The IRS has issued Notice 2019-35, guidance on factors used in certain defined benefit (DB) pension plan minimum funding and present value calculations. Updates include the corporate bond monthly yield curve, spot segment rates used under Internal Revenue Code Section (IRC Sec.) 417(e)(3), and the 24-month average segment rates under IRC Sec. 430(h)(2).
In addition, the notice provides interest rate guidance pertaining to 30-year Treasury securities under IRC Sec. 417(e)(3)(A)(ii)(II), as well as the 30-year Treasury weighted average rate under IRC Sec. 431(c)(6)(E)(ii)(I).
IRC Sec. 417 contains definitions and special rules for minimum survivor annuity requirements in DB plans. IRC Sec. 430 addresses minimum funding standards for single-employer defined benefit plans. IRC Sec. 431 addresses minimum funding standards for multiemployer plans.
The IRS issued Revenue Procedure (Rev. Proc.) 2019-20 providing guidance that describes a limited expansion of the agency’s determination program for retirement plans. An IRS determination letter expresses to the plan sponsor the Service’s opinion regarding the qualified status—the compliance—of the plan’s document. It is not an opinion or affirmation of the plan’s compliance in operation.
Recent Program Changes
In recent years, the IRS determination letter program has moved steadily in the direction of limiting determination letter applications for plans established and operated on pre-approved (prototype or volume submitter) documents. Such plans generally may only apply for an IRS determination at the time of termination. The IRS determination letter program has in practice become limited primarily to individually designed plan documents, with these determinations generally issued at the time a plan is established or is terminated.
New Plan Types Added
The IRS announced the addition of “Plan Mergers” and “Statutory Hybrid Plans” as new categories for which plan sponsors may request determination letters. Specifically, Rev. Proc. 2019-20 describes the following plan types and events that would justify applying for a determination letter at a time other than when the plan is established or terminated.
Individually designed merged plans – Rev. Proc. 2019-20 limits this to the merging of two or more plans of previously unrelated sponsors, in connection with “a corporate merger, acquisition, or other similar business transaction among unrelated entities that each maintained its own plan or plans prior to the plan merger.” Going forward, applications for an IRS determination for such events will be accepted on a continuing basis.
Individually designed “statutory hybrid” plans – These are plans that calculate “accrued benefits by reference to hypothetical account balance or equivalent amounts.” One example is cash balance defined benefit pension plans. Rev. Proc. 2019-20 explains that the most recent remedial amendment cycle for such plans did not include all provisions of final IRS statutory hybrid plan regulations, thus warranting this new application opportunity for existing plans. Applications by these plans will be accepted only from September 1, 2019, through August 31, 2020.
The Department of the Treasury and IRS have released a second quarter update to the 2018-2019 fiscal year Priority Guidance Plan (PGP). The PGP lists items of regulatory guidance that the IRS is—or hopes to be—working on during the fiscal year. A high priority item highlighted in the update is the release of guidance to implement provisions of the Tax Cuts and Jobs Act (TCJA), the tax reform legislation enacted in December of 2017. Some items of guidance have remained on the PGP over several fiscal years.
Following are the pending guidance items related to employee benefits.
- Regulations under Internal Revenue Code Section (IRC Sec.) 401(a)(9) updating life expectancy and distribution period tables for purposes of the required minimum distribution (RMD) rules
- Guidance on hardship distributions from employer-sponsored retirement plans (in response to the Balanced Budget Act of 2018 provisions)
- Guidance on missing retirement plan participants
- Final regulations on minimum present value requirements for defined benefit (DB) pension plans
- Guidance updating regulations on service credit and vesting
- Hybrid DB pension plan interest credit and annuity conversion factor guidance
- Multiple employer plan guidance
- Church plan guidance
- Guidance on Traditional and Roth IRAs, Including contributions and excise taxes
- Affiliated service group guidance
- Additional guidance on lifetime income payments from employer plans and IRAs
- Regulations on deferred vested benefit reporting requirements
- Final regulations on various issues for nonqualified plans subject to IRC Sec. 409A
- Final regulations on “ineligible” nonqualifed plans under IRC Sec. 457(f)
- Regulations for qualified ABLE programs (proposed regulations issued in 2015)
- Updated guidance on use of truncated taxpayer identification numbers (SSNs); proposed regulations issued in 2017
The IRS has updated the agency’s periodically-issued operational compliance (OC) list for employer-sponsored retirement plans. This list identifies the legislative provisions or agency guidance issued during the covered period that plans have been required to comply with in operation.
The updated list covers the years 2016 through 2019, and following are those items of legislation or guidance described in the updated OC.
- Hardship distribution changes due to enactment of the Bipartisan Budget Act of 2018, and subsequent proposed regulations (the OC list confirms IRS informal guidance that the proposed regulations may be relied upon until issued as final)
- Specified disaster relief and resulting retirement plan options
- Final qualified nonelective contribution (QNEC) and qualified matching contribution (QMAC) regulations
- Extensions (several) of temporary nondiscrimination relief for closed defined benefit pension plans
- Extended rollover period for certain retirement plan loan offsets and improper IRS tax levies on participant assets
- Mid-year changes to 401(k) safe harbor plans
- Final regulations on cash balance/hybrid retirement plans
- Final regulations on partial annuity distributions from defined benefit pension plans
- Proposed regulations on normal retirement age in governmental pension plans
- Restrictions on distributions during bankruptcy for collectively-bargained single-employer defined benefit pension plans
- Benefit restrictions for certain defined benefit pension plans of cooperatives and charitable organizations
The IRS released notice Notice 2019-18 that is of importance to defined benefit (DB) pension plans that may be considering an amendment to allow lump sum payments to participants already receiving annuitized (lifetime) payments. Notice 2019-18 declares that the IRS is suspending a previously-announced plan to revise required minimum distribution rules under Treasury Regulation 1.401(a)(9) that govern such benefit changes. Only under limited circumstances are such changes allowed under these regulations.
As background, the IRS points out that a number of sponsors of DBd plans have amended to provide a limited period during which certain retirees may elect to convert their annuities (lifetime income payments) into lump sums. Because the previously-announced plan to revise the governing regulations has been withdrawn, the IRS states that “until further guidance is issued,” the agency will not claim that such plan amendments offering a lump sum payment opportunity violate governing regulations.
Past IRS practice had authorized DB plans to offer these limited lump sum payment opportunities if they had applied for and received a private letter ruling (PLR), or an IRS determination letter on a plan’s qualified status. Notice 2019-18 states that the IRS will no longer issue PLRs on this issue, but does not rule out the option to consider such amendments in a plan’s determination letter filing.
The Pension Benefit Guarantee Corporation’s (PBGC) released final regulations that provide a new table for determining expected retirement ages for participants who are undergoing distress or involuntary termination in single-employer pension plans. The updated table is used to compute the value of early retirement benefits, which are included in the total value of benefits under a plan.
PBGC was created by ERISA to, in part, ensure timely and uninterrupted payments of pension benefits. The final rule replaces an existing table with the new table, and applies for valuations beginning in 2019.
Specifically, the final rules amend Appendix D, Table I-19 of ERISA Section 4044, which sets forth the methods for valuing retirement benefits of terminating single-employer plans covered under ERISA. Guaranteed benefits and benefit liabilities under a plan that is terminating due to distress, or is underfunded and involuntarily terminating, must be valued in accordance with this table.
The PBGC has decided against allowing a public comment period, due to the fact that the final rule takes effect as of January 1, 2019.
A tax bill has emerged from the House Ways and Means Committee, extending certain expiring tax provisions, addressing provisions of 2017 tax reform legislation and several recent disaster events (hurricanes and California wildfires), and proposing additional provisions that would affect tax-advantaged retirement savings arrangements. H.R. 88, titled the “Retirement, Savings, and Other Tax Relief Act of 2018,” is being reported as having bipartisan support.
How the legislation in its current form will be received in the Senate, if passed by the House, remains to be seen, although it is known that there have previously been negotiations on retirement provisions between leaders of both congressional bodies. Control of the House of Representatives will change with the start of the 116th Congress in January 2019, resulting from the November 2018 midterm elections. Leadership of the House Ways and Means Committee—the source of this bill—will shift from Rep. Kevin Brady (R-CA) to a Democratic House leader, widely expected to be Rep. Richard Neal (D-MA).
The following provisions of this legislation would in some manner impact retirement savings arrangements.
- Enhance retirement plan options related to distributions and repayments, plan loans, prorated tax treatment of distributions, etc., for several geographic areas recently affected by hurricanes, wildfires, typhoons, and volcanic eruptions
- Broaden options for employers to participate in multiple employer plans (MEPs) or a similar new design known as “pooled employer plan” (PEP)
- Extend the period within which a 401(k)-type plan may elect a safe harbor plan design
- Make Traditional IRA contributions an option for taxpayers of any age who have earned income
- Exempt $50,000 of aggregate retirement savings from RMD requirement (to be COLA-adjusted)
- Allow graduate student fellowship and stipend payments to qualify as earned income for IRA purposes
- Prohibit credit card-enabled retirement plan loan programs
- Allow retirement plan lifetime income investments to be distributed and rolled over to another accepting retirement arrangement if the plan ceases to offer this investment option
- Allow a higher cap (15 percent) on deferral rates in certain automatic enrollment 401(k) type plans
- Increase the maximum tax credit for small employers that establish retirement plans (maximum of $1,500 per year)
- Provide a tax credit incentive for employers to add automatic enrollment features to their retirement plans
- Allow 403(b)(7) custodial accounts to retain 403(b) status even if the plan is terminated by the sponsoring employer
- Permit recipients of military Ready Reserve compensation to make additional retirement plan salary deferrals
- Allow certain qualified retirement plans to be established through an employer’s tax return deadline, including filing extensions
- Provide nondiscrimination testing relief to certain defined benefit pension plans that are closed to new participants
- Enhance the fiduciary safe harbor for employer selection of lifetime income retirement plan investments
- Require an annual projection of potential lifetime income based on a participant’s retirement plan account balance
- Modify certain defined benefit pension plan insurance premiums paid to the Pension Benefit Guaranty Corporation (PBGC)
- Create a birth or adoption exemption to the 10 percent excise tax on early distributions from retirement plans
The Pension Benefit Guaranty Corporation (PBGC) issued final regulations, published in the October 3, 2018, Federal Register, regarding limitations on guaranteed benefits to be paid to owner-participants by this insuring agency. PBGC provides partial benefits in the event that certain defined benefit (DB) pension plans are unable to pay participants their promised benefits. The guaranteed benefits described in these regulations relate to terminating single-employer DB plans. They specifically address a change from prior law with respect to owners of the businesses sponsoring such terminating plans.
The guidance—first issued as proposed regulations on March 7, 2018—implements changes brought about by the Pension Protection Act of 2006 (PPA). Before PPA, as now, there have been limitations on the benefit guarantees—insurance payments—that are provided by this agency when a plan cannot do so. Note, however, that certain DB plans, including owner-only plans and small plans of certain professional organizations, are not insured by PBGC.
The PBGC-insured benefits of certain owners have restrictions that do not apply to rank-and-file employees. Before PPA, there were benefit limitations that applied to substantial owners, these being defined as a person owning the entire interest in an unincorporated trade or business, or more than 10 percent of a partnership or corporation. PPA changed the applicable definition from substantial owner to “majority owner,” now defined as a person owning the entire interest in an unincorporated trade or business, or more than 50 percent of a partnership or corporation.
The Pension Committee of the American Academy of Actuaries has released what it describes as an “exposure draft” document, which contains proposed standards of practice for actuaries valuing benefits payable as a lump sum from defined benefit (DB) pension plans.
The document notes the rising frequency of lump sum payments from DB plans, and that the amount of a lump sum calculated may vary based on certain market rates used in the calculation. Included is a discussion not only of traditional DB plan designs, but also cash balance and other hybrid plans.
The exposure draft makes clear that it is “not binding upon any actuary and is not a definitive statement of what constitutes generally accepted practice in the area under discussion,” but is being circulated for comments. Comments are to be received by November 15, 2018 (an e-mail address for submitting comments is provided).
The American Academy of Actuaries is a 19,500-member organization that serves the actuarial community, and as noted in this document, sets qualification, practice, and professionalism standards for actuaries in the United States.