As reported in our August 2009 article, tax-qualified retirement plans must be amended by the end of the 2009 plan year to reflect the mandatory changes enacted as part of the 2006 Pension Protection Act (“PPA”). For calendar-year plans, this PPA amendment deadline is December 31, 2009. (Governmental plans have an additional two years, and certain collectively bargained plans may enjoy an extension, as well.)
Because the consequences of failing to meet this amendment deadline could be quite severe, plan sponsors should take immediate action to verify that all of the necessary amendments have been adopted. As further explained below, Spencer Fane’s Employee Benefits Group is ready to assist in this process.
Mandatory PPA Changes
Although the more significant PPA changes affect defined benefit plans, several of the changes will also apply to defined contribution plans. For example, virtually all defined benefit plans must be amended for the following PPA changes:
- Modified assumptions for converting annuities into lump-sum payments (even small, lump-sum cashouts)
- Benefit restrictions based on a plan’s funding status
- Expansion of the direct rollover rules (e.g., allowing such rollovers to Roth IRAs, of after-tax amounts, and –– as of January 1, 2010 –– by non-spousal beneficiaries)
- Addition of a “qualified optional survivor annuity” (typically, a 75% joint and survivor annuity)
Depending on the type of plan, defined contribution plans may need to be amended to reflect the following PPA provisions:
- Faster vesting of non-matching employer contributions
- Expanded diversification rights for amounts invested in publicly traded stock of a sponsoring employer
- Modified treatment of “gap period income” in connection with corrective refunds
- Expanded direct rollover rules
- Addition of a qualified optional survivor annuity (for plans offering annuity distribution options)
Optional PPA Provisions
In addition to these mandatory changes, the PPA contained a number of provisions that plans may choose to adopt. These optional PPA provisions include the following:
- In-service distributions to facilitate “phased retirement”
- An expanded notice and election period for plan distributions
- Various types of automatic contribution arrangements
- Expanded hardship withdrawal opportunities
- Acceptance of additional types of rollover contributions
A plan that chose to implement any of these optional PPA provisions during 2009 must also be amended by the end of this year.
Discretionary Plan Amendments
Finally — and entirely unrelated to these PPA changes — current IRS guidance requires that any “discretionary” change in a plan’s operations be reflected in a plan amendment by the last day of the plan year in which that change was implemented. An example of such a discretionary change might be the addition of distribution option. Under this rule, any calendar-year plan implementing a discretionary change during 2009 must be amended by December 31, 2009, to reflect that change.
Consequences of Failing to Amend
The consequences of missing any of these amendment deadlines could be quite severe. The plan would lose its tax-qualified status. And, unfortunately, this is not the type of disqualifying defect that can be corrected under the IRS’s Self-Correction Program (“SCP”). Rather, the plan’s sponsor would have to participate in the Voluntary Correction Program (“VCP”). This would require both a submission to the IRS and the payment of a compliance fee.
We therefore strongly recommend that retirement plan sponsors review the terms of their plans to ensure that all PPA-related and discretionary changes have been reflected in appropriate plan amendments. Due to the number and variety of PPA changes, this will not be a simple task.
As a service to our clients (both current and new), Spencer Fane’s Employee Benefits Group will charge a flat fee of only $500 to review any qualified retirement plan to determine whether additional changes must be adopted by the end of the current plan year to document any of the mandatory PPA provisions. If we receive sufficient information concerning optional or discretionary changes implemented during 2009, our review will cover those types of amendments, as well. If this review confirms that all required amendments have already been adopted, the plan sponsor will enjoy relatively inexpensive peace of mind. If our review determines that additional amendments are needed, we will draft those amendments by the applicable deadline for our standard hourly fee.
Other Amendment Deadlines
Sponsors should also be aware of two other amendment deadlines of note. First, the deadline has already passed for virtually all qualified plans to adopt amendments needed to comply with final regulations issued under Section 415 of the Tax Code. Any sponsor that has missed this deadline should nonetheless adopt an appropriate Section 415 amendment in the near term. The failure to meet this amendment deadline may be corrected under VCP for a fairly minimal compliance fee of $375.
Second, as explained in our February 2009 article, qualified plans falling within “Cycle D” of the IRS’s determination letter program must be amended and restated — and a determination letter application filed with the IRS — by January 31, 2010. This deadline is entirely unrelated to the plan year on which a plan operates. In general, a plan falls within Cycle D if the sponsoring employer’s tax identification number ends with either “4” or “9.” The changes that must be incorporated into a Cycle D plan are even more extensive than the PPA changes summarized above. Accordingly, the sponsor of any Cycle D plan that has not already begun this review and amendment process should do so without further delay.