The Internal Revenue Service (“IRS”) has released the 2005 Cumulative List of Changes in Plan Qualification Requirements (the “2005 Cumulative List”). In general, the cumulative list identifies the provisions from statutes, regulations and other guidance that must be taken into account and that are required to be incorporated into the plan document when an application for an opinion, advisory or determination letter is submitted and reviewed by the IRS. The 2005 Cumulative List contains all of the changes and guidance that have become effective after December 31, 2001.
The 2005 Cumulative List applies primarily to the plan sponsors of individually designed defined contribution plans, including ESOPs, and defined benefit plans (“individually designed plans”) that fall in Cycle A. Individually designed plans are reviewed by the IRS on a five-year remedial amendment cycle (see Rev. Proc. 2005–66). As a general rule, the five-year cycle is determined by the last digit of the Plan sponsor’s employer identification number (EIN). There are exceptions to the general rule for controlled groups, affiliated employers, multiemployer plans and multiple employer plans. Cycle A is for plans with EINs ending in the numbers 1 or 6. The remedial amendment period for Cycle A begins on February 1, 2006 and ends on January 31, 2007. In this review cycle, the IRS will not consider any qualification changes, statutes enacted, or guidance published after the issuance of the 2005 Cumulative List.
The 2005 Cumulative List (by Internal Revenue Code (the “Code”) section) includes the following:
1. § 72(p): Final plan loan regulations under Treas. Reg. § 1.72(p)–1.
2. § 401(a)(4):
- Guidance published in Rev. Rul. 2001–30 regarding cross-testing new comparability plans. (See also amendments to Treas. Reg. §§ 1.401(a)(4)–8 and 1.401(a)(4)–9.)
- Guidance published in Rev. Rul. 2004–21 regarding the purchase of life insurance contracts.
3. § 401(a)(9): Final minimum required distribution regulations under Treas. Reg. §§1.401(a)(9)–1 through –9.
4. § 401(a)(17): Under the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”), the maximum amount of compensation that may be taken into account when determining a participant’s plan benefits has been increased.
5. § 401(a)(31):
- Under EGTRRA, employees’ after-tax contributions may be rolled over under certain circumstances.
- Under EGTRRA, the automatic rollover of certain mandatory distributions is permitted. (See also Notice 2005–5.)
- Under EGTRRA, the definition of eligible retirement plan was expanded to include § 403(b) annuity contracts and eligible governmental § 457(b) plans.
- Under EGTRRA, the definition of eligible rollover distribution excludes hardship distributions.
6. §§ 401(k) & 401(m):
- Under EGTRRA, distributions of elective deferrals from a § 401(k) plan upon severance from employment (rather than upon separation from service) are permitted. (See also Notice 2002–4.)
- Under EGTRRA, the period of time during which the employee is prohibited from making elective and employee contributions after receiving a hardship distribution was reduced from one year to six months. (See also Notices 2001–56 and 2002–4.)
- Under EGTRRA, the maximum amount of qualified salary reduction contributions that can be made to SIMPLE 401(k) plans has been increased.
- Under EGTRRA, the applicable dollar amount for elective deferrals has been increased.
- Under EGTRRA, the multiple use test on matching contributions has been repealed.
- Final § 401(k) and § 401(m) regulations.
7. § 402A: Under EGTRRA, the option to treat elective deferrals as designated Roth contributions to defined contribution plans is effective for taxable years beginning after December 31, 2005. Regulations are expected to be published soon.
8. § 404: Under EGTRRA, ESOP dividends may be reinvested without the loss of dividend deductions. (See also Notice 2002–2.)
9. § 408(q): Under EGTRRA, deemed individual retirement accounts (IRAs) are permitted in an eligible retirement plan. (See also Treas. Reg. § 1.408(q)–(e)(8)(T).)
10. § 409:
- Under EGTRRA, the allocation of employer securities in an ESOP maintained by an S corporation was restricted. (See also Treas. Reg. §1.409(p)–1T issued on July 21, 2003 and modified on December 17, 2004.)
- Guidance published in Rev. Proc. 2003–23 regarding direct rollovers from an ESOP maintained by an S corporation to an individual retirement plan (IRA).
- Guidance published in Rev. Rul. 2003–6 regarding whether an ESOP maintained by an S corporation is eligible for the delayed effective date of § 409(p) as added by EGTRRA.
- Guidance published in Rev. Rul. 2004–4 regarding synthetic equity owned by a disqualified person in a nonallocation year of an ESOP maintained by an S corporation.
11. § 411(a): Under EGTRRA, a faster minimum vesting schedule of matching contributions is required. (See also Rev. Rul. 2003–65.)
12. § 411(a)(11): Under EGTRRA, amounts attributable to rollover contributions may be disregarded in determining the value of an account balance for involuntary distributions.
13. § 411(d)(6):
- Guidance published in Rev. Proc. 2005 –23 as modified by Rev. Proc. 2005–76 regarding adding or expanding a provision under which a suspension of benefits occurs as addressed in the Heinz case (Central Laborers’ Pension Fund v. Heinz, 124 S. Ct. 2230 (2204)).
- Under EGTRRA, certain optional forms of benefit may generally be eliminated from defined contribution plans. (See also Treas. Reg. § 1.411(d)–4, Q&A–2(e).)
- Under EGTRRA, certain optional forms of benefit may generally be eliminated from defined benefit plans. (See also Treas. Reg. § 1.411(d)–3.)
14. § 412:
- Guidance published in Rev. Rul. 2004–20 regarding whether a qualified pension plan can be a § 412(i) plan if the plan holds life insurance contracts and annuity contracts for benefits at normal retirement age in excess of a participant’s benefits at normal retirement age under the plan.
- Guidance published in Notice 2004–59 regarding restrictions placed on plan amendments following an employer’s election of an alternative deficit reduction contribution.
15. § 414(v): Under EGTRRA, catch-up contributions are allowed for individuals age 50 or older. (See also Treas. Reg. § 1.414(v) and Notice 2002–4.)
16. § 415:
- Under EGTRRA, the defined benefit plan maximum annual dollar limit is increased and the age changed when the limit is actuarially reduced or increased. (See also Rev. Rul. 2001–51.)
- Under the Pension Funding Equity Act of 2004, the applicable interest rate for adjusting the annual benefit payable in a form subject to the minimum present value requirements was set at 5.5%. (See also Notice 2004–78.)
- Under EGTRRA, the defined contribution plan maximum annual addition permitted has increased to the lesser of $40,000 or 100% of compensation. (See also Rev. Rul. 2001–51.)
- Proposed Regulations § 1.415(c)–2(e) regarding the timing of compensation payments.
- Guidance published in Rev. Rul. 2002–27 regarding “deemed §125 compensation”.
17. § 416:
- Under EGTRRA, multiple changes were made to the Top-Heavy rules.
- Under EGTRRA, certain safe harbor 401(k) plans and 401(m) plans are exempt from the topheavy rules. (See also Rev. Rul. 2004–13.)
- Under EGTRRA, certain frozen defined benefit plans are exempt from the minimum benefit requirements.
18. § 417: Final regulations under Treas. Reg. § 1.417(e)–1 regarding retroactive annuity starting dates.
19. § 4975:
- Under EGTRRA, the prohibited transaction rules are amended to allow Plan loans for Subchapter S shareholders, sole proprietors and partners.
- Under the American Jobs Creation Act of 2004, the prohibited transaction rules are amended to allow an S corporation distribution on allocated shares to pay off an exempt loan as long as equal amounts are allocated to participant accounts.
20. Katrina Relief:
- Guidance published in Notice 2005–92 and Announcement 2005–70 regarding Katrina hurricane disaster relief. (See also the Katrina Emergency Tax Relief Act of 2005.)
21. Miscellaneous Guidance:
- Guidance published in Rev. Rul. 2001–62 regarding the mortality table under § 415(b)(2(E)(v) of the Code and the applicable mortality table under § 417(e)(3)(A)(ii)(I) of the Code.
- Guidance published in Rev. Rul. 2002–42 regarding a money purchase pension plan merger or conversion into a profit sharing plan.
- Guidance published in Rev. Proc. 2002–21 and Rev. Proc. 2003–86 regarding defined contribution retirement plans maintained by professional employer organizations.
- Guidance published in Rev. Rul. 2003–11 regarding satisfying the nondiscrimination rules under § 401(a)(4) of the Code and the minimum coverage requirements under § 410(b) of the Code when applying the increased compensation limit to former employees.
- Guidance published in Rev. Rul. 2004–10 regarding charging administrative expenses to former and current employees.
- Guidance published in Rev. Rul. 2004–12 regarding distribution restrictions applicable to rollover contributions.
- Guidance published in Rev. Rul. 2005–55 regarding medical reimbursement accounts under a profit sharing plan.
We would be glad to answer questions about any of these provisions or questions about updating your plan(s) accordingly.