IRC Archives - EMPLOYEE BENEFITS BLOG

Proposed IRS RMD Regulations Present Challenges, Risks for 403(b) Plans

by Teal Trujillo and Todd Solomon | Apr 12, 2022 | Employee Benefits, Employment, Fiduciary and Investment Issues, Retirement Plans

The Internal Revenue Service (IRS) is strategically working to execute the statutory changes that were outlined by the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) of 2019. However, the IRS’s efforts to streamline the required minimum distribution (RMD) requirements for Internal Revenue Code (IRC) Section 403(b) plans with Section 401(a) qualified plans, such as 401(k) plans, may have unforeseen challenges and risks.

A proposed rule was published on February 24, 2022, in the Federal Register. The preamble of the rule indicates that the IRS and US Department of the Treasury are considering changes to conform the treatment of Section 403(b) plans more closely with that of Section 401(a) qualified plans for RMDs. Section 403(b) plans are currently treated the same as individual retirement accounts (IRAs) for purposes of applying the RMD rules. As a result, RMDs are not required to be automatically made from Section 403(b) plans like they are from Section 401(a) retirement plans. The IRS’s proposed rule would require any nonprofit organized under IRC Section 501(c)(3) (i.e., hospitals, public schools and churches) with retirement plans to make RMDs going forward.

Though the proposed rule presents the opportunity to simplify and align the treatment of Section 403(b) plans and Section 401(a) qualified plans, it poses administrative difficulties and potential conflicts with state law. Section 403(b) plans can be invested in a variety of funds, including annuity contracts—group and individual contracts—with insurance companies, custodial accounts or retirement income accounts for certain church workers. For individual annuity contracts, this could create a contractual issue. Employers are not a party to individual contracts between plan participants and investment firms, which would limit the ability of employers to compel RMDs. (Note that distributions could still be forced from group annuity contracts between employers and investment firms.) Regardless of the type of annuity contract, every contract will have to be reviewed to ensure it can comply with the proposed rule. To the extent any changes need to be made to these contracts, state-level approval may be required as insurance companies are governed by state law requirements.

In addition, the proposed rule does not take into consideration the effect of the prospective changes on Section 403(b) plans that are exempt from ERISA because of the safe harbor offered by the US Department of Labor (DOL) in 1979 (29 C.F.R. § 2510.3-2(f)). One of the conditions for meeting the safe harbor is that the employer involvement be limited to certain specific activities. If an employer is required to actively negotiate with insurance providers or choose a provider to administer the RMD requirement for participants, it might be violating this restriction and inadvertently subject its program to ERISA. The IRS and DOL will need to coordinate on the impact of this rule in such cases.

The IRS is taking this proposed rule under review and has asked for feedback specifically related to administrative concerns, notable differences in the structure or administration of Section 403(b) plans compared to qualified plans that might affect RMDs, and [...]

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Treasury Issues New Guidelines on Searching for Missing Retirement Plan Participants

by McDermott Will & Emery and Jeffrey Holdvogt | Nov 28, 2017 | Employee Benefits, Employee Stock Ownership Plans (ESOPs), Retirement Plans

The US Department of the Treasury recently issued guidance that retirement plan sponsors should consider as part of their obligation to take reasonable steps to locate missing participants. Specifically, the Treasury issued a memorandum which sets forth guidelines that prohibit auditors from challenging qualified plans as failing to satisfy the required minimum distribution standards under Internal Revenue Code (IRC) Section 401(a)(9) if the plan has fulfilled all of the following with respect to participants that cannot be located:

Searched for alternative contact information in plan, plan sponsor and publicly available records for directories;
Used a commercial locator service, credit reporting agency or a proprietary internet search tool for locating individuals; and
Sent mail via United States Postal Service (USPS) certified mail to the last known mailing address and attempted contact “through appropriate means for any address or contact information,” which includes email addresses and telephone number.

The Treasury guidance is similar to, but also expands upon, prior guidance provided by the US Department of Labor, which addresses locating missing participants for terminated retirement plans.

Locating missing participants and beneficiaries can be challenging for plan sponsors. Many plan sponsors find that they are unable to locate participants who left employment many years prior and, as a result, are unable to make required minimum distributions. Both the IRS and Department of Labor have stepped up their enforcement of these requirements in recent years. In particular, the Department of Labor has made locating missing participants an enforcement priority for plan audits.

Supplemental Benefit Planning for Tax-Exempt Employers

by McDermott Will & Emery | Oct 31, 2017 | Employee Benefits, Executive Compensation, Retirement Plans

Tax-exempt employers face a matrix of tax and disclosure issues in designing an appropriate supplement retirement program. This resource intends to examine the income tax, payroll tax and Form 990 reporting aspects of the major plans currently available to tax-exempt employers, and review those major plans from the reference point of several major design considerations.

Proposed Changes to § 409a Regulations: Greater Clarity and Better Planning Alternatives

by Andrew Liazos and Allison Wilkerson | Jun 22, 2017 | Employee Benefits, Executive Compensation

Andrew Liazos and Allison Wilkerson wrote this bylined article on Tax Code Section 409A’s deferral and payment requirements for nonqualified deferred compensation plans. Recent IRS Section 409A guidance makes “several helpful changes that employers will want to consider and take advantage of,” the authors wrote, and they warned employers that they ignore final IRS “at their peril…in light of the more limited ability to correct errors.”

Read the full article.

Originally published in The Practical Tax Lawyer, Spring 2017

View From McDermott: Fifth Circuit Focuses on Process in ESOP Valuations

by Allison Wilkerson | Jul 28, 2016 | Employee Stock Ownership Plans (ESOPs), Labor, Retirement Plans

Though the Supreme Court’s 2014 unanimous ruling in Fifth Third Bank v. Dudenhoeffer announced the Employee Retirement Income Security Act (ERISA) standards for stock valuation in the context of a large public employee stock ownership plan (ESOP), the vast majority of ESOPs are still grappling with valuation issues. ESOPs that hold stock of closely-held corporations—approximately 90% of all ESOPs— remain almost unaffected by Dudenhoeffer’s valuation discussions, and face continued scrutiny by the Department of Labor (DOL). Appraisal of closely-held stock is an inexact science that involves an inherent level of uncertainty in assessing a variety of potential fact patterns.

This article summarizes valuation issues in acquisitions of closely-held corporation stock by ESOPs in the context of Perez v. Bruister, a recently decided Fifth Circuit case. The case stressed the importance of ‘‘process’’ in valuation determinations being utilized for acquisitions of a corporation’s stock by an ESOP. In reviewing the case, this article provides a detail of the process that should be followed to ensure consideration of the appropriate factors by fiduciaries in reviewing valuations for ESOP transactions. The article concludes with a discussion of guidance provided by the court in Bruister that may be instructive as to best practices for ESOP fiduciaries charged with establishing the value to be used by an ESOP holding shares of stock of a private company.

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Camp Tax Reform Proposal Targets Executive Compensation

by Andrew Liazos | Aug 5, 2014 | Executive Compensation

On February 26, 2014, U.S. House of Representatives Committee on Ways and Means Chairman Dave Camp (R-Mich.) released the proposed Tax Reform Act of 2014 (the Camp Proposal). In addition to simplifying the Internal Revenue Code (IRC) and reducing corporate and individual tax rates, the Camp Proposal would fundamentally change the income tax rules that apply to nonqualified deferred compensation arrangements and would further restrict tax deductions available to publicly held corporation when paying named executive officers. It would also impose a new excise tax on employees of certain tax-exempt organizations who receive excessive compensation and certain payments that are contingent upon a change in control. Although unlikely to be enacted this year, the Camp Proposal provides a blueprint for other legislators to propose tax law changes that would significantly impact current executive compensation practices. Given the current political environment and the way tax revenue is estimated by Congress when preparing budgets, it is likely that we have not seen the last of the executive compensation changes included in the Camp Proposal, which makes it important to understand how they work and what they would mean for current executive compensation programs.

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