Pension and Profit Sharing

<div class="Section1"><br /> <br /> The term controlled group is used to determine who makes up the group of employees that will be subject to the IRC’s coverage, nondiscrimination testing, and most qualification requirements that apply to qualified retirement plans. All employees of a single employer generally are included in this testing. The controlled group rules aggregate several entities (e.g., partnerships, sole proprietorships, and corporations) into a single employer for purposes of meeting various qualification requirements of the IRC. All employees of a group of employers that are members of a controlled group of corporations or, in the case of partnerships and proprietorships, are under common control will be treated as employed by a single employer.<a href="#_ftn1" name="_ftnref1">¹</a> In general, the determination of whether a group is a controlled group of corporations or under common control is based on stock ownership by value or voting power.<br /> <br /> A controlled group may be a parent-subsidiary controlled group, a brother-sister controlled group, or a combined group.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> A parent-subsidiary controlled group is composed of one or more chains of subsidiary corporations connected through stock ownership with a common parent corporation. A parent-subsidiary group exists if at least 80 percent of the stock of each subsidiary corporation is owned by one or more of the other corporations in the group and the parent corporation owns at least 80 percent of the stock of at least one of the subsidiary corporations. When determining whether a parent owns 80 percent of the stock of a subsidiary corporation, all stock of that corporation owned directly by other subsidiaries is disregarded.<br /> <br /> A brother-sister controlled group consists of two or more corporations in which five or fewer persons, individuals, estates, or trusts own stock consisting of 80 percent or more of each corporation and more than 50 percent of each corporation when taking into account each stockholder’s interest only to the extent he or she has identical interests in each corporation. For purposes of the 80 percent test, a stockholder’s interest is considered only if he or she owns some interest in each corporation of the group.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> A combined group consists of three or more corporations, each of which is a member of a parent-subsidiary group or a brother-sister group and one of which is both a parent of a parent-subsidiary group and a member of a brother-sister group.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> Special rules apply for determining stock ownership, including special constructive ownership rules, when determining the existence of a controlled group.<a href="#_ftn5" name="_ftnref5">⁵</a> Community property rules, where present, also apply.<a href="#_ftn6" name="_ftnref6">⁶</a> For purposes of qualification, the test for a controlled group is strictly mechanical; once the existence of a group is established, aggregation of employees is required and will not be negated by showing that the controlled group and plans were not created or manipulated for the purpose of avoiding the qualification requirements.<a href="#_ftn7" name="_ftnref7">⁷</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  IRC §§ 414(b), 414(c).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.  Treas. Reg. § 1.414(b)-1; IRC § 1563(a).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.  <em>U.S. v. Vogel Fertilizer Co.</em>, 455 U.S. 16 (1982); Treas. Reg. § 1.1563-1(a)(3).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.  IRC §§ 414(b), 1563; Treas. Reg. § 1.414(b)-1.<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.  IRC § 1563(d); Treas. Reg. § 1.414(b)-1.<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.  <em><em>Aero Indus. Co., Inc. v. Comm</em></em>., TC Memo 1980-116.<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.  <em><em>Fujinon Optical, Inc. v. Comm</em></em>., 76 TC 499 (1981).<br /> <br /> </div>

<span style="font-weight: 400;">Under the 2024 final RMD regulations, the surviving spouse will automatically be treated as the participant (without the need to make a special election) if all of the following are true: (1) the surviving spouse is the sole beneficiary, (2) the original participant died before their required beginning date and (3) the surviving spouse will receive payments under the life expectancy rule (rather than the ten-year rule).<a href="#_ftn1" name="_ftnref1">¹</a></span><span style="font-weight: 400;">  </span><br /> <br /> <span style="font-weight: 400;">If the original participant died after their required beginning date, the surviving spouse must make a separate election to be treated as though they were that participant.<a href="#_ftn1" name="_ftnref1">²</a></span><span style="font-weight: 400;">  </span><br /> <br /> <span style="font-weight: 400;">This election is only available when the surviving spouse’s first RMD would be in 2024 or later.  If the original participant would have reached their required beginning date in 2024 or later, the spousal election is permitted.</span><br /> <br /> <span style="font-weight: 400;">Whenever an election to be treated as the original participant is in effect, the Uniform Lifetime Table factor will be used to determine the amount of the surviving spouse’s RMDs up until the year of the surviving spouse’s death.  Generally, this will result in smaller annual RMDs when compared to use of the Single Life Table.</span><br /> <br /> <span style="font-weight: 400;">Also assuming an election to be treated as the original participant is in effect, upon the surviving spouse’s death, that spouse’s beneficiary must continue to receive distributions based on that spouse’s remaining life expectancy using the Single Life Table if the surviving spouse dies on or after the date they have begun to receive required distributions.  The factor is determined using the surviving spouse’s remaining life expectancy in their year of death (based on age), and then reducing that by one for each subsequent year.  The surviving spouse’s beneficiary has ten years to empty the account (i.e., they are not treated as an eligible designated beneficiary).</span><br /> <br /> <span style="font-weight: 400;">The proposed regulations also propose that, although the spousal election allows the spouse to be treated as the participant for purposes of the RMD regulations, that treatment does not apply in all situations.  It would, however, apply so that the spouse would not be subject to the 10% early withdrawal penalty for pre-age-59 ½ distributions.  The surviving spouse’s RBD would also be determined by reference to the original participant’s age, rather than the surviving spouse.  The proposed regulations also provide that when determining the account balance for RMD purposes, all amounts held in a designated Roth account and any other account under the plan are included for purposes of calculating the RMD for the year.<a href="#_ftn1" name="_ftnref1">³</a></span><br /> <br /> 1.   Treas. Reg. §§ 1.401(a)(9)-3(d), 1.401(a)(9)-3(e).<br /> <br /> 2.  Treas. Reg. § 1.401(a)(9)-5(g)(3)(i).<br /> <br /> 3.  Prop. Treas. Reg. § 1.401(a)(9)-5(g)(3)(ii).

Late in 2020, the DOL finalized a rule that would limit consideration of environmental, social and governance (ESG) factors when retirement plan fiduciaries are selecting plan investments without violating their fiduciary duties. Plan fiduciaries are obligated to act solely in the interest of plan participants and beneficiaries when making investment decisions. Under the final rule, the DOL said that plan fiduciaries must select investments based on pecuniary, financial factors and that it would apply an “all things being equal test”--meaning that fiduciaries were not prohibited from considering or selecting investments that promote or support non-pecuniary goals, provided that they satisfy their duties of prudence and loyalty in making the selection. This rule was seen as limiting fiduciaries’ ability to consider ESG factors in investing. However, earlier in 2021, the EBSA announced that it would not enforce this Trump-era rule, so that plan fiduciaries may once again consider ESG factors in making investment decisions.<br /> <br /> On November 22, 2022, the DOL released a new final rule on ESG investing.  The rule retains many prior elements, yet is generally expected to make it easier for plan fiduciaries to consider ESG factors in determining investment strategy. According to the rule, a plan fiduciary’s determination with respect to an investment or investment strategy must be based on factors that the fiduciary reasonably determines are relevant to a risk and return analysis. The DOL further states that the analysis should use appropriate investment horizons consistent with the plan’s investment objectives and should account for the funding policy of the plan established under ERISA. Under the final rule, however, fiduciaries will not be prohibited from considering collateral benefits aside from investment returns when there is an essential “tie” in the context of the investment analysis. Fiduciaries will also not violate their duty of loyalty merely because they take participant preferences into account when building their menu of otherwise prudent investment options.  The new rule does not contain any separate standard for QDIAs.<br /> <br /> This ESG investing rule continues to generate controversy, so practitioners should pay close attention to developments in this area.

Under pre-SECURE 2.0 law, two spouses who each have ownership interest in separate businesses often ran into problems trying to pass nondiscrimination testing due to the family attribution rules.  This often limited the flexibility of businesses offering retirement benefits solely due to state community property laws or the existence of minor children—and unintended consequence.  SECURE 2.0 created two important exceptions that can now help closely held business owners offer retirement plans without running afoul of the IRS.<br /> <br /> The government prohibits business owners from establishing retirement plans that primarily benefit highly compensated employees (HCEs) while excluding other less highly compensated individuals.  To prevent businesses from using multiple entities to provide benefits primarily to HCEs and pass the anti-discrimination tests, the law treats certain related entities as a single entity for nondiscrimination testing purposes.<br /> <br /> These “controlled group” rules evaluate the ownership structure of related entities.  If enough common ownership exists, the entities are deemed to be a single business for retirement plan testing purposes.  Similarly, when applying the law, individuals may be deemed to own business interests owned by certain family members—including spouses and minor children.<br /> <br /> Under pre-SECURE 2.0 law, one spouse was always deemed to own the business interests that were owned by their spouse unless a spousal exception applied.<br /> <br /> Under IRC Section 414, the spousal exception applies if all of the following are true: (1) the spouse has no direct interest in their spouse’s business, (2) the spouse does not participate in management of their spouse’s business, and is not a director, officer or employee of that business, (3) no more than 50% of that business’ income is passive (meaning derived from rents, royalties, dividends, interest and annuities), and (4) the spouse’s ownership interests are not subject to restrictions on the spouse’s ability to dispose of them that favor the other spouse or their minor children.<br /> <br /> Ignoring the attribution rules can expose the sponsoring business to steep penalties and potential disqualification.<br /> <br /> Couples who live in community property states were previously unable to qualify for the spousal exception.  In community property states, each spouse is deemed to own 50% of their spouse’s assets acquired during the marriage.  SECURE 2.0 overrides and disregards community property laws for purposes of the Section 414 spousal exception.<br /> <br /> Example: Assume David and Judy are a married couple residing in Texas, a community property state.  During the marriage, each spouse established their own separate business (each owning 100% of the interests in their respective business).  The two businesses are completely unrelated.  However, under pre-SECURE 2.0 law, David was treated as owning 50% of Judy’s business and vice versa under Texas law.  The couple was unable to qualify for the spousal exception because they could not satisfy the “no direct interest” requirement.<br /> <br /> Post-SECURE 2.0, no controlled group is deemed to exist because Texas’ community property laws are disregarded.  Beginning in 2024, David and Judy can each establish individual retirement plans for their business.  Each plan can be structured to pass the nondiscrimination testing rules considering only the individual company’s employees.<br /> <br /> Under pre-SECURE 2.0 law, minor children (under age 21) were treated as though they owned 100% of their parents’ business assets when determining whether a controlled group existed.  Therefore, if two individuals each owned separate businesses, a child in common would be deemed to own 100% of each parent’s business.  That’s true regardless of whether the two parents were ever married.<br /> <br /> Considering the example above, assume David and Judy had a seven-year-old child, Meredith.  Pre-SECURE 2.0, Meredith was deemed to own 100% of David’s business and 100% of Judy’s business.  David and Judy were unable to qualify for the Section 414 spousal exception solely because of Meredith’s existence.<br /> <br /> SECURE 2.0 changed the rules to disaggregate ownership of two businesses where common ownership was based solely on the existence of a minor child.

<div class="Section1"><br /> <br /> In 2020, the DOL introduced a new class exemption, PTE 2020-02. The exemption grants relief to financial advisors and institutions who provide investment advice (including retirement-related and rollover advice, <em><em>see</em> </em>Q 3977.01) if the terms of the PTE are satisfied.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> In creating the PTE 2020-02, the DOL&rsquo;s stated goal was to provide impartial conduct standards that are in line with guidance released by other regulators, including the SEC Regulation Best Interest and state-level fiduciary rules. To qualify under the PTE 2020-02, advisors must provide advice in accordance with impartial conduct standards, which include standards related to: (1) acting in the client&rsquo;s best interests, (2) reasonable compensation, (3)&nbsp;refraining from misleading statements, (4) disclosure, (5) conflict mitigation and (6)&nbsp;retroactive compliance review (<em><em>see</em> </em>below).<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> The exemption, which was finalized late in 2020, is available to registered investment advisers, broker-dealers, banks, and insurance companies (financial institutions) and their individual employees, agents, and representatives (investment professionals) that provide fiduciary investment advice to retirement investors.<br /> <br /> The exemption defines retirement investors as plan participants and beneficiaries, IRA owners, and plan and IRA fiduciaries. In determining whether an advisor is a fiduciary who may take advantage of the exemption, the new 2024 standard will apply (<em><em>see</em> </em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a>). The exemption&rsquo;s relief also specifically applies to otherwise prohibited transactions related to investment advice about retirement&nbsp;plan rollovers.&nbsp; In their 2024 release, the DOL also clarified that robo-advice providers can use PTE 2020-02.<br /> <br /> <hr><br /> <br /> <strong>Planning Point:</strong> The DOL has proposed a new rule that would make the process for obtaining a prohibited transaction exemption much more difficult.&nbsp;If passed, the changes will apply only prospectively, 90 days after the publication of the final rule in the Federal Register.&nbsp;The proposed regulations would require that communications with the DOL prior to submitting a formal application for exemption will become part of the administrative record that can be requested by the public.&nbsp;Applicants would not be permitted to approach the DOL on an anonymous basis. The regulations would impose new terms with respect to the independent&nbsp;fiduciary or appraiser that may be required.&nbsp;The current regulations provide information about when the fiduciary&nbsp;or appraiser will be considered &ldquo;independent,&rdquo; providing that the fiduciary or appraiser is independent if less than 2% of their revenue is derived from parties to the transaction (though it is currently possible that they could achieve independent status if the revenue is less than 5%). The new rules would make the standard stricter and require analysis of the revenue from the prior tax year and projected revenue for the current year. If an appraiser and a fiduciary are required, the appraiser must be independent of both the fiduciary and the applicant. It would also be possible that the individual could be deemed not &ldquo;independent&rdquo; if they have an interest in the transaction or future transactions of a similar type.<br /> <br /> <hr><br /> <p style="text-align: center;"><strong>Impartial Conduct Standards</strong></p><br /> Relief under the exemption is conditioned on adhering to impartial conduct standards, as follows:<br /> <br /> <em>Best Interests Standard.</em> The best interest standard follows longstanding legal concepts. It is generally satisfied if investment advice &ldquo;reflects the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims, based on the investment objectives, risk tolerance, financial circumstances, and needs of the investor, and does not place the financial or other interest of the [advisor/firm] or any affiliate, related entity or other party ahead of the interests of the investor, or subordinate the investor&rsquo;s interests to their own.&rdquo; The preamble is careful to note that the PTE does not create a duty to monitor&mdash;although a duty to monitor could be generated depending upon whether an investment could prudently be recommended to the investor <em>absent</em> ongoing monitoring.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> <em>Reasonable Compensation Rule.</em> The reasonable compensation standard requires that compensation not be excessive, as measured by the market value of the particular services, rights, and benefits the advisor is delivering.&nbsp;The reasonableness of fees will depend on the particular facts and circumstances at the time of the recommendation. Several factors inform whether compensation is reasonable, including the market price of services provided and/or the underlying assets, the scope of monitoring, and the complexity of the product. No single factor is controlling in determining whether compensation is reasonable. The important question is whether the charges are reasonable in relation to what the investor receives. Firms and advisors have no obligation to recommend the transaction that is the lowest cost or that generates the lowest fees without regard to other factors.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> The exemption also requires financial firms and advisors to seek to obtain the &ldquo;best execution&rdquo; of the investment transaction reasonably available under the circumstances. This duty is satisfied if the advisor complies with applicable federal securities laws, including those imposed by the SEC and FINRA that are beyond the scope of this discussion.<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> <em>No Misleading Statements.</em> This element requires that statements by the both the financial firm and the advisor to the investor about the recommended transaction and other relevant matters are not materially misleading at the time they are made. The preamble to the PTE states that &ldquo;other relevant matters&rdquo; include fees and compensation, material conflicts of interest, and any other fact that could reasonably be expected to affect the investor&rsquo;s investment decisions.<a href="#_ftn6" name="_ftnref6">⁶</a><br /> <br /> <em>Disclosure Requirement.</em> Financial firms are required to make written disclosure of their fiduciary status to investors prior to engaging in any transactions covered by the exemption. The disclosure must contain a written description of the services to be provided and material conflicts of interest arising out of the services and any recommended investment transaction. The disclosures should be in plain English, considering the investor&rsquo;s level of financial experience. The PTE does not require specific disclosures to be tailored for each investor or each transaction as long as a compliant disclosure is provided before engaging in the particular transaction.<a href="#_ftn7" name="_ftnref7">⁷</a>&nbsp; In their 2024 amendments, the DOL offered clarification for advisors who discuss recommendations and investment strategies in conversations that take place before the advisor is actually hired by the client.&nbsp; For timing purposes, it is sufficient for the advisor to make the required disclosures at or before the time a covered transaction occurs.&nbsp; In these types of situations, the covered transaction is deemed to have occurred at the later of (1) the date the recommendation is made, or (2) the date the advisor becomes entitled to compensation, whether payable now or in the future, because of making the recommendations.<a href="#_ftn8" name="_ftnref8">⁸</a>&nbsp; The DOL also clarified that these types of &ldquo;hire me&rdquo; conversations do not necessarily create fiduciary status, but the DOL did not specifically exempt them.<br /> <br /> <em>Financial Firms&rsquo; Policies &amp; Procedures Requirement.</em> The exemption requires financial firms to establish, maintain and enforce written policies and procedures prudently designed to ensure compliance with the impartial conduct standards. These policies and procedures should be designed to mitigate conflicts of interests generally and avoid incentives to violate the impartial conduct standards.<a href="#_ftn9" name="_ftnref9">⁹</a><br /> <p style="text-align: center;"><strong>Administrative Details</strong></p><br /> The final PTE adds a self-correction procedure. Advisors and firms will not be treated as violating the prohibited transaction rules if the advisor corrects the violation, notifies the DOL via email within 30 days and the correction occurs within 90 days of when the advisor learned of the violation. The advisor will also be required to make the investor whole again for any losses that occurred because of the violation. The financial institution is also required to notify the person responsible for conducting retrospective compliance reviews under<br /> the PTE.<br /> <br /> This retrospective review must be conducted at least annually. Under the final PTE, it must be certified by a senior officer of the financial institution. That officer must certify that the financial institution has procedures and policies in place designed to ensure compliance with the PTE. The officer must further certify that the firm has procedures in place to both test the effectiveness of their policies and modify them to ensure ongoing compliance.<br /> <br /> The final PTE introduces a new disclosure document that must be provided to retirement investors before recommending a rollover transaction. The written document must describe the specific reasons for recommending a rollover between two accounts&mdash;as well as acknowledge the advisor&rsquo;s status as a fiduciary.<br /> <p style="text-align: center;"><strong>BICE: Administrative Exemption: 2016-01</strong></p><br /> Prohibited Transaction Exemption 2016-01<a href="#_ftn10" name="_ftnref10">¹⁰</a> added the Best Interest Contract (BIC) Exemption as part of the Department of Labor&rsquo;s 2016 Fiduciary Rule (now repealed), designed to minimize conflicts of interest and provide that advisors act in the employee or participant&rsquo;s best interests. Under the BIC Exemption, financial institutions and advisors could receive variable compensation by acknowledging they were fiduciaries in providing investment advice and adhere to impartial conduct standards. In addition, the financial institution was required to have policies and procedures in place designed to ensure compliance with the impartial conduct standards, detect and record any material conflicts of interest, and designate a person responsible for compliance with the impartial conduct standard. Specified information had to be disclosed to participants prior to or at the time transactions based on the advice occur. That information was also required to be posted on a website maintained by the firm.<br /> <p style="text-align: center;"><strong>Historical Background</strong></p><br /> After the Fifth Circuit vacated the 2016 DOL fiduciary rule, the DOL removed the Best Interest Contract Exemption (BICE) in 2020.&nbsp; In June 2020, the DOL released a fiduciary PTE 2020-02 to replace the 2016 rule (<em><em>see</em> </em>the heading below for a discussion of BICE, as it would have applied under the 2016 DOL rule). The DOL has also extended the nonenforcement policy under FAB 2018-02 through January 31, 2022. As a result, the DOL did not pursue prohibited transactions claims against investment advice fiduciaries who were working in good faith to comply with the impartial conduct standards under PTE 2020-02 prior to that date. It also did not treat these fiduciaries as violating the prohibited transaction rules during this period. The DOL did not enforce the &ldquo;specific documentation&rdquo; and disclosure requirements for rollovers under PTE 2020-02 through June 20, 2022. Aside from the rollover exception, most other requirements were subject to full enforcement as of February 1, 2022. The retroactive compliance review deadline is six months after the end of the year (June 30, 2023 for 2022 transactions).&nbsp; The review must be certified by a senior executive officer of the institution that provides the investment device.&nbsp; Clients should also remember that any documentation or records related to the review should be retained for at least six years after the review is submitted.<br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; <em><em>See</em> <em>Improving Investment Advice for Workers &amp; Retirees</em></em>, ZRIN 1210-ZA29.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; Sec. II(d).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; Sec. II(a)(1).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp; Sec. II(a)(2).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp; Sec. II(a)(2)(B).<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp; Sec. II(a)(3).<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp; Sec. II(b).<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a> 29 CFR Part 2550.<br /> <br /> <a href="#_ftnref9" name="_ftn9">9</a>.&nbsp; Sec. II(c).<br /> <br /> <a href="#_ftnref10" name="_ftn10">10</a>.&nbsp; 81 Fed. Reg. 21002, corrected by 81 Fed. Reg. 44773.<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> The 2019 Tax Certainty and Disaster Relief Act extended the rules governing qualified disaster distributions from retirement accounts, discussed below for victims of disasters that occurred in 2018 through 60 days after enactment of the bill (December 20, 2019). The distribution itself must be made within 180 days after enactment of the law to qualify. <em><em>See</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a>. <em><em>See also</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a> for a discussion of how the CARES Act expanded the retirement plan distribution rules for 2020 in response to the COVID-19 pandemic.<br /> <br /> The 2017 tax reform legislation,<a href="#_ftn1" name="_ftnref1">¹</a> the 2017 Disaster Tax Relief and Airport and Airway Extension Act,<a href="#_ftn2" name="_ftnref2">²</a> and the Bipartisan Budget Act of 2018,<a href="#_ftn3" name="_ftnref3">³</a> include special tax relief for taxpayers affected by certain presidentially declared disasters that occurred in 2016 and 2017.<br /> <br /> A 2016 qualified disaster is a major disaster that was declared in 2016 by the president. A 2016 qualified disaster distribution is any distribution received from an eligible retirement plan in 2016 or 2017 if the recipient&rsquo;s main home was located in a 2016 qualified disaster area and the recipient sustained an economic loss from the disaster.<br /> <br /> A 2017 qualified disaster is limited to Hurricane Harvey and Tropical Storm Harvey, Hurricane Irma, Hurricane Maria, and the California wildfires. To be a 2017 qualified disaster distribution, the following requirements must be met:<br /> <br /> 1. The distribution was made:<br /> <p style="padding-left: 40px;">a. After August 22, 2017, and before January 1, 2019, for Hurricane Harvey or Tropical Storm Harvey (both referred to as Hurricane Harvey);</p><br /> <p style="padding-left: 40px;">b. After September 3, 2017, and before January 1, 2019, for Hurricane Irma;</p><br /> <p style="padding-left: 40px;">c. After September 15, 2017, and before January 1, 2019, for Hurricane Maria; or</p><br /> <p style="padding-left: 40px;">d. After October 7, 2017, and before January 1, 2019, for California<br /> wildfires.</p><br /> 2. The recipient&rsquo;s main home was located in a disaster area listed below on the date or any date in the period shown for that area.<br /> <p style="padding-left: 40px;">a. August 23, 2017, for the Hurricane Harvey disaster area.</p><br /> <p style="padding-left: 40px;">b. September 4, 2017, for the Hurricane Irma disaster area.</p><br /> <p style="padding-left: 40px;">c. September 16, 2017, for the Hurricane Maria disaster area.</p><br /> <p style="padding-left: 40px;">d. October 8, 2017 to December 31, 2017, for the California wildfire disaster area.</p><br /> 3. The recipient sustained an economic loss because of Hurricane Harvey, Hurricane Irma, Hurricane Maria, or the California wildfires<br /> <br /> None of the Acts define economic loss. Examples of economic loss include loss, damage, or destruction of real or personal property; loss related to displacement from a home; and loss of livelihood due to temporary or permanent layoff.<a href="#_ftn4" name="_ftnref4">⁴</a> There is no requirement that the amount of the qualified disaster distribution relate to the amount of the taxpayer&rsquo;s economic loss from the disaster or be made on account of the disaster.<br /> <br /> The Acts provide special rules for distributions from retirement accounts (qualified plans, 403(a)s, 403(b)s, governmental 457(b)s, and traditional, SEP, SIMPLE, and Roth IRAs). Distributions from retirement accounts made because of a qualified disaster are exempt from the 10 percent early distribution penalty (or 25 percent early distribution penalty for certain SIMPLE IRA distributions) if the penalty would otherwise be imposed under IRC<br /> Section 72(t). Qualified disaster distributions are treated as meeting the applicable plan&rsquo;s distribution requirements. The amount that may be treated as a qualified disaster area distribution is limited to $100,000 (the amount for any given year must be reduced by the amounts treated as 2016 disaster area distributions in prior years).<br /> <br /> If a taxpayer is affected by multiple qualifying disasters, the $100,000 limit is applied separately to each disaster distribution. Taxpayers may recognize income attributable to a qualified disaster distribution over a three-year period beginning with the year the qualified disaster distribution was made (unless an election to the contrary is made).<br /> <br /> In addition, taxpayers are also permitted a three-year period from the day after the distribution is received to make a repayment of qualified disaster distributions that is eligible for tax-free rollover treatment to an eligible retirement plan or made on account of a hardship. These repayments may be made at once or via a series of payments and will essentially be treated as though they were rollovers made within the 60-day window. A repayment to an IRA is not considered a rollover for purposes of the one-rollover-per year limitation for IRAs. The following types of distributions cannot be repaid:<br /> <ul><br /> <li>Qualified disaster distributions received as a beneficiary other than as a surviving spouse</li><br /> <li>Required minimum distributions</li><br /> <li>Periodic payments other than from an IRA that are for 10 years or more, the recipient&rsquo;s life or life expectancy or the joint lives or life expectancies of the recipient and their beneficiary.</li><br /> </ul><br /> Plans that make such a distribution also are protected against potential disqualification. Plans that permit qualified 2016 disaster distributions must be amended by the last day of the plan year beginning on or after January 1, 2018. Plans that permit qualified 2017 disaster distributions must be amended by the last day of the plan year beginning on or after January 1, 2019.<br /> <br /> Taxpayers who received certain distributions from retirement plans to buy or construct a principal residence but did not buy or construct the residence because of Hurricane or Tropical Storm Harvey, Hurricane Irma, Hurricane Maria, or the California wildfires had the opportunity to recontribute the distributions to an eligible retirement plan. The distributions had to be repaid before March 1, 2018 for repayments as a result of a hurricane or July 1, 2018 for repayments due to the California wildfires. A distribution that was not repaid before the applicable date may be taxable for 2017 and subject to the 10 percent additional tax on early distributions (or the 25 percent additional tax on certain SIMPLE IRA distributions).<br /> <br /> Individuals affected by a qualified disaster (as extended by the 2019 law) qualify for relaxed rules on loans from qualified plans. The plan administrator may increase the regular $50,000 limit on plan loans to $100,000 and the 50 percent of vested benefit limit to 100 percent. For individuals affected by a hurricane, the loan must have been made between September 29, 2017 and December 31, 2018. For someone affected by the California wildfires, the loan must have been made during the period beginning February 9, 2018 and ending on December 31, 2018. In addition, loan payments due during a specified period ending on December 31, 2018 may be suspended for one year by the plan administrator. The period begins on:<br /> <ul><br /> <li>August 23, 2017 if the recipient&rsquo;s home was located in the Hurricane Harvey disaster area</li><br /> <li>September 4, 2017 if the recipient&rsquo;s home was located in the Hurricane Irma disaster area</li><br /> <li>September 16, 2017 if the recipient&rsquo;s home was located in the Hurricane Maria disaster area; or</li><br /> <li>October 8, 2017 if the recipient&rsquo;s home was located in the California wildfire disaster area.</li><br /> </ul><br /> Casualty losses associated with a qualified 2016 or 2017 disaster are deductible regardless of whether total losses exceed 10 percent of the taxpayer&rsquo;s adjusted gross income (AGI), so long as the loss exceeds $500 per casualty. Taxpayers who do not itemize their deductions may increase their standard deduction by the net qualified disaster loss.<br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; Section 11028, 2017 Tax Act, P.L. 115-97.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; Title V, Disaster Tax Relief and Airport and Airway Extension Act of 2017, P.L. 115-63.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; Subdivision 2, Title I, Bipartisan Budget Act of 2018, P.L. 115-123.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp; 2017 IRS Publication 976, Disaster Relief.<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> A corporation may establish a qualified plan even though it has only one permanent employee and that employee owns all the stock of the corporation. If the plan is either designed or operated so that only the shareholder-employee can ever benefit, however, it will not qualify. Provision must be made for participation of future employees if any are hired.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> A pension plan will not fail to qualify merely because it is established by a corporation that is operated for the purpose of selling the services, abilities, or talents of its only employee, who is also its principal or sole shareholder.<a href="#_ftn2" name="_ftnref2">²</a> The plan of a corporation&rsquo;s sole shareholder was disqualified for violating the coverage requirement after it was shown that the only two hired personnel of the company, who had been excluded from the plan as independent contractors, in fact were employees.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> As to which individuals must be treated as employees and what organizations make up an employer, <em><em>see</em> </em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3928">3928</a>, Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3929">3929</a>, Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3933">3933</a>, and Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3935">3935</a>.<br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; Rev. Rul. 63-108, 1963-1 CB 87; Rev. Rul. 55-81, 1955-1 CB 392.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; Rev. Rul. 72-4, 1972-1 CB 105 (amplifying Rev. Rul. 55-81).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; <em>Kenney v. Comm.</em>, TC Memo 1995-431.<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> Precise top-heavy ratios need not be computed every year so long as the plan administrator knows whether or not the plan is top-heavy. For this purpose, and for the purpose of demonstrating to the IRS that a plan is not top-heavy, an employer may use computations that are not precisely in accordance with the top-heavy rules but that mathematically prove that the plan is not top-heavy. Several such methods are provided in the regulations.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  Treas. Reg. § 1.416-1, T-39.<br /> <br /> </div>

<div class="Section1"><br /> <br /> The requirement that a plan provide the qualified joint and survivor annuity (&ldquo;QJSA&rdquo;) and qualified preretirement survivor annuity (&ldquo;QPSA&rdquo;) forms of benefit ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3882">3882</a>) applies to all defined benefit plans, to all defined contribution plans that are subject to minimum funding standards (e.g., target benefit and money purchase pensions), and to profit sharing plans that include annuity provisions as the normal form of benefit.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> The automatic survivor benefit requirements also may apply to any participant under any other defined contribution plans unless, (1) the plan provides that in the event of the participant&rsquo;s death, his or her non-forfeitable accrued benefit will be paid in full to his or her surviving spouse or to another designated beneficiary if the spouse consents or if there is no surviving spouse; (2) the participant does not elect payment of benefits in the form of a life annuity; and (3) with respect to such participant, the plan is not a direct or an indirect transferee of a plan to which the automatic survivor annuity requirements apply.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> The automatic survivor benefit requirements will not apply to the portion of benefits accrued under a tax credit ESOP or leveraged ESOP if the participant has the right to demand distribution in the form of employer securities or to require repurchase by the employer of non-publicly traded securities.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect; 401(a)(11)(B).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; IRC &sect; 401(a)(11)(B); Treas. Reg. &sect; 1.401(a)-20, A-3.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; IRC &sect;&sect; 401(a)(11)(C), 409(h).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> The regulations set forth two safe harbor designs for defined contribution plans.<br /> <br /> Under the first safe harbor, referred to as a uniform allocation formula, a defined contribution plan will be nondiscriminatory if it allocates employer contributions and forfeitures for the year under an allocation formula that allocates to each employee the same percentage of plan year compensation, the same dollar amount, or the same dollar amount for each uniform unit of service (not exceeding one week) performed by the employee during the year.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> The second safe harbor design is referred to as a uniform points allocation formula. This formula allows a defined contribution plan other than an ESOP to be nondiscriminatory even though contributions are weighted for age, service, or compensation.<a href="#_ftn2" name="_ftnref2">²</a> It unfortunately imposes restrictions that limit its ability to favor higher paid employees with larger contributions and for that reason is seldom found outside the not-for-profit world.<br /> <br /> A plan with a non-uniform allocation formula may retain its safe harbor status if the effect of the non-uniform allocation is to provide lower benefits to highly compensated employees.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  Treas. Reg. § 1.401(a)(4)-2(b)(2).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.  Treas. Reg. § 1.401(a)(4)-2(b)(3).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.  Treas. Reg. § 1.401(a)(4)-2(b)(4)(v).<br /> <br /> </div>