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Year-End Qualified Plan Checklist

As we reported in our August 2010 article, sponsors of tax-favored retirement plans should keep in mind the many required amendments for which a 2010 year-end deadline is fast approaching.

HEART Act

Most tax-favored retirement plans must be amended by the end of the 2010 plan year to reflect the mandatory provisions of the Heroes Earnings Assistance and Relief Tax Act of 2008 (the “HEART Act”). HEART Act changes for which amendments are required include:

  • An enhanced survivor benefit; and
  • New rules governing the treatment of military differential pay.

Many sponsors have already amended their plans for the HEART Act. But, as we reported in our March 2010 article, some plans may require a second round of HEART Act Amendments to address guidance issued by the IRS in Notice 2010-15.

Delayed PPA Deadlines

The amendment deadline for most 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. In Notice 2009-97, however, the IRS extended the deadline for three categories of PPA amendments until the last day of the 2010 plan year. The following changes are affected by this delay:

  • For certain defined contribution plans that invest in employer stock, new diversification rights for participants;
  • For defined benefit plans, new funding-based limits on distributions and benefit accruals; and
  • For cash balance and other hybrid plans, a number of new vesting and other special rules.

Discretionary Amendments

In most cases, the deadline for adopting plan-design changes that do not reduce the rate of benefit accruals is the end of the plan year in which they take effect; i.e., such changes may be retroactive to the first day of the plan year. Thus, for most purposes, calendar-year plans must be amended to reflect 2010 design changes by no later than December 31, 2010.

Some design changes must be adopted, however, 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 2011 plan year, they must therefore be adopted by the end of the 2010 plan year.

Direct Rollovers for Nonspouse Beneficiaries

As a part of the PPA, Congress amended the rollover rules to allow nonspouse beneficiaries to roll death benefits directly into an individual retirement account or annuity. Despite some initial uncertainty, Congress has now made clear that this was a mandatory change.

Accordingly, all Section 401(a) qualified retirement plans, Section 403(b) plans, and governmental Section 457(b) plans have been required to allow direct rollovers by nonspouse beneficiaries since January 1, 2010. In general, these plans must be amended to reflect this change by the end of the first plan year beginning in 2010.

Cycle E Filing Deadline

Individually designed Section 401(a) qualified plans falling within “Cycle E” of the IRS’s determination letter program must be amended and restated — and have a determination letter application filed with the IRS — by January 31, 2011. The same is true for any governmental plan that chose not to submit a determination letter application during their regular cycle (Cycle C, which closed on January 31, 2009). A plan falls within Cycle E if the sponsoring employer’s tax identification number ends with either “5” or “0.” The sponsor of any Cycle E plan that has not already begun this review and amendment process should do so immediately.