Defined contribution plan

DOL Increases Civil Penalties for Certain Plan Failures

The Department of Labor recently issued a pre-publication version of a final rule containing several 2019 inflation-adjusted penalty amounts for certain failures associated with qualified retirement plans. The pre-publication version is for informational purposes only and the final rule will not be effective until published in the Federal Register. Publication of the final rule has been delayed due to a lapse in appropriations funding for certain government agencies, including the Office of the Federal Register.

The following increased penalty amounts will apply to any penalties assessed after the final rule’s effective date.

  • Failure to properly file a plan annual report (Form 5500 series): $2,194, per day
  • Failure to properly provide a plan black-out notice, or notice of right to divest employer securities (each recipient being a separate failure): $139, per day
  • Failure to provide DOL-requested documents: $156 (not to exceed $1,566 per request), per day
  • Failure to properly provide benefit statements and maintain records vis-à-vis former participants and beneficiaries: $30 per required statement
  • Failure of a fiduciary to comply with the prohibition on certain types of distributions from defined benefit pension plans with certain liquidity shortfalls; maximum penalty: $16,915 (penalty will be the amount of any distribution, if less)
  • Failure of a fiduciary to provide notice to participants and beneficiaries of the above-described distribution restrictions for certain plans with liquidity shortfalls; per violation per day: $1,736

These adjustments for 2019 are made under the authority of the Federal Civil Penalties Inflation Adjustment Act.


2019 Form 8950 Instructions Updated to Match New EPCRS Guidance

The IRS has released a January 2019 version of the Instructions for Form 8950, Application for Voluntary Correction Program (VCP) Under the Employee Plans Compliance Resolution System (EPCRS).

This form is used by retirement plans that have elected to apply to the IRS requesting written approval of a correction under VCP. With the release of Revenue Procedure 2018-52 early in October, the IRS updated the EPCRS to require that, as of April 1, 2019, all VCP submissions (including Form 8950) and payments must be made electronically at the pay.gov website.


IRS Releases 2019 Form 1099-R and 5498 Reporting Instruction

The IRS has released the 2019 Instructions for Forms 1099-R and 5498. These detailed instructions describe the reporting requirements for IRA and employer-sponsored retirement plan distributions, IRA contributions, rollovers, conversions, recharacterizations, and fair market values.

This follows the 2019 Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., and 2019 Form 5498, IRA Contribution Information, release earlier this month.

In addition to updating years, deadlines, figures, and guidance references, here are a few notable changes.

  • Information on how to report distributions and late rollovers (post 60-day rollovers) of retirement plan loan offset amounts that result from severance from employment or retirement plan termination.
  • Information on how to report IRA payments to state unclaimed property funds (IRA escheatment) on Form 1099-R, applicable on or after January 1, 2019.
  • A note that Forms 1099-R and 5498 can now be completed online to satisfy required reporting to recipients.

Comprehensive Retirement Savings Enhancement Bill Introduced

Senators Rob Portman (R-OH) and Ben Cardin (D-MD) have announced joint sponsorship of legislation with retirement plan implications: the Retirement Security and Savings Act of 2018 (yet unnumbered). This bill is their most comprehensive joint legislative effort since teaming up to help advance and enact retirement elements of the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Pension Protection Act of 2006.

A news release issued by Sen. Portman’s office acknowledged that this legislation is intended to establish “a foundation for a broader bipartisan, bicameral retirement policy debate in the next Congress” (2019). The news release further notes that “[t]he senators will continue their efforts to improve this legislation.” It also identifies a wide spectrum of interest groups and retirement industry players whose support the senators claim to have.

Following is a high-level, preliminary summary of this bill’s provisions.

  • Create a new automatic-enrollment/automatic-escalation safe harbor for 401(k)-type plans with higher contribution levels
  • Provide a small employer tax credit for implementing automatic enrollment
  • Simplify participant notices in automatic-enrollment type plans
  • Liberalize the saver credit for contributions to employer-sponsored plans and IRAs, and make it refundable and payable to a retirement account
  • Liberalize employer plan eligibility rules for less-than-full-time workers
  • Apply certain retirement plan nondiscrimination tests (e.g., top-heavy) separately to part-time employees
  • Allow nonspouse retirement account beneficiaries to do indirect (60-day) rollovers to inherited IRAs
  • Exempt small aggregate retirement balances ($100,000 or less) from required minimum distributions (RMDs)
  • Increase the RMD age in stages to age 75
  • Reduce excise tax for RMD failures from 50 percent to 25 percent, and under certain circumstances to as low as 10 percent
  • Reduce, under certain circumstances, the excise tax for IRA excess contributions from six percent to three percent
  • Exempt earnings on timely-removed IRA excess contributions from the 10 percent excise tax on early (pre-59½) distributions
  • Modernize the mortality tables that dictate RMD amounts
  • Enhance the small employer tax credit for establishing a retirement plan
  • Provide an employer tax credit for implementing automatic employee re-enrollment every three years
  • Treat certain student loan repayments as qualifying for employer matching contributions to a retirement plan
  • Treat employer-provided retirement planning services received in lieu of compensation as nontaxable
  • Allow an employer to make additional nonelective contributions to SIMPLE IRA plans
  • Allow self-correction of more inadvertent retirement plan operational failures
  • Expand the investments suitable for 403(b)(7) custodial accounts
  • Allow “de minimis” incentives to employees to contribute deferrals to certain employer-sponsored plans (without being considered to violate the contingent benefit rule)
  • Provide a second, higher catch-up deferral amount for those contributing at age 60 or older (current basic catch-up eligibility begins at age 50)
  • Raise the maximum qualifying longevity annuity contract (QLAC) contribution amount (amount excludable from RMDs) from $125,000 to $200,000
  • Allow certain annuities that feature accelerating payments to satisfy RMD requirements
  • Enhance the ability to partially annuitize retirement benefits
  • Authorize a study and report to Congress on current reporting and disclosure requirements
  • Consolidate certain defined contribution retirement plan notices
  • Simplify retirement plan distribution notice requirements
  • Exempt retirement plans from required recoupment of inadvertent overpayments to participants, and legitimize the rollover of such amounts
  • Allow custodial accounts of terminating 403(b)(7) plans to remain subject to 403(b)(7) rules, rather than requiring distribution from the account to the owner
  • Allow greater flexibility to use base pay for determining retirement benefits (excluding certain overtime pay)
  • Allow Roth-type deferral contributions to be made to SIMPLE IRA plans
  • Permit an employer to apply catch-up deferral eligibility requirements separately to legitimate separate lines of business
  • Liberalize the substantially equal periodic payment rules to allow transfers or rollovers between certain qualified plans if net periodic distributions (e.g., annual) comply with the distribution schedule
  • Enhance the ability of terminating employees to contribute payments for accumulated sick leave, vacation pay, severance or back pay to a deferral-type retirement plan
  • Permit the merger or transfer of plan assets from qualified retirement plans into 403(b) plans
  • Exempt designated Roth accounts in employer-sponsored plans (e.g., Roth 401(k), Roth 403(b)) from RMD requirements
  • Extend the qualified charitable distribution exemption from taxation to include SEP, SIMPLE IRA, qualified retirement, 403(b), and governmental 457(b) plans
  • Permit rollovers from Roth IRAs to employer-sponsored plans, with directive to the Secretary of the Treasury to modify the regulations to permit
  • Permit a spouse beneficiary of an employer-sponsored retirement plan account to elect to be treated as the employee for RMD purposes
  • Address certain interest crediting rates, mortality rates, and PBGC premiums for defined benefit plans

It is likely that the concepts in this bill could influence legislative action in 2019 rather than in the soon-to-end 2018 session of the 115th Congress. After all, this legislation is being introduced against a backdrop of legislative uncertainty as Congress prepares to conclude its 2018 session with a substantially different cast of senators and representatives to convene the 116th Congress in January 2019.

Also looming over the completion of legislative business before the holiday recess is the threat of a partial government shutdown when funding for multiple government functions expires today, December 21. While temporary funding by way of a continuing resolution through February was considered and approved by the Senate, there is significant uncertainty over the ability of Congress and President Trump to reach an agreement that would enable this continued government funding.

Regardless, there appears to be a growing readiness on the part of Congress to consider comprehensive retirement savings reform and enhancement, as indicated by the multitude of bills in the 2018 session with retirement elements. For that reason alone, the Retirement Security and Savings Act of 2018 merits a detailed study for all of its potential implications.

 

 


Bill Would Allow Matching Contributions on Student Loan Payments

The Retirement Parity for Student Loans Act (yet unnumbered), introduced by Senators Ron Wyden (D-OR) and Ben Cardin (D-MD), would allow employers to make contributions to 401(k), 403(b), and SIMPLE IRA plans in amounts having a matching relationship to an employee’s student loan debt repayments.

The legislation follows and may in part be a consequence of an August 2018 IRS private letter ruling (PLR) that addressed an employer’s request to make certain retirement plan contributions based on employees’ student loan debt repayments. While some in the industry were confused as to how such contributions would be treated for retirement plan purposes, the PLR’s facts and circumstances made clear that because such contributions were not matched to employee retirement contributions, they were not matching contributions in the traditional retirement plan sense. Such contributions, according to the PLR, could be made to the retirement accounts of qualifying employees as employer contributions of another type (e.g., profit sharing contributions) if plan design permitted, and otherwise-required nondiscrimination testing for the plan could be satisfied.

Senators Wyden’s and Cardin’s bill is intended to make this option broadly available to employers whose employees may be repaying student loan debt. Under the Retirement Parity for Student Loans Act, 401(k), 403(b), and SIMPLE IRA plans—all of which permit salary deferrals by participating employees—could allow employer contributions based on employees’ student loan repayments without special plan design conditions or special IRS approval. While such amounts would not actually match an employee’s deferrals into the 401(k), 403(b), or SIMPLE IRA plan, such employer-paid amounts could be contributed to such plans using their regular matching contribution formula.

Following are some of the bill’s key provisions.

  • Only employees’ higher education loan repayments (not loans for private secondary or elementary expenses) would qualify for such employer contributions.
  • Employer contributions matched to employee student loan debt repayments could not exceed the annual deferral limit appropriate to the employer’s plan (e.g., 401(k) vs. SIMPLE IRA plan deferral limit)—including catch-up contributions, reduced by such employee’s elective deferrals into the retirement plan; all amounts together must not exceed the employee’s compensation.
  • Only employees eligible to defer into the employer’s retirement plan may receive student loan matching contributions.
  • All employees who are eligible to receive retirement plan matching contributions must be eligible to receive student loan matching contributions.
  • For purposes of satisfying nondiscrimination requirements in providing retirement plan benefits, rights, and features, those who have no student loan debt—and, thus, would not receive student loan matching contributions—would not be considered as having been denied a benefit, right, or feature.
  • The Secretary of the Treasury would be directed to issue regulations governing such arrangements.
  • As proposed, the legislation would be effective for 2020 and later years (“plan year” was not specified).

Little time remains in the 2018 session of the 115th Congress. But it is reasonable to expect that—if not acted upon in this session—this bill could be reintroduced in the 116th Congress that will convene in January 2019.

 


PBGC Final Regulations Provide New Table to Allocation Assets in Terminating Single-Employer Plans

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.


Retirement Spotlight: IRS Moves to Mandatory Electronic Submission for Retirement Plan VCP Corrections

Employers whose retirement plans have compliance issues in need of correction through the IRS’ Voluntary Correction Program (VCP) will now have a few new and different hoops to jump through to get the IRS’ stamp of approval. The IRS has modified its VCP procedures under the Employee Plans Compliance Resolution System (EPCRS) with the release of Revenue Procedure 2018-52. It requires that submissions and VCP fee payments be made electronically on the pay.gov website starting April 1, 2019.

 

Submitting and Paying Online

Corrections through the new pay.gov procedure may be applied for beginning January 1, 2019.

  • Transition period: From January 1, 2019, through March 31, 2019, the IRS will accept either electronic submissions through pay.gov or traditional paper submissions. Paper submissions that are postmarked on or after April 1, 2019, will not be accepted.
  • Starting April 1st: All VCP submissions made on or after this date must be made through pay.gov.

These payment rules also apply to plans assessed sanctions through the IRS’ Audit Closing Agreement Program (Audit CAP). Plans that correct failures using the Self-Correction Program (SCP) are not required to submit to the IRS or pay a fee.

 

A 15MB file size restriction is imposed on pay.gov submissions. Submissions typically fall in the 5MB to 10MB range, but information for a submission that is above the 15MB threshold must be faxed to the IRS. Thus, a submission that is above the size restriction may need to be broken into two parts—one 15MB file sent to pay.gov and the rest of the information above 15MB faxed to the IRS.

 

Other EPCRS Changes

Although the major change lies in how VCP corrections are submitted, Revenue Procedure 2018-52 also contains several other noteworthy updates to the IRS’ EPCRS.

  • The reference to the IRS Letter Forwarding Program as an option for locating participants and beneficiaries is removed. (Though, that service under the program was technically discontinued years ago.)
  • If the IRS deems a VCP submission deficient or determines that issuing a compliance statement approving the correction is inappropriate, it can refuse to issue a compliance statement and may close the correction case, possibly without issuing a refund for the VCP fee. The previous IRS approach was to work with plans that made incomplete submissions in order to gather the required information so that the submission could be approved.
  • A new Penalty of Perjury statement that includes a plan sponsor signature must be included with submissions. This information previously was included on Form 8950, Application for Voluntary Correction Program (VCP) under the Employee Plans Compliance Resolution System (EPCRS).
  • Form 5265, which is an acknowledgement letter for Form 8950 submissions, will no longer be filed with the submission.
  • Corrective amendments detailed in the revenue procedure now also apply to pre-approved 403(b) plans.

 

More to Come

Several outstanding questions remain as 2019 approaches. Details at pay.gov are scarce at this time. For example, the revenue procedure does not state what plans should do if the submission is rejected—whether a second submission and fee would be required.

 

It is clear, however, that effective April 1, 2019, the VCP will become almost exclusively digital. The pay.gov website is active as it is used for other payment purposes as well, but as of this writing, the retirement plan correction information was not yet available. Watch ascensus.com Industry & Regulatory News as additional guidance becomes available.

 


House Tax Bill Would Make Several Changes to IRAs and Retirement Plans

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

Retirement Plans Affected by Wildfires Get Timing Relief for Certain Procedures

The Department of Labor’s Employee Benefits Security Administration (EBSA) has released a fact sheet containing guidance and relief for those impacted by the 2018 California wildfires. This followed the release of FAQ a couple days earlier.

The fact sheet focuses on verification procedures for plan loans and distributions, the deposit timing of participant contributions and loan repayments, blackout notices, ERISA claims compliance, and Form 5500, Annual Return/Report of Employee Benefit Plan, filing relief in light of the recent wildfires.

The fact sheet provides the following guidance for employers who were located in a county or tribal area identified now or in the future for individual assistance by the Federal Emergency Management Agency (FEMA) because of the 2018 California Wildfires.

  • The EBSA will not treat a distribution or loan provided because of the wildfires as a failure if procedural requirements for plan loans or distributions are not followed due to the wildfires (provided the wildfires are the cause, and the plan administrator makes a good-faith effort to comply with the requirements and makes an attempt to gather any missing documentation as soon as practicable).
  • It will not take enforcement action with respect to a temporary delay in forwarding participant contributions and loan repayments to a plan (employers and service providers must act reasonably to comply with existing rules as soon as practicable).
  • It will not require a fiduciary determination regarding blackout notice timing, as natural disasters are “beyond the reasonable control of the plan administrator” (an exception to the blackout notice timing).
  • It will not take enforcement action with respect to ERISA claims processing that is delayed (provided employers act reasonably, prudently, and in the best interest of participants and beneficiaries).

Form 5500 filing relief is detailed in the IRS news releases listed on the IRS disaster relief website. Impacted employers, advisors, and employees are encouraged to visit the EBSA’s disaster relief website, or to contact the DOL or IRS directly.