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EMPLOYEE BENEFITS MEMORANDUM
It's been several months since our last memorandum about legal developments affecting employee benefit programs. Here is another one that we trust will be helpful. I. Taxpayer Relief Act of 1997 This is the legislation that Congress passed along with the balanced budget bill on July 29, which President Clinton signed into law on August 5. There are several things in it that are noteworthy for employers who maintain employee benefit plans. First, and perhaps most significantly, the new law completely repeals the 15% excise tax on excess distributions and excess accumulations in qualified retirement plans. This was the tax that penalized persons who saved too much in their qualified plans. The repeal is effective for all distributions occurring after 1996 and with respect to the estates of all persons who died after 1996. For individuals with large qualified plan balances this is a welcome change. Second, for plan years beginning on or after August 5, the $3,500 mandatory cash out limitation is raised to $5,000. Third, for 401(k) plan years beginning after 1997, matching contributions on behalf of self-employed persons will no longer be treated as 401(k) elective deferrals. The net effect of this rule is that self-employed persons may -- starting next year -- begin receiving matching contributions under a 401(k) plan. Fourth, beginning August 5, you no longer need to file Summary Plan Descriptions or Summaries of Material Modifications with the Department of Labor. Fifth, beginning August 5, you will be able to offset or attach an employee's qualified plan benefits if that employee has been convicted of a crime involving the plan or has had a civil judgment entered against him or her involving a breach of fiduciary duties under ERISA. There are a few other rules that will also have to be satisfied here. For example, the court judgment, order, or decree must expressly provide for an offsetting or assignment of benefits. Also, if a spouse has rights in the benefits, the spouse must consent to the offset or must receive a minimum joint and survivor annuity from the plan. Note, too, that this new provision will not allow you to offset an employee's benefit for embezzlement, theft, or fraud that is unrelated to the plan. Sixth, the full funding limit for defined contribution plans is increased from 150% of the plan's current liability to 170% of the current liability. This increase is gradually phased in beginning in 1999. The full increase does not apply until plan years beginning in 2005. Seventh, if you maintain a Section 403(b) tax deferred annuity plan, the definition of "includable compensation" is amended to include Section 403(b) salary deferrals and employee contributions to a Section 125 plan. This change takes effect next year. It is similar to the change that was made to the Section 415 definition of compensation by the Small Business Job Protection Act of 1996, which passed last August. Eighth, if you maintain a 401(k) plan that requires your employees to invest in employer stock (there are not many of these), no more than 10% of the plan's assets may be invested in employer stock. This change will take effect for plan years beginning on or after January 1, 1998. There are a few exceptions to the new rule that need not be mentioned here. To the extent that these changes will require amendments to your qualified plans, those amendments will need to be made no later than the last day of the plan year beginning on or after January 1, 1998. So for calendar year plans, you will need to make your amendments by the end of next year. Amendments will have to be retroactive to the effective dates of the various changes in the new law. II. IRS Revenue Procedure 97-41 This one raises a judgment call in my view. As you know, the Small Business Job Protection Act of 1996 ("the 1996 tax law") included a number of attractive provisions intended to simplify the operation of qualified plans in general and 401(k) plans in particular. For example, ADP testing was simplified, the definition of highly compensated employee was simplified, family aggregation was repealed, the required minimum distribution rules were simplified, and so on. In almost all cases, these changes will simplify your life. But in order to take advantage of them you will need to amend your plans. The issue that arises is when should you amend your plans. Revenue Procedure 97-41 ("Rev. Proc. 97-41") says that, with a few small exceptions, you have until the end of the plan year beginning on or after January 1, 1999, to make your amendments to comply with the 1996 tax law so long as your amendments are retroactive to the effective dates of the various changes and so long as you operate your plans during the interim in accordance with whatever amendments you finally adopt. For example, a calendar year plan need not be amended to comply with the 1996 tax law until December 31, 1999, even though a number of advantageous changes under the 1996 tax law became effective in 1997. Here is where the judgment call comes. Suppose, for example, that you are maintaining a 401(k) plan. If you take full advantage of the 1996 tax law and Rev. Proc. 97-41 you will, for three years, be operating your 401(k) plan in a manner that is inconsistent with its written terms. You will be determining who is, or is not, a highly compensated employee using the 1996 tax law definition while your plan contains the old definition. You will be applying the 1996 tax law ADP test while your plan contains the old ADP test. You will be allowing your active employees to defer the receipt of their benefits beyond their required beginning date while your plan requires distributions to begin as of their required distribution date. And so on. Whereas you may have once looked at these delayed amendment dates with pleasure (why amend now when you can amend later?), this particular delay may cause some confusion about how the plan should be operated in the interim. It may also make it harder for you to demonstrate -- to your employees for example -- that you are operating the plan in compliance with the law. So you may want to think about whether it makes sense to go ahead and amend some or all of your plans to comply with those portions of the 1996 tax law that you intend to take advantage of. One approach, for example, would be to make some of the amendments next year after you have completed your 1997 testing and have reached some decisions about how you want to implement the new law. |
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