New Laws And Regulations Affecting Employee Benefit Plans
The following is a list of new laws and regulations that impact many employers’ employee benefit plans:
Deadline Nears for Section 409A Changes
Many deferred compensation arrangements must be redesigned and amended by December 31, 2006 to comply with Internal Revenue Code section 409A. In addition, deferred compensation plans that allow participants to elect the time and form of benefit payment must obtain elections by that date. This deadline was contained in IRS proposed regulations issued last September. The IRS has promised final regulations sometime this summer. It is possible that the final regulations will extend the deadline. In the meantime, deferred compensation plans must operate in “good faith” compliance with section 409A. See the Gordon Feinblatt Legal Bulletin dated February 14, 2006 for a summary of the requirements of section 409A and the proposed regulations or view the summary on Gordon Feinblatt’s Employment Law Resource Center at http://www.gordonfeinblatt.com/eib and click on Articles.
IRS Opens Up Determination Letter Program
The IRS is now accepting determination letter applications for 2001 tax act (“EGTRRA”) amendments to individually-designed (non-prototype) qualified retirement plans. The IRS has a new program that uses a staggered cycle under which plan sponsors will need to apply for determination letters just once every five years. Plans are assigned to a particular five-year cycle based on the last digit of the plan sponsor’s employer identification number (EIN):
LAST DIGIT OF EIN
DEADLINE FOR EGTRRA DETERMINATION LETTER SUBMISSION
1 OR 6
2 OR 7
3 OR 8
4 OR 5
5 OR 0
For example, an employer whose EIN ends in 1 or 6 must apply for an EGTRRA determination letter by January 31, 2007. There are special rules for governmental plans and plans maintained by more than one employer.
New 401(k) Regulations Are Effective
New IRS regulations became effective January 1, 2006 for most 401(k) plans.
- For plans that allow hardship withdrawals, two new “safe harbor” hardship events have been added: funeral and burial expenses for family members and certain home repair expenses following a casualty loss.
- New vesting requirements apply to rehired employees.
- When a plan refunds excess contributions to high-paid employees after failing the ADP/ACP nondiscrimination tests, earnings after the end of the plan year (“gap-period earnings”) must also be refunded.
- The ability of plans to make additional contributions (“QNEC’s”) to low-paid employees to correct failures of the ADP test is restricted.
Amendments for these changes are generally required by December 31, 2006.
Automatic Rollover Amendment Deadline Extended
Since March 28, 2005, qualified retirement plans have been required to automatically transfer mandatory distributions greater than $1,000 to an IRA selected by the plan sponsor, unless the participant elects otherwise. Many plan sponsors have already amended their plans to comply with the new rules. For those who have not amended their plans, an IRS extension may give additional time to amend. For example, taxable employers with a calendar fiscal year now have until September 15, 2006. The same extension applies to plans that chose to comply with the new rules by reducing the Plan cash out threshold to $1,000.
Part-Time Employee Exclusions Under Scrutiny
For many years, the IRS has said that a qualified retirement plan may not exclude employees just because they are classified as “part time”. (A plan may keep out part-timers until they work at least 1,000 hours in a 12-month period.) Despite this position, a number of plans still contain a blanket exclusion for part-timers. Recently, the IRS has directed its agents to scrutinize this issue when reviewing plans. Employers with plans excluding part-timers should consider dropping this provision or revising it to be acceptable to the IRS.
PBGC Premium Increases for Defined Benefit Plans
Starting this year, defined benefit plan sponsors will face higher PBGC premiums. For single-employer plans, the 2006 flat-rate premium increases from $19 to $30 per participant. After 2006, premiums will be indexed for inflation. The variable rate premium for underfunded plans did not increase, but may do so as a result of “pension reform” legislation pending before Congress. The variable rate premium remains at .9% of the plan’s underfunding.