SECURE 2.0 – How it Will Affect Your Retirement Plan

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Metro Bulletin 23-01
SECURE 2.0 – How it will affect your Retirement Plan
February 24, 2023

On 12/29/22, President Biden signed the SECURE 2.0 Act. This was included in the 2022 Budget Bill, to fund the government through 9/30/23. There are significant provisions that will affect every retirement plan. The main purposes of SECURE 2.0 are to (a) expand retirement coverage, (b) encourage more retirement savings, and (c) ease some administrative concerns. While there are 92 provisions, we’ve chosen some that may have the greatest impact upon your plan.

Be aware that most of these provisions will take effect in 2024 (1/1/24 for a calendar year plan.) However, some provisions have different effective dates, and, if so, we have specified them below.

Also, some of the provisions are mandatory, while others are optional. We have specified the optional ones. We hope that this Bulletin is helpful. Let us know if you have any questions.

 

    1. Two big changes to the 401(k) Catch-Up limit

Effective Date: The mandate that all catch-ups be done after-tax (“Roth”) is effective 1/1/24, while the higher limits apply as of 1/1/25.

Background: The highest amount that employees can contribute to a 401(k) Plan in 2023 is $22,500. However, if they are age 50 or older, they can have an additional salary deferral of $7,500. This is called a “catch-up contribution”.

SECURE 2.0 change: The catch-up limit is increased to $10,000, but only for those employees between ages 60 and 63. This higher limit will then be compared to 150% of the regular catch-up limit for 2024, and an employee can get the greater of these two limits. (tricky!). Then, at age 64 and later, this extra “bubble” disappears, and the normal catch-up limit returns. Note that the 150% amount (150% of $ 7,500 = $ 11,250) will be greater than the $ 10,000 figure.

Further, all catch-up provisions for highly-paid plan participants (compensation over $ 145K in the prior year) must be done as Roth, after-tax contributions. This gets tax revenue in the door more quickly (due to the after-tax nature), and this added revenue helped to pay for the rest of the Bill.

One nuance – While these “mandatory Roth catch-up” provisions apply to the highly-paid group, as noted just above, this is not quite the same as the “HCE group”, since (a) it doesn’t apply to those who make less than $ 145,000 who are owners, and (b) it doesn’t automatically apply to spouses of owners.

As you can imagine, if these catch-up contributions must be done as Roth, then the 401(k) Plan itself must allow for Roth contributions (not all do), in order to have any catch-up at all. We will need a plan amendment to accomplish this. It would seem counterproductive to not allow for Roth at this point.

One other issue to consider is for 401(k) Plans that are invested through either (i) individual brokerage accounts, or (ii) a pooled, commingled fund. It is important that we be able to track Roth funds separately from pre-tax funds. So, for example, it will be helpful to set up a separate brokerage account for this purpose. Similarly, some type of workaround will be needed for pooled plans.

 

      2. Changes to Long-Term Part-Time employees (“LTPT”)

Effective Date – 1/1/25

Background: An employer may require that an employee work 1,000 hours to join a plan. This worked well in the old days, but now many employees have multiple jobs/gigs, or no longer work full-time for a variety of reasons. As a result, more people are being kept out of the system due to the 1,000-hour rule. Congress wanted to cover them and addressed this concern in the first SECURE Act (“1.0”), by allowing these employees to join the plan after they worked 500 or more hours for 3 consecutive years. However, they only needed to participate in the “employee salary deferral” portion of the 401(k) plan, and did not need to get any Employer contributions. This was going to have become effective as of 1/1/24, according to SECURE 1.0.

SECURE 2.0 Change: The 3-year requirement has been reduced to 2 years. Note that “Eligibility Service” before 1/1/23 is ignored for this purpose; thus, the soonest that any LTPT employee can enter this way is 1/1/25. Note, too, that there are different rules for “Vesting Service”, but these rules would only apply to LTPT employees if Employer contributions are involved. This rule has also now been extended to 403(b) Plans, as well.

Comment: It is imperative that Employers start to accumulate this “hours data” now, since we’re going to need it pretty soon. Again, there is no requirement that Employers contribute to these LTPT people; just let them defer their own funds. (But you may contribute for them, of course.)

 

      3. Automatic Enrollment

Effective Date: 1/1/25

Background: Currently, employees do not join the 401(k) plan unless they “opt in”. Congress did create an “auto-enroll” option a few years ago, where the plan could be set up to automatically bring them in (unless they opted out). Automatic enrollment has been proven to increase participation. This provision was optional, however, and many plans chose to not adopt it. As explained above, one of Congress’ goals was to increase retirement plan “coverage”, so having this as an optional provision wasn’t a strong enough idea.

SECURE 2.0 Change: The auto-enroll provision will now be mandatory for all new 401(k) plans. Existing Plans need not include it. There are a few exceptions, however, as small firms (10 or fewer employees) and new firms (3 years or less) need not adopt it. There are also exceptions for certain other plans.

Note, too, that there are several variations of auto-enroll. A plan will need to initially enroll employees to have them contribute at least 3% of their own pay (up to 10% for this initial contribution). This will increase by 1% per year, until an employee has reached a level of 10% of pay (up to 15%, based on what provision the Employer selects.)

There remains a 90-day window where the employee (who is already enrolled in the plan) can opt out and get their funds returned.

Beware! This is probably the provision that causes the most errors in 401(k) plan administration, since there are (i) Notice requirements (to tell the employee that they are about to be auto-enrolled), and (ii) each contribution level will need to be ratcheted up every year (by 1%) in a timely way. If these functions aren’t done perfectly, you will have a compliance problem. Further, missed contributions for employees who are not timely enrolled (both the Employee and Employer portions) will typically be made up by the Employer. Be careful here.

 

      4. Employer Contributions can now be After-Tax

Effective Date: Immediate

Optional Provision.

Background: Until now, all Employer contributions have been done on a pre-tax basis. The employees pay the tax when they receive the funds.

SECURE 2.0 Change: If the Employer chooses to adopt this provision, the employee can then elect whether to have their Employer contributions made on an after-tax (“Roth”) basis. This tax option will only apply to contributions that are fully vested at the time that they are made. (This only makes sense as the employee will be paying taxes on the contribution right away).

Comment: An Employer who is considering whether to adopt this provision should check their payroll and recordkeeping systems to ensure that they are flexible enough to accommodate this feature. This may take some time.

      5. Match Can be made on Student Loan repayments

Optional Provision

Background: While an Employer may offer a match in their 401(k) plan, in reality many younger employees are paying off student loans when they start their career. They can’t afford to participate in the 401(k) plan. Several large Employers had already desired to offer a matching contribution with respect to these loan repayments, and had obtained “private letter rulings” from the IRS that allowed them to do so. But these rulings only applied to those Employers who sought them.

SECURE 2.0 Change: Again, Congress had a desire to expand 401(k) coverage, so the new Act allows Employers to offer the match (if the plan provides one) on these repayments, as if they had gone into the 401(k) plan.

 

      6. Force-Out limit increased

Optional Provision

Background: One hassle of administering a 401(k) plan is keeping track of terminated employees after they leave. Currently, a terminated employee can be forced out if their balance is less than $ 5,000. This is done by rolling the funds to an IRA for that person. If the account balance is less than $ 1,000, however, a check will be sent, instead of the IRA rollover. (Fun fact – the original 1974 version of ERISA had a limit of $ 1,750). While this is optional, we would expect that most plans would want to adopt it.

SECURE 2.0 Change: The $ 5,000 limit is increased to $ 7,000.

 

      7. Changes to the Required Minimum Distribution (“RMD”) rules

Effective Dates: 1/1/23 and 1/1/33 (yes, that is correct!)

Background: Remember the old age 70 ½ rule? The first Secure Act changed that age to 72. However, Congress wanted to provide even more relief in this area. This helps retirees by leaving more money in the retirement system.

SECURE 2.0 Change and Effective Dates: The age has been increased. As of 1/1/23, the new required beginning age is 73. This increases to age 75 as of 1/1/33. Remember, the RMD provision does not apply to non-owner employees who continue to work beyond these ages. They need not get an RMD, so there is no change on that.

Further, the excise tax on missed RMD’s has been drastically reduced, from 50% of the missed payout to either 25% or 10%. The lower rate applies if you correct the problem within a two-year window.

While the 50% current tax rate has always applied until now, many participants have been able to avoid it by filing a Form with the IRS and asking for relief. By making the tax rate more reasonable, it would appear that this back-door solution may no longer be available.

Comment: If they really want to provide meaningful relief, Congress will reconsider a provision first proposed in 2017 – creating a minimum level of account balance where we aren’t going to worry about an RMD, perhaps in the $ 100 K range. This would eliminate a nuisance for so many people, and would not cost that much, since the amounts are small. This will apparently be considered in SECURE 3.0 and we will keep track of this for you.

 

      8. Tax Credits for new 401(k) plans

Effective Date – 1/1/23

As an encouragement to set up plans, the Act includes a tax credit of up to $5,000 to pay for the expense of creating a new plan. This applies to Employers with 50 or fewer employees. Note that a pro-rata credit is also available to Employers with between 50 and 100 employees.

Further, these Employers can also get a tax credit of up to $1,000 per year per employee to defray the cost of an Employer contribution. This credit only applies to certain employees (comp < $ 100K/yr.) , and is phased out over 5 years. This is a generous provision, although it doesn’t extend to Defined Benefit or Cash Balance plans.

 

      9. Self-Certification of Hardship Distributions

Effective Date: Immediate

One of the problems in dealing with a hardship distribution is the “Certification” that the reason for the hardship actually falls within the 7 allowable reasons that an employee can withdraw these funds while still employed. It puts the Employer in a potentially uncomfortable situation, as a financially stressed-out employee may not want to hear that their reason or documentation isn’t good enough.

Secure 2.0 now allows the employee to “self-certify” that their hardship is valid. This will make things easier. Note, however, that there will still be problems if the employee isn’t truthful, or if the Employer is aware that the rules aren’t being followed.

 

      10. Quick Updates on some other Provisions

This legislation is big and detailed. This quick summary is not intended to be comprehensive, as there are other resources available if you want that.

Here are some of the other provisions included in SECURE 2.0. Let us know if you’d like to learn more or discuss them:

A. Access to 401(k) funds while still employed – Congress originally made it difficult to access a 401(k) account while still employed. It was supposed to be a “retirement plan”, and not a “savings account”. The two main avenues to access these funds today are via (i) loans or (ii) hardship distributions. The new Act will now expand these options, to cover distributions for “Disaster recovery”, “Terminally ill participants”, “Emergency personal situations”, “Victims of domestic abuse”, and “Premiums for long-term care”. I have put these categories in quotes to remind you that they are all terms that are defined in the Act, with various effective dates. The main concept is that the 10% early distribution excise tax is waived, and in some cases there is no mandatory tax withholding.

B. Lost and Found – There will be an on-line, searchable data base for employees to find benefits from prior jobs that may be due.

C. Back to Paper – There has been a recent trend to delivering everything electronically. The Act requires an annual paper statement, as of 1/1/26, unless the participant opts out. This feels like we are going backwards in time, although, in fairness, there are groups that believe that some people are being deprived of essential information without the paper version.

 

      11. Plan Amendment required

The plan document will need to be amended by 12/31/25, assuming a calendar year plan. This will be tricky, given the various options and effective dates. Each Employer decision on the optional provisions will need to be carefully recorded in this updated plan document. Further, communicating these changes to plan participants will be necessary. While an updated “Plan Summary” is typically provided when the actual document is restated, some of these changes will need to be communicated more quickly than the plan document deadline.

 

Questions?

Let your Analyst or Managing Consultant know and we will assist you. This will be tricky, but we’ve all lived through this before. We look forward to working with you to optimize your plan design and minimize your hassles.

Our West Virginia office has moved!

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Metro Benefits is pleased to announce that our Ripley, West Virginia office continues to grow and as of Monday, May 18, 2020 we have moved to a new location.

422 Charleston Drive
Suite A
Ripley, WV 25271

Chris Lestitian, Chastity Crihfield, Ronelle Flint, Tiffany Cummings and Meri Diesenberg are available in our WV office to assist Plan Sponsors, Financial Advisors and CPA’s with all of their retirement plan needs for themselves and for their clients.

metro benefits inc new wv address

 

Metro Bulletin 2020-2: The CARES Act – Retirement Plan Relief from the COVID Virus

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April, 2020

Purpose:

To provide you with an update on recent pension legislation, called “The CARES Act”. (This stands for “Coronavirus Aid, Relief, and Economic Security Act”).

You have an Important Option!

Some of the beneficial features of the CARES Act are optional. You need to make an election to use them. We will outline this for you clearly, in the “Distributions and Loans” section, just below.

1. Distributions and Loans

Congress wanted to make it easier for plan participants to be able to access their retirement funds during this emergency, so they have temporarily relaxed the payout and loan rules. But this relaxation applies only if the Plan Sponsor elects it. Due to the hectic nature of our world today, we are going to assume that you do wish to allow for these new provisions to take effect, unless you tell us otherwise by 4/20/20.

A. Allow for “In-Service” Distributions

Normally, an employee can only access their 401(k) funds if they have a “distributable event”, such as termination of employment, retirement, disability, or death. To allow easier access to these funds, you may now let an “affected employee” withdraw up to $100,000 from their account. Note, too, that these payouts can occur from Cash Balance and Defined Benefit plans, as well.

Who is an “affected employee”? This includes an employee (or a spouse/dependent) who is diagnosed with COVID-19. Also, if the employee endures financial hardship as a result of the virus, they, too, will qualify. This might include layoff, furlough, quarantine, reduced hours, or inability to work due to a (COVID-related) lack of available childcare. This sounds like a lot of people we all know. Rather than playing detective, the Act allows you to rely upon “self- certification” by the employee that they are affected in this way.

Congress was also gentle on the aspect of taxation. Normally, there is a 10% excise tax on premature payouts, but this is waived. Further, employees can (a) spread their income taxes out evenly over 3 years, and (b) have the option of repaying their distribution back to the plan or to their IRA, within that 3-year period. There is no need to withhold the 20% tax rate that normally applies to cash payouts.

B. More Generous Rules on Plan Loans

 Keeping with the theme, the CARES Act also makes it easier for plan participants to get a loan. The old limits were that an employee could receive up to 50% of their vested account balance, with a maximum limit of $ 50,000. The Act revises these limits to 100% of the vested account balance, with a limit of $100,000. Please note that this temporary provision applies only through 9/23/20.

Further, the Act offers relief for those who are now repaying their loans. Any loan payments due between now and the end of 2020 can be delayed, for up to one year. Interest will continue to accrue. When the payments commence again, we’ll need to re-amortize the loan. The normal maximum repayment period (5 years) can be extended by up to a year in this manner.

Again, this relief applies to “affected” plan participants only, as described above, i.e., only those whose health or finances have been affected by the virus.

Finally, note that these new rules about payouts and loans are temporary provisions, that expire after 2020. Plan documents will need to be amended by 12/31/22, which will probably coincide with the next round of 401(k) plan document restatements. We expect that many of the investment platforms will be advising plan participants of these new rules shortly. However, we can assist you in this regard.

Remember, though, that these new rules only take effect if you want them to. We are going to assume, if we don’t hear back from you, that you do want to take advantage of these new loan and distribution rules.  If you do not now have a loan provision in your plan, however, we’ll ignore that aspect.

2. Waiver of Required Minimum Distributions for 2020 (“RMD’s”)

Due to the recent market drop, there is concern that 2020 required RMD’s (now at age 72, not  70 ½) will cause an undue burden. This is because the amount of the 2020 required payout is based upon plan participants’ 12/31/19 balances, pre-drop. Since plan assets today are so much lower, taking that same dollar amount (determined from the 12/31/19 balance) is now viewed as punitive, since it represents a much higher percentage of the account than what Congress intended. As a result, the CARES Act suspends required payouts for 2020.

If the RMD has already been paid out, it can be repaid back into the plan or rolled into an IRA. Taxes will continue to be deferred. The IRS is expected to relax the 60-day rollover rule for IRA’s, for this purpose.

Note, too, that this suspension applies to those who reached age 70 ½ (old rules) in 2019, and took their RMD’s from the plan between 1/1/20 and 4/1/20. Those payouts can be returned or rolled over. Those who took their 2019 RMD during 2019 are not offered any relief under this bill.  This provision does not apply to Cash Balance/Defined Benefit plans, because those plan participants’ RMD’s were not affected by the market drop in the same way.

3. Cash Balance/Defined Benefit Funding Relief

Congress is well aware that many plan sponsors can not now pay their required contributions into “pension plans”, such as these, so the CARES Act provides relief. Any required contribution due for the rest of 2020 can now be made by 1/1/21. This might include minimum funding requirements, normally due by 9/15/20, and quarterly contributions, as well. Interest will accrue on these delayed contributions.

CB/DB plans also have a mechanism that measures and certifies their funded percentage, called an “AFTAP”. If the funded percentage drops below a certain level, then restrictions on lump sums and benefit accrual apply. The Act includes some relief for these calculations, allowing that the 2019 certification can also be used for 2020. It’s unclear how helpful this provision will be.

4. Other/Non-CARES Act

While we’re at it, we also wanted to mention that the IRS has delayed the due date for restating 403(b) (normally due 3/31/20) and CB/DB (normally due 4/30/20) plan documents, by 90 days. We have already completed these documents for most of our clients.

We are also hoping for relief on the due date for 5500 Tax Forms, typically due 7/31/20. Our industry Association (“ASPPA”) has requested a “mass extension” for all plans, allowing for a 10/15/20 due date.

There is also some discussion of suspending required contributions into 401(k) plans, such as the 3% safe harbor contribution. We’ll let you know more about this when or if we hear more.

Finally, we thank you for being a Client or Friend of Metro Benefits. We enjoy working with you, and we want to help. Please contact (e-mail is the way to go, for now) your Analyst or Managing Consultant if we can provide further assistance. We will get through this together.

Metro Bulletin 2020-1: The SECURE Act – 10 Things You Should Know

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January, 2020

Purpose:

To provide you with an update on recent pension legislation, called “The SECURE Act”. (This stands for “Setting Every Community Up for Retirement Enhancement Act of 2019”).  It makes some important changes, probably the most in a decade. This is not intended to be a comprehensive review, just a quick summary. Let us know if we can provide more detail.

1. Age 70 ½ required distributions modified

The required beginning date has been changed from age 70 ½ to age 72. This reflects increasing longevity, (especially given that age 70 ½ started being used in the 1960’s).

(Effective Date: Payouts for those reaching age 70 ½ after 12/31/19.)

2. “Open” Multiple Employer Plans (“MEPS”) are now allowed

Before we dive into this issue, a little background will be helpful. Most of the plans that we deal with are considered to be “single employer” plans. Then, there are other plans called “multi-employer plans, which are collectively bargained Union plans (ex: Teamsters, Airline pilots, etc.) Neither of these plan types are affected by this change.

Beyond that, there are plans that serve as a “group plan” for more than one, unrelated employer. These are called “Multiple Employer Plans”, or MEPS.  Examples include the Association of car dealers (“NADART”), The American Bar Association Plan (“ABA”), etc.  MEPS allow employers to pool resources to achieve efficiencies of scale. Until now, the employers in these MEP plans had to have some type of “commonality”, perhaps because they are in the same industry, same geographic area, etc.

The SECURE Act removes this commonality requirement, so that any employers can join forces. This may be a very big deal, as large group “Open MEPS” will likely be created in the future. Down the road, we may even set one up for our clients. The main advantage is potential cost savings (ex: one tax return, one audit, one plan document, etc.) Potential disadvantages include loss of flexibility and control. Time will tell.

(Effective:  Plan years beginning 1/1/21, although this may be delayed.)

3. Tax Credits for Adopting Plans/Auto-Enroll

There have been small tax credits available for several years, for employers who adopt a new plan. These credits have been minimal, and often overlooked. Congress has a strong desire to have more employees “covered” by a retirement plan, so, accordingly, they have significantly increased this tax credit. (Note: “credit”, not “deduction”). But there is a string attached.

The basic tax credit has increased from $500, to up to $5,000, for the adoption of a new plan. This can be applied against 50% of the actual start-up cost. This will cover a lot of start-up costs! The actual amount is based upon how many “Non-Highly Compensated Employees” are covered, and is determined as $250 per such employee (maximum $5,000). The “string attached” is that the Employer can receive an additional tax credit of $500 for the first 3 years of the plan, but only if the plan provides for “automatic enrollment.”. This is where newly-eligible employees are automatically covered by the plan, unless they opt out. (Without this provision, they have to “opt in” to be covered.) Again, we can see here Congress’ enthusiasm for more coverage.

(Effective: Plans created after 1/1/20.)

4. Encouragement of “Lifetime Income”

Another goal of Congress is to ensure that people don’t run out of money during their retirement. There is concern that the 401(k) universe is all about lump sum payouts, rather than monthly retirement income. To encourage monthly income, Congress has made a couple of changes. First, the amount of estimated monthly income will need to be shown on 401(k) benefit statements. This information, using a format and assumptions to be determined by the DOL, may be helpful to an employee trying to plan for their retirement. Further, the new law reduces fiduciary responsibility for the Plan Sponsor in selecting an annuity-provider. This had been a barrier to lifetime income in the past.

(Effective: 12 months after the DOL issues interim regulations; don’t hold your breath.)

5. More Time to adopt a New Plan

Until now, a new plan had to be adopted (signed plan document) by December 31, assuming that the Plan year is a calendar year. This causes a year-end rush. In order to make it easier for a new plan to be adopted, this deadline has been extended to the Employer’s tax return due date, including extensions.

(Effective:  Plans established on or after 1/1/20.)

6. Easier to have a “Safe Harbor” 401(k) Plan

A “Safe Harbor 401(k) plan” is one where the employer makes a fully-vested contribution, in an amount set by law, and, in return, the Plan gets a free ride on 401(k) discrimination testing.  There are two types of Safe Harbor Plans. One is based on a “matching” employer contribution.

(Example: Employee contributes 5% of their own pay, the Employer matches another 4%.) The other type of Safe Harbor has a fancy name, called a “non-elective” contribution. The required rate is an employer contribution of 3% of pay. (They call it “non-elective” because the employer contribution goes into the plan no matter what; the employee need not “elect” to put in their own funds in order to get it.)

Keeping with Congress’ theme of improving retirement coverage, they wanted to make it easier to implement a safe harbor plan, so they made two changes, both affecting the non-elective (3%) option, and not the matching safe harbor.  First, the “Notice Requirement” has been removed. (Until now, the employer had to provide every eligible plan participant with an annual “Notice”, announcing that the plan would be considered as a safe harbor plan for the following year.)

Second, we’ll have more time to implement such a plan. Currently, a safe harbor plan must be adopted by September 30 of that year. This deadline is extended to November 30, again, assuming a calendar year plan. Further, an employer can implement such a plan even after November 30, but the 3% contribution, in this case, must be increased to 4% of pay.

(Effective: Plan Years Beginning 1/1/20.)  

7. Payouts available for Birth or Adoption of children

The SECURE Act allows a plan participant to take out up to $5,000, without penalty, when they have or adopt a child under age 18. The plan must allow this distribution to be repaid anytime.

(Effective: 1/1/20.)

8. Eligibility for Part-Time Employees

This is a big deal. Remember, ERISA (the Federal law governing retirement plans) was adopted in 1974, when most employees worked for just one (or a handful) of employers for their whole career. The “gig economy” was not foreseen. As a result, the rules for plan participation (and vesting) were created to allow a “1,000 hour” requirement to enter a plan.

Many plans still have a 12-month/1,000-hour entry requirement. This bars most part-time employees from joining such a plan. As an alternative to the 1,000-hour rule, all plans will need to allow an employee to enter sooner, if they work 500 hours in 3 consecutive years. Note, however, that employees who enter a plan because of these new rules need not receive any employer contribution. For example, in a 401(k) Plan, they could only defer their own pay, if desired. They would not be involved in compliance testing.

(Effective: Plan Years Beginning 1/1/21. However, part-time service before 2021 need not be tracked or recognized.)

9. Higher penalties for not filing your Tax Forms

The tax form for a 401(k) plan is called a “Form 5500”. We prepare a lot of these. The due date is typically July 31, although it can be easily extended to October 15. These dates probably look familiar.

(You might want to sit down before you read this next part.)

Until now, the penalty for late filing had been $25 per day, to a maximum of $15,000 per tax year. We have seen these penalties actually imposed. The new law increases the maximum penalty to $250 per day, not to exceed $150,000. (Note: this means $150,000 maximum penalty for every year late or missed.)  Be careful!

(Effective: Tax Forms due after 12/31/19.)

10. What haven’t we covered here?

As we said at the outset, this is not intended to be a comprehensive report, so we’ve left out some information and details. Here are some items that you may wish to review on your own. Of course, we are available to provide further information, or just to chat.

  1. IRA contributions can now be made after age 70.
  2. IRA mandatory payouts can now begin at age 72. (Same as new 401(k) rules, above.)
  3. “Stretch IRA’s” eliminated. If the beneficiary is not an eligible beneficiary, the inherited IRA must now be distributed within 10 years (not over the beneficiary’s life expectancy). Financial professionals view this change as potentially very significant. They eliminated the stretch IRA in order to pay for the other various goodies set forth above.
  4. No more loans from a 401(k) plan via credit card.

Next Steps for You:

Please let your Analyst or Managing Consultant at Metro know if you have any questions or concerns.

Best wishes for a happy and productive 2020!

 

New IRS Regulations on Hardship Distributions

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Some, but not all 401(k) Plans allow for a Hardship Distribution. The IRS has recently released their final regulations on this topic. In general, these new rules will simplify the process. You can use the new rules now, although your plan document will need to be amended in the near future.  The purpose of this Bulletin is to briefly describe these new rules, and how we will help you to comply. If your plan does not allow for hardship withdrawals, this Bulletin doesn’t apply.

Q: Does the employee really need that much “hardship” money? Do I have to audit their finances to prove it?

A: No, but there are three steps that you need to take. First, the Employer must ensure that the amount of the hardship payout doesn’t exceed the hardship “need”. Second, the employee must take any available “non-hardship” payouts, such as in-service distributions, if they’re allowed, from the 401(k) plan. Finally, the employee must demonstrate that they have no other (personal) funds to pay for the hardship. On this last point, the Employer can now rely upon the employee’s representation that they have insufficient funds. (Exception: If the Employer knows that this representation is false, they can’t accept it.).

Q: Must the employee take a loan before they can receive a hardship payout?

 A: No – this requirement has been eliminated.

Q: Must we suspend the employee for participating for 6 months?

A: This suspension has also been eliminated. The objective that Congress and the IRS are trying to accomplish is to simplify the hardship process, and you can see that these changes are helpful in that regard.

Q: Can all funds be accessed via a hardship distribution?

A: Previously, the employee could not take out either (a) investment earnings on their own elective deferrals, or (b) Safe Harbor employer contributions. Those restrictions have now been eliminated. While it is still an option as to what sources of funds can be made available in a hardship, we are going to assume that all funds (including employer contributions) will be made available. If you would like a more restrictive approach, please let us know, so that we can tailor your plan amendment (more on this below) appropriately. Otherwise, all vested accounts will be available upon hardship.

Q: Did the definition of a “hardship” change?

A: Nothing major, just some clarifications. As a reminder, the basic requirements for a “hardship” are unchanged:

  1. Medical expenses
  2. Tuition
  3. Purchase of a primary residence
  4. Preventing eviction or foreclosure
  5. Funeral expenses
  6. Casualty Damage causing home repairs – the change here is that you no longer need to live in a federal disaster area to claim this one. (This requirement only existed for a very short time.)
  7. Beneficiary expenses – Some of the hardship reasons and expenses listed above can be paid on behalf of a “primary beneficiary”. This includes medical, educational, and funeral expenses. This provision has been around for several years.

Q: Do we need to amend our plan document to reflect these new rules?

A: If your plan allows for a hardship distribution, then it will have to be amended. If we are responsible for your plan document, we’ll provide the amendment. Otherwise, you should ask your document-provider. It appears that the amendment deadline will be early 2021, and is based upon the Employer’s tax return deadline (including extensions) for their 2020 return. However, we intend to provide this amendment to you within the next 60 to 90 days.

In preparing this amendment, we’ll allow for the most “liberal” options available. (Examples – (a) Allow all vested funds to be paid out, including both employer and employee contributions. (b) Allow a payout for hardships for a primary beneficiary.)

Q: Are the rules the same for 403(b) Plans?

A: Almost. The main differences are that (a) (due to quirks in the law) investment earnings on elective deferrals can’t be paid out, and (b) certain “safe harbor contributions” also can’t be paid out.

Q: Finally, what should I do?

A:   Be on the lookout for the plan amendment that we’ll be e-mailing to you shortly. Please let us know if you have any questions, or if you’d like to discuss these issues further. This seems to be a positive development for 401(k) Plans.

 

If you have any questions or concerns, please contact us at 412-847-7600