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Retirement Plan Changes, Past, Present and Future

Written by: John E. Rich, Jr.

As employers learn recent revisions, more reworking could loom.

Published in NH Business Review (11/20/2020)

In late 2019 and early 2020, Congress passed two major pieces of federal legislation, The Setting Every Community Up for Retirement Enhancement Act (the “SECURE Act”) and the Coronavirus Aid, Relief, and Economic Security (the “CARES Act”) that made significant changes to the Tax Code rules impacting employer retirement plans.  Beginning in June, the Internal Revenue Service and the U.S. Department of Labor began issuing guidance to assist stakeholders in implementing the numerous changes under both Acts, which impact a broad range of provisions.  As employers begin to implement mandatory changes and determine whether optional provisions should be adopted as guidance is issued, they should be aware that the retirement plan landscape could change significantly after the November election.  

Guidance on Retirement Plan Withdrawals and Loans for COVID-19 Expenses

On June 19, 2020, the Internal Revenue Service ("IRS") issued Notice 2020-50, which provided guidance on permitted coronavirus-related loans and special 2020 distributions under the CARES Act.  The CARES Act waives the normal 10% penalty tax on early distributions and waives the Tax Code rules restricting early distributions from IRAs, 401(k), 403(b) and Section 457(b) Plans. Qualified individuals can withdraw up to $100,000 during 2020 without the 10% early distribution penalty, spread the reported income over three years, and repay the distribution within three years to avoid taxation.  Notice 2020-50 clarifies and expands the definition of who is a qualified individual to take into account additional factors such as reductions in pay, rescissions of job offers, and delayed start dates with respect to an individual, as well as adverse financial consequences to an individual arising from the impact of the COVID-19 coronavirus on the individual's spouse or household member. Notice 2020-50 also clarifies that employers can rely on an employee’s certification that he or she is a qualified individual (and provides a sample certification), and provides employers a safe harbor procedure for implementing the suspension of loan repayments otherwise due through the end of 2020.

Lifetime Income Illustration Guidance

On August 18, 2020, the Department of Labor issued an interim final rule (the “IFR”) on the SECURE Act requirement that retirement plan statements include a lifetime income illustration to give employees a realistic illustration of their monthly retirement income. The IFR provides the important details necessary for lifetime income illustrations and model language for the required explanations.  In order to address liability concerns of employers and plan fiduciaries, the IFR provides liability protection if the lifetime income illustration satisfies the requirements of the IFR. The IFR will take effect September 18, 2021, and although no income illustrations are required before that date, significant work will be required by service providers to implement the IFR. 

Guidance on Part-Time Employee Participation and Retirement Plan Tax Credits

IRS Notice 2020-68 issued in September provided needed guidance on several SECURE Act provisions including the requirement that part-time employees must be allowed to participate in a Section 401(k) Plan if the employee has worked at least 500 hours per year with the employer for at least three consecutive years, and has attained age 21 (a “long-term part-time employee”).  Importantly, time worked before January 1, 2021 does not count towards the required three-year period and long-term part-time employees are not required to be eligible to receive employer contributions based on the 500-hour rule.  However, Notice 2020-68 clarifies that for vesting of employer contribution purposes, the employer must give vesting credit for each 12-month period in which the employee has at least 500 hours of service starting from the employee's date of hire. Starting with the 2021 plan year, employers need to carefully track hours so qualifying long-term part-time employees can begin making elective deferrals in the 2024 plan year.  Notice 2020-68 also provides guidance on the details of enhanced business tax credit for retirement plan startup costs to make setting up retirement plans more affordable for small businesses (less than 100 employees) and the additional tax credits available to employers that adopt an automatic enrollment feature. 

How Retirement Plans Could Changes

As employers implement the SECURE and CARES Act changes, they should be aware that Vice President Biden could make major retirement plan changes. His legislative agenda is short on details but his website states he will make Section 401(k) Plans “more equal so that middle class families can enter retirement with enough savings to support a healthy and secure retirement” and states he favors “equalizing the tax benefits of defined contribution plans.”  His plan eliminates the pre-tax treatment of Section 401(k) Plan deferrals in favor of a tax credit reportedly equal to $26 for every $100 an employee contributes which will reduce the greater tax benefit those in higher tax brackets receive under the current system.  If he and favorably inclined new Democratic Congressional majorities were to eliminate Tax Code rules that permit larger contributions to and for higher paid employees, it could cause some employers to evaluate whether to continue to offer plans or opt to contribute to a new government sponsored automatic 401(k) type savings option which Vice President Biden also supports. 

In summary, while employers work to implement the numerous changes to the retirement plan rules made in 2019 and 2020, they should be aware that even more profound changes could be coming in 2021 depending on the election outcome.

John E. Rich, Jr. chairs the Tax Department at McLane Middleton, Professional Association.  He specializes in employee benefits, pension, ERISA and tax-related matters. He can be reached at [email protected] or (603) 628-1438.

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