Calendar year 2021 presents new opportunities to review existing benefit arrangements to determine whether design changes are needed based upon changing economics and employee demographics. The new year also provides a new opportunity to focus on regulatory compliance by ensuring that the plan documents and other instruments governing benefit plans reflect actual operation and incorporate required law changes. Plan sponsors are encouraged to review their retirement plans to ensure that the arrangements remain in documentary and operational compliance with the ERISA and IRC rules. COVID-19 has clearly impacted plan administration and resulted in Congress’ enactment of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, which relaxed several of the tax-qualification requirements for retirement plans designed to ease employees’ access to their retirement funds and provisions allowing employers to delay contributions to their pension plans. The CARES Act, and pre-COVID-19 legislation including the Bipartisan Budget Act of 2018 (“BBA 2018”) and the Setting Every Community Up for Retirement Enhancement (“SECURE”) Act, may require that plan sponsors adopt timely amendments and operationally comply with the new laws.

QUALIFIED PLANS “ACTION ITEMS” LIST

• Review IRS Operational Compliance List (Required) The IRS most recently issued its Operational Compliance List in 2020 (the “OCL”) in order to assist plan sponsors in their compliance efforts. The current OCL provides a summary of action items that plan sponsors should address in 2021 and anticipate addressing in 2022, as well as the 2021 retirement plan cost-of-living increases. These changes include amendments made by BBA 2018 and the SECURE Act, final regulations that have become effective as well as Notices issued by the IRS. While many of the law changes are currently effective and must be complied with operationally, the deadline for plan sponsors to amend their retirement plans for many of the changes will likely be the end of this year and the end of 2022. For individually designed plans, the amendment deadline is the end of the second plan year after the law change is reflected in the IRS Required Amendments List. The IRS began issuing opinion letters for preapproved defined contribution plans in June of last year for plans that were restated for changes in the plan qualification requirements listed in Notice 2017-37 (the 2017 Cumulative List) for the third six-year remedial amendment cycle under Rev. Proc. 2016-37, 2016-29 I.R.B. 136. According to Announcement 2020-7, employers will have until July 31, 2022, to adopt a newly approved plan.
  
  
• Amend Plans for BBA 2018 (Required) While the BBA 2018 changes generally came into effect in 2019, all 401(k) and 403(b) plans must comply with the final hardship distribution regulations which apply to distributions made on or after January 1, 2020. The Department of Treasury issued proposed hardship distribution regulations on November 14, 2018, which were finalized on September 19, 2019. BBA 2018 eliminated the 6-month elective deferral suspension after a participant’s receipt of a hardship distribution and eliminated the requirement that a participant take all available loans before receiving a hardship distribution. Further, hardship distribution sources now include qualified nonelective contributions (QNECs), qualified matching contributions (QMACs), employer safe harbor contributions and the earnings on 401(k) contributions, with a caveat for income held in Section 403(b) plan custodial accounts. The legislation also expanded the definition of safe harbor expenses to include losses and expenses incurred as a result of a federally declared disaster where the participant’s principal residence or place of employment is located within the designated disaster area. Lastly, plan administrators are not required to inquire into the financial condition of employees, for hardship distribution purposes, so long as “the plan administrator does not have actual knowledge that is contrary to the representation.” Pursuant to Rev. Proc, 2020-9, the BBA amendment deadline is December 31, 2021. Please review our October Client Alert summarizing the BBA’s amendment of the hardship distribution rules Act.
  
  
• Implement the SECURE Act New Long-Term Part-Time Employee Rule (Required) Effective January 1, 2021, long-time part-time employees must be extended Section 401(k) plan participation eligibility. The SECURE Act defines a long-term part-time employee as an employee that has worked 500 or more hours in three consecutive 12-month periods, and who has attained a minimum age, not to exceed 21. A long-term part-time employee must be credited with a year of service, for vesting purposes, for each 12-month period during which the employee completes 500 hours of service prior to and after January 1, 2021. Employers may elect to exclude long-term part-time employees from the nondiscrimination testing, minimum coverage and top-heavy rules. Pursuant to Notice 2020-68, all of the employee’s years of service are taken into account for vesting purposes. This includes the service performed prior to January 1, 2021. Accordingly, long-term part-time employees must be credited with a year of vesting service for each 12-month period prior to and after January 1, 2021, in which the employee completes at least 500 hours of service. However, eligibility for participation is determined effective as of and after January 1, 2021. The amendment deadline is December 31, 2022 for calendar year plans.
  
  
• Issue the New Lifetime Investment Statements (Required) Effective September 18, 2021, defined contribution plans are now required to provide benefit income statements, during any 12-month period, which includes a lifetime income disclosure that illustrates the monthly payments the participant would receive if the total account balance were used to provide lifetime income streams, including a qualified joint and survivor annuity for the participant and the participant’s surviving spouse and a single life annuity.
  
  
• Accelerate Post-Death Distributions (Required) Effective January 1, 2020, the SECURE Act changed the way defined contribution plans distribute RMDs after the participant’s death. Pre-SECURE Act, distributions to a participant’s beneficiary could be paid over the beneficiary’s life expectancy. Post-SECURE Act, benefits can continue to be paid over the life expectancy of “eligible designated beneficiaries,” with the payment to other beneficiaries required to be made within 10 years of the participant’s death. “Eligible designated beneficiaries” generally include the participant’s surviving spouse, minor child, a chronically ill or permanently disabled individual among others. The amendment deadline is December 31, 2022 for calendar year plans.
  
  
• Waiver of the 10% Penalty for Qualified Birth or Adoption Distributions (Optional) Effective January 1, 2020, the SECURE Act amended Section 72(t)(2) of the Internal Revenue Code to add a new exception to the 10% early withdrawal penalty for qualified birth or adoption distributions (“QBOAD”). The new Section 72(t)(2)(H) permits an individual to receive a distribution from an eligible retirement plan of up to $5,000 without application of the 10% additional tax if the distribution meets the requirements to be a qualified birth or adoption distribution. The amount of the qualifying distribution is taxable, but the early withdrawal penalty will not apply. Plans are not required to permit in-service withdrawals for qualified births or adoptions. Accordingly, the penalty exception would apply only to participants in plans that have been amended to implement the optional withdrawal provision. The amendment deadline is December 31, 2022 for calendar year plans.
  
  
• Waiver of Early Withdrawal Penalty for Qualified Disaster Distributions (Required) Effective January 1, 2020, the 10% early withdrawal penalty on retirement plan distributions is waived for qualified disaster distributions not in excess of $100,000 for participants who lived in a presidentially declared disaster area. Participants can spread income tax payments on the qualified disaster distribution over a three-year period, and are permitted to restore the distribution by repayment to the plan within three years from the date of distribution. The SECURE Act's disaster relief provisions must be adopted no later than the last day of the plan year beginning on or after January 1, 2020, which is December 31, 2020 for calendar year plans (December 31, 2022 for governmental plans).
  
  
• Implement the Increase in QACA Contribution Escalation (Required) The SECURE Act amended Section 401(k)(13) of the Internal Revenue Code to allow qualified automatic contribution arrangement (QACA) safe harbor plans to increase the cap on automatically raising payroll contributions from 10% to 15% of an employee’s paycheck, with the option to opt out. The minimum thresholds of 3% to 6% under the law in effect prior to the passage of the SECURE Act (depending on the participation year) are unchanged.
  
  
• CARES Act COVID-19 In-Service Distributions (Optional); Loan Changes (Mandatory) The CARES Act contained discretionary provisions including allowing COVID-19 related in-service distributions (which require mandatory waiver of the 10% early withdrawal penalty if adopted). The in-service withdrawal can be recontributed over a three year period. The CARES Act also increased the $50,000 dollar limit for loans to $100,000 for COVID-19 related loans made during the 180-day period beginning March 27, 2020 and ending December 31, 2020, and delayed the repayment for such loans ignoring the 5-year maximum period for such loans. The amendment deadline is December 31, 2022 for calendar year plans.
  
  
• CARES Act Suspension of RMDs and Delay of DB Contributions (Required) The CARES Act imposed several new mandatory requirements on the operation and administration of retirement plans (excluding IRAs), including the delay in the repayment of existing loans and the temporary suspension of required minimum distributions. The CARES Act provided for the immediate adoption of the foregoing provisions, but requires that plans must be amended on or before the last day of the first plan year beginning on or after Jan. 1, 2022 (January 1, 2024 for governmental plans). Please review our April 2020 Client Alert for a summary of the CARES Act.
  

2021 COST OF LIVING INCREASE REMINDER

Plan sponsors are encouraged to update participant disclosures to ensure that participants are aware of the increased 2021 limits, which provides an opportunity for increased retirement savings. The IRS issued IRS Notice 2020-79, announcing the following 2021 cost-of-living adjustments for retirement plans late last year.

Type of Contribution & Benefit	2020 Limit	2021 Limit
Section 401(k), 403(b) or 457(b) Elective Deferral	$19,500	$19,500
SIMPLE Plan Annual Deferral	$13,500	$13,500
Section 415 Annual Additions Limitation
• Defined Benefit Plan	$230,000	$230,000
• Defined Contribution Plan	$57,000	$58,000
Maximum IRA Contribution	$6,000	$6,000
Catch-Up Contributions
• Retirement Plan	$6,500	$6,500
• SIMPLE Plan	$3,000	$3,000
• IRA	$1,000	$1,000
Compensation Limits
• Retirement Plans	$285,000	$290,000
• Highly Compensated Employees	$130,000	$130,000
• Key Employees
- Officer	$185,000	$185,000
- 1% Owner	$150,000	$150,000
Social Security Wage Base	$137,700	$142,800

 

We are available to assist you in implementing the discretionary and mandatory law changes discussed in this Newsletter and to provide guidance on any required changes in your administrative practices. Remember, we are more than lawyers and are always here to help!