Compliance May 17, 2022

IRS Again Extends Physical Presence Requirement Relief

The agency is still considering whether to make permanent relief from the requirement for certain elections to be witnessed in person by a plan representative or notary public.

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The IRS is providing a six-month extension, through December 31, of the temporary relief previously provided from the physical presence requirement for participant elections that are required to be witnessed by a plan representative or a notary public.

According to Notice 2022-27, the extension is being provided to respond to the continuing COVID-19 pandemic and to permit consideration of stakeholder comments.

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In response to the national emergency caused by the COVID-19 pandemic and related social distancing precautions, Notice 2020-42 provided temporary relief through December 31, 2020, from the physical presence requirement for any participant election that was witnessed by either a notary public of a state that permits electronic authorization or a plan representative, if certain requirements were satisfied. Last June, the IRS issued Notice 2021-40, extending the relief through June 30, 2022.

The Treasury Department and the IRS are currently reviewing the stakeholder comments to determine whether to retain the physical presence requirement without modification or to propose to modify it. If the Treasury Department and the IRS decide to propose to modify the requirement, they will do so only through the regulatory process, which will include the opportunity for further comment.

The agency previously solicited comments on whether relief from the physical presence requirement should be made permanent and, if made permanent, what, if any, procedural safeguards are necessary to reduce the risk of fraud, spousal coercion or other abuse in the absence of a physical presence requirement. Several comments from stakeholders requested permanent relief from the physical presence requirement. In addition, some stakeholders asked for additional time to submit comments about whether the physical presence requirement should be modified, considering concerns regarding potential fraud, spousal coercion or other abuse.

Notice 2022-27 includes instructions for submitting comments about whether permanent guidance modifying the physical presence requirement should be issued.

Ask the Experts May 17, 2022

Maximum Loan Amount Across Multiple Plans

Experts from Groom Law Group and CAPTRUST answer questions concerning retirement plan administration and regulations.

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“We are a public university system that sponsors separate 401(a), 403(b) and 457(b) plans, all of which allow loans. Do all three plans need to be aggregated in determining the maximum a participant may borrow? I read your Ask the Experts column on the subject, but it only references 401(k) and 403(b) plans.”

 

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Charles Filips, Kimberly Boberg, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, answer:

 

As mentioned in our prior column on the subject, the maximum amount that the participant may borrow is restricted by the Internal Revenue Code and requires all “qualified employer plans” sponsored by an employer to be treated as one plan for this purpose under IRC section 72(p)(2)(E)(ii). However, our prior column does not clarify whether loans from a 457(b) plan should also be aggregated with 401(a) and 403(b) loans. To find the answer to your question, we must refer to the relevant portions of IRC Section 72(p), which lists the types of plans to be aggregated, as follows:

 

(2)(E) Related employers and related plans

For purposes of this paragraph—

(i)the rules of subsections (b), (c), and (m) of section 414 shall apply, and

(ii)all plans of an employer (determined after the application of such subsections) shall be treated as 1 plan.

 

(4) Qualified employer plan, etc.

For purposes of this subsection—

 

(A) Qualified employer plan

(i)In general

The term “qualified employer plan” means—

(I)a plan described in section 401(a) which includes a trust exempt from tax under section 501(a),

(II)an annuity plan described in section 403(a), and

(III)a plan under which amounts are contributed by an individual’s employer for an annuity contract described in section 403(b).

(ii)Special rule

The term “qualified employer plan” shall include any plan which was (or was determined to be) a qualified employer plan or a government plan.

 

(B) Government plan

The term “government plan” means any plan, whether or not qualified, established and maintained for its employees by the United States, by a State or political subdivision thereof, or by an agency or instrumentality of any of the foregoing.

 

As the IRC Section clearly references 401(a) and 403(b) plans, those plans must be treated as one plan for purposes of calculating the loan limits under 72(p). Though 457(b) plans are not directly referenced, a “qualified employer plan” under IRC Section 72(p) includes a “government plan,” which means “any plan, whether or not qualified, established and maintained for its employees by the United States, by a State or political subdivision thereof, or by an agency or instrumentality of any of the foregoing.” A 457(b) plan is indeed a type of nonqualified plan, so presuming that as a public university you otherwise satisfy the “government plan” definition listed here, your eligible governmental 457(b) would be aggregated with your other plans for loan limit purposes as well.

 

As a note of caution, it is very important to be mindful of the IRC Section 72(p) limits. Any loan amount from an eligible governmental 457(b) plan to a participant or beneficiary that doesn’t satisfy IRC 72(p)(2) is treated as though the participant received it as a distribution from the plan under IRC 72(p) and is includible in their or their beneficiary’s gross income for the taxable year in which the loan is made. (26 CFR 1.457-7(b)(3)).

 

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.

Do YOU have a question for the Experts? If so, we would love to hear from you! Simply forward your question to Amy.Resnick@issgovernance.com with Subject: Ask the Experts, and the Experts will do their best to answer your question in a future column.

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