What better way to start off 2016 than with a heads-up on IRS intentions for issuing benefit plan guidance over the next 12 months? Many of these items could well impact the majority of our member companies across all states.
While the IRS has identified an extensive list of tax matters to be addressed, this article highlights those most likely to affect our members. MSEC will monitor the published guidance and notify you of significant benefit matters as they unfold.
IRS action items for this year include:
General Benefit Topics
- Clarifying the penalties and fraud rules for employers who misstate the tax impact of retirement plan contributions considered deductible. The 20-percent tax penalty is in addition to the general liability for misstating the tax impact of benefit amounts contributed, as well as overstating pension contributions made in excess of the maximum deductible amount. At the same time, IRS intends to address a related provision (IRC Sec. 6664) that outlines exceptions to the penalties based upon specific facts and circumstances. Both sets of guidance will focus mostly on amendments made by several acts over the last 10 or so years. These include the American Jobs Creation Act of 2004, the Gulf Opportunity Zone Act of 2005 (after Hurricane Katrina), the Pension Protection Act of 2006 (PPA), and the Health Care and Education Reconciliation Act of 2010 (relating to ACA).
- Revising regulations governing the timing rules for contributions and deductions to both funded and unfunded retirement plans, as well as those subject to immediate vesting.
- Providing guidance on an exciting new concept in retirement plans: a “combined plan” authorized under an obscure section of the PPA referred to as a 414(x) plan. It offers employers who have between two and 500 employees the opportunity to create a retirement plan that includes both a defined benefit (i.e. pension) and a qualified pre-tax arrangement (i.e. a 401k or 403b). The 414(x) Plan has not yet gained traction due to the many uncertainties involved in combining such plans while continuing to satisfy the tests and requirements of each. If the IRS simplifies this concept during 2016, it could prove quite valuable for employers–particularly those with employees of diverse ages!
- Revising regulations governing Employer Stock Purchase Plans (ESOPs) under IRC Sec. 409A and related sections.
- Making regulatory changes to Flexible Spending Accounts under IRC Sec. 125. Expect to see changes regarding the timing and use of unused employee funds at year end.
- Addressing early retirement plan distribution penalties related to the 10 percent penalty tax under IRC Sec. 72(p) for participants before age of 59 ½.
Government Employer Sponsored Plans
- The IRS plans to set forth the requirements of “pickup” arrangements for government-sponsored retirement plans under IRC 414(h)(2). Some plans that mandate employee contributions to a 401(a) and less frequently to a 403(b) plan will use a pickup arrangement. With a pickup arrangement, the employer will essentially reimburse the employee by making an additional employer contribution equal to the amount of the mandated employee contribution. Such pickup contributions, though made by the employer, are designated as mandated employee contributions.
- Provide guidance for determining whether a plan is a governmental plan within the meaning of IRC Sec. 414(d). This is a significant area needing clarity in that it impacts which government employers must be combined for various tax and benefit purposes under the complex “controlled group” rules. This clarification could impact both sponsors of as well as participants and beneficiaries in employee benefit plans that are determined to be governmental plans.
- Address the definitions of a “bona fide severance pay plan” and “substantial risk of forfeiture” under 457(f) (1) (B). These regulations would affect only state and local governmental plan sponsors of non-qualified 457 deferred compensation plans, as well as plan administrators, participants, and beneficiaries.
- Changes to apply the normal retirement age regulations of ERISA plans to government-sponsored IRC Sec. 414(d) retirement plans.
Defined Benefit Plans Only
- The IRS plans to provide guidance on the requirement for employer plan administrators to furnish an individual statement to participants who separate from service with a deferred vested benefit.
- Provide additional guidance regarding single-employer defined-benefit (pension) plans regarding funding of benefit liabilities, determining assets, and benefit restrictions for certain underfunded defined benefit plans.
The number of proposed regulations waiting to be finalized is too large to include all of them in this article. At the time of this writing, the IRS website had not yet been updated to reflect them, but it may be updated by the time you read this. Click here, or for the full regulatory agenda in 2016, see the Office of Management and Budget website regarding 2016 regulatory plans at www.reginfo.gov.