2008 Agenda
Rev. 12/06/07, E-mail Alert 2007-166 Updated 12/29/08

2008: Another Year of Change
As we look to 2008, we see a list of changes that we know about already. The retirement plan industry is constantly in rapid change. And 2008 is no exception. There are plan document changes in store, and the Pension Protection Act of 2006 (PPA) calls for a number of changes to both defined contribution and defined benefit retirement plans. This article reviews the current list of 2008 changes for defined contribution plans. Of course, legislative and/or regulatory changes could call for more additions. Stay tuned.

Restatement of Preapproved Defined Contribution Plans. By March or April of 2008, the IRS will announce the release of opinion and advisory letters for preapproved defined contribution plan sponsors’ documents (i.e., master and prototype plans and volume submitter EGTRRA plans). The IRS will also announce the deadline by which all employers using such plans must amend and restate onto the approved EGTRRA plan document. (The period is expected to be about two-years.)

Final Section 415 Regulations Plan Amendment. The deadline for adopting the final 415 regulations is the end of the first plan year starting on or after July 1, 2007. Calendar year plans must adopt this amendment by December 31, 2008. Included in these regulations are the new post-severance compensation rules. (While we urge our clients to complete the amendment by the end of the plan year, clearly since this is not a discretionary amendment, amendments must be done by the due date including extensions for the filing of the tax return, if later.)

PPA Changes. These are the major changes affecting defined contributions plans for the 2008 plan year.

Direct Rollover to a Roth IRA. Under PPA, funds from a qualified plan like a 401(k) may be directly rolled over to a Roth IRA. Prior to this change, the rollover went to a traditional IRA, which could then be converted to a Roth IRA. We await guidance from the IRS on the taxation and reporting of this new transaction.

Nonspouse Beneficiary. The IRS has changed this from an optional plan provision to one that is required. This is effective as of 2008. Thus, all qualified plans will operate under this PPA provision in 2008. The plan document amendment for PPA provisions is not required until 2009.

Bonding Increase. For non-ESOP defined contribution plans with employer securities, the bond is 10% of plan assets up to a maximum of $1,000,000 (increased from $500,000). FAB 2008-4 explains more on bonding.

Automatic Enrollment Plan Testing Change. For any eligible automatic enrollment plan subject to ADP/ACP testing, the time frame for making a refund for a failed ADP/ACP test without a 10% penalty has been extended to the end of the sixth month after the end of the plan year being tested (i.e., June 30 for a calendar year plan).

Automatic Enrollment 90-day Revocation Period. An automatically enrolled employee may opt out of deferring and request a withdrawal of all deferrals within 90 days of the first payroll from which deferrals were taken. In such a case, the plan is to return all deferrals to the employee with no IRS (pre-59½) or plan penalty. At this time, this appears to only be available to plans with a Qualified Default Investment Alternative (QDIA), thus plans which do not offer participant direction appear not to be eligible for this return ability.

Qualified Automatic Contribution Arrangement (QACA). This new automatic enrollment plan option is generating a great deal of buzz and may become quite popular. Or like designated Roth contributions, it may fizzle; we will have to wait and see the actual level of usage of this new program.

Qualified Joint and Survivor Annuity (QJSA) Option. New optional survivor annuity provisions must be made available under certain qualified plans. The new rule applies only to plans subject to QJSA rules, such as defined benefit and money purchase pension plans. If the plan’s normal QJSA survivor annuity payable to the spouse after the participant’s death is less than 75% of the annuity payable while both spouses are alive, the plan must allow the participant to elect an optional survivor annuity with an applicable percentage of 75%. Similarly, if the plan’s normal QJSA survivor annuity is greater than or equal to 75% of the annuity payable while both spouses are alive, the plan must allow the participant to elect an optional survivor annuity with an applicable percentage of 50%. Thus, for example, if a plan’s normal QJSA survivor annuity is 50%, the survivor annuity provided under the new optional survivor annuity that the participant may elect, must be 75%. This appears to just add more confusion; since the employer has already chosen what spousal options to offer, and now the participant can alter what is otherwise available.

Other Changes

403(b) Plan Document. The IRS requires all 403(b) plans to have a plan document in place by the end of the 2008 year. We have a 403(b) plan document compliant with the final 403(b) regulations available soon. In December 2008, IRS Notice 2009-3 extended the deadline for a document to December 31, 2009, effective January 1, 2009.

Cross-testing 401(k) Defined Contribution Prototype. This document will be available when the IRS approves the EGTRRA preapproved defined contribution documents in early 2008. It is anticipated that most cross-tested clients will be able to use this prototype. However, prototype plans will be more restricted than volume submitter and individually designed plans

Bill Grossman, QPA