The purpose of this article is to provide you with an update on (1) interim amendments that may be required in the near future, (2) the EGTRRA restatement process, and (3) the implementation of certain PPA provisions.
INTERIM AMENDMENT
- Hurricane Amendment
Many people also refer to this as the "Katrina amendment." Congress enacted KETRA (the Katrina Emergency Tax Relief Act of 2005), and GOZone (Gulf Opportunity Zone Act of 2005) to provide relief to participants affected by Hurricanes Katrina, Rita and Wilma. This legislation permitted plans to ease the restrictions on hardship distributions and loans. Employers who made these provisions available to participants must adopt the amendment by the last day of the plan year that begins in 2007 (i.e., December 31, 2007 for calendar year plans). The amendment provides for the maximum relief available under the laws and should be modified if the maximum relief was not made available to participants. The amendment is not designed to be adopted at a prototype sponsor level because of its limited application. Thus, each employer which utilized the "hurricane" provisions must adopt this amendment.
You may obtain the amendment at http://www.relius.net/News/OtherResources.aspx?T=P.
- Final 415 Regulations Amendment
The Treasury released final 415 regulations in April 2007. While the majority of the changes made by these regulations affect defined benefit plans, there are some changes that affect defined contribution plans (e.g., the post-severance compensation provisions). These regulations are effective for limitation years beginning on or after July 1, 2007. Pursuant to guidelines set forth by the IRS in Rev. Proc. 2007-44, an amendment to conform to these regulations would generally be needed by the due date of the tax return (plus extensions) for the taxable year of the employer that ends with or within the limitation year beginning on or after July 1, 2007. Thus, for a calendar year tax year/plan year/limitation year, the amendment would be required by the due date of the tax return for the 2008 year (which would be at some point in 2009). However, there are some concerns as to whether an amendment may be needed sooner than the general deadline, specifically where there are IRC § 411(d)(6) anti-cutback issues due to a change in the plan's definition of compensation.
In light of these concerns, we are currently drafting a final 415 regulation amendment for defined contribution plans and we expect to have that released by the end of October. We will notify you when that amendment is available. At that time, we will also inform you about the status of an amendment for defined benefit plans.
We expect that the final 415 regulation amendment will also include language intended to comply with Treasury Regulation § 1.411(d)-3, which was released as a result of the US 7th Circuit Court of Appeals case, Heinz v. Central Laborers' Pension Fund (303 F.3d 802, 805 (7th Cir. 2002)). This regulation primarily impacts defined benefit plans, but also affects defined contribution plans where vesting schedules have been amended to a more restrictive schedule. While it's not clear whether an amendment is actually needed, since all plans will need to be amended to reflect the final 415 regulations, we believe there is no harm including the language for the portion of the final 411 regulations relating to vesting. The portion of the regulations relating exclusively to defined benefit plans will not need to be adopted until plans are restated for EGTRRA.
- Gap period income on excess deferrals
When the Treasury issued Roth regulations earlier this year, it also issued regulations under IRC § 402(g). These regulations require that distributions of excess deferrals (deferrals that exceed the applicable dollar limit under IRC §402(g)) for 2007 and later include gap period income. This is similar to the gap period income distribution requirements that were imposed in the final 401(k)/401(m) regulations relating to excess contributions and excess aggregate contributions (i.e., due to failed ADP/ACP tests) for 2006 and 2007. PPA 2006 eliminated the requirement that gap period income be distributed on corrective distributions for a failed ADP/ACP test beginning in 2008. However, PPA did not eliminate the requirement with respect to distributions of excess deferrals. Normally, this would mean that an amendment would be needed by the due date of the employer’s tax return for the 2007 year. However, in light of a PPA Technical Corrections Bill (which would eliminate the requirement that gap period income be distributed on excess deferrals), the IRS has announced (in its list of 2007 interim and discretionary amendments) that an interim amendment to reflect the final regulations is not needed at this time. We will inform you if an amendment will be required in the future.
EGTRRA RESTATEMENTS
- Pre-approved plans
We have received informal "soft" approval on our prototype and "prototype-formatted" volume submitter defined contribution documents. This does not mean the plans are in their final approved form. It does mean, however, that the IRS is done with the active review of the plans and that any additional changes will likely be very minor.
Note that employers may not begin the EGTRRA restatement process until we receive FORMAL approval from the IRS. The IRS expects to issue all approval letters by the end of the first quarter in 2008. It is expected that employers will have 2 years from the date the plans are formally approved to restate their plans. If you have already been licensed to use our pre-approved plans, you will receive an email within the next several weeks that will include a link to the most current version of the EGTRRA documents (for review purposes only).
- Individually designed plans
The SunGard Relius ESOP and cash balance defined benefit plans are currently being updated to reflect the Cycle B submission requirements. The delay in issuing these updated documents is because of the delay in the issuance of the final 415 regulations, which are required to be included in plans submitted as part of Cycle B. We expect the updated documents to be available no later than the end of November and will announce this.
IMPLEMENTATION OF PPA PROVISIONS (including Automatic Enrollment)
Revenue Procedure 2007-44 clarifies that interim amendments for PPA are not needed prior to 2009. (There are no "anti-cutback" issues associated with the delaying amendments until 2009.). This includes any elective provisions such as automatic enrollment or non-spousal beneficiary rollovers. However, practitioners have raised a number of issues with respect to the operation/implementation of PPA provisions.
- Automatic Enrollment
If an employer wants to implement an eligible automatic contribution arrangement ("EACA") or a qualified automatic contribution arrangement ("QACA"), then an SMM and various notices may be needed. IRS guidance on automatic enrollment is expected later this month. We are also still awaiting the finalization of the DOL qualified default investment alternative regulations. Thus, we anticipate releasing a package with an SMM and various notices later this fall. This package will not include an actual plan amendment since a plan amendment is not required at this time.
- Qualified Optional Survivor Annuity
Beginning in 2008, plans that are subject to the qualified joint and survivor annuity requirements will need to offer a qualified optional survivor annuity. While most plans already offer an alternative annuity that would meet the PPA requirements, the new requirement will necessitate a modification to existing joint and survivor annuity notices. We will be working on updating our notices to comply with this requirement and will let you know when these updated forms are available, also later this fall.
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