Required Minimum Distribution Waiver in 2009

WRERA modified the required minimum distribution (RMD) rules for 2009 by waiving any 2009 RMDs for defined contribution plans. The method by which a plan treated RMD waivers in 2009 depended upon whether the plan complied with the RMD requirements by forcing the commencement of distributions at age 70½ or by only paying the required minimum amount each year.

In IRS Notice 2009-82, the IRS provided guidance (including sample amendments) to reflect the waiver of 2009 RMDs, and extended the deadline for adopting the required RMD waiver changes to the last day of the first plan year beginning on or after January 1, 2011 (the 2012 plan year for governmental plans).

In-PlanRoth Conversions

The Small Business Jobs Act of 2010 permitted eligible participants to convert their vested 401(k) or 403(b) plan accounts to Roth accounts without taking a distribution from the plan. This in-plan conversion allows participants to include the converted amounts in gross income for federal tax purposes in the year of the conversion (subject to a special rule for 2010 conversions), rather than having to wait until the year in which the amounts are actually distributed from the plan. Previously, a participant who wanted to convert his or her account to a Roth account would have had to take a distribution from the plan and then roll the distribution over to another plan with a Roth feature, such as a Roth IRA, in order to accelerate taxation and allow future earnings to accumulate tax-free.

Sponsors of 401(k) or 403(b) plans may offer in-plan Roth conversions anytime after September 27, 2010. In an effort to give plan sponsors sufficient time to enable plan participants to make in-plan Roth conversions before the end of the 2010 plan year, the IRS delayed the deadline for adopting plan amendments related to 2010 in-plan Roth conversions.

The amendment deadline works differently for 401(k), 403(b), and safe-harbor plans. Amendments to add an in-plan Roth conversion feature to a 401(k) plan are due by the later of (i) the last day of the plan year in which the conversion feature was added or (ii) December 31, 2011. A safe-harbor plan must generally be amended by the later of (i) the day before the first day of the plan year in which the conversion feature was added or (ii) December 31, 2011.

The amendment deadline for 403(b) plans depends on whether the plan will be subject to an extended remedial amendment period. If the 403(b) plan is subject to the extended remedial amendment period, the amendment deadline is the later of (i) the end of the remedial amendment period or (ii) the last day of the plan year in which the conversion feature was added. If the remedial amendment period is not available to the 403(b) plan, the amendment must be adopted by the last day of the plan year in which the conversion feature is added.

Three-Year Cliff Vesting for Cash Balance Plans

Benefits under a cash balance (or hybrid) plan in existence on June 29, 2005 must use a three-year cliff vesting schedule for all participants who have an hour of service in a plan year beginning after December 31, 2007. While this is a PPA change, IRS Notice 2009-97 extended the deadline for adopting this required change to the last day of the first plan year beginning on or after January 1, 2010.

However, on October 19, 2010, the Department of the Treasury (Treasury) issued final and proposed regulations regarding this change for cash balance (or hybrid) plans. In order to give plan sponsors time to take the final regulations into account, IRS Notice 2010-77 further extended the deadline to adopt amendments for this change to the last day of the first plan year beginning on or after January 1, 2011 (December 31, 2011 for calendar year plans).

Funding-Based Benefit Restrictions

Under the new pension funding rules, benefit restrictions apply to certain underfunded defined benefit pension plans. For plans that are less than 80% but at least 60% funded, the plan generally cannot pay more than 50% of the participant's accrued benefit in a lump sum, and it cannot be amended to increase benefits. For plans that are less than 60% funded, no benefit accruals are allowed (mandated plan freeze) and tighter benefit restrictions apply (no lump-sum payments may be made). These rules are effective for plan years beginning after December 31, 2007, but IRS Notice 2009-97 delayed the deadline for adopting funding-based restriction amendments to the last day of the first plan year beginning on or after January 1, 2010.

On June 25, 2010, the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010 (the Act) was enacted. This law gave single-employer defined benefit plans a two-year reprieve from the funding restrictions enacted by PPA for benefit accruals and Social Security level income options and provided an opportunity to elect funding relief for certain eligible plan years. Depending upon the circumstances, the funding relief election and related notices may be due by the end of 2011. The Act also provided funding relief for multiemployer pension plans and plans sponsored by 501(c)(3) charities.

In order to give plan sponsors time to take the funding relief provided by the Act into account, IRS Notice 2010-77 further extended the deadline to adopt amendments for the new funding rules to the last day of the first plan year beginning on or after January 1, 2011 (December 31, 2011 for calendar year plans).

Note: The IRS is expected to issue additional guidance on these changes and may provide an extension to adopt conforming amendments. Hence, amendments for these changes may not be needed by the end of the 2011 plan year.

Hybrid Plan Changes

The PPA made several changes that are applicable to hybrid pension plans, including cash balance plans. IRS Notice 2009-97 extended the deadline for adopting such amendments (other than the elimination of the lump-sum whipsaw) until the last day of the first plan year beginning on or after January 1, 2010.

However, on October 19, 2010, Treasury issued final and proposed regulations regarding PPA changes applicable to hybrid pension plans. In order to give plan sponsors time to take the final regulations into account, IRS Notice 2010-77 further extended the deadline to adopt amendments for PPA changes applicable to hybrid pension plans (other than the elimination of the lump-sum whipsaw) to the last day of the first plan year beginning on or after January 1, 2011. IRS Notice 2010-77 also suggests that anti-cutback relief will be provided in the final regulations to the extent protected benefits are reduced to comply with the PPA changes.

IRS Notice 2011-85 announced that the IRS and Treasury intend to finalize the proposed hybrid plan market-rate regulations. The finalized hybrid plan market-rate regulations are not expected to take effect earlier than January 1, 2013. Plan amendments must be adopted by the last day of the plan year preceding the first plan year the final regulations are effective. So, if the regulations are effective January 1, 2013, calendar year plans will have to be amended by December 31, 2012. In that case, if 204(h) notices are necessary, they will have to be distributed by November 16, 2012. IRS Notice 2011-85 also provides anti-cutback relief to the extent protected benefits are reduced to comply with the PPA changes.

Elective deferral (contribution) limit under Code section 402(g)

$17,000

$16,500

$16,500

Catch-up contribution limit under Code section 414(v)(2)(B)(i)

$5,500

$5,500

$5,500

Annual compensation limit under Code section 401(a)(17)

$250,000

$245,000

$245,000

Maximum defined benefit annuity limit under Code section 415(b)(1)(A)

$200,000

$195,000

$195,000

Maximum defined contribution annual additions limit under Code section 415(c)(1)(A)

$50,000

$49,000

$49,000

Highly compensated employee threshold under Code section 414(q)(1)(B)

$115,000

$110,000

$110,000

Key employee threshold under Code section 416(i)(1)(A)(i)

$165,000

$160,000

$160,000

Annual Safe-Harbor 401(k) Plan Notices

Traditional Safe-Harbor Plan Notice. Safe-harbor 401(k) plans must provide an annual safe-harbor notice to all plan participants describing the safe-harbor contribution and other material plan features.

"Wait and See" Safe-Harbor Notice. Sponsors of safe-harbor 401(k) plans that intend to satisfy the safe-harbor requirements through a 3% nonelective contribution may wish to follow the "wait and see" approach. Plan sponsors that follow this approach must provide a notice prior to the beginning of the plan year notifying eligible employees that the safe harbor may be adopted. Additionally, plan sponsors that previously provided a "wait and see" notice prior to the beginning of the ongoing plan year and that decide to implement a safe-harbor arrangement prior to the end of the plan year (by making the 3% nonelective contribution) must provide a supplemental notice to eligible employees informing them that the safe-harbor arrangement will be adopted.

The traditional safe-harbor notice and the contingent notice must be provided at least 30 days and no more than 90 days prior to the beginning of the plan year. The supplemental notice must be provided at least 30 days before the last day of the plan year. Thus, calendar year plans will need to provide the applicable notice by December 1, 2011.

NOTE: If you previously provided a "wait and see" safe-harbor notice and have decided to implement the 3% nonelective safe-harbor contribution for this plan year, in addition to providing the notice described above, you will also need to amend your plan to provide for the safe-harbor contribution prior to the end of the plan year.

Qualified Default Investment Alternative Notices

Participant-directed 401(k) plans that invest participant contributions for which no affirmative investment election has been made into a qualified default investment alternative (QDIA) must provide an annual notice. The notice must be distributed to all participants who have been or may be defaulted into a QDIA.

The notice must be provided at least 30 days before the beginning of each plan year. For calendar year plans, notice must be provided by December 1, 2011.

A QDIA is an investment alternative (for example, a balanced fund or target-date fund) in a participant-directed 401(k) or profit-sharing plan into which participant contributions are "defaulted" if the participant has not made an affirmative investment election. If a plan fiduciary properly selects a QDIA and follows the specific QDIA requirements, which include providing an initial and an annual notice, the plan fiduciary will generally receive fiduciary protection for those defaulted investments under Section 404(c) of the Employee Retirement Income Security Act of 1974, as amended (ERISA), because participants will be "deemed" to have elected to invest their contributions in the QDIA.

NOTE: One of the many QDIA notice requirements is that the notice be "separate" from any other notices that are provided. However, the QDIA notice is permitted (but not required) to be combined with the safe-harbor notice (described above) and the automatic enrollment notices (described below).

401(k) Plan Annual Automatic Enrollment Notice

Sponsors of 401(k) plans that automatically enroll participants must provide an annual notice to all eligible employees describing the circumstances under which contributions may be automatically contributed to the plan. This notice may be combined with the QDIA notice (described above). This notice must be distributed at least 30 days, but no more than 90 days, prior to the beginning of each plan year. For calendar year plans, the notice must be provided by December 1, 2011.

NOTE: There are a number of different automatic enrollment arrangements (for example, one arrangement simply provides for the automatic enrollment of participants, while another is linked to satisfying 401(k) plan discrimination tests), but each requires a notice.

Defined Benefit Plan Annual Funding Notice

Plan sponsors of single- and multiemployer defined benefit pension plans must provide an annual funding notice to participants, beneficiaries, and labor organizations representing participants. The notice must contain certain information about the plan, including the plan's funding status for the previous two years, and a statement of the plan's assets and liabilities, among other items.

The notice generally must be provided within 120 days following the end of the plan year. Small plans (covering fewer than 100 participants) must provide the notice by the filing due date of the plan's IRS Form 5500. Additional notice requirements apply if the plan is subject to benefit restrictions due to failure to meet certain funding targets.

For calendar year plans, the notice is due by April 30, 2012.

Notice of Consequences of the Failure to Defer Benefits

Under section 411(a) of the Internal Revenue Code, a plan is required to obtain participant consent in order to distribute defined contribution or defined benefit plan benefits that have a present value exceeding $5,000. The regulations under section 411(a) indicate that the consent is only valid if the participant is properly informed of the right to defer receipt of distribution. The PPA added the requirement that participants must also be informed of the consequences of failing to defer their distributions until normal retirement age. While the notice requirement is in effect for plan years beginning after December 31, 2006, the PPA included a "reasonable attempt to comply" standard until 90 days after the issuance of final regulations.

IRS Notice 2007-7 contained a safe harbor describing what would be considered a "reasonable attempt" to comply with the notice requirement. In October 2008, the IRS issued proposed regulations. Until the issuance of final regulations occurs, plan sponsors should continue to take good-faith reasonable steps to comply with the notice requirements. We will issue a LawFlash when the final regulations are released.

Participant Benefit Statements

Depending upon the type of qualified plan, specific participant benefit statement requirements apply, as described below.

Defined Benefit Pension Plans. Plan sponsors of defined benefit pension plans must either provide participant benefit statements every three years to vested participants who are active employees or provide an annual notice to participants describing how a benefit statement may be obtained.

Participant-Directed Defined Contribution Plans. Participant-directed defined contribution plans are required to provide participant statements on a quarterly basis. Plan sponsors are deemed to timely provide statements if they are provided within 45 days following the end of the calendar quarter.

Non-Participant-Directed Defined Contribution Plans. Plans that do not permit participants to individually direct their account balances are required to provide statements at least once each calendar year. Plan sponsors are deemed to timely provide statements if they are provided on or before the date on which the Form 5500 annual report is filed by the plan (including extensions).

Participant Fee Disclosures

For plan years beginning on or after November 1, 2011 (for calendar year plans, January 1, 2012), sponsors of participant-directed defined contribution plans must provide participants and beneficiaries with disclosure on general information about plan investments, planwide administrative expenses, and individual expenses, and a comparison table detailing investment performance and expenses for designated plan investment funds and benchmark indexes. This disclosure is due on or before the date of plan eligibility and annually thereafter. The initial compliance deadline for this fee disclosure is May 31, 2012.

Sponsors of such plans must also provide each participant and beneficiary with quarterly disclosures of the total dollar amount charged to each participant's account for administrative services and other individual charges. The initial compliance deadline for the quarterly disclosure is August 14, 2012.

Even though the initial compliance deadlines for the fee disclosures are not until the spring and summer of 2012 for calendar year plans, plan sponsors should begin assembling information and coordinating with the plan's service providers and investment providers prior to the effective date to ensure that compliant disclosure materials can be furnished to plan participants in a timely manner.