Newslink: Retirement

October 2018
Retirement Plans Administration Update


As we approach the end of the 2018 year, this newsletter highlights updates for your retirement plans.  It is important to review this information, so you are aware of changes on the horizon for retirement plans.  Please contact your Client Service Manager if you have any questions.

Ability to Use Forfeitures to Offset Fully Vested Contributions in 401(k) Plans

The IRS issued final regulations recently allowing employers to reduce 100% vested contributions by forfeitures in the plan, thereby reducing the deposit requirement of the employer.  Contributions which are 100% vested to participants are safe harbor contributions, qualified nonelective contributions (QNEC) and qualified matching contributions (QMAC).  For example, if an employer must fund a safe harbor contribution of $50,000 and there are forfeitures in the plan of $20,000, the prior rules did not allow the employer to reduce the deposit to $30,000.  The final regulations now allow employers to offset 100% vested contribution deposits by the forfeitures.  TRI-AD’s clients’ 401(k) plans contain the option to contribute QNECs and QMACs, and several provide for safe harbor contributions.  If you are a TRI-AD client, we will be providing an amendment to your 401(k) plan(s) before the end of 2018 to bring your plan in compliance with the regulations.  Please keep an eye out for the amendment, and sign and date accordingly.

Hardship Distribution Changes for Plan Years Beginning in 2019 for 401(k) and 403(b) Plans

As we discussed in our legislative update webinar earlier this year, the Bipartisan Budget Act of 2018 (BBA) included hardship distribution relief for participants effective for plan years beginning on or after January 1, 2019. The IRS did not change the rule that participants must have an immediate and heavy financial need in order to qualify for a hardship distribution, nor did they expand the hardship safe harbor rules to include additional circumstances in which participants can take a hardship.  Those rules remain the same so participants must still prove that they are eligible for a hardship distribution for the same reasons most plans currently allow, .e.g., prevention of a foreclosure of a principal residence, medical expenses, etc.  Please note that some of these rules will not impact plans that follow the facts and circumstances determination for hardship distributions.  Most plans follow the safe harbor rules and only allow hardships for a list of particular circumstances. Unfortunately, the IRS has not yet issued guidance regarding these rules, but TRI-AD intends on implementing these new rules for our clients’ retirement plans for plan years beginning in 2019. The Act makes the following changes:

  • Participants no longer required to take a loan before receiving a hardship distribution.  Under the current hardship rules, participants are required to exhaust all funds available to them before taking a hardship distribution.  If the plan allows for participant loans and there is a loan available to the participant, under the current rules, the participant must take a loan before taking a hardship distribution.  Under BBA, the participant now can take a hardship distribution without taking the loan first.
  • Eliminates the 6-month deferral suspension.  Under current hardship rules, employees may not continue to defer money into the plan for six months after they take hardship distributions.  Under BBA, this restriction has been removed and participants may continue to defer into the plan after they take hardship distributions.  It is unclear what happens with participants who are in their 6 month suspension period on January 1, 2019 so hopefully the IRS guidance will address this matter.  The most conservative approach is to continue the 6 month suspension into 2019 and then allow the participant to defer after it expires. 
  • Expands the type of money that participants can receive as a hardship.  The current hardship rules restrict the type of accounts that participants can take money out of for hardship distributions.  Current rules state participants can take a hardship from their 401(k) or 403(b) deferral accounts (not including earnings on the deferrals post 12/31/1988), matching contributions or profit sharing contributions. Under the new BBA law, participants will be able to take hardship distributions from all accounts including:
    • Safe harbor contribution accounts (Qualified Automatic Contribution Arrangements contribution accounts are excluded, but needs clarification by IRS)
    • Qualified Nonelective Contributions (QNEC)
    • Qualified Matching Contributions (QMAC)
    • Earnings for all eligible sources including post 12/31/1988 earnings on elective deferrals (this is not allowable for 403(b) plans yet)

TRI-AD will incorporate these new rules into our operations so that hardships are more available to 401(k) and 403(b) participants.  TRI-AD clients who do not wish to expand the hardship rules as indicated above should speak with their Client Service Manager.  401(k) plan documents will need to be amended to incorporate the new hardship rules by the end of the plan year beginning in 2019. It is not clear when 403(b) plans must be amended. TRI-AD will prepare the necessary amendments once the IRS has issued guidance.

Fiduciary Rule Update

The Department of Labor (DOL) investment advice fiduciary rules and associated prohibited transaction exemptions are no longer in place.  Now we are back to the rules that were in place prior to June 2016.  In general, individuals are a fiduciary if they:

  • exercise any discretionary authority or discretionary control with respect to plan management or exercise any authority or control with respect to management or disposition of plan assets;
  • render investment advice for a fee or other compensation, direct or indirect, with respect to any assets of the plan, or has any authority or responsibility to render such advice even if not actually rendered; or
  • have any discretionary authority or discretionary responsibility in the administration of the plan.

The DOL’s guidance over the past couple of years has revolved around the investment advice component of the definition.  The fiduciary investment advice regulations and associated prohibited transaction exemptions were vacated by a federal court, so the prior rules are now in effect.  Those rules indicate a five-factor test to determine whether an individual is a fiduciary under the investment advice rules.  The individual is a fiduciary if the individual renders investment advice:

  • as to the value of securities or other property, or makes recommendations as to the advisability of investing in, purchasing or selling securities or other property;
  • on a regular basis;
  • pursuant to a mutual agreement or understanding with the plan or plan fiduciary;
  • with the understanding that the investment advice services will serve as the primary basis for investment decisions with respect to plan assets; and
  • individualized to the needs of the plan.

The key issue with the investment advice rule is when investment advisors receive compensation, it is uncertain if a prohibited transaction occurs.  For this reason, the DOL announced that until further guidance is published, the DOL will not pursue prohibited transaction claims against investment advice fiduciaries who are acting in good faith to comply with the DOL’s fiduciary rules and prohibited transaction exemptions that were vacated by the Court.

What’s next?  The Securities Exchange Commission (SEC) has proposed its own best interest standards for investment advisers and broker-dealers.  The DOL will more than likely publish their own revised regulations and hopefully the two agencies will coordinate the new guidance before the rules are finalized.  Once the government agencies publish final guidance, we will inform you of the changes.

Check Your 2017 5500 Form IRS Acknowledgement Letter for an Extension of Time

For plan sponsors who did not file their December 31, 2017 Form 5500 by July 31, 2018, an extension was filed to extend the due date of the 5500 form to October 15, 2018.  When an extension is prepared for your plan, the IRS sends you an acknowledgement of the extension of time.  According to others in the industry, some plan sponsors have received erroneous IRS extension notices.  If an extension was filed for your plan, please review your IRS acknowledgement letter to ensure the IRS has approved your extension to file your 2017 5500 no later than October 15, 2018.  If you have a different plan year than a calendar year, you should also review the IRS notices to ensure you have the correct filing due date.  If your letter has an error, please notify your Client Service Manager.

2019 COLA Limits to be Published in October

The IRS will publish the 2019 cost-of-living adjustments (COLA) for retirement plans and health and welfare plans in October 2018. It is anticipated that several of the limits will be increasing for 2019. TRI-AD will notify you once the limits are published, so keep an eye out for our annual COLA email.