Revised Operational Compliance List Affirms Ability to Rely on Proposed Hardship Regulations

The IRS has updated its Operational Compliance (OC) list that highlights changes in the tax-qualification requirements and other guidance affecting the operation of retirement plans (including 401(k) plans). The OC list is one of two tools that the IRS provides to help individually designed plans maintain compliance (see our Checkpoint article). (The other tool is an annual required amendments list (see our Checkpoint article).) The first OC list was issued in March 2017 and identified operational compliance items for 2016 and 2017 (see our Checkpoint article). The revised list adds items for 2018 and 2019, plus several disaster-relief items for 2017. Here are highlights for 401(k) plans:

• Hardship Distributions. The list of changes effective in 2019 summarizes amendments to the rules for hardship distributions included in the Bipartisan Budget Act of 2018 (see our Checkpoint article) and subsequently addressed in proposed IRS regulations (see our Checkpoint article), highlighting transition rules that would allow contribution suspensions to be lifted for hardship distributions prior to 2019, expand the list of safe harbor expenses for distributions after 2017, delay the regulations’ representation requirement, and allow plans to suspend contributions as a condition for distributions made in 2019. The 2019 list explains that the deadline applicable to plan amendments for the final hardship regulations will be the same deadline as applies to disqualifying provisions (see our Checkpoint article). The 2018 list also discusses the proposed regulations, focusing on how those regulations would apply to distributions for damage to an employee’s principal residence. Both lists (2018 and 2019) affirm that taxpayers may rely on the proposed regulations until the final regulations are published.
• Disaster Relief. The 2019 list includes disaster relief for victims of Hurricanes Florence and Michael, and explains that any necessary plan amendments will be required by the deadline generally applicable to disqualifying provisions. The 2018 and 2017 lists add items relating to California wildfires relief, “qualified 2016 disaster distributions,” and relief for the victims of Hurricanes Harvey, Irma, and Maria.
• Final QNEC and QMAC Regulations. The 2018 list discusses the final regulations that permit forfeitures to be used as QNECs or QMACs (see our Checkpoint article), and notes that plans were permitted to apply the final regulations prior to their formal effective date of July 20, 2018.
• Extended Rollovers. The 2018 list discusses the effective dates of changes to the rollover rules applicable to qualified plan loan offset amounts and refunded federal tax levies.

EBIA Comment: Plans must comply operationally with changes in relevant qualification requirements from the effective date of those changes, whether or not they are included in the OC List. The revised OC list showcases some of the options available to plan sponsors under recent guidance, and the extended remedial amendment periods applicable to those changes. The most significant aspect of this version of the OC list, however, may be its clarification that the IRS’s proposed hardship regulations can be relied upon until final regulations are issued. The OC List continues to be available only online; plan sponsors and their advisors will want to consult the OC List webpage periodically for updates. For more information, see EBIA’s 401(k) Plans manual at Sections IV.B (“Form and Operational Qualification Requirements”) and XXVII.G.1 (“Extended Remedial Amendment Periods for Individually Designed Plans Resulting From a Change in Qualification Requirements”).

Contributing Editors: EBIA Staff.