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2012 JCEB Q&As Offer Nonbinding IRS Responses on Employee Benefit Issues
Practical Law Legal Update 7-520-1684 (Approx. 4 pages)
2012 JCEB Q&As Offer Nonbinding IRS Responses on Employee Benefit Issues
by PLC Employee Benefits & Executive Compensation
| Published on 06 Jul 2012 • USA (National/Federal) |
The Joint Committee on Employee Benefits (JCEB) recently released Q&As containing nonbinding responses from Internal Revenue Service (IRS) staff to 26 questions regarding employee benefit issues. The Q&As address a range of topics, including health and welfare and retirement plan issues.
The Joint Committee on Employee Benefits (JCEB) recently released Q&As containing responses from IRS and Treasury Department representatives to 26 questions from ABA members regarding employee benefit issues. The document, compiled by the JCEB, is based on informal discussions between representatives of the JCEB, the IRS and the Treasury at a May 11, 2012 meeting. Responses to the questions are unofficial and nonbinding. Topics addressed include (but are not limited to):
- Incorporating the terms of two health flexible spending accounts into one plan document.
- Premiums for domestic partner coverage.
- Corrections under the Employee Plans Compliance Resolution System (EPCRS) for a partial year of missed deferral and failure to timely enroll an employee in a 401(k) plan.
- True-up of matching contributions for an employee on qualified military service.
- Determination of the "top 25" list for defined benefit plans.
- Interaction between the general test and the benefits, rights and features test for early retirement subsidies.
- Spin-off of a safe harbor plan mid-year due to a corporate event.
- Rollovers.
- Plan amendments for rollovers by non-spouse beneficiaries.
- Excluding employees from participation and calculating hours of work for 403(b) plans.
Among the responses included in the Q&As, an IRS representative explained that a defined benefit plan must separately test an early retirement subsidy as an optional form of benefit under the benefits, rights and features test, even if the plan passes the general test to meet the nondiscrimination in amount of benefits requirement of Section 1.401(a)(4)-3 of the Treasury Regulations.
An IRS representative explained that each distribution alternative available under the plan for both subsidized and unsubsidized early retirement benefits are separate, optional forms of benefit that must separately satisfy the requirements of Section 1.401(a)(4)-4 of the Treasury Regulations. Furthermore, if a plan provides different levels of subsidy for an early retirement benefit, each distribution level available at each level of subsidy is a separate optional form of benefit.
An IRS representative also explained what employers should do if they discover that their calendar year non-safe harbor 401(k) plan fails to timely enroll an eligible employee who became eligible to participate in the plan in February but the error was not discovered until September. An IRS representative explained that the employer may correct the error by either:
- Contributing an estimated amount for the employee in September, and, after the plan year ends, provide any additional amount owed based on the actual deferral percentage test (ADP). If the employer contributes too much in September, the excess should be treated as an employer contribution for the year it was contributed and allocated in accordance with the terms of the plan. The excess cannot be treated as a plan forfeiture or miscellaneous contribution and placed in an unnamed and unallocated plan account.
- Waiting until the plan year is over and correcting when the ADP for the year of exclusion is known.
However, an IRS representative noted that if the enrollment error occurs and is discovered in the same month, it should be corrected at that time, because the error may become costlier to correct as time passes and the plan sponsor may become ineligible to make the correction under EPCRS.
An IRS representative also indicated to the JCEB that the IRS is developing additional guidance on:
- The tax treatment of rollovers.
- Direct rollovers.
Employers with an early retirement subsidy feature in their defined benefit plans may wish to check with their actuary to ensure that the subsidy is tested as an optional form of benefit under the benefits, rights and features test even if the plan passes the general test. Also, employers that have failed to timely enroll eligible employees may wish to ensure that correction complies with the Q&As and EPCRS. Practitioners and employers may wish to review the other Q&As to determine if they are applicable to their individual circumstances.
For more information related to these topics, see Practice Notes, Correcting Qualified Plan Errors under EPCRS and Safe Harbor 401(k) Plans: Overview and Planning Opportunities.