On Saturday, the Senate passed its version of the Tax Cuts and Jobs Act. The process of reconciling the House and Senate versions of the bill has already begun in earnest. Currently, the retirement-plan-related changes included in each version of the bill still differ in many respects, and it is unclear which (if any) changes will be included in the final bill. As a result, with only a few weeks left until the holiday recess, a clear picture of the potential impact of tax reform on retirement plan sponsors has yet to emerge.
Stephen Pavlick focuses his practice on employee benefits matters for multinational corporations. He concentrates on qualified plans, related fiduciary and other Employee Retirement Income Security Act (ERISA) issues, deferred compensation and equity arrangements, and funding strategies for post-retirement welfare benefits. He has worked extensively with cash balance plans. Read Stephen Pavlick's full bio.
The new Disaster Tax Relief and Airport and Airway Extension Act of 2017 provides additional relief and flexibility for retirement plan participants impacted by recent hurricanes, including relaxed rules for plan distributions, withdrawals and loans.
President-elect Trump proposes to reduce the maximum corporate income tax rate from 35 percent to 15 percent. While the effective date of any rate reduction is uncertain, it likely will not occur before 2018. Deductions claimed when tax rates are 35 percent are worth 20 percent more to the taxpayer than if the same deduction is claimed when rates are 15 percent. Thus, a deduction for a $10 million pension contribution is worth an additional $2 million if claimed in 2017 when the tax rate is 35 percent than if claimed in 2018 when the tax rate is 15 percent.
This article, Accelerating Deductions for Compensation and Benefits if Corporate Tax Rates Are Reduced, discusses how bonus accruals, welfare benefits and pension contributions that might be deducted in 2017 rather than 2018 without much, if any, in the way of additional costs or administrative burdens for the employer and no adverse tax consequences for the employees/participants. Accelerating the deductions for these amounts will result in considerable savings if rates are reduced.
The Department of Treasury and Internal Revenue Service issued final regulations addressing the minimum present value requirements for pension benefits payable partly as an annuity and partly in an accelerated form, usually a lump sum. With these regulations, Treasury and IRS take another step in promoting lifetime income alternatives for retirement plan participants with simplified calculations for partial annuity payments.
The IRS recently issued guidance providing safe harbor 401(k) plan sponsors with increased flexibility to make mid-year plan changes. Notice 2016-16 sets forth new rules for when and how safe harbor plan sponsors may amend their plans to make mid-year changes, a process which traditionally has been subject to significant restrictions.
President Barack Obama signed into law the Bipartisan Budget Act of 2015 (the Budget Act), which raised Pension Benefit Guaranty Corporation (PBGC) premium rates beginning in 2017.
Single-employer defined benefit pension plans must pay annual premiums to the Pension Benefit Guaranty Corporation (PBGC), the U.S. government agency that insures these plans. All single-employer defined benefit pension plans pay an annual fixed premium. Those plans with unfunded vested benefits at year-end must pay an additional variable rate premium. The due date for payment of these premiums has generally been the fifteenth day of the tenth full calendar month of the premium payment year.
In 2016, the fixed premium is set at $64 per participant. The variable rate premium is based on the amount of potential liability that the plan creates for the PBGC. Calculated on a per-participant basis, the variable rate premium is a specified dollar amount for each $1000 of unfunded vested benefits under the plan as of the end of the preceding year, subject to a $500 per-participant cap. For 2016, it will equal $30 per $1000 of underfunding, subject to the cap. Both premiums are indexed for inflation.
Changes to PBGC Rates
The Budget Act makes the following changes:
- Single-employer fixed premiums will be raised to $69 per participant for plan years beginning in 2017, $74 per participant for plan years beginning in 2018 and $80 per participant for plan years beginning in 2019. In 2020, the fixed premium will be re-indexed for inflation.
- Single-employer variable rate premiums, which will continue to be adjusted for inflation, will increase by an additional $3 for plan years beginning in 2017 (from $30 to $33 per $1000 of underfunding, subject to indexing); by an additional $4 for plan years beginning in 2018 (from $33 to $37 per $1000 of underfunding, subject to indexing); and by an additional $4 for plan years beginning in 2019 (from $37 to $41 per $1000 of underfunding, subject to indexing). There are no scheduled increases (other than indexing) for years after 2019.
- To include the 2025 premium revenue within the 10-year budget window, the premium due date for plan years beginning in 2025 will be the fifteenth day of the ninth calendar month beginning on or after the first day of the premium payment year.
For more information regarding the PBGC premium increases described above or the other employee benefits provisions included in the Budget Act, please contact your regular McDermott lawyer or one of the authors.
On July 21, 2015, the Internal Revenue Service (IRS) issued Announcement 2015-19 (the Announcement), which ends the five-year remedial amendment cycles for individually designed plans effective January 1, 2017. For remedial amendment cycles beginning after 2016, plan sponsors will no longer be able to apply for determination letters on their individually designed defined contribution and defined benefit plans, except for initial qualification and qualification upon termination. Effective on the Announcement date, off-cycle requests for determination letters will no longer be accepted. The IRS intends to publish additional guidance periodically, and seeks comments on the upcoming changes.
Click here to read the full On the Subject.
On February 2, 2015, the White House released its Fiscal Year 2016 Budget, which includes a number of tax reforms targeting retirement savings. The provisions, if enacted as presented, would have a significant effect on current retirement-related tax incentives.
Recently issued regulations provide long-awaited guidance to sponsors of hybrid retirement plans on a variety of issues, including the market rate of return requirement and required changes for plans using crediting rates that do not meet this requirement. In a change from earlier regulations, hybrid plans are now allowed to offer subsidized survivor and early retirement annuity benefits. The regulations also provide some guidance concerning pension equity plans.
The Internal Revenue Service (IRS) recently announced the cost-of-living adjustments to the applicable dollar limits on various employer-sponsored retirement and welfare plans for 2015. Although many dollar limits currently in effect for 2014 will change, some limits will remain unchanged for 2015.