Phased retirement has become increasingly popular among two groups of employees: those who would like to begin easing away from work at a younger age, and those who need to continue working at older ages but require a less demanding schedule. We recently conducted a webinar to help employers identify the situations in which phased retirement may be beneficial, and structure phased retirement arrangements in such a way as to avoid the practical and legal pitfalls.
As previously discussed, faced with substantial budget cuts, the Internal Revenue Service (“IRS”) has announced that it is eliminating most determination letters (letters concerning the qualified status of retirement plans, which gives rise to numerous tax benefits), effective December 31, 2016. (Announcement 2015-19.) In the past, individually designed retirement plans were able to obtain a determination letter once every five years, during a cycle provided by the IRS. The most likely new regime will involve making determination letters on individually designed plans available only when a plan is first adopted, or when it is terminated. Between those dates, the only way to ensure qualification other than filing a declaratory judgment action with the Tax Court is likely to be to adopt annual updates put out by the IRS that will include model wording for amendments.
For entities that maintain a retirement plan, the new regime may mean that they discover qualification issues only on audit, when it is too late to fix the issue. And the potential penalties on audit (for the employer, the trust under the plan, and the employees) are, as set forth in a prior article, huge. What steps should a plan administrator take to ensure the qualification of a plan after that point? Read more.
On July 21, 2015, the Internal Revenue Service (“IRS”) issued Announcement 2015-19, in which it announced that it would be making substantial changes to the determination letter program intended to allow retirement plan sponsors to ensure that their plans are qualified (eligible for tax benefits). This announcement will affect all retirement plans intended to be qualified, but will create particular issues for plans maintained by governmental employers (“governmental plans”). Read more.
The Pension Research Council of The Wharton School of the University of Pennsylvania has done a study on the effects of Utah’s change in its pension system. Before the change, employees participated in a defined benefit plan. Employees hired after the change were given a choice between a hybrid (defined benefit/defined contribution) plan or a straight defined contribution plan. Those who failed to make a choice were automatically assigned to the hybrid plan. In general, either of the new plans was less generous than the old defined benefit plan.
In general, the Pension Research Council found that employees hired after the change had greater turnover than those hired before the change. Moreover, those electing into the hybrid plan were more likely to stay with the employer than those electing into the defined contribution plan. Those who defaulted into the hybrid plan had the highest turnover.
The Pension Research Council concluded that while the change may have saved the state money in pension costs, “public pension reformers must consider employee responses, in addition to potential cost savings, when developing and enacting major pension plan changes.”
Field Assistance Bulletin 2004-02 gives guidance on what a plan fiduciary needs to do in order to fulfill its fiduciary obligations under ERISA with respect to: (1) locating a missing participant of a terminated defined contribution plan; and (2) distributing an account balance when efforts to communicate with a missing participant fail to secure a distribution election.