The Internal Revenue Service extended the deadline for amending qualified retirement plans to comply with certain requirements enacted under the Pension Protection Act (PPA) and released a list of the qualified plan amendments that must be adopted in 2010.

Extension of Deadline for Amending Plans to Comply with Certain Pension Protection Act Requirements

The IRS extended the deadline for amending tax-qualified retirement plans to comply with the following PPA requirements until the last day of 2010 (for plans with calendar year plan years):

  • The funding-based restrictions on certain forms of distribution and benefit accruals under Internal Revenue Code Sections 401(a)(29) and 436

The PPA requires defined benefit pension plans to impose certain restrictions when the plan is not adequately funded. Depending on the severity of the underfunding, the plan may need to:

  • Restrict the availability of certain forms of distribution, such as lump sums and Social Security leveling options,
  • Eliminate plant shut-down benefits and similar unpredictable contingent benefits,
  • Prevent plan amendments that increase benefit liabilities from taking effect, and/or
  • Suspend future benefit accruals.

The funding-based restrictions became effective for plan years commencing after 2007, but the PPA deferred the deadline for adopting plan amendments to comply with these restrictions until the last day of the 2009 plan year. The IRS has now extended this deadline until the last day of the plan year beginning in 2010.

  • Cash Balance Plan Requirements

Under the PPA, cash balance plans are subject to new vesting and age-discrimination requirements, including restrictions on interest credits under such plans that exceed a “market rate of return.” These requirements became effective for plan years beginning after 2007, but the PPA deferred the deadline for adopting plan amendments to comply with these requirements until the last day of the plan year beginning in 2009. The IRS has further extended this deadline until the last day of the plan year beginning in 2010.

  • Diversification Requirements for Defined Contribution Plans Investing in Employer Securities

The PPA requires certain defined contribution plans that invest in publicly-traded employer securities to allow participants to diversify their accounts. The new diversification requirements became effective for plan years beginning after 2006, but the PPA deferred the deadline for amending plans to comply with the diversification requirements until the last day of the plan year beginning in 2009. The IRS has further extended this deadline until the last day of the plan year beginning in 2010.

Other Qualified Retirement Plan Amendments Required to be Adopted in 2010

In addition to the amendments described above, qualified plans will also need to be amended in 2010 to comply with the following new requirements:

  • Heroes Earnings Assistance and Relief Tax Act (“HEART Act”).
    • Plans must provide employees who die or become disabled while performing qualified military service with the same death or disability benefits that are available to employees who die or become disabled while actively employed. This change does not require the plan to provide for additional benefit accruals or employer contributions for the period of qualified military service.
    • Plans may, but are not required to, provide benefit accruals for the period of qualified military service to employees who die or become disabled while performing qualified military service.
    • The Heart Act imposes new rules with respect to the treatment of “differential pay” under qualified retirement plans. Differential pay refers to the compensation paid to employees who are on active military duty to bridge the difference between their regular compensation and their military pay.
    • Eligibility for a qualified reservist distribution was extended to individuals who are called to active duty after December 31, 2007. The qualified reservist distribution is an in-service withdrawal that is available to qualifying employees who are called to active duty. Qualified reservist distributions will not violate the restrictions on in-service withdrawals of elective deferrals and will not subject the employee to the tax penalty on early distributions.

For a more detailed explanation of the changes required by the Heart Act, see "Heroes Act Imposes New Employee Benefit Mandates and Tax Benefits for U.S. Veterans."

  • Non-Spouse Beneficiary Rollovers. Effective for distributions made after December 31, 2009, qualified plans are required to make direct rollovers available to non-spouse beneficiaries who are eligible to receive rollover distributions. Non-spouse beneficiary rollovers have been permitted since 2007.
  • Elimination of Gap Period Income for Excess 401(k) Contributions. If a participant’s elective deferrals for a tax year exceed the maximum dollar limits ($16,500 for 2010), the excess elective deferrals must be distributed along with any investment income allocated to the excess deferrals. Effective for tax years beginning after 2007, only investment income allocated to the excess deferrals during the year in which the excess deferrals were contributed must be distributed. Investment income allocable to excess deferrals during the period beginning after the end of the year in which such deferrals were contributed and ending on the date the excess deferrals are distributed (the “gap period”) is no longer permitted to be distributed along with the excess deferrals. This change reverses an amendment to the Treasury regulations that became effective in 2007, which required distribution of the income allocable to the excess deferral during the gap period. The Plan must also be amended, if necessary, to comply with this regulation for the plan year that begins in 2007.
  • Suspension of 2009 Required Minimum Distributions (“RMDs”) from Defined Contribution Plans. Defined contribution plans need to be amended to reflect the manner in which such plan administered the statutory waiver of RMDs for 2009. For more information about the waiver of RMDs for 2009, see "IRS Issues Additional Guidance Regarding Waiver of 2009 Required Minimum Distributions."