As the end of the year approaches, it is important for plan sponsors to review whether any qualified plan actions must be taken prior to year-end. This LawFlash describes potential year-end notices and plan amendments that may be required for tax-qualified retirement and savings plans. This list is not exhaustive, but is intended to serve as a reminder of items that should be reviewed and considered before the end of the year.

PLAN AMENDMENTS

Amendments to comply with certain provisions of the Pension Protection Act of 2006 (PPA) relating to stock diversification requirements, benefit restrictions, and hybrid plans are required to be adopted by the last day of the first plan year beginning on or after January 1, 2010. Thus, calendar-year plans must adopt these amendments by December 31, 2010. Additionally, amendments relating to the Heroes Earnings and Assistance Relief Tax Act of 2008 (HEART Act) are also required to be adopted by the end of 2010 for calendar-year plans. Collectively bargained and governmental plans may have later effective dates and/or amendment deadlines. Also, certain rules may differ for multiemployer plans. If your plan is not a collectively bargained, governmental, or multiemployer plan, the list below will help you determine if any amendments are required for your plan by the end of the 2010 plan year.

Required Amendments

Below is a list of amendments relating to changes in the law that may need to be adopted by the end of the 2010 plan year.

Defined Contribution Plan Amendments

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Discretionary Amendments

Plan amendments for discretionary changes (i.e., changes not required by law, such as plan design changes) must be adopted by the end of the plan year in which the amendment is effective (unless earlier adoption is necessary to avoid a benefit cutback). Thus, calendar-year plans must be amended by December 31, 2010 for optional changes that took effect in 2010.

ANNUAL NOTICE REQUIREMENTS

Depending upon the type of qualified plan and the plan’s features, one or more annual notices may be required. Please carefully review the following notices to determine whether any are required to be issued for your plan.

Annual Safe-Harbor 401(k) Plan Notices

  • Traditional Safe-Harbor Plan Notice. Safe-harbor 401(k) plans must provide an annual safeharbor notice to all plan participants describing the safe-harbor contribution and other material plan features.
  • Wait and See” Safe-Harbor Notice. Sponsors of safe-harbor 401(k) plans that intend to satisfy the safe-harbor requirements through a 3% nonelective contribution may wish to follow the “wait and see” approach. Plan sponsors that follow this approach must provide a notice prior to the beginning of the plan year notifying eligible employees that the safe harbor may be adopted. Additionally, plan sponsors that previously provided a “wait and see” notice prior to the beginning of the ongoing plan year and that decide to implement a safe-harbor arrangement prior to the end of the plan year (by making the 3% nonelective contribution) must provide a supplemental notice to eligible employees informing them that the safe-harbor arrangement will be adopted.

The traditional safe-harbor notice and the contingent and supplemental notices must be provided at least 30 days and no more than 90 days prior to the beginning of the plan year. Thus, calendar-year plans will need to provide the applicable notice by December 1, 2010.

Note: If you previously provided a “wait and see” safe-harbor notice and have decided to implement the 3% nonelective safe-harbor contribution for this plan year, in addition to providing the notice described above, you will also need to amend your plan to provide for the safe-harbor contribution prior to the end of the plan year.

Qualified Default Investment Alternative Notices

Participant-directed 401(k) plans that invest participant contributions for which no affirmative investment election has been made into a qualified default investment alternative (QDIA) must provide an annual notice. The notice must be distributed to all participants who have been or may be defaulted into a QDIA. The notice must be provided at least 30 days before the beginning of each plan year. For calendar-year plans, notice must be provided by December 1, 2010.

A QDIA is an investment alternative (for example, a balanced fund or target-date fund) in a participantdirected 401(k) or profit-sharing plan into which participant contributions are “defaulted” if the participant has not made an affirmative investment election. If a plan fiduciary properly selects a QDIA and follows the specific QDIA requirements, which include providing an initial and an annual notice, the plan fiduciary will generally receive fiduciary protection for those defaulted investments under Section 404(c) of the Employee Retirement Income Security Act of 1974, as amended (ERISA), because participants will be “deemed” to have elected to invest their contributions into the QDIA.

Note: One of the many QDIA notice requirements is that the notice be “separate” from any other notices that are provided. However, the QDIA notice is permitted (but not required) to be combined with the safeharbor notice (described above) and the automatic enrollment notices (described below).

401(k) Plan Annual Automatic Enrollment Notice

Sponsors of 401(k) plans that automatically enroll participants must provide an annual notice to all eligible employees describing the circumstances under which contributions may be automatically contributed to the plan. This notice may be combined with the QDIA notice described above. This notice must be distributed at least 30 days, but no more than 90 days, prior to the beginning of each plan year. For calendar-year plans, the notice must be provided by December 1, 2010.

Note: There are a number of different automatic enrollment arrangements (for example, one arrangement simply provides for the automatic enrollment of participants, while another is linked to satisfying 401(k) plan discrimination tests), but each requires a notice.

Defined Benefit Plan Annual Funding Notice

Plan sponsors of single- and multiemployer defined benefit pension plans must provide an annual funding notice to participants, beneficiaries, and labor organizations representing participants. The notice must contain certain information about the plan, including the plan’s funding status for the previous two years, and a statement of the plan’s assets and liabilities, among other items.

The notice must generally be provided within 120 days following the end of the plan year. Small plans (covering fewer than 100 participants) must provide the notice by the filing due date of the plan’s IRS Form 5500. Additional notice requirements apply if the plan is subject to benefit restrictions due to failure to meet certain funding targets.

For calendar-year plans, the notice is due by April 30, 2011.

Notice of Consequences of the Failure to Defer Benefits

Under Code Section 411(a), a plan is required to obtain participant consent in order to distribute defined contribution or defined benefit plan benefits that have a present value exceeding $5,000. The Code Section 411(a) regulations indicate that the consent is only valid if the participant is properly informed of the right to defer receipt of distribution. The PPA added the requirement that participants must also be informed of the consequences of failing to defer their distributions until normal retirement age. While the notice requirement is in effect for plan years beginning after December 31, 2006, the PPA included a “reasonable attempt to comply” standard until 90 days after the issuance of final regulations.

IRS Notice 2007-7 contained a safe harbor describing what would be considered a “reasonable attempt” to comply with the notice requirement. In October 2008, the IRS issued proposed regulations. Until the issuance of final regulations occur, plan sponsors should continue to take good-faith reasonable steps to comply with the notice requirements. We will issue a LawFlash when the final regulations are released.

Participant Benefit Statements

Depending upon the type of qualified plan, specific participant benefit statement requirements apply, as described below.

  • Defined Benefit Pension Plans. Plan sponsors of defined benefit pension plans must either provide participant benefit statements every three years to vested participants who are active employees or provide an annual notice to participants describing how a benefit statement may be obtained.  
  • Participant-Directed Defined Contribution Plans. Participant-directed defined contribution plans are required to provide participant statements on a quarterly basis. Plan sponsors are deemed to timely provide statements if they are provided within 45 days following the end of the calendar quarter.  
  • Non-Participant-Directed Defined Contribution Plans. Plans that do not permit participants to individually direct their account balances are required to provide statements at least once each calendar year. Plan sponsors are deemed to timely provide statements if they are provided on or before the date on which the Form 5500 annual report is filed by the plan (including extensions).  

Special Tax Notices

In IRS Notice 2009-68, the IRS issued two model safe-harbor Special Tax Notices for eligible rollover distributions from an employer plan that can be used to satisfy Code Section 402(f). The first notice applies to distributions that are not from a designated Roth account. The second safe-harbor notice is designed for distributions from a designated Roth account.  

The revised notices serve as safe harbors for distributions made on and after January 1, 2010. Plan sponsors should ensure that their notices have been properly updated.  

TRANSFERS AND SPIN-OFFS TO PUERTO RICO QUALIFIED PLANS BY DECEMBER 31, 2010

In Revenue Ruling 2008-40, the IRS clarifies that the transfer or spin-off of assets from a dual-qualified (United States and Puerto Rico) plan funded through a U.S. trust to a Puerto Rico–only qualified plan funded through a Puerto Rico trust is generally prohibited and that such a transfer is taxable to affected participants and may jeopardize the U.S. tax-qualified status of the U.S. plan. However, Revenue Ruling 2008-40 provides a relief period expiring on December 31, 2010, during which such transfer will be allowed without any adverse tax consequences. Plan sponsors contemplating such a transfer or spin-off should act quickly in order to accomplish and complete the transfer or spin-off by the December 31, 2010 deadline. Any such transfer after that date will generally be taxable to the Puerto Rico residents participating in the plan and could jeopardize the tax-qualified status of the U.S. plan unless the Puerto Rico transferee plan makes an election to comply with U.S. qualification requirements under ERISA Section 1022(i)(2).

We understand that there have been recent discussions between practitioners and the IRS regarding open issues that exist relating to such transfers and that the IRS is considering extending the relief in Revenue Ruling 2008-40. However, as of the date that this LawFlash is being issued, we have no formal guidance from the IRS confirming any such extension. We will issue a LawFlash if such an extension is issued.