Year-end benefit plan to-do list

Just as a car needs ongoing maintenance to run well or operate legally, employee benefit plans benefit from periodic check-ups.  With Congress making continuous changes to the income tax code and the IRS issuing a never-ending stream of interpretive guidance, most plans will require some amendments this year.  Some of the more common amendments and the deadlines are:

401(k) Plans -- All 401(k) plans and plans with after-tax employee or employer matching contributions must adopt a "good faith" amendment implementing the final 401(k) regulations by the end of the 2006 plan year (December 31 for calendar year plans).

Safe Harbor Notices -- The 401(k) regulations modified the required content of 401(k) safe harbor notices by adding additional requirements regarding vesting, distributions and contact information.  In addition, because the Pension Protection Act (PPA) shortened allowable vesting schedules for employer profit sharing contributions, the Notice will need to reflect the correct schedule.  Plans that adopted automatic enrollment provisions under the PPA must also include information about the deferral procedures.  Notices should be distributed to participants by December 1 for a calendar year plan.

ROTH Amendments -- If a plan permitted ROTH after-tax deferrals to a 401(k) plan during 2006, the plan sponsor must adopt a conforming plan amendment by the end of the 2006 plan year.

EGTRRA Restatements -- Individually designed plans (primarily ESOPs, stock bonus or cash balance plans) sponsored by an employer with an EIN ending in 1 or 6 must restate the plan document, and submit it to the IRS for a favorable determination letter if desired, by January 31, 2007.

Discounted Stock Options or Stock Appreciation Rights (SAR) -- New Tax Code section 409A imposes severe income tax penalties on recipients of some "discounted" options or SARs.  A discounted option or SAR is one with an exercise price lower than fair market value on the grant date.  The IRS is providing a transition period until December 31, 2006 to correct this situation.  Typical corrections include increasing in the exercise price, a cash-out of the grant (with a post-2006 payout), replacing the grant with a new grant or conforming the existing grant to the 409A requirements.  The decision may impact several other sensitive areas, such as SEC disclosures for public companies, triggering deduction limits or shareholder disclosure and consent.

Additional rules may apply to your particular type of plan or situation.  Consulting with your employee benefits expert should be part of your annual year-end cycle to ensure that the plans stay in compliance and that the plan sponsor and participants avoid any unnecessary taxation or penalties.