IRS Permits Mid-Year Amendments to Safe Harbor 401(k) Plans Adopted to Comply with Windsor Decision

The IRS has issued Notice 2014-37 expressly permitting plan sponsors to adopt mid-year amendments to safe harbor 401(k) plans to reflect the outcome of United States v. Windsor (invalidating Section 3 of the 1996 Defense of Marriage Act). As discussed in our April 2014 Employees Benefit update, the IRS issued guidance requiring that any qualified retirement plan requiring an amendment to reflect the outcome in Windsor to adopt such plan amendment by the later of:  (1) the end of the plan year that the change is first effective; (2) the due date of the employer's tax return for the tax year that includes the date of the change; or (3) December 31, 2014. However, a safe harbor 401(k) plan must generally be maintained throughout a full 12-month plan year, which means that the plan typically can only be amended before the beginning of the plan year. In Notice 2014-37, the IRS has provided an exception to this general rule, providing that a safe harbor 401(k) plan will not fail to satisfy the requirements to be a 401(k) safe harbor plan merely because the plan sponsor adopts a mid-year amendment pursuant to Notice 2014-19.

PBGC Issues Final Regulations on Determining Guaranteed Amount of Unpredictable Contingent Event Benefits

The Pension Benefit Guaranty Corporation (PBGC) issued final regulations on how to determine the amount of unpredictable contingent event benefits (UCEB) guaranteed under Title IV of ERISA for single-employer defined benefit plans. UCEBs are benefits or benefit increases that become payable solely by reason of the occurrence of an unpredictable contingent event (UCE), such as a plant shutdown or other reductions in force. Historically, when underfunded single-employer defined benefit plans were terminated, the PBGC generally guaranteed the payment of new pension benefits and benefit increases over a five-year phase-in period, beginning on the date the new benefit or benefit increase was adopted or effective.

The Pension Protection Act of 2006 (PPA) section 403 and these final regulations (which are substantially the same as the proposed regulations issued in March 2011) change the start of the phase-in period for UCEBs. The phase-in rules are now applied as if a plan amendment creating a UCEB was adopted on the date the UCE occurred rather than as of the actual adoption date of the amendment, resulting in a lower guarantee of UCEBs. The change applies to UCEBs that become payable as a result of a UCE that occurs after July 26, 2005.

IRS Releases Final Regulations on Tax Treatment of Qualified Retirement Plan Payment of Accident or Health Insurance Premiums

The IRS issued final regulations on May 12, 2014 finalizing its 2007 proposed regulations clarifying the tax treatment of payments from a qualified retirement plan for accident or health insurance premiums. Consistent with the proposed regulations, the final regulations provide that payments from a qualified retirement plan for accident or health insurance premiums will generally constitute a taxable distribution to the participant for the year in which the premium was paid, unless another statutory provision provides for a different result. Thus, amounts distributed from a qualified retirement plan that an employee elects to have applied to pay health insurance premiums under a cafeteria plan would be considered taxable income to the employee.

The final regulations provide an exception for the payment of disability insurance premiums from a qualified plan if (1) the disability insurance replaces retirement plan contributions if the employee is unable to continue employment due to disability, and (2) the payment of benefits to an employee's account does not exceed the amount of  annual contributions that could have been reasonably expected to be made to the plan on the employee's behalf during the disability period, reduced by any other contributions.

The final regulations address only the situation in which disability premiums are paid from the plan. If the disability insurance premiums are not paid by the plan, the insurance benefits paid to the plan on account of an employee's disability would be considered contributions to the plan governed by qualified plan contribution rules (such as the Code's dollar limits on employer contributions to a defined contribution plan). Similarly, if an employer self-insures (as opposed to having a disability insurance contract), the payments to the plan on account of an employee's disability would be considered a contribution to the plan subject to the general rules that apply to qualified plan contributions.

These regulations generally apply for taxable years that begin on or after January 1, 2015. However, taxpayers may elect to apply the regulations to earlier taxable years.

PBGC Issues Final Rule Reducing Reporting Obligations for Certain Multiemployer Plans

The PBGC finalized its proposed rule amending its multiemployer regulations to make providing information to the PBGC and plan participants more efficient and effective, and reduce the burden on plan sponsors without substantive changes. The amendments reduce the number of actuarial valuations required for certain small terminated (but not insolvent) plans and remove certain notice requirements for insolvent multiemployer plans. In addition, the final rule shortens the advance notice filing requirement for merger transactions. Under the PBGCʼs final rule, plan sponsors of all plans involved in a merger or transfer of assets and liabilities between multiemployer plans must jointly file a notice with the PBGC no less than 45 days before the transaction (reduced from 120 days), provided that no compliance determination has been requested.