September 17, 2010
Upcoming Compliance Deadlines for Governmental Retirement Plans
This Compliance Alert reminds state and local governmental plan sponsors of qualified retirement plans about upcoming compliance deadlines. Specifically, by January 31, 2011, governmental plans that wish to file for a determination letter and that did not file in Cycle C (February 1, 2008 to January 31, 2009) must submit their Cycle E determination letter requests to the Internal Revenue Service (IRS), covering plan amendments made since the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA).1
Cycle E Determination Letter Amendments
Governmental defined benefit (DB) and defined contribution (DC) plans being submitted for determination letters in Cycle E must be amended to reflect the applicable requirements set forth in the 2009 cumulative list that will be reviewed by the IRS.2 Governmental plans filing in Cycle E, therefore, will have to be amended on or before January 31, 2011 for any Pension Protection Act of 2006 (PPA'06) requirements that apply even though the deadline for adopting PPA'06 amendments for governmental plans is generally the last day of the 2011 plan year.3
However, because the IRS has indicated that it will not review amendments related to the Heroes Earnings Assistance and Relief Tax Act (HEART Act) or the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA) as part of the Cycle E review, governmental plan sponsors are not required to, but may, amend their plans for these statutory provisions at this time.4
Discretionary Plan Amendments
Under IRS rules, plan amendments that are discretionary (i.e., not legally required) generally must be adopted by (1) the last day of the plan year in which they become effective; or if later, (2) the last day of the next regular legislative session beginning after the amendment's effective date in which the governing body with authority to amend the plan can consider a plan amendment under the laws and procedures applicable to the governing body's deliberations. If a discretionary amendment is not adopted by this deadline, the plan is not considered to be operating in accordance with its terms and should be corrected under the IRS voluntary corrections program.5
Amendments for Both DB and DC Plans
For those governmental plans that might wish to adopt HEART Act and WRERA amendments at this time, what follows is a list of those required and discretionary amendments:
- Survivor Benefits If a participant dies while performing qualified military service, the plan must provide that the deceased participant's beneficiaries are entitled to any survivor benefits that are contingent upon termination of employment on account of death (e.g., include additional life insurance). In addition, it appears that, even if the plan does not offer the type of survivor benefits described above, the plan must provide vesting credit, but not contributions or benefit credit for the deceased participant's period of qualified military service.
- Contribution or Benefit Credit If a participant dies while performing qualified military service, a plan may provide that the period of qualified military service will be counted for purposes of benefit accruals or contributions. The period of qualified military service is already counted for vesting purposes under the mandatory provision described above. If a participant becomes disabled while performing qualified military service, a plan may provide that the disabled participant's period of qualified military service will be counted for purposes of benefit accruals or contributions only, or for both accruals or contributions and vesting.
- Military Differential Wage Payments If the employer pays military differential wage payments to participants, the plan must include military differential wage payments in the definition of compensation used for Internal Revenue Code (IRC) §415 and other IRC requirements (e.g., includible compensation for elective deferrals), but not for purposes of employer contributions or benefits.
- Direct Rollovers by Nonspouse Beneficiaries A plan must permit nonspouse beneficiaries to make direct rollovers into an individual retirement account (IRA) or Roth IRA that is treated as an inherited IRA or Roth IRA. This provision was optional under PPA'06 for distributions made after 2006, but is mandatory for plan years beginning after 2009.6
Amendments for DC Plans Only
The following amendments only apply to DC plans:
- 2009 Required Minimum Distributions WRERA provided that no minimum distributions from defined contribution plans were required to be paid for 2009. Depending upon the minimum distribution language currently in a plan and how the plan decided to treat the minimum distributions that, without WRERA, would have been required for 2009, the plan might be required to reflect the treatment of the 2009 required minimum distribution.7
- Qualified Reservist Distributions IRC §401(k) and §403(b) plans may allow reservists to take distributions of their elective deferrals and earnings provided the reservists have been ordered or called to active duty after September 11, 2001 for a period of at least 180 days or for an indefinite period.
- Deemed Severance from Employment Distributions IRC §401(k), §403(b) and §457(b) plans may allow participants who are on active duty in the uniformed services for a period of more than 30 days to be treated as having severed employment for purposes of qualifying for a distribution of employee elective deferrals and earnings upon severance from employment.
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As with all issues involving the interpretation or application of laws and regulations, plan sponsors should rely on their attorneys for authoritative advice on compliance with PPA'06, HEART, WRERA, and any other applicable laws. The Segal Company can be retained to work with plan sponsors and their attorneys on amendments and IRS determination letter filings.
- For more information regarding IRS extension for governmental plans to file under Cycle E, please see Segal's September 1, 2009 Compliance Alert, "IRS Extends Determination Letter Deadlines for Governmental Plans." (Click on the following text to return to the Compliance Alert.)
- Notice 2009-98 was published in the December 28, 2009 issue of the Internal Revenue Bulletin. (Click on the following text to return to the Compliance Alert.)
- For more information about the determination letter filing process, see the IRS FAQs at http://www.irs.ustreas.gov/retirement/article/0,,id=184417,00.html. (Click on the following text to return to the Compliance Alert.)
- Under Section 104(d)(2) of the HEART Act and IRS Notice 2010-15, Q&A-18 and Q&A-19, plan sponsors have until the last day of the 2012 plan year to retroactively amend their plans for required changes and optional changes that they wish to be retroactively effective, provided the plans must have been operated in accordance with the terms of the amendment since the required or, for voluntary amendments, the specified effective date, and the amendment must be retroactive to the applicable date. (Click on the following text to return to the Compliance Alert.)
- The corrections program is described in Rev. Proc. 2008-50 and is available on the following page of the IRS Web site: http://www.irs.gov/irb/2008-35_IRB/ar10.html. (Click on the following text to return to the Compliance Alert.)
- Because it relates to a PPA'06 amendment, plans might wish to adopt this amendment now, even though the amendment deadline for this WRERA provision extends to the end of the 2012 plan year for governmental plans. (Click on the following text to return to the Compliance Alert.)
- The deadline to adopt amendments for this provision is the last day of the 2012 plan year, but a plan might wish to determine how it handled 2009 minimum distributions now, while the issue is still relatively fresh, so that it can adopt the appropriate amendment if necessary. (Click on the following text to return to the Compliance Alert.)
Compliance Alert, The Segal Company's periodic electronic newsletter summarizing important developments affecting benefit plan compliance, is for informational purposes only. It is not intended to provide authoritative guidance. On all issues involving the interpretation or application of laws and regulations, plan sponsors should rely on their attorneys for legal advice.