This advisory is to remind plan sponsors of deadlines for amending qualified retirement plans. Some amendments must be completed by December 31, 2010 (for calendar year plans). Others must be completed by January 31, 2011 (for Cycle E plans). Still others must be completed by the deadline for filing the plan sponsor’s 2010 tax return (“interim” amendments). This advisory identifies those plans that must be amended now or in the near future.
Amendments to comply with the Heroes Earnings Assistance and Relief Tax Act of 2008 (HEART) are generally required to be adopted by December 31, 2010 (for calendar year plans). The HEART Act provides for certain retirement and welfare benefits (some required and some optional) for returning military personnel and their beneficiaries. Some of these changes include expanded survivor benefits and distribution options.
Plan sponsors must adopt “discretionary” plan amendments no later than the last day of the plan year in which the amendment is effective. Discretionary amendments are amendments that are permitted to be adopted by the plan but are not required. For example, plan loans are permitted to be part of certain plans but are not required. An employer instituting a plan loan or other optional features in 2010 would need to amend the plan before December 31, 2010 (for calendar year plans).
“Cycle E” plans (defined below) will need to be amended to adopt certain required changes in the law no later than January 31, 2011. Note that if a Cycle E plan has discretionary amendments, those amendments still must be adopted by December 31, 2010 (for calendar year plans). An example of a required amendment would be restating the plan to reflect the final Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) changes in lieu of good faith EGTRRA amendments previously adopted.
Finally, all qualified retirement plans must adopt interim amendments no later than the due date of the plan sponsor’s 2010 tax return (with extensions). For example, a calendar year taxpayer with a calendar year retirement plan would have until March 15, 2011 (without extensions), or September 15, 2011 (with extensions), to adopt 2010 interim amendments. Different deadlines would apply to fiscal year taxpayers or non-calendar year retirement plans. Interim amendments are good faith amendments and reflect the IRS’s view that a general reference to a required amendment must be added to a plan document between required filing cycles.
Each of these types of amendments is discussed below.
I. Heroes Earnings Assistance and Relief Tax Act of 2008
HEART was signed into law on June 17, 2008. HEART provides retirement benefits to military personnel and their beneficiaries.
Some HEART amendments are mandatory and some are optional. Examples of mandatory amendments include:
- mandatory death benefits
- treatment of differential wage payments as compensation for Code Section 415 purposes Examples of optional HEART changes include:
- optional benefit accruals for participants who die or become disabled while on military leave
- treatment of differential wage payments as compensation for purposes of contributions and benefits
- deemed severance from employment for plan distribution purposes
- in-service distributions for qualified reservists
Most retirement plans will require amendments to adopt the HEART provisions on or before December 31, 2010.
II. The Worker, Retiree, and Employer Recovery Act of 2008
The Worker, Retiree, and Employer Recovery Act of 2008 (WRERA) has several amendment deadlines. Perhaps the most well-known provision of WRERA was applicable to the 2009 calendar year. For 2009, plans could choose to avoid making required minimum distributions to participants at the later of age 70-1/2 or termination of employment (age 70-1/2 for five percent or more owners). Plans are not required to be amended for this provision of WRERA until the end of next year (December 31, 2011).
In contrast, another provision of WRERA requires amendments this year as an interim amendment. Prior to 2010, retirement plans were permitted to allow non-spouse beneficiaries to roll over distributions they receive from a deceased participant’s retirement benefit. The non-spouse rollover provision was optional prior to 2010. Effective January 1, 2010 (for calendar year plans), plans are now required to allow non-spouse rollovers. Because this is a required change, an interim good faith amendment must be reflected in plan documents no later than the plan sponsor’s due date of its 2010 federal income tax return.
To add even more complexity, WRERA also had changes with effective dates prior to 2010. Many of these changes were technical corrections to the Pension Protection Act (PPA). For example, WRERA (as a technical correction to PPA) eliminated an administratively challenging requirement to include certain earnings attributable to 401(k) contributions that exceeded the maximum contribution. Changes that were classified as technical corrections to the PPA Act were required to be adopted no later than December 31, 2009 (for calendar year plans).
Because of the various effective dates in the WRERA legislation, it is very important to discuss any required WRERA amendments with your legal counsel.
III. Extended time to adopt certain Pension Protection Act Changes
With few exceptions, the deadline for calendar year plans to adopt amendments required by the PPA was December 31, 2009. However, because the IRS did not release critical guidance on several aspects of the PPA, the IRS extended the deadline to adopt certain amendments until December 31, 2010 (for calendar year plans). These changes include:
- •• distribution and benefit accrual restrictions based on funding of defined benefit pension plans (Code Section 436)
- •• special rules applicable to cash balance and similar defined benefit plans (Code Section 411(a)(13)(C))
- •• diversification of employer stock held in defined contribution plans (Code Section 401(a)(35)(E))
IV. Discretionary Amendments Potentially Due by December 31, 2010
Plan sponsors should be careful to consider any changes to a plan made in 2010—including operational or administrative changes—that may require the adoption of a plan amendment. A discretionary amendment relates to a plan design change that is not mandated by a change in law. An employer has the option to make changes to the plan design or the administration of the plan, but once made, those changes may require a plan amendment. Plan sponsors should review plans to determine whether there are discretionary amendments that should be adopted. Examples include (this is not an exhaustive list) the following:
- adding designated Roth contributions to a 401(k) plan
- adding an automatic contribution arrangement (also known as a negative election feature)
- adding or changing loan or hardship distribution provisions
- allowing annual or post-severance contributions of accumulated and unused PTO
Plan sponsors should also be careful about amendments that change eligibility or decrease the amount of benefits provided under a plan. In many cases, these types of amendments cannot be adopted retroactively, but can only be adopted prospectively. For example, the addition of a cash or deferred (401(k)) contribution to a plan can only be added prospectively (not at the end of the year). Similarly, an amendment to reduce a match should be done prospectively.
V. Cycle E Filings Due by January 31, 2011
Individually Designed Plans
The IRS has established staggered deadlines for employers to file their qualified retirement plans with the IRS for a determination letter. As a general rule, every individually designed qualified retirement plan is assigned a specific five-year cycle (Cycles A-E) based upon the last digit of the plan sponsor’s employer identification number (EIN). If the plan sponsor’s EIN ends in 5 or 0, the plan is a Cycle E plan.1 Plan sponsors must submit Cycle E plans for a determination letter request no later than January 31, 2011 (plan sponsors should verify the EIN of their subsidiaries or other divisions maintaining their own separate plans). The effect of this system is that plan sponsors need to apply for new determination letters generally only once every five years. Prior to each cycle, the IRS issues guidance (in the form of a Notice entitled “Cumulative List of Changes in Plan Qualification Requirement”) on the provisions that must be included in each plan that is being submitted for a determination letter. Plan sponsors should review the Cumulative List (see Notice 2009-98) issued in connection with Cycle E filings to make sure that all required amendments are included in the plan document.
For your information, the general filing cycle information is as follows: see table.
Master & Prototype plans and volume submitter plans are generally reviewed on a six-year cycle. The deadline for plan sponsors using a defined contribution pre-approved plan document (such as a 401(k) plan) to restate a plan for EGTRRA and other changes was April 30, 2010.2 Additionally, the deadline to file this type of pre-approved plan with the IRS for a determination letter was also April 30, 2010. However, the IRS provided the following employers with an extension of time to file their defined contribution pre-approved plan with the IRS. The deadline to make this filing is January 31, 2011.
- employers with an EIN ending in a 5 or 0 (similar to Cycle E filings for individually designed plans)
- employers with an EIN ending in a 4 or a 9 who established a pre-approved plan for the first time during 2009 (employers who amended and restated a pre-existing individually designed plan into a prototype plan during 2009 are not eligible for this relief)
- governmental employers
Plan sponsors should review their qualified retirement plans now to ensure compliance with required amendment deadlines. Please do not hesitate to contact your Alston & Bird LLP attorney if we can assist you in proper filing procedures for your qualified retirement plan and to discuss any plan amendments and applicable deadlines.