July 17, 2003 (PLANSPONSOR.com) - The good news in
Thursday's regular jobless claims report was that the number
of Americans queuing up for initial benefits plunged by
29,000 last week. The bad news: the total is still well above
a recessionary benchmark.
According to US Department of Labor (DoL) data for the
week ending July 12, claims dropped to 412, 000 from a
revised 441,000 the week before.
The four-week moving average – a closely watched
figure because it irons out short-term volatility – was
424,000, down 3,500 from the previous week’s revised
average of 427,500.
The DoL reported that the number of Americans
clinging to the jobless rolls during the week ending July
5 was 3.65 million, a decrease of 117,000 from the
preceding week’s revised level of 3.77 million.
Analysts were expecting 425,000 new claims for the latest
report.
The DoL’s data for the July 12 week follows two
consecutive weekly gains in jobless claims to a 439,000
total for the July 5 week (See
Initial Jobless Claims Jump For Second Week).
T
he government also reported last week that the
nation’s June unemployment rate shot up to 6.4% from
May’s 6.1%, representing its highest level since April 1994
(See
Jobless Claims Spike Higher For Week, Month
).
Economists continue to fret about the fact that the
jobless claims totals have been stuck above the 400,000
mark – a widely accepted indicator of a sluggish
employment market.
July 16, 2003 (PLANSPONSOR.com) - In a move likely
to (at least initially) engender heartburn on the part of
plan sponsors and providers alike, today the Treasury
Department and Internal Revenue Service have issued a new set
of proposed regulations dealing with 401(k) plans.
>On the other hand, while the printed regulations are
voluminous, the new proposed regulations will replace the
current regulations, incorporate the guidance issued since
1994 (the last time regulations on 401(k) plans were
updated), and address open issues, according to
regulators.
>Plan sponsors will (perhaps) be comforted to note an
acknowledgement by Treasury and the IRS that while “certain
of the substantive changes in these proposed regulations
will require changes in plan design or plan operation…the
proposed regulations are not otherwise intended to require
significant changes in plan systems and practices that were
developed under existing guidance and that conform to the
requirements of sections 401(k) and 401(m),” according to
the regulations.
>In fact, in announcing the changes, the IRS noted
that the most substantial changes to the section 401(k) and
section 401(m) provisions were made to the methodology for
testing the amount of elective contributions, matching
contributions, and employee contributions for
nondiscrimination.
Insightful Comments
“The proposed rules are the result of years of gathering
useful and much appreciated insights from the retirement
plan community,” Treasury Assistant Secretary for Tax
Policy Pam Olson said in a statement. “Our goal with the
proposed rules is to put all the rules in one place and
resolve a number of open matters. Ending uncertainty will
make it easier for employers to sponsor plans to help
employees save for their retirement and will assist
administrators who are charged with ensuring that their
plans adhere to all the Internal Revenue Code requirements
that apply to employer plans.”
>It was the second big announcement in the past week
for federal regulators who, on July 10, unveiled final
regulations for plans qualified under Section 457
(see
Final Regs Shed Light on 457 Programs
).
>Among the items addressed in the new 401(k)
regulations:
incorporation of prior guidance on automatic
enrollment, reflecting the fact that a cash or
deferred arrangement (CODA) can specify that the
default that applies in the absence of an affirmative
election by an employee can be a contribution to a
trust
clarify the definition of a CODA, noting that it
excludes contributions that are treated as after-tax
employee contributions at the time of the contribution
and contributions made pursuant to certain one-time
irrevocable elections, but would also specify that a CODA
does not include an arrangement under which dividends
paid to an ESOP are either distributed to a participant
or reinvested in employer securities in the ESOP pursuant
to an election by the participant or beneficiary under
section 404(k)(2)(A)(iii) as added by EGTRRA.
clarify that amounts contributed in anticipation of
future performance of services generally would not be
treated as elective contributions under section 401(k).
Note that, pursuant to section 401(k)(3)(G), a state
or local governmental plan is deemed to satisfy the ADP
test.
>The proposed regulations specify that "a plan will
not be treated as satisfying the requirements of section
401(k) if there are repeated changes to plan testing
procedures or plan provisions that have the effect of
distorting the ADP so as to increase significantly the
permitted ADP for HCEs, or otherwise manipulate the
nondiscrimination rules of section 401(k), if a principal
purpose of the changes was to achieve such a result."
>The proposed regulations would change the treatment
of a CODA under a plan which includes an ESOP, noting that
since the issuance of the existing regulations, the use of
an ESOP as the employer stock fund in a section 401(k) plan
"has become much more widespread."
Consequently, the proposed regulations would eliminate the
disaggregation of the ESOP and non-ESOP portions of a
single section 414(l) plan for purposes of ADP and ACP
testing, as required under current law.
Distribution Directions
>The proposed regulations reflect EGTRRA's amendments
to replace "separation from service" with "severance from
employment", as a reason for distribution, as well as
eliminating the "same desk rule" as a standard for
distributions under section 401(k) plans.
>The proposed regulations also note that EGTRRA
directed the Secretary of the Treasury to revise the
regulations relating to distributions under section
401(k)(2)(B)(i)(IV) to provide that the period during which
an employee is prohibited from making elective and employee
contributions following a hardship distribution is now just
six months (rather than the 12 months required under
§1.401(k)-1(d)(2)(iv)(B)(4) of the existing
regulations).
>Regulators specifically requested feedback on
whether a change in status from employee to leased employee
described in section 414(n) should be treated as a
severance from employment that would permit a distribution
to be made.
Additionally, the proposed regulations do not include
reference to "retirement" (included in the existing
regulation) as an event allowing distribution because
retirement is not listed in the statute, and is subsumed by
severance from employment, according to the announcement.
Hardship Course
>Regulators noted that, in addition to the statutory
changes, the rules relating to hardship distributions have
been reorganized in order to clarify certain ambiguities -
including the relationship between the generally applicable
rules, employee representations, and the safe harbors
provided under the existing regulations.
>While the existing regulations set forth two basic
requirements (an immediate and heavy financial need, and
that the distribution is necessary to satisfy that need)
followed by safe harbor provisions.
The proposed regulations would retain those basic
requirements, but would clarify that each safe harbor is
separately applicable to each basic requirement.
The proposed regulations would also provide that an
employee representation used for purposes of determining
that a distribution is necessary must provide that the need
cannot reasonably be relieved by any available distribution
or nontaxable plan loan (even if the distribution or loan
would not be sufficient to satisfy the financial need).
However, the representation does not need to provide that a
loan from a commercial source will be taken if no such loan
"in an amount sufficient to satisfy the need is available
on reasonable commercial terms."
The proposed regulations would also modify the
existing regulations to add other types of defined
contribution plans to the list of plans that an employer
may maintain after the termination of the plan that
contains the qualified CODA while still providing for
distribution of elective contributions upon plan
termination, to include not only an ESOP and a SEP, but
also a SIMPLE IRA plan, a plan or contract that satisfies
section 403(b) and a section 457 plan.
>Noting that the IRS and Treasury have been concerned
that employers have been making high percentage qualified
non-elective contributions (QNECs) to a small number of
employees with low compensation rather than providing
contributions to a broader group of NHCEs in order to pass
the ADP test, the proposed regulations would add a new
requirement that is designed to limit the use of targeted
QNECs.
>The new requirement would generally treat a plan as
providing impermissibly targeted QNECs if less than half of
all NHCEs are receiving QNECs and would also treat a QNEC
as impermissibly targeted if the contribution is more than
double the QNECs other non-highly compensated employees are
receiving, when expressed as a percentage of compensation,
according to the regulations.
However, QNECs that do not exceed 5% of compensation are
never treated as targeted and would always satisfy the new
requirement.
The regulations also provide guidance on the implementation
of this new restriction.
>Additionally, under the existing regulations, a plan
that receives a plan-to-plan transfer that includes
elective contributions, QNECs, or QMACs, must provide that
the restrictions on withdrawals continue after the
transfer.
The proposed regulations make explicit a requirement
that the transferor plan will fail to comply with the
restrictions on withdrawals if it transfers elective
contributions, QNECs, or QMACs to a plan that does not
provide for these restrictions.
However, a transferor plan will not fail to comply
with this requirement if it reasonably concludes that the
transferee plan provides for restrictions on withdrawals.
Nondiscrimination Notice
>The proposed regulations say that a plan must
provide for satisfaction of one of the specific
nondiscrimination alternatives described in section 401(k),
either by incorporating by reference the ADP test of
section 401(k)(3) and the regulations under proposed
§1.401(k)-2, if that is the nondiscrimination alternative
being used (i.e. the current year testing method or prior
year testing method, which type of safe harbor).
If, with respect to the nondiscrimination alternative being
used there are optional choices, the plan must provide
which of the optional choices will apply, according to the
regulations.
>As per the Small Business Job Protection Act, the
proposed regulations eliminate the provision prohibiting a
tax-exempt employer from adopting a section 401(k) plan.
Additionally, the proposed regulations clarify that a
partnership is permitted to maintain a CODA, and individual
partners are permitted to make cash or deferred elections
with respect to compensation attributable to services
rendered to the entity, under the same rules that apply to
common-law employees - a rule that the new proposal extends
to sole proprietors.
>The regulations are proposed to apply for plan years
beginning no sooner than 12 months after publication of
final regulations in the Federal Register.
However, it is anticipated that the preamble for the
final regulations will permit plan sponsors to implement
the final regulations for the first plan year beginning
after publication of final regulations in the Federal
Register.