Covington & Burling Explains Updated Tax Notice for Retirement Plans -

In “Time to Update Tax Notices for Qualified Plans”, Covington & Burling explains that:

“The IRS has updated its model Special Tax Notice (sometimes called a “402(f) Notice”) for certain changes in the law since 2009. Employers should review their Special Tax Notices to incorporate required updates. When a tax-qualified retirement plan allows lump-sum distributions (or installments over fewer than 10 years), the plan must allow the recipient to roll over his or her distribution to an IRA or another employer’s tax-qualified plan. The plan administrator must provide to anyone receiving a distribution a notice–commonly called a “Special Tax Notice” or “402(f) Notice”–that describes the tax consequences of a distribution and the recipient’s rollover rights.”

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Year-End Compliance Reminders for Defined Contribution Plans

In “2014 Plan Year: Year-End compliance reminders,” Prudential summaries year-end compliance issues for qualified defined contribution plans. The summary discusses the rules for the various tests that plans must have completed as well as the new limits. Prudential also discusses correction issues, including correcting ADP test and ACP test excesses, corrective contributions, corrective distributions, and ensuring the proper correction of contribution allocation errors.

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Buck Consultants Analyzes PBGC Guidance on DC Rollovers

In “PBGC Finalizes Additional Guarantee for DC Rollovers”, Buck Consultants, a Xerox company explains that:

“PBGC has finalized regulations that increase individual participant maximum benefit guarantees when covered defined benefit plans accept rollovers from defined contribution plans in exchange for lifetime income benefits and are subsequently terminated. PBGC anticipates increased use of rollovers and aims to promote retirement security for those benefits.”

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ERIC members and trial members can read more on this issue here.

IRS’s Employee Plans News Discusses Procedural Guidelines for Pension Equity Plan Determination Letters

In the latest edition of Employee Plans News, the Internal Revenue Service (IRS) discusses its new procedural guidelines for pension equity plan determination letters. The newsletter links to the IRS’s PEP Determinations Worksheet and Explanation of PEP Plan Issues, which are intended for use by IRS employees in processing determination letter applications. The IRS indicates that “These documents explain the issues unique to PEP plans that we will take into account when reviewing plan documents, such as how the provision of hypothetical interest impacts the plan’s compliance with the accrual rules of Internal Revenue Code Section 411(b)(1).” The IRS also includes links to its PEP Memorandum. The IRS indicates that the memorandum “highlights the plan document’s compliance with IRC Section 411(b)(1)(G), which generally provides that a participant’s accrued benefit under a qualified defined benefit plan cannot be reduced on account of any increase in the participant’s age or service”.

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Towers Watson Finds that Defined Benefit Plan Risk Declined for Large Companies in 2014

In “Pension Risk Declines for Fortune 1000 Plan Sponsors in 2014”, Towers Watson reports that:

“Among companies in the 2013 and 2014 Fortune 1000, the median Pension Risk Index score fell from 1.8% to 1.2% over the last year. Over 2013, a strong stock market increased market capitalization and higher interest rates reduced liabilities. Companies whose pensions pose significant risks might want to consider de-risking their plans by shifting from equity to debt.”

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Milliman Analyzes Hybrid Plan Guidance

In “IRS Issues Final and Proposed Rules for Hybrid Pension Plans”, Milliman indicates that:

“The IRS has published a final rule covering tax-qualified cash balance (hybrid) pension plans, providing guidance on the key issue of “market rate of return.” Sponsors of hybrid plans have waited for four years for this guidance since the agency delayed the effective date of an October 2010 final rule following practitioners’ concerns that the IRS had incorrectly interpreted the statutory definition. In general, the final rule applies to plan years that begin on or after Jan. 1, 2016. The IRS also published a companion proposed rule to facilitate the transition for plan sponsors to adopt requirements, allowing for an election to apply the proposed rule to amendments adopted earlier than Jan. 1, 2016. The IRS seeks comments on the proposal by Dec. 18, 2014.”

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IRS Amends Safe Harbor Notices on Eligible Rollover Distributions

The Internal Revenue Service on November 24 released Notice 2014-74 updating two safe harbor explanations in Notice 2009-68 that can be used to satisfy the requirement under Internal Revenue Code section 402(f) concerning certain information to be provided to recipients of eligible rollover distributions. The changes to the safe harbor explanations relate to the allocation of pre-tax and after-tax amounts, distributions in the form of in-plan Roth rollovers, and certain other clarifications.

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PBGC Finalizes Rules Regarding the Treatment of Rollover Amounts in DB Plans

The Pension Benefit Guaranty Corporation (PBGC) finalized regulations regarding the treatment of rollovers into defined benefit plans if the plan is terminated and trusteed by the PBGC (the “rollover regulations”). The PBGC indicates that the final rollover regulations are the same as the proposed regulation, except for some minor clarifications. The PBGC indicates that it is amending the current rollover regulation in anticipation of the increased use of rollovers from defined contribution (DC) plans to defined benefit (DB) plans, to promote retirement security, and to expand the opportunity for participants to elect lifetime annuity options by rolling over savings from DC to DB plans.

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IRS Announces Upcoming Retirement Plan Webinars

The Internal Revenue Service (“IRS”) recently announced two new retirement plan webinars. On December 4, 2014, the IRS will hold a webinar titled “Properly Defining Retirement Plan Compensation” which will discuss Internal Revenue Code Sections 414(s) & 415 compensation, identifying which definition may be used for each plan purpose, and common plan failures involving compensation. On December 11, 2014, the IRS will hold a webinar on “Retirement Plan Distributions - What every participant should know” which will include taking a distribution from a retirement plan, a new plan distribution rule allows participants to direct pre and post-tax amounts to multiple destinations, exceptions to the additional 10% tax on early distributions from plans, beneficiary designations, and required minimum distributions.

Information on the December 4th call is available here.
Information on the December 11th call is available here.

ERIC Urges DOL to Ensure Any Guidance on Brokerage Windows is Narrowly Tailored to Address Specific Concerns

The ERISA Industry Committee (ERIC) submitted comments to the Department of Labor (DOL) responding to the agency’s request for information on brokerage windows in retirement plans.

ERIC provided the DOL with information regarding the use of brokerage windows in large retirement plans. ERIC explained that large retirement plans offer a variety of investment options to meet the diverse needs of their plans’ participants.

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New Report Examines Behavior of Defined Contribution Plan Participants

A recently issued report titled “Defined Contribution Plan Participants’ Activities, First Half 2014”, examines the choices of participants in defined contribution (“DC”) plans. The authors found that:

“DC plan withdrawal activity in the first half of 2014 remained low and was similar to the activity observed in the first half of 2013…The vast majority of DC plan participants continued contributing to their plans…Most DC plan participants stayed the course with their asset allocations as stock values generally rose over the first six months of the year… Defined contribution (DC) plan assets are a significant component of Americans’ retirement assets, representing more than one-quarter of the total retirement market (Figure 1) and almost one-tenth of U.S. households’ aggregate financial assets at the end of the second quarter of 2014.”

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IRS Publishes Latest Edition of Employee Plans News

The Internal Revenue Service (“IRS”) has recently published Issue 2014-18 of the Employee Plans News. This edition discusses, a new option for plan sponsors to include income annuities in default target date fund investment options and the Information Reporting Program Advisory Committee (IRPAC) 2014 annual report. The newsletter also discusses the EPCU QJSA project which found that most sponsors complied with the qualified joint and survivor annuity notice and consent requirements.

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IRS Updates Its Retirement Plan Reporting and Disclosure Requirements Guide

The Internal Revenue Service (IRS) has recently updated its Retirement Plan Reporting and Disclosure Requirements Guide. The IRS indicates that the Guide is intended to be used as a quick reference tool and in connection with the Department of Labor’s Retirement Plan Reporting and Disclosure Guide. The 12-page guide summarizes the types of reporting and disclosures that are required, the type of information that must be provided, who must be provided with the information, and when the information must be provided.

The IRS Guide is available here.

Towers Watson Analyzes Rollover Guidance

In “IRS Issues Favorable Guidance on Allocation of Aftertax Benefits in Rollovers,” Towers Watson explains that:

“In Notice 2014-54, the IRS allows retirement plan participants to avoid current taxation on distributions that include aftertax amounts by rolling over pretax amounts directly to an individual retirement account (IRA) or employer plan and directing aftertax amounts into a Roth IRA (or taking them in cash). The rules apply to participants, beneficiaries and alternate payees in defined benefit, defined contribution, 403(b) and governmental 457(b) plans. The allocation procedure avoids the complexities of a pro rata allocation approach the IRS had previously required for direct rollovers that included aftertax amounts.”

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IRS Updates 2015 Retirement Plan Limits

The Internal Revenue Service (IRS) has announced the cost‑of‑living adjustments for retirement plans for 2015. The IRS explains that “Many of the pension plan limitations will change for 2015 because the increase in the cost-of-living index met the statutory thresholds that trigger their adjustment. However, other limitations will remain unchanged because the increase in the index did not meet the statutory thresholds that trigger their adjustment.” The announcement indicated that the limit for elective deferrals for 401(k) plans increased from $17,500 to $18,000 and the limit for catch-up contributions for employees aged 50 increased from $5,500 to $6,000.

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Pension Plan Funding Increases in September

In “Milliman analysis: Corporate pension funded status improves by $26 billion in September, the best month of 2014 so far”, Milliman indicates that the funded status of large companies’ defined benefit plans improved by $26 billion during September. Milliman reports that “The deficit dropped to $253 billion from $279 billion at the end of August, primarily due to an increase in the benchmark corporate bond interest rates used to value pension liabilities.”

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Towers Watson Analyzes Missing Participant Guidance

In “DOL Updates Guidance on Locating Missing Plan Participants”, Towers Watson indicates that:

“The Department of Labor (DOL) has updated its 2004 guidance on the steps necessary to satisfy the fiduciary duty to search for missing retirement plan participants. While much of the earlier guidance remains the same, the update was necessary to address the fact that certain previously mandated search methods are no longer available. In particular, the DOL had required plan sponsors to use letter-forwarding services offered by the IRS or Social Security Administration (SSA), both of which have since been discontinued. The new guidance (Field Assistance Bulletin 2014-01) instead requires the use of free Internet search tools.”

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DOL Posts Most Recent Retirement Plan Data From Forms 5500

In “Private Pension Plan Bulletin: Abstract of 2012 Form 5500 Annual Reports”, the U.S. Department of Labor analyzes the most recent data on retirement plans based on 2012 Form 5500 annual reports. The bulletin indicates that the total amount of assets held by retirement plans has increased by 10% to $6.98 trillion in 2012 and the total number of active participants increased from 90.2 million to 91.3 million. The bulletin also states that contributions to retirement plans also increased by 3.5 percent in 2012 to $481.6 billion.

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New Analysis of Hybrid Plan Regulations

Richard Shea and Robert Newman Covington & Burling LLP highlight the key provisions of the new hybrid plan regulations in “Hybrid Plan Regulations Could Reinvigorate the Defined Benefit Plan System”. In the article, they indicate that:

“Treasury and the IRS recently issued long-awaited regulations governing cash balance and other hybrid pension plans. Final regulations implement the intent of Congress in the Pension Protection Act of 2006 (the “PPA”) to eliminate the so-called “whipsaw calculation” and permit more generous rates of return for employees and retirees. Proposed regulations issued at the same time set forth a path for non-compliant plans to become compliant. Private sector plans must adopt these changes before the first day of first plan year beginning in 2016. Most significantly, however, is that the regulations − for the first time − specify the way in which employers can marry the efficiency of delivering benefits under through a defined benefit plan with the reduced financial volatility of a defined contribution plan. In short, the regulations make possible a new design for retirement benefits that may prove attractive for employers and employees alike: the shared-risk pension plan.”

To read more from Covington, click here.
ERIC members and trial members can read more about the regulations here.

IRS Issues Guidance on Rollovers

The Internal Revenue Service (IRS) has issued new guidance on rollovers in Notice 2014-54 and proposed regulations. Generally, if participants roll over a portion of their accounts and also have a portion paid to them, each of those amounts will include a share of any earnings in the participant’s designated Roth account. The IRS indicates that it received comments that some plan providers were structuring distributions in a way whereby all of the after-tax amounts were included in distributions to Roth IRAs.

Notice 2014-54 is available here.
The proposed regulations are available here.

ERIC members and trial members can read more here.