Fully Insured Plans

<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).

<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>

<div class="Section1"><br /> <br /> A qualified joint and survivor annuity (“QJSA”) is an annuity (1) for the life of the participant, with a survivor annuity for the life of his or her spouse that is not less than one-half (nor greater than 100 percent) of the amount of the annuity payable during the joint lives of the participant and his or her spouse, and (2) that is the actuarial equivalent of a single annuity for the life of the participant.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> With respect to married participants, the qualified joint and survivor annuity must be at least as valuable as any other optional form of benefit payable under the plan at the same time. If a plan has two joint and survivor annuities that satisfy the QJSA requirements and one has a greater actuarial value than the other, the more valuable one is the QJSA. If a plan offers two actuarially equivalent joint and survivor annuities that meet the QJSA requirements, it may designate which joint and survivor annuity is the QJSA and allow a participant to elect out of the designated QJSA in favor of the equal QJSA without spousal consent.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> A plan subject to the QJSA requirements must permit a participant to receive a distribution under a QJSA when the participant attains the earliest retirement age under the plan. Written consent of the participant (but not the spouse) is required for a QJSA benefit to commence. The earliest retirement age is the earlier of the earliest age at which a participant could receive a distribution under the plan or the early retirement age determined under the plan (or, if no early retirement age, the normal retirement age under the plan).<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>.  IRC § 417(b).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.  Treas. Reg. § 1.401(a)-20, A-16.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.  Treas. Reg. § 1.401(a)-20, A-17.<br /> <br /> </div>

<div class="Section1"><br /> <br /> The final regulations provide a set of uniformity requirements that apply to all defined benefit safe harbors. A plan generally must provide a uniform normal retirement benefit in the same form for all employees, using a uniform normal retirement age. For purposes of this requirement, Social Security retirement age will be treated as a uniform retirement age.<a href="#_ftn1" name="_ftnref1">¹</a> The regulations provide for three safe harbors: one for unit credit plans, one for fractional accrual plans (including flat benefit plans), and one for insurance contract plans.<a href="#_ftn2" name="_ftnref2">²</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 § 401(a)(5)(F).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.  Treas. Reg. § 1.401(a)(4)-3(b).<br /> <br /> </div>

<div class="Section1"><br /> <br /> These plans may not use the general test of IRC Section 401(a)(4). The plans must satisfy the IRC&rsquo;s nondiscrimination requirements following the requirements that are specified under IRC Sections 401(k) and 401(m). Those sections also allow several safe harbor designs that can eliminate a requirement to complete a mathematical test for deferrals and matching contributions ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3802">3802</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3808">3808</a>).<a href="#_ftn1" name="_ftnref1">¹</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;&sect; 401(k), 401(m); Treas. Reg. &sect; 1.401(a)(4)-1(b)(2)(ii)(B).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> The IRS released guidance expressing disapproval of plans that attempt to satisfy the nondiscrimination requirements by limiting participation to highly compensated employees and to rank and file employees with very short periods of service. The IRS noted that sponsors of such plans use “plan designs and hiring practices that limit who receives a benefit to the nonhighly compensated employees and to other employees with very small amounts of compensation” and whose tenure with the company never results in their benefits being vested. These plans are targeted for adverse rulings, possible disqualification, or other actions.<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>.  Memorandum dated October 22, 2004, Carol D. Gold, Director Employee Plans.<br /> <br /> </div>

<div class="Section1"><br /> <br /> An integrated plan will not be considered discriminatory merely because the plan is integrated with Social Security (i.e., the plan uses the permitted disparity rules).<a href="#_ftn1" name="_ftnref1">¹</a> As a result, if a plan is integrated in a way that satisfies the permitted disparity rules, the disparity is disregarded in determining whether the plan satisfies the applicable defined contribution or defined benefit safe harbor.<a href="#_ftn2" name="_ftnref2">²</a> For details on Social Security integration, <em><em>see</em> </em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3863">3863</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)(5)(D).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; Treas. Reg. &sect; 1.401(l)-1(a)(1).<br /> <br /> </div></div><br />