Most employee benefit plans that are subject to ERISA are required to file Form 5500. This includes both retirement plans (including most 403(b) plans) and welfare-benefit plans, although many welfare-benefit plans covering fewer than 100 participants are exempt.

The failure to file Form 5500 can result in serious penalties. The DOL currently assesses a penalty of $300 per day, up to $30,000 per year for a failure to file Form 5500. Ouch.

But there is good news. The DOL maintains a voluntary compliance program that allows employers to correct a failure to file Form 5500 and pay a substantially reduced fee. Even in cases where there have been failures to file Form 5500 over multiple years, the maximum fee under the program is only $4,000. That's still a lot of money, but it's better than staring down something approaching a 6-digit penalty.

The program was recently updated (see here). The technical details of how the program works and what has changed will not be of interest to most of you. But it's a good time to remind ourselves the program exists - and should be used whenever possible.

If you sponsor a 403(b) retirement plan - which might be the case if you are a 501(c)(3) organization or a governmental educational agency - you are required to maintain a written plan document for the plan. This hasn't always been the law, however. The plan-document requirement began in 2009 when the current 403(b) regulations went into effect.

Some plans have yet to come into compliance with this rule. In most cases this is not due to willful disregard of the law. Rather, plan sponsors may not understand the requirement or - more likely - they may think they have a plan document, because they have entered into an annuity contract or custodial agreement with the investment provider for the plan. But that contract typically will not satisfy all the requirements of a plan document. 

Well, if you happen to sponsor a 403(b) plan that hasn't yet fully complied with the plan-document requirement, the IRS has a deal for you. Under a recently released update to its Employee Plans Compliance Resolution System or "EPCRS" (see here), the IRS has outlined a specific procedure for correcting this problem. It requires filing an application with the IRS and paying a fee. But the relief and peace of mind it provides is nearly priceless.

And there's even better news: If you file your application to correct this problem by December 31, 2013, the required fee is half of what it would be normally. For example, a plan with 51 to 100 participants would typically pay      Continue Reading...

The IRS has issued guidance temporarily relaxing certain requirements related to loans and hardship distributions from 401(k), 403(b), and governmental 457(b) plans, in an effort to make those funds more readily available to individuals affected by Hurricane Sandy. The new rules apply to loans and hardship distributions made between October 26, 2012 and February 1, 2013, if they are made for the purpose of assisting plan participants or their family members who live or work in a Sandy-related federally declared disaster area.

As described in an IRS news release:

“This broad-based relief means that a retirement plan can allow a Sandy victim to take a hardship distribution or borrow up to the specified statutory limits from the victim’s retirement plan. It also means that a person who lives outside the disaster area can take out a retirement plan loan or hardship distribution and use it to assist a son, daughter, parent, grandparent or other dependent who lived or worked in the disaster area.”

Highlights of the specific relief provided:

Plan Amendment. Plans can make qualifying loans or hardship distributions before the plan document has been formally amended to allow for loans or hardship distributions, so long as an amendment is made by the end of the first plan year beginning after December 31, 2012.
Broader Hardship Standards. Hardship distributions can be made for any Sandy-related hardship, not just the “safe harbor” hardship standards typically relied upon.
Relaxed Documentation Requirements. Documentation and procedural requirements related to hardship distributions      Continue Reading...

The IRS has released its annual cost-of-living adjustments for retirement plans for 2013. Among the highlights:

• The annual limit on elective contributions (other than catch-up contributions) to a 401(k), 403(b), or 457(b) plan has increased to $17,500.
• The annual limit on catch-up contributions (for plan participants age 50 or older) remains the same at $5,500.
• The maximum amount of annual additions that may be made to a defined contribution plan (the "415 limit") has increased to $51,000.
• The maximum amount of compensation that may be taken into account for the year (the "401(a)(17) limit") has increased to $255,000.
• The compensation threshold for identifying certain highly compensated employees remains the same at $115,000.

Separately, the Social Security Administration announced that the Social Security taxable wage base will increase to $113,700 for 2013 - up from $110,100 in 2012. In addition to affecting certain retirement-plan contributions, this impacts the amount of wages and earned income that are subject to the Social Security portion of the FICA and SECA taxes.

The IRS has posted a new 403(b) Plan Checklist to its website. It is a list of 10 common operational problems, intended as a "quick tool" to help employers spot check for key compliance issues. 

Among the issues identified:

• Is the employer eligible to sponsor a 403(b) plan?
• Is the plan complying with the "universal availability" requirement?
• Are employee contributions being monitored and appropriately limited?
• Are the dollar limits on plan loans being monitored and repayments enforced?
• Is the plan obtaining proper substantiation of hardship withdrawals?

A key issue that is NOT addressed on the checklist is the written-plan requirement. Since 2009, IRS regulations have required that 403(b) plans be maintained under a written plan document. Although it's a fairly simple requirement to comply with, it has been often overlooked. But you can be sure the IRS will check for a written document in every 403(b) examination it conducts.

Employers that sponsor 403(b) plans would be well-advised to use this checklist to conduct a mini self-audit at least once a year. Any issues that may be identified are much easier to resolve through voluntary correction than if the IRS discovers them on audit.

As the crisp fall air settles in, our thoughts turn to pumpkins, hayrack rides, apple cider - and, of course, retirement plan restatements. This year, it's Cycle B plans that must be restated and filed with the IRS for a fresh determination letter. If your EIN ends in a 2 or a 7 and you sponsor an individually designed retirement plan, you're up. The deadline to file with the IRS is still a few months away (January 31, 2013), but it's a good time to start getting everything in order, so you can beat the last-minute rush.

Not sure if you have an individually designed plan? All ESOPs and cash-balance pension plans are individually designed, and many traditional defined-benefit pension plans are too. But most plans maintained on a pre-approved "prototype" or "volume submitter" plan document are not considered individually designed and do not need to be submitted to the IRS at this time. This covers many (but not all) 401(k) and profit-sharing plans. Your retirement plan service provider or legal counsel can help you understand what type of plan you have, if you're not sure.

In updated guidance on its letter-forwarding program, the IRS has announced it will no longer offer the program to benefit-plan administrators for the purpose of locating missing individuals who may be entitled to plan benefits.

"Under this revenue procedure, the Service will no longer provide letter-forwarding services to locate a taxpayer that may be owed assets from an individual, company, or organization. The letter-forwarding program is now limited to situations in which a person is trying to locate a taxpayer to convey a message for a humane purpose . . . or in an emergency situation."

The IRS's rationale appears to be that, with the proliferation of locator services available over the internet, use of the letter-forwarding program is no longer necessary for efficient and cost-effective administration of private benefit plans.

As a result of this guidance, many retirement-plan sponsors will need to re-visit plan provisions that direct the plan administrator to use, or consider using, the IRS's letter-forwarding program when searching for missing participants or beneficiaries. This became a particularly popular approach after the DOL issued a Field Assistance Bulletin in 2004 regarding the fiduciary obligation to attempt to locate certain missing participants. That bulletin advocated using the IRS's letter-forwarding program as one of several tools available to search for missing individuals.

The August 30 deadline for initial annual disclosures under the DOL's participant-level fee-disclosure regulation is fast approaching. Employers with participant-directed 401(k) plans should be putting the final touches on their notices (or confirming that their service providers have done so) and making sure all systems are "go" for distributing them by next Thursday.

If you need a refresher, take a look at the DOL's fact sheet on the final rule, as well as our prior coverage (here).

The Department of Labor has withdrawn the controversial "Q&A-30" in Field Assistance Bulletin 2012-02, which would have required some investment-specific disclosures regarding fees and expenses in 401(k) plans that offered only a brokerage window, self-directed brokerage account, or similar arrangement and did not designate any specific investment options beyond the brokerage platform. In an amended bulletin (Field Assistance Bulletin 2012-02R), the DOL replaced Q&A-30 with a new Q&A-39 that does not require any investment-specific disclosures in brokerage-window-only plans, but does contain strong language warning plan fiduciaries that merely offering a brokerage window to participants may not be fully consistent with the general fiduciary obligations imposed by ERISA.

As brief background, the DOL's participant-level fee-disclosure regulation (which goes into effect this year) requires specific annual and quarterly disclosures to participants in most participant-directed 401(k) and other individual-account plans regarding plan-level and investment-level fees and expenses. (The initial disclosures are due by August 30, 2012, for calendar-year plans.) The investment-level information applies only to investments that are "designated investment alternatives." A brokerage window is not a designated investment alternative. So the regulation generally has been read to mean that no investment-level disclosures are required in a plan that does not have any designated investment alternatives but rather offers participants a brokerage window or self-directed brokerage account through which investments may be made in a large number of publicly available investment securities.

Q&A-30 went beyond that by nonetheless requiring investment-level disclosures in brokerage-window-only plans with respect to investment options that were either designated      Continue Reading...

The Department of Labor (DOL) has opined that a large 401(k) plan covering over 9,800 employees of 500 different employers is not a single retirement plan, but rather is a collection of separate plans established by each participating employer.

The plan was set up as a "multiple employer plan" and referred to as an "open MEP" because the employers adopting the arrangement were not related to each other by ownership, industry, or any other unifying factor. The DOL concluded this lack of "genuine organizational relationship" among the employers was fatal to the intended treatment of the plan as a single plan.

Although this opinion does not impair the tax-qualified status of open MEPs, it does mean that employers participating in open MEPs will be required to separately comply with the standards imposed under ERISA, such as the plan document, summary plan description, and Form 5500 requirements. In addition, each employer is treated as a fiduciary under ERISA and is charged with, among other things, prudently selecting and monitoring investment and service providers, including the sponsor of the open MEP and its affiliated service providers.

In light of this opinion, employers considering an open MEP should carefully evaluate the extent to which participation in the plan will, in fact, relieve it of responsibilities it otherwise has as an employer offering retirement benefits to its employees.

A federal appeals court in Boston ruled late last week that a portion of the Defense of Marriage Act (DOMA) is unconstitutional because it violates the rights of same-sex couples who are validly married under Massachusetts law. At issue in the case was a provision of DOMA that says only opposite-sex spouses may be recognized as spouses for purposes of federal law.

This has important implications for employee-benefit plans because several provisions of federal law grant spouses special rights. For example, spouses have survivor rights under retirement plans, and spouses can receive tax-free coverage and have special-enrollment and COBRA rights under group health plans. Under DOMA, these rights do not apply to same-sex spouses, but that could change if DOMA is struck down.

The case does not disturb existing state statutes and constitutional provisions that prohibit the recognition of same-sex marriages. But difficult questions may arise if a same-sex couple that is validly married in one state seeks to enforce rights under federal law against an employer or employee-benefit plan in a state that does not recognize same-sex marriage.

Ultimately, this is an issue that will be addressed by the Supreme Court, and now that a federal appeals court has ruled, review by the Supreme Court could come as early as next year.

In a recent advisory opinion, the U.S. Department of Labor (DOL) clarified the scope of its regulation on non-ERISA 403(b) plans. Under that regulation, certain 403(b) plans sponsored by 501(c)(3) organizations are considered exempt from ERISA. Among other things, the plans must be voluntary, must only allow for employee contributions (no employer contributions), and must limit other employer involvement.

The new advisory opinion describes an employer that maintains two plans: a 403(b) plan that allows for only employee salary-reduction contributions and a separate 401(a) qualified retirement plan through which employees receive matching contributions based on their contributions to the 403(b) plan. The DOL noted that simply maintaining two plans did not preclude the 403(b) plan from qualifying for the non-ERISA safe harbor. But in this case the close relationship between the two plans caused the 403(b) plan to fail the safe harbor. Specifically, the coordinated matching contribution provided through the 401(a) plan was too much employer involvement and caused the 403(b) plan not to be strictly "voluntary".