. Following are key elements of the legislation.


Retirement Plans and Individual Savings

  • Enhances options for multiple employer plans (MEPs), including unrelated employers participating in pooled employer plans (PEPs)
  • Expands provisions for automatic enrollment and automatic contribution increases in 401(k)-type plans
  • Increases the retirement plan start-up tax credit to a maximum of $5,000 per year
  • Provides a new automatic enrollment tax credit
  • Delays required minimum distributions (RMDs) from IRAs and retirement plans to age 72
  • Requires most nonspouse IRA and retirement plan beneficiaries to deplete inherited accounts—and be taxed—within 10 years
  • Permits Traditional IRA contributions at any age
  • Treats certain graduate student taxable stipend and fellowship payments—and certain difficulty-of-care payments, as eligible compensation for IRA contribution purposes
  • Allows earlier entry into employer-sponsored retirement plans by some long-term, less-than-fulltime employees
  • Requires certain retirement plans to provide annual lifetime income estimates
  • Provides a new exemption from the IRA and retirement plan early distribution 10% percent excise tax for births and adoptions
  • Allows lifetime income investments to be rolled over to an IRA or another retirement plan if a current plan option is eliminated
  • Provides a longer period in which an employer may elect to establish a tax-qualified retirement plan
  • Enhances the ability of an employer to adopt a safe harbor plan design for its 401(k) plan
  • Provides an annuity selection safe harbor for those employer retirement plans that offer this investment option
  • Provides nondiscrimination relief for certain defined benefit pension plans closed to new participants
  • Permits in-service distributions at age 59½ to participants in governmental 457(b) plans and certain pension plans
  • Extends to those affected by a qualifying federally-declared disaster the special disaster-related rules for access to and use of retirement funds
  • Broadens the definition of eligible expenses in 529 plans
  • Several other miscellaneous provisions


Health and Welfare

Several tax provisions intended to help fund elements of the Affordable Care Act (ACA)—often referred to as Obamacare—would be repealed. They include the following.

  • Repeals the 40% excise tax (“Cadillac tax”) on certain high-cost employer-provided health insurance plans
  • Repeals the 2.3% excise tax on certain medical devices, which applied to manufacturers, producers, and importers (but not individuals)
  • Repeals an annual fee assessed to health insurance providers based on their market share (suspended for 2019), a fee typically passed on to consumers in the form of higher health insurance premiums


Effective Dates and Required Amending

Complicating the picture is the fact that the effective dates of some changes are mere days away—January 1, 2020—these dates having been retained from the legislation as passed by the House of Representatives in May, 2019. However, wisely included in the legislation is a delayed amendment deadline for employer-sponsored retirement plans. This will allow implementation of changes immediately, with amending for the changes generally by the end of the 2022 plan year (2024 for governmental and collectively-bargained plans).


Monitoring and More Analysis to Come

Watch this News for updates and further analysis as it becomes available.

Age Table for 2020 Valuations in Certain Defined Benefit Plans Posted in Federal Register

Today’s Federal Register contains the official publication of a Pension Benefit Guaranty Corporation (PBGC) retirement age table for use by single-employer defined benefit pension plans that are undergoing distress or involuntary terminations, and have valuation dates in 2020. A pre-publication version of the guidance was announced Friday, December 6. As noted by PBGC, “this table is needed to compute the value of early retirement benefits, and thus the total value of benefits under the plan.”

Senators Propose Reforms to Strengthen Multiemployer (Union) Pension Plans

Senate Finance Committee Chairman Charles Grassley (R-IA) and Senate Health, Education, Labor and Pensions (HELP) Committee Chairman Lamar Alexander (R-TN) have proposed the Multiemployer Pension Recapitalization and Reform Plan, ultimately to be reflected in legislation intended to assist struggling multiemployer (union) pension plans. Currently, only a Technical Explanation—not legislation text—is available.

The objectives, as stated in the Technical Explanation as well as in a Senate news release, include the following.

  • Stabilize plans in immediate danger of failure.
  • Provide a limited infusion of taxpayer dollars.
  • Strengthen the Pension Benefit Guaranty Corporation (PBGC)’s ability to insure the multiemployer system.
  • Put the multiemployer system on a stable path for the long term.
  • Ensure fiscal responsibility.

The bill does not go as far in providing actual funding for struggling pension plans as the Rehabilitation for Multiemployer Pensions Act, also known as the Butch Lewis Act, introduced by Ways and Means Committee Chairman Richard Neal (D-MA) and passed by the House of Representatives in July of this year. That legislation has not been considered in the Senate, but, as passed in the House, proposes the following.

  • Establish a Pension Rehabilitation Administration within the Treasury Department and a related trust fund to make loans to certain union pension plans that are in critical-and-declining status, or insolvent.
  • Enable the Treasury Department to issue bonds to fund the loans described above.
  • Appropriate to the PBGC funds for additional assistance that some plans could qualify for beyond the above-described loans.


PBGC—Seeking Changes to Form 5500 Reporting—Requests OMB Approval for Modifications to the Agency’s Information Collection Authority

The Pension Benefit Guaranty Corporation (PBGC) is requesting that the Office of Management and Budget (OMB) extend approval, with modifications, for the agency to collect information pertaining to retirement plan annual reporting on Form 5500, Annual Return/Report of Employee Benefit Plan.

The PBGC is proposing modifications to the 2020 Form 5500 Schedule R, Retirement Plan Information, and its related instructions. The proposed modifications would affect multiemployer (union) defined benefit pension plans covered by Title IV of ERISA. PBGC is also proposing other minor modifications to the Form 5500 series to improve the accuracy of reported information.

The PBGC is publishing a notice informing the public of its request for OMB approval.  Comments on the request are to be submitted no later than 30 days after publication in the Federal Register, which is currently scheduled for tomorrow, November 13.

2020 Cost-of-Living Adjustments for IRAs and Retirement Plans

The IRS issued Notice 2019-59 containing the 2020 IRA and retirement plan limitations after cost-of-living adjustments (COLAs). Most of the retirement plan limitations increased.


2020 IRA Contribution Limitations

  • Traditional and Roth IRA contributions: $6,000 (unchanged)
  • Traditional and Roth IRA catch-up contributions: $1,000 (not subject to COLAs)
  • IRA deductibility phase-out range for single taxpayers that are active participants in retirement plans: $65,000 to $75,000 (was $64,000 to $74,000 for 2019)
  • IRA deductibility phase-out range for married joint filing taxpayers that are active participants in retirement plans: $104,000 to $124,000 (was $103,000 to $123,000 for 2019)
  • IRA deductibility phase-out range for non-active participants who are married to active participants in retirement plans: $196,000 to $206,000 (was $193,000 to $203,000 for 2019)
  • Roth IRA income limit phase-out range for determining contribution eligibility for married joint filers: $196,000 to $206,000 (was $193,000 to $203,000 for 2019)
  • Roth IRA income limit phase-out range for determining contribution eligibility for single filers and heads-of-households: $124,000 to $139,000 (was $122,000 to $137,000 for 2019)


2020 Retirement Plan Limitations

  • Annual additions under Internal Revenue Code Section (IRC Sec.) 415(c)(1)(A) for defined contribution plans: $57,000 ($56,000 for 2019)
  • Annual additions under IRC Sec. 415(b)(1)(A) for defined benefit pension plans: $230,000 ($225,000 for 2019)
  • Annual IRC Sec. 402(g) deferral limit for 401(k), 403(b), and 457(b) plans: $19,500 ($19,000 for 2019)
  • Catch-up contributions to 401(k), 403(b), and 457(b) plans: $6,500 ($6,000 for 2019)
  • Annual deferral limit for SIMPLE IRA and SIMPLE 401(k) plans: $13,500 ($13,000 for 2019)
  • Catch-up contributions for SIMPLE IRA and SIMPLE 401(k) plans: $3,000 (unchanged)
  • IRC Sec. 401(a)(17) compensation cap: $285,000 ($280,000 for 2019)
  • Highly compensated employee definition income threshold: $130,000 ($125,000 for 2019)
  • Top-heavy determination key employee definition income threshold: $185,000 ($180,000 for 2019)
  • SEP plan employee income threshold for benefit eligibility: $600 (unchanged)


Retirement Savings Tax Credit

Taxpayers who make contributions to IRAs and/or salary deferrals under retirement plans may qualify for an income tax credit if their income is under certain amounts. Contributions of up to $2,000 may be eligible for credits of 10, 20, or 50 percent of the amount contributed. Eligibility is based on income and tax filing status as provided in the instructions for Form 8880, Credit for Qualified Retirement Savings Contributions. The applicable income limits are subject to cost-of-living adjustments as well.

The maximum income thresholds in all categories for this credit will increase for 2020. For 2020, taxpayers with adjusted gross income that exceeds $65,000 for joint filers, $48,750 for head of household, and $32,500 for all other filers will not qualify for a tax credit. See Notice 2019-59 for the specific income limitations based on tax filing status.

PBGC Asks OMB for Authority Pertaining to DB Plan Contribution Failures

The Pension Benefit Guaranty Corporation (PBGC), an agency that provides benefit insurance for participants in certain defined benefit (DB) pension plans, is requesting from the Office of Management and Budget (OMB) the authority to revise a form used to report failures to make required contributions to a plan.

A change that PBGC is proposing would require that when a payment is made to satisfy a missed contribution, the filer must submit documentation of that payment; for example, a copy of the canceled check, or wire transfer documentation. The Federal Register-published PBGC document also addresses ERISA-provided liens intended to safeguard the funding of single-employer DB plans covered by PBGC’s plan termination program.

Comments in response to this PBGC request must be submitted on, or before, January 6, 2020.

PBGC Amends Its Request for Authority to Collect DB Plan Information

The Pension Benefit Guaranty Corporation (PBGC), an agency that provides benefit insurance for participants in certain defined benefit (DB) pension plans, has amended its request for authority to collect information from retirement plan sponsors.

The previously-granted permission request—approved through June 30, 2021—allows PBGC to solicit information from plan sponsors that is pertinent to PBGC’s role as insurer of these plans. Such routinely granted approvals give an agency like PBGC the authority to require a response from recipients—in this case, retirement plan sponsors—to whom an information collection request has been directed.

PBGC is seeking amended authority because the agency has changed the information it wishes to collect. The information relates to PBGC’s risk exposure in the event that an insured DB plan terminates with unsatisfied benefit obligations. Among the items of information being sought is the number of participants in a plan that were already receiving periodic DB benefits and were subsequently offered and elected to receive their plan benefits in a lump sum. This change in the information being sought is claimed to be a reflection of recent IRS guidance.

Comments in response to this PBGC request for amended information collection authority must be submitted to the Office of Management and Budget (OMB) by November 29, 2019.