403(b) Plans – E is for ERISA

February 5, 2023February 11, 2023

Ten Mandatory SECURE 2.0 Changes for 401(k) Plans

The SECURE 2.0 Act of 2022, as enacted on December 29, 2022, contains over 90 provisions affecting retirement plans and IRAs, but of the many provisions only a handful are required changes for 401(k) plans. This post lists those changes and indicates when the provisions go into effect. Unless otherwise noted, 401(k) plans (and 403(b) plans, to which these changes also apply) will need to be amended to reflect mandatory SECURE 2.0 changes by the end of their 2025 plan year, unless that deadline is later extended. Note that some of the changes listed below, such as the paper disclosure requirement, may not require a plan amendment. Also as noted, two are required changes only if discretionary provisions are first adopted.

One. Increases In Required Minimum Distribution Age

Effective for required minimum distributions (RMDs) after December 31, 2022 for individuals who attain age 72 after that date, the RMD increases from 72 to 73 for those born between 1951 and 1959, and age 75 for those born in 1960 and subsequent. A technical glitch needs to be corrected, as the law currently puts those born in 1959 into the age 73 and age 75 distribution categories.

Two. Removal of RMD Requirement for In-Plan Roth Accounts

RMDs during your lifetime are not required for Roth IRAs, but were required under prior law, to be taken from from in-plan Roth accounts. SECURE 2.0 eliminates the requirement to take lifetime RMDs from in-plan Roth accounts effective for tax years beginning after December 31, 2023.

Three. Roth Catch-Up Contributions for High Earners

Effective for tax years beginning after December 31, 2023, age 50 catch-up contributions under 401(k) plans made by participants whose wages in the prior year exceeded $145,000 must be made in the form of designated Roth contributions. The $145,000 amount is indexed after 2024. Catch-up contributions for lower wage earners can continue to be made on a pre-tax basis but must be permitted to be made in the form of designated Roth contributions. Another technical glitch in the law needs to be corrected, in order to make catch-up contributions permissible at all, beginning in 2024. Plans that don’t include designated Roth contributions must be amended to do so by the applicable deadline, in order to accommodate the Roth catch-up feature.

Four: Increased Catch-Up Limit Between Ages 60-63

Effective for tax years beginning after December 31, 2024, the age 50 catch-up limit is increased for participants between the ages of 60 and 63 to the greater of (a) $10,000 or (b) 150% of the 2024 “normal” catch-contribution limit. 150% of the 2023 catch-up contribution limit already exceeds $10,000 ($11,250). The $10,000 limit will be adjusted for cost-of-living after 2025.

Five. Coverage of Long-Term, Part-Time Workers

This one is a double whammy because SECURE 1.0, enacted in 2019, requires coverage of long-term, part-time employees for 401(k) plans in 2024, and SECURE 2.0 expanded this rule to ERISA 403(b) plans, in addition to reducing the number of years required to qualify as a long-term part-time employee. Specifically, beginning in 2025 401(k) and ERISA 403(b) plans must allow employees who complete 500 or more hours of service in two consecutive years to make elective deferrals (but need not make employer contributions on their behalf), taking into account service worked in 2023 and subsequent. Under SECURE 1.0, 401(k) plans must allow employees who worked 500 or more hours in three consecutive years, beginning in 2021, to make elective deferrals commencing in 2024. These employees need not be taken into account for nondiscrimination and coverage purposes or for top-heavy purposes.

An example illustrates how this works. An employee who works at least 500 hours of service in 2021, 2022, and 2023 would be eligible to make elective deferrals in their employer’s 401(k) plan on January 1, 2024, per SECURE 1.0. But if that same employee were employed by an employer with an ERISA 403(b) plan, the employee would have to work 500 or more hours in both 2023 and 2024, in order to be eligible to make elective deferrals in 2025 under SECURE 2.0 Note that this would be the case even if the employee were a student employee or were hired into a position requiring less than 20 hours per week (categories that were exceptions to the universal availability rule applicable to 403(b) plans). Service for plan years before January 1, 2023 is disregarded for purposes of SECURE 2.0 eligibility, but service worked since 2021 is counted for vesting purposes under both SECURE Acts.

Six. Auto-Enrollment and Auto-Escalation for Newly Adopted Plans

Effective for single-employer 401(k) or 403(b) plans adopted on or after December 29, 2022 SECURE 2.0 requires that, starting in 2025, the plan auto-enroll participants, and auto-escalate deferrals. This rule also applies to employers that adopt multiple employer plans on or after December 29, 2022. Certain exemptions apply, including employers with 10 or fewer employees, businesses in the first three years of existence, governmental and church pans, and SIMPLE 401(k) plans. For plans subject to the rule, the automatic enrollment percentage must start at 3% and increase at least 1% on the first day of each successive plan year until the deferral rate reaches at least 10%, but not more than 15%. For plan years beginning before 2025, non-safe harbor plans may not exceed 10%. Participants must be permitted to withdraw deferrals, and earnings, within 90 days, without application of the 10% early withdrawal penalty tax. Qualified default investment alternatives must be used for the automatically contributed amounts, subject to modification by participants.

Seven. Repayment Deadline for Qualified Birth or Adoption Distributions (If Offered)

This is a mandatory change to a discretionary provision from SECURE 1.0. SECURE 1.0 introduced the option of allowing participants to take qualified birth or adoption distributions (QBADs), which are distributions from a 401(k) or 403(b) plan (or IRA) of up to $5,000 per parent that are not subject to the early withdrawal penalty tax and that are taken within one year of the date of a birth or finalization of adoption proceedings. SECURE 1.0 provided that these amounts may be repaid back to the qualified plan or IRA notwithstanding normal contribution dollar limits, but did not specify a deadline for repayment. For plan sponsors that did add QBADs to their plans, and for IRA custodians that made them available, SECURE 2.0 now requires that repayment be made within three years. The repayment period ends December 31, 2025 for QBADs that are currently outstanding.

Eight. Surviving Spouse Election to be Treated as Employee

Surviving spouses have several special options with regard to a spouse’s retirement accounts, that are not available to non-spouse beneficiaries. Effective for 2024, SECURE 2.0 adds one more option: the surviving spouse of the account holder who is the designated beneficiary of the account can irrevocably elect to be treated for RMD purposes as the deceased account holder of the retirement account him or herself. As a consequence, RMDs will be paid no sooner than when the account holder would have reached his or her required beginning date, and will be paid out according to the account holder’s life expectancy, rather than the spouse’s life expectancy, using the Uniform Life Table rather than the Single Lifetime Table. Note that this option is different from the surviving spouse electing to treat the account as his or her own, which would also result in use of the Uniform Life Table, but using the spouse’s birthdate. This new option under SECURE 2.0 would primarily be of interest to an older surviving spouse, as it would permit use of the younger account holder’s life expectancy for RMD purposes.

Nine. Required Annual Paper Account Statement

Under a Department of Labor “safe harbor” set forth in final Department of Labor regulations published in 2020, retirement plan sponsors may deliver plan disclosures such as Summary Plan Descriptions, quarterly or annual account statements, and other items, by electronic means, either through email or posting on a company website. EforERISA posted about the electronic disclosure safe harbor back in 2020. Effective for plan years beginning after December 31, 2025, SECURE 2.0 requires that defined contribution plans, which include 401(k) and 403(b) plans, provide a paper benefit statement at least once per year. The other three required quarterly statements may be delivered electronically provided the safe harbor delivery requirements are met. Participants are permitted to opt-out of paper delivery. SECURE 2.0 also instructs DOL to revise the electronic delivery regulations by December 31, 2024, to require a one-time initial paper notice to new participants that informs them of their right to receive all required disclosures on paper. This initial written disclosure would be required to be delivered prior to issuance of any electronic communications about the plan.

Ten. Annual “Reminder” Notice for Unenrolled Participants (Sec. 320)

This is a required provision for employers who opt to use simplified disclosure procedures for employees who are eligible under their plan, but do not actively participate. This is a discretionary provision under SECURE 2.0 and it is unclear how many employers will adopt it, due to the administrative challenges of segregating the two employee populations for different notice purposes. Currently required ERISA disclosures must be made to employees who have met eligibility requirements under a retirement plan, but do not actively participate, equally to those who are actively participating in a retirement plan. Effective immediately, a plan sponsor may carve unenrolled participants out of normal notification procedures, provided that they supply an annual notice of the employees’ eligibility to participate in the plan, and any applicable election deadlines. Other prerequisites to this simplified annual notice procedure are that (a) the employee is provided any notification they expressly request be supplied; and (b) the employee received a Summary Plan Description and all other required notices upon initially becoming eligible to participate in the plan.

If you are a 401(k) or 403(b) plan sponsor, or advise plan sponsors, and have questions about these required changes under SECURE 2.0, use the Contact form at EforERISA to get more information on next steps.

The above information is a brief summary of legal developments that is provided for general guidance only and does not create an attorney-client relationship between the author and the reader. Readers are encouraged to seek individualized legal advice in regard to any particular factual situation. © 2023 Christine P. Roberts, all rights reserved.

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January 4, 2023January 4, 2023

Five SECURE 2.0 Changes Impacting Non-Profit Employers

On December 29, 2022 President Biden signed into law H.R. 2617, the Consolidated Appropriations Act, 2023, a $1.7 trillion omnibus spending bill that will keep the federal government funded for the 2023 fiscal year. Of the many provisions in the massive bill, Division T, the SECURE Act of 2022, contains close to 400 pages of far-reaching changes affecting retirement plans and IRAs. Commonly referred to as SECURE 2.0, it builds upon and adds to retirement plan provisions of the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE 1.0) which was passed in 2019, but is more extensive than the earlier law. This post focuses on five provisions of SECURE 2.0 that specifically impact retirement plans maintained by non-profit employers. In addition to the changes listed below, which affect plans currently in existence, beginning in 2025 newly adopted Section 403(b) plans will be required to auto-enroll participants, with some exceptions.

One: Expansion of Multiple Employer Plan and Pooled Employer Plan Arrangements to Section 403(b) Plans

Effective for plan years beginning after December 31, 2022, Section 403(b) plan sponsors can participate in multiple employer plan arrangements (MEPs) and pooled employer plan arrangements (PEPs), potentially achieving economies of scale under such arrangements (in terms of recordkeeping and investment expenses) that have previously only been available to for-profit employers. MEPs and PEPs organized for Section 403(b) plan sponsors will be able to take advantage of relief, extended under SECURE 1.0, from the “one bad apple” rule so that violation of one employer member of a multiple employer or pooled arrangement does not affect the tax treatment of other, compliant employer members.

Two: Section 403(b) Plans May Invest in Collective Investment Trusts (CITs)

Since 1974, the only two permitted investment vehicles for 403(b) plans were annuity contracts and mutual funds. Effective as of its date of enactment, SECURE 2.0 adds a third option, collective investment trusts (CITs), to that short list. CITs are pooled investment arrangements that are made available only to qualified retirement plans, and that share some features with mutual funds but have different regulatory oversight and may offer some cost efficiencies. Despite the immediate effective date, there will be some lead time before CITs are available to Section 403(b) plan sponsors due to the need to modify applicable securities laws.

Three: Expanded Investment Sources for Section 403(b) Hardship Withdrawals

Prior to SECURE 2.0, hardship withdrawals from Section 403(b) plans could be drawn only from employee contributions, less earnings. Effective for plan years after December 31, 2023, SECURE 2.0 will bring Section 403(b) plans into conformity with Section 401(k) plans in this regard, so that QNECs, QMACs , in addition to elective deferrals, and earnings on these amounts, are permitted sources for hardship withdrawals. SECURE 2.0 also permits hardship withdrawals to be made on the basis of a written certification by the participant as to the need for the withdrawal rather than on the basis of more formal documentation.

Four: Extension to Amend Section 457(b) Plans for SECURE 1.0 Required Minimum Distribution Rules

As we posted recently, December 31, 2022 was the deadline for sponsors of non-governmental Section 457(b) deferred compensation plans to amend their plan documents to incorporate changes to required minimum distribution rules under SECURE 1.0. For tax-exempt sponsors of these plans who did not act timely, SECURE 2.0 has extended the amendment deadline under SECURE 1.0 to conform to the amendment deadline under applicable provisions of SECURE 2.0. The new deadline is the last day of the first plan year beginning on or after January 1, 2025 (2027 in the case of governmental plans). Note in this regard that SECURE 2.0 further modifies RMD rules, including increasing the RMD starting age in stages, first from 72 to 73, then eventually to 75, so additional amendments to RMD provisions will eventually be needed under SECURE 2.0. Plans must operate in accordance with required provisions, in the interim.

Five: Eligibility for Long-Term, Part-Time Employees

This is a provision of SECURE 2.0 that is not unique to 403(b) plans but applies equally to 401(k) plans. The original SECURE 1.0 rule required long-term, part-time employees, defined as employees who have worked 500 or more hours of service in three consecutive twelve-month periods, to be able to participate in the deferral-only portion of a 401(k) plan beginning in 2024. Effective for plan years beginning after December 31, 2024, SECURE 2.0 expands this rule to 403(b) plans that are subject to ERISA and reduces the three consecutive twelve-month requirement to two consecutive periods. This will be a significant adjustment to 403(b) plan sponsors who are accustomed to the universal availability rule, one exception to which permitted employees who normally work less than 20 hours per week, and who fail to accumulate 1,000 hours of service in an eligibility measurement period, to be excluded from making elective deferrals. Although universal availability does not apply under 401(k) plans, the 1,000 hour rule operated in a similar way and will now yield to the 500 hour in two consecutive year standard.

SECURE 2.0 will be a topic of discussion at EforERISA in many posts to come. If you have not subscribed to this blog yet, please take a moment to do so by typing your email address under the prompt at “Continue Reading More Articles.” And if you are a plan sponsor, or advise plan sponsors, and have questions about provisions of the law or steps to take to get ready for their implementation, don’t hesitate to reach out using the Contact form (under “Posts Worth Revisiting”).

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October 21, 2022November 28, 2022

2023 Retirement Plan Limits Announced

The Internal Revenue Service announced new dollar limits for retirement plans for 2023, with most limits showing a sizeable increase over 2022 amounts. The new annual 401(k) elective deferral limit is $22,500 with a $7,500 catch up for those age 50 or older, permitting $30,000 to be contributed annually, or $5,000 per month. Plan sponsors should also note that the compensation threshold to determine highly compensated employees increases from $135,000, to $150,000, which is measured based on prior year’s compensation. The rest of the new limits are shown below:

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January 27, 2022January 28, 2022

What the Supreme Court’s Hughes Decision Means to Plan Sponsors

“The point is that you’re not insulated from making bad [investment] decisions in your — [ . . . ] plan by the fact that you’ve made some good [investment] decisions in your plan, are you?”[1]

The fiduciaries of two 403(b) plans maintained by Northwestern University were sued for ERISA fiduciary breach on the grounds that the plans paid excessive recordkeeping fees, in part because of the existence of multiple recordkeepers, offered retail share class mutual funds and annuities when cheaper and materially identical institutional class alternatives were available to a plan of Northwestern’s size, and had a too-large roster of investment options that confused participants (Northwestern made changes that corrected some of these issues by the time the Supreme Court heard oral argument.) The Northwestern fiduciaries moved to dismiss these claims, in part, on the grounds that the participants could have chosen from among lower-priced investments offered by the plans, hence failed to successfully allege that a fiduciary breach occurred.

In a unanimous decision by Justice Sonia Sotomayor in Hughes v. Northwestern University, the Supreme Court addressed a narrow issue on the standard of pleading an ERISA fiduciary breach:

Whether, if plaintiffs can allege the existence of overpriced or otherwise imprudent investment options or recordkeeping arrangements, their complaint will survive a motion to dismiss, and may proceed to trial, even if participants could have chosen from among other investments that were not similarly flawed.

The Supreme Court answered this question “yes,” and remanded the case to the Seventh Circuit to determine whether fiduciary breaches were sufficiently alleged, notwithstanding that the Northwestern University 403(b) plans included some low-cost investment options which participants, in the self-directed arrangement, were free to choose over higher-priced options.

In reaching its conclusion the Supreme Court called out the Seventh Circuit for using “flawed” reasoning in its over-reliance on participant choice: “[s]uch a categorical rule is inconsistent with the context-specific inquiry that ERISA requires and fails to take into account respondents’ duty to monitor all plan investments and remove any imprudent ones.” Hughes Opinion at p. 2, citing Tibble v. Edison Int’l, 575 U.S. 524, 530 (2015).

In other words, because ERISA fiduciaries must continually monitor investment options (and recordkeeping contracts, and other arrangements whose costs offset the growth of ERISA assets), the maintenance of some options that reflect fiduciary prudence does not excuse the continued presence of other options that do not.

Reliance throughout the Hughes opinion on the Tibble case is instructive. In that case, plaintiffs alleged in 2007 that the Edison 401(k) Savings Plan added mutual funds in 1999 and in 2002 with retail share pricing when materially identical, lower-priced institutional-class mutual funds were available. The district court allowed the allegations regarding the funds added in 2002 to proceed but not the funds added in 1999, because more than six years had passed since the overpriced funds were added to the investment mix, and that exceeded the applicable statute of limitations for fiduciary breach.

The Ninth Circuit affirmed, but the Supreme Court disagreed, holding that ERISA fiduciary’s continuing duty to monitor and remove imprudent investments meant that the statute of limitations with regard to the 1999 fund additions remained open, because imprudent retention of an investment was a fiduciary breach, separate and distinct from a breach that occurs at the point of selecting an investment. 575 U.S. at 529, citing, inter alia, A. Hess, G. Bogert, & G. Bogert, Law of Trusts and Trustees § 684, at 147-148.

While it does not provide bright-line answers to what constitutes a fiduciary breach, the Hughes decision does acknowledge the complexity that the duty of prudence encompasses, stating that examinations of fiduciary prudence “will necessarily be context specific,” turning on the factual circumstances that prevail at the time the fiduciary acts; that at times, the circumstances facing an ERISA fiduciary will implicate “difficult tradeoffs,” and that courts must give “due regard” to the “range of reasonable judgments a fiduciary may make based on her experience and expertise.” Hughes Opinion at p. 6.

What does this mean for plan sponsors, plan investment committees, and other fiduciaries of 401(k), 403(b) and other ERISA retirement plans? Nothing that common sense did not already dictate, but seeing the issues addressed so succinctly by the country’s highest court should be an impetus for plan fiduciaries to take the proper steps, which include (but are not limited to):

They must regularly evaluate the performance and pricing of their entire universe of investment options, as well as their recordkeeping and other vendor relationship, in a regular benchmarking or other apples-to-apples comparison process.
They must also put those relationships out to competitive bid at the outset of the relationship and periodically thereafter.
The benchmarking and bidding process must be documented in the form of meeting minutes and resolutions as must the periodic, such as quarterly, review of investment performance.
Use of a carefully chosen ERISA 3(21) investment advisor or 3(38) investment manager will assist with this process, but the choice and retention of the fiduciary advisor or manager is itself subject to the fiduciary standard and failing to benchmark and bid out those relationships could lead to potential liability.
An investment policy statement that articulates the process through which fiduciaries fulfill their duties of prudence, loyalty, and diversification with regard to selection and retention of investments is also advisable. However, care must be taken to not create too specific a set of guidelines as drifting from them could itself give rise to fiduciary liability.

In summary, the Supreme Court has weighed in, and ERISA fiduciaries who can point to some prudent investment options will not defeat fiduciary breach allegations at the pleading stage if they have not also regularly monitored and pruned inefficient and overpriced investments and recordkeeping relationships from their plan lineup. Plan sponsors and other fiduciaries who already have good fiduciary hygiene practices in place should have little to fear, but those who do not now have no comfort that some is good enough, for defeating allegations of fiduciary imprudence.

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[1] Justice Elena Kagan, Transcript of Oral Argument, Hughes v. Northwestern (19-1401), Retrieved at https://www.supremecourt.gov/oral_arguments/argument_transcripts/2021/19-1401_d18f.pdf

November 4, 2021November 17, 2021

IRS Announces 2022 Retirement Plan Limits

On November 4, 2021, the IRS announced 2022 cost-of-living adjustments for annual contribution and other dollar limits affecting 401(k) and other retirement plans. The maximum annual limit on salary deferral contributions to 401(k), 403(b), and 457(b) plans increased $1,000 to $20,500, but the catch-up contribution limit for employees aged 50 and older stayed the same at $6,500. That raises the total deferral limit for a participant aged 50 or older to $27,000. The Section 415(c) dollar limit for annual additions to a retirement account was increased to $61,000 from $58,000, and the $6,500 catch-up limit increases that to $67,500 for participants aged 50 or older. In addition, the maximum limit on annual compensation under Section 401(a)(17) increased to $305,000 from $290,000, and the compensation threshold for Highly Compensated Employees increased to $135,000, from $130,000. Other dollar limits that increased for 2021 are summarized below; citations are to the Internal Revenue Code. Unchanged were the annual deductible IRA contribution and age 50 catch-up limit ($6,000 and $1,000, respectively), and the age 50 SIMPLE catch-up limit of $3,000. In a separate announcement, the Social Security Taxable Wage Base for 2022 increased to $147,000 from the prior limit of $142,800 in 2021.

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September 11, 2021

IRS Prioritizes Guidance on Student Loan Repayment Contributions

On September 9, 2021 the Department of the Treasury issued its 2021-2022 Priority Guidance Plan listing guidance projects that are priorities for the Treasury Department and IRS during the twelve months ending June 30, 2022. Among the Employee Benefits topics is “[g]uidance on student loan payments and qualified retirement plans and §403(b) plans.” This post reviews the state of the law on student loan repayments through retirement plans and briefly discusses what type of guidance might be forthcoming.

Current State of the Law

The current state of guidance on using student loan repayments as a base for employer contributions to a qualified retirement plan or 403(b) plan is limited to a private letter ruling issued in 2018 to Abbott Labs. In addition, proposed measures are contained in various pieces of federal legislation including the Securing a Strong Retirement Act of 2021, commonly referred to as SECURE 2.0.

In the private letter ruling (PLR 201833012), discussed in our earlier post, the employer sought approval of an arrangement under which they made a 5% nonelective contribution on behalf of participants who contributed up to 2% of their compensation towards student loan repayments. Those participants could still make elective deferral contributions under the plan, but would not receive a matching contribution (also equal to 5% of compensation) for the same pay periods in which they participated in the student loan repayment program. Both the nonelective and matching contributions were made after the end of the plan year and only on behalf of employees who either were employed on the last day of the plan year or had terminated employment due to death or disability. The nonelective contributions based on student loan repayments also vested at the same rate as regular matching contributions did.

The PLR addressed whether the nonelective contribution made on behalf of student loan repayments violated the “contingent benefit rule.” Under that rule, a 401(k) plan is not qualified if the employer makes any other benefit (with the exception of matching contributions) contingent on whether or not an employee makes elective deferrals. The IRS concluded that the program did not violate the contingent benefit rule because employees in the program could still make elective deferrals, but simply would not receive the regular employer match on those amounts during pay periods in which they received the nonelective contribution based on student loan repayments.

Only Abbott Labs has reliance on the terms of the PLR, although the PLR may indicate the approach the IRS will take in any new guidance regarding student loan repayments as a basis for retirement plan contributions.

Proposed Legislation

Congress has noticed the impact that student loan repayment obligations has had on employees’ ability to save for retirement. As mentioned, the most significant bill that would address this issue is the Securing a Strong Retirement Act of 2021, commonly known as SECURE 2.0. Specifically, Section 109 of the Bill would treat “qualified student loan payments” equal to elective deferral contributions, for purposes of employer matching contributions under a 401(k) plan, a 403(b) plan, a governmental 457(b) plan, or a SIMPLE IRA plan, and would permit separate nondiscrimination testing of employees who receive the matching contribution based on student loan repayments. “Qualified student loan payments” would be defined to include any indebtedness incurred by the employee in order to pay their own higher education expenses. Under SECURE 2.0, total student loan repayments that are matched, plus conventional elective deferrals, would be capped at the dollar limit under Internal Revenue Code (“Code”) Section 402(g) ($19,500 in 2021).

What Future IRS Guidance Might Hold

Based on the Abbott Labs PLR and SECURE 2.0, we might hope or anticipate that any future IRS guidance on programs that condition employer retirement plan contributions on participant student loan repayments would include the following:

Guidance on how such programs may comply with the contingent benefit rule, including whether it will suffice simply that program participants may continue making elective salary deferrals (while likely foregoing regular matching contributions while student loan repayments are being matched).
Guidance on whether such a program, by nature limited to employees with student loans, is a “benefit, right or feature” that must be made available on a nondiscriminatory manner under Code Section 401(a)(4), and if so how it might satisfy applicable requirements.
Guidance on whether, and how, employers can confirm that loan repayments are being made, including whether (as SECURE 2.0 would permit), employers may rely on an employee’s certification of repayment status.
Guidance on nondiscrimination testing of contributions under a student loan repayment program, including provision for separate testing, as SECURE 2.0 would permit.

Additionally, plan sponsors would no doubt appreciate guidance on use of outside vendors for student loan repayment programs and how they might interact with conventional retirement plan record keepers and third party administrators.

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January 18, 2019February 15, 2021

#10YearChallenge for 403(b) Plans

The #10YearChallenge on social media these days is to post a picture of yourself from 2019, next to one from 2009, hopefully illustrating how little has changed in the 10 year interim. For tax-exempt employers who sponsor Section 403(b) plans, however, 2019 brings a different #10YearChallenge – namely, to bring their plan documents – many of which date back to 2009 – into compliance with current law.

The actual deadline to restate your 403(b) plan (technically, the end of the “remedial amendment period”) falls on March 31, 2020, but vendors of 403(b) documents that have been pre-approved by the IRS will proactively be sending clients document restatement packages this year, in order to avoid the inevitable crunch just prior to the 2020 deadline. The restatement deadline is an opportunity to retroactively restate the plan document (generally, to January 1, 2010) to correct any defects in the terms of the plan documents, such as missed plan amendments. It is also the last chance for tax-exempt employers with individually designed plan documents to restate onto a pre-approved document, as the IRS does not now, and does not intend to, issue approval letters for individually designed 403(b) plans

There are significant differences in the 403(b) document landscape in 2019, as compared to 2009. Back in 2009, which was the year the IRS first required all 403(b) plan sponsors to have a plan document in place, there were no IRS pre-approved documents. Now, in 2019, numerous vendors offer pre-approved documents that individual tax-exempt employers can (somewhat) tailor to their needs (for instance, through Adoption Agreement selections). The IRS pre-approved documents are much lengthier than the documents that were adopted in 2009. For instance, the Fidelity Adoption Agreement from 2009 was approximately 6 pages long, including attachments, but the 2019 restatement version, with attachments, is approximately 49 pages long. This difference is down to changes in the laws governing retirement plans, as well as increased sophistication of plan administration and recordkeeping systems over that time.

Due to increasing complexity in plan design and administration, employers may want to take the restatement opportunity to self-audit their plan administration procedures and to confirm that they are consistent with the way the document, as restated, reads. For instance, does the payroll department, whether internal or outsourced, draw from the correct payroll code sources when processing employee salary deferrals and employer matching or nonelective contributions? Does the plan contain exclusions from the definition of compensation that are being ignored when payroll is processed? Are participant salary deferrals and loan repayments timely being remitted to the plan? The self-audit is a good opportunity to catch any operational errors and correct them under IRS or Department of Labor voluntary compliance programs (e.g. Employee Plans Compliance Resolution System, and Voluntary Fiduciary Correction Program).

Pre-approved document vendors (often also the investment providers) will assist employers in migrating their 2009 (or subsequent) plan document provisions over to the new version of the document, but employers should seek assistance from benefit counsel in this process to limit the chance of errors. Benefit counsel can also help conduct a self-audit, or take employers through the voluntary correction programs in the event any operational errors are uncovered.

June 20, 2017February 10, 2021

Beyond the 403(b) Plan: Top 5 Things to Know About Deferred Compensation for Non-Profit Executives

Tax-exempt employers may offer deferred compensation plans to their select executives to allow for retirement savings over and above the dollar limits applicable under a Section 403(b) plan. However the rules governing these arrangements, which fall under Section 457 of the Internal Revenue Code (Code), are complex and often misunderstood. Below are five things top things to keep in mind in this area, to get the most that the law offers without unpleasant tax surprises along the way.

1. It’s complicated……

First, there are two types of 457 plans: 457(b) plans and 457(f) plans. A tax-exempt employer can use both for the same executives but careful planning is advised. The (b) plans allow set-aside (in the form of employee deferrals or employer contributions) of only $18,000 (in 2017) per year, with no age 50+ catch-up allowance. Amounts set aside under a (b) plan are not taxed until they are distributed to the executive, an event which must be delayed until termination of employment/retirement, or on the occurrence of unforeseeable circumstances (narrowly defined). Taxation is delayed until distribution even though the amounts are generally “vested” (no longer subject to forfeiture) when they are contributed. By contrast there is no dollar limit on the amount that may be set aside under a 457(f) plan (subject to item no. 4, below), but the amounts are taxable upon completion of a vesting schedule (e.g., from 3 to 10 years). Therefore distribution in full almost always happens upon completion of vesting. Put most simply, (b) plans are a good way to double an executive’s 403(b) deferral budget, and (f) plans are a good way to help an executive catch up on retirement savings when a retirement or other departure date is within a 3 to 10 year time horizon. Further, in order for an exemption from ERISA to apply, participation in these plans must be limited to a “select group of management or highly compensated employees,” comprising no more than 5% – 10% of the total workforce, referred to as the “top-hat” group. In a small tax-exempt employer with 10 or 20 employees this may mean only 1 or 2 executives may participate.

2. You (usually) can’t roll to an IRA.

Generally when an executive is ready to take distribution of benefits from a 457(b) or (f) plan a taxable cash distribution is required, and rollover to an IRA is not an option. (One exception is when the executive moves to a new employer that maintains a 457(b) plan that accepts rollover contributions). Under a (b) plan, which may allow installment distributions over a period of years, the lack of an IRA rollover option is not so severe, but in a 457(f) plan setting, which generally calls for lump-sum distributions, the tax impact can be severe and the executives should be advised to do advance tax planning with their own CPAs or other tax advisors, well ahead of their planned retirement date or other vesting trigger. In my experience, lack of the IRA rollover option often comes as an unwelcome surprise to the covered executives.

3. The assets belong to the organization.

Section 457 plans are non-qualified meaning in relevant part that they assets the plans hold belong to the tax-exempt organization that sponsors the plan until the date(s) they are paid out to the participants. The assets must be held in an account in the name of the organization “FBO” the 457 plan account for the name of the executive. There is no form of creditor protection but it is possible to put in place a “rabbi trust,” so called because the trust format was first approved by the IRS on behalf of a synagogue for its spiritual leader. The rabbi trust will not protect the 457 assets from the organization’s creditors, but it will prevent the organization from reneging on the deferred compensation promise to an executive. This is particularly helpful for an organization that anticipates changes in its board structure after approval of a 457 arrangement.

4. The normal “reasonable compensation” rules still apply.

Tax-exempt organizations must pay only reasonable compensation, in light of the services provided, to employees and other individuals who comprise “disqualified persons,” a category that includes executive directors and other “C-suite” members. Under the “intermediate sanction” regime the IRS imposes excise taxes on individuals who benefit under, and organization managers (e.g., board members) who approve, compensation arrangements that fail the reasonableness standard. Deferred compensation arrangements must be reasonable in light of all other compensation and benefits provided to the executives in question and in most cases this will require a third-party compensation consultant’s evaluation and review. This is a vitally important and often-overlooked piece of deferred compensation compliance in the tax-exempt arena.

5. DOL notification is required.

As part of the ERISA exemption for top-hat deferred compensation plans, a tax-exempt organization must provide a “top-hat notification letter” to the Department of Labor within 120 days of implementing such a plan. Top-hat letters must be filed electronically. Failure to timely file a top-hat letter could mean that your deferred compensation plan is liable for ERISA penalties for failure to file annual information returns (Form 5500), to hold plan assets in trust, to make certain disclosures to participants, and on a host of other compliance points. The Department of Labor permits late filing of top-hat notification letters for payment of a modest fee. If your organization has a deferred compensation plan in place you should have ready access to a copy of the top-hat notification letter (or confirmation of its online filing) and should consider the DOL correction program if you cannot do so.

Having practiced law in Santa Barbara, California, a haven for charitable organizations, for over 20 years I have had the privilege of working with these special deferred compensation plan rules in many different factual settings and would be happy to help your organization navigate them in order to best retain and reward your valued executives.

June 17, 2011February 10, 2021

IRS, DOL Increase Scrutiny of Section 403(b) Plans

Tax-exempt organizations are now two and a half years into a major overhaul of the tax regulations and other rules governing Internal Revenue Code Section 403(b) retirement plans. Final regulations under Section 403(b) that issued in 2007, and were effective for most plans on January 1, 2009, for the first time required that all Section 403(b) arrangements – not just those that are subject to ERISA – be set forth in writing. Department of Labor (“DOL”) guidance also expanded the annual reporting duties of Section 403(b) plans effective in 2009, including for the first time the requirement that Section 403(b) plans with more than 100 participants obtain annual audited financial statements. These changes are part of an effort by the Internal Revenue Service (“IRS”) and DOL to bring Section 403(b) plans more into line with Section 401(k) and other plans maintained by for-profit employers.

Against this background, the IRS and DOL recently have increased their scrutiny of 403(b) plans and their sponsors. This increased scrutiny takes several forms.

A. Questionnaire re: “Universal Availability” in College, University Plans
I earlier wrote about an IRS questionnaire being sent to institutions of higher learning, to determine the extent to which they comply with the universal availabilty rule. Under that rule, if a Section 403(b) plan permits any employee to make salary deferrals to the plan, then it must offer the same opportunity to all employees (with limited optional exclusions). Colleges and universities often have many different categories of academic staff with widely varying work schedules, some of which end up classified as benefit-ineligible, at least with regard to group health coverage. Once an employee is classed as ineligible for group health coverage, it is not uncommon that they not be offered enrollment in other benefit plans, even those, such as Section 403(b) plans, that may have less restrictive eligibility. This is the kind of oversight that the questionnaire project is targeting. The Service will offer closing agreements to institutions that appear to be complying with the universal availability rule, and for those that improperly are excluding employees from making deferrals under the plan, it will extend the opportunity to self-correct. Self-correction would entail allowing impro9perly excluded employees to enroll in the plan and restoring (with employer money) missed deferrals the employees would have made if timely enrolled, plus earnings.

B. Increase in EBSA Audits of Tax-exempt Employers
In addition to the questionnaire project, there is at least anecdotal evidence that tax-exempt employers may also now be subject to increased plan audit activity from the DOL’s employee plans division, the Employee Benefits Security Administration. The Ryding Company, a long established administrative firm, reports an uptick in “full-blown” plan audit letters sent to its tax-exempt clients in Southern California.

According to Patricia Neal Jensen, J.D. , the company’s Senior Vice President, Marketing, EBSA inquiries have focused on timely deposit of salary deferrals (which is as soon as they reasonably can be segregated from payroll, or within 7 days for plans with fewer than 100 participants), and compliance with the written plan document rule. In addition to these issues, however, Ms. Jensen is noting for the first time inquiries about rates of return on plan investments, plan/investment committee agendas and minutes, investment policy statements, and due diligence reports on plan investment vendors and other service providers.

In Ms. Jensen’s experience, 403(b) investment vendors have not traditionally assisted clients with plan/investment committee guidance, or provided investment policy statements. Even now, when some vendors might be extending such services, plan sponsors should be wary of conflicted advice, particularly from vendors that have had a monopoly on plan investment options. Third party advisors who work in this area are offering fiduciary training for the plan/investment committee members, and helping employers put in place the procedural steps and documentation needed to demonstrate proper fiduciary functions.
I asked Ms. Jensen for her top recommendations to a tax-exempt employer, based on the audit activity she is seeing, and she replied as follows:

• Deposit employee salary deferrals and loan repayments within the 7-day safe harbor (small plans) or as soon as reasonably possible;
• Make sure your plan document is up to date and that you are administering the plan in compliance with the document;
• Hire a qualified, third party advisor who can work at the plan level… not from the perspective of the investment vendor;
• Have him or her take the plan out to bid to check on investment costs and performance
• Maintain investment/plan committee agendas and minutes; and
• Have an Investment Policy statement and do what it says.