Taxation, Finance & Corporation

Monika, the current economic condition in this country has plan sponsors and plan participants

worried about their 401(k) retirement accounts, both today and in the future.

As a society we’re getting older and less frugal. This is particularly alarming in light of the current economic factors

impacting our nation. Although more than $11.7 trillion is currently invested in retirement plans, this amount was

approximately $16 trillion in September 2008. This obviously reflects that the economic downturn impacted retirement

plans. Almost everyone lost money in their retirement accounts and many people either have lost jobs or are facing the

possibility of losing their jobs. We are finding that many participants are now looking to their retirement plans for temporary

relief of their financial distress. We are doing our best to assist plan sponsors and participants to understand the rules for

different ways money can be taken out of the plan. We want to caution plan participants to save for retirement and avoid

depleting these savings for anything short of an emergency. Only 44% of families nearing retirement have an IRA with an

average account balance of $60,000 or more. The question isn’t at what age do you want to retire, it’s at what income.

To make ends meet, participants are looking at plan loans for temporary relief. Which types of

plans can offer plan loans?

Some plans, such as profit-sharing, 401(k) and money purchase plans, are permitted to offer loans to plan participants. The

availability of loans will be stated in the plan document. IRA-based plans, such as SEPs, SIMPLE IRAs and SARSEPs, and

traditional and Roth IRAs, are not permitted to provide loans.

Are there limitations on the amount of the loan?

The amount participants may take for a loan is limited to the lesser of: 50% of their vested account balance or $50,000. The

law, and some plans, allow loans of $10,000 if 50% of a participant’s vested account balance is less than $10,000.

Loans need to be repaid back to the account. What are the requirements for loan repayments?

The participant must make payments at least quarterly, over a period not exceeding five years. There is an exception to the

five-year rule for loans taken out for the purchase of the participant’s primary home.

When are there taxability issues with plan loans?

Loans that initially don’t meet the requirements of the Code because they aren’t limited to 50% of the vested account

balance or they exceed $50,000 are treated as a distribution when the loan is made and taxed accordingly. Missing

payments cause the loan to go into default whereupon the outstanding balance on the loan will be taxed as if distributed

to the participant. Sometimes, this is just a payroll mix-up. Suddenly, the loan payments are no longer coming out of

the participant’s payroll check. If the error is not corrected, then the law treats the loan as a deemed distribution and it

is includible in the participant’s income. Some plans allow for a “cure period” in which participants can make up missed

payments.

The number one taxability issue we see with loans occurs when a participant terminates employment with an outstanding

loan balance. In this situation, plans usually offset the distribution of the participant’s account by the amount of the

outstanding loan balance. For tax purposes, the amount of the distribution includes the loan balance at the time of the

offset. If the participant wants to roll over his or her entire benefit, then he or she must come up with money to cover

both the loan offset and the 20% mandatory withholding that applies to the full amount including the loan offset. The 10%

additional early distribution tax applies if the person is under age 55 unless another exception to this early withdrawal tax

applies.

Can owner-employees borrow from the plan?

An owner-employee is allowed to borrow from the plan. However, he or she must follow the same rules as any other

participant. The loan must be a formal loan meeting all of the loan requirements regarding amounts and repayment. If it

does not, then it may be a prohibited transaction. What is not allowed is the employer dipping into plan assets – maybe

informally borrowing a little just to tide him or her over – to meet payroll or pay other bills and then repay it later. This is

never permitted.

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Another problem we frequently encounter in tough economic times is when an employer withholds salary deferrals from

employees’ pay intending to deposit the money in its plan, but doesn’t. The employer “borrows” the money, maybe to

cover payroll, or rent or whatever, thinking that it won’t hurt to wait a few weeks until the withheld salary deferrals are

deposited into the plan’s funding vehicle. Again, this is never okay. The Department of Labor looks very harshly on this

fiduciary violation. The money must be deposited into the plan as soon as the money can reasonably be segregated from

the employer’s assets.

Let’s turn our attention to hardship distributions. What type of plans can offer hardship

distributions?

You’ll only find hardship distributions in defined contribution plans, such as 401(k), 403(b) and 457 plans.

What are the requirements for hardship distributions?

The regulations for 401(k) plans require that there has to be an “immediate and heavy financial need,” as defined in

the plan. A distribution is deemed to be for an “immediate and heavy financial need” if it is for medical expenses, the

purchase of a principal residence, tuition and related education expenses, the prevention of eviction or foreclosure,

funeral expenses and repairing casualty damage to the employee’s house. Also, a distribution must be necessary to

satisfy an immediate and heavy financial need as defined by plan terms. The participant must first exhaust all loans and

distributions, other than hardship distributions, available under all plans of the employer. Some plans may also require

that the employee not have other resources available to meet the need, including his or her spouse’s and minor children’s

assets.

I think it is important to note that, under a directive contained in the Pension Protection Act of 2006, the 401(k) hardship

rules have been modified to treat a participant’s beneficiary the same as a participant’s spouse and dependents for

purposes of qualifying for certain hardship distributions. Certain hardship distributions (medical, tuition and funeral

expenses) can now be made to a participant based upon the need of a grandchild or domestic partner if that individual

has been designated as a beneficiary under the plan.

When are there taxability issues with hardship distributions?

Employees should remember that hardship distributions are not tax-free money. Generally, they are subject to income tax

in the year of distribution and, if the employee is under the age of 59 ½, to the10% early distribution tax unless another

exception to this early distribution tax applies. However, these distributions are not subject to the mandatory 20% income

tax withholding.

Any final words of caution you wish to provide to the plan sponsors?

Yes. If you wish to allow loans, hardship distributions, and even the modified hardship rule for the participant’s beneficiary,

the plan must include the language allowing for these features. Too many times my examination agents find that the plan

sponsor allows plan loans and hardship distributions because they may have read or heard that they are permitted by law,

but their plan specifically prohibits them or is silent. I would suggest that every plan sponsor read their plan before they

offer any of these features to their participants.

A Message from the Advisory Committee on Tax Exempt and Government Entities

(ACT): Stakeholders: please participate!

Important official survey asks how the new retirement plan IRS determination letter process is

working and how it might be improved

An IRS advisory council is studying the retirement plan document determination letter process. A new online survey

form asks for the views of employers, benefits attorneys, third-party administrators, consultants, providers of master

& prototype documents and other stakeholders. In 2005 the IRS radically changed the determination letter process by

creating 5-year and 6-year cycles for amending and filing individually designed, volume submitter and M&P retirement

plan documents. Further changes were made in 2007. The advisory council wants to know how the process is working

and how it might be improved, including the process for making required amendments or restatements.

Employee Plans Published Guidance

(July 2009 - September 2009)

Regulations

T.D. 9459, 74 Fed. Reg. 45993 Allows §414(d) governmental plans (including governmental

§403(b) contracts and governmental §457(b) plans) to

continue using a reasonable good faith interpretation of

§401(a)(9) to comply with the required minimum distribution

rules instead of complying with the regulations under

§401(a)(9).

REG-159704-03, 74 Fed. Reg. 48030 Updates the eligibility requirements and standards for performing

actuarial services for ERISA-covered employee

pension benefit plans as well as actuarial continuing education

requirements.

Revenue Rulings

Rev. Rul. 2009-18, 2009-27 I.R.B. 1 Lists all guidance that is obsolete or superseded by the

403(b) final regulations under §1.403(b)-1 through 11.

Rev. Rul. 2009-30, 2009-39 I.R.B. Gives two examples of how a 401(k) plan sponsor may

automatically increase an eligible employee’s default contribution

percentage.

Rev. Rul. 2009-31, 2009-39 I.R.B. Provides that qualified plans may be amended to permit

certain annual contributions of the dollar equivalent of

unused paid time off as employer contributions or elective

401(k) contributions.

Rev. Rul. 2009-32, 2009-39 I.R.B. States that qualified plans may, under certain circumstances,

allow employees upon termination of employment

to contribute the dollar equivalent of unused paid time off

to the plan.

Revenue Procedures

Rev. Proc. 2009-36, 2009-35 I.R.B. 304 States that a §414(d) governmental plan’s remedial

amendment cycle will not end before the end of the 91st

day after the close of the first legislative session that

begins more than 120 days after the plan’s determination

letter (provided its determination letter application was

submitted timely to the IRS). The sponsor of an individually

designed governmental plan may elect Cycle E (instead of

Cycle C) as the plan’s initial (EGTRRA) remedial amendment

cycle.

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Rev. Proc. 2009-43, 2009-40 I.R.B. Provides for automatic IRS approval of a revocation

request under WRERA §204 (revoking an election to

treat the plan as being funded at the prior year’s certified

level with IRS’s approval) if certain requirements are met.

This Rev. Proc. also states special rules for automatic IRS

approval of revocation requests made pursuant to the resolution

of arbitration and that the IRS will consider revocation

requests that do not satisfy the standard for automatic

approval if the requests are submitted in accordance with

IRS’s normal ruling letter procedures.

Notices

Notice 2009-65, 2009-39 I.R.B. Provides sample automatic enrollment plan language

that a 401(k) plan sponsor can adopt with automatic IRS

approval.

Notice 2009-66, 2009-39 I.R.B. Includes guidance to help small employers use automatic

enrollment for their SIMPLE IRA plans.

Notice 2009-67, 2009-39 I.R.B. Provides sample automatic enrollment plan language that

a SIMPLE IRA prototype plan sponsor can adopt with

automatic IRS approval.

Notice 2009-68, 2009-39 I.R.B. Contains two updated safe harbor 402(f) notices plans may

provide recipients of an eligible rollover distribution. These

updated notices reflect law changes (such as information

on a distribution from a designated Roth account under an

employer plan) and explain rules that apply in special situations

(such as when a distribution is made to a surviving

spouse or other beneficiary).

Notice 2009-71, 2009-35 I.R.B. 262 Announces the IRS’s plan to issue guidance for eligible

combined plans under §414(x) and requests comments on

issues related to these combined plans.

Notice 2009-75, 2009-39 I.R.B. Describes the federal income tax consequences of rolling

over an eligible rollover distribution from §401(a) qualified

plans, §403(a) annuities, §403(b) plans or eligible §457(b)

governmental plans to a Roth IRA.

401(k) Phone Forum Rescheduled to September 30, 2009

The 401(k) Phone Forum originally scheduled for August 6, 2009, has been rescheduled to

September 30, 2009, at 2:00 p.m. EST. Speakers will be Roger Kuehnle, Senior Tax Law

Specialist, and Lisa Mojiri-Azad, Senior Technical Reviewer, Office of Division Counsel/

Associate Chief Counsel, TE/GE.

Those registered for the originally scheduled event in August do not need to reregister. New

participants can register here.

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We’re Glad You Asked!

We had to let 4 of our 10 employees go this year leaving only 6 employees remaining in our

retirement plan. My accountant told me this may constitute a “partial termination.” What does

this mean?

Generally, if more than 20% of your total plan participants left in one year because of a lay-off, then your plan may have

incurred a partial termination. The law requires that all “affected participants” be fully vested in their account balance upon

the date of full or partial plan termination. This means that affected employees must become 100% vested in all employer

contributions regardless of the plan’s vesting schedule.

Generally, an “affected participant” in a partial termination is any one who has left employment for any reason, during the

period in which the partial termination occurred, and who still has an account balance under the plan. Some plans wait

until a participant has 5 consecutive 1-year breaks in service before they forfeit his or her nonvested account balance. For

these plans, participants who left during the determination period and who have not had 5 consecutive 1-year breaks in

service are affected participants.

Additional Resources:

Code §411(d)(3)

Revenue Ruling 2007-43

Does the 2009 required minimum distribution (RMD) waiver apply to defined benefit plans?

No, 2009 RMDs are waived only from defined contribution plans (DC) and IRAs. They are still required from most defined

benefit plans (DB). However, in some rare instances, a DB plan may provide a benefit based in part on the balance of a

participant’s separate account. This type of an account, known as §414(k) account, is treated as a DC plan and is covered

by the 2009 RMD waiver.

Additional Resources:

Code §401(a)(9)

Notice 2009-9

§201 of the Worker, Retiree, and Employer Recovery Act of 2008

Web Spins - The Retirement Plans Site

We’re back: Web Spins - the column that takes you for a quick spin around the “Retirement Plans Community” Web page.

We’ve been busy since our last column. Be sure to check out our latest postings:

Retirement & Savings Initiatives

On September 5, 2009, the Obama administration announced new Retirement & Savings Initiatives. The initiatives

expand opportunities for automatic enrollment in plans, permit workers to save payments they would receive for unused

vacation or other similar leave in their retirement plan, help employees and employers better understand their tax-favored

savings options and make it easier to save tax refunds.

• Life Events That Can Affect Retirement Savings

Starting a job, marriage, divorce, retirement, death – major life events affect your retirement planning. Learn

more about how major life events may influence your retirement.

• Information about Rollovers

We’ve updated our resources for retirement plan rollovers.

403(b) Retirement Plan Mini-Course for Employers

A presentation for employers and sponsoring organizations with 403(b) plans.

403(b) Retirement Plan Mini-Course for Employees

A presentation for employees on how a 403(b) plan works.

TE/GE ACT Report Issued June 10, 2009

The ACT presented four recommendations to the IRS Commissioner and TE/GE.

Ways to Avoid Delays: Determination Letter Application Processing Procedures

Determination letter application packages are now scanned into the Tax Exempt Determinations System (TEDS). This

streamlined process requires that you do not use staples, rubber bands, or binding when submitting your application

package. If multiple applications are submitted in the same mailing, please separate them with dividers or different colored

papers.

You can avoid delays in processing by organizing application packages as follows:

1. Cover letter:

The cover letter should state significant and relevant information for the plan being submitted such as: whether the

plan is part of a controlled or affiliated service group, or that it is being submitted with a related plan, whether the

application is being filed on or off-cycle, if the plan was involved in a merger, if it is a part of a multiple employer plan,

or whether this plan was submitted under the Voluntary Correction Program or is currently being audited.

If applications for two or more plans of the same employer are submitted together, each application should include

a cover letter that identifies the name of the employer and the plan numbers as well as the employer identification

numbers of all the related plans being submitted together.

2. Form 8717, User Fee for Employee Plan Determination, Opinion, and Advisory Letter Request (with user fee payment,

if applicable):

Submit correct user fee:

If eligible for user fee exemption, the certification on Form 8717 must be signed and dated. Stamped signatures are

not acceptable.

If a request is made for a Demonstration 5 (Average Benefit Test) or Demonstration 6 (General Test), include the

additional user fee in accordance with the Form 8717 Column A fees.

3. Form 2848, Power of Attorney and Declaration of Representative and/or Form 8821,Tax Information Authorization.

4. Most current determination letter and all amendments not covered by a prior letter. If the plan has never received a

letter, provide a signed and dated copy of the prior plan document or adoption agreement (with the applicable opinion/

approval letter). See “Verification of Prior Plan Document in the Absence of a Determination Letter.”

5. Form 8905, Certification of Intent To Adopt a Pre-approved Plan, if applicable.

6. Application Form (Form 5300, 5307, 5310):

Form 5307 application:

Please use the most current Form 5307, revised March 2008, to allow for optical scanning. Applications

postmarked after July 31, 2009, submitted on an older version will be returned - see EPN Summer 2008.

Place a list of volume submitter modifications after the meeting minutes in #10.

EGTRRA good faith and interim amendments need only be submitted for volume submitter plans that do not

authorize the practitioner to amend on behalf of the adopting employer.

401(k) Phone Forum - September 30, 2009 (Rescheduled Date)

A discussion of recent 401(k) guidance is rescheduled for September 30, 2009.

401(k) Checklist and Fix-It Guide Updated

We’ve updated the 401(k) Checklist and Fix-It Guide to include participant loan issues. Also, the two publications now

work hand-in-hand. The checklist helps plan sponsors keep their plan compliant by asking 10 “yes” or “no” questions. If

you answer “no” to any of the questions or would like to learn more, select “(More)” and you will be directed to the Fix-It

Guide where you will find tips and examples on how to find, fix and avoid the mistake.

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Form 5310 application:

Place Form 6088 after Form 2848 in #3.

Terminating plans should include a formal resolution to terminate the plan (for example, Meeting Minutes or Board

of Directors Resolution);

Terminating plans are processed as “on-cycle” cases (see Revenue Procedure 2007-44). Terminating plans must

be amended for all laws in effect as of the date of termination.

7. Attachments relating to application questions (such as a controlled group statement).

8. Schedule Q, Elective Determination Requests.

9. Demonstrations.

10. Notice to Interested Parties (for Form 5310 applications).

11. Meeting minutes, resolutions or other formal actions approving amendments, restatements, or actions involving the

plan such as a merger or termination.

12. Restated plan for the applicable Cumulative List. (Note: A “working copy” must be restated – see section 7.04 of

Revenue Procedure 2009-6).

Pre-Approved Plans: Plan document changes/corrections that were required for pre-approved (master &

prototype or volume submitter) plans’ qualification as part of their initial review should be incorporated in the

plan sponsors’ master plan documents so that adopting employer submissions will not require amendments

for the same issues.

Merged Plans: If submitting a plan that has been involved in a merger, the application must demonstrate that

all merged plans are qualified as of the date of merger for the surviving plan to receive a letter. See related

article on merged plans in EPN Winter 2009.

13. EGTRRA good faith amendments, interim and discretionary amendments in chronological order with the most current

on top. (See Revenue Procedure 2007-44 and Announcement 2008-23 for additional guidance).

14. Current trust agreement.

15. All other pertinent documents, such as merger agreements or compliance statements.

For general case processing procedures for Employee Plans Determination Letters, see Revenue Procedure 2009-6,

Determination Resources and the EP Determination Letter Resource Guide on our Web site.

Retirement & Savings Initiatives: Helping Americans Save for the Future

On September 5, 2009, as part of the Retirement & Savings Initiatives, the IRS and Treasury issued four notices and

three revenue rulings to promote retirement plan savings.

The notices contain:

• sample amendments to add an automatic enrollment feature (also known as an automatic contribution

arrangement) to 401(k) and SIMPLE IRA plans;

• guidance on using an automatic contribution arrangement (ACA) in SIMPLE IRA plans; and

• two updated safe harbor explanations (§402(f) notices) for eligible rollover distributions.

The revenue rulings clarify the rules on:

• increasing ACA default contribution percentages; and

• contributing unused vacation and sick pay to a retirement plan, both annually and upon termination of

employment.

See the EPN Special Edition for more details.

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The EPCU Insider

Master & Prototype (M&P) Project

Welcome back to “The EPCU Insider!” In this column, we provide the latest news from our shop so you can be informed if

you happen to receive a letter from us. The EPCU addresses pension compliance by using questionnaire studies to pinpoint

troublesome areas with minimal burden to taxpayers.

Our recent M&P Project has focused on compliance issues with sponsors and adopting employers. EP specialists

reviewing M&P determination letter applications and those examining M&P plans have discovered that some adopting

employers are not aware of their responsibilities to timely amend their plans for current law. The EPCU is sending

compliance contact letters to M&P sponsors and adopting employers requesting information on their practices and

procedures that:

• measure the communication between M&P sponsors and adopting employers; and

• ensure that sponsors are notifying adopting employers of their need to understand and timely amend their plan

documents.

The M&P Project involved two phases. First, we sent a contact letter to a sample of M&P sponsors requesting a list of

their adopting employers and verification of the M&P sponsor’s administrative practices and procedures directed at three

key responsibilities. Next, we sent a contact letter to the adopting employers requesting information on fulfillment of those

same sponsorship obligations.

Although many of the responsibilities associated with adopting and amending an M&P plan appear to have been shifted

from the adopting employer to the M&P sponsor, it is not sufficient for the M&P sponsor to merely provide the adopting

employer with an approved plan document.

As a condition of an M&P plan receiving an opinion letter, the M&P sponsor agrees to comply with the responsibilities

outlined in Revenue Procedure 2000-201. Sponsors have three key obligations to their adopting employers. They must

make reasonable and diligent efforts to ensure that adopting employers:

1. are aware of and receive all plan documents and amendments, including an approved copy of the plan, any

subsequent amendments and the most recently issued opinion letter;

2. complete and sign new adoption agreements or signature pages when necessary (such as if the plan has been

restated, if modifications are made to prior elections or if new elections are selected); and

3. timely amend their plan when necessary to retain approved status (for example, when any provisions fail to meet

the requirements of law, regulations or other guidance affecting qualification).

The M&P Project is listed under Current Projects on the EPCU’s Web page and includes frequently asked questions and

information about the project’s process.

We encourage you to e-mail any comments for the M&P Project or any other project, especially if these suggestions focus

on areas of potential noncompliance, to EPCU@irs.gov.

1 The M&P Project focused on GUST 1 Opinion Letter issuance at the onset of the project in 2008.

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Highlights of the Retirement News for Employers

The Retirement News for Employers has information for small businesses with retirement plans. Encourage your

clients to join the thousands of existing subscribers to this free newsletter.

The Summer 2009 Edition featured:

• “Know the Rules before You Break Open Your Retirement Piggy Bank” – notes the differences in the Code

§72(t) exceptions for distributions from IRAs vs. distributions from retirement plans.

• “SIMPLE IRA Plans: The 2-Year Rule on Early Distributions” – describes the two-year rule for SIMPLE IRA

distributions, the increase in Code §72(t) additional tax to 25% and lists the exceptions to the tax.

• “Fixing Common Plan Mistakes” – explains how a plan can correct the failure of not applying its automatic

enrollment provision to eligible employees.

• “We’re Glad You Asked!”

Q&A discusses controlled group rules involving family attribution and the need to aggregate all entities.

Q&A discusses the maximum contribution that can be made when a person participates in both a SEP

plan and a SIMPLE IRA plan.

Subscribe to the Retirement News for Employers newsletter.

PBGC Insights

Identifying Plan Assets for the 2008 Form 5500: The 2008 Schedule R (Form

5500) requires defined benefit plans with 1,000 or more participants to provide a breakdown of

plan assets into 5 broad categories: stocks, investment-grade debt, high-yield debt, real estate

and other. In reference to this requirement, PBGC received the following question: If plan

assets are held in investment accounts or trusts that invest in several of these asset categories,

in which category should we list these accounts?

Answer: Assets held in investment accounts, trust funds or other commingled accounts should

be separated into the five asset classes. For example, the share of total plan assets held as

stocks should be based on the value of stocks held directly by the plan plus the value of stocks

held in the trusts, accounts, funds, etc. in which it invests. The other categories (investmentgrade

debt, high-yield debt, real estate or other) should be treated similarly.

Proposed rule on USERRA Benefits Under Title IV: On July 29, 2009, PBGC published in the Federal

Register a proposed rule that would amend PBGC’s benefit payments regulation to implement provisions of The

Uniformed Services Employment and Reemployment Rights Act of 1994 (USERRA). USERRA provides that an individual

who leaves a job to serve in the uniformed services is generally entitled to reemployment by the previous employer. Upon

reemployment, the individual must receive credit for benefits, including employee pension plan benefits, that would have

accrued but for the employee’s absence due to the military service. Comments on the proposed rule must be submitted by

September 28, 2009.

Under PBGC’s current benefit payments regulation, a benefit is guaranteed only if the participant satisfies the conditions

for benefit entitlement on or before the plan’s termination date. The proposed rule would provide that if a service member

is reemployed within the USERRA time limits, even if the reemployment occurs after the plan’s termination date, PBGC

would treat the service member as having satisfied the reemployment condition as of the termination date. The change

would apply to reemployments under USERRA initiated on or after December 12, 1994.

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2009 Premiums

• The 2009 inflation-adjusted flat premium rate is $34 per participant for single-employer plans. The flat premium

rate for multiemployer plans is $9 per participant.

• Filing due dates vary depending on the size of the plan (based on the participant count for the prior plan year) and

the date that the premium payment year starts:

• If you have a large plan (500 or more participants) or mid-sized plan (100-499) with a premium payment

year that started January 1, 2009, your Comprehensive Filing is due October 15, 2009.

• If you have a small plan (fewer than 100) with a premium payment year that started January 1, 2009, your

Comprehensive Filing is due April 30, 2010.

Sign Up for My PAA Webcasts

• Webcasts are planned for September 23, 2009 and September 30, 2009 (both Wednesdays). PBGC staff will

review how to e-file via My PAA, pass along filing tips and answer questions from Webcast participants.

• For details or to sign up, see What’s New for Practitioners

Sign Up for Filing Reminders, What’s New, Interest Rate Updates

• Filing Reminders: e-mail filing reminders on the Practitioners Filing Reminders page.

• What’s New: e-mail updates about new premium filing or regulatory developments on the What’s New for

Practitioners page.

• Interest Rate Updates: monthly updates of PBGC’s interest rates on the Monthly Interest Rate Update page.