Year-End Amendments

The month of December is a bit different in 2013. Typically, we mark this time scrambling to amend 401(k), profit sharing, and money purchase plans in order to maintain their tax-qualified status. This year there are no required year-end amendments for this type of plan.

Most defined benefit plans, on the other hand, must be amended by December 31, 2013 to maintain compliance with the funding rules of Internal Revenue Code Section 436, which was added by the Pension Protection Act of 2006. If you maintain a defined benefit plan that is subject to the minimum funding rules of Internal Revenue Code Section 412, you should contact your plan service providers about these required amendments immediately.

Starting in 2014

During a two-year period that is expected to start sometime in 2014, pre-approved plans, such as prototype plans that use an adoption agreement and volume submitter plans, will need to be amended and restated to reflect the changes made by the Pension Protection Act of 2006 and other recent changes in the law. These updates are needed due to the six-year remedial amendment cycle the IRS established for pre-approved plans.

Consistent with years past, we expect the IRS will issue a notice during the coming months, indicating when this two-year period formally opens. The timing for this hinges on when the IRS starts issuing opinion letters to plan sponsors. That is expected to occur starting in early 2014.

There are several other important reminders and recent developments impacting employee benefits that companies should consider when planning for the New Year.

Healthcare Flexible Spending Accounts (FSA) – Relaxing the “Use It or Lose It” Rule

Employers who sponsor healthcare FSAs: be aware that the IRS recently relaxed the “use it or lose it” rule. Plan sponsors are now permitted to amend their healthcare FSA plans to allow participants to carry over up to $500 of expenses incurred in the year in which they were carried over and do not count toward the $2,500 annual limit for pre-tax contributions.

Same-Sex Marriage and Employee Benefits

Following the June 26, 2013 Supreme Court decision in U.S. v. Windsor, 133 S.Ct. 2675 (2013), the IRS and U.S. Department of Labor acted quickly to issue guidance stating that individuals of the same sex who are married in states where these marriages are legally recognized are treated as spouses under federal law. The rule applies even if they move to a state that does not recognize same-sex marriages. 

Spouses have special rights under qualified retirement plans and are often default beneficiaries in the absence of a designation. Employers should be diligent and cautious in confirming that rules affecting spouses are followed when administering retirement plans. In states that do not recognize same-sex marriages, it is not clear whether the death certificate will reflect if the participant was involved in a same-sex marriage.

By way of comparison, this recent guidance does not mandate that coverage under insurance plans be provided to same-sex spouses. Employers should review their plans to determine who is and is not eligible for coverage and consider any desired amendments. Some plans may not offer coverage to all federal law “spouses.”

Healthcare Reform – Are You Ready?

Now is the time for employers to determine how to respond to the rollout of healthcare reform. Before deciding what to do with existing plans, how to manage the rising costs of insurance coverage, and whether workforce changes will be necessary to re-define who is a “part-time” employee or shift “full-time” workers to “part-time” positions, be sure to understand the legal rules and risks involved in these decisions. 

Don’t Forget Required Minimum Distributions

Section 401(a)(9) of the Internal Revenue Code requires employers to make minimum distributions to participants of tax-qualified retirement plans and others. Generally, this distribution should be made to participants when they reach the age of 70 1/2 or retire and to beneficiaries in the event of the participant’s death. Employers with older, retired participants in their plan, who have not yet started receiving distributions or who have beneficiaries awaiting payments for participants who died one or more years ago, should contact their administrative firm to ensure compliance with minimum distribution requirements.