Blue Ridge ESOP Associates Industry News

Given the tremendous devastation caused by Hurricane Harvey, the IRS has issued two relief declarations that may be of interest to plan sponsors.  The first extends to January 31, 2018 the time for filing Form 5500 and certain other returns that would otherwise become due for filing between August 23, 2017 and January 31, 2018.  Affected employers are those in the counties covered by the relief announcement (listed on the IRS website) and those who are unable to complete filings because they can’t obtain required filing data from a bank or other service provider in the covered areas. The IRS news release is at https://www.irs.gov/newsroom/tax-relief-for-victims-of-hurricane-harvey-in-texas. 

Hardship Withdrawals

In an April 2015 article, the IRS said plan sponsors must maintain supporting documentation for hardship withdrawals.  The IRS asserted that it was not sufficient to rely on a participant’s self-certification that criteria for a hardship distribution had been met.  The IRS also said that a plan sponsor’s failure to maintain hardship documentation was a plan qualification issue.  That last assertion drew criticism from some daily recordkeepers who were relying on participant electronic certification for hardship withdrawals.

Good News for Safe Harbor 401(k) Plans

The IRS has issued a proposed regulation that will permit forfeitures to be used to satisfy safe harbor contributions.  This is welcome news for 401(k) safe harbor plans that hold employer match or discretionary profit sharing money that was subject to a vesting schedule when contributed to the plan.  While many 401(k) plans permit forfeitures to be used for plan expenses or other non-safe harbor employer allocation purposes, the proposed regulation gives plan sponsors another option – use forfeitures to fund safe harbor contributions. 

Some ESOPs permit participants to take a lump sum distribution from their accounts.  Some may provide an option for all or a portion of the distribution to be paid in shares of Employer stock.

IRS Provides Help with Rollovers

If you receive a distribution check and fail to roll over the payment to an IRA or other plan within 60 days, you may be in luck.  The IRS has provided a self-certification procedure for those who inadvertently fail to complete a rollover within 60 days.  Revenue Procedure 2016-47 provides a sample self-certification letter that a taxpayer can use to notify an IRA or other institution that he qualifies for a waiver of the 60-day rollover requirement.  The waiver applies if one or more of 11 circumstances apply, including:

• Check was misplaced and not cashed
• Taxpayer’s home was severely damaged
• A family member died
• Taxpayer or family member was seriously ill
• Taxpayer was in jail
• Postal error

Form 5500

The IRS, Department of Labor (DOL) and Pension Benefit Guaranty Corporation (PBGC) have decided that Form 5500 requires a major update.   The proposed revisions will be published July 21, followed by a 75-day comment period.  The revised Form 5500 is targeted for rollout with the 2019 filing year.  According to a DOL press release, proposed revisions are intended to:

An unusual provision was slipped into the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015. This legislation provided that the time for filing Form 5500 returns for 2016 and later could be extended an additional 3 ½ months instead of the current extension period of 2 ½ months.   That would have meant the possibility for extending the filing deadline for a calendar 2016 plan to November 15, 2017!   Complaints about the extension did NOT fall on deaf ears. Congress passed the Fixing America’s Surface Transportation Act of 2015, which REPEALS the new extended filing deadline.

Form 5500 changes are coming. The IRS published the proposed Form 5500 for 2015, and new questions are embedded in the return:

• Trust information, including name of trust and its federal identification number, name of trustee and trustee phone number
• Plan document questions relating to whether the plan has been timely amended ,and a request for the date of the most recent determination letter (or opinion letter for plans using a volume submitter or prototype document)
• Question regarding any tax deductible dividends paid by a C corporation ESOP
• Question on whether the plan has incurred unrelated business taxable income
• 401(k) nondiscrimination testing questions
• Coverage testing questions

New Tax Notices

Background. When a company’s retirement plan includes employer stock as an investment option and stock value declines significantly, plan participants may seek to recover losses. In the past decade, there have been many “stock drop” lawsuits and most have involved public companies that sponsor KSOPs or other plans holding employer stock. Claimants have alleged that plan fiduciaries failed to liquidate employer stock or failed to restrict further purchases when such investments became imprudent. Defendants have responded by citing The Moench Presumption as part of their defense.

In the 1995 ESOP case Moench v. Robertson, public company stock declined sharply before the company went bankrupt. ESOP fiduciaries continued to invest in company stock while the share price dropped from $18.25 to $.25 over a two-year period. The Third Circuit court ruled that ESOPs are designed to be invested in employer stock and there is a “presumption of prudence” for holding employer stock in an ESOP. A plaintiff can overcome the presumption by establishing that a fiduciary abused its discretion by investing in employer stock.