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Total Articles: 23

401(k) and 403(b) Plan Hardship Distribution Substantiation: What Will the IRS Be Looking For?

On February 23 and March 7, 2017, the Internal Revenue Service (“IRS”) issued memoranda to examination agents addressing review of substantiation provided in support of safe harbor hardship distributions under 401(k) and 403(b) plans. Although the memoranda cannot be relied upon as official guidance, they are good reference points to help plan sponsors and third party administrators (“TPAs”) avoid issues on audit.

Will Your Forfeiture Account Disqualify Your 401(k) Plan?

In the last six months, several clients called me regarding substantial balances in a so-called “forfeiture account” in their 401(k) plans. A few of these clients have forfeiture accounts that violate the ERISA requirements. It is imperative that forfeitures be handled properly since both the IRS and the Department of Labor (DOL) on audit generally review how forfeitures have been handled by the plan.

New Compliance Questions in IRS Form 5500 Warrant Screening Reviews of 401(K) Plans During 2016

The IRS recently added new questions to the 2015 Form 5500/5500-SF annual retirement plan returns. The Form 5500-Series returns are used by retirement plans to report the financial condition, investments, and operations of the plans to the DOL and IRS. When the new IRS compliance questions were originally introduced, the IRS described the questions as optional for plan year 2015. However, in its most recent instructions, the IRS has specifically advised plan sponsors not to complete these questions for the 2015 plan year. The IRS decision to delay completion is due to privacy and misreporting concerns raised by retirement plan administrators and advisors.

IRS Provides Welcome Guidance on Mid-Year Amendments to Safe Harbor 401(k) Plans

The IRS recently issued Notice 2016-16 (the “Notice”), which permits most mid-year amendments to safe harbor 401(k) plans. This is welcome news to sponsors of safe harbor 401(k) plans who, prior to the issuance of the Notice, faced uncertainty over whether any mid-year changes to their plan would invalidate the plan’s safe harbor status.

Deadline for Restating Your 401(k) Plan May Be Around the Corner

Preapproved (prototype or volume submitter) defined contribution plans must be restated for the Pension Protection Act by April 30, 2016.

2016 Pension Plan Limits, 401(k) Deferral Limit Unchanged

The Internal Revenue Service (IRS) has announced the tax year 2016 cost-of-living adjustments affecting dollar limitations on benefits and contributions under qualified retirement plans and other inflation-adjusted amounts. The pension plan limitations will not change for 2016 because the increase in the cost-of-living index did not meet the statutory thresholds that trigger their adjustment.

Supreme Court Rules That Fiduciary Breach Claims Related to 401(k) Investment Options Not Time-Barred by ERISA’s Six-Year Limitations Period

The United States Supreme Court unanimously ruled in Tibble v. Edison Int’l that a suit alleging a breach of fiduciary duty for failure to properly monitor investment options in a 401(k) plan was not time-barred because it was brought more than six years after the investment options in question were added to the plan. The Employee Retirement Income Security Act of 1974 (ERISA) contains a six-year statute of limitations with respect to suits alleging breaches of fiduciary duty. The Court stated in its decision that, under trust law, a fiduciary generally has a continuing duty to monitor investment options and remove imprudent ones. The Court held that a lawsuit alleging fiduciary breach is not time-barred so long as the alleged breach occurred within six years of the suit’s filing (even if more than six years have passed since the investment option was added to the plan). The Court, however, did not articulate the scope of a plan fiduciary’s continuing duty to monitor plan investments, leaving this question for lower courts.

ERISA Fiduciaries Must Continuously Monitor 401(k) Investment Choices

The U.S. Supreme Court has held unanimously that a plan fiduciary has a continuing duty to monitor investments offered under a 401(k) plan, a duty that is separate and apart from the duty to exercise prudence in selecting investments in the first place.

Is There An Elephant In The Room?

401(k) Plan documents can read like Russian novels. They are often long and difficult to understand, so it’s no surprise that administrative errors in operating such plans happen frequently. Common errors include omitting or including compensation that doesn’t meet the definition in the plan document, failing to enroll a new employee or a rehire on time, and botching participant loans (such as a failure to set up repayment of the loan in payroll on a timely basis or extending the repayment schedule beyond the five-year limit).

Who's Checking The Person Who Checked The Boxes?

Most small to mid-size employers sponsoring a 401(k) plan maintain their plan on a pre-approved prototype document. If you’re not familiar with the term pre-approved prototype plan, it consists of a “check the box” document called an Adoption Agreement that is about 25 pages long and a Basic Plan document that can be up to 100 pages long (small type). These two parts comprise the formal written plan document required under ERISA.

New Final Treasury Regulations Clarify Rules For Mid-Year Amendments To Safe Harbor 401(k) Plans

On November 14, 2013, the Internal Revenue Service (IRS) issued final regulations, which provide guidance on permitted mid-year reductions or suspensions of safe harbor nonelective contributions. The final regulations also revise previous requirements for permitted mid-year reductions or suspensions of safe harbor matching contributions.

Legal Alert: Mid-Year Changes to Safe-Harbor Plans

On November 14, 2013, the Internal Revenue Service issued final regulations modifying some of the conditions for making mid-year changes to employer matching or nonelective contributions under plans that utilize the nondiscrimination safe harbors under sections 401(k) and/or 401(m) of the Internal Revenue Code. These new regulations make some changes to the existing regulations, and to the proposed regulations that had been issued in 2009.

IRS Releases Findings from 401(k) Plan Compliance Check Questionnaires

The IRS recently released an interim report summarizing its findings from a “compliance check” questionnaire that was sent to a broad sampling of 401(k) plans in 2010. The questionnaire was sent to a representative sample of 401(k) plan sponsors of all sizes. The response rate was very high—98% of the 1,200 plans that received the questionnaire completed it.

The Second Circuit's Adoption of the Moench Presumption of Prudence Provides "Accomodation" for Employers Facing Stock Drop Suits

A recent opinion from the United States Court of Appeals for the Second Circuit should reassure employers worried about employee lawsuits alleging the imprudence of investing in company stock through company retirement plans during unstable economic times. In recent years, the federal courts have heard an increasing number of these so-called “stock drop” cases (including many that have arisen as a result of the crash of the subprime mortgage market). Until now, the Second Circuit remained silent as to the decisive standard of review applicable to such claims.

It’s Electric – DOL Issues Guidance on Electronic Disclosure Under Participant Fee Disclosure Regulations

Plan administrators can satisfy fiduciary requirements for disclosures concerning participant-directed individual account plans (the most common example being 401(k) plans) through the use of electronic media in certain circumstances, as described in a Technical Release issued by the U.S. Department of Labor (DOL) on September 13, 2011. Technical Release 2011-03 provides guidance on using electronic media for plan information disclosures in two situations: 1) when the information disclosed is included in a pension benefits statement; and 2) when the information is disclosed separately from a pension benefits statement. Plan administrators who make the required disclosures in accordance with the Technical Release will not be subject to enforcement action by the DOL. Notwithstanding this guidance, employers should watch out for future guidance as this is merely interim relief and final regulatory guidance is expected in the future.

IRS 401(k) Compliance Check – Are You Ready?

Approximately 1,200 randomly selected 401(k) plan sponsors received letters, sent during the week of May 17, from the IRS Employee Plans Compliance Unit asking them to complete a 401(k) Compliance Check Questionnaire.

IRS Asking Employers To Answer 401(k) Questionnaire.

The IRS announced last week that it will be looking at 1,200 401(k) plans by way of a plan compliance questionnaire. Letters from the IRS are expected to go out at the end of May. An employer receiving a letter will be assigned a personal identification number (PIN) to use when filling out the questionnaire online. The employer has 90 days to complete the form, but can get an extension. Answering the questionnaire is "technically voluntary," but an IRS spokesperson made it clear that they want the information.

Plan Amendments Done Right.

Employers wishing to reduce labor costs during these rough economic times may be considering eliminating matching contributions or other employer contributions to their tax qualified profit sharing and 401(k) plans. While its perfectly legal to make such changes, make sure that the plan documentation is properly and timely amended. Plan documentation includes the actual plan document, which can include both an adoption agreement and master plan document for prototype arrangements, and the Summary Plan Description.

You’ve Gotta Have Heart.

Last month President Bush signed into law the Heroes Earnings and Assistance and Relief Act of 2008 (HEART or the Heroes Act). The Act's provisions impact benefits under 401(k) plans. In addition, Health FSAs, group health plans, and cafeteria plans may also be impacted by some Heroes Act changes.

DOL Issues Guidance On Qualified Default Investment Alternatives.

Employers that have adopted a qualified default investment alternative (QDIA) for their 401(k) plans now have a new resource to help work through potential problems, including issues related to investments that predate the QDIA rules, the coordination of QDIA and other plan-related notices, grandfathered stable value funds, and so-called "round trip" restrictions.

Supreme Court Ruling Allows Individuals to Recover Individual 401(k) Account Losses.

Today, the U.S. Supreme issued its ruling in LaRue v. DeWolff, Boberg & Associates, Inc. The high court disagreed with the Fourth Circuit Court of Appeals' decision that a participant in a 401(k) plan is prohibited from using Section 502(a)(2) of the Employee Retirement Income Security Act (ERISA) to recover losses allegedly caused by his employer's failure to carry out his investment instructions. "Although [Section] 502(a)(2) does not provide a remedy for individual injuries distinct from plan injuries," the majority wrote, "that provision does authorize recovery for fiduciary breaches that impair the value of plan assets in a participant's individual account."

DOL Issues Final Regs On QDIA's.

Participant-directed accounts have become the norm in most 401(k) plans. But with the increase in the number of plans utilizing automatic enrollment features, plan fiduciaries should select a default investment for participants who fail to make an election.

New Automatic Enrollment Arrangement For 401(k) Plans.

If you are considering adding automatic enrollment for employees who have not signed up for the 401(k) plan, a new kind of automatic enrollment is available next year. Beginning January 1, 2008, a 401(k) plan can offer a "Qualified Automatic Contribution Arrangement" (QACA) which requires minimum levels of 401(k) deferrals and exempts the 401(k) plan from nondiscrimination and top heavy testing.
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