Preview of Changes for 2010

Not only is 2010 the beginning of a new decade (and the name of the movie sequel to 2001: A Space Odyssey), it also marks the effective date of a number of retirement plan changes. Following is a preview of coming attractions — at least the ones we know of at this point.

EGTRRA amendment deadline: The deadline for plan sponsors of preapproved defined contribution plans to restate their plans onto an EGTRRA plan document is April 30, 2010. Preapproved master, prototype, and volume submitter plans must be restated every six years. Failing to restate a plan by the deadline will result in a non-amender failure. To bring a plan back into compliance, the plan sponsor must make a correction through the IRS’s Employee Plans Compliance Resolution System (EPCRS) and pay associated non-amender penalties.

In addition to the EGTRRA plan restatement (which many plans have already completed), there will be “snap-on” amendments required by provisions in the Pension Protection Act of 2006 (PPA), the Heroes Earnings Assistance and Relief Tax Act of 2008 (HEART), the Emergency Economic Stabilization Act of 2008 (EESA), and the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA). The PPA amendments are generally required by the end of the 2009 plan year. Other provisions are required in 2010 and 2011 for WRERA. To ease the burden, many plans have put the latter components into the PPA amendment completed in 2009.

DB(k) plans: PPA introduced the DB(k) plan effective January 1, 2010. This new qualified plan is available to businesses with at least two and not more than 500 employees. The DB(k) permits a defined benefit plan to accept elective deferrals. The defined benefit component must either provide a minimum formula of 1% of final average pay for up to 20 years of service or use a cash balance design. The 401(k) component must provide for automatic enrollment with a minimum deferral rate of 4% of pay (with no automatic annual increase) and a fully vested employer matching contribution of 50% on the first 4% of compensation deferred. Any additional employer contributions — matching or non-elective, which are permitted — must be fully vested after three years of service. Additional details include:

  • Uniform provision of contributions and benefits is required.
  • Permitted disparity may not be used.
  • The plan satisfies the top heavy rules.
  • The ADP/ACP tests are satisfied by the 4% automatic deferral and the 50% employer match on the first 4% contributed.
  • Amounts deferred or matched above those minimums will be subject to ADP/ACP testing.

At press time, we were still awaiting detailed guidance for the DB(k) from the IRS.

RMDs for 2010: WRERA permitted participants to waive their required minimum distribution (RMD) amounts for the 2009 distribution calendar year (DCY). The following rules apply for the 2010 DCY:

  • Participants who had been receiving RMDs prior to 2009 must receive an RMD for 2010.
  • Participants who turned age 70 1/2 in 2009 and did not take an RMD for the 2009 DCY by April 1, 2010, must take an RMD for the 2010 DCY by December 31, 2010.
  • Participants who will turn age 70 1/2 in 2010 (and were therefore not affected by the WRERA provision waiving RMDs for the 2009 DCY) have until April 1, 2011, to take their first RMD.

Charitable IRA donations end: The PPA provision allowing IRA owners age 70 1/2 or older to donate up to $100,000 a year to a qualified charitable organization (and apply the donation amount toward their RMD for the year) ends December 31, 2009. This provision, which was set to expire at the end of 2007, was extended by EESA. Note: The WRERA provision allowing 2009 RMDs to be waived may have reduced the number of taxpayers who took advantage of this opportunity.

402(f) notice changes: The 402(f) notice, commonly known as the “Special Tax or Rollover Notice,” must be provided to individuals prior to their receiving a distribution. The notice explains everything participants need to know about distributions including eligible rollover options and distribution rules, various tax consequences, and myriad other distribution details.

Even though the IRS required the notice to be updated in 2007, the long-awaited IRS model notice (which was last updated in 2002) wasn’t issued until 2009. The model notice is in Question and Answer format and includes important language about designated Roth distributions, distributions from automatic enrollment arrangements, distributions to individuals currently serving in the military, and much more. The effective date for implementing the information in the newly released model notice is January 1, 2010.

Mandatory nonspouse rollovers: For plan years beginning after December 31, 2009, allowing nonspouse beneficiaries to roll over their benefit will be a mandatory plan provision. Distributions to nonspouse beneficiaries will now be considered “eligible rollover distributions” subject to the 20% mandatory federal tax withholding and 402(f) notice requirements.