Understanding Employee Benefits and key developments in the employee benefits field and items of interest to our clients. MORE

On October 26, 2020, the Internal Revenue Service (IRS) released Notice 2020-79, which sets forth the 2021 cost-of-living adjustments affecting dollar limits on benefits and contributions for qualified retirement plans. The IRS also announced the dollar limitation for employee salary reductions for contributions to health flexible spending arrangements in Revenue Procedure 2020-45. The health savings account (HSA) and high deductible health plan (HDHP) annual deductible and out-of-pocket expense adjustments were announced earlier this year in Revenue Procedure 2020-32. The Social Security Administration announced its cost-of-living adjustments for 2021 on October 13, 2020, which includes a change to the taxable wage base.

The following chart summarizes the 2021 limits for benefit plans. The 2020 limits are provided for reference.

  2020 2021
Elective Deferral Limit 401(k), 403(b), 457(b)  $19,500 $19,500    (no change)
Catch-up Limit (age 50+) $6,500

 

 $6,500      (no change)

 
Defined Benefit Limit $230,000 $230,000  (no change)
Defined Contribution Limit $57,000

 

 $58,000
Dollar Limit – Highly Compensated Employees $130,000 $130,000  (no change)
Officer – Key Employee $185,000 $185,000  (no change)
Annual Compensation Limit $285,000 $290,000
SEP Eligibility Compensation Limit $600 $650
SIMPLE Deferral Limit $13,500 $13,500  (no change)
SIMPLE Catch-up Limit (age 50+) $3,000 $3,000  (no change)
Social Security Taxable Wage Base $137,700 $142,800
ESOP 5 Year Distribution Extension Account Minimum $1,150,000 $1,165,000
Additional Amount for 1-Year Extension $230,000 $230,000       (no change)
HSA (Self/Family) Maximum Annual Contribution $3,550/$7,100 $3,600/$7,200
HDHP Minimum Deductible Limits $1,400/$2,800 $1,400/$2,800   (no change)
Out-of-pocket Expense Annual Maximum $6,900/$13,800 $7,00/$14,000
Medical FSA $2,750 $2,750                   (no change)

For more information on the 2021 cost-of-living adjustments, please contact Nick Bertron, Jeff Cairns or the Stinson LLP contact with whom you regularly work.

 

On Friday, June 19, 2020, the IRS released Notice 2020-50 which provides additional guidance regarding the coronavirus-related distributions (“CRDs”) and coronavirus-related loans and loan repayment delays (“CR Loan Relief”) made available to certain retirement plan participants affected by COVID-19 under the CARES Act. The notice expands, and in some cases modifies, previous guidance issued by the IRS regarding CRDs and CRD Loan Relief discussed in our recent blog. Discussion of the material information contained in the notice is provided below.

Expanded Definition of “Qualified Individual” Eligible for CRDs and CR Loan Relief

Notice 2020-50 expands the definition of “qualified individual” (an individual eligible for CRDs or CR Loan Relief) to take into account additional factors such as reductions in pay, rescissions of job offers, and delayed start dates with respect to an individual, as well as adverse financial consequences to an individual arising from the impact of COVID-19 on the individual’s spouse or household member[1].

Under the expanded definition provided under Notice 2020-50, “qualified individual” is now defined as an individual who:

  • is diagnosed, or whose spouse or dependent is diagnosed with COVID-19 by certain approved tests; or
  • experiences adverse financial consequences as a result of the individual, the individual’s spouse, or a member of the individual’s household (that is, someone who shares the individual’s principal residence):
    • being quarantined, furloughed or laid off, or having work hours reduced due to COVID-19;
    • being unable to work due to lack of childcare due to COVID-19;
    • closing or reducing hours of a business that they own or operate due to COVID-19;
    • having pay or self-employment income reduced due to COVID-19; or
    • having a job offer rescinded or start date for a job delayed due to COVID-19.

The notice clarifies that plan administrators can rely on an individual’s certification that the individual is a qualified individual (unless the plan administrator has actual knowledge to the contrary), but also notes that an individual must actually be a qualified individual in order to obtain favorable tax treatment with respect to a CRD. The notice provides a sample certification that may be used by an individual to certify that they satisfy the conditions to be a qualified individual.

Distributions that may be treated as CRDs

 In Notice 2020-50, the IRS confirms that, in general, a qualified individual is permitted to designate a distribution satisfying the applicable CARES Act requirements as a CRD without regard to whether the plan treats the distribution as a CRD.  Notice 2020-50 further clarifies that the amount of a CRD is not limited to amounts withdrawn solely to meet a need arising from COVID-19. Thus, an individual who is a qualified individual is permitted to take CRDs up to the $100,000 limit regardless of the individual’s need for the funds.

Direct Rollover, Notice and Withholding Requirements Not Applicable to CRDs

The notice and prior guidance provide that a plan is not required to treat a plan distribution meeting the applicable requirements as a CRD. The notice clarifies that if a plan elects to treat a distribution as a CRD, the rules for eligible rollover distributions do not apply and the plan is not required to offer the individual a direct rollover with respect to the distribution and the plan administrator is not required to provide the individual with a 402(f) notice. In addition, the CRD is not subject to the 20% withholding requirement normally applicable, but the voluntary withholding requirements continue to apply.

Safe Harbor for Suspension of Loan Repayments

Under the CARES Act, a plan may permit a delay in certain loan repayments (generally, loan repayments with a due date between March 27, 2020 and December 31, 2020) without causing the loans to be treated as a deemed distribution under Code § 72(p). For plans providing qualified individuals with this repayment relief, the notice provides a safe harbor to satisfy the CARES Act requirements and avoid a deemed distribution.

Under the safe harbor, a qualified individual will not be treated as having a deemed distribution if:

  • the obligation to repay a plan loan is suspended under the plan for any period beginning not earlier than March 27, 2020, and ending not later than December 31, 2020 (the “Suspension Period”);
  • loan repayments resume after the end of the Suspension Period and the term of the loan may be extended by up to 1 year from the date the loan was originally due to be repaid;
  • interest accruing during the Suspension Period is added to the remaining principal on the loan; and
  • the loan is reamortized and repaid in substantially level installments over the remaining period of the loan.

Use of the safe harbor is not required, and the IRS has acknowledged that there may be additional reasonable methods for administering the suspension of loan repayments.

Plans Accepting Recontribution of CRDs

Under the CARES Act, a qualified individual who receives a CRD that is eligible for tax-free rollover treatment is generally permitted to recontribute, at any time within the 3-year period beginning on the day after the date on which the distribution is received, any portion of the CRD (but not an amount in excess of the amount of the distribution), to an eligible retirement plan that accepts eligible rollover contributions. A plan administrator may rely on an individual’s certification that they are a qualified individual in determining whether the recontributed amount was a CRD, unless the administrator has actual knowledge to the contrary.

Tax Reporting of CRDs by Eligible Retirement Plans

Notice 2020-50 details the reporting procedures for eligible retirement plans that issue CRDs. If an eligible retirement plan makes a CRD, the plan must report the distribution on Form 1099-R even if the individual recontributes the CRD to the same plan in the same year. If no other appropriate code applies to the distribution, the plan is permitted to use distribution code 2 (early distribution, exception applies) or distribution code 1 (early distribution, no known exception) in box 7 of Form 1099-R.

Tax Reporting of CRDs by Qualified Individuals

Notice 2020-50 provides a detailed discussion of the reporting requirements and tax consequences applicable to qualified individuals that receive CRDs. In general, a qualified individual is permitted to designate any distribution satisfying the applicable requirements as a CRD (without regard to whether the plan treated the distribution as a CRD) by reporting the distribution on the individual’s federal income tax return and on Form 8915-E (Qualified 2020 Disaster Retirement Plan Distributions and Repayments).

Qualified individuals designating amounts as CRDs have two options for including the taxable portion of the CRD in his or her income: (1) include the taxable portion of the distribution in income ratably over a 3-year period; or (2) elect out of the 3-year ratable income inclusion and include the entire amount of the taxable portion of the CRD in the year of distribution. An election cannot be made or changed after the timely filing of the individual’s federal income tax return (including extensions) for the year of distribution, and all CRDs received in a taxable year must be treated consistently (either all distributions must be including in income over a 3-year period or all distributions must be included in income in the current year).

If a qualified individual elects to recontribute any portion of the CRD during the 3-year period beginning on the day after the date the CRD is received, the reporting requirements and applicable tax consequences vary depending on whether the individual uses the 1-year or 3-year inclusion method with respect to the CRD and whether the recontribution is made before or after the individual files his or her federal income tax return for the applicable tax-year.  Special rules also apply for qualified individuals who use the 3-year income inclusion method with respect to a CRD if the individual dies before the full taxable amount of the CRD has been included in the individual’s gross income.

For more information on the new IRS guidance or the CARES Act, please contact Jeff Cairns, Audrey Fenske or Nick Bertron or the Stinson LLP contact with whom you regularly work.

[1] As we noted in a recent blog, under previous IRS guidance, a “qualified individual” did not include an individual that experienced adverse financial consequences attributable to a spouse’s loss of income due to coronavirus-related quarantine, furlough, layoff, reduced hours, inability to work due to lack of child care, or closing of a spouse’s business or reduced hours of a spouse’s business. The definition of qualified individual, as expanded by Notice 2020-50, now includes these individuals.

In a new information letter, the U.S. Department of Labor (DOL) concludes offering professionally managed asset allocation funds, which include a private equity component as an investment option in an individual account plan (e.g., a 401(k) plan), is not a per se violation of ERISA. Plan fiduciaries commonly invest defined benefit pension plan assets in private equity in order to take advantage of the increased diversification and enhanced returns offered by private equity investments relative to publicly traded securities. In contrast, due to questions surrounding the ERISA fiduciary liabilities associated with having private equity investment exposure in an individual account plan, such plans have not offered participants investment options that include private equity exposure. As a result of the DOL’s position in the information letter, this dichotomy may change soon. However, before plan fiduciaries jump to offer private equity investment exposure to plan participants, fiduciaries must consider that the information letter outlines a robust process to follow when determining whether to offer a professionally managed asset allocation fund with a private equity component in the plan’s investment line-up.

The Scope of DOL’s Conclusion

In the June 3, 2020 information letter, the DOL concludes that a “plan fiduciary would not, in the view of the Department, violate the fiduciary’s duties under section 403 and 404 [ERISA’s fiduciary duty provisions] of ERISA solely because the fiduciary offers a professionally managed asset allocation fund with a private equity component as a designated investment alternative for an ERISA covered individual account plan.” This conclusion does not, however, open the door to a plan fiduciary allowing plan participants to invest in any type of private equity arrangement.

First, the DOL only considered the type of investment vehicle proposed by the private equity investment group requesting the letter, and therefore, the scope of the letter is limited to such investment vehicles. The proposed professionally managed asset allocation funds with a private equity component would be structured as a custom target date, target risk, or balanced fund, permitting only a certain portion of the fund’s assets to be exposed to private equity. The remainder of the fund’s assets would be invested in publicly traded securities or other liquid investments with established market values.

Second, the information letter’s conclusion only applies to private equity investments that are components of larger, diversified multi-asset investment vehicles. The information letter does not address situations in which individual account plan participants are able to invest directly in private equity.

Factors the Plan Fiduciary Must Consider

In addition to concluding the inclusion of asset allocation funds with private equity components in a plan’s investment line-up is not a per se violation of a plan fiduciary’s duties under ERISA, the information letter describes the factors that a plan fiduciary must consider before deciding to include such an investment vehicle in the plan’s investment line-up. The plan fiduciary must determine if it has the skills, knowledge, and experience necessary to understand the private equity component of the investment vehicle and to make the required determinations. If the plan fiduciary lacks these traits, it must engage a qualified investment adviser or professional to help it determine whether including an asset allocation fund with a private equity component in the plan’s investment line-up is appropriate and, if so, assist in selecting a suitable asset allocation fund.

With respect to selecting a particular asset allocation fund with a private equity component, the plan fiduciary must follow a thorough, objective and analytical process that considers all relevant facts and compare the asset allocation fund with appropriate alternatives that do not include a private equity component. According to the DOL, during such a process a plan fiduciary must consider the following:

  • Whether the fund’s characteristics match the characteristics of the plan and the needs of its participants and beneficiaries (e.g., in light of the participants’ ages, contribution and withdrawal patterns, employment turnover, etc., if the nature and duration of the fund’s liquidity restrictions are appropriate)
  • Whether the addition of the fund would allow participants to diversify investment risk while still earning an appropriate return (net of fees) over a multiple year period
  • Whether the party controlling the fund has the requisite capabilities, experience, and stability to manage an investment with a private equity component, given the complexity of private equity activity
  • Whether the private equity component of the fund has been appropriately limited in size (e.g., no more than 15% of the fund’s assets are held in the private equity component)
  • Whether the fund has features to ensure it maintains sufficient liquidity to allow participants to receive benefit distributions and change their plan investment options as permitted by the plan’s term
  • How the fund will value the private equity investments
  • Whether plan participants will be given sufficient and adequate information regarding the fund to understand the risks associated with investing in a fund that includes a private equity component

Should a plan fiduciary decide to include an asset allocation fund with a private equity component in a plan’s investment line-up, the DOL stresses that the plan fiduciary must continuously monitor such a fund to ensure that keeping it in the plan’s investment line-up remains prudent.

The Department of Labor has issued final regulations that will enable employers to electronically provide required information and documents to more plan participants.  Although employers have been able to electronically provide some documents and information to some participants under existing rules, use of electronic delivery was limited because of an affirmative consent requirement that applied to many participants.  In contrast, the new rules provide a “safe harbor” for plans to default to electronic disclosure, if participants are allowed to opt out, and the plan meets certain notice and access requirements.

The availability of this new safe harbor is expected to save approximately $3.2 billion in costs for ERISA retirement plans.  The regulations are in response to the President’s August 31, 2019 Executive Order, which directed the DOL and the Treasury Department to review ways to make retirement plan disclosures required under ERISA and the Internal Revenue Code more understandable and useful to participants, including exploring the potential for broader use of electronic delivery as a way to improve effectiveness and reduce costs.  The DOL worked with Treasury throughout the regulatory process, and Treasury and the IRS intend to issue additional guidance regarding the electronic delivery of participant notices required under the Internal Revenue Code.

These new rules are applicable to retirement plans only, and not to welfare benefit plans.  Below are Q&As that address some of the key features of the new safe harbor.

What kinds of electronic addresses may be used?

The regulations make it easier for plans to facilitate electronic disclosure by allowing a plan to use an electronic address (e.g., email or smartphone number) already used by the employer for general employment-related purposes.  To ensure email will be accessed regularly enough to be effective, the email address must either be (i) assigned by the employer (but not by the plan administrator or recordkeeper or otherwise specifically assigned for plan use) or (ii) provided by the plan participant, beneficiary, or anyone else entitled to documents.  An employer cannot assign an electronic address to anyone except participants.  When a participant terminates employment, the plan must have reasonable procedures in place to obtain a new electronic address from the departing employee, if the email address in use is one assigned by the employer.

Who is covered under the safe harbor?

To be covered by the new safe harbor, a participant must receive an initial paper notice that electronic delivery will be used.  The notice must identify the electronic address that will be used, describe how to access documents, and caution the participant that documents may only be available for a limited period of time.  The notice must also describe the participant’s rights to opt out of electronic delivery and to request a paper copy of any document free of charge and how to exercise those rights.  This notice requirement applies to both new and existing employees, some who may already receive electronic disclosures under an existing safe harbor.  Although it may be possible to fall within the existing regulatory safe harbor based on required regular work-related email access or affirmative consent for some participants while using the new safe harbor for other participants, the requirements for document delivery would differ for the two groups of participants, making plan administration complex.

How must documents and information be delivered?

Documents and information may be provided electronically in two ways:  (i) they may be attached in electronic form to an email, or (ii) they may be made available on a website.

If a document is available on the internet, participants must receive a “notice of internet availability” or “NOIA.”  The NOIA must include a link to the document or a website address specific to the document.  If the link/website requires the participant to login first, the document link must be prominently displayed following login.  The regulations include requirements for how long a document or information must be maintained on the website.  Whether the documents are on a website or in an attachment to an email, the plan administrator must take steps reasonably calculated to protect the confidentiality of personal information of participants and beneficiaries.

Are there content restrictions or requirements for an email of NOIA?

Yes.  Both the NOIA and an email that delivers a document or information in an attachment must also include information on the participant’s rights similar to the initial notice and a telephone number of the plan administrator or representative.  The rules also require specific statements to be included in the NOIA or email.  The content of the NOIA must otherwise be limited to a brief, simple description of the documents or information.  Whether attached to the email or included on a website, the documents or information must be in a format that is easily readable on-line, easily printed, and searchable.

Can an NOIA or email cover multiple plans or multiple documents/disclosures?

No.  Emails or NOIAs may not include information about more than one plan and generally may not include more than one document/information disclosure.  However, summary plan descriptions, annual disclosures, and any other documents/disclosures designated by the Secretary of Labor or the Secretary of Treasury may be included in a single annual NOIA (“Annual NOIA”).

When must documents and information be delivered?

Documents and information must be available on a website or delivered to participants at the same time as they are otherwise required to be furnished to participants under ERISA.  The safe harbor does not change these requirements.

If the document or information is provided in an electronic attachment to an email, the email would need to be sent by the date it is required to be furnished to the participant under ERISA.

Although documents and information that are made available on a website must be available and an NOIA generally provided by the date required under ERISA, the Annual NOIA must only be provided annually and no later than 14 months after the most recent NOIA.

When will the safe harbor be available?

Although the rules are not effective until sixty days after they are published in the Federal Register, in response to comments and due to the difficulties of plan administration associated with the COVID-19 pandemic, the DOL will not take action against a plan administrator that relies on them before the effective date.

Will the existing safe harbors still be available?

The existing safe harbor for electronic delivery (based on either affirmative consent or required regular work-related access to email) remains available.  Other existing safe harbors based on DOL interpretations in Field Advisory Bulletin 2006-03 (covering pension benefit statements) and 2008-03 (addressing QDIA notices) and in Technical Release 2011-03R (fee disclosures) may only be relied on for a period of eighteen months following the effective date of the new regulations.

On May 4, 2020, the IRS provided guidance on coronavirus-related distributions (“CRDs”) and coronavirus-related loans and loan payment delays (“CR Loan Provisions”) in the form of FAQs.  In those FAQs, the IRS answered a few of the questions that many practitioners, administrators, and employers have been asking:

  • Does a spouse’s loss of income trigger eligibility for CRDs or CR Loan Provisions? For now, an individual is not considered a “qualified individual” (an individual eligible for CRDs or CR Loan Provisions) due to adverse financial consequences that are attributable to a spouse’s loss of income due to coronavirus-related quarantine, furlough, layoff, reduced hours, inability to work due to lack of child care, or closing of a spouse’s business or reduced hours of a spouse’s business. (Q&A-3.)  The FAQ also notes that Treasury and the IRS may expand the list of factors considered in determining whether an individual is a “qualified individual” in future guidance.
  • Are CRDs and CR Loan Provisions optional? Both CRDs and CR Loan Provisions are optional, meaning that a plan need not provide for CRDs, higher loan limits, or delayed loan payments.  (Q&A-9.)
  • If a plan does not offer CRDs, will participants lose out on favorable CRD treatment? If a participant is otherwise able to take a distribution from a plan, but the plan does not provide for CRDs, the participant is still able to claim beneficial CRD treatment (no 10% additional tax, three-year inclusion in income, and ability to repay) if the participant is a “qualified individual.”  (Q&A-9.)  Similarly, the CARES Act does not add any distribution events for a defined benefit pension plan, but if the participant is a qualified individual, the beneficial CRD treatment may be available for an otherwise available distribution.  (Q&A-9 and Q&A-10.)
  • Is a plan required to accept repayments of CRDs? Repayments of CRDs are treated as rollovers, and no plan is required to accept rollovers.  (Q&A-12.)  Presumably, if a plan accepts all rollovers, it must accept repayments of CRDs.
  • Can a plan administrator rely in all cases on a participant’s certification that they are eligible for CRDs or CR Loan Provisions? Although the CARES Act provides that an administrator may rely on an employee’s certification that the requirements to be a qualified individual are met, this reliance is only available if the administrator does not have actual knowledge to the contrary.  (Q&A-11.)

The FAQs also mention that the Treasury and IRS will substantially follow the principles in IRS Notice 2005-92 (Katrina-related guidance on similar provisions) in the forthcoming final guidance where the Katrina-related provisions are similar to those of the CARES Act. (Q&A-2.) This should helpful in anticipating tax and information reporting requirements with respect to CRDs and coronavirus-related loans.

Guidance under the CARES Act related to CRDs and CR Loan Provisions is evolving. For the most up-to-date information, please contact Audrey Fenske, Mark Wilkins, Sam Butler, or any member of the Stinson employee benefits group with any questions.

Since the coronavirus (COVID-19) first emerged as a serious health emergency, Congress has moved quickly to pass three major pieces of legislation designed to address the public economic and health crises caused by the pandemic. According to reports, House Democrats have prioritized multiemployer pension reform in previous negotiations regarding coronavirus relief legislation, and are likely to continue to do so as lawmakers consider a potential “phase 4” COVID-19 relief bill.

Since the beginning of 2018, lawmakers from both sides of the aisle have introduced three major proposals attempting to address the ongoing multiemployer pension plan crisis. The proposals, each of which are summarized below, will likely provide the framework for any pension reform discussions that may take place in the context of future COVID-19 relief legislation. At this point a timeline for any further legislative action is uncertain as both the House and Senate are out of session until April 20, but reports indicate that a fourth relief bill could be passed between late April and mid-May.

Links to the summaries below:

For more information on the federal multiemployer pension reform proposals, please contact Tom Dowling, Nick Bertron, Joel Abrahamson, Dominic Cecere, Nicole Faulkner, Rick Pins, James Sticha, Johnny Wang or the Stinson LLP contact with whom you regularly work.

RELATED RESOURCES

Stinson’s Coronavirus Task Force

Coronavirus Resources & Employment FAQs

Previously Published Coronavirus Alerts

RELATED PRACTICE AREAS

Labor, Employment & Benefits

Employee Benefits

 

On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which addresses the public economic and health crisis related to the 2019 novel coronavirus (COVID-19). The CARES Act includes a temporary provision that allows employers to make tax-free student loan payments on behalf of employees pursuant to a qualifying educational assistance program maintained by the employer under Internal Revenue Code (Code) Section 127.

To qualify for tax-free treatment, the student loan payment must satisfy the following conditions:

  • The payment must be made after March 27, 2020 and before January 1, 2021.
  • The amount of the payment may not exceed $5,250. The $5,250 limit is reduced by any other educational assistance provided to the employee under the employer’s educational assistance program during the year (such as reimbursement of current tuition).
  • The payment must be issued to pay principal or interest on a qualified education loan (as defined in Code Section 221(d)(1)) incurred by the employee for his or her education. In general, a qualified education loan is any indebtedness incurred by the employee to pay qualified higher education expenses which are attributable to education furnished during a period in which the employee was an eligible student (at least half-time at an eligible educational institution).

The payments must also be provided under a program that meets the general requirements of Code Section 127, which include, among other things, that the program be in writing, that the payment not discriminate in favor of highly compensated employees, and that its terms and availability be adequately communicated to employees.

Employers electing to provide this benefit may issue payment directly to the lender or make payment to the employee. Employees who receive student loan assistance may not deduct the interest portion of that excludible student loan payment under Code Section 221.

As indicated above, employers who wish to take advantage of the new employee student loan assistance available under the CARES Act must provide the benefit through an education assistance program that meets the requirements of Code Section 127. Those employers with existing programs who wish to provide the new benefit will also likely need to amend their programs to include student loan repayments as an available benefit.

 

On March 11, the IRS issued Notice 2020-15. The new guidance permits high-deductible health plans (HDHPs) to pay for 2019 Novel Coronavirus (COVID-19) testing and treatment without a deductible (or with a deductible below the minimum annual deductible otherwise required), and without jeopardizing the plan’s status as an HDHP. This is significant guidance for employers sponsoring HDHPs because it means that an individual with an HDHP that covers these costs on a first-dollar basis may continue to contribute to a health savings account (HSA) as an eligible individual.

As background, only certain eligible individuals are permitted to make deductible contributions to an HSA. Among other requirements, an eligible individual must be enrolled in an HDHP and have no disqualifying health plan coverage. HDHPs must in turn impose minimum deductibles established by law. As noted above, the new IRS guidance carves out an exception for COVID-19 testing and treatment, permitting such expenses to be covered with a reduced deductible or no deductible.

Employers should consider integrating these changes with existing coronavirus response efforts. Employers seeking to adopt changes in response to this guidance should reach out to experienced benefits counsel to discuss implications to their health plans, including required amendments

On December 19, 2019, the President signed the SECURE Act. SECURE includes, among other things, provisions that are intended to make retirement plans more accessible, especially to smaller employers, address changing workforce demographics, address nondiscrimination issues facing defined benefit plans, encourage guaranteed income options under defined contribution plans, and increase penalties for noncompliance with certain plan filing and notice requirements. Some provisions are effective immediately, and some may require most plan sponsors to adjust administration for 2020. The provisions most broadly applicable are discussed below.

Retirement Plan Accessibility

A number of changes make it easier or less costly for employers to adopt or maintain plans.

Credits Enhanced.   Beginning in 2020, employers with no more than 100 employees who start up a new plan can receive annual credits in the first three years of up to $250 for each non-highly compensated employee eligible to participate, capped at $5000. If the plan includes (or an existing plan adds) an auto-enrollment feature, a new $500 credit is available for the first three years in which the plan has an auto-enrollment feature.

Retroactive Plan and Safe Harbor Adoption. Beginning in 2020, an employer’s adoption of a plan (except for elective deferrals) is treated as effective on the last day of a tax year if adopted by the due date of the tax return for the tax year. Previously, qualified plans had to be signed and partially funded by the last day of the initial plan year to be in effect for that year. For plan years beginning after 2019, amendments to plans without existing matching contributions to provide for a nonelective 401(k) “safe harbor contribution” may be adopted as late as 30 days before the end of the plan year, or, if the employer is willing to make a contribution of at least 4%, as late as the end of the following plan year. SECURE also eliminates the safe harbor notice requirement for plans satisfying nondiscrimination requirements through nonelective contributions.

Auto-Escalation Nondiscrimination Safe Harbor. The 10% cap on elective deferrals that result from auto-enrollment and auto-escalation for a plan that satisfies the nondiscrimination safe harbor through an auto-enrollment and escalation design (“QACA”) has been raised to 15%. The cap on auto-enrollment for the initial year remains at 10%.

“Open MEPs.” Beginning in 2021, individual account (i.e., defined contribution) plans may be maintained by unrelated employers that use a “pooled plan provider” and will not subject to the “one bad apple” rule, under which the unresolved operational issues of one employer could disqualify the entire plan. In order to be eligible for this relief from the one bad apple rule, the plan must provide for the spin-off of the portion of the plan attributable to the employer with the unresolved disqualification issues into a separate plan; and the spin-off must occur, except in certain circumstances to be identified in future guidance. If the plan has disqualifying errors that result from the failure of the pooled plan provider to perform its duties, the entire plan may be disqualified.

The pooled plan provider must agree that it is a named fiduciary of the plan and responsible for ERISA compliance and compliance with qualification requirements, and must make sure employers take actions accordingly. It must also register with the IRS and comply with requirements regarding audits of the plan. Existing multiple employer plans will not be considered pooled employer plans unless elected and the plan and pooled plan provider meet the requirements.

The participating employers maintain responsibility for selecting and monitoring the pooled plan provider and for investments, unless the pooled plan provider delegates investment to another fiduciary. In addition, they must take any actions identified by the pooled plan provider or the DOL as necessary for the proper administration of the plan.

Special provisions make these plans easier to administer: the pooled plan provider is responsible for disclosures, which may be electronic, and only one 5500 is required.

Changing Workforce Demographics

Employees are living and working longer, and the number of employees working part-time has remained high, even after recovery from the recession.

Post-70-1/2 Contributions (IRAs). Beginning in 2020, there is no maximum age for contributions to a traditional IRA. However, any contributions after age 70-1/2 will reduce the qualified charitable distribution limit.

Age for Required Minimum Distributions (RMD) Raised. The age at which distributions must begin for terminated participants (and certain active participants) in employer-sponsored plans and IRA owners has been raised from 70-1/2 to 72. The new RMD rule applies to individuals who attain age 70-1/2 after December 31, 2019.

Part-time Employees. Effective in 2021, employees who meet the plan’s age requirements, if any, and have at least 500 hours of service in three consecutive 12-month periods must be allowed to participate and make elective deferrals into employer-sponsored 401(k) plans. However, these participants may be excluded for testing purposes, and they are not required to receive a matching contribution, and, if the plan is top heavy, the special vesting and contribution requirements would not apply to them. In determining years of vesting service for a participant who is a participant solely because of the new part-time employee rules, each 12-month period in which the employee has 500 hours of service will constitute a year of vesting service. These changes do not apply to collectively bargained employees. Hours of service must be counted for purposes of eligibility to participate beginning with the first 12-month period beginning on or after January 1, 2021.

Closed Defined Benefit Plans

Absent relief, many defined benefit plans that have been closed to new participants would have been forced to freeze benefits due to discrimination issues associated with the frozen plan becoming disproportionately composed of more highly compensated employees as the participant population ages or due to a failure to meet the minimum participation requirements due to participant attrition. Under SECURE, a plan that was closed before April 5, 2017, or existed for least five years before closing, with no substantial increase in benefits, rights, or features, benefits or coverage in those five years very generally:

—   will have relief from the benefits, rights, and features nondiscrimination requirements if the plan meets the nondiscrimination requirements for the plan year of closing and the two following plan years and any post-closing amendment does not discriminate significantly in favor of highly compensated employees;

—   will be able to take advantage of more permissive rules for aggregating the plan with defined contribution plans for purposes of testing nondiscrimination in benefits if the plan satisfies nondiscrimination in benefits and coverage for the plan year of closing and the two following plans years and any post-closing amendment of coverage or benefits provided does not discriminate significantly in favor of highly compensated employees; and

—   will be considered to satisfy the minimum participation requirements, if the plan satisfied the minimum participation requirements at the time of closing.

Providing, Communicating and Preserving Lifetime Income

Guaranteed Retirement Income Contracts. With the closure or termination of defined benefit pension plans, employees have lost access to plans that provide for guaranteed lifetime income. While employers sponsoring defined contribution plans currently can provide guaranteed lifetime options, they have been reluctant to do so due to administrative complexity and fiduciary risk.

SECURE provides a safe harbor, which, if followed, will limit the fiduciary risk associated with providing a “guaranteed retirement income contract.” The safe harbor requires receiving specific representations from the insurer and evaluating reasonableness of the costs of the annuity relative to the benefits delivered and the financial soundness of the insurer at the time the insurer is initially selected. On an ongoing basis, the fiduciary must receive and review the insurer’s representations at least annually.

Communicating Lifetime Income. SECURE will require, for retirement plan participant disclosures provided 12 months or later after final guidance is issued, disclosure of the amount of an annuity (a QJSA, assuming a spouse of equal age, and a single life annuity) that a participant’s defined contribution could provide upon retirement. This disclosure will be required annually, and the Department of Labor is directed to develop assumptions and model disclosures within one year of enactment.

Preserving Retirement Income. SECURE provides for disposition of annuity contracts, should they no longer be available under a plan. Plans may distribute the contract in kind to the participant or to an eligible retirement plan, even if there is no distribution event, so long as the distribution or rollover occurs in the 90-day period prior to the elimination of the annuity option. SECURE also seeks to protect income for retirement by eliminating plan loan treatment for loans made through a credit card or similar process; this provision is effective immediately.

Other Provisions Broadly Applicable to Plans or Employees

Limitation on Non-Spousal “Stretch IRAs.” Generally, beginning with any deaths occurring after 2019, non-spouse designated beneficiaries of participants or IRA owners will be required to take a distribution of all a participant’s defined contribution plan account or IRA within ten years of the death of the participant/owner. There is an exception for disabled or chronically ill beneficiaries and for a beneficiary who is no more than ten years younger than the participant/owner; distributions over the beneficiary’s life expectancy continue to be available to these beneficiaries, as well as the participant/owner’s spouse. In addition, the 10-year period for minor beneficiaries does not begin until the child reaches the age of majority.

Penalty-Free Withdrawal for Birth/Adoption Expenses. Beginning in 2020, participants who withdraw up to $5000 from a plan will not be subject to the 10% penalty tax on early withdrawals if the withdrawal is taken to cover birth or adoption expenses. Presumably, plans will need to be prepared to address this new exception when reporting distributions for 2020. To be exempt from the 10% penalty tax, the participant must include the name, age and TIN of the child on the participant’s tax return for the year. To avoid qualification issues, where a distribution would not otherwise be permitted under a plan, the $5000 limit must be applied to aggregated distributions from all qualified plans of the employer and members of the employer’s controlled group, and the distribution must be made within one year of the child’s birth or the date the adoption is finalized. The SECURE provision includes the ability of the participant to repay the distribution, treating it as a rollover; more guidance is needed on the tax treatment and timing of this repayment.

Reporting/Notice Noncompliance Penalties Increased.

IRS penalties for failing to file Forms 5500 and to provide certain notices to participants were increased tenfold, effective for filings and notices due after 2019.

Generally, for a tax qualified retirement plan to be adopted, the plan document must be signed and dated by the sponsoring employer and retained. However, in Val Lanes Recreation Center Corp. v. Commissioner of Internal Revenue, T.C. Memo 2018-92, the Tax Court found that the employer’s failure to produce a signed plan document did not disqualify the plan.

In Val Lanes, the Tax Court held that the IRS abused its discretion in revoking a favorable determination letter finding that Val Lanes’ Employee Stock Ownership Plan (ESOP) was qualified under Internal Revenue Code (IRC) § 401(a). The IRS issued a favorable determination letter, conditioned on Val Lanes’ timely adoption of a proposed amendment to comply with Internal Revenue Code (IRC) § 414(u).[1] Val Lanes claimed it adopted the amendment and restated the plan shortly after receiving the favorable determination letter, but it did not have a signed restated plan document. The IRS took the position that since the employer could not produce a signed plan document, the amendment was never executed and the ESOP did not meet the condition of the determination letter for qualification.

Although Val Lanes could not produce a signed plan document, the Tax Court found that it had adopted the amendments soon after receiving the favorable determination letter because of the credible explanation as to the absence of the executed copy. Val Lanes explained that flooding in the facility had caused extensive water damage, including damage to documents relating to the ESOP, and that the Department of Labor and IRS had seized documents and computers from Val Lanes’ accountant in an unrelated matter. The court also pointed to the fact that the IRS did not initially list failure to amend the plan as required by IRC § 414(u) as a basis for revocation on Form 886-A when it requested additional information during the plan audit. The court believed this suggested that evidence of adopting the amendment was provided during the audit.

On December 13, 2019 the IRS released a Chief Counsel Memorandum regarding qualified retirement plan adoption requirements and addressing “[c]oncerns . . . that taxpayers may argue that Val Lanes supports the proposition that a taxpayer may attempt to meet the taxpayer’s burden to have an executed plan document based on the production of an unsigned plan and a pattern and practice of signing documents given by an advisor.”[2] While memorandums may not be used or cited as precedent, they are released to the public and provide insight about the IRS’s positions and opinions on certain issues, including IRS audit positions.

The Memorandum outlines the IRS’s position that due to the unusual facts and circumstances in Val Lanes, the decision should be limited to those specific facts. According to the Memorandum, the general rule that a plan document must be signed for a qualified plan to be adopted remains the same. Therefore, “it is appropriate for IRS exam agents and others to pursue plan disqualification if a signed plan document cannot be produced by the taxpayer.”[3] Ultimately, the plan sponsor bears the burden of proof that it executed the plan document.[4]

As outlined in the Memorandum, plan sponsors can expect IRS agents to pursue plan disqualification for failure to produce a signed plan document during an IRS examination of a plan. Therefore, employers and plan sponsors should continue properly executing plan documents and retaining records in accordance with Treas. Reg. 1.6001-1(e). However, in light of Val Lanes, there may be relief for plan sponsors that cannot produced a signed plan document in extraordinary circumstances and where there is credible evidence that the plan document was executed and signed. Unfortunately, the Memorandum does not provide any guidance about the factors the IRS will consider in determining whether a taxpayer has met its burden that it executed a plan document. If a plan sponsors discovers that it failed to adopt a required plan amendment, retroactive permission to adopt and sign the amendment or restatement of the plan is often available under the Employee Plans Compliance Resolution System (EPCRS), voluntary correction procedures.

 

[1] IRC section 414(u) was amended in 1996 to require qualified plans to include special rules for employees with “qualified military service.”

[2] Office of Chief Counsel, IRS, Memorandum AM 2019-002, at 3 (Dec. 9, 2019), https://www.irs.gov/pub/foia/am-2019-002.pdf.

[3] Id.

[4] Id.