Nov 28, 2007

2007 Year End Deadlines for Qualified Retirement Plans

Statutes and regulations issued over the past few years have converged to create a number of potential year end deadlines for qualified retirement employee benefit plans and their sponsors. The following are some of these year-end deadlines and issues that plan sponsors should keep in mind:

Cost-of-Living Increases to Plan Limits.

Plan sponsors should update their systems and formulas to include the new IRS rates adjusted for the cost of living:


Determination Letters.

Beginning in 2006, the IRS finalized new procedures that uses a staggered period for the issuance of determination letters for qualified plans. The deadlines are generally staggered over five years and based upon the EIN of the plan sponsor. The deadline for submitting determination letter applications to the IRS, including submissions for a determination letter regarding the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), is January 31, 2008 for the following plans: single-employer, individually designed defined contribution plans, including ESOPs, whose EIN Numbers end in 2 or 7; single-employer, individually designed defined contribution plans whose EIN numbers end in 2 or 7; and multiple employer plans. Sponsors of these plans should consult the IRS’s 2006 Cumulative List, which is published in IRS Notice 2007-3, 2007-2 I.R.B. 255,, for the statutory and regulatory provisions that must be reflected in their plans when submitted for a determination letter.

Automatic Plan Benefit Statements.

Although most plans already issue an annual benefit statement to participants, the Pension Protection Act requires that, for plan years beginning after December 31, 2006, plans must provide (i) a quarterly statement to defined contribution plan participants with the right to direct investments; (ii) an annual statement for defined contribution plan participants without investment direction rights; and (iii) a statement every three years for defined benefit participants. Under certain conditions, collectively bargained plans must also comply beginning in plan years starting after December 31, 2007 (For example, if all the collective bargaining agreements terminated (ignoring extensions) between August 17, 2006 and December 31, 2007.) Please note that if the sponsor of a defined benefit plan opts to provide an annual notice of availability of the pension benefit statement, instead of providing an actual pension benefit statement every 3 years, the required notice must be furnished no later than December 31, 2007. In addition to personalized benefit information, the contents of a statement for defined contribution plans must also include an explanation about any limitations or restrictions on the right to direct investments, the importance of portfolio diversification, the inherent risks of holding more than 20% of assets in a single security, and the Department of Labor website that contains information regarding investing and diversification.

Automatic 401(k) Enrollment Notices.

If you have already set up an automatic enrollment feature in your 401(k) plan, remember that you must notify participants before the start of the new plan year of their right to opt out of the automatic deferrals or to change deferral amounts. Generally, this notice should be provided by December 1st of the prior plan year. The IRS has provided a sample Automatic Enrollment and Default Investment Notice at If you are interested in implementing an automatic enrollment feature in a defined contribution plan under the new regulations, please contact SGR’s Employee Benefit Group or see the Client Alert titled, “Qualified Automatic Contribution Arrangements,” for more information.

Plans with Employer Stock Funds.

If your plan has investments in or permits participants to direct investments in employer stock, the diversification rules created by the Pension Protection Act of 2006 (“PPA”) require the plan to offer divestiture of the employer securities at least as often as any other investment option by January 1, 2008. While certain divestment provisions have been in place since December 18, 2006, a transition rule permitted plans to wait until the end of 2007 to change its provisions. A plan may meet the new requirements by allowing participants (i) to divest employer stock at least as frequently as they may divest the investment option with the most frequent divestment periods, or (ii) by restricting divestment periods for all investment options to match the less frequent divestment period for employer stock. Please note that divestment of employer stock must be no less frequent than quarterly.

Rollovers into Roth IRAs.

For plan years starting in 2008, distributions from qualified plans, such as profit-sharing or 401(k) plans, Section 403(b) annuity plans, and Section 457 governmental plans, may be rolled over directly into a Roth IRA. Plan sponsors wanting to offer this flexibility to participants may want to consider drafting plan amendments to permit such rollovers starting next year.

Distributions to Active Duty Reservists.

If your plan permitted distributions of elective deferral amounts in a 401(k) or 403(b) plan for military reservists called to active duty for more than 179 days, such distributions are not subject to the 10% early withdraw penalty tax, but that exception does not apply for reservists called to duty on or after December 31, 2007.

If you have any questions about the contents of this Client Alert, or any other questions about your employee benefit plans or compensation issues, please contact SGR’s Employee Benefits Group.

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