The Setting Every Community Up for Retirement Enhancement (“SECURE”) Act which was signed into law in December of 2019 has enacted sweeping changes to the retirement plan industry.  As a result, this is the first in a series of articles that are intended to summarize the most impactful aspects of the SECURE Act as they apply to tax-qualified retirement plan sponsors.

It is important to understand that even though this legislation was only recently enacted, many of its provisions are already effective.  However, many others require additional regulatory guidance before they can be implemented.  Therefore, it is critical for retirement plan sponsors to take the time to educate themselves on the impact of these changes in order to help ensure the proper administration and operation of their retirement plans.

Delayed RMD Beginning Date

In general, “required minimum distributions” (“RMD(s)”) are mandatory annual retirement plan distributions that are required to be received by certain individuals once they attain a certain age.  In this manner, RMDs are intended to ensure that employees spend their retirement savings during their lifetime rather than attempt to use their retirement savings as an estate planning tool.

Prior to the SECURE Act, the first RMD was required to be taken by April 1^st of the calendar year after the later of: 1) the year in which an employee attains age 70-1/2; or 2) the year that employment with the plan sponsor is terminated.  However, a 5% owner was required to take his or her first RMD by April 1^st of the calendar year after the year in which age 70-1/2 was attained regardless of whether he terminated employment or not.

Effective for 2020, the SECURE Act increased the age that triggers when the first RMD must be taken from age 70-1/2 to age 72 thereby delaying when the first RMD must be taken.  Employees who turned 70-1/2 in 2019 or earlier cannot take advantage of this rule change and must continue to receive their annual RMDs even if they have not yet attained age 72 in 2020.

401(k) Safe Harbor Notice Requirements

Effective for plan years beginning after December 31, 2019, plan sponsors are no longer required to issue annual 401(k) safe harbor participant notices in relation to a 401(k) safe harbor profit sharing (also referred to as “non-elective”) feature.

Plans that include a 401(k) safe harbor profit sharing feature generally require an employer contribution of at least 3% of compensation to all eligible employees in order to avoid the application of certain onerous nondiscrimination testing that would otherwise apply.  One of the requirements associated with satisfying the “401(k) safe harbor” requirements is the provision of a formal notice to employees that discusses such contribution as well as certain other plan features and information.  The notice generally must be provided at least 30 but no more than 90 days prior to the beginning of each plan year that the 401(k) safe harbor contribution is to be made.  However, effective for plan years beginning after December 31, 2019, such notices are no longer required in connection with a 401(k) safe harbor profit sharing feature.  Notwithstanding the foregoing, the 401(k) safe harbor notice requirement continues to apply to plans that have a 401(k) safe harbor matching feature.

This change will help to reduce the administrative burden experienced by plan sponsors of plans with a 401(k) safe harbor profit sharing feature.

401(k) Safe Harbor Adoption Deadline

Effective for plan years beginning after December 31, 2019, a 401(k) safe harbor profit sharing contribution feature equal to at least 3% of compensation can be adopted as late as 30 days prior to the end of the plan year to which it would relate or, if at least 4% of compensation is allocated as the 401(k) safe harbor profit sharing contribution amount, as late as the last day for distributing excess contributions for the plan year.  Generally, this means that a plan that employs a calendar year plan year will have until December 31^st of the year after the year to which the safe harbor contribution relates to adopt a 401(k) safe harbor profit sharing feature if the amount to be allocated under such feature is at least 4% of compensation.

In the past, a plan with a 401(k) safe harbor feature generally had to be amended to implement such feature before the first day of the plan year to which such feature related.  Thus, this change will now provide significant design flexibility to plan sponsors because it will allow a plan sponsor to wait until 30 days before the end of the plan year before committing to a mandatory employer contribution of at least 3% of compensation for eligible employees.  This is important because it can allow a plan sponsor to wait until the year is almost over before determining whether the safe harbor contribution may be necessary to avoid refunds that might otherwise occur as a result of failed nondiscrimination testing.  In addition, if the plan sponsor is willing to give a slightly larger safe harbor contribution, it can now wait until after the end of the plan year to which it would relate before deciding to make a safe harbor election.

Increased Small Employer Plan Start-up Tax Credit

Effective for tax years beginning after December 31, 2019, the small employer start-up plan tax credit is increased to 50% of start-up costs for each of the first 3 years that a plan exists up to the greater of: 1) $500; or 2) the lesser of: a) $250 for each non-highly compensated employee eligible to participate in the plan; or b) $5,000.

In 2002, a tax credit was created by Congress to benefit small employers (100 or fewer eligible employees) who decided to establish a tax-qualified retirement plan.  However, the amount of such credit was capped at 50% of start-up costs for each of the first 3 plan years with a maximum per year credit of $500.  This change under the SECURE Act significantly increases the maximum amount of the per year tax credit up to, potentially, $5,000.  Presumably, many small employers will not be able to qualify for the full $5,000 tax credit due to the qualifications associated with reaching such amount.  However, this is a significant gesture on the part of Congress to increase the maximum credit amount in a somewhat transparent attempt to encourage small employers to provide retirement plan access to its employees.

Small Employer Automatic Enrollment Tax Credit

Effective for tax years beginning after December 31, 2019, a tax credit of $500 is established for each of the first 3 years that a small employer (100 or fewer eligible employees) sponsors a plan with an “eligible automatic contribution arrangement” (“EACA”).  In general, an EACA is a broadly available type of automatic contribution arrangement that can be designed in order to allow participants to withdraw their automatic contributions within 90 days of initial participation if they are enrolled by mistake.

An existing plan can add the EACA feature to qualify for the tax credit.  In addition, a small employer could qualify for both this automatic enrollment tax credit and the start-up plan tax-credit discussed above in the same tax year.

According to much of the available retirement plan industry guidance on the topic, the majority of automatically enrolled employees do not immediately suspend their 401(k) deferrals upon discovering that they are enrolled and, instead, continue to participate in the plan.  Thus, this tax credit may not only encourage more small employers to implement an EACA but could also have a very positive impact on employees’ savings for their retirement.

We hope that this article helped you to better understand this topic.  However, please be advised that it is not intended to serve as financial, tax or legal advice so it should not be construed as such.  If you have questions about this topic, we strongly urge you to further discuss it with a qualified retirement plan professional.  For more information about this topic, please contact our marketing department at 484-483-1044 or your administrator at Legacy.

In August of 2019, the IRS issued Revenue Ruling 2019-19 (“Guidance”) which provided guidance regarding the tax treatment of certain types of uncashed checks issued from a tax-qualified retirement plan.  The facts presented within the Guidance involved an individual who received a check representing a taxable distribution from a tax-qualified plan and, while able to cash it in 2019, chose not to do so.  The best example of such a situation would appear to be an individual who receives a required minimum distribution (“RMD”) in December of 2019 but then chooses to hold the check and not cash it until January of 2020.  The Guidance then presents and answers three separate tax questions about such circumstances.

The first question posed within the Guidance is when the uncashed check should be declared as gross income by the recipient.  In this regard, the IRS indicates that the distribution is taxable to the participant in 2019 because it was actually distributed in 2019 and could have been cashed by the recipient in 2019.  The IRS states in a footnote that it is irrelevant whether the individual keeps the check, sends it back, destroys it or cashes it in a subsequent year.  The amount would still constitute gross income for 2019.

The second question posed within the Guidance considers whether the failure to cash the check in 2019 would impact the plan administrator’s withholding obligation in relation to the distributed amount.  Unsurprisingly, the IRS states that the recipient’s failure to cash the check does not affect the timing of the plan administrator’s withholding obligation or the plan administrator’s liability for the payment of the tax.

The final question discussed within the Guidance is whether the failure to timely cash the check alters the reporting obligation with regard to such amount.  Again, as to be expected, the Guidance indicates that as long as the amount to be reported exceeds the reporting threshold (a meager $10), the recipient’s failure to cash the distribution check does not impact the obligation to report such amount on a 2019 Form 1099-R.

While the specific issues raised and answered within the Guidance are welcome, it is questionable why the IRS thought it was currently necessary to formally address them.  This is because the issues considered within the Guidance are examples of relatively well settled points that the IRS has routinely espoused in other contexts and likely were already assumed to be the position of the IRS on these issues by the vast majority of retirement plan practitioners.  Notwithstanding, the IRS does include a statement at the end of the Guidance that suggests a broader examination of these issues may be provided in the future.

More specifically, at the end of the Guidance, the IRS states that it is continuing to “analyze issues that arise in other situations involving uncashed checks from…retirement plans…including situations involving missing individuals with benefits under those plans.”  The fact that the Guidance is limited to a scenario where the individual actually receives the check is surely quite important to the conclusions drawn therein.  Presumably a different result might be warranted if the plan administrator does not possess a current address for the intended recipient and, as a result, cannot successfully issue a distribution check into the possession of such individual.   Hopefully, the IRS will take the opportunity in the near future to provide additional guidance on this topic with regard to “missing participants” due to the lack of certainty that surrounds that aspect of this issue.

We hope that this article helped you to better understand this topic.  However, please be advised that it is not intended to serve as financial, tax or legal advice so it should not be construed as such.  If you have questions about this topic, we strongly urge you to further discuss it with a qualified retirement plan professional.  For more information about this topic, please contact our marketing department at 484-483-1044 or your administrator at Legacy.

In April of 2019, the Internal Revenue Service (“IRS”) issued an update to the program allowing employers to voluntarily correct certain retirement plan tax-qualification failures.  This program, known as the “Employee Plan Compliance Resolution System” (“EPCRS”), includes rules and guidelines for situations where a retirement plan sponsor must formally submit the failures to the IRS under the “Voluntary Correction with Service Approval” (“VCP”) portion of EPCRS as well as situations where a plan sponsor can independently implement correction of the failure itself under the “Self-Correction Program” (“SCP”) segment of EPCRS without direct IRS oversight.  In a welcome move, this most recent update to EPCRS has expanded certain situations where a retirement plan sponsor can independently correct a tax-qualification failure under SCP.  The remainder of this article is dedicated to exploring some of the new scenarios where a plan sponsor is permitted to “self-correct” tax-qualification defects.

Notwithstanding the expanded role of SCP considered within this article, it is important to remember that the correction of any retirement plan tax-qualification failure is a technical and complicated process which must be performed in specific compliance with many detailed rules and requirements.  Thus, despite the “do-it-yourself” message suggested by the name of the “Self-Correction Program”, we strongly recommend that all VCP and SCP correction efforts only be performed under the guidance of a qualified retirement plan service provider which usually requires the retention of a competent ERISA attorney.

Participant Loan Failures

Prior to the recent update to EPCRS, SCP was extremely restrictive with respect to the correction of participant loan failures.  Under prior guidance, correction of participant loan failures essentially was not allowed under SCP.  However, the 2019 EPCRS update now allows certain loan failures to be corrected under SCP which means that, in some circumstances, a loan default can now be avoided by utilizing SCP.

In this regard, EPCRS now allows the self-correction of participant loan failures in circumstances where: 1) loan repayments are not made timely causing the loan to go into default; 2) a participant’s spouse does not provide written consent for the loan (if necessary); and 3) a participant receives more plan loans than permitted under the terms of the plan (ex. plan provides for only one loan per participant but participant is allowed to obtain two loans from the plan).

Despite this expansion to the correction of loan failures under SCP, certain loan failures remain correctable only under VCP.  More specifically the following loan failures all require a formal submission to the IRS under VCP: 1) loans that exceed the statutory maximum loan amount; 2) loans that exceed the statutory maximum loan repayment term; and 3) loans that violate the level amortization requirement.

It is interesting to note that a participant loan failure triggers a tax-qualification defect under the Internal Revenue Code (“IRC”) that is subject to enforcement by the IRS while also triggering violations under the Employee Retirement Income Security Act (“ERISA”) that are subject to enforcement by the Department of Labor (“DOL”).  Prior to the new guidance, the DOL indicated that it would accept correction of loan failures under VCP as full correction for ERISA purposes.  However, that DOL guidance was promulgated at a time that the IRS essentially did not allow for correction of loan failures outside of VCP.  Thus, now that the IRS is allowing the self-correction of certain loan failures that previously required correction under VCP, a conflict has been created.

As plan sponsors take advantage of the new opportunity to self-correct loan failures under SCP, such failures will be resolved for IRS IRC purposes but not DOL ERISA purposes since the DOL does not recognize the self-correction of loan failures under SCP as full correction for ERISA purposes,.  Thus, unless or until the DOL updates its guidance on this matter, self-correction of loan failures under SCP will not alleviate a plan sponsor’s potential liability under ERISA for such failure.  Hopefully, the DOL will take steps in the near future to align its prior guidance with this new development in order to remedy this concern.

Retroactive Plan Amendments to Resolve Certain Operational and Document Failures

In addition to prior versions of EPCRS being extremely restrictive with respect to the correction of participant loan failures under SCP, retroactive amendments were not routinely permitted under SCP.  In the past, retroactive plan amendments were permitted under SCP but generally only in the context of the early inclusion of not yet eligible employees and with regard to the granting of loans and/or hardship distributions when the plan did not explicitly allow for them.

The 2019 EPCRS update has now expanded the situations under which a retirement plan sponsor can resolve operational defects through retroactive plan amendments.  This should prove valuable in situations where the terms of a plan were more restrictive than its operation. Under the new guidance, a retirement plan is eligible to self-correct via retroactive amendment to conform the terms of the plan to its operation if the amendment: 1) results in an increase in a benefit, right or feature provided under such plan; 2) is available to all eligible employees; and 3) otherwise complies with the Code and the correction principles of the EPCRS.  Although extremely fact dependent, it is expected that most SCP corrections of this type will need to be completed within approximately two plan years of its occurrence.

Self-correction is also now available to correct certain plan document failures such as a failure to execute a required plan amendment or a restatement if the failure is corrected within approximately two plan years of its occurrence and such failure did not involve the execution of the initial plan document.

We hope that this article helped you to better understand this topic.  However, please be advised that it is not intended to serve as financial, tax or legal advice so it should not be construed as such.  If you have questions about this topic, we strongly urge you to further discuss it with a qualified retirement plan professional.  For more information about this topic, please contact our marketing department at 484-483-1044 or your administrator at Legacy.