![]() ![]() Plan sponsors facing a merger or acquisition and considering eliminating a safe harbor plan design should proceed with caution. Treasury Regulation 1.401(k)-5, Special rules for mergers, acquisitions, and similar events, has been reserved for future guidance. Plan sponsors must meet one of the two criteria before taking the additional steps required to remove the safe harbor. They may also amend in the middle of a plan year if they are operating at an economic loss or if they’ve provided participants advanced notice, at least 30 days before the start of the plan year, indicating they may reduce or suspend the safe harbor mid-year. Plan sponsors may remove the safe harbor feature effective the first day of a plan year. Are there special rules for safe harbor 401(k) plans? For example, if a plan document allows immediate distributions upon separation from service, and is later amended to allow distributions in the plan year following the year of separation from service, any benefits accrued before the date of the amendment will retain the more beneficial timing for processing. Timing of distributions is also a protected benefit. Inservice distributions (other than hardship)ĭistributions of after-tax contributions at any timeĭistributions after any stated age or period of service, andĭistributions taken within a certain period. ![]() To illustrate, if a plan document allows for in-service distributions upon attainment of age 59½, and is later amended to remove in-service distributions, then any benefits accrued before the date of the amendment may still be withdrawn as an in-service distribution at age 59½. If a plan sponsor amends the document to allow less favorable distribution events, the assets accrued before the amendment’s effective date must have the distribution triggers preserved. Forms of payment under a defined contribution plan may be removed as long as the option for an identical lump-sum distribution is available and it is based on an equal or greater portion of the participant’s account as the form that is being eliminated.Įvents triggering the availability of a distribution must also be considered. For example, while not required to provide benefits upon attainment of early retirement age, if a plan document allows for 100 percent vesting, certain distributions, or a waiver of allocation conditions, the optional form of benefit is protected. Optional forms of benefit are also protected. Amendments to make allocation conditions less favorable are usually timed for the start of the next plan year. For example, plan sponsors may not reduce any benefit that has been accrued for a plan year under a pre-amendment formula, even if the contributions have not yet been made to the participant. Some accrued benefits are more difficult to determine. Post-amendment accruals for participants with three or more years of service are subject to the new schedule unless the participant irrevocably elects to remain with the old schedule. Their vested percentage may be “frozen” until the new schedule provides for an increase. ![]() Post-amendment accruals for participants with less than three years of service are subject to the new vesting schedule, but their accrued benefit cannot be reduced. Pre-amendment accruals for affected participants are subject to a combined “best of both worlds” schedule. If a plan sponsor amends the document to provide a less favorable vesting schedule, the following rules will apply. For example, a participant’s vested account balance may not be reduced. These are easy to see when looking at a participant’s account balance or the accrued benefit under a defined benefit plan. What benefits are protected?Īccrued benefits are protected. Plan sponsors should evaluate their plans for protected benefits when they make a discretionary amendment or when there is an acquisition or merger of plans. When would a plan sponsor need to consider protected benefits? Found in Internal Revenue Code Section (IRC Sec.) 411(d)(6), this is known as the anti-cutback rule. Plan sponsors are prohibited from reducing benefits that participants have already earned. ![]()
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |