Mandatory distributions - jumping directly from $1,000 to $7,000

This subject has come up in discussion before, but since I've seen the new FIS plan termination amendment, I thought I'd bring it up again.

We've been taking the conservative position (rightly or wrongly) that the jump to $7,000 only applies if the plan ALREADY has a $5,000 limit. A plan that has a $1,000 limit, we've been amending to $5,000, then operationally switching to $7,000. 

The FIS plan termination amendment, which of course isn't IRS approved language, does provide an option to jump directly from $1,000 to $7,000. But, this is a termination amendment, not an amendment for an ongoing plan.

I believe in one of the webcasts quite a while ago, there was some musing that operationally jumping directly from $1,000 to $7,000 operationally, and catching up with the formal SECURE/2.0 amendments, would be acceptable, but that was REALLY unofficial - just some general discussion.

Anyone have any new thoughts on this subject? 

32 minutes ago, Belgarath said:

We've been taking the conservative position (rightly or wrongly) that the jump to $7,000 only applies if the plan ALREADY has a $5,000 limit. A plan that has a $1,000 limit, we've been amending to $5,000, then operationally switching to $7,000. 

Personally, I don't think you need to amend to $5,000 in order to take advantage of $7,000.  The caveat would be if there are any other elections that need to be made in order for the limit to be $7,000.  If all you need to change is the limit, I have no issues jumping from $X to $7,000, as $7,000 takes the place of $X (its irrelevant that point).

We are also amending the cash-out to $0 when increasing the force-out to $7,000.  If we had a client say no to removing the cash-out, I wouldn't lose sleep on going from less than $5,000 to $7,000.

BTW, there was a webcast a few weeks ago on LTPT that said a plan amendment to eliminate the LTPT issue (like amending to reduce hours of service or going with elapsed time) could be done operationally now as long as the amendment is done by the S2.0 amendment deadline.  That feels a bit aggressive to me.

The defaults from your preapproved document provide might only increase the limit to $7,000 if the limit was previously $5,000. You could still go straight from $1,000 to $7,000 but the amendment might need the sponsor's signature.

Distributions less than the force out limit are not 411(d)(6)-protected, so there is no anti-cutback issue.

27 minutes ago, RatherBeGolfing said:

BTW, there was a webcast a few weeks ago on LTPT that said a plan amendment to eliminate the LTPT issue (like amending to reduce hours of service or going with elapsed time) could be done operationally now as long as the amendment is done by the S2.0 amendment deadline.  That feels a bit aggressive to me.

It does to me too - but it is actually straight out of the preamble to the proposed LTPT regulations. Here is what the IRS said:

Quote

For example, if a plan that is not an applicable collectively bargained plan or a governmental plan is maintained on a calendar-year basis and provides that, in order to be eligible to make a cash or deferred election under the CODA in the plan, an employee is required to complete a 12-month period during which the employee is credited with at least 1,000 hours of service, but the employer intends to amend the plan to provide that, effective January 1, 2024, each employee is eligible to make a cash or deferred election as soon as administratively practicable after the employee's employment commencement date, then the intended plan amendment would be made pursuant to section 112 of the SECURE Act and related provisions of the SECURE 2.0 Act. Accordingly, if the plan is operated in accordance with the intended plan amendment, then the plan amendment would not be required to be adopted before the deadline that applies to the plan under section 501 of the SECURE 2.0 Act (that is, December 31, 2025, or such later date as the Secretary may prescribe).

https://www.federalregister.gov/d/2023-25987/p-37

9 minutes ago, C. B. Zeller said:

The defaults from your preapproved document provide might only increase the limit to $7,000 if the limit was previously $5,000. You could still go straight from $1,000 to $7,000 but the amendment might need the sponsor's signature.

That is a good side issue since we haven't seen the amendments yet.  That said, I think we may run into that issue either way unless you make the call as the document provider to default all your documents to $7,000.  Most amendments that are adopted by the provider on behalf of the sponsor also include the same effective date, so unless you default all your docs with the same effective date, you will probably need the sponsor's signature.

I have a feeling we will need sponsor signature for a lot of the S2.0 amendments as there are so many optional features.  There are other optional features that I don't think would work as a default amendment, like Roth match/nonelective.  Some clients love the idea, others don't want the hassle.

14 hours ago, RatherBeGolfing said:

 

I have a feeling we will need sponsor signature for a lot of the S2.0 amendments as there are so many optional features.  There are other optional features that I don't think would work as a default amendment, like Roth match/nonelective.  Some clients love the idea, others don't want the hassle.

Yeah, I've resigned myself to that - I assume most, if not all, will have to be signed - this won't be a typical "cookie cutter" amendment. I am VERY thankful that we already did the CARES amendment, so we don't have to try to reconstruct all that garbage - going to be bad enough dealing with the SECURE/2.0 amendments. We might just require signatures on all of them for administrative consistency - no danger of missing one that way.

And thanks to you and C.B. for the responses.

My position is that you need a current amendment to go from $1k to $5k to be able use the SECURE 2.0 jump to $7k and 2026 amendment. My reasoning is if the plan only has $1k then does have the default IRA rollover provision? (certainly there is no IRA provider) I don't know if the anti-cutback rules give you that. Maybe basic plan documents are generic enough in that regard that it's covered.

Anyway, I'm in the conservative camp with B, especially for DBPs where the plan's cash out threshold also ties in to QJSA requirements.

14 minutes ago, CuseFan said:

My reasoning is if the plan only has $1k then does have the default IRA rollover provision? (certainly there is no IRA provider)

You could have an amount less than $5,000 (or even less than $1,000) and have a default rollover and IRA provider.  It depends on what the cash-out limit is. If cash-out is $0 or any amount that is less than the force-out, you would need the rollover provision.  I do agree that that an amendment is likely needed if you haver to add the IRA provider particulars (or really anything other than the just the force-out limit)