- The Internal Revenue Service (IRS) has updated its Operational Compliance List for retirement plans with a number of changes that take effect in 2019, with a focus on changes to hardship distributions.
- The Operational Compliance List identifies both mandatory and discretionary plan amendments, and may also provide other guidance impacting the day-to-day operation of the plan, to help plan sponsors correctly and effectively operate qualified plans.
- The Operational Compliance List is released only on the IRS website and cannot be relied upon as a comprehensive list of all potentially relevant IRS guidance or new legislation for a particular year.
The Internal Revenue Service (IRS) has updated its Operational Compliance List to add changes effective in 2019. The updates for 2019 are focused on changes to hardship distributions.
In Revenue Procedure 2016-37, the IRS modified its determination letter program effective Jan. 1, 2017, established the Required Amendments List, and established the Operational Compliance List, among other guidance. The modification of the determination letter program generally allows for individually designed plans to apply for a determination letter only for initial plan qualification and for qualification upon plan termination. The IRS' modification of the determination letter program eliminated the staggered five-year remedial amendment cycle on which determination letter applications were accepted. The end of the determination letter cycle effectively eliminated the applicability of the IRS' Cumulative List of Changes in Plan Qualification Requirements (Cumulative Lists) to individually designed plans. These changes effectively make it impossible for plan sponsors of ongoing individually designed plans to get confirmation through a favorable determination letter that the terms of their plan documents comply with currently applicable plan qualification requirements.
In place of the Cumulative Lists for individually designed plans, the IRS began releasing an annual Required Amendments List and maintaining an Operational Compliance List. The lists are intended to help plan sponsors of individually designed plans maintain the plan's qualified status by summarizing in a single document changes relevant to the qualification and proper operation of the plan. Plan sponsors of individually designed plans should carefully review each Required Amendments List and all updates to the Operational Compliance List to help ensure proper plan administration, given that such plan sponsors are generally no longer able to confirm with the IRS that the plan's terms comply with applicable qualification requirements.
The Required Amendments List summarizes statutory and administrative changes in qualification requirements that are first effective during the plan year of publication, though the list is not updated during such year. The Required Amendments List provides only mandatory changes that a plan must adopt to maintain its qualified status. The first Required Amendments List was published in 2016. None of the Required Amendments Lists published so far (for plan years 2016 through 2018) included any required amendments for 401(k) plans.
In contrast, the Operational Compliance List identifies both mandatory and discretionary plan amendments, and may also provide other guidance impacting the day-to-day operation of the plan (even if such guidance doesn't require any changes to the terms of the plan), to help plan sponsors correctly and effectively operate qualified plans. The Operational Compliance List is released only on the IRS website and cannot be relied upon as a comprehensive list of all potentially relevant IRS guidance or new legislation for a particular year.
The updates added by the IRS to the Operational Compliance List for 2019 are focused on the below changes to hardship distributions.
- The Bipartisan Budget Act of 2018 (BBA) made the following changes regarding hardship distributions.
- Employees may take a hardship distribution without first taking any available plan loan, though plans may still impose a requirement to first utilize available plan loans.
- In general, hardship distributions may be made from qualified nonelective contributions (QNECs), qualified matching contributions (QMACs), and earnings on QNECS, QMACs and elective deferrals. However, as indicated by the preamble to the Proposed Treasury Regulations released in November 2018 (described below), a 403(b) plan still cannot permit a hardship distribution from earnings on 403(b) elective deferrals, earnings on QNECs/QMACs, or QNECs/QMACs that are in a custodial account.
- The hardship distribution safe harbor requirement to suspend participant contributions for six months following the hardship distribution is eliminated.
- Proposed Treasury Regulations issued in November 2018 would make the following changes, though the proposed regulations do not explicitly allow for reliance prior to the issuance of final regulations.
- Prohibit a 401(k) plan or 403(b) plan, for plan years beginning on or after Jan. 1, 2020, from suspending a participant's contributions as a condition of obtaining a hardship distribution. However, plan sponsors may eliminate the six-month suspension for plan years beginning on or after Jan. 1, 2019.
- Expand the safe harbor reasons deemed to constitute an immediate and heavy financial need to include 1) medical, educational or funeral expenses of primary beneficiaries, 2) casualty losses to repair a principal residence, and 3) expenses related to losses caused by federally declared disasters.
- For hardship distributions made on or after Jan. 1, 2020, the participant must provide a written representation that he or she has a financial need for the hardship distribution, and the plan administrator may rely on this written representation as long as the plan administrator does not have actual knowledge that the representation is false.
- Clarify that hardship distributions may be made from safe harbor 401(k) plan contributions.