Compliance October 31, 2017

IRS Letter May Open Door for Auto Enrollment in More Governmental 457 Plans

In response to a private letter ruling from the IRS, ICMA-RC will provide its public-sector clients with a model 457(b) plan document incorporating auto enrollment based on the plan approved by the IRS.

Reported by

A recent Internal Revenue Service (IRS) private letter ruling (PLR) could broadly expand the use of automatic enrollment in 457(b) retirement plans sponsored by public-sector employers. Auto enrollment in 457(b) plans has been allowed by the IRS, but governmental plan sponsors have been reluctant to use it due to state laws and administrative concerns.

In the PLR describing the plan features, the IRS says, “Maintaining an EACA [eligible automatic enrollment arrangement] (within the meaning of Section 414(w)(3)) through the Plan, under which the participant is treated as having elected to have the employer make contributions in an amount equal to a uniform percentage of compensation provided under the Plan until the participant specifically elects not to have contributions made (or specifically elects to have contributions made at a different percentage), does not cause the Plan to fail to satisfy Section 457(b)(4) and Section 1.457-4(b).”

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ICMA-RC [ICMA Retirement Corp.] says the IRS favorable letter ruling is the first to adapt the Pension Protection Act (PPA)’s auto-enrollment rules to a governmental 457(b) plan. While private letter rulings are not considered formal precedent, they do provide insight into the IRS’ views. ICMA-RC expects that its model 457(b) plan will encourage governmental plan sponsors to adopt auto-enrollment in their 457(b) retirement plans in states that allow the practice.

As some states forbid deferrals to be deducted from employee’s paychecks without the person’s consent, public-sector employers should be mindful of their particular state’s law.

Ask the Experts October 30, 2017

A Special Halloween Edition

“Do the Experts have any Treats for us this Halloween, or only Tricks?”

Reported by

Stacey Bradford, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, vice president, Retirement Plan Services, Cammack Retirement Group, answer:

 

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In the true spirit of Halloween, the Experts have both Tricks AND Treats for you, as follows:

 

Trick: The House of Representatives is reportedly considering a reduction of the pre-tax elective deferral limits for 403(b),401(k) and 457(b) plans to as little as $2,400, though the remaining amount up to the existing deferral limits could be contributed as a Roth contribution. Scary stuff!

 

Treat: The President, fortunately, appears to be against this proposal. And, the elective deferral limit is slated to go UP next year, by $500, to $18,500 ($24,500 if age 50 or older by 12/31/2018).

 

Trick: The compensation limit for determining who is a Highly Compensated Employee (HCE) for nondiscrimination testing purposes is remaining at $120,000 as it has each year since 2015. Since HCEs are determined by measuring prior-year compensation, this means that this compensation threshold will remain the same for testing through the 2019 plan year. Since salaries have increased at many organizations since 2015, more employees are now considered to be HCEs for testing purposes, which may negatively impact nondiscrimination test results.

 

Treat: Though the HCE compensation threshold did not change, many other retirement plan limits increased, including the elective deferral limit described above, the 415 limit on total annual additions to a participant’s account (from $54,000 to $55,000) and the limit on annual compensation that may be taken into account (from $270,000 to $275,000).

 

Trick: The Department of Labor is cracking down on plans with missing participants, and auditing plans specifically with missing participants in mind. Though the initiative is currently limited to defined benefit (DB) plans, it is certainly feasible that such audits will be expanded to include defined contribution (DC) plans at some point.

 

Treat: Many “missing” participants are not actually missing at all. The DOL was able to find many participants in plans that they audited by simply sending certified letters to participants’ last-known addresses. And, if that fails, many participants can be located via a variety of methods, including simple internet searches and participant locator services.

 

The Experts wish all of you a Happy Halloween!

 

 

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 Rebecca.Moore@strategic-i.com with Subject: Ask the Experts, and the Experts will do their best to answer your question in a future Ask the Experts column.

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