October 26, 2010
Individual account plan administrators should consider amendments to their 401(k) and 403(b) plans and summary plan descriptions (SPDs) in order to implement two recent legislative and regulatory items. First, the Department of Labor recently released a final rule requiring plan administrators to provide participants and beneficiaries with certain investment fee and expense information. Plan SPDs will need to be amended in order to comply with these new requirements. Second, legislation was recently enacted authorizing 401(k) and 403(b) plans to allow in-plan Roth conversions. A plan amendment is required to authorize the conversions. The details of these new items are outlined below.
1. Department of Labor Releases Final Rule on Fee Disclosures in Individual Account Plans
On October 14, 2010, the Department of Labor released final regulations detailing new requirements for 403(b) and 401(k) plans that grant participants and beneficiaries the right to direct the investment of all or a portion of assets held in their individual accounts. Under these new regulations, plan fiduciaries must take steps to ensure that plan participants and beneficiaries are informed, on a regular and periodic basis, of plan investment options and related fees and expenses. The regulations permit plan administrators to rely upon information received from investment service providers in making the required disclosures.
These new regulations become effective on December 20, 2010, and will apply to 401(k) and 403(b) plans for plan years beginning on or after November 1, 2011. For most calendar-year plans, this means that the regulations will apply on January 1, 2012.
Plan-Related Information: The regulations specifically require plan administrators to automatically disclose to each participant or beneficiary (i) on or before the date that they can first direct their investments, (ii) annually thereafter, and (iii) upon any change in the disclosed information, certain plan-related information including, but not limited to the following:
In addition, plan administrators must automatically provide participants and beneficiaries with a statement containing the following information on at least a quarterly basis. This information may be included in the quarterly benefit statement currently required under § 105 of ERISA:
Investment-Related Information: In addition, the regulations require plan administrators to automatically disclose to each participant or beneficiary (i) on or before the date that they can first direct their investments, (ii) annually thereafter, and (iii) upon any change in the disclosed information, certain investment-related information including, but not limited to the following:
The rule provides a model chart that may be used to provide the above-described investment return and expense information. If the model chart is used correctly, the regulations explain that the requirement to provide the information in a comparative format will also be met.
Finally, the regulations provide that certain additional investment-related information (e.g., prospectuses, financial statements, etc.) is to be provided to plan participants and beneficiaries upon request.
2. In-Plan Roth Account Conversions Allowed Under 401(k) and 403(b) Plans
On September 27, 2010, the President signed the Small Business Jobs Act (the "Act") into law. Effective immediately, the Act allows in-plan Roth conversions for 401(k) and 403(b) plans. Previously, plan participants could only effect a Roth account conversion by withdrawing amounts from their employer-sponsored plan and then rolling such amounts over into a Roth IRA. Beginning on January 1, 2011, the Act also authorizes governmental 457(f) plan sponsors to add designated Roth accounts to their plans and to allow in-plan Roth conversions.
In order to take advantage of the in-plan Roth conversion option, plan terms must be amended to authorize Roth salary deferrals (if the plan does not already authorize such deferrals) and to specifically authorize in-plan conversions. Conversions are only permitted upon distributable eligible rollover events (e.g., upon the termination of employment, a participant’s reaching age 59-1/2, a participant’s qualified disability, etc.). Furthermore, the conversion must otherwise meet all of the plan’s written rollover requirements. Spousal beneficiaries are eligible for the conversion option as well.
There are several advantages to offering an in-plan Roth account conversion as opposed to requiring participants to take a distribution from their 401(k) or 403(b) account and then roll the amount over into a Roth IRA. Among other things, these include:
Plan participants are subject to tax on all pre-tax conversions rolled over or converted into a designated Roth account. However, under current special tax legislation participants may elect to have conversions to a Roth account made in 2010 be taxed 50% in 2011 and 50% in 2012. After 2010, amounts rolled over or converted to a Roth account or Roth IRA will be taxed in the year of the roll over or conversion. The 10% early distribution tax does not apply to Roth rollovers or conversion. Plan sponsors should carefully consider a plan amendment authorizing in-plan Roth conversions prior to December 31, 2010.
If you have any questions regarding the new fee disclosure requirements or the in-plan Roth conversion option, or if you would like any assistance amending your plan or SPD, please contact David Schiller at (214) 698-3205 or firstname.lastname@example.org, Krista Hanvey at (214) 698-3425 or email@example.com, or one of our other Gibson Dunn employee benefits attorneys listed below.
Charles F. Feldman – New York (212-351-3908, firstname.lastname@example.org)
Stephen W. Fackler – Palo Alto (650-849-5385, email@example.com)
Michael J. Collins – Washington, D.C. (202-887-3551, firstname.lastname@example.org)
Sean C. Feller - Los Angeles (213-229-7579, email@example.com)
Amber Busuttil Mullen – Los Angeles (213-229-7023, firstname.lastname@example.org)
IRS Circular 230 disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any matters addressed herein.
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