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Newsletter
June
2009 Volume
26 - Number 1
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This newsletter is addressed to our clients, their attorneys,
accountants and other professional advisors. Citations may be included for those
who want to refer directly to the source material. IN THIS ISSUE:
Provision for Relief from Required Minimum
Distribution (RMD) for 2009 - The Worker, Retiree and Employer Recovery
Act of 2008 (WRERA) provides for suspension of required minimum distributions
for 2009. Permitted Plan Changes for 401(k) Safe Harbor
Plans - Due to the downturn in the economy, a number of plan sponsors have
raised questions regarding how they may change or eliminate certain
retirement plan contributions. The following questions and answers address
some of the most frequently raised issues. This newsletter can also be
viewed online at www.prplans.com. |
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Provision for Relief from Required Minimum
Distribution (RMD) for 2009 The Worker,
Retiree and Employer Recovery Act of 2008 (WRERA) provides for suspension of
required minimum distributions for 2009. Under the
provision, no minimum distribution is required for calendar year 2009 from
individual retirement plans (IRA) and employer provided qualified retirement
plans that are defined contribution plans within the meaning of Internal
Revenue Code (IRC) Section 414(i). The next
required RMD will be for calendar year 2010.This relief applies to lifetime
distributions to employees and IRA owners and after death distributions to
beneficiaries. In the case of an
individual whose required minimum distribution beginning date is April 1,
2010 (Individuals attaining age 70˝ in 2009) the first year for which a
minimum distribution would be required under current law would be 2009. Under
WRERA, no distribution is required for the 2009 year and therefore no minimum
required distribution is due by April 1, 2010. However, the
provision does not change the required beginning date for purposes of
determining the RMD for calendar years after 2009. Therefore for an
individual whose required beginning date is April 1, 2010, the RMD for 2010
must be made no later than the last day of calendar year 2010. If an employer
provided qualified plan distributes an amount to an individual in 2009 that
is an eligible rollover distribution, but would have been a required minimum
distribution absent this provision, the plan is permitted but not required to
offer the employee a direct rollover of that amount. Also the distribution is
not subject to the mandatory 20% income tax withholding and the employee can
roll over the full amount of the distribution by contributing it to an
eligible retirement plan within 60 days of the distribution. The relief is not
available for required minimum distributions from defined benefit plans so
the requirement for minimum distributions for a participant in a defined
benefit plan is unchanged The provision is effective for calendar
years beginning after December 31, 2008. However, the provision does not
apply to any required minimum distribution for 2008 that is permitted to be
made in 2009 by reason of an individual’s required beginning date being April
2, 2009. |
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Permitted Plan Changes for 401(k) Safe Harbor
Plans Due to the
downturn in the economy, a number of plan sponsors have raised questions
regarding how they may change or eliminate certain retirement plan
contributions. The following questions and answers address some of the most
frequently raised issues. May an employer amend a safe harbor 401(k) plan
to reduce, suspend or eliminate safe harbor non-elective contributions during
a plan year? Yes. IRS
published a proposed rule on May 18th to permit an employer who
maintains a safe harbor 401(k) plan and is experiencing a “substantial
business hardship” to reduce, suspend or eliminate non-elective contributions
during the plan year without disqualifying the 401(k) arrangement. This new
rule applies to both a traditional safe harbor plan which leaves the deferral
choice to each participant and to a qualified automatic contribution
arrangement (QACA) which provides for specified levels of automatic
contribution where there is no participant deferral election. In order to
comply with the new regulations, the plan must meet the following
requirements: 1.
advance notice of the change must be provided to
all eligible employees; 2.
the
amendment must be effective no earlier than the later of 30 days after the
notice and the date of adoption of the amendment; 3.
the employees must have a reasonable opportunity
after the notice and prior to the reduction or suspension to change their
deferral elections; 4.
the employer amends the plan to provide that the
applicable nondiscrimination test will be satisfied for the entire plan year
in which the reduction/suspension/elimination occurs using the current year
testing method; 5.
the plan satisfies the safe harbor
non-elective contribution requirement through the amendment’s effective date. In addition, safe
harbor compensation must be limited to a prorated amount of the otherwise
applicable $245,000 annual limit to reflect the shortened safe harbor
contribution period. Please note that
many employers rely on their plan’s 401(k) safe harbor status to exempt them
from the top heavy minimum contribution requirement. An amendment to reduce,
suspend or eliminate the 401(k) safe harbor contribution will subject a
top-heavy plan to top heavy minimum requirement. May an employer who maintains a safe harbor
401(k) plan which provides for matching contributions amend or freeze the
matching provisions effective mid year? Yes. The plan may
be frozen or amended mid year in order to eliminate or reduce future matching
contributions. To accomplish this, the following steps are required: 1.
Provide a notice of the plan change to the
employees at least 30 days before the effective date of the amendment to
reduce or eliminate the match. 2.
Provide the employees a reasonable opportunity to
change their deferral elections. 3.
Adopt an amendment to reduce or eliminate the matching
contributions effective at least 30 days after the amendment effective date. 4.
Fund the existing match through the date of the
amendment. 5.
Apply current year testing for the entire year
for discrimination testing. How will a top-heavy 401(k) safe harbor plan be
affected by freezing the safe harbor contribution? Many employers
rely on their plan’s 401(k) safe harbor status to exempt them from the top
heavy minimum contribution requirement. An amendment to reduce, suspend or
eliminate the 401(k) safe harbor contribution will subject a top-heavy plan
to the top heavy minimum requirement. An employer with
a top-heavy plan should carefully consider whether the best option is to 1)
reduce the 401(k) safe harbor contribution and incur a top heavy minimum contribution
requirement or 2) continue the 401(k) safe harbor contribution through the
end of the year to avoid the top heavy minimum contribution requirement. May an employer terminate a safe harbor 401(k)
plan mid year? Yes, an employer
may terminate a safe harbor 401(k) plan mid year regardless of whether the
plan has a safe harbor non-elective contribution formula or a safe harbor
matching contribution formula. Providing the
plan does not terminate due to a “substantial business hardship” or an
acquisition transaction, the following steps must be taken: 1.
Provide a 30 day notice to employees of intention
to terminate the plan. 2.
Fund the safe harbor contribution through the
date of termination. 3.
Apply ADP and ACP tests using current year
testing method. May an employer terminate a safe harbor 401(k)
plan mid year and retain safe harbor status for the short plan year? Yes. If the
employer terminates the plan due to a substantial business hardship that
satisfies the pension plan funding waiver requirements or the employer is
involved in an acquisition that satisfies Code Section 410(b)(6)(C), the plan
continues to qualify for safe harbor status for the short plan year. The
regulations do not require an advance notice in either of these instances. What factors are used to determine if an employer
has incurred a substantial business hardship? 1.
Is the employer operating at an economic loss? 2.
Is there substantial unemployment in the business
or in the industry? 3.
Are the sales and profits in the industry
depressed or declining? |
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