IRS

IRS Issues Final Regulations Approving Forfeitures to Fund QNECs, QMACs

The IRS and Department of the Treasury have issued final regulations amending the definitions of qualified nonelective contribution (QNEC) and qualified matching contribution (QMAC), settling the issue of whether participant forfeitures can be used to fund QNECs and QMACs.

QNECs and QMACs are types of employer contributions to qualified retirement plans commonly used to correct certain contribution testing failures in 401(k)-type plans. Unless certain safe harbor exemptions apply, 401(k) plans generally must satisfy rules that limit the disparity between the average deferrals of highly compensated employees (HCEs) and nonhighly compensated employees (nonHCEs). Similarly, in nonsafe harbor situations, 401(k) plans must satisfy rules that limit the disparity between average matching contributions of HCEs and nonHCEs. To correct testing failures under these rules, employers can make QNECs and QMACs.

These final regulations finalize the proposed regulations issued by the IRS in January 2017, which first altered the definitions of QNEC and QMAC to allow the use of forfeitures in funding QNEC and QMAC contributions. Before 2017, the IRS and Treasury Department interpreted the 401(k) regulations in a manner that did not permit the use of participant forfeitures to fund these employer contributions.

The final regulations are scheduled to be published as early as July 20 in the Federal Register, and will take effect on that publication date.


IRS Releases 2018 Detailed Instructions for IRA Reporting

The IRS has released the 2018 tax year Instructions for Forms 1099-R and 5498. This release was much anticipated because of tax law changes resulting from the Tax Cuts and Jobs Act in December 2017 and the Bipartisan Budget Act in February 2018. The release of these detailed instructions was delayed substantially from prior years.

The following changes are included in the 2018 Instructions.

  • No recharacterizing of 2018 or later Roth IRA conversions, or 2018 or later retirement plan-to-Roth IRA rollovers
  • Special rules for victims of 2016 and 2017 natural disasters
  • New Form 1099-R reporting code for a qualified plan loan offset distribution due to severance from employment or termination of a plan
  • New Form 5498 reporting code for rollover of offset retirement plan loans
  • Special reporting for U.S. Armed Forces in designated combat zones

Although the IRS previously released the 2018 version of Form 5498, IRA Contribution Information, as of this writing, the IRS had not released the 2018 version of Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.


IRS Grants Tax-Related Deadline Relief to Texas Storm Victims

The IRS has issued News Release TX-2018-05, describing tax-related deadline relief available to victims of severe storms and flooding in Texas. In addition to postponement of tax return deadlines falling within dates identified in the news release, the relief includes postponement of deadlines for completing certain time-sensitive tax-related acts specified in Treasury Regulation 301.7508A-1(c)(1). These acts include completion of rollovers or recharacterizations, correction of certain excess contributions, making plan loan payments, filing Form 5500, and certain other acts under this regulation.

Such deadlines falling on or after June 19, 2018, and on or before October 31, 2018, are postponed to October 31, 2018.

The Texas counties included in the relief at this time include Cameron and Hidalgo. The relief applies specifically to residents of these identified areas, to those whose businesses or records necessary to meet a covered deadline are located there, and to certain relief workers providing assistance following the disaster events. Any individual visiting a covered disaster area who is injured or killed as a result of the events is also entitled to deadline relief. Affected taxpayers who reside or have a business located outside the covered disaster area are required to call the IRS disaster hotline at 866-562-5227 to request relief.


IRS Releases 2018 Series Forms for VCP Plan Correction Submissions

The IRS has released a series of June 2018-dated forms that are used in submissions for retirement plan corrections under the Service’s Voluntary Correction Program (VCP). In addition to the general VCP Compliance Statement form, individual schedules are used for specific plan types (e.g., SIMPLE IRAs, SEPs) or certain plan failures (e.g., non-amender, plan loan failure). The updated forms follow.

Form 14568-B, Model VCP Compliance Statement Schedule 2: Other Nonamender Failures and Failure to Adopt a 403(b) Plan Timely

Form 14568-E, Model VCP Compliance Statement Schedule 5: Plan Loan Failures (Qualified Plans and 403(b) Plans)

Form 14568-H, Model VCP Compliance Statement Schedule 8: Failure to Pay Required Minimum Distributions Timely


IRS, PBGC Issue Tax-Related Deadline Relief for Victims of Recent Hurricanes

The IRS and the Pension Benefit Guaranty Corporation (PBGC) have issued announcements that expand previously-issued tax-related deadline relief for victims of storms, flooding, landslides, and mudslides in Hawaii.

IRS Relief

Under this relief, certain time-sensitive tax-related acts are eligible to be completed beyond their normal deadlines as provided in Treasury Regulation 301.7508A-1(c)(1). They include completion of rollovers and recharacterizations, correction of certain excess contributions, making plan loan payments, filing Form 5500, and certain other acts under this regulation.

The relief applies specifically to residents of the identified areas, to those whose businesses or records necessary to meet a covered deadline are located there, and to certain relief workers providing assistance following the disaster events. Any individual visiting a covered disaster area who was injured or killed as a result of the events is also entitled to deadline relief. Affected taxpayers who reside or have a business located outside the covered disaster areas are required to call the IRS disaster hotline at 866-562-5227 to request relief.

Under IRS News Release HI-2018-03, covered deadlines that fall on or after April 13, 2017, and on or before August 15, 2018, are extended to August 15, 2018. The relief applies to affected individuals who reside or have a business in the City and County of Honolulu and Kauai County.

PBGC Relief

The PBGC—the agency with primary oversight over defined benefit pension plans—issued Disaster Relief Announcement 18-07 describing special relief the agency is granting to plans and to designated persons (those responsible for meeting a PBGC deadline) affected by storms, flooding, landslides, and mudslides in Hawaii. The disaster area consists of the City and County of Honolulu and Kauai County.

The deadline relief applies to the following actions.

  • Payment of PBGC insurance premiums (single and multi-employer plans)
  • Filing termination notices (single-employer plans)
  • Completing the distribution of plan assets (single-employer plans)
  • Filing post-distribution certification, Form 501 (single-employer plans)
  • Filing for distress termination, Form 601
  • Filing a reportable event notice
  • Filing Form 5500, Annual Return/Report of Employee Benefit Plan

Also, certain plans with underfunding, missed contribution, or funding waivers that must file special actuarial information within 15 days following the filing of their Form 5500 will have until August 15, 2018, for such filing.


Dan Kravitz Discusses Strategic Plan Terminations

In a recent article published by ​PLANSPONSOR, Dan Kravitz, president of Kravitz, Inc., and Chris Pitman, an expert plan termination consultant with the firm,​ ​​​​​​define the concept of strategic plan termination—what the pros and cons are, and what an employer’s responsibilities entail under IRS and PBGC regulations. “If an employer has the right goals and follows the right process​, strategic plan terminations can be a win-win for the company and for employees,​”​ said the pair.


IRS Announces Tax-Related Deadline Relief for Hawaii Volcano Victims

The IRS has issued News Release HI-2018-02, announcing tax-related deadline relief for certain Hawaii residents who are victims of recent volcanic eruptions and earthquakes. In addition to postponement of tax return deadlines falling within dates identified in the news release, the relief includes postponement of deadlines for completing certain time-sensitive tax-related acts specified in Treasury Regulation 301.7508A-1(c)(1).

These acts include completion of rollovers or recharacterizations, correction of certain excess contributions, making plan loan payments, filing Form 5500, and certain other acts under this regulation. For those who qualify, such deadlines falling on or after May 3, 2018, and on or before September 17, 2018, are postponed to September 17, 2018.

The area identified as directly qualifying for relief is “Hawaii County” (also referred to as the Island of Hawaii, or the “Big Island”). The relief applies specifically to residents of the identified area, to those whose businesses or records necessary to meet a covered deadline are located there, and to certain relief workers providing assistance following the disaster events. Any individual visiting a covered disaster area who is injured or killed as a result of the events is also entitled to deadline relief. Affected taxpayers who reside or have a business located outside the covered disaster area are required to call the IRS disaster hotline at 1-866-562-5227 to request relief.

 


Advisory Group Recommends Missing Participant and Determination Letter Program Changes to IRS

The Advisory Committee on Tax-Exempt and Government Entities (ACT) has issued its 2018 Report of Recommendations to the IRS on several issues potentially affecting tax-exempt entities, including tax-qualified retirement plans. Recommendations specific to retirement plans include potential broadening of the IRS determination letter program, and administration of the IRS’s missing participant program.

The IRS in 2015 announced a significant scaling back of its program of issuing determination letters, which affirm plans’ qualified status. For example, beginning in 2017, individually designed plans could only submit for determination letters at the time of plan establishing or termination, with certain exceptions to later be specified by the IRS. Earlier this year the IRS requested comments on types of plans and circumstances that might justify the Service reopening a broadened determination letter program for 2019. This 2018 ACT report offers recommendations on circumstances and parameters for a limited reopening of the determination letter program not only for 2019, but for beyond as well.

The report also makes recommendations concerning missing plan participants. Among these are a recommendation that IRS coordinate missing participant guidance with the Department of Labor and Pension Benefit Guaranty Corporation, that it reopen the IRS’s former letter forwarding program, allow uncashed check amounts to be forfeited (subject to reclaiming), apply plan distribution field directives to distributions other than required minimum distributions, etc.


IRS Addresses Withholding for IRA Payments to State Unclaimed Property Funds

The IRS has released Revenue Ruling (Rev. Rul) 2018-17, which addresses withholding and reporting requirements for the payment of an IRA owner’s interest to a state unclaimed property fund (an action sometimes referred to as “escheatment”).

Rev. Rul. 2018-17 states that payments made in this manner are treated as includable in gross income, and are therefore designated as distributions subject to the rules on federal income tax withholding for IRAs. The revenue ruling also states that the distributing trustee must report these payments on the applicable year’s Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., identifying the IRA owner as the recipient.

For payments made before the earlier of January 1, 2019, or the date it becomes reasonably practicable to comply with the requirements, a person will not be treated as failing to comply with the withholding and reporting requirements described in the revenue ruling.