Governance and Compliance Advisory Update: October 2009 - Thought Leadership - Towers Perrin
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October 2009

Governance and Compliance Advisory Update: October 2009

September saw an increase in significant retirement plan regulatory activity.  Specifically, the Internal Revenue Service (IRS):

  • released two new safe harbor rollover notices, updated for current tax law (e.g., Roth 401(k))
  • provided guidance on how plan sponsors can align contribution rates under automatic enrollment arrangements with participant pay increases
  • provided guidance on contributing unused paid time off (PTO) to qualified retirement plans
  • clarified the tax treatment of non-Roth distributions rolled over to Roth IRAs
  • addressed several outstanding issues related to the waiver of 2009 required minimum distributions.

The Department of Labor (DOL) also released guidance that could make it easier for plan sponsors to comply with ERISA 404(c), and plan participants to understand their plan’s investment options.

Finally, legislation supported by the Obama administration was introduced to repeal the Defense of Marriage Act (DOMA), which would trigger changes in qualified retirement plans, health and welfare plans, and human resource policies.

IRS Takes Action

Next month, we will discuss the final IRC Section 430 and 436 regulations that were released by the IRS on October 7, and which were previewed in a special edition of the IRS Employee Plans News (discussed below). Also, it is anticipated that the IRS will release guidance on cash balance plans soon. Industry groups have been urging the IRS to provide guidance on setting interest rates under these plans. Finally, we have learned that IRS audits of nonqualified deferred compensation plans has begun. The IRS has sent detailed information document requests to employers seeking information on compliance with Section 409A of the Code. We will provide more information on these topics through client alerts and in next month's issue of the GCA Update.

Legislative Developments

Proposed legislation would repeal DOMA

Representative Nadler introduced the Respect for Marriage Act of 2009. The bill would repeal the DOMA (which defines marriage as the union of one man and one woman for federal law purposes) and would instead provide that if a marriage is valid under state law, it must be recognized for purposes of federal law (e.g., ERISA, the Internal Revenue Code, Family and Medical Leave Act).

Insight: Under the new law, states that have not previously recognized same-gender marriage would not be required to do so. The Obama administration has expressed support for the repeal of DOMA. If enacted, the bill would have significant implications for qualified plans (e.g., same-gender spouses would be recognized for purposes of survivor annuity rules), and health and welfare plans (e.g., eligibility and tax treatment of benefits). Should this legislation pass, plan sponsors may have to update plan documents, SPDs, enrollment forms, payroll systems and other participant communications.

A copy of the legislation can be found here. 

Regulatory Developments

Safe Harbor Rollover Notice Is Updated

The IRS issued Notice 2009-68, which contains updated safe harbor tax explanation notices. Sponsors of qualified plans, 403(b) plans and governmental 457(b) plans are required to furnish such a notice to recipients of an eligible rollover distribution. The notice explains some of the key tax consequences and implications of the decision to roll over the distribution.

Insight: Due to changes in the tax law (e.g., Roth 401(k) contributions), the previously published safe harbor notice was outdated. Since tax consequences of Roth contributions are substantially different from other types of retirement contributions, the IRS published two safe harbor notices: one for distributions of Roth 401(k) contributions (only), the other for distributions of all other types of contributions. Plan sponsors may use the updated safe harbor notice immediately, or continue to use the old version (modified to reflect current tax law) until the end of 2009. Plan sponsors will need to decide quickly whether to start using the new safe harbor notices or to update their current notice based on the new safe harbor notices.

A copy of the Notice can be found here. 

IRS Allows Sponsors to Align Auto 401(k) Contribution Limits With Participant Pay Increases

The IRS issued Revenue Ruling 2009-30, which allows plan sponsors to automatically increase participants’ default contribution rate each year, at the same time they receive a midyear pay increase. In certain circumstances, the amount of the increase may even be determined with reference to the size of the participant’s pay raise. The IRS also issued Notice 2009-65, which provides two sample amendments 401(k) plan sponsors can use to add automatic enrollment features to their plans.

Insight: If plan sponsors choose this strategy, participants are least likely to notice the impact and, therefore, continue to encourage retirement savings among an employee population that may otherwise decline to participate in the plan or lower their contribution rate. The ruling applies to all types of automatic enrollment arrangements.

A copy of the Revenue Ruling and Notice can be found here and here.

IRS Provides Guidance on Contributing Unused PTO to DC Plans 

The IRS issued two Revenue Rulings (2009-31 and 2009-32), which provide guidance on qualified retirement plans that permit annual contributions (including 401(k) contributions) of an employee’s unused PTO.

Insight: The rulings describe the tax consequences associated with allowing such contributions to a qualified retirement plan. One ruling addresses contributions made while a participant is employed; the other addresses contributions of unused PTO at termination of employment. Plan sponsors looking to encourage employees to adequately save for retirement should consider allowing PTO contributions if this strategy is in alignment with their PTO benefit philosophy. Plan sponsors should also consider the impact on nondiscrimination testing for the defined contribution plan and the added costs created by monetizing the PTO.

A copy of the Rulings can be found here and here.  

SEC Summary Prospectus and 404(c) Relief

In Field Assistance Bulletin 2009-03, the DOL takes the position that a mutual fund's short-form prospectus can be used to satisfy prospectus delivery requirements for plans in which ERISA Section 404(c) protection is sought.

Insight: Plan sponsors should consider whether a short-form prospectus will be more effective in educating participants about their investments than a fund’s normal form of prospectus. While considering how best to comply with 404(c), plan sponsors should also review their plans' overall compliance with 404(c) and its operational practices, in light of the many lawsuits brought against plan fiduciaries seeking to recover significant losses to 401(k) plan accounts.

A copy of the special edition of the IRS Employee Plans News can be found here.

Roth IRA Rollovers

In Notice 2009-75, the IRS provides that non-Roth distributions from an employer plan rolled over to a Roth IRA are included in gross income in the year of distribution.

Insight: Plan sponsors should consider whether it makes sense to allow in-service distributions of employer contributions in 2010, which higher-income participants could then roll over to a Roth IRA (before tax rates increase), due to the expiration of Roth IRA income limits.

A copy of the Notice can be found here.  

Required Minimum Distribution Relief

The Worker, Retiree, and Employer Recovery Act of 2008 (WRERA) waived the requirement for qualified (and certain other tax-favored) defined contribution plans and IRAs to make required minimum distributions (RMDs) for 2009. The IRS recently issued Notice 2009-82 regarding this change, which, among other things:

  • provides important transition relief (through November 30, 2009) for employers whose plans may not have been operated in a manner that is consistent with the terms of the plan with respect to waived required minimum distributions during some part of 2009
  • provides a waiver of the 60-day rollover window (through November 30, 2009) for participants who may have received distributions during 2009 that did not have to be made in view of the RMD suspension
  • answers miscellaneous questions about this RMD change
  • offers two sample amendments for use by plan sponsors to document this RMD change in their plans which provide participants with a choice as whether to receive the 2009 distributions.

Insight: Because some plans may have been operated in a manner that reflects their current terms, they don't need this transition relief.

A copy of the Notice can be found here.

Publications

Pension Plan Funding and Benefit Restriction Guidance 

The IRS issued a special edition of the IRS Employee Plans News, stating that final regulations under IRC Section 430 (minimum funding requirements) and 436 (benefit restrictions) will generally be effective for plan years starting on or after January 1, 2010.

Insight: The final regulations were released October 7. The November edition of GCA Update will discuss these regulations.

A copy of the special edition can be found here.

This document is incomplete without the accompanying discussion by a Towers Perrin consultant. All materials and intellectual capital contained within are property of Towers Perrin. This publication was prepared to support our clients' need for information on the issues discussed. Recipients should understand that this publication does not constitute, and should not be used as a substitute for, legal, accounting, actuarial, tax or other professional advice. If such advice is required, the recipient should engage the services of the appropriate professional.