April 2, 2015
- IRS Again Updates EPCRS to Facilitate Automatic Enrollment, Releases Guidance on Hardship Distributions
- IRS Finalizes Regulations Clarifying Definition of Performance-Based Compensation under 162(m)
IRS Again Updates EPCRS to Facilitate Automatic Enrollment, Releases Guidance on Hardship Distributions
On April 2, the Internal Revenue Service (IRS) issued Revenue Procedure 2015-28, modifying the Employee Plans Compliance Resolution System (EPCRS) – a voluntary correction program through which retirement plan sponsors can fix inadvertent errors without any loss of qualified plan status. The changes are intended to facilitate the adoption of automatic enrollment arrangements. In conjunction with the IRS announcement, Treasury Department officials sent a message to the American Benefits Council, thanking us for having previously recommended that the agency take this action.
- New safe-harbor EPCRS correction methods regarding automatic contribution features, including automatic enrollment and automatic escalation of elective deferrals, in 401(k) and 403(b) type plans.
- Special safe harbor correction methods for plans (including those with automatic contribution features) with limited duration failures and that involve elective deferrals.
Under previous guidance, when an employer plan sponsor failed to execute a contribution, the sponsor was required to make employer matching contributions as if the employee deferral contribution had been made, plus any earnings, plus a penalty equivalent to 50 percent of the expected employee deferral.
The new revenue procedure eliminates the 50 percent penalty for plans with automatic enrollment and/or automatic escalation features, providing certain requirements are met, including the timing of the correction. This modification effectively reduces the cost of voluntary self-correction.
With respect to non-automatic plans, the guidance provides for a reduction rather than full elimination of the 50 percent penalty unless the correction is made within three months.
These modifications are effective as of April 2, 2015, but there is a “sunset” provision in the guidance limiting the modified correction method to errors made prior to January 1, 2021. The guidance states that the IRS will consider whether to extend the safe harbor correction method for failures that begin in later years, taking into account “the extent to which there is an increase in the number of plans implemented with automatic contribution features.”
The IRS recently made updates to the EPCRS program through Revenue Procedure 2015-27, issued on March 27. The changes included clarification to the correction rules on overpayment failures and reduced Voluntary Correction Program fees for failing to meet the requirements for participant loans (see the March 31 Benefits Byte).
In related news, the IRS also released guidance on hardship distribution and loan records. In an April 1 newsletter, Employee Plans News Issue 2015-4, the IRS explicitly stated that even if a plan sponsor uses a Third Party Administrator (TPA), they must obtain and keep hardship distribution records, noting that “[f]ailure to have these records available for examination is a qualification failure that should be corrected” using EPCRS.
The guidance continues by stating that it is not sufficient for plan participants to keep their own records of hardship distributions and that electronic self-certification is also not sufficient documentation of hardship. “[Plan sponsors] must request and retain additional documentation to show the nature of the hardship.”
The newsletter also states that plan sponsors should retain records in either paper or electronic format for each plan loan granted to a participant, including documentation verifying that the loan proceeds were used to purchase or construct a primary residence, if applicable. “If a participant requests a loan with a repayment period in excess of five years for the purpose of purchasing or constructing a primary residence, the plan sponsor must obtain documentation of the home purchase before the loan is approved.” This language has raised concerns that plan sponsors would require an after-the-fact process to determine if the funds were used to purchase or construct a primary residence.
The Council is following up with the IRS for further clarification. For more information, contact Jan Jacobson, senior counsel, retirement policy, at (202) 289-6700.
IRS Finalizes Regulations Clarifying Definition of Performance-Based Compensation under 162(m)
On March 31, the Internal Revenue Service (IRS) issued final regulations clarifying the definition of “performance-based compensation” as it relates to stock options and stock appreciation rights under Internal Revenue Code Section 162(m). This part of the tax code generally places a $1 million cap on the amount of annual compensation that may be deducted by a public company for the chief executive officer and certain top-paid executives. Certain performance-based compensation is not subject to the limit.
The final regulations provide that the standard for qualified performance-based compensation in the form of stock options, stock appreciation rights, restricted stock, restricted stock units (RSU), and other equity-based awards is satisfied if the plan states the maximum number of shares with respect to which options or rights may be granted to each individual employee. The IRS noted that this is not meant to be a substantive change in the regulations but only a clarification regarding satisfaction of the per-employee limitation requirement.
The proposed regulations, originally released in June 2011, had referred only to stock options and stock appreciation rights. Restricted stock, restricted stock units (RSU), and other equity-based awards were added after IRS received comments in response to the proposal.
As stated in the preamble to the proposed regulations, the IRS is issuing the rule because “a limit on the maximum number of shares for which individual employees may receive options or other rights is appropriate because it is consistent with the broader requirement that a performance goal include an objective formula for determining the maximum amount of compensation that an individual employee could receive.”
The final regulations apply to compensation attributable to stock options and stock appreciation rights that are granted on or after June 24, 2011. The final regulations apply to any remuneration that is otherwise deductible resulting from a stock option, stock appreciation right, restricted stock (or other property), restricted stock unit, or any other form of equity-based remuneration that is granted on or after April 1, 2015.
For more information on executive compensation matters, contact Lynn Dudley, senior vice president, global retirement & compensation policy, at (202) 289-6700.