On June 29, 2020, the Internal Revenue Service (“IRS”) released Notice 2020-52 (“IRS Notice”) which grants certain COVID-19 related relief to retirement plan sponsors who employ a safe harbor 401(k) (“Safe Harbor”) plan design feature.  The majority of the guidance is temporary relief which expires on August 31, 2020.  However, the IRS Notice also includes a clarification that shall remain effective after August 31, 2020.

Temporary Suspension of Economic Loss / Safe Harbor Notice Content Requirement

Generally, a Safe Harbor feature is required to be effective for a full 12-month plan year.  However, in certain circumstances, it is permissible to suspend or reduce the Safe Harbor feature during the current plan year (“Mid-Year”) if certain additional requirements are met.  More specifically, in order for a Safe Harbor feature to permissibly be suspended Mid-Year, the plan sponsor of such plan must either:

1) be operating at an economic loss; or

2) the Safe Harbor notice issued by the plan sponsor to each eligible employee before the beginning of the plan year (“SH Notice”) must include specific language advising that:

a) the plan may be amended Mid-Year to reduce or suspend Safe Harbor employer contributions; and

b) the reduction or suspension will not be effective for at least 30 days after all eligible employees receive notice of the intended suspension or reduction of employer Safe Harbor     contributions[1].

However, the IRS Notice temporarily suspends the economic loss and/or SH Notice content requirements described above.  Therefore, with regard to any suspension or reduction of Safe Harbor employer contributions that occurs from March 13, 2020 through and including August 31, 2020, a plan sponsor is neither required to have been operating at an economic loss nor to include the specific language referenced above within their annual SH Notice.

Temporary Suspension of 30 Day Advance Notice Requirement for Safe Harbor Profit Share

As suggested by the discussion above, generally a suspension or reduction of a Safe Harbor contribution feature may not occur any earlier than 30 days after each eligible employee receives supplemental notification of the intended suspension or reduction.  With respect to this 30 day advance notice requirement, the IRS Notice indicates that such requirement shall not apply with regard to the suspension or reduction of Safe Harbor profit sharing features that occur from March 13, 2020 through and including August 31, 2020.  It is important to note that this suspension of the 30 day advance notice requirement only applies to Safe Harbor profit sharing contribution features and does not apply to Safe Harbor matching contribution features.    Regardless, the temporary relief within the IRS Notice shall only be available if:

1. A supplemental notice advising of the suspension or reduction in Safe Harbor profit sharing contributions is received by each eligible employee by no later than August 31, 2020; and
2. The plan amendment that reduces or suspends the Safe Harbor profit sharing contributions is adopted no later than its effective date.

Suspension or Reduction of Safe Harbor Contribution for HCEs Only

In general, it is not permissible to implement a Mid-Year change to a Safe Harbor plan that reduces or otherwise narrows the group of employees eligible to receive Safe Harbor contributions.  Thus, for example, it would not be permissible to amend a Safe Harbor plan Mid-Year in order to exclude all “Sales Associates”.  However, the IRS Notice clarifies that it is permissible to implement a Mid-Year amendment to a Safe Harbor plan in order to reduce or suspend a Safe Harbor contribution if such reduction or suspension only applies to “highly compensated employees” (“HCEs”).  Typically, an HCE is any employee who owns greater than 5 percent of the plan sponsor or earned greater than $125,000[2] in the prior year.

In order to implement the HCE clarification discussed in the IRS Notice, the affected HCEs must first receive an updated SH Notice.  Such updated SH Notice must advise them of the change to their eligibility to receive the Safe Harbor contribution and must also provide them with an opportunity to change their deferral election before the Mid-Year reduction or suspension is implemented. In general, these timing requirements are deemed to be satisfied if the updated SH Notice is provided at least 30 days before the effective date of the change.

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.

[1] Each Safe Harbor notice prepared by Legacy Retirement Solutions, LLC for its clients includes the necessary language advising all eligible employees that the plan at issue may be amended Mid-Year to reduce or suspend Safe Harbor employer contributions and that such reduction or suspension will not be effective for at least 30 days after such notice is received.

[2] This is the current 2020 dollar amount which is annually adjusted by the IRS for cost of living increases.

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 third and final article in a series that are intended to summarize the most impactful aspects of the SECURE Act as they apply to tax-qualified retirement plan sponsors.  If you would like to review prior articles in the series, please refer to our website at legacyrsllc.com/category/statutory-regulatory/.

It is important to understand that even though this legislation was only recently enacted, many of its provisions are already effective.  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.

Required Distributions for Designated Beneficiaries

One of the more impactful provisions of the SECURE Act involves the timing of distributions that may be made from defined contribution plans following the death of the plan participant.  More specifically, effective with regard to participant deaths that occur after December 31, 2019, distributions to “designated beneficiaries” must generally be made by no later than 10 years following the end of the year in which the participant dies (“10 Year Rule”).  In this context a “designated beneficiary”, is an individual formally designated by the participant as the beneficiary of his or her retirement plan account but who is not the participant’s spouse.

Prior to the SECURE Act, designated beneficiaries were permitted to take a distribution of the decedent’s plan account over the life expectancy of the designated beneficiary.  Thus, in most circumstances, the prior rule would have granted greater flexibility to a designated beneficiary regarding his or her ability to delay the tax impact of an inherited retirement plan account.  Presumably, the additional federal tax revenue generated by the implementation of this provision was intended to offset the loss in tax revenue resulting from other provisions of the SECURE Act.  For example, the SECURE Act also increased the age that “required minimum distributions” (“RMDs”) must begin from age 70-1/2 to age 72.

Notwithstanding the foregoing, several exceptions apply to the new 10 Year Rule.  Most importantly, as suggested above, spouses are exempt from the 10 Year Rule and will remain able to receive distributions from their deceased spouse’s retirement plan account over the surviving spouse’s life expectancy.  Also, in general, the following categories of designated beneficiaries are exempt from the 10 Year Rule: 1) disabled or chronically ill individuals; 2) someone who is not more than 10 years younger than the deceased participant; or 3) a minor child of the deceased participant.  However, with respect to minor children eligible for the 10 Year Rule exception, the 10 Year Rule distribution period begins in the year after the year that such child reaches the age of majority.

Increased Penalties for Late Filed Forms 5500

Effective for Forms 5500, Annual Return/Report of Employee Benefit Plan, (“Form(s) 5500”), required to be filed after December 31, 2019, late filing penalties assessable by the Internal Revenue Service (“IRS”) have increased to $250 per day up to a maximum of $150,000 per late filed return. This is a significant increase over the previously applicable IRS late filing penalties of $25 per day up to $15,000 per late filed return.

The new IRS late-filing penalty assessments associated with Form 5500 are severe.  However, the establishment of “reasonable cause” to attempt to abate an IRS late-filing penalty assessment remains.  In addition, at times the Department of Labor’s (“DOL”) “Delinquent Filer Voluntary Compliance Program” (“DFVC”) may be available to eliminate an IRS assessed Form 5500 late-filing penalty.  Finally, this increase to the IRS late-filed Form 5500 penalty amounts does not impact the DOL’s ability to concurrently assess its own late filed Form 5500 penalties.

Portability of Lifetime Income Options

Effective for plan years beginning on or after December 31, 2019, a plan sponsor of a defined contribution plan generally is permitted to allow a participant without a distributable event to receive an “in-kind” distribution of a lifetime income investment product held under the plan.  However, the ability to offer such a distribution is limited to situations where the lifetime income investment at issue is no longer authorized to be an investment under the plan.

As suggested by their name, lifetime income investment products generally are designed to be held by the owner for his or her lifetime.  As such, lifetime income products generally include early sale / termination charges that are intended to encourage lengthy holding periods.  In the situation where a plan sponsor decides to remove an existing lifetime income product from a plan’s permissible investment menu, this has the potential to force a participant to liquidate, at significant expense, a lifetime income product that is no longer permitted as a plan investment.  Thus, this new provision of the SECURE Act would allow a participant invested in a lifetime income product to obtain a distribution of the investment and avoid incurring the otherwise applicable fee or penalty.

Presumably, this provision of the SECURE Act will encourage more plan sponsors to offer lifetime income options within defined contribution plans.  This is because this rule change will eliminate one of the perceived problems associated with offering lifetime income options within retirement plans.

Lifetime Income Provider Fiduciary Safe Harbor

Several of the provisions of the SECURE Act include at least tacit encouragement for defined contribution plan sponsors to offer lifetime income investment options to participants.  However, a plan sponsor that decides to include a lifetime income investment product within a plan’s investment menu is generally responsible on a fiduciary level for the selection of the insurance company offering such product.  Further complicating such selection process is the realization that payments made under such investment product may not even begin until several decades after the initial selection process is completed and will likely continue for several decades after such payments begin.  Thus, many plan sponsors are rightfully wary to act as a fiduciary while selecting an insurance company to offer an insurance product that may need to make payments to participants forty or more years into the future.

In order to attempt to alleviate this valid concern, the SECURE Act outlines a “safe harbor” process for a plan sponsor to follow in order to have certainty that it has satisfied its fiduciary duty of prudence when selecting an insurance provider to offer a lifetime income investment product within the plan.  This provision was effective upon the date of enactment of the SECURE Act so it is currently effective.

In order to take advantage of the newly established safe harbor, the plan sponsor must first engage in an “objective, thorough, and analytical search for the purposes of identifying insurers.”  Then, subsequent to completing this due diligence obligation, the plan sponsor must consider the financial capabilities of each insurer with regard to its ability to satisfy its obligations under the lifetime income investment product and conclude that the insurer is financially able to satisfy those obligations. The SECURE Act states that a fiduciary will be deemed to satisfy this requirement if it obtains certain written representations specified under the SECURE Act from the insurers in question.

The plan sponsor must also consider the costs of the lifetime income product in relation to its benefits and conclude that the cost is “reasonable”.  Although the SECURE Act does not explicitly define what constitutes reasonable in this context, it does indicate that a plan sponsor is not required to select the lowest cost option.  In addition, the SECURE Act specifies that a fiduciary does not have an on-going obligation to review the appropriateness of previously selected lifetime income products.  Instead, such investment only needs to be approved at the time of purchase or initial selection.

SECURE Act Plan Amendment Deadline

Many of the provisions of the SECURE Act will result in the need to implement formal amendments to existing retirement plan documents.  In this regard, the SECURE Act establishes a deadline to amend for the changes that it implements.  That deadline is the end of the first plan year beginning on or after January 1, 2022.  Thus, the earliest date that a plan would need to be amended in order to memorialize the changes required under the SECURE Act would be December 31, 2022.  In addition, a delayed amendment deadline applies for collectively bargained and governmental plans.

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.

The Coronavirus Aid, Relief and Economic Security Act of 2020 (“CARES”) Act was signed into law on March 27, 2020 (“Date of Enactment”).  It has enacted numerous economic relief measures intended to assist businesses and individuals as they deal with the broad impact of COVID-19.  This article is intended to focus upon the impact that the CARES Act will have on tax-qualified retirement plans.

As with most legislation, initial efforts must be focused upon attaining a simple understanding of the drafters’ intentions.  However, in between initial understanding and actual implementation often lie both practical and procedural challenges.  The CARES Act is no different in this respect as the implementation of certain of its provisions will require additional guidance from the Internal Revenue Service (“IRS”) as well as modifications to retirement plan industry service providers’ current processes.  Thus, it is important that everyone exercises patience (and caution) while implementing the applicable provisions of the CARES Act in order to avoid creating unintended consequences …. such as future compliance issues.

Despite the need for additional guidance on certain items discussed below, all of the retirement plan related provisions of the CARES Act were immediately effective upon its enactment.

Coronavirus Distributions

One of the most impactful provisions of the CARES Act is that it grants plan sponsors with the discretion to offer a new tax-favored form of participant distribution (“Coronavirus Distribution(s)”) from any “eligible retirement plan” which includes 401(k) plans, profit sharing plans, 403(b) plans and “individual retirement accounts” (“IRA(s)”).  Coronavirus Distributions will be available only during the 2020 calendar year for, in aggregate, no more than $100,000 per participant.   Such distributions will not be subject to the 10% early withdrawal penalty tax that might otherwise apply to retirement plan distributions made prior to the attainment of age 59-1/2.  In addition, such distributions are not eligible for direct rollover to another retirement plan and are not subject to mandatory 20% federal tax withholding.  However, 10% withholding will apply unless the participant elects a different withholding percentage.

The amount of any Coronavirus Distribution will be included in the taxable income of the recipient ratably over a three-year period.  In addition, once distributed, the amount of any Coronavirus Distribution may, in general, be repaid by the Participant receiving such distribution back to any eligible retirement plan that he or she is eligible to participate in.  Presumably, since the distributed amount would have already been at least partially taxed by the time a repayment would be made, repayment will result in a current deduction for the taxpayer in relation to the amount of any such repayment.

Coronavirus Distributions may only be made available to participants:

1) who are diagnosed with COVID-19 by a test approved by the Center for Disease Control;

2) whose spouse or dependent is diagnosed with COVID-19 by a test approved by the Center for Disease Control; or

3) who experience adverse financial consequences as a result of being quarantined, furloughed, laid off or forced to work reduced hours due to COVID-19; who are unable to work due to a lack of available child care resulting from COVID-19; who experience a closure or reduction in hours of a business owned or operated by the participant due to COVID-19; or who are subject to other factors as may later be determined by the Secretary of the Treasury.

Unfortunately, it is not currently clear what, if any, documentation may be necessary to substantiate the “impact” items described above.  However, notwithstanding this current lack of clear guidance, plan sponsors are permitted to rely on participants’ assertions that they have been impacted by COVID-19 and, therefore, entitled to a Coronavirus Distribution.  Thus, with the proper disclosures and participant executed forms, plan sponsors should be able to avoid any potential liability for determining whether a participant is eligible for a Coronavirus Distribution.

Finally, it is notable that the Coronavirus Distribution is not merely the creation of another set of circumstances under which a hardship withdrawal may be granted.  Although certain participants may be eligible to receive a hardship withdrawal due to their personal experiences in relation to the COVID-19 pandemic, such hardship distributions would remain subject to the “normal” hardship withdrawal rules.  This means that, unlike the new Coronavirus Distributions, hardship withdrawals would potentially remain subject to the 10% early withdrawal penalty tax, could not be repaid to a tax-deferred retirement vehicle and could not have their tax impact spread over three separate tax years.  Thus, it appears that there are significant advantages to receiving a Coronavirus Distribution rather than a hardship withdrawal.

Increased Loan Limits

The CARES Act also increases the maximum amount of a loan that certain participants may receive from qualified or 403(b) plans eligible to offer participant loans. More specifically, the general rule restricting plan loans to the lesser of $50,000 or 50% of the participant’s nonforfeitable account balance is increased to the lesser of $100,000 or 100% of the participant’s nonforfeitable account balance.  This increased limit applies to loans taken within 180 days of the Date of Enactment.

In addition to the increased maximum loan amount, the CARES Act also extends the due date for repaying a participant loan.  In this regard, the due date for any loan repayment which becomes due from the Date of Enactment through December 31, 2020 is delayed by one year.  Any subsequent payment of a delayed loan repayment amount is required to accrue interest during such delay and such delay is to be ignored for purposes of complying with the five year loan repayment term limit that otherwise applies to most participant loans.

Finally, the availability of the participant loan relief described above is conditioned upon the borrower being impacted by COVID-19 in one of the manners described above in conjunction with Coronavirus Distributions.  Thus, only those participants (and their spouses and dependents) who are diagnosed with COVID-19 or that experience adverse financial consequences as a result of COVID-19 will be eligible for these more favorable participant loan requirements.  Of particular note here, the exception granted above under the Coronavirus Distribution provisions with respect to accepting a participant’s self-certification that he or she has been impacted by COVID-19 was not specifically referenced within the participant loan provisions of the CARES Act.  While this was likely an unintended omission, it is relevant that it appears that a plan sponsor is not authorized to solely accept a participant’s self-certification that he or she was impacted by COVID-19 in order to allow such individual to receive a larger loan amount or a more favorable loan repayment term.  Thus, until additional guidance is provided on this provision of the CARES Act, plan sponsors should be particularly cautious when attempting to implement it.  Presumably, this would mean heavily documenting any loan granted under the CARES Act guidance in order to substantiate the availability of this exception to the general rule.

Notwithstanding the concerns expressed above about who may be eligible for loan related COVID-19 relief, remember that, independent of the CARES Act, a plan sponsor can allow for the suspension of loan repayments for up to one year in the event of a participant incurring an unpaid leave of absence or a situation where the participant is being paid less than the loan repayment amount.  This provision is something that may become more important to plan sponsors in the context of participants who are furloughed or who experienced reduced work hours.

Waiver of 2020 Required Minimum Distributions

The CARES Act also waived all “required minimum distributions” (“RMD(s)”) that might otherwise be required for all tax-qualified plans, 403(b) plans, governmental 457(b) plans and IRAs.  This waiver applies in relation to any RMD required to be paid during the 2020 calendar year and includes 2019 RMDs that are required to be distributed by April 1, 2020.  Finally, for purposes of determining RMDs that become due after 2020, an individual’s required beginning date is determined without regard to the RMD waiver enacted under the CARES Act.

Delayed Funding of Single-Employer Defined Benefit Plans

Under the CARES Act, the due date for funding 2020 employer contributions in relation to single-employer defined benefit pension plans is delayed until January 1, 2021 but interest must accrue on such delayed payment.  In addition, the CARES Act allows a plan sponsor to treat the plan’s adjusted funding target attainment percentage (“AFTAP”) for the last year ending before January 1, 2020 as the AFTAP for plan years that include calendar year 2020 when determining whether certain benefit restrictions may apply.

CARES Act Plan Amendment Deadline

Implementation of the provisions of the CARES Act will require formal amendments to existing retirement plan documents.  In this regard, the CARES Act establishes a deadline of no later than the end of the first plan year beginning on or after January 1, 2022.  Thus, the earliest date that a plan would need to be amended in order to memorialize any changes imposed under the CARES Act would be December 31, 2022.  In addition, a delayed amendment deadline of no later than the end of the first plan year beginning on or after January 1, 2024  applies for governmental plans.

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.