As the end of the calendar year approaches, sponsors of qualified retirement plans should consider whether their plan documents require updates to comply with important legal changes and deadlines. Below is a summary of some key legal developments that may impact your plan:

 New Disability Claims Procedure Rules

As we explained in a prior alert, the U.S. Department of Labor issued new regulations that revise the required procedures for disability benefit claims filed after April 1, 2018. In addition to disability plans, these rules apply to certain retirement plans that provide disability benefits.

Under the new rule, if a claim is denied, plans must now explain the decision, including the basis for disagreeing with any disability determination by the Social Security Administration or the views of any health care professional who evaluated the claimant. The rule also requires that notices be provided in a “culturally and linguistically appropriate manner,” meaning that a claim or appeal denial letter may need to include a statement in a non-English language. If your plan includes disability claims procedures, you may need to amend your plan by the end of the plan year that includes April 2018 (December 31, 2018 for calendar year plans).

Hardship Distributions

The Bipartisan Budget Act of 2018 (the Budget Act) gives plan sponsors the option to eliminate certain restrictions on hardship withdrawals for plan years beginning after December 31, 2018. Specifically, the Budget Act eliminates:

(i) the mandatory six-month suspension of any new elective deferrals to an employer-sponsored plan following a hardship withdrawal; (ii) the restriction on taking a hardship withdrawal from qualified nonelective contributions, qualified matching contributions, or earnings on post-1986 pre-tax contributions; and (iii) the requirement that a participant take all permissible nontaxable plan loans before taking a hardship withdrawal. To the extent that a plan sponsor adopts one or more of these discretionary design changes, a plan amendment will be required by the end of the plan year in which such changes become effective (December 31, 2019 for calendar year plans).

 IRS Updates Model Tax Notices for Eligible Rollover Distributions from Retirement Plans

Administrators of qualified retirement plans are required to provide a written explanation of tax consequences to recipients of eligible rollover distributions. The Internal Revenue Service (IRS) historically provides “safe harbor” model notices that plan administrators may rely upon to satisfy this notice requirement. In response to the Tax Cuts and Jobs Act of 2017, the IRS recently updated the model safe harbor notices to reflect changes in the law.

IRS Notice 2018-74 contains two separate safe harbor notices, based on whether the amount distributable from the qualified plan comes from a designated Roth account or a non-designated Roth account. In addition, the new notices now account for an extended rollover deadline for qualified plan loan offset amounts. The updated notices also reflect other changes to the rollover rules, including exemptions from the early distribution penalty for certain federal phased retirees and distributions to certain public safety employees from governmental plans. Plan administrators should review the notices they are currently using to see if they need updating.

Use of Forfeiture Accounts in Safe Harbor Plans

The IRS issued regulations permitting employers to use forfeitures to fund qualified non-elective contributions (QNECs), qualified matching contributions (QMACs), and safe harbor contributions. Previously, the IRS took the position that forfeitures could not be used to fund QNECs, QMACs, or safe harbor contributions because these types of contributions had to be fully vested at the time they were contributed to an employer’s plan.

Under the new regulations, however, employers may now use existing forfeitures to fund QNECs, QMACs, and safe harbor contributions, rather than making additional contributions to the plan for that purpose. The IRS clarified that QNECs, QMACs, and safe harbor contributions were only required to be fully vested at the time the contributions were allocated to participant accounts, rather than when first contributed to the plan. These regulations apply to plan years beginning on or after July 20, 2018, but may be applied to earlier periods. If your plan currently states that forfeitures may not be used to fund QNECs, QMACs, and safe harbor contributions, a plan amendment will be required by the end of the plan year in which such an update becomes effective.

Disaster Relief

Plan sponsors offering special disaster distributions and loans in response to Hurricane Michael or Hurricane Florence should amend their plans for these optional provisions. The affected areas include: Alabama, Florida, Georgia, North Carolina, South Carolina, and Virginia. For natural disasters occurring in 2017 (Hurricanes Irma and Maria, and the California Wildfires), plan sponsors have until the last day of the plan year beginning on or after January 1, 2019 to amend their plans.

 New IRS Limits for 2019

The IRS just released the cost-of-living adjustments for various retirement plan limitations that will take effect on January 1, 2019. The key highlights for 2019 include:

  • The annual limit on elective deferrals for 401(k), 403(b), and most 457 plans is increased from $18,500 to $19,000.
  • The maximum compensation for retirement plan purposes is increased from $275,000 to $280,000.
  • The threshold for determining who is a “highly compensated employee” is increased from $120,000 to $125,000.
  • The limit on annual contributions to an IRA, which last increased in 2013, is increased from $5,500 to $6,000. The additional catch-up contribution limit for individuals aged 50 and over remains $1,000.
  • The catch-up contribution limit for individuals aged 50 and over who participate in 401(k), 403(b), and most 457 plans remains unchanged at $6,000.

If you sponsor a qualified plan, you should review your plan documents carefully to determine whether any of these legal changes may impact you. Please do not hesitate to contact any of the Bass, Berry & Sims attorneys in our Employee Benefits Practice Group for assistance with reviewing and, if necessary, amending your plan documents.