Author: ericgregory

IRS Permits the Use of Forfeitures for QNECs, QMACs and Safe Harbor Contributions

Many employers had long assumed that they could fund contributions to qualified plans made to avoid violating nondiscrimination rules from employee forfeiture accounts. Recently, the IRS finalized helpful new guidance to employers clarifying that forfeitures can be used fund these contributions. QNECs, QMACs and Safe Harbor Contributions Tax-qualified defined contribution plans (e.g., 401(k) and profit sharing plans) may not discriminate in favor of highly compensated employees (“HCEs”). There are two nondiscrimination tests that specifically apply to 401(k) plans: (1) the Actual Deferral Percentage (“ADP”) test, which applies to employee salary deferrals; and (2) the Actual Contribution Percentage (“ACP”) test, which applies to employer matching contributions, if any, and employee after-tax contributions. These non-discrimination tests are complex and can be difficult to administer. If the employer fails one or both of these tests, one option it has is to make a qualified non-elective contribution (“QNEC”) or a qualified matching contribution (“QMAC”) to increase the average percentage deferrals or match for non-highly compensated employees (“NHCEs”) in comparison to the HCEs. Additionally, employers can implement a “safe harbor” plan design to avoid ADP and ACP testing altogether. Safe harbor plans are exempt from this testing, so long as the employer makes a matching or non-elective contribution under one of the pre-approved safe-harbor formulas. All of these contributions are subject to certain nonforfeitability and distribution requirements. Treasury Regulations: Forfeitures Seemingly Not Permitted It...

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Signs Point to Yes: The IRS Advisory Committee Drops Hints That the Qualified Retirement Plan Determination Letter Program Might Return in Some Form

For many years, plan sponsors could regularly get a determination letter from the IRS to ensure that their individually-designed qualified retirement plan met all of the requirements for favorable tax treatment. However, in 2017 the IRS ended that practice. Since that time, plan sponsors have had no mechanism by which to confirm that their plans continued to satisfy all of the qualification requirements. Recent publications from the IRS and its Advisory Committee, however, suggest that the program might come back in some form. Issues for Employers without the Determination Letter Program Without the determination letter program, employers are required to be more vigilant that their individually-designed plans are regularly reviewed by benefits counsel. For decades, determination letters served as a “backstop” for employers to ensure compliance with the Internal Revenue Code, which helps guarantee the current deductibility of employer contributions and tax-free growth of plan investments held in trust. Qualification is also important to third parties. Auditors and investment managers would typically examine favorable determination letters. Companies involved in mergers and acquisitions would typically present a favorable determination letter to demonstrate qualification requirement compliance. Since the program has not been in place, it has been more difficult to obtain assurance that a plan meets the qualification requirements. Signs of Change Early in 2018, the IRS published Notice 2018-24, which requested comments on possibly re-opening the program for individually-designed plans....

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Qualified Transportation Fringe Benefits No Longer Deductible for Employers

In the past, employers have been able to deduct expenses related to “qualified transportation fringe benefits” (“QTFBs”) such as qualified parking, transit passes, transportation in commuter highway vehicles, or qualified bicycle commuting reimbursements. Pub. L. No. 115-97, commonly referred to as the “2017 Tax Act” or the “Tax Cuts and Jobs Act” (“TCJA”), however, has repealed the ability of employers to deduct the costs associated with QTFBs after December 31, 2017. Ramifications for For-Profit Employers QTFBs are no longer deductible for employers when provided under a salary reduction arrangement (“SRA”), where the employee has the choice between the actual receipt of compensation and the QTFB benefits. Employees, conversely, may still make elections under an SRA or otherwise exclude QTFBs from their income. Employees, however, can no longer exclude qualified bicycle commuting reimbursements from income for tax years 2018 through 2025. This means that most employers have less of an incentive to provide QTFBs. Employers may provide additional compensation to employees that would be deductible so long as it is “ordinary and necessary” under Code Section 162. Ramifications for Non-Profit Employers Tax-exempt organizations must include as unrelated business taxable income (“UBTI”) any amounts paid by the organization for any QTFBs. This is effectively a 21% tax on these amounts. This will give rise to a requirement to file a Form 990-T for smaller non-profit organizations that otherwise would not be...

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The Sixth Circuit Reminds Plan Sponsors of the Importance of Firestone “Magic Words” for ERISA Plan Interpretation

A recent ruling by the Sixth Circuit Court of Appeals acts as an important reminder to ERISA plan sponsors that reserving the written right to interpret plan documents may be critical in interpreting otherwise ambiguous language. The Firestone Language In the 1989 case Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989), the United States Supreme Court conclude that an ERISA plan administrator’s decision will be reviewed under a de novo (i.e., without deference) standard, unless the ERISA plan document confers discretion on that administrator to determine eligibility for benefits and construe terms of the plan. Since then, many plan administrators are sure to incorporate the so-called “Firestone language” in plan documents that explicitly grants the plan administrator such authority. With Firestone language, courts have typically granted a much more lenient “arbitrary and capricious” standard of review. The Norton Healthcare Challenge to Firestone Language In 2013, a Kentucky federal judge found that Norton Healthcare, Inc. shortchanged early retirees’ pensions and ordered the company to recalculate their monthly retirement income and lump-sum benefits, based on unclear plan language. That court held that the common-law doctrine of contra proferentum should apply. That is a doctrine of contractual interpretation providing that, where a promise, agreement or term is ambiguous, the preferred meaning should be the one that works against the interests of the party who drafted the contract. In other...

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The PBGC’s Missing Participant Program Now Allows Terminating Defined Contribution Plans to Participate

Especially upon plan termination, locating missing participants can be a major headache for plan sponsors, who have a fiduciary obligation to locate participants and distribute benefits under the terminating plan. In one development that may help in this regard, the Pension Benefit Guaranty Corporation (“PBGC”) issued final regulations that expand, revise and simplify its Missing Participant program. Most importantly, it now allows defined contribution plans (e.g., 401(k) and profit sharing plans) to participate on a voluntary basis, either by transferring the missing participant’s benefit to the PBGC or informing the PBGC of the missing distributee. “Missing Participants” For terminating defined contribution plans, the PBGC considers a participant as “missing” if they fail to elect a method of distribution on close-out of the plan, the plan does not know with reasonable certainty the location of the participant, or the participant did not accept a lump sum payment of his or her benefit. The PBGC regulations provide that if a participant’s check remains uncashed by a “cash-by” date that is at least 45-days after the issuance of the check, the distribution is considered uncashed and the participant is considered missing. “Diligent Search” A defined contribution plan may only represent that it does not have reasonable certainty about the location of a participant without a “diligent search.” The PBGC defines a “diligent search” as: Searching the records of the plan, related plans,...

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The HR Blog is published by Dickinson Wright PLLC to inform the public of important developments within the firm and practice areas. The content is informational only and does not constitute legal or professional advice. We encourage you to consult a Dickinson Wright attorney if you have specific questions or concerns relating to any of the topics covered in this blog.

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