Industry & Regulatory News

Enhancing Emergency and Retirement Savings Act Introduced

Senator James Lankford (R-OK) and Senator Michael Bennet (D-CO) have introduced the Enhancing Emergency and Retirement Savings Act of 2021 to provide flexibility and access for those who experience unexpected emergencies.

The legislation would provide a penalty-free “emergency personal expense distribution” option from employer-sponsored retirement plans and IRAs. The proposal would allow for one emergency distribution per calendar year of up to $1,000 from the individual’s total nonforfeitable accrued benefit under the plan. The bill requires that the withdrawn funds be paid back to the plan before an additional emergency distribution from that same plan is allowed. The amount can be recontributed within a three-year period to any eligible plan to which a rollover contribution can be made.

An emergency personal expense distribution is defined as a distribution for purposes of meeting unforeseeable or immediate financial need relating to necessary personal or family emergency expenses. The plan sponsor of an employer-sponsored retirement plan may rely on an employee’s certification that the conditions are satisfied in determining whether the distribution is an emergency distribution.


IRS Issues Deadline Relief for West Virginia Storm Victims

The IRS has issued a news release announcing the postponement of certain tax-related deadlines for West Virginia victims of severe storms, straight-line winds, tornadoes and flooding. The tax relief postpones various tax filing and payment deadlines that occurred starting February 27. In addition to extending certain tax filing and tax payment deadlines, the relief includes completion of many time-sensitive, tax-related acts described in IRS Revenue Procedure 2018-58 and Treasury Regulation 301.7508A-1(c)(1), which include filing Form 5500 for retirement plans, completing rollovers, and making retirement plan loan payments.

Affected taxpayers with a covered deadline on or after February 27, 2021, and before June 30, 2021, will have until June 30, 2021, to complete certain time-sensitive, tax-related acts. This includes the May 17 deadline for filing 2020 individual income tax returns and paying any tax due. Taxpayers also have until June 30 to make 2020 IRA contributions.

“Affected taxpayer” automatically includes any individuals who live, and businesses whose principal place of business is located, in the covered disaster area. The areas included in this relief are Boone, Cabell, Kanawha, Lincoln, Logan, Mingo, and Wayne counties in West Virginia.

Those who reside or have a business located outside the covered disaster area, but have been affected by the disaster, may contact the IRS at 866-562-5227 to request relief.


IRS Issues Revised 2020 Publication 590-B

The IRS has issued a revised 2020 Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs), intended to clarify the application of required minimum distribution (RMD) rules under the Setting Every Community Up for Retirement Enhancement Act (SECURE Act).

The explanation of the 10-year rule has been expanded to indicate that, if applicable, the entire balance of the IRA must be withdrawn by December 31 of the year containing the 10th anniversary of the owner’s death, and the beneficiary is allowed, but not required, to take a distribution before that date. The publication notes that the 10-year rule applies if

  • the beneficiary is an eligible designated beneficiary who elects the 10-year rule if the owner died before reaching his required beginning date, or
  • the beneficiary is a designated beneficiary who is not an eligible designated beneficiary, regardless of whether the owner died before reaching his required beginning date.

An example in the prior version of the publication that was carried forward from 2019 has caused some confusion in that it suggested a required life expectancy distribution where the 10-year rule would have been applicable. This example has been modified to reflect life expectancy payments for an eligible designated beneficiary, and a note has been added clarifying that, if death occurred before the required beginning date and the 10-year rule applies, no distribution is required for any year before the 10th year.

Taken together, the publication appears to suggest that the 10-year rule may not be an option for an eligible designated beneficiary for death on or after the account owner’s required beginning date.

The IRS has indicated that it will soon issue proposed regulations regarding changes made to the RMD rules under the SECURE Act.


Executive Order Includes Review of ESG Factors in Retirement Plans

Last week, President Biden issued an Executive Order on Climate-Related Financial Risk, which includes a directive to the Department of Labor (DOL) Secretary to consider publishing, by September 2021, a proposed rule to suspend, revise, or rescind the Financial Factors in Selecting Plan Investments and Fiduciary Duties Regarding Proxy Voting and Shareholder Rights final rules that were published during the Trump administration regarding environmental, social, and governance (ESG) investments and proxy voting by employee benefit plans.

The Secretary is also directed to identify what actions the DOL can take under ERISA and the Federal Employees’ Retirement System Act to “protect the life savings and pensions of United States workers and families from the threats of climate-related financial risk,” along with assessing “how the Federal Retirement Thrift Investment Board has taken environmental, social, and governance factors, including climate-related financial risk, into account.”

Within 180 days, the Secretary is to submit a report to the President on the actions taken in response to this executive order.

This executive order follows the DOL Employee Benefits Security Administration’s March 10, 2021 announcement that it would not enforce either of the final rules until it publishes further guidance. That announcement arose from a January 25, 2021 executive order directing federal agencies to review existing regulations.


Retirement Security and Savings Act Re-Introduced

Senators Rob Portman (R-OH), and Ben Cardin (D-MD), have introduced the Retirement Security and Savings Act of 2021, legislation that was last introduced in 2019. This bill, like the Securing a Strong Retirement Act introduced in the House of Representatives earlier this month, is intended to build on the Setting Every Community Up for Retirement Enhancement Act (SECURE) of 2019. With more than 50 provisions, this bill contains a broad set of retirement reforms under the following categories, highlights of which are enumerated below.

Expanding Coverage and Increasing Retirement Savings

  • Establishes a new automatic enrollment safe harbor with contributions starting at 6 percent in the first year and a three-tier rate of matching contributions on deferrals up to 10 percent of pay
  • Provides for a special tax credit on the first 2 percent of pay to nonhighly compensated employees for employers that adopt the new safe harbor
  • Makes the individual taxpayer’s saver’s credit refundable and would require that the credit be contributed directly to a Roth IRA or designated Roth in a qualified plan
  • Reduces the long-term part-time threshold implemented under the SECURE Act from three consecutive years with at least 500 hours to two consecutive years with at least 500 hours
  • Provides for a 60-day rollover to an inherited IRA for nonspouse beneficiaries
  • Raises the RMD age to 75 in 2032
  • Creates an additional catch-up contribution for those who have attained age 60 that is $10,000 for retirement plans that are not SIMPLE IRA or 401(k) plans, and $5,000 for SIMPLE plans and will be indexed with the cost of living
  • Allows deferral of tax on gain from sale of employer securities to an ESOP

 

Preservation of Income

  • Increases the maximum amount that can be funded to a qualifying longevity annuity contract (QLAC) to $200,000
  • Directs the Secretary of the Treasury to update regulations to allow exchange-traded funds (ETFs) to be included in variable annuity products

 

Simplification and Clarification of Qualified Retirement Plan Rules

  • Directs the Secretaries of the Treasury and Labor to adopt regulations outlining the consolidation of certain employee notices into a single notice
  • Permits nonspouse beneficiaries to roll over assets to 401(k), 403(b), and 457 plans
  • Allows contributions to SIMPLE IRA plans on a Roth basis
  • Reduces the 50 percent penalty for late distribution of a required minimum distribution (RMD) to 25 percent
  • Allows mergers of 401(a) and 403(b) plans
  • Exempts retirement savers that have $100,000 or less in retirement assets from taking RMDs
  • Reduces penalties for IRA excess contributions and the failure to take an RMD from an IRA if corrected timely, and removes requirements that, in case of a prohibited transaction, the IRA ceases to be qualified as an IRA and that assets are deemed to be distributed
  • Creates a national retirement savings lost and found (including an online searchable database to reunite retirement savers with their savings), increases the cash-out limit to $6,000, and requires that unclaimed balances under $1,000 are transferred to the Pension Benefit Guarantee Corporation (PBGC)

 

Defined Benefit Plan Reform

  • Clarifies that the variable interest crediting rate used as the projected interest crediting rate for cash balance plans is a reasonable projection subject to a maximum of 6 percent
  • Eliminates indexing of PBGC variable rate premiums
  • Reduces the overfunding threshold by which employers with overfunded pension plans may use a portion of the surplus assets to fund welfare benefits to the same population of retirees and extends provision through 2031

 

Reforming Employer Plan Rules to Harmonize with IRA Rules

  • Synchronizes retirement plan rules to allow the exemption of Roth balances from RMD rules
  • Allows plan participants to make charitable distributions
  • Allows spouse beneficiaries to treat a deceased participant’s balance as their own in the plan
  • Roth IRA amounts would be permitted to be rolled over to retirement plans

 

Plan Amendments

  • Establishes an amendment deadline on or before the last day of the first plan year beginning on or after January 1, 2023 (2025 for governmental plans), and conforms the plan amendment dates under the SECURE Act, Coronavirus Aid, Relief, and Economic Security (CARES) Act, and Taxpayer Certainty and Disaster Tax Relief Act to these new dates

Smaller Sequel to SECURE Act Re-Introduced in Senate

Senator Charles Grassley (R-IA), along with co-sponsors Maggie Hassan (D-NH) and James Lankford (R-OK), have re-introduced the Improving Access to Retirement Savings Act. The bill was originally introduced late in the last session of Congress and contains the following provisions.

  • Expands access to multiple employer plan (MEP) arrangements by allowing 403(b) plans of tax-exempt organizations to participate
  • Clarifies that eligibility for the small employer pension plan start-up credit for small employers joining a MEP is predicated on the first three years of participation in the MEP, irrespective of how long the MEP has been in existence
  • Provides a 9½-month safe harbor for correction of employee elective deferral failures in an automatic contribution arrangement
  • Allows retroactive amendments until the employer tax return due date plus extensions that increase certain benefit accruals for the preceding plan year

These provisions were included in a larger bill, Securing a Strong Retirement Act or SSRA, that was approved by the House Ways and Means Committee earlier this month.


IRS Provides Additional COBRA Premium Subsidy Guidance

On May 18, the IRS issued Notice 2021-31, which provides guidance affecting COBRA premium assistance pursuant to the American Rescue Plan Act of 2021 (ARPA). The notice includes 86 questions that clarify the application of the premium assistance to group health plans, employee eligibility, determination of the premium subsidy amount, and the advance payment or quarterly offset of taxes for employers.

 

Eligibility (Questions 1–20)

Notice 2021-31 clarifies that an assistance eligible individual (AEI) is an individual who experiences an original qualifying event of reduction in hours or involuntary termination of employment. If the AEI experiences an extension of COBRA continuation coverage period due to disability, a second qualifying event, or state mini-COBRA extension, he will be eligible for the subsidy to the extent that his additional period of coverage falls during the subsidy period. Finally, an AEI is no longer eligible for premium assistance if he is eligible for another group health plan or Medicare. An AEI is considered eligible for another group health plan if enrolled or eligible to enroll during the period April 1 to September 30, 2021.

Operationally, employers are not required to obtain an attestation or certification from the employee’s eligibility status to provide premium assistance. However, employers are required to maintain information used to make a determination, including any attestations or certification, if applicable.

 

Reduction in Hours (Questions 21–23)

An employee’s reduction in hours causes the qualified beneficiary to be eligible for premium assistance, regardless of whether the reduction in hours is voluntary or involuntary. In addition, furlough or strikes generally constitute reduction-in-hour events.

 

Involuntary Termination of Employment (Questions 24–34)

These questions and answers provide examples of what is and what is not considered an involuntary termination. In general, involuntary termination is the severance from employment due to the independent unilateral exercise of authority by an employer where the employee was otherwise willing to continue employment.

The following constitute involuntary termination.

  • Employer’s action to terminate employment because of the employee’s absence from work due to illness or disability
  • Termination for cause unless gross misconduct
  • Resignation due to material change in the geographic location of employment
  • Window termination (i.e., employees facing impending termination are offered a severance to terminate in a specified period of time)
  • Employee-initiated termination because of concerns about workplace safety if the circumstances amounted to constructive termination (i.e., the employer failed to provide reasonable accommodation)
  • Employee-initiated termination in response to reduction in hours
  • Failure of an employer to renew an employment contract

The following constitute voluntary termination.

  • Retirement
  • Employee-initiated termination due to concerns about workplace safety
  • Employee-initiated termination because child is unable to attend school or childcare facility because of COVID-19. However, if the leave is temporary and an employee-employer relationship exists, the qualifying event may be reduction in hours
  • Death of an employee

 

Coverage Eligible for Premium Assistance (Questions 35–42)

Premium assistance is available for group health plan coverage that includes medical, vision, or dental-only plans, health reimbursement arrangement (whether integrated or stand-alone), and retiree health plans (if available to active employees that are similarly situated). The premium assistance is not available for qualified small employer health reimbursement arrangements or health flexible spending arrangements.

 

Premium Assistance Period (Questions 43–46)

The premium assistance is available for the period April 1 to September 30, 2021, and the employee is eligible to receive premium assistance beginning the first period of coverage beginning on or after April 1, 2021. However, an employee is not required to elect the first period of coverage beginning on or after April 1, 2021, and may instead choose any prospective period of coverage within the available period (April 1 to September 30, 2021).

 

End of COBRA Premium Assistance Period (Questions 47–50)

COBRA coverage will continue for the AEI at the end of the subsidy period, but premiums must be timely paid for subsequent periods of coverage.

 

Extended Election Period (Questions 51–55)

An AEI will be able to have a second opportunity to elect coverage during the extended election period even if she had previously declined certain coverage while electing others (e.g., enrolling in continuation coverage for dental and vision but declining health coverage). Or if an employee had elected self-only continuation coverage, her spouse or dependent child, who would also qualify as an AEI, would also have a second election opportunity.

 

Extensions Under the Emergency Relief Notices (Questions 56–59)

Individuals must elect or decline retroactive coverage within 60 days of receipt of the election notice. Individuals will not have a second opportunity to elect coverage. The one-year extended period due to the pandemic continues to apply for premium payment outside the April 1 to September 30, 2021, period.

 

Payments to Insurers Under Federal COBRA (Question 60)

Insurers may be liable for excise taxes if they fail to treat an AEI as having made a full payment of the premium. The employer will be responsible for making a payment to the insurance carrier.

 

Comparable State Continuation Coverage (Questions 61–62)

State continuation programs will not fail to provide comparable coverage under ARPA if the programs provide different maximum periods of coverage, different qualifying events, or different qualified beneficiaries. However, a qualified beneficiary is eligible only if the individual meets the definition under COBRA.

 

Calculation of Premium Assistance (Questions 63–70)

The credit for the premium assistance is equal to the amount of COBRA premium costs not paid by the AEI plus any administrative costs otherwise allowed (generally, 102 percent). Notice 2021-31 clarifies that an amount subsidized by the employer would not be eligible for a credit.

 

Claiming the COBRA Premium Assistance Credit (Questions 71–86)

Regarding payment of the premium assistance to the plan sponsor, Notice 2021-31 clarifies that employers are eligible for the credit if subject to COBRA or self-insured and insurers are eligible for the credit for insured plans subject to mini-COBRA.

Notice 2021-31 also clarifies that the IRS and the Department of the Treasury are aware of additional issues concerning COBRA premium assistance that have not been addressed. They are continuing to consider the issues and may issue further subsequent guidance.


IRS Issues Deadline Relief for Tennessee Storm Victims

The IRS has issued a news release announcing the postponement of tax-related deadlines for Tennessee victims of severe storms, straight-line winds, tornadoes, and flooding. The tax relief postpones various tax filing and payment deadlines that occurred starting March 25. Affected taxpayers with a covered deadline on or after March 25, 2021, and before August 2, 2021, will have until August 2, 2021, to complete certain time-sensitive, tax-related acts. This includes the May 17 deadline for filing 2020 individual income tax returns and paying any tax due. Taxpayers also have until August 2 to make 2020 IRA contributions.

In addition, the relief includes completion of acts described in IRS Revenue Procedure 2018-58 and Treasury Regulation 301.7508A-1(c)(1), which include filing Form 5500 for retirement plans, completing rollovers, and making retirement plan loan payments.

“Affected taxpayer” automatically includes any individuals who live, and businesses whose principal place of business is located, in the covered disaster area. The areas included in this relief are Campbell, Cannon, Cheatham, Claiborne, Clay, Davidson, Decatur, Fentress, Grainger, Hardeman, Henderson, Hickman, Jackson, Madison, Maury, McNairy, Moore, Overton, Scott, Smith, Wayne, Williamson, and Wilson counties.

Those who reside or have a business located outside the covered disaster area, but have been affected by the disaster, may contact the IRS at 866-562-5227 to request relief.


IRS Provides 2022 Amounts for HSAs and HRAs

IRS Revenue Procedure (Rev. Proc.) 2021-25 provides the 2022 inflation-adjusted amounts for health savings accounts (HSAs) and the maximum amount that may be made newly available for expected benefit health reimbursement arrangements (HRAs).

The HSA 2022 calendar year annual limitation on deductions under Internal Revenue Code (IRC) Sec. 223(b)(2) is $3,650 for an individual with self-only coverage under a high deductible health plan (HDHP) and $7,300 for an individual with family coverage under an HDHP.

In calendar year 2022, under IRC Sec. 223(c)(2)(A), an HDHP is a health plan with an annual deductible that is not less than $1,400 for self-only coverage or $2,800 for family coverage. The annual out-of-pocket expenses—deductibles, co-payments, and other amounts (but not premiums)—cannot exceed $7,050 for self-only coverage or $14,100 for family coverage.

Under Pension Excise Tax Regulation Sec. 54.9831-1(c)(3)(vii), the maximum amount that may be made newly available for the plan year for an excepted benefit HRA is $1,800 for plan years beginning in 2022.


IRS Notice Addresses Taxation of Dependent Care Benefits

On May 10, 2021, the IRS released Notice 2021-26, which addresses the taxation of dependent care benefits available during taxable years ending in 2021 or 2022 because of a carryover or extended claims period enacted under the Consolidated Appropriations Act, 2021 (CAA).  This notice clarifies that amounts that would have been excluded in the prior tax year remain excludable from income in the subsequent tax year. In particular, Notice 2021-26 provides three examples to illustrate when amounts carried over or available under an extended claims period are excludable from income, as follows.

Example 1: Calendar Plan Year

For the 2020 plan year, the employee elects to contribute $5,000, but incurs no dependent care expenses. The employee is permitted to carry over $5,000 into the 2021 plan year. For the 2021 plan year, the employee elects to contribute $10,500 to the plan. The employee is reimbursed for $15,500 in expenses during the 2021 plan year. The entire amount, $15,500, is excludable from income.

Example 2: Noncalendar Plan Year (July 1 to June 30)

For the 2020 plan year, the employee elects to contribute $5,000, but incurs no dependent care expenses. The employee is permitted to carry over $5,000 into the 2021 plan year. For the 2021 plan year, the employee elects to contribute $10,500 to the plan. The employee does not incur any dependent care expenses during the 2021 plan year. Beginning on January 1, 2022, the employee has $15,500 in available benefits. For the 2022 tax year, only $10,000 is excludable from income because $5,000 is the maximum carryover and $5,000 is the permitted contribution for the 2022 tax year. The remaining amount, if reimbursed is taxable. The example also includes another piece detailing the two-and-a-half-month grace period.

Example 3: Noncalendar Plan Year (July 1 to June 30)

For the 2020 plan year, the employee does not elect to participate or contribute in the dependent care plan. For the 2021 plan year, the employee elects to contribute $10,500 to the plan. The employee incurs $5,000 in dependent care expenses for the period July 1, 2021, to December 31, 2021. The $5,000 incurred is excludable from income. Beginning January 1, 2022, the employee has $5,500 available, but only $5,000 is excludable from income because $5,000 is the permitted contribution for the 2022 tax year. The remaining $500, if reimbursed, is taxable. The example also includes another piece detailing an additional employee contribution and incurred expenses.

Finally, this notice provides that an amount carried over or available under the extended claims period is not taken into account when determining the applicable limit.

Notice 2021-26 will be published in the Internal Revenue Bulletin 2021-21 on May 24, 2021.