Although the main feature of the Tax Cuts and Jobs Act is a significant reduction in the corporate federal income tax rate, the Act also makes a number of significant changes to the rules governing employer-sponsored retirement plans and individual retirement accounts. From plan loans to hardship withdrawals and Roth recharacterizations, employers should make sure that they understand how these new rules might affect them.
It is common for employers to contract with one or more third parties (sometimes referred to as “leasing companies”) to provide individuals to perform services for the employer. Various issues may arise regarding the treatment of such individuals under a retirement plan maintained by the employer.
In recent years, sponsors and administrators of 401(k) and 403(b) plans have received conflicting advice on the steps they should take to substantiate an employee’s entitlement to an in-service withdrawal on account of financial hardship. For instance, an April 2015 IRS newsletter seemed to require that plan sponsors obtain and retain documentary proof of an employee’s entitlement to a hardship withdrawal. However, two recent internal IRS memos outline a permissible approach to this substantiation requirement that need not involve conditioning a hardship withdrawal on an employee’s provision of supporting documents. Plan sponsors should thus consider this new alternative.
After years of effort, the Department of Labor released final rules on April 6, 2016, that will substantially alter the way investment advice is provided to ERISA plans, their participants, and even non-ERISA IRAs.
On Friday, June 26, 2015, the Supreme Court published its ruling in Obergefell v. Hodges, holding (by a 5 to 4 margin) that the Fourteenth Amendment requires a state to license marriages between two people of the same sex, and to recognize any such marriage that is lawfully licensed and performed out-of-state. As a result, all (remaining) state laws or constitutional amendments banning same-sex marriage are now invalid.
The United States Supreme Court gave considerable comfort to defined contribution plan participants – and their lawyers – who sue plan fiduciaries for failing to keep track of plan investment options. In a unanimous decision handed down on May 18, 2015, the Court held in Tibble v. Edison International that ERISA fiduciaries have a “continuing duty” to monitor investment options, and that plan participants have six years from the date of an alleged violation of that duty to file a lawsuit against the plan’s fiduciaries. This ruling significantly undercuts the utility of a statute of limitations defense that had been successfully deployed by plan fiduciaries in previous cases, and creates fertile ground for more litigation.
The IRS has just given sponsors of 401(k) and 403(b) plans a number of additional options for correcting a failure to honor an employee’s election to defer a portion of his or her pay. These new options, as announced in Revenue Procedure 2015-28, will be particularly helpful to sponsors of plans that provide for automatic enrollment (including those with an automatic escalation feature).
The IRS has issued additional guidance regarding how the Supreme Court’s 2013 decision in Windsor v. United States (regarding same-sex marriage) applies to qualified plans and Section 403(b) arrangements. Notice 2014-19 provides that plans must operationally comply with the Windsor decision as of June 26, 2013, although certain same-sex marriages are not required to be recognized until September 16, 2013. Plans with language that is inconsistent with the Windsor decision must generally be amended by December 31, 2014 (although certain plans may have additional time to amend). The related FAQs provide that Section 403(b) plans are also subject to the same operational effective dates, but are not required to be amended at this time. Plan sponsors should consult with counsel to determine whether their qualified plans must be amended to comply with Windsor and to discuss correction of any operational failures that may have occurred since June 26, 2013.
The IRS has resolved key questions about in-plan Roth conversions. Notice 2013-74 addresses both old concerns (raised when Congress first authorized in-plan Roth conversions in 2010) and new ones (raised when Congress expanded the scope of Roth conversions in 2013). With the added certainty this guidance offers to employers, administrators, and recordkeepers, plan sponsors who decided against adding an in-plan conversion feature may wish to reconsider. Sponsors who already offer in-plan conversions may now wish to take advantage of the new options.
Recent updates to the IRS’s Employee Plans Compliance Resolution System (“EPCRS”) will allow tax-exempt organizations and public schools that sponsor Section 403(b) retirement plans to correct additional compliance problems under those plans. These changes, as reflected in Revenue Procedure 2013-12, are generally effective for corrections or submissions made on or after April 1, 2013, although they may also be applied immediately.