Compliance January 7, 2019

IRS Adds ‘Other Circumstances’ to Instances for Which Determination Letter Requests Can Be Made

Previously, the IRS said a plan can request a determination letter only if it has never received a letter before; the plan is terminating; or the IRS makes a special exception.

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The IRS has issued Revenue Procedure 2019-4 explaining how the agency provides advice to taxpayers on issues under the jurisdiction of the Commissioner, Tax Exempt and Government Entities Division, Employee Plans Rulings and Agreements Office (Employee Plans Rulings and Agreements). It also details the types of advice available to taxpayers, and the manner in which such advice is requested and provided.

Of note, the new Revenue Procedure makes a change to Revenue Procedure 2018–4 Section 8.02 to add new section 3, “Other Circumstances,” to provide a new category for which determination letters can be requested. Though the category is added, the IRS does not specify what “other circumstances” for which it applies.

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In 2016, the agency issued Revenue Procedure 2016-37 ending the remedial amendment cycle (RAC) system and replacing it with a new approach to the remedial amendment period. At the time, the IRS said a plan can request a determination letter only if it has never received a letter before; the plan is terminating; or the IRS makes a special exception. The IRS said it anticipates making exceptions based on program capacity to work on additional applications, and the need for rulings in certain areas. The agency said it will measure need in a variety of ways including annual input from the Employee Plans (EP) community.

The agency subsequently asked for comments about the potential expansion of the determination letter program. Groom Law Group recommended consideration of the following plans as appropriate applicants for updated determination letters: “Plans with a cash balance or similar benefit formula whose last determination letter was before the effective date of the final IRS hybrid plan regulations; plans that address income replacement and inflationary pressures through adoption of a variable annuity feature; and traditional pension plans that convert to a cash balance-type formula.”

Other suggested categories of plans that should be able to seek determination letters include plans that “undergo major changes that otherwise make certain compliance testing unnecessary,” such as safe harbor 401(k) plans. The attorneys also point to the situation wherein “plan changes are accompanying significant workforce adjustments, such as downsizings or corporate separations.”

Finally, the attorneys recommended the IRS offer determination letters in the case that corrective plan amendments are submitted as part of an Employee Plan Compliance Resolutions System (EPCRS) submission, or in the case that a governmental plan has undergone “a significant change in the governing state or local law.”

The IRS at the same time has issued Revenue Procedure 2019-5 setting forth procedures for issuing determination letters on issues under the jurisdiction of the Director, Exempt Organizations (EO) Rulings and Agreements.

Links to both Revenue Procedures may be found at https://www.irs.gov/irb/2019-01_IRB.

Data and Research January 7, 2019

Employers Developing Strategies to Manage Employee Retirement Timing

Employers have a dual concern about losing skilled workers and increasing benefit costs from employees who retire too late. 

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Although 83% of employers have a significant number of employees at or nearing retirement, only 25% say they are effectively timing their workers’ retirement, according to the 2018 Longer Working Careers Survey by Willis Towers Watson.

While 81% of employers say that managing the timing of their employees’ retirement is an important business issue, only 53% say they have a good understanding of when their employees will retire.

Eighty percent of employers view older employees as crucial to their success. Fifty-four percent believe the loss of talent due to retiring workers over the next five years will be more significant than other labor market risks. Forty-eight percent worry about the loss of organization-specific knowledge, and 50% expect to have difficulty finding workers with similar knowledge and skills.

“Many employers say they are not managing the retirement of their older workers effectively,” says Alan Glickstein, managing director, retirement, at Willis Towers Watson. “With growing numbers of workers either planning to retire or delaying their retirement, the stakes are high. As a result, employers are rethinking how they manage their workers retirement patterns and are taking action.”

Forty-nine percent of employers think that delayed retirements over the next five years will increase benefits costs. Forty-one percent are worried that they will increase wage and salary costs, and 37% are concerned that workers who stay on past normal retirement age will block promotions for younger employees.

To cope with this, employers have either adopted or plan to adopt one or more of the following strategies over the next few years:

  • Offering financial wellbeing programs to older employees approaching retirement.
  • Offering flexible employment, such as the possibility of changing positions (offered by 30% of employers) and the ability to work part time (27%).
  • Permitting retired employees who are collecting benefits to work as consultants or contingent workers (49%).
  • Allowing workers to take a phased retirement (9%).
“Older workers are clearly a sought-after resource, and our research shows there is a definite supply of employees who would like to work into their 60s and beyond,” says Lauren Hock, director, retirement at Willis Towers Watson. “Many employers misunderstand their employees’ motivations and circumstances for retiring. Therefore, they do not have a grasp on their likely retirement patterns and are vulnerable to the  workforce issues associated with employees who linger for financial reasons but have lower engagement and productivity. We believe employers can effectively draw on the expertise of older workers, and this opportunity will require careful management.”

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