The Internal Revenue Service (IRS), on May 12, 2000, extended for one year the deadline for amending and restating individually designed qualified retirement plans to comply with GUST. Prior to the announcement, the deadline was December 31, 2000. The time for filing determination letter applications on the amended and restated plans also is extended for one year.
GUST refers, in the aggregate, to the following laws: the General Agreement on Tariffs and Trade (GATT), the Uniformed Services Employment and Reemployment Rights Act (USERRA), the Small Business Job Protection Act of 1996 (SBJPA) and the Taxpayer Relief Act of 1997 (TRA 97). Changes required by the IRS Restructuring and Reform Act of 1998 also are included under the GUST amendment requirements.
The IRS announced that it would issue detailed guidance on the extension within a few weeks.
If your 401(k) plan or other retirement plan is a volume submitter, mass submitter or a prototype plan, a different amendment and submission deadline currently applies for your plan. Under IRS' most recent announcement for those types of plans, you will have one year following the date the sponsoring entity of such plan receives its Opinion Letter from the IRS on the master plan document. You should contact your provider to discuss the amendment process.
We would be happy to answer questions you may have on the amendment process or on your retirement plan.
New Safe Harbor Notice for Plan Distributions and Rollovers
On January 21, 2000, the Internal Revenue Service (IRS) issued a new Safe Harbor Notice to be provided to terminated employees who are eligible to receive a distribution from a qualified retirement plan. The Safe Harbor Notice provides information to participants on their direct rollover rights, and other rights, upon receiving a distribution from a retirement plan.
The new Safe Harbor Notice includes updated language to reflect recent changes in the tax law.
If you are using the old Safe Harbor Notice for the required notice on plan distributions, you should replace it with the new Safe Harbor Notice. Please contact any of the individuals listed at the end of this Cooley Alert in order to obtain a copy of the new Safe Harbor Notice.
Automatic Extension for Filing 1999 Form 5500 for Calendar Year Plans
The IRS and the Department of Labor have announced an automatic extension for filing the 1999 Form 5500 series reports. The extension applies only to retirement plans and welfare plans that use the calendar year as the basis for filing their Forms 5500.
The automatic extension for filing allows such Forms 5500 to be filed on or before Monday, October 16, 2000. Plan sponsors do not have to file extension requests in order to receive this automatic extension.
The automatic extension was granted to allow plan sponsors and their advisors time to adapt to changes in the Form 5500 filing requirements. These changes include a revised Form 5500, new electronic filing rules and filing the Form 5500 with the Department of Labor, rather than with the IRS.
Plans that do not report their Form 5500 on a calendar year basis are not eligible for the automatic extension. Such plans must either file their 1999 Form 5500 by the regular due date or must request an extension of the filing period by filing a written request for extension of time to file.
Changes Make Section 401(k) Safe Harbor Plans More Appealing
The SBJPA introduced a new 401(k) plan concept, popularly known as a "safe harbor" 401(k) plan. A safe harbor plan is a 401(k) plan that is not required to conduct annual ADP (401(k) contributions) and/or ACP (matching contributions) nondiscrimination testing because the employer makes a minimum amount of fully vested contributions to the plan each year. Such contributions may be in the form of an employer matching contribution or an employer nonelective contribution. Such safe harbor plans first became effective for the 1999 plan year.
Safe harbor plans are subject to strict operational rules and advance notice requirements as well as fairly rich contribution requirements. While the contribution, compliance and notice requirements for safe harbor plans remain unchanged from those set forth in SBJPA, the IRS recently issued Notice 2000-3, which makes compliance with certain of the requirements somewhat easier to achieve. For example:
- Plan sponsors can wait as late as December 1 of a calendar year to adopt the three percent (3%) employer nonelective contribution in order to have their plan qualify as a safe harbor plan for that calendar year. This delayed adoption date does not apply to adoption of the safe harbor matching contribution, which is an alternate means of meeting the safe harbor plan requirements.
- Plan sponsors now can make the safe harbor matching contribution on a pay period, monthly or quarterly basis, rather than only annually.
- Plan sponsors now can provide the annual safe harbor notice electronically, rather than providing a paper copy.
- Plan sponsors may switch during the year from the matching safe harbor format to a non-safe harbor plan (and conduct ADP and ACP testing for that year) by giving employees adequate advance notice of the change.
- Plan sponsors with a profit sharing plan who add a 401(k) feature to the plan mid-year may make the plan a safe harbor plan for its first year as a 401(k) plan.
The IRS guidance also simplified, to some extent, the content of the required annual notice.
Safe harbor plans remain subject to strict compliance and notice requirements but are somewhat more workable under the new guidelines. This Alert only highlights the changes to the safe harbor plan requirements. For more information, please contact any of the persons listed at the end of this Alert.
IRS Allows Negative Elections for Existing Participants in 401(k) Plans
In Revenue Ruling 2000-8, the IRS expands the rules on 401(k) plan negative elections from previously issued guidance that applied only to new employees. Under Revenue Ruling 2000-8, employers may amend their 401(k) plans to provide that current, as well as new, participants are deemed to elect a predetermined percentage of their compensation to be deferred as 401(k) contributions unless the participants affirmatively elect otherwise (a negative election). Such deemed elections could help some 401(k) plans to pass the actual deferral percentage nondiscrimination test applied to 401(k) contributions (ADP test).
Typically, new employees (especially new non-highly compensated employees) tend not to participate immediately in a 401(k) plan. This tendency toward late participation may result in lower deferrals for the employer's non-highly compensated employee group, which, in turn, may require employers to limit the deferral amounts of their highly compensated employees in order to pass the ADP test.
In Revenue Ruling 2000-8, the IRS permits the application of the negative election provision to current employees who have a deferral election in effect. The ruling allows the plan to raise a current employee's deferral percentage up to a higher predetermined percentage (such as three percent of compensation) unless the employee affirmatively elects otherwise. The negative election provision may not be applied to current employees who have elected not to defer their compensation under the plan.
As a condition for applying the negative election, the employer must notify a new or current eligible employee that unless he or she elects not to participate in the plan or elects to defer a different percentage of compensation within a reasonable time (prior to the start of the plan year), then the employee will be deemed to have elected to defer the predetermined percentage of compensation. In addition, the plan must allow the participant to change his or her election prospectively at any time. All plan participants must be notified annually of the negative election provision, their current deferral percentages, and their right to withdraw from the plan or change their deferral percentages under the plan.
Employers who are considering a negative election approach for their 401(k) plan should keep two issues in mind. First, the investment of the negative election amounts are not eligible for the limited fiduciary protection under ERISA Section 404(c) unless, and until, the participant provides specific investment direction for such amounts. Second, the right of an employer under state law automatically to withhold amounts from employees' paychecks without employee consent is unclear. However, we anticipate that the Department of Labor may issue guidance on this point in the near future.
Excluding New and Younger Participants from ADP Test Under SBJPA
A recently effective provision of SBJPA changes plan testing requirements in a way that also may help some 401(k) plans pass the ADP test. A 401(k) plan may provide that employees with less than one year of service or who are below the age of 21 are excluded from participating in the plan. However, many employers allow such employees to participate in the 401(k) plan. Prior to SBJPA such provisions had the effect of making it more difficult for the plan to pass the ADP test because new and younger employees tend not to defer as much of their compensation as do longer-term and older employees.
Under the SBJPA, Congress changed the 401(k) ADP test rules to permit plan sponsors to exclude from the ADP test those non-highly compensated employees with less than a year of service or who had not attained age 21, even though those employees are allowed to participate in the plan. Thus, if the plan meets other requirements, employers may allow young and short-term employees to participate in a plan without having to include their deferrals in the ADP test for the plan. This change took effect for the 1999 plan year and your plan must be amended to provide for this special testing exclusion in order to gain its benefit.
IRS Finalizes Regulations on Paperless Administration
The IRS has finalized regulations regarding the transmission of notices through electronic media. The final regulations, which are effective January 1, 2001, but which currently may be relied on, provide broad, flexible standards for the electronic transmission of certain notices and consents required for distributions.
Specifically, the final regulations allow a qualified plan to furnish the notices and consents required by (1) Internal Revenue Code (the "Code") Section 402(f) (the direct rollover notice), (2) Code Section 411(a)(11) (the notice of distribution options and the right to defer distribution and consent to distribution) and (3) Code Section 3405(e) (the withholding notice) either on a written paper document or through an electronic medium reasonably accessible to the participant. The final regulations require that the participant be advised of his or her right to request and receive a copy of the notice on a written paper document without charge.
The final regulations also permit a plan to provide rollover notices and distribution notices more than ninety (90) days prior to a distribution, if the plan provides a summary of the notices within ninety (90) days prior to the distribution.
The IRS reiterated that these final regulations do not address the application of ERISA to the use of electronic media for any plan communication or transaction. The final regulations also do not address the issues of the electronic administration of plan loans. The IRS expects to issue guidance on the electronic administration of plan loans in the future. Furthermore, the IRS noted that since spousal consents require a notary public or plan representative as a witness, the use of electronic media for such notices is not permitted.
New Department of Labor Voluntary Correction Program For Certain ERISA Fiduciary Violations
The Department of Labor recently announced the implementation of a new Voluntary Fiduciary Correction Program (VFC). VFC, which was effective April 14, 2000, allows fiduciaries of retirement plans, including 401(k) plans, and welfare plans who participate in the VFC with respect to specified fiduciary violations to receive a "no-action" letter from the Department of Labor with respect to the specific fiduciary violations.
The Department of Labor currently has listed thirteen violations that are correctable under VFC. The correctable violation that may be of most interest to 401(k) plan fiduciaries is the late deposit to a trust of employee 401(k) contributions. Other correctable violations include various issues with plan loans to participants, buying and selling assets from or to a party in interest, purchase or sale of assets by a plan at other than fair market value and distribution of benefits without proper valuation of plan assets.
VFC requires a comprehensive written application and full correction of the fiduciary violation, including contributions of lost earnings or lost profits to the affected plan. VFC also requires that the participants in the plan be notified of the fiduciary violation and of the correction and that the participants be given, upon request, a complete copy of the written VFC application submitted by the plan fiduciary to the Department of Labor.
If you would like more information about VFC, please contact us.
New Rules on Cafeteria Plan Status Changes
The IRS recently issued final and proposed regulations that address family status changes under Code Section 125 plans, also referred to as cafeteria plans or flexible benefit plans. Family status changes are the events that allow a participant in a cafeteria plan to change his or her deferral elections during a plan year.
Final Regulations
The final regulations expand somewhat the exclusive list of status changes for health and group-term life insurance coverage originally included in the temporary regulations published in 1997. Otherwise, the 1997 temporary regulations were followed in the final regulations.
The two primary modifications to the list of status changes under the final regulations are to (1) the definition of change in employment and (2) life insurance changes permitted as the result of either a change in marital status or an employment status change of a spouse or dependent. Specifically, any employment status change of an employee, or spouse or dependent of the employee, that affects the employee's eligibility under a cafeteria plan constitutes a change in status.
With respect to group-term life insurance, in the event of a change in the marital status of the employee or a change in the employment status of the spouse or dependent, the employee can make a corresponding increase or decrease in the employee's life insurance election. Under the proposed regulations, only a decrease in coverage was permitted.
The IRS did not impose a specific period within which status election changes must be made. Within the confines of HIPAA and COBRA, and any other minimum periods required by law, a cafeteria plan may establish its own requirements for when election changes regarding change of status must be made.
The final regulations are effective for cafeteria plan years beginning on or after January 1, 2001. Cafeteria plans should be amended to reflect the final regulations.
Proposed Regulations
The cafeteria plan proposed regulations provide an exclusive set of status changes for dependent care and adoption expenses and expand the events under which election changes may be made for all benefits, including health care and group-term life insurance.
For dependent care and adoption benefits offered under a cafeteria plan, the change of status events are the same as those available for health care and group-term life insurance coverage, with two additions.
Starting or finishing adoption proceedings is an additional status change for adoption assistance benefits.
A change in the number of "qualifying individuals" also is a status change for dependent care benefits. The proposed regulations now state that a child's attainment of age 13, the age at which a non-disabled child is no longer eligible for dependent care coverage, is a permissible status change for dependent care.
Status changes allowed in response to changes in the cost or coverage of benefits also are addressed in the proposed regulations. For example, under the proposed regulations, the addition of a new benefit option mid-year, such as adding an HMO, would allow election changes.
Also, the proposed regulations provide that a change in coverage or cost of benefits under self-insured health plans, group-term life insurance plans, dependent care assistance and adoption assistance is a status change. Previously, such cost or coverage changes were allowed only if an independent entity providing health insurance made cost or coverage changes.
The proposed regulations also allow status changes in order to reflect changes made by an employee's spouse or dependent during the spouse's or dependent's open enrollment period. Similarly, the proposed regulations allow status changes if the spouse or dependent makes an allowable change under the spouse's or dependent's cafeteria plan.
Both the final and the proposed regulations retain the requirement that any changes to coverage based on a status change must conform to the reason for the status change. A status change may not be used to make unrelated changes to all cafeteria plan coverage elections.
Employers may rely on the proposed regulations for cafeteria plan guidance prior to the proposed regulations becoming final. If you have questions on either the final or proposed cafeteria plan regulations, please contact any of the persons listed below.