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New IRS Guidance for Tax-Qualified Pension Plans with Rehired Retirees Due to COVID-19

The Internal Revenue Service (IRS) recently updated its guidance for retiree distributions under a defined benefit plan. Specifically, the new IRS guidance addresses rehires following a bona fide retirement due to COVID-19.

As a background, a defined benefit plan may make distributions to a retiree only in the case of a “bona fide retirement,” which is a facts and circumstances analysis. In prior rulings, the IRS indicated that retiree distributions without a bona fide retirement can cause a defined benefit plan to lose its tax-qualified status, where both all contributions and earnings become immediately taxable.

According to the IRS, a rehire due to COVID-19-related “unforeseen circumstances” generally would not disqualify an individual’s prior retirement from being considered a bona fide retirement under a defined benefit plan. However, the IRS cautioned that such a rehire cannot include any prearrangement to rehire the individual prior to the individual’s retirement. Such a prearrangement still yields a retirement that is not “bona fide.”

Finally, although the IRS issued this guidance in question and answer format primarily for defined benefit plans, plan sponsors should be able to apply the same rationale to distributions from defined contribution plans. In short, the new IRS guidance provides welcome relief to plan sponsors and employers who are looking to rehire retirees in a tight job market.




Expect More Difficulty Obtaining Fiduciary Insurance

Increasing retirement plan-focused litigation has put insurance carriers and fiduciary service providers in difficult positions. In this article published in PLANSPONSOR, McDermott Partner Erin Turley said such litigation continues to be a “major focus” in the fiduciary insurance marketplace.

“It is a challenging market right now, to the point that we are looking at trying to think about ways that insurance products might be differently structured, to address what we hope will only be a short-term tightening in the market.”

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Finally SECURE: Opportunities in the 2019 SECURE Act for Plan Sponsors

The SECURE Act—the most significant piece of retirement plan legislation in more than a decade—is now law. Plan sponsors should immediately start considering how changes included in the SECURE Act could impact their retirement and health and welfare plans in 2020 and beyond.

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Big ERISA Decisions on the Horizon—SCOTUS to Review Third ERISA Case this Term

The US Supreme Court recently agreed to review the Eighth Circuit’s decision in Thole v. US Bank, in which the Eighth Circuit held that participants in an overfunded defined benefit pension plan lack standing to sue for fiduciary breaches under ERISA. The Supreme Court’s decision in this case—the third ERISA case accepted by the court this term—could have significant implications for plan sponsors and plan fiduciaries. Many believe that if the Supreme Court rules that the plaintiffs have standing to bring suit, it could encourage a proliferation of litigation against plans where there is no actual impact on participants’ benefits.

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Hardship Distribution Changes: What’s Next?

In 2018, the Treasury Department and the IRS issued new hardship distribution rules applicable to defined contribution plans, and many plans have begun administering these new rules. While plan sponsors may want to wait for further IRS guidance before amending their plans, they should take steps now to inform employees of changes in hardship distribution administration.

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IRS Announces 2020 Limits for Health Savings Accounts and High-Deductible Health Plans

The Internal Revenue Service (IRS) recently announced cost-of-living adjustments to the applicable dollar limits for health savings accounts and high-deductible health plans for 2020. Nearly all of the dollar limits currently in effect for 2019 will change for 2020.

See a comparison of the applicable dollar limits for HSAs and HDHPs for 2019 and 2020.

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Clear as Mud: Defined Benefit Plan Liability with Facility Sales, Restructurings and Cessations

In certain cases of a facility sale, restructuring or cessation, recently released information by the Pension Benefit Guaranty Corporation (PBGC) leaves many unanswered questions about plan sponsor liability for single-employer defined benefit plans. Given the lack of clarity, these plan sponsors should continue to consult their lawyer in any type of transaction, restructuring or cessation that approaches a 15 percent demographic change in a plan sponsor’s controlled group over a three-year period.

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