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Tuesday, September 1, 2009
Pension
Protection Act: Looming Deadline and Key Changes for Defined Contribution Plans
 By the last day of the plan year beginning in 2009 (December 31, 2009
for calendar plan years), all qualified retirement plans must be amended to
comply with the requirements of the Pension Protection Act of 2006 (the “PPA”) This applies to required provisions as well
as optional provisions that plan sponsors have chosen to make available under
their plans.
While the PPA, and its technical
corrections under the Worker, Retiree, and Employer Recovery Act of 2008
(WRERA), made numerous changes to the rules regarding defined benefit, defined
contribution, and hybrid plans, this Newsletter focuses on those provisions
that have the greatest impact on defined contribution plans. Most of these provisions are already
effective in operation, and some are operational only (no written plan
amendment will be necessary), but all should be reviewed for amendment by plan
year end.
Defined Contribution Plan
Provisions
New vesting rule for employer nonelective contributions. All
employer contributions made to defined contribution plans must vest according
to three-year cliff or six-year graded vesting schedules.
Safe harbor automatic contribution arrangements. In
order to encourage employee participation, the PPA created a safe harbor to
incentivize employers to offer automatic enrollment into 401(k) plans. Plans meeting the safe harbor contribution
level, vesting and opt-out requirements will automatically satisfy the
nondiscrimination and top-heavy tests.
Also, the related default investment rules provide protection for
fiduciaries.
Non-safe harbor automatic contribution arrangements. The
PPA also expanded and provided certain more flexible operational rules and
fiduciary protective rules for automatic contribution arrangements in general –
even if they do not meet the safe harbor requirements.
Excess contribution distribution timing.
Automatic contribution arrangements that meet certain requirements may
distribute excess 401(k) and excess matching contributions as late as six
months after year-end (rather than 2 1/2 months after year-end) without being
subject to the related 10% excise tax penalty on excess contributions.
Automatic contribution 90-day withdrawal option. Automatic
contribution arrangements that meet certain requirements may allow participants
to withdraw their automatic contribution amounts (adjusted for gain or loss)
during the first 90 days of participation without penalty.
Preemption for automatic contributions. The
PPA addressed the concern that automatic enrollment features violated state
laws prohibiting deduction from an employee’s wages without consent by
providing that ERISA preempts any state law that would prohibit or restrict
automatic enrollment to ERISA-covered plans.
Expanded hardship distribution rules. At the option of the employer,
plans may expand the definition of hardship distributions to include hardships
experienced by the primary beneficiary of the participant, regardless of
whether the beneficiary is a spouse or dependent.
Gap period income eliminated. Under the PPA, gap period income
(i.e., income between the end of the plan year and date of distribution) was no
longer required to be paid on corrective distributions made to highly
compensated employees to correct for failing the 401(k) or matching
contribution discrimination tests. But,
gap period income remained applicable to corrective distributions of excess
deferrals that inadvertently exceeded the dollar limits under the Code. However, WRERA provides that gap period
income does not apply to excess deferral distributions either. Apparently, the failure to make this
coordinating change in the PPA was an oversight.
Distribution notice and consent period expanded.
Plans have the option to increase the current 90-day period that relates
to certain timing rules for providing distribution notices and election forms to
a 180-day period.
Notice regarding failure to defer payments. Distribution
notices must describe the right to defer the receipt of benefits and the
consequences of failing to do so.
Periodic benefit statements. Quarterly benefit statements,
with certain required information, must be provided to participants who have
the right to self-direct investments, and annual benefit statements must be
provided to those who do not have the self-direction control. For self-directed plans, participants must
also be advised of the importance of diversification, the risk associated with
holding more than 20% of plan assets in a single security, and be directed to
the DOL website for information on investing and diversification.
Fiduciary
protections – participant self-directed investment plans. The
PPA added new provisions under ERISA for participant self-directed investment
plans to provide for certain fiduciary protections when participants do not
give investment instructions (a safe harbor for investing those funds into a
Qualified Default Investment Alternative), for investment “mapping”
transactions that typically occur when vendor changes or investment fund
changes are made, and in the case of blackout periods.
Notice of right to divest employer securities.
Participants must have the right, and be notified of the right, to
diversify investments in publicly traded employer securities. (There are several diversification rights
provided to participants in defined contribution plans that hold publicly
traded employer securities.)
Professional investment advice. The PPA provides statutory
prohibited transaction exemptions with respect to investment advice provided by
a fiduciary to participants in self-directed plans. The exemptions apply to “eligible investment
advice arrangements”.
Rollovers by nonspouse beneficiaries. An eligible rollover
distribution received by a nonspouse beneficiary may be directly rolled into an
inherited IRA. See below for a more
detailed explanation.
Rollovers of after-tax contributions. Participants are permitted to
direct roll after-tax amounts from qualified retirement plans to
defined benefit, defined contribution, and 403(b) plans, if the receiving plan
separately accounts for these amounts. But,
plans are not required to accept these rollovers.
Rollover from qualified plan to Roth IRA. Subject
to income tax treatment rules, taxable eligible rollover distributions from
qualified plans must be permitted to be rolled over directly to a Roth IRA. Participants and spouse beneficiaries are
also permitted to do an indirect rollover within the 60-day rollover period. Prior to January 1, 2010, modified adjusted
gross income and tax filing status limitations apply. Plan administrators are not responsible for
assuring that the individual is eligible to make the Roth IRA rollover. (Participants may rollover Roth 401(k)
accounts to a Roth IRA without regard to the income limitations.)
Qualified reservist distribution. Distributions of elective
deferrals to a military reservist who is called to active duty on or after
September 11, 2001 for more than 179 days are not subject to the 10% excise tax
early withdrawal penalty.
Age 62 in-service distributions. Money purchase pension plans,
which generally are not permitted to provide for in-service withdrawals prior
to normal retirement age, may now provide for such withdrawals to a participant
who attains age 62. (In addition, money
purchase pension plans should be reviewed for compliance with related final
regulations if the normal retirement age in the plan is less than 62.)
New spousal annuity requirements. Plans that are required to provide
an annuity as the normal payment form must offer married participants a
“qualified optional survivor annuity” (“QOSA”) as an optional form of payment
in addition to the currently required “qualified joint and survivor annuity"
(“QJSA”).
EGTRRA permanence. Effective back in 2002, the Economic Growth
and Tax Relief Reconciliation Act of 2001 (“EGTRRA”) made significant changes
to qualified plans, especially 401(k) plans. These included increases in the 401(k)
pre-tax contribution limits, the institution of 401(k) catch-up contributions for
participants age 50+, increases in overall contribution limits, implementation
of 401(k) Roth contributions, and expanded rollover and portability provisions. These EGTRRA provisions were set to expire
January 1, 2011, but the PPA makes them permanent.
Rollovers for Nonspouse
Beneficiaries
The nonspouse beneficiary rollover provision has generated a lot of
interest and has recently become a mandatory qualified plan provision, so an
expanded explanation is provided.
Before the PPA, only the participant’s surviving spouse was permitted
to roll over the deceased participant’s benefits to an IRA or other eligible
retirement plan, while nonspouse beneficiaries incurred immediate tax liability
for benefits distributed to them. Effective
for distributions after December 31, 2007, the PPA allows nonspouse
beneficiaries, including trusts, to roll over distributions of the deceased
participant’s benefit from a qualified retirement plan directly to an IRA. The transfer must occur as a
trustee-to-trustee transfer and cannot be made pursuant to a 60-day rollover
option. In addition, the IRA must be
established and treated as an inherited IRA showing the beneficiary as the
beneficiary of the IRA, rather than its owner, and will be unable to accept
other contributions. Special timing and
distribution rules apply.
As enacted by the PPA, the nonspouse rollover provision was optional,
but WRERA has made it mandatory, meaning that all qualified plans are required
to make the nonspouse rollover available for plan years beginning after
December 31, 2009. Accordingly, plan
sponsors may wish to include appropriate provisions for nonspousal rollovers
when amending their plans for the PPA this year.
Notes about Post-PPA Qualified
Plan Legislation
Legislation affecting qualified plans has continued post-PPA and
additional attention and amendments are required. This is referenced only briefly in this
Newsletter.
The Heroes Earnings Assistance and Relief Tax Act of 2008 (“HEART Act”)
contains several provisions that affect qualified plans, some with retroactive
effective dates. These provisions focus
on those in the military and provide for certain additional benefits or special
benefit treatment for participants in military service. HEART Act amendments are generally required
to be made in written form by the last day of the plan year beginning on or
after January 1, 2010.
And, in addition to the WRERA technical corrections to the PPA that are
referenced or directly incorporated into the listing above, WRERA permits the suspension of required
minimum distributions for the 2009 year.
These distributions (generally required for 5% owner-participants who
have attained age 70 1/2 or other participants at the later of age 70 1/2 or
retirement) may be waived for 2009 in accordance with special rules. And, if required minimum distributions are
made in 2009, they may be treated by the participant as eligible rollover
distributions; but the special direct rollover tax notice and mandatory 20%
percent withholding requirements are waived, and the plan is not required to
treat the distributions as direct rollovers.
The permitted suspension applies to beneficiary required minimum
distributions as well. While operational
for the 2009 year, related qualified plan amendments for these suspension
provisions are not required to be made in written form until the last day of
the plan year beginning on or after January 1, 2011.
For more
information, please contact Randye C. Snyder at rcsnyder@liskow.com and Brianne S. Rome
at bsrome@liskow.com or go to www.liskow.com.
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