IRS Updates Operational Compliance List for Retirement Plans

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

IRS and DOL Issue Deadline Relief Following Iowa, Nebraska, and Alabama Disasters

The IRS has issued two news releases that announce extensions of time for taxpayers to complete certain time-sensitive tax-related acts following severe storms and flooding in Iowa and Nebraska. In addition, the Department of Labor (DOL) issued guidance to employee benefit plans, and to those plans’ participants and beneficiaries, affected by the Iowa and Nebraska events, or by severe storms in Alabama.

The IRS news releases specifically note that these extensions apply to IRA contributions, as well as to the numerous time-sensitive acts described 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.

Iowa Deadline Relief
IRS news release IA-2019-02 defines the relief granted for the Iowa counties of Fremont, Harrison, Mills, Monona and Woodbury. Qualifying tax-related acts with deadlines falling on or after March 12, 2019, and on or before July 31, 2019, are extended to July 31, 2019.

Nebraska Deadline Relief
News release NE-2019-02 identifies the Nebraska counties of Butler, Cass, Colfax, Dodge, Douglas, Nemaha, Sarpy, Saunders and Washington as covered under this relief. Qualifying tax-related acts with deadlines falling on or after March 9, 2019, and on or before July 31, 2019, are extended to July 31, 2019.

This relief applies specifically to residents of an identified disaster 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 a covered disaster area are required to call the IRS disaster hotline at 866-562-5227 to request relief.

DOL Relief for Iowa, Nebraska and Alabama
The DOL has issued a fact sheet (not yet available at the DOL website) for sponsors of employee benefit plans—including employer-sponsored retirement plans—and a document containing frequently-asked questions (FAQs) directed to such plans’ participants and beneficiaries. These DOL documents address the special deadline relief for these states that is available from this agency, which has oversight over ERISA-governed employee benefit plans.

Employer-Provided Student Loan Assistance Options Take Several Forms

The vast student loan debt of Americans who have attended post-secondary educational institutions has received much publicity, prompting lawmakers and employers to seek options to aid those who face such debt. Proposed approaches have included both legislation and options within current employee benefit structures, including retirement plans.


Employer Participation in Repayment Act of 2019
Senators John Thune (R-SD) and Mark Warner (D-VA) are chief sponsors of the Employer Participation in Repayment Act of 2019 (S. 460), which was introduced the in February 2019. This bill would expand the definition of tax-exempt employer-provided educational assistance to include “qualified student loan repayment amounts” contributed by the employer of up to $5,250 per year. This statutory change would allow such employer payments without their being treated as employee benefits taxable to the receiving employee.

Importantly, the benefit proposed in S. 460 is not a contribution to a retirement plan or other tax-advantaged savings account. However, this employer payment could ease financial pressure on an employee, perhaps enabling her to more fully participate in a retirement savings arrangement.


Retirement Parity for Student Loans Act
The Retirement Parity for Student Loans Act was introduced in December 2018 by Senators Ron Wyden (D-OR) and Ben Cardin (D-MD), and could be re-introduced in 2019. It would allow an employer to make a matching contribution to a 401(k), 403(b), or SIMPLE IRA plan based on an employee’s post-secondary student loan payment that is paid to a lender. Under current law, an employer-made matching contribution to one of these retirement plans can only be based on an employee’s deferral of compensation into that plan.


PLR on Plan Contributions for Those Making Student Loan Payments
In 2018, the IRS issued a private letter ruling (PLR) 201833012 addressing whether an individually designed 401(k) plan could allocate employer nonelective (e.g., profit sharing) contributions using a formula based on employee student loan repayments to a lender, rather than employee salary deferrals.

While loosely called “matching” contributions in some media analyses, such contributions do not meet the retirement plan definition of matching contribution if not based on employee salary deferrals. Instead, such contributions would more accurately be termed employer nonelective contributions.

Not every employer situation, nor every plan document, would lend itself to targeting such employer contributions to employees making student loan payments. Furthermore, a specific PLR can only be relied upon by the applying entity—in this case the retirement plan sponsor.

IRS Won’t Challenge DB Plans That Offer a Lump-Sum Distribution Window, for Now

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.

GAO Recommends Further Guidance for Retirement Assets Escheated to States

The U.S. Government Accountability Office (GAO) has released the findings of a survey conducted to measure the effects transfers from qualified retirement plan sponsors and IRA trustees to state unclaimed property funds.

GAO was asked to study what happens after retirement assets transfer to states and to review IRS and DOL guidance to determine steps that can be taken by either agency to improve these transactions. The survey included responses from 22 states, and a variety of 401(k) service providers and IRA trustees.

GAO found that current guidance has resulted in uneven practices across service providers and trustees. To ensure the consistent administration of benefits, GAO has made three recommendations.

  1. The IRS should clarify if transfers to states are considered distributions subject to taxation and withholding requirements.
  2. The IRS should consider whether a transfer to a state is a permissible reason to extend the 60-day rollover period.
  3. The DOL should specify under what circumstances uncashed distribution checks from active qualified retirement plans may be transferred to a state.

The IRS has responded that it will work to implement the suggestions, while DOL has stated it will consider making the changes but will need to consider input from stakeholders before doing so.

The GAO released a Fast Facts summary, highlights of its findings, and the full report.



IRA Updates Nonresident Alien Tax Withholding Publication and Tax Treaties

The IRS has released the 2019 tax year version of Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities. This publication contains information on several aspects of withholding to satisfy potential tax obligations of nonresident aliens, one of which is associated with payments from retirement savings arrangements.

Such payments are subject to withholding at a 30 percent rate, unless a more favorable tax rate applies according to the tax treaty between the U.S. and the nonresident alien’s home country. To qualify for a treaty rate, the individual must provide the payor a completed Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting.

The treaty rates were formerly included in Publication 515, but are now found directly at the tax treaties page IRS website.


IRS Released 2019 Retirement Reporting Forms and Redesigned 2018 Tax Forms

The IRS has released the 2019 versions of Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit Sharing Plans, IRAs, Insurance Contracts, etc., and Form 5498, IRA Contribution Information, as well as the 2018 redesigned Form 1040, U.S. Individual Income Tax Return, and related schedules.

Forms 1099-R and 5498

Form 1099-R reports distributions from IRAs and employer-sponsored retirement plans, and direct rollovers between employer plans and IRAs. Form 5498 reports annual IRA, SEP, or SIMPLE IRA plan contributions, as well as rollovers, fair market value, Roth IRA conversions, if required minimum distributions are due for Traditional and SIMPLE IRA owners, and certain other information. The IRS has not yet released the separate 2019 Instructions for Forms 1099-R and 5498.

Form 1040

The IRS has released the 2018 version of Form 1040, U.S. Individual Income Tax Return, along with the 2018 Form 1040 Instructions and other accompanying schedules. Many adjustments to taxable income were formerly accounted for on a comprehensive Form 1040 in previous years, but the IRS has transitioned to a simpler basic Form 1040 with various additional schedules. The instructions indicate that Forms 1040A and 1040-EZ are no longer available for 2018 income tax reporting, and individuals who filed one of these forms in the past may now file the Form 1040.

One retirement-related change on the 2018 Form 1040 is that IRA, pension, and annuity payments, including rollovers, will be reported on Lines 4a and 4b, instead of the former Lines 15 and 16.

The 2018 Form 1040 is supplemented with six new schedules, and the schedule instructions are contained in the Form 1040 Instructions. The following new schedules will be used to claim certain additional income, tax credits, and taxes owed for retirement and other savings accounts.

  • Schedule 1, Additional Income and Adjustments to Income, will be used to claim, among other things, tax deductions for IRAs and health savings accounts (HSAs).
  • Schedule 3, Nonrefundable Credits, will be used to claim, among other things, education credits, the IRA and retirement plan savings contribution credit (saver’s credit), and certain other credits.
  • Schedule 4, Other Taxes, will be used to claim, among other things, the additional penalty taxes owed for the early distributions and excess contributions for IRAs, retirement plans, Coverdell ESAs, Archer MSAs, HSAs, and ABLE accounts.

IRS Seeks Comments on SIMPLE IRA Plan Documents and Notice 98-4

The IRS has released very little guidance on SIMPLE IRA plans since the release of Notice 98-4. Scheduled to be published in tomorrow’s Federal Register is an IRS request for comments, in which the IRS seeks public input on the SIMPLE IRA plan documents and Notice 98-4. The document for which it seeks comments are Form 5304-SIMPLE, Savings Incentive Match Plan for Employees of Small Employers (SIMPLE)—Not for Use With a Designated Financial Institution, and Form 5305-SIMPLE, Savings Incentive Match Plan for Employees of Small Employers (SIMPLE)—for Use With a Designated Financial Institution.

Notice 98-4 contains SIMPLE IRA plan guidance that answers many general questions. Forms 5304-SIMPLE and 5305-SIMPLE are IRS model employer-level documents used to adopt SIMPLE IRA plans. Employers may elect to use the 5304-SIMPLE when a designated financial institution (i.e., the single organization where all plan contributions are forwarded) is not named, and Form 5305-SIMPLE when one is named. Notice 98-4 provides guidance on SIMPLE plans beyond that contained in Internal Revenue Code section 408(p).

Written comments are due to the IRS on or before February 4, 2019. The request for comments provides details on how to submit the comments.


403(b) Plan Transition Relief for Elective Deferral “Once in, Always in” Rule

The IRS has released Notice 2018-95, which provides transition period relief from the “once in always in” (OIAI) condition for excluding part-time employees (i.e., employees who normally work fewer than 20 hours a week) from making elective deferrals under a 403(b) plan.

The 403(b) plan exclusion rules found under Treasury Regulation 1.403(b)-5(b)(4) state, in part, that an employee may be excluded if the employee is reasonably expected to work less than 1,000 hours in the employee’s first year of employment. For subsequent years, the employee must have actually worked fewer than 1,000 hours in the preceding 12-month period. Most crucial is the OIAI rule, which states that once a participant does not meet the conditions for exclusion as previously stated, the employee may no longer be excluded under the part-time exclusion. That is, once eligible to defer, an employee cannot lose this eligibility due to the part-time exclusion, even if he works less than 1,000 hours in a preceding 12-month period.

In Notice 2018-95, the IRS provides transition period relief for 403(b) plans that have not followed the OIAI rule (i.e., have been excluding participants as part-time after they became eligible).

The relief stems from comments related to the pre-approved 403(b) plan Listing of Required Modifications (LRMs). The LRMs address the OIAI rule, stating that “once an Employee becomes eligible to have Elective Deferrals made on his or her behalf under the Plan…the Employee cannot be excluded from eligibility…in any later year under this standard.” Commenters requested transition relief based on this LRMs language, claiming that many employers were not aware that the OIAI rule existed.

The notice provides relief for taxable years beginning after December 31, 2008, and ending on the last day of the last exclusion year that ends before December 31, 2019. During this period, plans will not be treated as failing to satisfy the conditions of the part-time exclusion merely because the plan was not operated in compliance with the OIAI rule. The notice goes on to provide examples, and also establishes a “fresh start” opportunity for plans once the relief period expires, requiring plans to follow the OIAI rule for exclusion years beginning on or after January 1, 2019.

IRS Explains Reliance on Opinion and Advisory Letters for 403(b) Plans

The IRS has provided FAQs at its website that explain opinion and advisory letter reliance regarding its relatively new program under which certain employers may establish 403(b) plans using a pre-approved plan document.

Because the IRS generally is no longer issuing rulings or determination letters on individually designed plans, the importance of pre-approved plans has increased. 403(b) plans can be established as prototype or volume submitter plans.

The FAQs describe eligible employers, what opinion and advisory letters are, and the reliance on an IRS opinion or advisory letter.