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2 Thank You to Our Sponsors!

3 Session 2 Plan Document Update: What You Need to Know in 2018 Kelsey N. H. Mayo, Esq. Partner Poyner Spruill LLP Robert M. Richter, Esq., APM Vice President FIS Wealth and Management

4 Agenda Top Issues for 403(b) Plan Restatements Defined Benefit Restatements New Pre-approved Plan Program Individually Designed Plans Interim Amendments 4

5 403(b) Plan Restatements

6 Timeframes Deadline to restate is March 31, 2020 for those wanting retroactive reliance We do not know what the remedial amendment period is for individually designed 403(b) plans 6

7 Poll Question #1 How many remaining 403(b) plans do you have to restate? A. None - we restated all the plans (if any) we have B. Less than 5 C. Between 5 20 D. Between E. 100 or more

8 Effective Date of Restatement A plan can have retroactive reliance back to the first day of 2010 plan year Plan can be effective in 2009 in order to conform plan document to operation, but no reliance for 2009 In order to have retroactive reliance back to 2010, the restatement effective date must be the first day of the 2010 plan year This means all changes to the plan since 2010 must be reflected in the plan 8

9 Example 2009 document didn t have match 2013 employer added 50 percent match up to eight percent of compensation (no amendment) 2016 employer changed to basic match safe harbor (no amendment) 2018 employer restates, showing safe harbor Approaches: Use 2010 effective date and special effective dates to show changes in 2013 and 2016 (best practice) Use 2018 effective date and reflect changes to prior provisions; no reliance on most plan provisions Use 2010 effective date and reflect as many retroactive changes as possible 9

10 Example from IRS Plan B, adopted effective January 1, 2014, provided that participants could make elective deferrals of up to $18,000 (this exceeds the 2014 IRC 402(g) limit of $17,500) In plan-year 2014, two participants deferred $18,000 as permitted by the plan Conclusion: the plan doesn t comply with the law both in form and in operation The plan sponsor must correct the defect by the end of the RAP (March 31, 2020) retroactive to the start of the plan s RAP (January 1, 2014) The plan sponsor must also correct the excess deferrals based on EPCRS correction principles 10

11 Example from IRS Plan D, adopted effective in 2012, provides that all employees may make elective deferrals In operation, for plan years the employer excluded employees who worked fewer than 20 hours per week (part-time employees) as otherwise permitted under the law Conclusion: the plan sponsor failed to operate the plan according to its terms The plan complies with the 403(b) regulations in form (it s the operation that is wrong) The plan can t be corrected by a plan amendment during the RAP The sponsor must correct this operational failure under EPCRS Note: in this example the initial plan document did not reflect the operation 11

12 Open Issue Suppose the plan in the prior example did not exclude anyone for deferral purposes when initially established in 2012 Employer added the 20 hour/week exclusion in 2015 in operation but no amendment was adopted Not clear if this can be corrected as part of the RAP

13 More Woes: Required Appendices Persons to whom administrative functions have been allocated and the specific functions allocated to such persons shall be identified in an administrative appendix to the plan Service agreements and other records or information pertaining to the administration of the plan may be included or incorporated by reference in the appendix 13

14 Administrative Function Appendix 14

15 Investment Appendix A list of all vendors of investment arrangements approved under the plan Good news: IRS only requires the vendor and type of investment (e.g., custodial or annuity) Obtaining the information for open access plans will require employer involvement 15

16 Once-In-Always-In The once-in-always-in approach is problematic for restatements (and for some employers going forward) Many employers have been using the in-and-out approach since 2010 IRS allows discretionary changes and changes in the law to be handled through a special effective-date appendix or modification There is no formal guidance indicating that this is a change in the law and therefore no guidance allowing a special effective-date for this provision IRS guidance on this is expected soon Our hope is that it would only require a change in the BPD May also require some splaining to employers on why the operation of the plan is changing 16

17 415 Notice Effective for the plan year after the pre-approved plan is adopted, employers must provide employees with an annual notice No guidance on what annually means There aren t prescribed dates such as 30 days before the plan year begins Purpose of the notice is to inform employees of the special aggregation rule for 403(b) plan (the so-called Dr. rule) 17

18 Poll Question #2 Do you currently provide an annual notice to 403(b) participants in order to satisfy the universal availability requirement? A. Yes B. No

19 Impermissible Pre-Approved 403(b) Provisions Governmental and non-electing churches can only use 15-year cliff vesting or 5-20 year graded vesting (some refer to as pre-erisa vesting) QCCOs cannot adopt a pre-approved 403(b)(9) (retirement income account) plan IRS interpretation of law is that non-qccos cannot adopt a 403(b)(9) plan (pre-approved or individually designed)

20 Multiple Employer Plans (MEPs) Law is not clear if a 403(b) MEP is permitted under the law Doesn t seem to a problem for group of Virginia colleges and universities that are forming a MEP IRS permitted MEP language to be in plan but there is no reliance on the language

21 Defined Benefit Plan Restatements

22 Pre-approved DB Plans Most pre-approved PPA defined benefit plans were approved on March 31, 2018 Restatement deadline is April 30, 2020 Relatively few changes in the law so restatement process shouldn t be too painful Last minute changes - IRS permitted actual rate of return for interestcrediting rate 22

23 Plan Terminations Does a DB plan need to be restated onto new pre-approved plan prior to termination? Restatement isn t a qualification requirement There haven t been many interim amendments If filing Form 5310 then no reason to restate As time goes on, individually designed plans may have more at risk by submitting If not filing Form 5310 then safest is to restate 23

24 Defined Contribution Plan Restatements

25 Rev. Proc

26 Tri-Cycle Restatement Period The new rules apply with the next six-year cycle DC plan submission period begins October 2, 2017 and ends October 1, 2018 IRS approval expected in 2020 Restatement period around Does not change the 403(b) rules 26

27 New Terminology New consolidated program is referred to as opinion-letter program No distinction between M&Ps and volume-submitter plans Sponsor of pre-approved plan is the provider

28 Pre-Approved Plan Formats Adoption agreement plan AA and basic-plan document Single-plan document Contract style

29 Two Types of Plans 1. Standardized plans Same as existing rules Must satisfy coverage and nondiscrimination Employer modifications destroy reliance

30 2. Non-standardized plans Two Types of Plans Same rules that currently apply to volume-submitter plans If employer makes minor modifications, then Form 5307 may be used May use facts and circumstances for hardships Permitted to have irrevocable elections not to participate

31 Expansion of Permissible Provisions Non-standardized ESOP may include a 401(k) feature A money-purchase plan may be combined with a 401(k) or profit sharing plan Non-electing (ERISA exempt) church plans are permitted

32 No Reliance IRS will not rule on trust provisions Must be a separate document No reliance on Title I ERISA provisions (clarification technically not a change in reliance rules)

33 IRS User Fees Adoption-agreement plan $16,000 Each additional AA $11,000 Single-plan document $28,000 Providers pay lower user fees if using mass submitter documents ($300 per plan as word-for-word adopter)

34 Impact of User Fees Consolidation of plans (MP, PS, 401(k))? Standardized plans Target benefit plans

35 Poll Question #3 How many target-benefit plans does your firm administer? A. Zero B. One C. Two D. More than two

36 Individually Designed Plans

37 Pre-approved Plans: Impermissible Provisions

38 If It s Not Impermissible, Then Technically it s allowed in a pre-approved plan The adoption agreement could be this large: Or it could be small: the terms of the plan are: (with a very long parameter on what can be filled in)

39 Impermissible Provisions Collectively bargained plans (single-employer or multi-employer) Union employees of single-employer can be covered under preapproved plan Stock bonus plans other than ESOPs ESOPs with MP provisions or that hold preferred stock

40 Impermissible Provisions Plans with 401(h) accounts (post-retirement medical) DB/K plans (414(x)) DB plans with 414(k) accounts (pre-egtrra provisions are grandfathered) Rollover accounts are permitted Governmental DB plans with DROP features

41 Impermissible Hybrid Provisions Hybrid plans with any of the following features are NOT permitted in a pre-approved plan: A statutory hybrid plan that is not a cash balance formula (e.g., a pension-equity plan) An interest-crediting rate based on a participant s choice or a rate that doesn t satisfy the regulations (1.411(b)(5)-1(d)) An interest-crediting rate that is based on a subset of assets or rate of return on certain regulated investment companies (RICs)

42 Impermissible Hybrid Provisions Hybrid plans Conversion from a traditional DB formula unless it s an A + B conversion No wear-away approach That use three percent or fractional accrual method Must use 133 one-third percent method That are fully insured (IRC 412(e)(3))

43 Impermissible Hybrid Provisions Offset provisions unless: Offset is applied on accumulate basis at annuity starting date Offset meets the safe-harbor requirements of 1.401(a)(4)-8 Minimum accrued benefit of 0.5 percent of compensation for each year of credited service

44 The New Determination Letter (DL) Program For IDPs Rev. Proc

45 One and Done Employers can only request a determination letter on an IDPdesigned plan If they have never received a determination letter on the plan On plan termination (Form 5310) Other circumstances identified by IRS Don t hold your breath IRS requests comments (IRS Notice ) on the potential expansion of the scope of the DL program for IDPs during the 2019 calendar year

46 One and Done For purposes of one and done, reliance on pre-approved plan is not the same as having received a DL Example: employer has traditional DB on an M&P plan and has reliance Employer adds cash-balance provisions Employer could submit for a DL as an initial plan qualification In many cases this won t be necessary as most cash-balance provisions will be permitted in pre-approved plans

47 Amendments No ability to obtain approval of interim or discretionary amendments to IDPs Good-faith no longer the standard

48 Required Amendments List IRS will annually issue a Required Amendments List for IDPs only An item will be put on the RA list when: The law changes and the IRS determines no guidance is needed The law changes and the IRS has issued guidance on the subject The IRS issues changed guidance (e.g., regulations on forfeitures reducing SH and QNECs)

49 Required Amendments List Generally have two years to adopt an amendment once it is on the list No exception for IRC 411(d)(6) IRS has not changed the interim amendment rules for preapproved plans Used in issuing determination letters to IDP Use list issued two years earlier So 2016 list applies to determination letter requests made in 2018

50 First RA List (2016) IRS Notice Part A: changes in qualification requirements that generally would require an amendment to most plans None Part B: other changes in qualification requirements that may require an amendment: Collectively bargained defined benefit plans: restrictions on accelerated distributions from underfunded single-employer plans in employer bankruptcy under 436. (Highway and Transportation Funding Act of 2014, P.L , 2003)

51 IRS Notice Second RA List (2017) Part A: changes in qualification requirements that generally would require an amendment to most plans Cash-balance regulations Benefit restrictions for certain DB plans that are eligible cooperative or charity plans Part B: other changes in qualification requirements that may require an amendment: Bifurcated benefits in a DB plan (model amendments provided in IRS Notice )

52 Operational Compliance List New rules could result in extend delays between effective date of change in the law and the adoption of a conforming amendment IRS will issue an annual operational checklist to help employers know what changes are effective each year Good for all plans Per the IRS: it is not intended to be a comprehensive list of every item of IRS guidance or new legislation Lists are at:

53 Possible Interim and Discretionary Amendments

54 Disability Claims Regulations Effective April 1, 2018 Most plans do not need an amendment (plus it s an ERISA provision) Updated claims procedures for plans that make determinations as to disability

55 Disaster Relief Disaster Tax Relief and Airport and Airway Extension Act of 2017 (for hurricanes Harvey, Irma, and Maria) Bipartisan Budget Act of 2018 (California wildfires) Discretionary amendment not due until last day of 2019 plan year

56 Tax Jobs and Cuts Act of 2017 Extension of rollover period for loan offsets due to termination of employment or plan Most plans will not need an interim amendment but updated 402(f) notice is needed

57 Bipartisan Budget Act of 2018 Elimination of six-month suspension and requirement to obtain all loans Expansion of sources to include earnings on elective deferrals, QNECs, QMACs and SH Not clear that earnings on elective deferrals to a 403(b) plan can withdrawn All are discretionary so last day of PY in which they are implemented No rules yet for 403(b) plans Will need to make decisions regarding default provisions for adoption at sponsor level

58 Questions? 58

59 Thank You to Our Sponsors!