When the IRS “sunset” the ongoing determination letter program to retirement plans (see Revenue Procedure 2016-37), it committed to annually releasing a list to assist sponsors in achieving operational compliance with the Code’s qualification requirements (the “Operational Compliance List”). The Operational Compliance List is intended to identify changes in qualification requirements that are effective during a particular calendar year. Now, plan sponsors can review the list to ensure their plans achieve operational compliance by identifying changes in qualification requirements effective during a calendar year.

Last month, the IRS issued its 2019 Operation Compliance List. The 2019 Operational Compliance List starts with some important caveats, including:

  • While the IRS intends to periodically update the list, it is not intended to be comprehensive.
  • A plan must be operated in compliance with all changes in qualification requirements from the respective effective date of each such change. In order to be qualified, a plan must comply operationally with each relevant qualification requirement, even if the requirement is not included on the Operational Compliance List.

The Operational Compliance list details changes effective in 2017 and forward; however, we will focus in this alert on those changes highlighted in the Operational Compliance List that are effective in 2019:

1. Changes Relating to Hardship Distributions.

  • Under the Bipartisan Budget Act of 2018:
    • a distribution will not fail to be treated as made on account of hardship merely because the employee does not take any available loan from the plan, and
    • the types of contributions and earnings a plan may make available for hardship distributions were expanded.
    • the IRS and Treasury were directed to eliminate the safe harbor requirement to suspend participant contributions for six months in order for the distribution to be deemed necessary to satisfy an immediate and heavy financial need.
  • Proposed Regulations Regarding Hardship Withdrawals were issued that proposed to revise the 401(k) regulations to:
    • prohibit a plan from suspending a participant’s contributions as a condition of obtaining a hardship distribution.
    • revise the safe harbor list of expenses deemed to constitute an immediate and heavy financial need, including modifications regarding casualty losses and disaster-related expenses.

The effective date of these proposed changes vary (and ultimate depend on the issuance of final regulations); however, it is worth noting that the prohibition on a plan providing for a suspension of elective contributions or employee contributions as a condition of obtaining a hardship distribution would only apply for a distribution made after 2019.

  • As is now customary in the case of domestic natural disasters, Relief for Victims of Hurricanes Florence and Michael extended the retirement plan relief provided under Announcement 2017–15 (guidance issued with respect to Hurricane Maria and California Wildfires) to similarly situated victims of Hurricanes Florence and Michael through March 15, 2019. Under this guidance:
    • retirement plans can provide loans and hardship withdrawals to employees and certain members of their families who live or work in the disaster areas affected and designated for individual assistance by the FEMA.
    • the procedural and administrative rules that normally apply to retirement plan loans and hardship distributions are relaxed (which relaxation is intended to permit eligible retirement plan participants to access their money more easily in a time of crisis). Note, however, that plan sponsors must make a good-faith effort to acquire any foregone usually required documentation as soon as practicable following the distribution/withdrawal.
    • post-distribution restrictions (including the six-month ban on 401(k) and 403(b) contributions that normally affects employees who take hardship distributions) need not apply.
  • A welcome extension of temporary nondiscrimination relief for closed defined benefit pension plans (issued in Notice 2018-69). This notice extends, to plan years beginning before 2020, the relief provided to closed defined benefit plans under Notice 2014-5, as previously extended, to provide temporary relief for closed defined benefit plans that may have difficulty meeting the nondiscrimination requirements under Internal Revenue Code Sections 401(a)(4) and 410(b). The guidance allows a defined benefit plan to be combined with the employer’s defined contribution (DC) plan in certain instances.

Of course, a cardinal rule with retirement plans is that the plan must be operated in accordance with its terms. To that end, a plan amendment will likely be necessary to effectuate any/all of these changes; contact your plan provider to make necessary changes to your plan document.