Once again, amendment season is upon us. Sponsors of tax-favored retirement plans should keep in mind the many required amendments for which a year-end deadline is fast approaching. This article highlights some of the more important changes that sponsors must address before the curtain closes on 2011.
Defined Benefit Plans: Delayed PPA Deadlines
The amendment deadline for most of the changes required by the Pension Protection Act of 2006 (“PPA”) was the last day of the first plan year beginning on or after January 1, 2009. However, in a series of Notices (most recently, Notice 2010-77), the IRS has extended and re-extended the deadline for two categories of changes applicable to qualified defined benefit and hybrid plans:
- For defined benefit plans, Sections 401(a)(29) and 436 of the Tax Code impose new funding-based limits on distributions and benefit accruals. Although these restrictions affect only seriously underfunded plans, all qualified defined benefit plans must be amended to reflect the new rules.
- For cash balance and other hybrid plans, the PPA added a number of new vesting and other special rules.
The IRS’s multiple postponements create a trap for the unwary: sponsors may have dealt administratively with these law changes years ago, but might well have lost track of the amendment deadline. Affected plans must be amended by the last day of the first plan year beginning on or after January 1, 2011. For calendar-year plans, the deadline is therefore December 31, 2011.
Defined Contribution Plans: Waiver of 2009 RMDs
Most retirement plans must begin distributing benefits to retirees who have attained age 70½. The distributions necessary to satisfy this requirement are called required minimum distributions (or “RMDs”). As we reported in a February 2009 article, the Worker, Retiree and Employer Recovery Act of 2008 (“WRERA”) eliminated the requirement that many defined contribution plans make RMDs for the 2009 calendar year.
In a November 2009 article, we reported on Notice 2009-82, in which the IRS explained how plan sponsors should implement that one-time waiver. Although plan sponsors had to decide by November 30, 2009, how to handle 2009 RMDs operationally, the amendment deadline is only now approaching for calendar-year plans. Affected plans must be amended no later than the last day of the first plan year beginning on or after January 1, 2011.
Defined Contribution Plans: In-Plan Roth Conversions
Ordinarily, the only way participants may make Roth contributions to a retirement plan is to designate a salary deferral as a “qualified Roth contribution” when it is made. As we reported in our February 2011 article, however, the Small Business Jobs Act of 2010 established a mechanism whereby participants may convert their pre-tax retirement savings into Roth accounts.
In Notice 2010-84, the IRS issued guidance on implementing such “in-plan Roth conversions.” Among other things, the Notice extended the amendment deadline for adding an in-plan conversion feature. This relief extended not only to the conversion component, but also to the addition of the underlying Roth contribution arrangement and the distribution provisions necessary to trigger the conversion. The extended amendment deadlines are as follows:
- For 401(k) plans, the later of: (i) the last day of the first plan year in which the amendment is effective, or (ii) December 31, 2011.
- For safe-harbor401(k) plans, the later of: (i) the day before the first day of the first plan year in which the amendment is effective, or (ii) December 31, 2011.
- For 403(b) plans, the later of: (i) the last day of the first plan year in which the amendment is effective, or (ii) the last day of the plan’s “remedial amendment period,” if any. (In general, a 403(b) plan will have a remedial amendment period if it was adopted in writing by December 31, 2009, and either adopts a pre-approved 403(b) plan that has received a favorable opinion letter [once those letters are issued] or submits an application for an individual determination letter [once that option becomes available to 403(b) plans].)
- For 457(b) plans, we are still awaiting IRS guidance.
Governmental Plans: PPA Amendment Deadline
As we reported in our August 2009 article, Congress gave governmental employers an additional two years to amend their retirement plans to reflect the mandatory changes enacted as part of the PPA. That deadline is the last day of the first plan year beginning on or after January 1, 2011 (i.e., December 31, 2011, for calendar-year plans). This deadline applies to both defined benefit and defined contribution plans.
In General. In most cases, the deadline for adopting a plan-design amendment (at least, one that does not reduce the rate of benefit accruals) is the end of the plan year in which it takes effect. In other words, such changes may usually be made retroactive to the first day of the plan year. Thus, for most purposes, calendar-year plans must be amended to reflect 2011 design changes by no later than December 31, 2011.
Special Changes. Some design changes must be adopted before the plan year in which they take effect. These include certain changes to safe-harbor 401(k) contributions, as well as certain reductions in the rate of pension accruals. For such design changes to be effective for the 2012 plan year, they must therefore be adopted by the end of the 2011 plan year. (These changes may also require the sponsor to issue participant notices before the amendment is effective.) Thus, calendar-year plans must be amended for this type of change by the same date—December 31, 2011.
Cycle A Filing Deadline
In addition to the changes discussed above, individually designed Section 401(a) qualified plans falling within Cycle A of the IRS’s determination-letter program should be amended and restated—and have a determination letter application filed with the IRS—by January 31, 2012. This deadline is unrelated to the plan year on which a plan operates.
A plan falls within Cycle A if the sponsoring employer’s tax identification number ends with either “1” or “6.” The many changes that must be incorporated into a Cycle A plan are listed on the IRS’s 2010 cumulative list of retirement plan changes, which was issued in Notice 2010-90. Accordingly, the sponsor of any Cycle A plan that has not already begun this review and amendment process should do so without further delay.
What Should Plan Sponsors Do?
The consequences of missing any of the amendment deadlines discussed above could be quite severe: the plan would lose its tax-favored status. The consequence for Cycle A plans that are not timely restated and submitted to the IRS is also severe: they will not be covered by a favorable determination letter until—at the earliest—their next on-cycle year (2017).
Sponsors should therefore carefully review their documents to determine whether they have adopted conforming amendments and restatements by the applicable deadlines. Spencer Fane’s Employee Benefits Group is ready to assist sponsors in this review, as well as in drafting any necessary documents.