During the last quarter of 2010, tax-qualified retirement plan sponsors should review their plans and amend them by the end of the year (or in some cases, by the end of the last day of the plan year ending on or after January 1, 2010), to comply with applicable legislative and regulatory changes that have occurred over the past few years. The following summarizes these changes and other year-end housekeeping matters that are necessary for continued compliance with retirement plan requirements.
I. Required Amendments for 2010
A. Defined Benefit Plan Amendments
- Cash Balance/Hybrid Plans – A cash balance or other hybrid pension plan must provide for the following, among other applicable requirements: (1) 3-year cliff vesting; (2) an interest crediting rate that does not exceed a market rate of return; and (3) no reduction or cessation of benefit accruals based solely on a participant’s age (i.e., the similarly situated younger participant standard). Amendments for cash balance and hybrid plan changes are required to be made by the last day of the first plan year beginning on or after January 1, 2010 (December 31, 2010 for calendar-year plans). The final hybrid pension plan regulations were released on October 18, 2010, and those final regulations generally apply to plan years that begin on or after January 1, 2011.
- Funding-Based Benefit Restrictions – If a plan does not meet certain funding targets, the plan must provide certain restrictions to benefit payments and benefit accruals. For example, if a pension plan is underfunded by certain amounts, the plan must have provisions in place that (1) prevent plan amendments that increase benefit liabilities, and (2) suspend future benefit accruals until adequate contributions are made. Amendments implementing the rules related to funding-based benefit restrictions are required to be made by the last day of the first plan year beginning on or after January 1, 2010. For more on the funding-based benefit restrictions, please refer to our earlier WorkCite dated November 6, 2009.
B. Defined Contribution Plan Amendments
- Waiver of Required Minimum Distributions – The Worker, Retiree and Employer Recovery Act of 2008 (WRERA) permitted defined contribution plans to eliminate required minimum distribution (RMD) payments for 2009. The required minimum distribution rules generally require that a participant begin annual minimum distributions after the participant reaches age 70½ (and usually only if the participant is no longer employed by the plan sponsor). WRERA provided defined contribution plans with several alternatives on handling those RMDs that would otherwise have been paid in 2009. If a plan sponsor chose to change its normal procedure for 2009 RMDs, the sponsor must amend the plan to reflect that procedure is required by the last day of the 2011 plan year. For more on the 2009 waiver of required minimum distributions, please refer to our earlier WorkCites dated October 12, 2009 and February 12, 2009.
- Diversification of Publicly Traded Employer Stock – If a plan invests employer contributions and/or employee elective contributions in publicly traded employer securities, the plan must permit participants to divest their accounts of employer securities and reinvest their accounts in other diversified investments in accordance with specific rules. For example, participants must generally be permitted to select investments from at least three different options with materially different risk and return characteristics. This right, which participants may exercise quarterly, applies to amounts attributable to elective deferrals and employee contributions, including employee after-tax and rollover contributions. Participants with at least three years of service must be given the same diversification rights for employer contributions that are invested in employer securities. Amendments providing for diversification of publicly traded employer stock must be made by the last day of the first plan year beginning on or after January 1, 2010. For more on the requirement to provide for diversification of publicly traded employer stock, please refer to our earlier WorkCite dated December 22, 2006.
C. Amendments Affecting Defined Benefit and Defined Contribution Plans
- HEART Act – The Heroes Earnings Assistance and Relief Tax Act of 2008 (the HEART Act) was enacted to provide benefit-related advantages for eligible military personnel and their families. The two mandatory requirements under the HEART Act that must be included in retirement plans apply to survivor death benefits and differential wage payments. Survivors of a participant who dies while performing qualified military service must receive the same plan benefits that would be due to the survivors if the participant had resumed employment with the employer and died the following day. Examples of the types of benefits that survivors could be entitled to receive under the HEART Act include accelerated vesting or ancillary life insurance benefits provided under the plan.Differential wage payments must be included in the plan’s definition of compensation for purposes of Internal Revenue Code Section 415 and other limits, such as for the definition of a highly compensated employee. Whether the plan decides to include differential wage payments for purposes of contributions or benefit accruals is optional.Amendments for the mandatory HEART Act provisions are required to be made by the last day of the first plan year beginning on or after January 1, 2010. For more on the HEART Act, please refer to our earlier WorkCites dated January 29, 2010 and July 18, 2008.
- Survivors of a participant who dies while performing qualified military service must receive the same plan benefits that would be due to the survivors if the participant had resumed employment with the employer and died the following day. Examples of the types of benefits that survivors could be entitled to receive under the HEART Act include accelerated vesting or ancillary life insurance benefits provided under the plan.
- Differential wage payments must be included in the plan’s definition of compensation for purposes of Internal Revenue Code Section 415 and other limits, such as for the definition of a highly compensated employee. Whether the plan decides to include differential wage payments for purposes of contributions or benefit accruals is optional.
- Direct Rollovers by Nonspouse Beneficiaries – A retirement plan must allow non-spouse beneficiaries to make direct rollovers to an individual retirement plan. This provision, previously optional, is now required for plan years beginning on or after December 31, 2009. For more on direct rollovers by nonspouse beneficiaries, please refer to our earlier WorkCites dated March 5, 2007 and January 22, 2007.
II. Discretionary Plan Amendments
Discretionary plan amendments must be adopted by the last day of the plan year in which they become effective, unless a different amendment deadline applies. Therefore, if a plan design change became effective during the 2010 plan year, an amendment would be required by December 31, 2010.
III. Cycle E Determination Letter Filings
Under the cyclical IRS determination letter program, if a plan sponsor whose EIN ends in 5 or 0 desires to obtain a new determination letter for its qualified plan, the sponsor must submit a determination letter application by January 31, 2011. Plans must be amended to include items listed in the IRS’s 2009 cumulative list. Although the determination letter filing is not due until January 31, 2011, any other plan amendments that are required to be made by the end of the year must still be made before December 31, 2010.
IV. Year-end Action Steps
To ensure that amendments are made in a timely fashion, plan sponsors should take the following action steps:
- Review all qualified plans to determine what amendments, if any, are required.
- Compile a list of any discretionary plan changes that became effective during the 2010 plan year.
- Draft an amendment covering the mandatory and discretionary changes, and make sure the amendment is adopted and signed prior to the end of the 2010 plan year.
- Plan sponsors that will be filing for new determination letters should begin the process as soon as possible to avoid any time sensitive issues surrounding the upcoming filing deadline.
Please note: Any amendments required for the 2010 plan year must be executed by December 31, 2010, rather than the January 31, 2011 determination letter filing deadline.