Category Archives: 401(k) Plans

IRS Plan Correction Program Goes Digital

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The IRS maintains a voluntary correction program for retirement plan sponsors, called the Employee Plans Compliance Resolution Program, or EPCRS. Plan errors that have occurred within 2 years generally may be eligible for self-correction, whereas older plan errors that are “significant” must be corrected with IRS approval through the Voluntary Compliance Program, or VCP. EPCRS is a very popular way for plan sponsors to resolve plan problems on their own schedule, and without suffering the monetary penalties that likely would apply in the event of a plan audit.

On September 28, 2018, the IRS announced that, effective April 1, 2019, VCP submissions, including payment of “user fees,” must be made electronically through the www.pay.gov website, per the instructions set forth in Revenue Procedure 2018-52. Plan sponsors, or their authorized representatives, may voluntarily use the electronic submission method starting January 1, 2019, but it will be mandatory starting April 1, 2019 and the IRS will reject hard copy VCP submissions postmarked on or after that date.

Revenue Procedure 2018-52 makes extensive revisions to Sections 2, 10 and 11 of Revenue Procedure 2016-51 (and otherwise generally supersedes it) to describe the new electronic user fee payment and VCP submission methods.  Under the new methods, a plan sponsor must either itself submit the VCP application electronically, or authorize a representative to do so via Form 2848, Power of Attorney.  Only third parties designated via Form 2848, such as attorneys, CPAs, or enrolled agents, can sign and file the VCP application on the plan sponsor’s behalf.  (A plan sponsor may use Form 8821 to designate other representatives (such as unenrolled return preparers) to inspect or receive confidential information from IRS about the submission.)

Under the new procedures, the VCP submission process will be as follows (note that links to IRS forms are not provided as they may be changing as a result of the new Revenue Procedure):

  1. Create an account at www.pay.gov, if one does not already exist. If using an authorized representative (AR), confirm that the AR has a www.pay.gov account.
  2. Using www.pay.gov, complete Form 8950, Application for Voluntary Correction Program (VCP).  If using an AR, the AR will complete the form.
  3. Assemble, into a single PDF file not exceeding 15 MB, the following:
  • Plan Sponsor’s signed Penalty of Perjury Statement. (This used to be part of IRS Form 8950 but now will be a separate statement.
  • Form 2848, Power of Attorney, or Form 8821, Tax Information Authorization. If using an AR, you must check line 5a for “Other acts authorized” on Form 2848 and include as a description “signing and filing of the Form 8950 and accompanying documents as part of a VCP submission.”
  • Form 14568, Model VCP Compliance Statement, and any/all applicable Schedules to same (Forms 14568-A through 14568-I), and required enclosures.  Alternatively, a cover letter and separate written narrative could be used.
  • Sample earnings calculations and earnings computations.
  • Relevant plan document language or full plan document when applicable (e.g., non-amender failures).
  • Copy of opinion, advisory, or determination letter, if applicable, pertaining to the plan document.
  • Any other required information, such as statement required for 403(b) plans re: cooperation of all investment providers.

4.  Upload the PDF file at www.pay.gov. If information supporting the submission exceeds the size limit, follow special fax instructions set forth in Section 11.03(7) of the Revenue Procedure.

5.  Use www.pay.gov to pay the user fee, as set forth in Appendix A of Revenue Procedure 2018-4 (and successor Revenue Procedures issued at the beginning of each year). The user fees are now based on plan assets rather than the number of plan participants.

6.  Keep the “Payment Confirmation – Application for Voluntary Correction Program” that is generated on successful filing through pay.gov; the Tracking ID on this receipt serves as the IRS control number for your submission and is official acknowledgement of the submission; if no confirmation is generated call (877) 829-5500 for assistance.

If you discover additional operational errors after submitting your VCP materials, but before the submission has been assigned to an IRS representative, you are directed to call the VCP Status Inquiry Line at (626) 927-2011 (not toll-free) for further information. Although it is currently customary for the IRS to contact the filer once a submission is assigned to an IRS representative, this may not be the case in the future; in the Revenue Procedure the IRS reserves the right to process submissions and issue compliance statements without any prior contact with the filer.  If the IRS gets the jump on you in this manner, you will likely have to pay a new user fee and address the later-discovered errors under a new VCP submission.

Even before the recent increase in VCP user fees, EPCRS was a consistently strong revenue source for the IRS and the new digital streamlining of the program will likely increase its use by plan sponsors over time.

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Filed under 401(k) Plans, 403(b) Plans, EPCRS, ERISA, VCP, Voluntary Compliance Programs

IRS Weighs In on 401(k) “Match” to Student Loan Repayments

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The IRS has approved an arrangement under which an employer “matches” employee student loan repayments by making non-elective contributions to its 401(k) plan on behalf of the employees paying the loans. The guidance is in the form of a Private Letter Ruling (PLR 201833012) that is only citable authority for the taxpayer who requested the ruling, but it is a promising development on the retirement plan front given the heavy student loan debt carried by current millennial employees and the generations following them. The program described in the ruling solves the problem of low 401(k) plan participation by employees who are carrying student loan debt, allowing them to obtain the “free” employer matching funds that they would otherwise forego.

The employer who obtained the ruling maintained a 401(k) plan that included a generous matching formula – 5% of eligible compensation for the pay period, provided that the employee made an elective deferral of at least 2% of compensation for the pay period. The employer proposed establishing a “student loan repayment (SLR) nonelective contribution” program with the following features:

Program Features
• It would be completely voluntary; employees must elect to enroll;
• Once enrolled, employees could opt out of enrollment on a prospective basis;
• Enrollees would still be eligible to make pre-tax or Roth elective deferrals, but would not be eligible to receive regular matching contributions while enrolled;
• Employees would be eligible to receive “SLR nonelective contributions” and true-up matching contributions, as described below; and
• If an employee initially enrolls in the program but later opts out of enrollment, the employee will resume eligibility for regular matching contributions.

SLR Nonelective Contributions
• If an employee makes a student loan repayment during a pay period that equals at least 2% of compensation for the pay period, the employer will make an SLR nonelective contribution equal to 5% of compensation for the pay period.
• Although based on each pay period’s compensation, the collective SLR nonelective contribution will be made as soon as practicable after the end of the plan year. (Because employees may stop and restart student loan repayments or regular elective deferrals, presumably it would not be possible for an employer to know, before the end of the plan year, precisely how much SLR nonelective contributions, and catch-up contributions, each program participant is due.)
• The SLR nonelective contribution is made regardless of whether or not the employee makes any regular salary deferrals throughout the year.
• The employee must be employed on the last day of the plan year (other than when employment terminates due to death or disability) in order to receive the SLR nonelective contribution.
• The SLR nonelective contributions are subject to the same vesting schedule as regular matching contributions.
• The SLR nonelective contributions are subject to all applicable plan qualification requirements: eligibility, vesting, distribution rules, contribution limits, and coverage and nondiscrimination testing.
• The SLR nonelective contributions will not be treated as a regular matching contribution for purposes of 401(m) testing.

True-Up Contributions
• In the event an employee does not make a student loan repayment for a pay period equal to at least 2% of the employee’s eligible compensation, but does make a regular elective deferral equal to at least 2% of compensation, the employer will make a “true-up matching contribution” equal to 5% of the employee’s eligible compensation the pay period.
• Although based on pay period compensation, the collective true-up matching contribution will be made as soon as practicable after the end of the plan year.
• The employee must be employed on the last day of the plan year (other than when employment terminates due to death or disability) in order to receive the true-up matching contribution.
• The true-up matching contributions are subject to the same vesting schedule as regular matching contributions.
• The true-up matching contributions are treated as regular matching contributions for purposes of 401(m) testing.

The specific ruling that the IRS made was that the SLR nonelective contribution program would not violate the prohibition on “contingent benefits” under applicable Income Tax Regulations. Under this rule, an employer may not make other benefits, such as health insurance, stock options, or similar entitlements, contingent on a participant’s making elective deferrals under a 401(k) plan. There are a few exceptions, most notably employer matching contributions, which are expressly contingent on elective deferrals. Because the SLR nonelective contributions are triggered by employees’ student loan repayments, and not by elective deferrals, and because employees who receive them are still eligible to make regular elective deferrals, the IRS concluded that they did not violate the contingent benefit rule. The IRS stated that, in reaching this conclusion, it presumed that the taxpayer had not extended any student loans to employees who were eligible for the program and had no intentions to do so.

Closing Thoughts
Existing vendors who help employers contribute towards student loan repayments will probably move to establish and market versions of the SLR nonelective contribution program described in the private letter ruling, in which case additional, and more broadly applicable, IRS guidance would be welcome. In the meantime, employers wishing to put such a program in place should not assume that reproducing the facts in the ruling is a safe harbor from adverse tax consequences, and should consult legal counsel to assess potential liability.

Note:  The employer who obtained the Private Letter Ruling was later identified as Abbott Labs.

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California’s Dynamex Decision: What it Means for ERISA Plans

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The California Supreme Court ruled on April 30, 2018 that, for purposes of coverage under California wage orders, employers must start with the presumption that a worker is a common law employee, and then may properly classify him or her as an independent contractor only if all of the following three criteria are met:

  1. The worker is free from the control and direction of the hiring business in connection with the performance of the work;
  2. The worker performs work that is outside the usual course of the hiring entity’s business; and
  3. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.

Although the Dynamex ruling is limited to classification of workers under the California wage orders, it’s practical effect is likely to be much broader, as employers are unlikely to use one definition of employee for wage and hour purposes, and another definition for, say, reimbursement of business expenses, or benefit plan eligibility.

Speaking of which, what is the likely impact of the Dynamex ruling on employee benefit plans? Will employers have to offer coverage retroactively to the hire date of the now-reclassified independent contractors? Must they offer coverage going forward?

ERISA plans look to the federal definition of common law employee, which in turn looks to federal case law and an IRS multi-factor test.   So the Dynamex decision does not itself create eligibility under an ERISA plan.   What if individuals who were reclassified as employees under the ABC test were to claim retroactive eligibility under an ERISA plan, however?  As a starting point, it is helpful to look at how most plan documents currently define “eligible employee” and how they treat the issue of workers who were engaged as independent contractors, but later are classified as common law employees.

Most prototype 401(k) plan documents – and some health plan documents in use by “self-insured” employers – contain what is commonly referred to as “Microsoft language” — under which plan eligibility will not extend retroactively to individuals who are hired as independent contractors, even if they later are classified as employees. The language came into common use after the Ninth Circuit ruling in Vizcaino v. Microsoft Corp., 120 F.3d 1006 (9th Cir. 1997), cert. denied.522 U.S. 1098 (1998), which held that long-term, “temporary” workers, hired as independent contractors, were employees for purposes of Microsoft’s 401(k) and stock purchase plan.[1]

For example, a prototype 401(k)/profit sharing plan that is in wide use provides as follows:

“Eligible Employee” means any Employee of the Employer who is in the class of Employees eligible to participate in the Plan. The Employer must specify in Subsection 1.04(d) of the Adoption Agreement any Employee or class of Employees not eligible to participate in the Plan. Regardless of the provisions of Subsection 1.04(d) of the Adoption Agreement, the following Employees are automatically excluded from eligibility to participate in the Plan:

(1) any individual who is a signatory to a contract, letter of agreement, or other document that acknowledges his status as an independent contractor not entitled to benefits under the Plan or any individual (other than a Self-Employed Individual) who is not otherwise classified by the Employer as a common law employee, even if such independent contractor or other individual is later determined to be a common law employee; and  (2) any Employee who is a resident of Puerto Rico.

And a self-insured group health plan document from a well-known provider states as follows:

The term “Employee” shall not include any individual for the period of time such individual was classified by the Employer as an independent contractor, leased employee (whether or not a “Leased Employee” under the Code section § 414(n)) or any other classification other than Employee. In the event an individual who is excluded from Employee status under the preceding sentence is reclassified as an Employee of the Employer pursuant to a final determination by the Internal Revenue Service, another governmental entity with authority to make such a reclassification, or a court of competent jurisdiction, such individual shall not retroactively be an Employee under this Plan. Such reclassified Employee may become a Covered Person in this Plan at such later time as the individual satisfies the conditions of participation set forth in this Plan. (Emphasis added.)

The Microsoft language, if present, may resolve the issue of retroactive coverage. What about coverage going forward? If a worker has provided services as an independent contractor but cannot retain that status under the ABC test, and is hired as a common-law, W-2 employee, does the first hour of service counted under the plan begin the day they become a W-2 employee, or the date they signed on as an independent contractor? The Microsoft provisions quoted above would suggest that service would start only when the common-law relationship starts, however employers are cautioned to read their specific plan documents carefully and to consult qualified employment and benefits law counsel for clarification. If the desire is to credit past service worked as an independent contractor, it may be advisable to seek IRS guidance before doing so, as fiduciary duties require that plan sponsors act in strict accordance with the written terms of their plan documents.

Finally, what about insured group health and welfare documents, such as fully insured medical, dental, vision, disability or life insurance? The policies and benefit summaries that govern these benefits probably won’t contain Microsoft language and may define eligible status as simply as “you are a regular full-time employee, as defined by your [Employer].”

Employers that are “applicable large employers” under the Affordable Care Act must count individuals who have been re-classified as common-law employees under the ABC test toward the group of employees to whom they offer minimum essential coverage; this group must comprise all but 5% (or, if greater, all but 5) of its full-time employees.  Unfortunately, there is potential ACA liability for failing the 95% offer on a retroactive basis. Public comments on the final employer shared responsibility regulations requested relief from retroactive coverage when independent contractors were reclassified as common-law employees, but the Treasury Department specifically failed to grant such relief, noting in the preamble to the final regulations that doing so could encourage worker misclassification.  Whether the customary 3-year tax statute of limitations would apply in such situations is not entirely clear; also unclear is whether employers could successfully argue that workers that fail the ABC test still somehow could classify as non-employees for federal common-law purposes.

Bottom line? Every California employer paying workers other than as W-2 employees should be re-examining those relationships under the ABC test and should be consulting qualified employment law counsel, and benefits law counsel, about the consequences of any misclassification, both on a retroactive basis (particularly with regard to the ACA), and going forward (all benefit plans).

[1] Another Ninth Circuit case, Burrey v. Pacific Gas & Elec. Co., 159 F.3d 388 (9th Cir. 1998), essentially followed the Microsoft ruling, but with specific regard to “leased employees” as defined under Internal Revenue Code § 414(n). A discussion of leased employees is beyond the scope of this post.

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Filed under 401(k) Plans, Affordable Care Act, Benefit Plan Design, Employer Shared Responsibility, Gig Economy, Independent Contractor, PPACA, Worker Misclassification

Death, Taxes, and DOL Audits Persist

What this means for benefit plan sponsors and the professionals who advise them is that compliance with plan reporting and disclosure rules, and with the plan documentation duties that underpin them, must remain a priority. This is particularly the case with regard to health and welfare plans offering group medical, dental, vision, life, disability and similar forms of coverage, as opposed to 401(k) and other retirement plans.

That is because retirement plan service providers supply plan documentation to employers who engage their services, whereas insurance companies only provide benefit summaries designed to comply with state insurance laws rather than with the disclosure duties mandated under ERISA.

It is often left to benefit brokers and other third parties to the insurance (or self-funding) relationship, to bridge the gap, by drafting Summary Plan Descriptions and/or “wrap” documentations containing required ERISA disclosures, and by ensuring that they are properly delivered to plan participants and beneficiaries under Department of Labor protocols for hard copy and electronic distribution.

If you or your clients have any questions on what ERISA requires around plan documents and their delivery to the folks that they cover, please don’t hesitate to give me a call.

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Filed under 401(k) Plans, DOL Audit, ERISA, Fiduciary Issues, Plan Reporting and Disclosure Duties, Self-Insured Group Health Plans, Summaries of Benefits and Coverage, Wrap Documents

California Wildfires: Congress Grants Expanded Access to Retirement Savings

The recently-signed Bipartisan Budget Act of 2018 (the “Act”) expands access to 401(k) and other retirement plan savings for those impacted by the California wildfires that occurred late last year in federally-declared disaster areas including Santa Barbara and Ventura counties. The expanded access is available to individuals whose principal residence is or was located in the “California wildfire disaster area” at any time between October 8, 2017 to December 31, 2017 and who sustained an economic loss – whether personal or business – as a result of the wildfires, and whose employer agrees to amend their plan by December 31, 2019 to include the special rules (retroactive to 2018).   Those taking IRA withdrawals should check with their IRA custodians or trustees re: availability of the new measures.

As to whether the relief extends to those affected by flooding, mudflows, and debris flows directly related to the wildfires, there is some uncertainty in the wording of the Act. As mentioned above, eligible individuals are determined based on their residence on or before December 31, 2017, a date which preceded the January 9, 2018 flooding, mud and debris flow.  However, the Act defines “California wildfire disaster area” as the area subject to Presidential disaster declarations made between January 1, 2017 through January 18, 2018.  The original California wildfire disaster declaration was made January 2, 2018, and was amended on January 10 and 15 to incorporate damage from flooding, mudslides and debris flow directly related to the wildfires, which would suggest that those related types of damage would come within the scope of the relief. More guidance from the government would be helpful on this point.

There are three main types of expanded access:

  • Special withdrawal rules

-Eligible individuals may take plan or IRA withdrawals of up to $100,000 without application of the 10% penalty tax that ordinarily applies before age 59 ½.  Although California’s Franchise Tax Board generally follows federal disaster relief, a California early withdrawal penalty of 2.5% may apply, so check with your CPA.  The withdrawal must take place between October 8, 2017 and December 31, 2018.  The tax impact of the withdrawal may be spread over up to 3 years from the date of the withdrawal, or tax may be avoided entirely by repaying the full amount to the plan, or an IRA, within the same 3 year period.

  • Retirement plan loan relief

– An extension of up to one year applies to repayments due on a plan loan that was outstanding on or after October 8, 2017.  The one year extension does not cause the loan to exceed the maximum five-year repayment period.  Interest continues to accrue during the extension.

– New plan loans may be taken out on or after Feb. 9, 2018, through Dec. 31, 2018 in an amount up to the lesser of $100,000, or 100% of the vested retirement plan account (increased from $50,000 or 50%).   The limit is reduced by an amount equal to the highest outstanding balance of all loans during the prior twelve months.

  • Repayment of amounts taken out to buy or build a home in the disaster area

  –Persons who took hardship withdrawals from their plans after March 31, 2017 and before January 15, 2018 in order to buy or build a personal residence can re-deposit their withdrawals, or roll them to an IRA, by June 30, 2018, if the purchase or construction could not go forward as a result of the wildfires. The same relief is available to first-time homebuyer IRA withdrawals made during this time.

In earlier guidance, the IRS extended the filing deadline for personal and business income taxes by two weeks for those affected by the California wildfires, and California’s Franchise Tax Board granted equivalent relief for state returns. The new deadline for personal returns is April 30, 2018.

Note:  a version of this post was published in the Pacific Coast Business Times on February 23, 2018.

 

 

 

 

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Filed under 401(k) Plans, 403(b) Plans, Disaster Relief, ERISA, IRA Issues, Profit Sharing Plan

New Year Brings New, (Sometimes) Lower VCP User Fees

Effective January 2, 2018, the IRS has materially lowered the user fees required to be paid in order to participate in the Voluntary Compliance Program (VCP) under the Employee Plans Compliance Resolution System or EPCRS.  VCP is a way for sponsors of qualified retirement plans to get IRS approval of voluntary correction of operational errors and other plan errors that jeopardize the plan’s tax-qualified status.  Under old user fees, which were based on the number of plan participants as of the last day of a plan year, most applicants fell within the 100 – 1,000 participant range, which in 2017 carried a fee of $5,000.  The new fees, set forth in Appendix A to IRS Revenue Procedure 2018-1, are based on plan assets as of the last day of the plan year and are as follows:

User Fee               Plan Assets

$1,500                   $500,000 or less

$3,000                   Over $500,000 to $10,000,000

$3,500                   Over $10,000,000

As many if not most plan sponsors will fall in the over $500,000 to $10,000,000 range, this will result in a $2,000 reduction in the applicable user fee.

Lowering the price barrier to participation in VCP is a positive for plan sponsors.  Obtaining a compliance statement from IRS through the program is the equivalent of insurance against penalties and interest that would be assessed if the plan problems were discovered on audit.  The VCP compliance statement is also crucial in the event the plan sponsor sells its business or merges with another entity, as plan problems must be disclosed in the pre-deal due diligence stage, and unresolved plan problems can slow down or even derail a sale or merger transaction.  Speaking of insurance, some fiduciary liability insurance carriers will cover, and provide reimbursement for, the VCP user fee and professional services used in preparing the application (although generally amounts that are owed to the plan are not covered).

There is a downside to this new fee schedule, namely in the loss of reduced fees (as low as $300) for submissions that were limited to participant loan errors, failures to make required minimum distributions, and SEP and SIMPLE plan submissions.

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Filed under 401(k) Plans, 403(b) Plans, EPCRS, ERISA, Profit Sharing Plan, VCP

IRS Announces New Benefit Limits for 2018

olga-delawrence-386839On October 19, 2017 the IRS announced 2018 cost-of-living adjustments for annual contribution and other dollar limits affecting 401(k) and other retirement plans.   Salary deferral limits to 401(k) and 403(b) plans increased $500 to $18,500, but other dollar limits remained unchanged, including the compensation threshold for highly compensated employee status. Specifically, an employee will be a highly compensated employee (HCE) in 2018 on the basis of compensation if he or she earned more than $120,000 in 2017.  Citations below are to the Internal Revenue Code.

In a separate announcement, the Social Security Taxable Wage Base for 2018 increased to $128,400 from $127,200.

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Filed under 401(k) Plans, 403(b) Plans, COLA Increases, ERISA, IRA Issues, Nondiscrimination Testing for Qualified Retirement Plans, Profit Sharing Plan, Section 457(b) Plans