What plan sponsors need to do now for the SECURE and CARES Acts

ARTICLE | January 19, 2021

Over the last 12 months, there have been a number of significant tax laws enacted that affect qualified retirement plans. These include provisions outlined in the Setting Every Community Up for Retirement Enhancement (SECURE) Act and the Coronavirus Aid, Relief and Economic Security (CARES) Act as well as numerous IRS notices and clarifications regarding these provisions. While many of the provisions took effect in 2020, most were optional for plan sponsors to elect for their plans. This article will highlight the provisions under these acts and consider what plan sponsors need to do to incorporate these provisions into their plan documents and plan administration.

SECURE Act

The SECURE Act, enacted on Dec. 20, 2019, included significant retirement plan legislation:

• Pooled employer plans (PEPs) – PEPS became available after Dec. 31, 2020. Unlike existing multiple employer plans (MEPs), PEPs do not require that the participating employers have a common characteristic. PEPs can only be formed as section 401(k) plans and the plan sponsors must select a pooled plan provider as the named fiduciary. The pooled plan provider must register with the U.S. Department of Labor (DOL).
• Automatic enrollment – The maximum permitted automatic enrollment deferral contribution was increased for qualified automatic contribution arrangement (QACA) safe harbor plans. The  percentage in the tax code, in section 401(k)(13)(C)(iii), was increased from 10% to 15% after the first year of participation, effective for plan years beginning after Dec. 31, 2019.1
• Required minimum distributions (RMDs) – The RMD age was increased for qualified retirement plans from age 70½ to 72 effective for distributions required to be made after Dec. 31, 2019, for plan participants who reached age 70½ after Dec. 31, 2019. [See also the CARES Act changes noted below.]
• Part-time employee participation – Section 401(k) plans are now required to allow participation by long-term, part-time employees. This includes employees (age 21 or above) working more than 500 hours but less than 1,000 hours per year for three consecutive years. Plan sponsors must only offer the opportunity to defer into the plan. Employer contributions (e.g., matching contributions, nonelective contributions) are not required. In addition, these employees can be excluded from discrimination testing, minimum coverage and top-heavy testing. This provision is effective for plan years beginning after Dec. 31, 2020. Plan years beginning before Jan. 1, 2021, are not taken into account in the determination of eligibility.
• Lifetime income investment contracts – Plan participants can transfer certain lifetime income investment contracts (e.g., an annuity contract paid over the life expectancies of a plan participant or life expectancies of a plan participant and beneficiary) between defined contribution plans or to an IRA by direct trustee-to-trustee transfer when a plan no longer authorizes the investment contract. This provision is effective for plan years beginning after Dec. 31, 2019.
• Lifetime income disclosures – Plan sponsors are required to include lifetime income disclosures on participant-defined contribution plan benefit statements. The information presented must include an estimated monthly annuity over the participant’s (or the participant and spouse’s) life expectancies based on their current account balance. The DOL has issued an interim final regulation that will become effective Sept. 18, 2021, and shall apply to pension benefit statements furnished after such date.  [See tax alert dated Aug. 19, 2020, here for further information.]
• Birth and adoption expenses – Code section 72(t)(2) was amended to add a new exception to the 10% early withdrawal penalty tax related to distributions for qualified birth or adoption expenses from eligible retirement plans. The distributions (up to $5,000 for each child) must be made within 12 months of the birth or adoption and may be recontributed to the plan under certain circumstances.[2] The $5,000 per child limit applies to all plans in the plan sponsor’s controlled group.
• Safe harbor plan 401(k) rules – A midyear plan amendment is permitted to the nonelective employer contribution percentage for the plan year, provided the amendment occurs within 30 days before the close of the plan year. Plan amendments made within the 30 days before the close of the plan year are permitted, provided the nonelective contribution is at least 4% of compensation for all eligible employees. This provision is effective for plan years beginning after Dec. 31, 2019.
• Closed defined benefit plan testing – The nondiscrimination testing rules for certain closed (also known as frozen) defined benefit pension plans were modified to permit existing participants to continue to accrue benefits. This feature serves to protect older plan participants and their benefits under the plan.
• Plan loans – Plans are no longer permitted to extend plan loans through credit cards or similar arrangements. These arrangements should be suspended effective for plan years beginning after Dec. 31, 2019.
• In-service distributions – Defined benefit plans and governmental section 457(b) plans can offer in-service distributions at age 59½. [This provision was technically part of the American Miners Act.]

CARES Act

The CARES Act, enacted on March 27, 2020, included provisions that offered access to tax-favored distributions for plan participants that suffered adverse financial consequences due to COVID-19. These provisions include:

• Coronavirus-related distributions (CRDs) – If offered by the plan sponsor, CRDs permit qualified individuals (those affected by COVID-19 as defined by the IRS) to withdraw up to an aggregate limit of $100,000 from their retirement accounts through Dec. 30, 2020.[3] The distributions are not subject to the 10% early withdrawal penalty tax and the individuals are permitted to either report the full distribution as income in 2020 or as income ratably over a three-year period. Alternatively, the individuals are permitted to repay all or a part of the distributions back to the plan(s) tax-free in a trustee-to-trustee transfer within three years of the date of the CRD withdrawal, provided the plan accepts rollovers. CRDs are available from section 401(k) plans, section 403(b) plans, governmental section 457(b) plans and money purchase pension plans.4
• Plan loan relief – For qualified individuals affected by COVID-19, plan sponsors could choose to temporarily increase the maximum plan loan limits from the lesser of $50,000 or 50% of their vested account balance to the lesser of $100,000 or 100% of their vested account balance. These limits applied to loans made from March 27, 2020, through Sept. 22, 2020. Relief from plan loan repayments was also permitted (but not required) for any individual with an outstanding plan loan having a repayment due date between March 27, 2020, and Dec. 31, 2020. These suspended loan repayments can be delayed for up to one year longer than the original term of the loan. The repayments starting in 2021 must reflect the suspended 2020 payments (taking into account interest). IRS Notice 2020-50 provides a methodology for the application of this provision and the related re-amortization of the loan.
• Temporary waiver of RMDs – For certain defined contribution plans (i.e., section 401(k) plans, section 403(b) plans and governmental section 457(b) plans), RMDs were completely waived for 2020. This includes RMDs required by April 1, 2020, and RMDs for participants with a required beginning date of April 1, 2021. This waiver does not apply to defined benefit plan RMDs.
• Single-employer defined benefit plan relief – Required minimum contributions from plan sponsors due in the 2020 calendar year were extended until Jan. 1, 2021. However, pursuant to IRS Notice 2020-82, the IRS will treat a contribution made by Jan. 4, 2021, as timely made. 

Required plan amendments

While the provisions noted above were not mandatory, to the extent plan sponsors adopted these provisions, required plan amendments will need to be made.

SECURE Act plan amendments must be completed no later than the last day of the first plan year beginning on or after Jan. 1, 2022 (2024 for governmental or collectively bargained plans). [IRS Notice 2020-68 and IRS Notice 2020-83.]

CARES Act plan amendments must be completed by the last day of the first plan year beginning on or after Jan. 1, 2022 (2024 for governmental plans). 

Plan sponsor considerations and action steps

Given the number of provisions in both the SECURE Act and the CARES Act, plan sponsors should begin developing a process to address the impact of these changes. As the first step, with the assistance of their plan administrator, plan sponsors should inventory which provisions have been implemented. This step would include obtaining copies of all board minutes, revised internal company policies and procedures, plan announcements, and employee communications related to each provision. The effective date for each provision should be determined and the due dates for any required plan amendments. Consideration should be given to the following:

SECURE Act

• Adoption of a PEP. It is anticipated that smaller plan sponsors will be interested in PEPs in order to offer a section 401(k) plan at a reasonable cost. These plan sponsors will need to identify a pooled plan provider and understand the fees associated with the arrangement. While the pooled plan provider takes on many plan roles, plan sponsors still will have fiduciary responsibilities including monitoring the plan’s operations and determining if the fees charged are reasonable. [We previously published an alert summarizing these changes, found here.] Note also that new small business plan sponsors may be eligible for a tax credit up to 50% of the qualified costs (capped at $5,000) of setting up the plan.
• Automatic enrollment feature. Plan sponsors who want to take advantage of the option to raise the maximum automatic deferral contribution percentage under their safe harbor plan will need to update procedures, communicate the change to plan participants and amend the plan within the required time frame noted above. If the safe harbor plan documents the maximum automatic qualified percentage by reference to code section 401(k)(1)(C)(iii) without incorporating a specific percentage, then the plan will need to be amended by the end of the 2022 plan year (effective to the first plan year beginning after Dec. 31, 2019) to explicitly reflect a maximum rate of other than 15% in order to avoid an operational failure.

In addition, small employer plan sponsors (employers with no more than 100 employees on a controlled group basis receiving at least $5,000 of compensation for the preceding year) who start a new section 401(k) plan that includes an automatic enrollment feature, or amend an existing section 401(k) plan to include an automatic enrollment, may be eligible for a $500-per-year tax credit for up to a three year taxable period. Plan sponsors can review their eligibility for this credit and the advisability of adding the automatic deferral feature.5

• Tracking part-time employees. The provision to include part-time employees in section 401(k) plans will require employers to start keeping track of their long-term, part-time employee service hours. Essentially, these employees will first become plan eligible for plan years beginning in 2024 unless a plan sponsor chooses to include them earlier. In the interim, starting in 2021, plan sponsors will need to begin capturing the data needed to identify and track employee eligibility. Whether this is done internally or via the third-party plan administrator should be considered by the end of the 2021 plan year. Employers with a large number of part-time employees or seasonal workers will want to focus on this issue as early as possible. [Note, however, that plan years prior to 2021 are taken into account for vesting purposes.]
• Lifetime income disclosures. The DOL interim rule provides an actuarial methodology for calculating the required disclosures and a model format. However, these types of required disclosures are not typically performed by defined contribution plans and will likely increase the amount and type of information required to be gathered. While the final effective date of this rules is not clear at this time, plan sponsors should consider how they will begin to address the required information gathering and who will be identified to generate the required disclosures (i.e., plan administrators or record keepers).
• Adding birth or adoption distributions. Plan sponsors can consider whether they would like to offer in-service distributions for qualified birth or adoption distributions. This provision is optional and plan sponsors are not required to permit this type of distribution or recontribution. Plan sponsors that do add this provision will need to update their distribution forms, rollover forms (to permit a recontribution), withholding processes and employee communications. A plan amendment is required within the time frame noted above.
• In-service distributions. Plan sponsors of defined benefit plans or governmental 457(b) plans have an opportunity to allow plan participants earlier access to their retirement funds. If they choose to permit or lower the in-service distribution age to 59½, they will need to update their distribution forms, plan documents, withholding processes and employee communications, including summary plan descriptions (SPDs).

CARES Act

• Three-year repayment right on CRDs. CRDs must be properly reported on a Form 1099-R (Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, etc.) and reflect the appropriate distribution code even if the plan participant who received the CRD chooses to repay all or part of the distribution in the year of distribution or over three years. Plan sponsors will need to develop procedures to ensure that the re-contribution process is handled correctly to reflect the tax-free rollover nature of the contribution. Coordination with third-party administrators is recommended regarding the repayment process, identifying the appropriate source for re-contributions (i.e., before-tax or after-tax account) and communications with the plan participants. In addition, plan documents will need to be amended to reflect these changes.
• Plan loan relief repayments. Plan sponsors should review their plan loan repayment provisions and communications to those employees who took advantage of the plan loan provisions. In particular, plan sponsors should communicate with the employees and remind them that any loan payments that were suspended through Dec. 31, 2020, must be repaid beginning in 2021. In addition, plan sponsors should be working with their third-party administrators regarding the recalculation of the loan repayments and coordinating with payroll to effectuate the revised repayment schedules.
• RMDs. Plan sponsors will need to review their RMD processes and, as necessary, amend plan provisions, policies and procedures to address the changes to the RMD rules. In addition, distribution forms, and participant and beneficiary communications, will require updating.
• Partial plan terminations. Given the number of employees that were separated from service, terminated or furloughed pursuant to an employer-initiated severance from employment in 2020, there is a risk that a qualified retirement plan may have experienced a partial plan termination under code section 411(d)(3). The IRS rules generally provide that participants become fully vested in their account balances if there is drop by at least 20% (the turnover rate) in qualified plan participation related to these actions

The IRS has provided a list of frequently asked questions (FAQs) on coronavirus-related relief for retirement plans.6 FAQ15 provides that for purposes of calculating the turnover rate, employees rehired by Dec. 31, 2020, can be excluded from the 20% calculation for the 2020 plan year. However, more recently, this date was updated to March 31, 2021.7

The 20% reduction is not a bright-line test, and there are exceptions based on the facts and circumstances.  Accordingly, plan sponsors should be reviewing and monitoring their plans as early into 2021 as possible to determine if terminated employees may have become fully vested in their benefits.

Plan sponsors should work closely with their retirement plan advisors to monitor any developments in these areas and to implement these features.

^{1 IRS Notice 2020-86 provides additional guidance on the plan requirements regarding this provision. We previously published an alert summarizing these changes, found here.}

^{2 IRS Notice 2020-68 provides guidance on the definitions and plan requirements regarding this provision.}

^{3 IRS Notice 2020-50 provides guidance on the definitions and the distribution requirements regarding this provision. We previously published an alert summarizing these changes, found here.}

^{4 On Dec. 22, 2020, Congress passed the Consolidated Appropriations Act, 2021. President Donald Trump signed the act on Dec. 27, 2020. This act clarifies that CRDs are also permitted from money purchase pension plans.}

^{5 IRS Notice 2020-68 provides additional guidance on the definitions and plan requirements regarding this provision.}

^{6 The IRS FAQs can be found here.}

^{7 On Dec. 22, 2020, Congress passed the Consolidated Appropriations Act, 2021, which the president signed on Dec. 27, 2020. This act clarified that a qualified plan will not be treated as having a partial termination during any plan year that includes the period beginning on March 13, 2020, and ending on March 31, 2021, if the number of active participants covered by the plan on March 31, 2021, is at least 80% of the number of active participants covered by the plan on March 13, 2020.}

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This article was written by Anne Bushman, Toby Ruda and originally appeared on Jan 19, 2021.
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