The Rosenbaum Law Firm P.C. Blog

The Internal Revenue Service (IRS) has announced increases to user fees for letter rulings and determinations with respect to employee plans. The increases will take effect on January 4, 2021.

The IRS issued Rev Proc 2021-4, which will be effective January 4, 2021 and  will reflect increased user fees for the following types of letter ruling and determination letter requests:

• Letter ruling request for Five-Year Automatic Extension of the Amortization Period – Current fee = $1,000; New Fee = $6,500
• Form 5300 (Application for Determination for Employee Benefit Plan) – Current fee = $2,500; New Fee = $2,700
• Form 5307 (Application for Determination for Adopters of Modified Volume Submitter Plans) – Current fee = $800; New Fee = $1,000
• Form 5310 (Application for Determination for Terminating Plan) – Current fee = $3,000; Fee effective New Fee = $3,500

Over the last 10 years or so, IRS has increased these types of fees in the hopes that many plan sponsors don’t seek such rulings.

Kiplinger conducted a poll that showed that plan participants did raid their retirement plan accounts because of COVID.

The poll showed that nearly 60% of Americans withdrew or borrowed money from an IRA or 401k during the pandemic, and nearly two-thirds (63%) used those retirement savings to cover basic living expenses.

These numbers are staggering but are not surprising when you consider how many people truly live from hand to mouth, week to week.

My latest article on JDSupra.com can be found here.

It’s pretty simple as a 401(k) plan sponsor, you have a fiduciary duty to only pay reasonable plan expenses.

When terminating your third-party administrator (TPA), you need to identify the costs of de-converting the plan to the next TPA. Hopefully, those costs are known to you when you signed that original TPA contract. If not, understand the costs and how it bears to the annual fee that you have been paying. While a de-conversion/termination fee is an acceptable fee in the 401(k) plan business, it should bear some reason for the annual TPA fee. De-converting shouldn’t be more than the annual fee, it shouldn’t be half the fee. A month or two, maybe. As a plan sponsor and fiduciary, you can’t pay unreasonable plan expenses, you’d be breaching your fiduciary duty if you did.

When a plan sponsor has a late Form 5500 to file, one of the great things out there is the Delinquent Filer Voluntary Compliance Program (DFVCP). It gives the plan sponsor the opportunity to pay reduced civil penalties for voluntarily complying with the annual reporting requirements. The problem with the DFVCP is that it still doesn’t mean the end of the hassle of a late Form 5500.

A plan sponsor can file under the DFVCP program, pay the penalty, and still get hassled because the government is a little slow to identifying plans that file under the program. Filing under the program may not stop the Department of Labor and especially the Internal Revenue Service, from sending out a penalty letter for a late Form 5500 a month later. With government, sometimes on hand doesn’t know the other, so a plan sponsor may still have to fight a penalty letter.

I have a client who filed under the DFVCP and then received a letter from the Internal Revenue Service with a close to $100,000 penalty. Now they had to pay for me to send documentation to have that penalty waived. So while it’s a great program, there may be some hassle along the way.

People tend to hate change especially when things are good. The problem with a change in the retirement plan business that I find is when a plan provider you’re working with, gets purchased. The people who have led this plan provider usually see a sale as a time to cash out and eventual phaseout, while trying to maintain some order in the handful of years they have left.

I know a thing or two about provider purchases as both third party administrators I worked for, were purchased. The problem with any purchase that I find is that change is inevitable and that change tends to be the phaseout of many of the people that drew you to that plan provider in the first place. In addition, your habits with this plan provider will change, thanks to changes mandated by the new parent company. If the parent and now subsidiary are in the same line of business, there will be far more changes than if the parent is adding this new subsidiary as a new line of business.

Change can be good, but changes in the running of a plan provider you work with, are a little unsettling.

Where to sell Pooled Employer Plans? A good start is the states where employers have to offer retirement plans. 12 states and one city have enacted laws that, generally, require certain employers without their retirement plans to make the state-sponsored plan available to their employees.

The one thing about state plans like CalSavers in California is so many employers are a little hesitant in having government play a part in retirement savings, especially since the Federal government has made a mess of Social Security. Employers with five or more employees must participate in CalSavers if they don’t already have a workplace retirement plan. Wouldn’t a Pooled Employer Plan? To quote Alaska former Governor Sarah Palin: “You betcha’.”

The Consolidated Appropriations Act, 2021 signed into law by President Trump, also provided relief to distributions from a retirement plan as a result of a declared disaster.

The Act provides that the 10% early withdrawal penalty doesn’t apply to qualified disaster distributions; that special rules apply to retirement plan distributions used for qualified disaster area home purchases; and for increases in the limit for retirement plan loans made because of a disaster.

The Act provides that the pre-59 ½ early 10% distribution penalty doesn’t apply to any qualified disaster distribution. A “qualified disaster distribution” is any distribution made from an eligible retirement plan: (i) on or after the first day of the incident period of a qualified disaster and before the date which is 180 days after the date of the enactment of the, and (ii) to an individual whose principal place of residence was located in the qualified disaster area and who sustained an economic loss by reason of such qualified disaster. An individual may not receive a qualified disaster distribution that exceeds the excess of $100,000 over the aggregate amounts treated as qualified disaster distributions received by such individual for all prior tax years. If an individual has to include any part of the distribution in income, they can spread it over a three-year period.

The Act also allows an individual who received a distribution to purchase or build a home in a qualified disaster area but was unable to do so, to repay the distribution to an eligible retirement plan. The eligible retirement plan can be a plan for which the individual is a beneficiary and to which a rollover contribution of such distribution could be made. This also includes IRAs. For the special repayment rule to apply, a “qualified distribution” means any distribution which was to be used to purchase or build a home in a qualified disaster area, but which was not used because of the qualified disaster. The distribution must have been received within 180 days before the first day of the incident period and ending within 30 days after the expiration of the incident period.

The Act also increased the amount that a qualified individual can withdraw as a plan loan on account of a disaster. A loan from a retirement plan is limited to the lesser of $50, 0000 or 50% of the participant’s vested account balance in the plan. The TAct increased the maximum amount to the lesser of $100,000 or 100% of the participant’s vested account balance. For purposes of this new rule, a “qualified individual” is an individual whose principal residence was located in the qualified disaster area who sustained an economic loss by reason of such qualified disaster.

In addition, the Act permits qualified individuals to delay the repayment of loans, including previously made loans, for one year if the payment due date occurs during the period beginning on the first day of the incident period and ending on the date which is 180 days after the last day of the period. Any subsequent repayments will be adjusted to reflect the delay and any interest that accrued during the delay.

The Consolidated Appropriations Act, 2021, signed into law by President Donald Trump on December 27, 2020, provided COVID-19 relief, including some retirement plan law changes.

The COVID-Related Tax Relief Act of 2020, which is Subtitle B of the Act, amends the CARES Act to provide that in-service distributions from money purchase pension plans can qualify as COVID CARES Act distributions. This change is effective as if made part of the CARES Act.

Money purchase plans still do exist and they should have been treated the same as other Defined Contribution Plans, as it pertains to the CARES Act.

The Consolidated Appropriations Act, 2021, signed into law by President Donald Trump on December 27, 2020, provided COVID-19 relief, including some retirement plan law changes.

Section 411(d)(3) of the Internal Revenue Code requires retirement plans to provide for 100% vesting upon termination or partial termination of a plan. A partial termination may be deemed to occur when an employer reduces its workforce (and plan participation) by 20%. The turnover rate is calculated by dividing employees terminated from employment (vested or unvested) by all participating employees during the applicable period, which is usually a calendar year.

The Act changes the rules temporarily, by changing the measuring stick from the period of COVID emergency, with the hopes that affected employers could re-hire employees previously terminated before March 31, 2021.

Section 209 of the Act provides that a plan will not be treated as having had a partial termination during any plan year which includes the period beginning March 13, 2020, and ending March 31, 2021, if the number of active participants in the plan covered on March 31, 2021, is at least 80% of the number on March 13, 2020. This means businesses that may have suffered greatly from the pandemic, forcing layoffs and plant closings, but whose employment numbers rebound by the end of March of 2021, will not be required to fully vest those who were terminated.