Hyden, Miron & Foster, PLLC Law Blog

Monday, July 2, 2018

What's New With Your Company's Retirement Plan

By: Danny Broaddrick, ERISA/Qualified Plan Counsel


Recent legislation has impacted various aspects of many qualified retirement plans such as 401(k), profit sharing and even defined benefit (pension) plans to some degree. Some of the significant changes to note are as follows:

Internal Revenue Code change affects Hardship Distribution rules after December 31, 2017

In passing the Tax Cuts and Jobs Act (Tax Act) on December 20, 2017, Congress did not specifically change the rules of the Internal Revenue Code, or related regulations, that specifically cover in-service “hardship-based” participant withdrawals from qualified retirement plans such as 401(k) plans.

However, if a qualified retirement plan, ie. 401(k), profit sharing plan, etc., permits in-service “hardship-based” participant withdrawals, one change made by Tax Act is important for employers to understand, especially if the employers’ plan allows participant hardship withdrawals and uses the hardship criteria referred to by the IRS as the “safe harbor” hardship criteria. The “safe harbor” hardship criteria are specific circumstances under the broader requirement that the participant must have an “immediate and heavy financial need” to make the hardship withdrawal. Using these limited criteria, as opposed to a general category, is generally beneficial to the employer when the employer acts as the Plan Administrator determining the participant’s eligibility for the withdrawal.

One of these limited categories is for expenses for the repair of damage to the participant’s principal residence that would qualify for the casualty deduction under Section 165 of the Internal Revenue Code (determined without regard to a minimum threshold that applies to the casualty loss deduction). Prior to January 1, 2018, Section 165 (a) provided: “there shall be allowed as a deduction any loss sustained during the taxable year and not compensated for by insurance”.

Effective January 1, 2018 through December 31, 2025, Section 165 has been changed by the Tax Act to require that the loss must result from a Federally-declared disaster. Since the requirements for the withdrawal are tied to losses that would be eligible under IRC Section 165, the new requirement in IRC Section 165 also applies to the hardship withdrawal. This is a significant change because, previously, the withdrawal may have been avail-able for uncompensated damage to the taxpayer’s home resulting from any fire, storm, flood or other isolated incidents. However, under the Tax Act provisions, in order to be deductible under Section 165 (and thus eligible for “safe harbor” hardship withdrawal category), such a loss must result from a Federally-declared disaster.

Many anticipate that Congress may instruct the IRS to provide guidance that eliminates this new requirement, but until such time, compliance requires Plan Administrators to apply of the new restriction.

More Hardship Distribution rule changes to take effect after December 31, 2018

In addition to the Tax Act, the Bipartisan Budget Act of 2018 was enacted on February 9, 2018 (Spending Act). Part of this Act requires that the IRS make certain additional changes to applicable regulations that govern participant hardship withdrawals. Employers that are 401(k) plan sponsors need to understand these recent changes, and likely adjust procedures in their administration of hardship withdrawal requests. The Spending Act changes are effective January 1, 2019, and will likely re-quire Plan language amendments to incorporate the new rules.

A positive resulting from the Spending Act is that it directly expands availability of hardship withdrawals to qualified non-elective contributions, qualified matching contributions, and certain earnings. These amounts are not eligible under current rules.

The Spending Act also changes current rules that require a participant, in some circumstances, to have exhausted any available plan loans before taking a hardship withdrawal.

Further, under current IRS regulations, a hardship withdrawal will be deemed “necessary to satisfy an immediate and heavy financial need” only if certain requirements are met. These include that the participant is restricted from contributing salary deferrals to the plan, and all other plans maintained by the employer, for at least six (6) months after taking the withdrawal. The Spending Act directs the IRS to draft regulations to remove the six-month salary deferral suspension in order for the withdrawal to be eligible as a safe harbor hardship withdrawal. This is a welcomed change for employers for payroll purposes, as well as for participants.

Recent Department of Labor legislation regarding “disability” determinations by Employers as Plan Administrators?

The Department of Labor (DOL) issued regulations (DOL Regulation §2650.503-1) modifying the claim procedures that must be used by a plan providing disability benefits. The new regulations became effective April 1, 2018. They only apply to plans that (1) are subject to ERISA, (2) provide for “disability benefits”, and (3) require the plan administrator to determine whether an individual is disabled.

“Disability benefits” include numerous rights that the retirement plan terms may give participants in the event they meet the plan’s definition of “disability”. The language of a plan should be reviewed to determine applicability of these new procedures to actual plan features and benefits. Examples of such disability-related benefits could include: acceleration of the vesting schedule, waiver of service conditions to receive annual contributions, etc.

The regulations do not apply if a Plan Administrator (often defined as the Employer) does not make the determination of disability (such as where disability is determined by the Social Security Administration or where a participant’s eligibility for disability benefits is determined under employer’s long-term disability program). If the plan’s language is vague or silent as to whom is determining disability, a conservative approach may be to assume that the Plan Administrator is making the determination.

When is the next two year period when my retirement plan will have to have to have a language update or “restatement”?

1. When do employers need to up-date the language of their de-fined contribution prototype plans, such as 401(k) and profit sharing plans?

The IRS has not announced the next two-year “restatement window” when employers are required to update the language of their defined contribution prototype plans, such as 401(k) and profit sharing plans. Specimen plan templates called “prototypes” must be submitted by October 1, 2018 by plan drafters and suppliers. It is likely the IRS will take two years to review and approve these plans. The IRS will announce the start of the restatement window shortly before all plans are approved. Employers will then have at least two years after IRS approval to restate/update their plans. It is anticipated that the restatement window will begin in 2021 and end in 2023.

2. When do employers need to update the language of their defined benefit pension plans?

In contrast to the above stated period for defined contributions plans, the restatement window for defined benefit prototype plans is currently under-way as of April, 2018. An important change in this restatement period is that “cash balance” defined benefit plans will be eligible to be restated on to a prototype, or IRS pre-approved, plan document. Historically this type of advanced plan has not been eligible for the prototype program.

How are the costs for a plan to submit a correction under the Voluntary Correction Pro-gram determined after January 2, 2018?

The Employee Plans Correction Resolution System, Voluntary Correction Program (“VCP program”) allows sponsors of retirement plans to obtain IRS approval for the voluntary correction of most plan operational errors. If not timely corrected and identified in an IRS plan audit, such errors could jeopardize a plan’s tax-exempt status under the Internal Revenue Code and/or be costly to the employer by imposition of penalties and sanctions. In the past, the IRS has charged submission or “user” fees for submissions under the VCP program based on a plan’s total participant count. Discounted sub-mission fees were offered for certain types of streamlined submissions.

Effective January 2, 2018, the Internal Revenue Service (“IRS”) has revised the structure of fees for submissions in the VCP program. The new fee structure is based on a plan’s total asset value and represents a significant change from the previous methods the IRS used to determine and charge the VCP fees. While the new structure will significantly lower the user fee for some applicants, it raises the fees for others (particularly small plans).

The new simplified submission fee structure based on total assets as follows:

Total Plan Assets

User Fee

$500,000 or less


$500,001 to $10,000,000


Over $10,000,000



In general, the fees are determined based on the end of year net plan assets, based on the most recently filed Form 5500. For plans not required to file a Form 5500 series return, the fee is determined by the net plan assets as of the last day of the most recent plan year preceding the VCP filing. Since the IRS has eliminated the special fees for certain streamlined VCP submissions, the filing fee is now the same for any type of error.

This change benefits many larger plans as they can reduce the VCP user fee from potentially $15,000 to a maximum fee of $3,500. Conversely, the change will negatively impact many smaller plans which may see an increase in the fee applicable fee based on assets rather than the number of participants.

The self-correction program (“SCP”) under EPCRS is still available, with no user fee, to correct certain eligible operational errors.

Employers should consult a qualified ERISA/Qualified Plan attorney for assistance with plan error corrections under the Employee Plans Correction Resolution System.

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