This fall is a good time to assess and plan for actions that need to be taken by year end and in 2008 to ensure U.S. qualified plan compliance. It is also a good time to start planning to take advantage of new opportunities in 2008. This article provides a brief summary of important new requirements and new options for plan sponsors. 

Year-End and Interim Deadlines

In a previous Osler Update, we addressed the new cyclical schedule for qualified plan sponsors to periodically obtain IRS determination letters affirming that their restated plans satisfy current legal requirements. The deadline for plans in Cycle B is January 31, 2008; however, qualified plans are also subject to interim amendment requirements to reflect new rules and regulations. These amendments are often required in advance of the cyclical filings for favorable determination letters from the Internal Revenue Service (IRS).

In addition, amendments to reflect discretionary plan changes, such as adding Roth 401(k) features to a 401(k) plan, usually must be adopted by the last day of the plan year in which the discretionary change becomes effective. Failure to adopt one of these amendments on time could jeopardize the plan’s qualified status and attendant tax benefits. If you missed a prior deadline, there is a simplified and relatively inexpensive procedure to get IRS approval for your late adoption, but you will only be eligible for this simplified correction procedure if you find the problem before the IRS does. This makes year-end reviews of compliance with prior deadlines advisable as well.

The IRS has just published a list of 2007 Interim and Discretionary Amendments updating prior guidance. Among the amendments included on this list are amendments to comply with final regulations on maximum benefits and contributions (which are applicable to limitation years beginning after June 30, 2007), amendments to comply with new regulations on vesting and benefit accrual under Section 411(d)(3) of the Internal Revenue Code, and amendments extending special distributions and loan rules to the victims of the 2005 hurricanes. In reviewing past compliance, plan sponsors should in particular check that amendments to comply with final 401(k) regulations and amendments to reflect required automatic rollover of certain involuntary cashouts of benefits, included in prior IRS lists, have been adopted in a timely manner.

Even if there is a delayed amendment deadline for new requirements, a plan oftentimes is required to be in operational compliance with new rules in advance of the amendment deadline. This rule applies to Pension Protection Act changes. Even if amendments are not required now, implementing these changes requires communication with employees and working out procedures with the plan’s service providers, each of which takes time.

New Notice Requirements

Certain plans that permit investment in publicly traded company stock were required to give participants new diversification rights and distribute diversification notices to participants beginning in 2007. The Department of Labor has announced that penalties of up to $100 per participant may be applied for each day of noncompliance with the notice requirement. New benefit statement requirements for plans have also come into effect. Compliance with these new requirements will often require coordinated action among the plan’s service providers. Plan sponsors should not assume that any benefit statements that were in use before the new requirements came into effect or that were provided by a service provider will comply with the new rules.

2008 Requirements

Here are some of the important requirements that will come into effect in 2008:

  • New defined benefit plan funding requirements and related participant notice requirements are applicable in plan years beginning in 2008. Under these rules, not only may your contributions increase, but benefit increases and lump sum payouts also may be restricted if the plan is deemed substantially underfunded.
  • Plans providing annuities may need to be amended to provide for new survivor annuities in 2008.
  • Changes to the maximum deductible contribution rules are effective for years beginning after 2007.
  • The maximum U.S. Employee Retirement Income Security Act bond required for plans holding employer securities increases from $500,000 to $1 million in 2008.
  • Changes in the calculation of lump sums under defined benefit plans, which include the phased introduction of a new interest rate, begin to be effective in 2008.

New Opportunities

An attractive new plan design for "auto enrollment" safe harbor 401(k) plans will become available in 2008. Plan sponsors might also want to implement changes that were available in prior years but which they have not yet adopted, beginning in their 2008 plan year. The easiest way to do this would be to introduce the changes as of the first day of that year. Examples of these optional provisions are Roth 401(k) provisions, in service pension plan distributions for participants aged 62 or older, which may be used in conjunction with phased retirement programs, and “eligible investment advice arrangements” which facilitate the use of third party advisers to assist participants and beneficiaries who direct their own investments.

Plan Housekeeping

Depending on the sponsor’s documents and procedures, plan changes may need to be adopted by the Board of Directors. The Board’s meeting schedule might impose an earlier practical deadline than the legal deadline for changes, or special meetings might need to be scheduled to approve changes. In addition, it takes time to establish administrative systems and employee communications to implement approved changes. For all of these reasons, now is a good time to start getting ready for 2008.