The Internal Revenue Service (the “IRS”) has released the 2008 Cumulative List of Changes in Plan Qualification Requirements (the “2008 Cumulative List”). In general, the Cumulative List identifies the changes in qualification requirements that must be taken into account when an application for an opinion, advisory or determination letter is submitted and reviewed by the IRS. The 2008 Cumulative List contains all of the changes in statutes, regulations and guidance that have become effective since December 31, 2001. Thus, the 2008 Cumulative List includes the plan qualification requirements discussed below in addition to those plan qualification requirements included in the 2004, 2005, 2006 and 2007 Cumulative Lists.
The 2008 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 D. Individually designed plans are reviewed by the IRS on a five-year remedial amendment cycle. (See Rev. Proc. 2005–66 as modified by Rev. Proc. 2007–44.) 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. Plans with EINs ending in the numbers 4 or 9 fall in Cycle D. Multiemployer plans under Internal Revenue Code (the “Code”) § 414(f) also fall in Cycle D. The remedial amendment period for Cycle D begins on February 1, 2009 and ends on January 31, 2010. A plan sponsor of a Cycle D plan whose first plan year beginning after January 1, 2009 ends on or after February 1, 2010 may defer the submission of its plan until Cycle E (February 1, 2010 – January 31, 2011) for the initial cycle only. All subsequent submissions are required to be submitted in Cycle D.
In this review cycle, the IRS will not consider any statutes enacted or guidance published after October 1, 2008, any qualification requirements first effective in 2010 or later, or any statutory provisions that are first effective in 2009 for which there is no guidance identified in the 2008 Cumulative List. Plans submitted in Cycle D must be amended to include the provisions of the Pension Protection Act of 2006 (the “PPA”) listed below. All plans submitted in Cycle D will receive a determination letter covering PPA even if a plan’s deadline for amending for the PPA is after January 31, 2010. At the option of the plan sponsor, plans submitting in Cycle D may be amended for the Heroes Earnings Assistance and Relief Tax Act of 2008 (the “HEART Act”) but, with the exception of terminating plans, the IRS will not consider the HEART Act in issuing determination letters (even the HEART Act provisions included in the 2008 Cumulative List), and such letters cannot be relied on with respect to HEART Act provisions. Terminating plans must include all law changes in effect at the time of termination including any applicable HEART Act provisions.
The 2008 Cumulative List includes the following new plan qualification requirements (listed by Code section):
- Guidance published in Rev. Rul. 2008–40 regarding dual-qualified plans provides that the transfer of amounts from a trust under a plan qualified under § 401(a) to a nonqualified foreign trust is treated as a distribution from the transferor plan and that the transfer of assets and liabilities from a qualified plan to a plan that satisfies § 1165 of the Puerto Rico Code is also treated as a distribution from the transferor plan.
- Guidance published in Rev. Rul. 2008–45 provides that the exclusive benefit rule of § 401(a) is violated if the sponsorship of a qualified retirement plan is transferred from an employer to an unrelated taxpayer and the transfer is not in connection with a transfer of business assets or operations from the employer to the unrelated taxpayer.
- 401(a)(5) and 401(a)(26): Under PPA, the moratorium on the application of certain nondiscrimination and minimum participation requirements has been extended to all governmental plans.
- 401(a)(35): Under PPA, defined contribution plans are required to provide employees with the freedom to divest publicly traded securities.
- 401(a)(36): Under PPA, defined benefit plans and certain defined contribution plans are permitted to allow in-service distributions to a participant who has attained age 62, even if the participant has not reached normal retirement age.
- 401(a)(37): Under the HEART Act, participants who die while performing “qualified military service” are to be treated as if they had resumed employment on the day before death and then terminated employment on account of death for purposes of determining eligibility for survivor benefits.
- 401(k): Under PPA, a plan may treat a participant’s designated beneficiary in the same manner as the participant’s spouse or dependent for safe harbor hardship withdrawal purposes. Also, a plan will not fail to satisfy the requirements of a § 401(k) safe harbor plan because of a midyear change to implement the PPA hardship withdrawals.
- 401(k)(2)(B)(i)(V): Under PPA, reservists called to active duty for at least 179 days after September 11, 2001 and before 2008 are permitted to take penalty-free withdrawals.
- 401(k)(3)(G): Under PPA, the moratorium on the application of certain nondiscrimination and minimum participation requirements has been extended to all governmental plans.
- 401(k)(8)(A)(i): Under PPA, the requirement to distribute gap period income on corrective distributions of excess contributions was eliminated for all 401(k) plans.
- 401(k)(13): Under PPA, a plan can meet nondiscrimination requirements by treating each eligible employee as having elected to have the employer make elective contributions, unless an employee has made an affirmative election to opt out, in an amount equal to a qualified percentage of compensation (an “Automatic Contribution Arrangement”).
- 401(m)(6)(A): Under PPA, the requirement to distribute gap period income on corrective distributions of excess aggregate contributions was eliminated for all 401(k) plans.
- 401(m)(12): Under PPA, a plan can meet nondiscrimination requirements by adopting an Automatic Contribution Arrangement.
- 402(c)(2)(A): Under PPA, after-tax contributions from a qualified plan can be directly rolled over to a tax-sheltered annuity or a qualified plan, including a defined benefit plan, if the separate accounting requirements are met.
- 402(c)(11): Under PPA, a nonspouse beneficiary is permitted to directly roll over distributions from qualified plans, tax-sheltered annuities, and 457 Plans to an inherited IRA.
- 402(f): Under PPA, the notice and consent period to provide participants a description of their right to defer certain distributions may be given as early as 180 days prior to the annuity stating date.
- 408A(e): Under PPA, distributions from qualified plans, tax-sheltered annuities, and 457 plans can be directly rolled over to Roth IRAs.
- 411(a): Under PPA, the faster vesting schedule that currently applies to matching contributions will apply to all employer nonelective contributions to a defined contribution plan.
- 411(a)(11): Under PPA, the notice and consent period to provide participants a description of their right to defer certain distributions may be given as early as 180 days prior to the annuity stating date. In addition, the notice must also include a description of the consequences of failing to defer that distribution.
- 411(a)(13): Under PPA, in order to avoid violating the age discrimination prohibition, a hybrid plan must provide that an employee who has completed at least three years of service is 100 percent vested in employer contributions.
- 411(b)(1): Guidance published in Rev. Rul. 2008–7 addresses (1) the application of the backloading provisions of § 411(b)(1)(A), (B), and (C) to defined benefit cash balance plans and (2) the use of a “greater of” formula in the instance of a conversion of a defined benefit pension plan to a cash balance plan, including limited § 7805(b) relief.
- 411(b)(5): Guidance published in Notice 2007–6 relating to cash balance plans and other hybrid defined benefit pension plans and to amendments that convert defined benefit pension plans to hybrid defined benefit pension plans, addresses the special rules relating to age discrimination.
- 414(d): Under PPA, a plan established and maintained by Indian tribal governments, a subdivision of an Indian tribal government, or an agency or instrumentality of either, is treated as a governmental plan as defined under Section § 414(d) of the Code. (See also Notices 2006–89 and 2008–67 regarding transition relief.)
- 414(f)(6): Under PPA, an election to be treated as a multiemployer plan may be revoked within 1 year after the enactment of PPA. Regulations under Sections 6611(a)(2) and (b)(2) of the U.S. Troop Readiness, Veterans’ Care, Katrina Recovery, and Iraq Accountability Appropriations Act, 2008 also amend this section.
- 414(u)(9): Under the HEART Act, employers may elect to treat an employee who dies or becomes disabled (as defined in the plan), as if the individual had been reemployed on the day preceding death or disability and terminated employment because of death or disability. The employer would then be allowed to make contributions or additional benefit accruals on behalf of that individual as if he or she had survived and returned to employment.
- 414(u)(12): Under the HEART Act, if an employer pays differential pay to an employee during a period of service in the uniformed service lasting more than 30 days, the differential pay must be reported as wages on the employee’s W–2; the individual receiving the differential pay will be treated as an employee of the employer; and the differential pay will be treated as compensation for both qualified plan and IRA purposes. The employee will, therefore, be able to make contributions to a qualified plan or an IRA based on this compensation.
- 414(w): Under PPA, participants are permitted to withdraw contributions made to an Automatic Contribution Arrangement during the first 90 days after the first affected payroll period, with no adverse tax consequences.
- 415(b)(2)(E)(ii): Under PPA, the interest rate assumption for applying benefit limitations to lump sum distributions shall not be less than the greater of (1) 5.5 percent, (2) the rate that provides a benefit of not more than 105 percent of the benefit that would be provided if the applicable interest rate were the interest rate assumption, or (3) the interest rate specified in the plan. (Final Regulations under 415 were published April 5, 2007).
- 415(b)(2)(H) and 415(b)(10): Under PPA, the definition of “governmental plan” is amended to include certain Indian tribal government plans.
- 415(b)(3): Under PPA, the active participant restriction was eliminated from the definition of “average compensation for high 3 years.”
- 415(b)(11): Under PPA, if a church plan participant has never been a highly compensated employee of the church, the 100 percent of compensation benefit limitation is removed.
- 416(g)(4)(H)(i) and (ii): Under PPA, plans which consist solely of a 401(k) and 401(m) automatic contribution arrangements are excluded from the definition of “top-heavy plan.”
- 417(e)(3): Under PPA, the applicable interest rate and mortality table to be used for determining the present value of lump sum distributions has been amended (See Notice 2008–30 for guidance.)
- 417: Under PPA, an additional survivor annuity is required. If the plan’s survivor annuity percentage is less than 75%, the plan must include a 75% survivor annuity option. If the plan’s survivor annuity percentage is greater than or equal to 75%, the plan must include a 50% survivor annuity option.
- 432(e): Under PPA, multiemployer plans that are less than 65% funded are required to adopt a rehabilitation plan.
- 436: Under PPA, funding-based benefit limitations would be imposed on underfunded singleemployer defined benefit plans. (See also Notices 2008–21 and 2008–73 regarding transition relief.)
We would be glad to answer questions about any of these provisions or about updating your plan(s) accordingly.