Year-end compliance issues for single-employer DB and DC retirement plans

Summary

By year-end 2022, sponsors of calendar-year single-employer retirement plans must adopt necessary and discretionary plan amendments to ensure compliance with statutory and regulatory requirements of ERISA and the tax code. This Client Action Bulletin (CAB) looks at key areas—including administrative compliance issues—that defined benefit (DB) and/or defined contribution (DC) plan sponsors should address by December 31, 2022. Please note that the “Action” section at the end of this CAB includes an update on the waiting game still in play for certain guidance covering those compliance amendments for which the original adoption deadlines have been extended.

Discussion

Qualified plan amendments

Employers that sponsor retirement plans should review their plan documents before the end of 2022 to ensure that discretionary or operational features comply with ERISA and the Internal Revenue Code (IRC). Sponsors that made discretionary plan changes during 2022 must formally adopt plan amendments by December 31, 2022. In addition, required or discretionary amendments relating to plan years prior to 2022 should be considered as part of any year-end plan review, taking into account whether they have been properly adopted and executed.

Although there are several changes related to the Setting Every Community Up for Retirement Enhancement (SECURE) Act and the Coronavirus Aid, Relief, and Economic Security (CARES) Act that are required to be in place operationally, as discussed below, the deadline for amendments reflecting these changes, which was set for the last date of the plan year that starts on or after January 1, 2022, was generally extended to December 31, 2025, by IRS Notices 2022-33 (see our August 2022 Benefits Alert for details) and 2022-45. However, this delay does not apply if a plan is terminating.

Plan sponsors of certain individually designed plans must check their plans to see if any amendments are required in order to comply with the IRS 2020 Required Amendments List (RAL) in Notice 2020-83 for individually designed tax-qualified retirement plans. The RAL is divided into two parts. Part A covers changes in requirements that generally would require an amendment to most plans or to most plans of the type affected by the change. Part B includes changes in requirements that the U.S. Treasury Department and the IRS anticipate will not require amendments to most plans but might require an amendment because of an unusual plan provision in a particular plan. For example, if a change affects a particular requirement that most plans incorporate by reference, then Part B would include the change because a particular plan might not incorporate the requirement by reference and, thus, might include language inconsistent with the change. The 2020 list identifies the following changes that may require amendments to an individually designed retirement plan by December 31, 2022:

Part A. There are no changes in requirements that generally would require an amendment to most plans or to most plans of the type affected by the change.

Part B. Changes in requirements that may require an amendment:

• Difficulty of care payments treated as compensation for retirement contribution limitations. The SECURE Act added a provision to increase the annual additions limit for retirement plans to take into account difficulty of care payments and to include the amount of the difficulty of care payments in a participant’s compensation.
  Although this was originally identified by IRS Notice 2020-83 as a provision that, if applicable, would have to be amended by December 31, 2022, Notice 2022-33 referenced above extends the amendment deadline to December 31, 2025.
• Application of cooperative and small employer charity pension plan rules to certain charitable employers. The CARES Act adds Section 414(y)(1)(D) to the Internal Revenue Code to provide that a cooperative and small employer charity pension plan (CSEC plan) includes a defined benefit plan that, as of January 1, 2000, was maintained by a tax-exempt employer that met specific characteristics. A CSEC plan may not include the benefit restrictions of Internal Revenue Code Section 436.

Correcting failures to amend a retirement plan on time

If a plan sponsor discovers a failure to adopt either a required or discretionary plan amendment, it should consider correcting the mistake through the IRS’s Employee Plans Compliance Resolution System (EPCRS). See IRS Revenue Procedure 2021-30. Doing so, in many cases, lowers the standard filing fees for correcting such failures. For example, for a failure to adopt an interim amendment on time, the EPCRS fees to resolve the failure fall between a range of $1,500 to $3,500, based on the amount of plan assets. Monetary sanctions can be substantially more than this range if the IRS audits the plan and discovers a late amendment or a failure to adopt an amendment. Plan sponsors also may correct operational errors through EPCRS, but many such errors can be self-corrected without contacting the IRS or paying a fee, provided the corrective action is taken in a timely manner as specified in EPCRS.

Annual notices and benefit statements

As in past years, plan sponsors may need to distribute certain notices to participants.

DB plans subject to ERISA and the tax code must post on the sponsor’s existing intranet site Parts I and II of the 2021 Form 5500 and the Schedule SB within 90 days after the date the Form 5500 is filed (by January 13, 2023, if Form 5500 was filed on October 15, 2022). However, the IRS has issued guidance (IRS News Release IR-2022-175) extending the deadline for Form 5500 filing (including Form 8955-SSA) for businesses located in areas designated by the Federal Emergency Management Agency (FEMA) as qualifying for assistance due to Hurricane Ian and other recent natural disasters.

DB plans must provide benefit statements every three years or an annual notice explaining how participants may obtain statements.

DC plans and DB plans not covered by the Pension Benefit Guaranty Corporation (PBGC) with calendar plan years (e.g., “professional service employers” with fewer than 26 employees, electing church groups, etc.) must distribute to participants by December 15 the 2021 summary annual report (SAR), if the 2021 Form 5500 due date was extended by an IRS Form 5558 filed on time. Corporate employers must distribute the 2021 SAR, if no IRS Form 5558 was filed but an extension request (IRS Form 7004) was filed on time for the employer’s income tax return (IRS Form 1120). Tax-exempt employers must distribute the 2021 SAR if no IRS Form 5558 was filed but an extension request (IRS Form 8868) was filed on time for the employer’s information return (IRS Form 990).

DC plans that allow participants to direct their investments must provide by December 31 a statement—if not included in a summary plan description (SPD)—that the plan fiduciaries are relieved of liability for certain losses resulting from participants’ exercise of their rights to direct their investments, and includes information about the availability of any investment advice services the plan sponsor offers.

DC plans must provide by December 1, if applicable: a 401(k) safe harbor notice; an automatic enrollment notice; and/or a qualified default investment alternative notice.

Employee Stock Ownership Plans must provide by December 2 a diversification notice to participants first eligible to divest employer securities on January 1, 2023.

Other operational action items

By December 31, 2022, retirement plan sponsors also should:

• Make recurring required minimum distributions (RMDs), for both DC and DB plans.
• To maintain a 401(k) plan’s qualified status due to a failed 2021 actual deferral percentage (ADP) test or actual contribution percentage (ACP) test, (1) pay to all affected participants any ADP/ACP distributions needed to correct the failure; or (2) make a qualified nonelective contribution (QNEC) to all non-highly compensated employees (HCEs) to the recurring required minimum distributions (RMDs), for both DC and DB plans.
• For DC plans under which the plan document provides for use of a forfeiture account, use the forfeitures.
• For top-heavy DB and DC plans, make the required top-heavy contributions.
• If desired, make a voluntary funding election to avoid ERISA 4010 filing or at-risk status (i.e., DB plan elections to reduce a credit balance or revoke a credit balance election) and/or request a change in the funding method for 2022.
• Certify the DB plan’s 2022 plan-year adjusted funding target attained percentage (AFTAP), if the plan used a “range” certification. (Note: A failure to meet this deadline will result in the AFTAP for the plan year being deemed under 60% retroactively to October 1, 2022.)
• Make an election to reduce the DB plan’s carryover and/or prefunding balance as of January 1, 2022 (e.g., to avoid or terminate a benefit restriction) by providing an irrevocable written notification to the plan’s enrolled actuary and plan administrator.
• If necessary, revoke a prior election to use a carryover or prefunding balance to meet minimum funding requirements for 2022 by providing an irrevocable written notification to the DB plan’s enrolled actuary and plan administrator. (Note: This election is only allowed to the extent that the amount of the prior election exceeded the minimum required contribution.)

Action

Although the year-end countdown rapidly approaches, there is still time to review and amend retirement plans. Operational procedures and plan changes also should be assessed for compliance and properly drafted, adopted, and executed amendments. In addition, the need for participant notices must be determined and, if necessary, any required notices should be distributed as soon as possible. Plan sponsors also should be mindful of pending legislation or recently enacted laws that have compliance-related implications. Plan sponsors should review their plans and SPDs to be sure they are in compliance.

As mentioned in the “Summary” section above, we are still in a holding pattern regarding several key pieces of outstanding guidance plan sponsors will need before they can craft compliance amendments to be adopted prior to the extended deadlines. We understand your frustration with the delay but want you to know that Milliman continues to closely monitor the situation and will provide you with updates as soon as the pending guidance becomes available. One benefit of this wait is that, as indicated by the IRS in Notice 2022-33, the expectation is that plan sponsors will be able to adopt all SECURE Act, Miners Act, and CARES Act amendments on a single date.

For additional information about year-end compliance reviews, plan amendments for calendar-year retirement plans, or preapproved plan availability, please contact your Milliman consultant.