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June 1990

COLA, quarterly payments and form 5500 filing. (cost-of-living adjustments) (IRS rules and regulations)

by Geller, Sheldon M.

    Abstract- A discussion addressing developments in the areas of cost-of-living adjustments, quarterly pension plan payments, and the filing of IRS Form 5500, which is used to satisfy IRS and Employment Retirement Income Security Act requirements related to reporting welfare benefit plans and self-employed pension plans, is presented.

The IRS has recently announced cost-of-living adjustments applicable to the dollar limitations on benefits and contributions under qualified plans (see IR-90-15). Effective as of January 1, 1990, some of the increases are as follows:

1. Maximum annual before-tax employee contribution into a 401(k) plan is increased from $7,627 to $7,979;

2. Maximum annual payment permitted under a defined benefit plan is increased from $98,064 to $102,582;

3. Maximum annual limits on contributions to an individual's account under a defined contribution plan will remain at $30,000 for 1990 (since the law provides that it will not be changed until the defined benefit plan limit for benefits exceeds $120,000);

4. Maximum annual limit is increased from $200,000 to $209,200 for determining a) a pension under a defined benefit plan and b) the actual deferral percentage ("ADP") under a 401(k) plan (compensation paid to a spouse as well as to any lineal descendants of the employee who has not attained age 19 before the close of the year needs to be taken into account in determining an employee's compensation);

5. Threshold amount for purposes of the 15% excise tax on large distributions from a retirement plan for individuals electing grandfather treatment is increased from $122,580 to $128,228 (and from $612,900 to $641,140 for lump-sum distributions), effective for distributions during the 1990 calendar year. The $150,000 ($750,000 for lump-sum distributions) threshold applicable when the grandfather rule is not elected remains unchanged; and

6. Limitations used in the definition of highly compensated employee ("HCE") of $81,720 and $54,480 are respectively increased to $85,485 and $56,990. In performing the ADP test for 401(k) plans and in determining whether qualified plans are discriminatory, HCEs now include any employee receiving compensation exceeding a) $85,485, b) $56,990 and in the top 20% of employees ranked by pay, and c) $51,291 and is an officer.

Employers sponsoring qualified plans that have received favorable determination letters need not request new determination letters solely because of yearly amendments to adjust maximum limitations in plans. Specific plan provisions governing the implementation of the cost-of- living adjustments may not need to be amended since adjustments are generally incorporated by reference, thereby automatically providing for these increases.

Quarterly Pension Plan Payments

OBRA 1987 requires employers sponsoring defined benefit plans to make quarterly plan contributions beginning in 1989.

Payment Due Dates. There are four required installments for each plan year. For calendar year plans the due dates of each required installment are April 15, july 15, and October 15 of the plan year (i.e., 1990) and January 15 of the following year (i.e., 1991). For fiscal years the dues dates come in corresponding months. That is, for non-calendar year plans, the due dates of the required installments are 15 days after the end of each quarter of the plan year.

Required Annual Payment. The required annual payment is the lesser of a) 90% of the amount the employer is required to contribute for the current plan year, or b) 100% of the amount that the employer was generally required to contribute for the preceding plan year (unless the preceding plan year was less than 12 months). Unless the plan's valuation is performed on the first day of the plan year, employers would generally not know the required contribution for the current plan year and, therefore, would be advised to contribute amounts based upon (b) above.

Transitional Rule. There is a phase-in of the applicable percentage for each quarterly contribution as follows:

PlanYearApplicable

BeginninginPercentage

19896.25%

199012.50%

199118.75%

1992andlater25.00%

Failure to Make Quarterly Contributions. There is no apparent, prescribed penalty for failure to make quarterly payments. However, if the full amount of a required contribution installment is not made on a timely basis, then a) interest must be paid to the pension trust in respect of any underpayment, and b) the employer is required to notify each participant, beneficiary, and alternate payee (under a qualified domestic relations order) of the failure to make a quarterly payment. This notification is required only if the quarterly payment is not made within 60 days of the applicable due date of the payment (i.e., there is a grace period regarding notification).

The 1987 Act has increased the non-deductible excise tax from 5% to 10%. It is imposed on an employer if the annual contribution is not made within eight and one-half months after the end of the plan year. If the required contribution is made within 90 days after the IRS advises the employer to make a contribution, a 100% deductible excise tax will be applicable. Form 5500 Filing

Welfare Benefit Plans. For plan years beginning after 1988, certain fringe benefit plans, including group-term life, accident and health, and dependent care assistance plans, must file a Form 5500 (Sec. 6039D). These rules were primarily applicable only to cafeteria plans, education assistance programs and group legal services plans. Since Form 5500 is used to satisfy both ERISA and IRS reporting requirements, welfare benefit plans otherwise excepted from ERISA filing requirements (e.g., unfunded or fully insured plans with fewer than 100 participants) must now file Form 5500 to satisfy IRS reporting requirements. This reporting requirement was enacted along with Sec. 89 and its nondiscriminatory provisions. Although Sec. 89 was repealed last year, it is understood that no changes to the filing requirement that would exclude small employers from filing are currently under consideration. Plan sponsors, however, should wait for guidance to be issued before filing Form 5500 for the 1989 plan year for dependent care assistance plans and group- term life plans.

Self-Employed Pension Plans. Pension and profit sharing plans covering only a business owner (and spouse) need not file a Form 5500 EZ for the 1989 plan year unless assets exceeded $100,000 (IRS Ann. 90-22). These plans had to file Form 5500 for the 1988 plan year if assets exceeded $25,000.

IRS Form 5500 EZ may be used by a one-participant plan, that is, a plan that covers a) only the taxpayer and his or her spouse (if the business is wholly owned by the taxpayer and the spouse), or b) only partners in a partnership or the partners and their spouses. if the employer has two or more so-called one-participant plans, and the total assets of all the plans are more than $100,000, the sponsoring employer has to file a 1989 IRS Form 5500 EZ for each plan.



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