Stephanie Alden Smithey

Transcription

1 Amending Your Qualified Plans for the Pension Protection Act and the Worker, Retiree, and Employer Recovery Act (and Other Pension Laws) September 24, 2009 Presented By: Stephanie Alden Smithey

2 You may need to amend this year for Pension Protection Act of 2006 (PPA) Heroes Earnings Assistance and Relief Tax Act of 2008 (HEART Act) Emergency Economic Stabilization Act of 2008 (EESA) Worker, Retiree, and Employer Recovery Act of 2008 (WRERA) Pension Funding Equity Act of 2004 (PFEA) (for deadlines extended by above acts) Other IRS guidance

3 The first questions to consider What changes are mandatory (interim) (disqualifying)? What changes are optional (discretionary)? Why does it matter? Revenue Procedure covers the adoption of interim and discretionary plan amendments

4 Some Important Amendment Deadlines General deadline for PPA Amendments (both mandatory and optional): Amend by last day of first plan year beginning on or after 1/1/2009 (12/31/2009 for calendar year plans) General deadline for any optional amendment absent specific IRS guidance: Amend by last day of the plan year in which amendment is effective Review Rev. Proc carefully for many more details and exceptions to these general deadlines

5 More questions to consider What amendments may not be legally required but are needed to clarify or correct current plan provisions due to changes in the law? What changes may not require plan amendments but require operational changes that need to be communicated and implemented?

6 Mandatory Amendments Accelerated vesting for employer contributions to DC plans Employer stock diversification Direct rollovers to Roth IRAs Rollovers by nonspouse beneficiaries to inherited IRAs 401(k) plans - nondiscrimination testing changes 401(k) plans - gap-period income Death benefits under the HEART Act beginning in 2007 Treatment of differential wage payments 401(k) distributions during uniformed service Notice period for distribution elections Qualified Optional Survivor Annuity (QOSA) requirement Defined benefit plan funding limits on benefits and accruals Fidelity bond changes Interest rate assumption for applying benefit limitations to lump sums 415 limitations on contributions

7 Accelerated Vesting Requirements for Employer Contributions to DC Plans Minimum vesting before PPA (and after EGTRRA): Employer matching contributions: 100% after 3 years (3-year cliff) or At least 20% per year starting with the second year (2-year graded) Other employer contributions in a defined contribution plan: 100% after 5 years (5-year cliff) or At least 20% per year starting with the third year (3-year graded)

8 Accelerated Vesting Requirements for Employer Contributions to DC Plans (Continued) PPA shortened the minimum periods for other employer contributions to: 100% after 3 years (3-year cliff) or At least 20% per year starting with the second year (2-year graded) Effective Date: generally applies to contributions made in plan years beginning after 12/31/2006 Mandatory PPA Amendment: Amend by last day of first plan year beginning on or after 1/1/2009 Note: Plan sponsor can decide whether to apply the above vesting rules to contributions made before the effective date of the change

9 Employer Stock Diversification Law before PPA: ESOPs must allow participants who are age 55 with 10 years of service to diversify investments PPA changed the timing requirements for diversification: Elective deferrals immediately Employer contributions after 3 years of service New Model Notice was provided in Notice Effective Date: applies to plan years beginning after 12/31/2006 Mandatory PPA Amendment: Amend by last day of first plan year beginning on or after 1/1/2009

10 Direct Rollovers to Roth IRAs Law before PPA: Plan distribution had to be rolled over to a traditional IRA which could then be converted into a Roth IRA PPA allowed participants to elect a direct rollover from a qualified retirement plan to a Roth IRA Amount of rollover included in income at time of rollover Not permitted if AGI exceeds $100,000 or if taxpayer is married and filing separately (for 2008 and 2009) These restrictions go away in 2010 due to deletion by Tax Increase Prevention and Reconciliation Act of 2005

11 Direct Rollovers to Roth IRAs (Continued) WRERA clarified that AGI and filing status restrictions did not apply for direct rollovers from designated Roth accounts to Roth IRAs for 2008 and 2009 PPA amendments made before WRERA clarification may need to be modified Notice describes federal income tax consequences of direct rollovers to a Roth IRA Effective Date: applies to distributions made after 12/31/2007 Mandatory PPA and WRERA amendments: Amend by last day of first plan year beginning on or after 1/1/2009 (12/31/2009 for calendar year plans)

12 Rollovers by Nonspouse Beneficiaries to Inherited IRAs Optional under PPA (until 2010): Optional for plan years beginning after 12/31/2006 (1/1/2007 through 12/31/2009 for calendar year plans) Amend by last day of first plan year beginning on or after 1/1/2009 Mandatory under WRERA (a plan must permit them): Mandatory effective for rollovers in plan years beginning after 12/31/2009 (1/1/2010 for calendar year plans) Amend by employer s income tax return due date (including extensions) for 2010

13 401(k) Plans Nondiscrimination Testing Changes Before PPA: Excess Contributions from failed ADP test and Excess Aggregate Contributions from failed ACP test distributed within 2 ½ months of close of year (March 15) were exempt from 10% excise tax and were taxable in year of contribution (unless total < $100, then tax in year of distribution) PPA clarifies: Distributions completed by deadline are taxable in year of distribution regardless of amount For EACAs, deadline is 6 months after close of plan year Effective for plan years beginning on or after 1/1/2008 Mandatory PPA Amendment: Amend by last day of first plan year beginning on or after 1/1/2009

14 401(k) Plans Gap-Period Income PPA eliminated requirement to distribute gap period income as part of ADP and ACP corrective contributions WRERA also eliminated requirement that gap period income be distributed for excess deferrals Both changes effective for plan years beginning after 12/31/2007, because WRERA change is effective as if included in PPA Mandatory PPA Amendment: Amend by last day of first plan year beginning on or after 1/1/2009

15 Death benefits under the HEART Act Beginning in 2007 If participant dies while performing qualified military service, the participant s survivors are entitled to: any additional plan benefits under plan as if participant resumed and then terminated employment on account of death, but excluding any benefit accruals relating to the period of qualified military service Effective with respect to deaths occurring on or after 1/1/2007 Mandatory HEART Act Amendment: Amend by last day of the first plan year beginning on or after 1/1/2010

16 Treatment of Differential Wage Payments Employer has option of providing differential wage payments (difference between military pay and amount employee was paid while on the job) to individuals on active military duty If individual is on active military duty for at least 30 days, his differential wage payments must be treated as compensation (rather than post-severance compensation) Effective Date: years beginning after 12/31/2008 (2009) Mandatory HEART Act Amendment if employer chooses to provide discretionary differential wage payments: Amend by last day of first plan year beginning on or after 1/1/2010

17 401(k) Distributions During Uniformed Service A participant performing uniformed service for more than 30 days must be treated as having been severed from employment during such service for purposes of the 401(k) distribution restrictions Allows participant to elect to take a distribution of his elective deferrals Participant may not make contributions to the plan during the 6-month period beginning on the date of distribution Effective Date: 1/1/2009 Mandatory HEART Act Amendment: Amend by last day of first plan year beginning on or after 1/1/2010

18 Notice Period for Distribution Elections Law Before PPA: a participant may waive a qualified joint and survivor annuity during the 90 day period ending with the annuity starting date PPA expanded the election period to 180 days Compliance with 90-day period also complies with 180-day rule, so plan may choose to continue to operate using 90-day period Effective for plan years beginning after 12/31/2006 Mandatory PPA Amendment: Amend by last day of first plan year beginning on or after 1/1/2009 (unless choose to retain more restrictive 90-day period)

19 Notice Period for Distribution Elections (Continued) The 90-day notice period is also expanded to 180 days for the general consent rules and for the rollover notice rules plan may also require amendments to reflect these changes New - The model 402(f) notice has finally been updated. Notice provides two safe harbor notices for: Distributions from a designated Roth account, and Distributions not from a designated Roth accounts

20 Qualified Optional Survivor Annuity (QOSA) Requirement Types of plans that must provide the QOSA Defined benefit plans Money purchase plans Any other defined contribution plan which provides for annuities, including 401(k) plans and profit sharing plans Defined contribution plans which do not provide for annuity payments are not affected

21 Qualified Optional Survivor Annuity (QOSA) Requirement (Continued) QOSA Requirements: If plan s current QJSA percentage is less than 75%, must offer a 75% QOSA option If plan s current QJSA percentage is greater than or equal to 75%, must offer a 50% QOSA option Effective for distributions with annuity starting dates in plan years beginning after 12/31/2007 Mandatory PPA Amendment: Amend by last day of first plan year beginning on or after 1/1/2009

22 Defined Benefit Plan Funding - Limits on Benefits and Accruals If a plan is underfunded, possible limitations on Payment of shutdown benefits and other unpredictable contingent event benefits Plan amendments that increase liabilities for benefits Payment of accelerated benefit distributions (such as single sum payments) Benefit accruals Employees must be provided notice of these benefit limitations within 30 days of the plan becoming subject to the limits

23 Defined Benefit Plan Funding - Limits on Benefits and Accruals (Continued) Limits applied based on plan s adjusted funding target attainment percentage (AFTAP), but fully apply if AFTAP is less than 60% Effective for plan years beginning after 12/31/2007 Mandatory PPA Amendment: Amend by last day of first plan year beginning on or after 1/1/2009 WRERA provides that mandatory cash out payments are not restricted payments and may be distributed immediately from an underfunded plan

24 Fidelity Bond Changes Law Before PPA: Fidelity Bond required for 10% of plan assets up to maximum of $500,000 PPA Change: Maximum fidelity bond increased to $1 million for plans that hold employer securities Effective Dates: Increased Bonding plan years beginning after 12/31/2007 RBD Exemption plan years beginning after PPA enactment date of 8/17/2006 Mandatory PPA Amendment: Generally operational change, but if plan includes details regarding fidelity bond, amend by last day of first plan year beginning on or after 1/1/2009

25 Interest Rate Assumption for Applying Benefit Limitations to Lump Sums PFEA amendment required for plan years beginning in 2004 and 2005 PPA amendment required for distributions made in plan years beginning after 12/31/2005 Amendment deadline in PFEA was extended first by PPA and later by WRERA, with final amendment deadline of the last day of the first plan year beginning on or after 1/1/2009 There is still time to confirm appropriate amendments have been adopted

26 415 Limitations on Contributions Final 415 Regulations issued 4/5/2007 Change computation of limit and definition of compensation counted in computing the limit (i.e. compensation paid after severance from employment) Change employee s ability to defer out of postseverance compensation, and provide deferrals can only be made from amounts included in 415 compensation Provide that 415 compensation is limited by 401(a)(17)

27 415 Limitations on Contributions (Continued) Effective Date: limitation years beginning on or after 7/1/2007 (2008 for calendar year plan years) Mandatory amendment to comply with final Regulations remedial amendment period allows amendment to be adopted by the employer s 2008 tax return due date, including extensions Most 415 amendments have been adopted and most tax return due dates are past confirm 415 amendments were timely adopted

28 Optional Amendments Eligible automatic contribution arrangements (EACAs) Qualified automatic contribution arrangements (QACAs) Rollovers of after-tax amounts Hardship distributions for primary beneficiary expenses Qualified reservists distributions In-service distributions at age 62 under DB plans Required minimum distribution (RMD) waiver for DC plans Interest rate assumption for determining lump sum distributions under DB plans Optional benefit accruals in event of death or disability resulting from active military service Midwestern disaster relief New Paid time off contributions

29 Eligible Automatic Contribution Arrangements (EACAs) Rules established under PPA for EACAs, including notice requirements Introduces permissible withdrawals if made no later than 90 days after first automatic contribution Effective for plan years beginning after 12/31/2007 (1/1/2008 for calendar year plans) Optional PPA Amendment: Amend by last day of first plan year beginning on or after 1/1/2009 Recent guidance issued on automatic contribution increases (Rev. Rul ) and sample amendments to add automatic enrollment (Notice )

30 Eligible Automatic Contribution Arrangements (EACAs) (Continued) WRERA modifications and clarifications Automatic contributions not subject to DOL Default Investment Rule under ERISA Section 404(c)(5) Clarification that permissible withdrawals not included in 402(g) limit WRERA No amendment needed unless plan was amended to include operational detail inconsistent with the above clarifications

31 Qualified Automatic Contribution Arrangements (QACAs) PPA provided for new safe harbor deferral structure using a qualified automatic contribution arrangement (QACA) Effective for plan years beginning after 12/31/2007 (1/1/2008 for calendar year plans) Optional PPA Amendment: Amend by last day of first plan year beginning on or after 1/1/2009

32 Rollovers of After-Tax Amounts Permits qualified plans (DB or DC) to accept after-tax direct rollover amounts from a qualified retirement plan, provided the plan separately accounts for the after-tax amounts Effective for taxable years beginning after 12/31/2006 (1/1/2007) Optional PPA Amendment: Amend by last day of first plan year beginning on or after 1/1/2009

33 Hardship Distributions for Primary Beneficiary Expenses PPA required guidance to be issued for determining whether a hardship is incurred by a participant s beneficiary under the plan IRS Notice (Section III) permits hardship distributions for medical, tuition, and funeral expenses for a primary beneficiary Effective on enactment of PPA (8/17/2006) Optional PPA Amendment: Amend by last day of first plan year beginning on or after 1/1/2009

34 Qualified Reservists Distributions PPA allowed plan to permit in-service distributions to reservists called to active duty on or after 9/11/2001 for a period of at least 180 days or for an indefinite period While on active duty, tax relief from 10% early withdrawal penalty applies for any in-service withdrawals (e.g. hardships), as well as distributions on severance from employment PPA provision expired on 12/31/2007; however, the HEART Act reinstated it effective 1/1/2008 and made it permanent Effective for distributions after 9/11/2001 Optional PPA Amendment: Amend by last day of first plan year beginning on or after 1/1/2009

35 In-Service Distributions at Age 62 under DB Plans Law Before PPA Pension Plans: no in-service distributions Profit-Sharing Plans: in-service distributions permitted PPA permits pension plans to provide for in-service distributions at age 62 Effective for distributions in plan years beginning after 12/31/2006 Optional PPA Amendment: Amend by last day of first plan year beginning on or after 1/1/2009

36 Required Minimum Distribution (RMD) Waiver for DC Plans Required Minimum Distributions (RMDs) WRERA provides for temporary waiver for 2009 Applicable plans defined contribution plans (which include 401(a), 403(b) and 457(b) state governmental plans) and IRAs Applies to participants and beneficiaries scheduled to receive RMDs for 2009 that are due by 12/31/2009 or 4/1/2010 WRERA Amendment: Amend by last day of first plan year beginning on or after 1/1/2011 (12/31/2011 for calendar year plans)

37 Required Minimum Distribution (RMD) Waiver for DC Plans (Continued) Advantages participants and beneficiaries do not have to realize losses by taking money out of plan based on 12/31/2008 market values Benefits a small class of participants: retirees over age 70½ who have not yet requested a distribution from the plan or 5% owners still working, all who have account balances valued over $5,000 What employers need to do now: Consider RMDs currently made from plan and consider costs of changing plan administration

38 Interest Rate Assumption for Determining Lump Sum Distributions under DB Plans Before PPA: Indexed rate based on 30-year Treasury Bonds PPA: Segmented yield curve based on high-grade corporate bonds, with phase-in for PPA change likely to cause minimum lump sum values to decrease plan may pay larger lump sums Effective for plan years beginning after 12/31/2007 Optional PPA Amendment: Amend by last day of first plan year beginning on or after 1/1/2009

39 Optional Benefit Accruals in Event of Death or Disability Resulting from Active Military Service For benefit accrual purposes, Plan may treat participant who dies or becomes disabled while performing qualified military service as if he had resumed employment on the day before and terminated employment on the date of death or disability Effective with respect to deaths and disabilities occurring on or after 1/1/2007 Optional HEART Act Amendment: Amend by last day of first plan year beginning on or after 1/1/2010

40 Midwestern Disaster Relief EESA and IRS Fact Sheet address optional relief related to the storms, tornados, and flooding in the Midwest, including: Plan loans permitted from 10/3/2008 to 12/31/2009 with limit increased to $100,000 or 100% of participant s vested account balance Delay for up to one year of plan loan payments due between disaster date (6/6/2008 for most Indiana counties) and 12/31/2009 Rollover of hardship distribution not used to purchase or construct home between disaster date and 3/3/2009 by repayment to plan

41 Midwestern Disaster Relief (Continued) Relief from 10% early distribution tax for qualified disaster recovery assistance distributions up to $100,000 between disaster date and 1/1/2010 (distribution not required to be made on account of the disaster) Permitted repayment of qualified disaster recovery assistance distribution to an eligible retirement plan within 3 years of distribution date (treated as direct rollover) Optional EESA amendments amend by last day of first plan year beginning on or after 1/1/2010

42 New Paid Time Off Contributions Recent guidance issued permitting certain contributions of dollar equivalent of unused paid time off Rev. Rul regarding unused time at end of year Rev. Rul regarding unused time at termination of employment Can be used beginning with 2009 plan year Optional amendment would need to be adopted by last day of plan year in which amendment is effective

43 Single-Employer Plan Funding Rules Overhaul of funding calculations for DB plans Minimum required contribution Value of plan assets = FMV on valuation date Funding target = PV of accrued benefits If Value of plan assets < Funding target Minimum required contribution = Target normal cost + Shortfall amortization charge PPA mandatory changes Whether amendment is needed depends upon amount of detail in plan funding provisions Work with plan actuary

44 Multiemployer Plan Funding Rules New PPA Funding Standards and Notice Requirements Red (critical), yellow (endangered) and green (healthy) funding zones Funding Improvement Plans & Rehabilitation Plans Impact on Contributing Employers Obligation to adopt new contribution/benefit schedules Potential surcharges & excise taxes

45 WRERA Funding Relief Single Employer Plans Averaging of plan assets Phase-in funding target schedule Look-back for AFTAP when determining whether benefit accrual restrictions apply Multiemployer Plans Freezing of 2008 funding status for one year, or 3-year extension of timeline for Funding Improvement and Rehabilitation Plans

46 Questions? Thank you!

47 Amending Your Qualified Plans for the Pension Protection Act and the Worker, Retiree, and Employer Recovery Act (and Other Pension Laws) September 24, 2009 Presented By: Stephanie Smithey