Right now, I am loving me some IRS. The agency everyone loves to hate each April 15 has been on quite a roll lately with some really great news for those of us in the 401(k) and pension world. Here’s what they’ve done this year:
Withdrew a proposed regulation that would have hurt cross-testing: Practically all of the 401(k) and profit sharing plans we work with use cross-testing. It allows employers to save so much money on rank-and-file contributions compared with uniform allocation or integrated plans. Naturally, there was fear and concern across the land when the Treasury Department issued a proposed regulation in January which would have made cross-tested plans less convenient at best and much more expensive to plan sponsors at worst. Letters were written to the Treasury. Congress was asked to help. Those efforts paid off. In April, the IRS and Treasury announced that the proposed regulation was being withdrawn. Now, we’re not out of the woods yet. In the IRS/Treasury announcement, it said “further consideration will be needed” with respect to the relevant issues. So this proposal or something like it could show up again one day. But for the time being, cross-testing is safe. Yay!
Proposed gateway contribution relief for DB/DC combos: Companies with a defined benefit (DB) or cash balance plan paired with a defined contribution (DC) plan may have been told sometime or another that Non-Highly Compensated Employees have to be given a contribution of at least 7.50% of pay in the DC plan. This is called the “gateway contribution.” It is a minimum contribution which “opens the gate” and allows the employer to use cross-testing or otherwise test for nondiscrimination on a benefits basis. A 7.50%-of-pay contribution can be kind of expensive. Currently, matching contributions cannot be counted toward the 7.50%. Under a proposed regulation, some matching contributions could be applied toward gateway, potentially saving money for those plans that utilize a match. In addition, the 7.50% gateway contribution might not be needed at all if the plans would pass nondiscrimination testing using a lower interest rate than normal (6.00% instead of 7.50% to 8.50%). There are other helpful things in this proposed regulation, including favorable rules about testing closed DB plans and use of average contribution rates. What is interesting is that the now-withdrawn proposed regulation on cross-testing described above was part of this proposed regulation on DB/DC combos. They sort of sneaked the cross-testing provision in at the end. The cross-testing provision is gone, but the rest of the proposed regulation is still under review and may be finalized at some point in the future.
Clarified when safe harbor 401(k) plans may be amended mid-year: Safe harbor 401(k) plans are a different animal from other types of qualified plans. With a safe harbor 401(k), a notice must be issued to all participants before the plan year starts. This notice describes key plan provisions and summarizes what the company will contribute for them. Participants can then adjust the contributions from their paychecks in response to this information. Perhaps they will cut their own deferrals back if they are getting more from the company, and vice versa.
Another rule of safe harbor 401(k) plans is that the provisions are to remain in effect for a full plan year, meaning no changing the plan during the year. It was unclear whether this referred to all the plan provisions or just the ones covered in the participant notice. Some took the conservative (and inconvenient) position that once January 1 passed, nothing in the plan could be changed that year, even provisions that would not influence how much an employee contributed from his paycheck. Thankfully, your IRS came to the rescue and announced that many changes are now allowed to safe harbor 401(k) plans mid-year, provided the employees are notified about the changes when appropriate and they are given time to change their salary deferral election. There are still some changes that may not be made mid-year. You can’t change from a match safe harbor to a 3% nonelective mid-year, for example.
Postponed the additional compliance questions on Form 5500: Have you ever completed a form which had questions that the instructions said not to answer? Me neither, unless you count those questions that say, “For Office Use Only.” But that’s exactly what we have on the 2015 Form 5500 series. Some additional compliance questions have been added to the Form 5500 series. They are not to be answered. The instructions say so. You can look it up. Originally, the questions were going to be optional for 2015 and probably mandatory in 2016 or shortly thereafter. We still expect them to be made mandatory sometime down the road. So be prepared. Just don’t answer the questions for 2015.
While some of these favorable IRS actions may turn out to be only temporary, they are still steps in the right direction. They make our lives easier and our clients’ lives easier. For that, we owe the IRS and the Treasury Department a round of applause.