Metro Benefits is pleased to announce that our Ripley, West Virginia office continues to grow and as of Monday, May 18 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.
April, 2020
To provide you with an update on recent pension legislation, called “The CARES Act”. (This stands for “Coronavirus Aid, Relief, and Economic Security Act”).
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.
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.
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.
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.
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.
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.
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.
January, 2020
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.
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.)
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.)
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.)
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.)
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.)
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.)
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.)
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.)
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.)
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.
Please let your Analyst or Managing Consultant at Metro know if you have any questions or concerns.
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:
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