July 22, 2020
To our clients and friends:
This is another in a series of newsletters designed to keep you informed of current events in the area of retirement plans.
There have been a LOT of developments over the past few months. So this is actually “newsy”. We’ve issued Metro Bulletins on a couple of them. Let’s take a moment to review some of this activity, and what it means to you. We won’t go into too much depth here, since this is more of a summary.
- Hardship Regs – On 9/23/19, the IRS finalized their “Hardship Distribution” regulations.
- A Plan participant is no longer required to suspend their 401k contributions for 6 months if they take a hardship distribution. (The old rule, requiring suspension, was designed to “prove” that a financial “hardship” existed”).
- Also, a plan participant no longer needs to apply for a plan loan before being allowed to take a hardship payout. This rule is optional, although we are administering our plans this way.
- Hardship payouts are now allowed from all types of money. Previously, access to investment income on employee deferrals had been restricted. (Note: Even under these new rules, 403 (b) plans still have this restriction.)
- Technical changes to the “casualty” reason for a hardship. Now, you need to be in a federally-declared disaster area.
- SECURE Act – The link to our (lovely) Bulletin is here.
- Required payout age of 70 ½ replaced by age 72. No such payouts are required for 2020. This applies to those who reach age 70 ½ after 12/31/19.
- “Multiple Employer Plans” will be allowed, even if there is no relationship among the Employers in the group. This will lead to the creation of “mega-plans” in the future (for better or worse).
- Increase in tax credit for an Employer who sets up a new Plan. This defrays the expense of starting the Plan. Extra bonus tax credit if you design the plan with an auto-enroll feature. This covers 50% of the start-up and administrative costs, and can total up to $ 15,000 over three years ($ 5 K/yr).
- More time to adopt a new Plan – no longer bound by the old 12/31 deadline, now you may adopt until your tax return due date
- More time to establish a 401k safe harbor Plan – Old rule was that you had to adopt/announce by 9/30, in order to enjoy the benefits (auto-pass on testing!) of a Safe Harbor. New deadline is 11/30, although you can adopt even later than that if you give an extra 1% of pay (4% vs 3%). No relief was granted for the “matching” version of Safe Harbor, only the 3% “non-elective”. Note, too, that the annual “Safe Harbor Notice” will no longer be required, for Plans which use the 3% version.
- Since the day that President Ford signed ERISA (9/2/74), the standard has been 1,000 hours to be able to enter a plan. (An Employer could always be more generous, however.) The SECURE Act will now allow employees who work 500 hours in 3 consecutive years to join a plan, as well. This will allow part-time workers to be covered, which has been one of Congress’ goals for a while. Note that hours worked before 1/1/21 don’t count for this requirement, so the soonest anyone can be brought in this way would be 1/1/24. Note, too, that these employees need not get any Employer contribution; they just need to be allowed to defer.
- The maximum penalty for filing a late tax return (“5500 Form”, normally due by 7/31, but extendable to 10/15) has increased from $ 25 to $ 250 per day late. Maximum penalty of $ 150K per form. (wow/be careful!)
- CARES Act – On 3/23/20, Congress passed the CARES Act, to provide (financial) relief relative to the pandemic. We provided another Bulletin on this Act, found here.
- Easier access to funds for employees, even while they’re still working. Each Employer must decide whether to adopt these more relaxed procedures for their plans. (Fortunately, many of our clients’ employees have not been too adversely affected. As a result, in our conversations with our clients, most have decided to not adopt these optional provisions, preferring to protect employees’ retirement accounts in this way.)
- These options include a doubling of the loan limit to $ 100K, access to funds while still employed (premature payout tax is waived, you may repay these payouts, and you may spread out your taxes over 3 years.) This enhanced accessibility applies to the end of 2020.
- Loan repayments due in 2020 can be delayed for up to a year.
- Required minimum distributions are waived for 2020, but not for defined benefit plans.
- Some of our clients sponsor defined benefit or cash balance plans. Contributions required during 2020 can be delayed until 1/1/21. (Congress may be cooking up more pension funding relief shortly.)
- Plan document Update – 403(b) Plan documents had been due on 3/31/20, while cash balance and pension plan documents were due 4/30/20. The CARES Act extends these due dates by 90 days.
- Here is something that neither Congress nor the IRS has addressed – the due date for 5500 tax forms for calendar year plans, normally due 7/31/20.
- I would have expected some relief, as they had already granted more time for forms due earlier than 7/31. Not yet. An automatic extension would have been nice.
- Even better, it might be time to get rid of this whole (silly) extension game (since they are automatically granted), and just change the due date to 10/15.
- Electronic Disclosure – The DOL has released their final regs on this topic. Our industry has been lobbying for this improvement for more than 15 years, and this is important.
- Instead of distributing paper notices (and there are a lot of them), these new regs allow the sponsor to email them, instead. This will save a lot of time and money.
- There are, of course, some rules to follow, to ensure that people are able to receive these emails. In addition, employees can opt out of these e-notices and request paper statements.
- We expect the financial institutions’ recordkeeping systems to take the lead on implementing these procedures. Please let us know if we can assist, or if your plan is not on one of these “platforms” and you wish to explore further.
- More Plan Documents coming Up! – The IRS is on a 6-year cycle for plan documents. As a result, all 401(k) documents will need to be restated by the middle of 2022. The exact date has not yet been announced.
- IRS Notice 2020-52 – Ability to suspend Safe Harbor contributions mid-year
- As a result of the pandemic, many Employers have been unable to make the (promised) 3% of pay Safe Harbor contribution into their 401(k) Plan.
- If you want this relief, then you need to adopt a plan amendment by 8/31/20, and you can cease these contributions. (Both types of Safe Harbor are covered; the matching type and the 3% “non-elective” type.)
- Then, you need to provide the employees with a Notice.
- The “price” you pay for this is that you lose the free ride that the Safe Harbor would normally have provided on the 401k discrimination test. As a result, if the test is failed, then the Highly-Compensated” plan members will probably get a (taxable) refund in 2021.
Was that too much information? We hope not. This is why you (hopefully) have Metro looking out for you.
Quick Metro Update:
We are proud to announce that we have relocated our WV office to a new building in Ripley, WV. We are fortunate to have five professionals there, to serve the needs of our West Virginia clients.
Finally, please note that ….
We sincerely hope that you are holding up OK during this pandemic, both personally and professionally. Let us know if we can assist …
Best Wishes 😊
David M. Lipkin, FSA, MSPA Editor
Metro Benefits, Inc. is a regional consulting firm, based in Pittsburgh, PA and Ripley, WV. We provide a wide range of services for qualified plans. While we make every effort to verify the accuracy of the information that we present here, you should consult with your Plan attorney or other advisor before acting on it.