IRS Guidance

New Withholding Form to Be Used for 2022

The IRS has made available a 2022 tax year draft Form W-4P, Withholding Certificate for Periodic Pension or Annuity Payments, and indicates that the form will be split into two forms. Form W-4P will continue to be used, but only to withhold federal income tax from periodic retirement plan and IRA payments. Periodic payments are installment payments at regular intervals generally over a period of more than one year.

A 2022 tax year draft of new Form W-4R, Withholding Certificate for Nonperiodic Payments and Eligible Rollover Distributions, has also been released and will be used for nonperiodic and rollover distributions beginning in that tax year. Nonperiodic distributions are subject to a 10 percent withholding rate unless a different rate is elected. Eligible rollover distributions are subject to a mandatory 20 percent withholding rate on the taxable amount of the distribution unless a higher rate is elected. A revised draft of Form W-4R is expected to be made available shortly.


IRS Issues Deadline Relief for Texas Victims of Winter Storms

The IRS has issued a news release announcing the postponement of certain tax-related deadlines for Texas winter storm victims. The tax relief postpones various tax filing and payment deadlines that occurred starting on February 11. The entire state of Texas is included in this relief. Additionally, taxpayers in other locations will automatically be added to this relief if the disaster area is further expanded.

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, making retirement plan loan payments, etc.

Affected taxpayers with a covered deadline on or after February 11, 2021, and on or before June 15, 2021, will have until June 15, 2021 to complete the act(s). “Affected taxpayer” automatically includes anyone who resides or has a business located within the designated disaster area. Those who reside or have a business located outside the identified disaster area, but have been affected by the disaster, may contact the IRS at 866-562-5227 to request the relief.


IRS Details Additional Temporary Guidance for Cafeteria Plans

The IRS has issued Notice 2021-15, providing additional guidance and flexibility to employee benefit plans offering health FSA and dependent care arrangements. Because of COVID-19, employees participating in these programs are more likely to have unused amounts in these accounts as a result of changes in anticipated expenses during the pandemic. To qualify as a cafeteria plan under IRC Section 125, funds remaining at the end of the plan year generally cannot be carried over to future plan years, and restrictions apply when modifying elections after the start of the plan year.

While initial temporary relief was made available for 2020, the Consolidated Appropriations Act of 2021, enacted in December 2020, provides the following additional flexibility for 2021 and 2022 plan years.

  • Permits post-termination reimbursements through the end of the plan year that participation ceased for health and dependent care FSAs.
  • Creates special rule for dependent care programs, allowing the plan to substitute “under age 14” for “under age 13” as the maximum age for qualifying dependents.
  • Provides carryover of unused funds into the subsequent plan year from the 2020 and 2021 plan years.
  • Allows health and dependent care FSAs to offer a grace period extension of 12 months after the end of the plan year.
  • Permits mid-year election changes by plan participants of health and dependent care FSAs for plan years ending in 2021 without a change in status.

Notice 2021-15 provides illustrative examples of these provisions, details on interaction with COBRA continuation coverage, and timing of plan amendments. The notice also provides additional relief that allows employers to retroactively amend their

  • cafeteria plans to permit mid-year election changes for employer-sponsored health coverage, and
  • health reimbursement arrangements to permit reimbursement of over-the-counter drugs without a prescription and menstrual care products.

IRS Confirms Late Mailing of Notices for 2019 Forms 5500 Series Extension Approvals

The IRS has announced in an Employee Plans News bulletin that processing requests for an extension of time to file 2019 Forms 5500 series returns were delayed in 2020, resulting in delayed mailing of Notice CP 216F.

Form 5500 is generally due by the last day of the seventh month following the end of the plan year being reported. But plan sponsors can request a 2½ month extension by filing Form 5558, Application for Extension of Time to File Certain Employee Plan Returns. Notice CP 216F confirms approval of the requested extension and is typically mailed before returns are due. Notices for 2019 Form 5500 extensions, however, are being mailed months after this timeframe.

Plan sponsors that are just receiving the Notice CP 216F for 2019 Form 5500 filings can be assured that the extension has been approved and that no further action is necessary.


Retirement Spotlight: IRS Aims to Clarify 60-Day Postponement Rule for Federally Declared Disasters

At the end of 2019, the Internal Revenue Code (IRC) was amended to create a mandatory 60-day postponement for certain federal tax-related deadlines in the event of a disaster. This new provision was designed to ensure that affected taxpayers would have guaranteed relief while recovering from a natural disaster or other emergency. But this measure didn’t seem to affect how the IRS had already been responding to such events. In fact, the new law created some ambiguity. In an effort to address this uncertainty, the IRS has released proposed regulations. These regulations provide more information about

  • what time-sensitive tax acts are covered;
  • how the 60-day postponement is determined; and
  • how the phrase, “federally declared disaster,” is defined for purposes of this 60-day period.

These regulations make it clear that the practical applicability of the automatic 60-day rule still ultimately depends on the IRS’s granting of deadline relief when disasters happen. And because the IRS has already been doing this—typically granting more than 60 days—there may not be a noticeable change.

60-Day Postponement Rule

The mandatory 60-day postponement rule was added (as IRC Sec. 7508A(d)) by the Taxpayer Certainty and Disaster Tax Relief Act of 2019. (This act was part of the Further Consolidated Appropriations Act, which also contained the SECURE Act.) It requires the IRS to automatically postpone for 60 days certain time-sensitive, federal tax-related deadlines—including those related to retirement savings plans—in response to federally declared disasters that occur on or after December 21, 2019.

The rule applies to taxpayers

  • who reside in or were injured or killed in a disaster area,
  • who have principal places of business in the disaster area,
  • who are relief workers providing assistance in a disaster area, or
  • whose tax records necessary to meet a tax deadline are located in a disaster area.

The IRS already had the authority under IRC Sec. 7508A to extend certain tax-related deadlines for up to one year in response to presidentially declared disasters or terroristic or military actions. The IRS typically makes disaster declarations through news releases, describing the counties affected and the length of the deadline postponement. Extensions typically are 120 days. Some are less. But the 60-day postponement rule ensures at least a minimum time to complete the acts covered by the guidance.

Time-Sensitive Tax Acts

The 60-day postponement statute contains a list of specific time-sensitive, tax-related acts. Those that pertain to retirement plans are

  • making IRA or retirement plan contributions,
  • removing excess IRA contributions,
  • recharacterizing IRA contributions, and
  • completing rollovers.

The proposed regulations point to other time-sensitive acts—specified under IRC Sec. 7508, Treasury Regulations, and IRS Revenue Procedure 2018-58—such as filing IRS Form 5500 for retirement plans and making retirement plan loan payments. Thus, the proposed regulations do not limit the mandatory 60-day postponement to only those acts listed in new IRC Sec. 7508A(d). Instead, they reinforce the IRS’s discretion in identifying which tax-related acts will be postponed.

So, despite the seemingly automatic nature of the new 60-day extension, individuals must still wait for the IRS to grant relief that applies to a specific disaster and to a specific area. If the IRS decides not to postpone a time-sensitive act, the 60-day postponement statute simply doesn’t apply. On the other hand (for disasters with incident dates), if the IRS postpones an act, the postponement must be for at least 60 days.

60-Day Postponement Period

The mandatory 60-day postponement period generally begins on the earliest “incident date” specified in a Federal Emergency Management Agency (FEMA) disaster declaration and ends on the date that is 60 days after the latest incident date. For example, consider a hurricane battering a coastal state for several days. FEMA announces a disaster declaration that is approved by the president. It specifies the earliest incident date for the affected counties as August 15 and the latest incident date (when the flooding ends) as August 19. The deadline postponement begins on August 15 and ends 60 days from August 19.

Under the 60-day postponement statute, however, it is unclear how the 60-day period is calculated when the disaster declaration either does not contain an incident end date or does not contain any incident dates. This happened with the president’s March 13, 2020, emergency coronavirus declaration: no incident date was specified, and no latest incident date has yet been determined. The proposed regulations simply state that in such a case no mandatory postponement period applies. Rather, the IRS will determine the postponement period—under its discretionary authority under IRC Sec. 7508A(a)—not to exceed one year.

Federally Declared Disaster

The 60-day postponement statute uses the phrases “disaster area” and “federally declared disaster” and cites the definitions found in IRC Sec. 165(i)(5). There, “federally declared disaster” is defined as ‘‘any disaster subsequently determined by the President of the United States to warrant assistance by the Federal Government under the Robert T. Stafford Disaster Relief and Emergency Assistance Act.’’ But the words “federally declared disaster” are not used in the Stafford Act. Instead, the Stafford Act uses the terms ‘‘emergency,’’ ‘‘major disaster,’’ and ‘‘disaster (used to refer to both emergencies and major disasters).”

This language difference between IRC Sec. 165(i)(5) and the Stafford Act has led to some misunderstanding. For this reason, the IRS has also amended the regulations under IRC Sec. 165 to clarify that the term “federally declared disaster” includes references to both “major disaster” and “emergency,” as defined in the Stafford Act.

The Takeaway

The IRS is accepting comments on all aspects of the proposed regulations before they are adopted as final. Written or electronic comments and requests for a public hearing must be received by March 15, 2021.These regulations—when made final—may clarify the interplay between the new mandatory 60-day postponement rule and existing disaster relief. But practically, not much is likely to change. The IRS will continue to exercise its considerable authority to postpone tax-related deadlines. Postponements will generally continue to exceed 60 days. And individuals will still rely on the IRS to identify which disasters and tax-related items will qualify for deadline postponement.

Visit ascensus.com for further developments on this and other guidance.

 

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Washington Pulse: IRS Releases Final QPLO Regulations

Plan participants have more time to roll over certain plan loan offsets under the Tax Cuts & Jobs Act of 2017 (TCJA). These are known as qualified plan loan offsets (QPLOs). In response to this legislative change, the IRS released proposed regulations in August 2020. The IRS finalized the regulations in December 2020, with only one modification: the applicability date.

The IRS had previously stated that the regulations, once finalized, would apply to plan loan offset amounts treated as distributed on or after the date the final regulations were published in the Federal Register. Plan administrators and service providers were concerned that, if the final regulations were published in 2020, then they would not have enough time to implement the required changes for reporting distributions on the 2020 IRS Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.

To help alleviate this concern, the IRS revised the applicability date. The final regulations apply to plan loan offsets treated as distributed on or after January 1, 2021. The new applicability date will affect how QPLOs are reported on 2021 Forms 1099-R, which won’t be sent to taxpayers until January 2022. Taxpayers—including Form 1099-R filers—may, however, choose to rely on these final regulations for plan loan offset amounts that were treated as distributed on or after August 20, 2020—the date the IRS released the proposed regulations.

Overview

A plan loan offset is generally described as the process by which a participant’s accrued benefit is reduced (offset) in order to repay an outstanding plan loan. The offset can occur only when the participant has a distributable event, such as a severance from employment. Often, plan loan policies require loan repayments to be made through payroll withholding, so former employees cannot continue previously scheduled loan payments. In this case, a loan default occurs when a participant leaves the employer. At that point, the participant can cure the default by paying off the loan balance.

More likely, however, is that the participant will request a total distribution, and the plan administrator will offset the loan amount, removing it as a plan asset. This cancelled loan amount—the offset amount—is not simply “forgiven.” It is considered an actual distribution and is taxable to the former participant for the year in which it is offset, unless it is rolled over. But often participants will not do this. It could be that they don’t have the out-of-pocket funds to roll over the offset amount. Or perhaps they don’t understand their options.

Before the TCJA was enacted, participants had to complete the rollover within 60 days of the loan offset. While this may be enough time for some participants, others might not understand that the offset amount is taxable until they receive a Form 1099-R, which may be well after the 60-day time frame. More fundamentally, 60 days doesn’t provide much time to come up with the money to roll over the offset amount. If a participant cannot repay the loan to the plan, it’s also unlikely that the participant can make up the offset amount by rolling over the loan amount into another eligible plan within 60 days. Under the TCJA, participants have a much longer time period to complete a rollover of certain loan offsets.

Existing Rules Still Apply

Many of the familiar rollover rules pertaining to offset amounts remain intact. For instance, the final regulations still contain a definition of “plan loan offset amount,” which is eligible to roll over within 60 days. And Treasury Regulation (Treas. Reg.) 1.401(a)(31)-1 Q&A-16 still applies. This provision exempts offsets from the requirement that a plan administrator must offer a direct rollover option on all eligible rollover distributions. Although offset amounts are eligible for rollover treatment, they cannot be rolled over directly because the outstanding loan assets are no longer in an account that can be paid to another eligible plan. Instead, participants can indirectly roll over offset amounts.

Another rule, under Treas. Reg. 31.3405(c)-1, Q&A-11, provides that offset amounts alone are not subject to 20 percent mandatory federal withholding. But if the offset is processed along with a cash distribution that is also an eligible rollover distribution, then the plan administrator must calculate the 20 percent withholding based on the sum of the cash distribution plus the offset amount.

Example: A participant quits his job and requests a lump-sum distribution of his entire account balance. This balance includes $7,000 in cash and a $3,000 unpaid loan amount, which is offset in accordance with the plan’s loan policy. The total distribution eligible for rollover is $10,000. Therefore, the plan administrator must withhold $2,000 on the lump-sum distribution, which is equal to 20 percent of the total $10,000 eligible rollover distribution. The plan administrator withholds $2,000 from the $7,000 cash portion of the distribution and sends the participant a $5,000 check. If the participant had requested a direct rollover of the $7,000, no withholding would apply, and the $3,000 QPLO could be rolled over from the participant’s other assets.

QPLO Requirements

While “regular” plan loan offset amounts still exist, a QPLO describes offsets that occur only upon plan termination or severance from employment. Plan participants and spousal beneficiaries have until their tax filing deadline (including extensions) for the taxable year in which a QPLO occurs to indirectly roll over all or part of the loan offset amount to another eligible retirement plan or IRA. This rule applies to QPLOs from 401(a) plans (such as profit sharing plans, 401(k) plans, and defined benefit plans), 403(a) plans, 403(b) plans, and governmental 457(b) plans.

Two “Qualifying” Conditions

The proposed regulations define a QPLO as a plan loan offset amount that meets the following two conditions.

  • The loan amount is treated as distributed from an eligible employer plan to a participant or spousal beneficiary either because the eligible employer plan was terminated or because the participant incurred a severance from employment that caused a failure to meet the loan repayment terms.
  • The loan offset amount must relate to a plan loan that met the requirements of Internal Revenue Code Section (IRC Sec.) 72(p)(2) immediately before the plan termination or the participant’s severance from employment.

IRC Sec.72(p)(2) contains the plan loan conditions that must be met to avoid treating a loan as a distribution. Such conditions normally include the $50,000 limitation, the five-year term maximum, and the level repayment requirement. If these loan requirements are not met immediately before the loan offset occurs, the offset amount cannot be treated as a QPLO.

Example: Participant B and Participant C both take loans in 2019 from Plan X. Participant B’s loan meets all of the conditions of IRC. Sec. 72(p)(2), and she has not missed any payments on her loan when her plan is terminated on August 1, 2021. Any offset amount may be considered a QPLO because all loan requirements were satisfied immediately before plan termination.

On January 1, 2021, Participant C defaulted on his loan payments. The employer provided a cure period until June 30, 2021, during which Participant C made no repayments. When the plan terminates on August 1, 2021, Participant C’s loan offset amount will not be a QPLO because the loan did not satisfy the level repayment requirement immediately before plan termination. It will, however, still be eligible to be rolled over within 60 days.

Automatic Six-Month Rollover Extension

In the final regulations, the IRS has clarified that the automatic six-month extension under Treas. Reg. 301.9100-2(b) also applies to the deadline by which a QPLO must be rolled over, provided that

  • the taxpayer files a timely tax return, and
  • the taxpayer takes corrective action within the six-month period.

If these requirements are met, taxpayers will normally have until October 15 of the year following the QPLO distribution to roll over that amount.

Example: On June 1, 2020, Participant D has a $10,000 QPLO amount that is distributed from her plan. The automatic six-month extension applies if Participant D timely files her tax return (generally by April 15, 2021), rolls over the QPLO amount, and if necessary, amends her tax return by October 15, 2021, to reflect the rollover.

12-Month “Bright-Line” Test

Both the proposed and the final regulations contain a test that is designed to help plan administrators identify QPLOs after a severance from employment. A plan loan offset amount will meet the severance-from-employment requirement if the plan loan offset 1) relates to a failure to meet the loan’s repayment terms solely because of the severance, and 2) occurs within the period beginning on the date of the participant’s severance from employment and ending on the first anniversary of that date.

As a result, plan administrators must not report an offset as a QPLO if the offset occurs more than 12 months after the participant’s severance from employment. Offsets occurring after the 12-month period will be treated like regular loan offset amounts, which are subject to the 60-day indirect rollover deadline.

Form 1099-R Reporting Requirements

Plan administrators must report whether a distribution is a regular offset amount or a QPLO on Form 1099-R. The 2021 Form 1099-R instructions provide that if a participant’s accrued benefit is offset to repay a loan (a regular offset amount), the plan administrator should report the distribution as an actual distribution (code 1 for an early distribution or code 7 for a normal distribution) in Box 7 and not use code L, which is used only for deemed distributions. But for a QPLO, the plan administrator should enter code M in Box 7, along with any other applicable code.

Next Steps

Because the delayed applicability date is the only change contained in the final regulations, plan administrators, recordkeepers, and service providers have received additional time to comply with the new regulations. Plan administrators should start working with their service providers, if applicable, to create procedures for tracking severance of employment dates and to ensure that their systems can report QPLOs properly on Form 1099-R.

Please visit ascensus.com for the latest news and developments.

 

 

Click here for a printable version of this issue of the Washington Pulse.


Public Hearing Announced for Proposed Regulations on Postponements Due to Federally Declared Disasters

Published in the Federal Register is an IRS notice of public hearing on proposed regulations for automatic 60-day postponement of certain deadlines following federally declared disasters. (The proposed regulations were published January 13, 2021, in the Federal Register.)

The public hearing is scheduled for March 23, 2021. Oral comments at the hearing can be made by telephone. Speakers outlines must be received by the IRS by March 15, 2021. The notice contains details on how to submit outlines and to receive an agenda prepared by the IRS. If no outlines are received, the hearing will be cancelled.

The tax-related acts covered by these proposed regulations are defined in Internal Revenue Code Section 7508A. This is the authority historically cited for postponement of deadlines in cases of local or regional disaster declarations. These postponements typically have a duration of as much as 120 days, though some are less. The new proposed regulations would create an automatic 60-day postponement in cases of federally declared disasters, ensuring that there would be at least 60 days to complete the tax-related acts covered by the guidance.

In addition to extending certain tax filing and tax payment deadlines, the postponements addressed in this guidance include completion of the 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, making retirement plan loan payments, etc.


Retirement Spotlight: IRS Gives SECURE Act Guidance on Traditional and QACA Safe Harbor Plans

The SECURE Act makes it easier for employers to adopt ADP/ACP safe harbor plan provisions. These plans, which include both “traditional” safe harbor plans and qualified automatic contribution arrangements (QACAs), have proven popular with many employers. This is because such plans are usually deemed to pass several nondiscrimination tests. IRS Notice 2020-86 provides guidance on some of the details of these SECURE Act provisions, including direction on amendments and notices. But while this notice gives important direction, we await more comprehensive regulatory guidance.

 

Background

Retirement plans, such as 401(k) plans, are subject to various nondiscrimination tests. The ADP test1 applies to employee deferrals and the ACP test2 applies to matching and after-tax contributions. The top-heavy test helps ensure that key employees’ accounts do not contain a disproportionate share of overall plan assets. Failing these tests can result in certain employees having to remove deferrals or in employers having to make additional—and at times substantial—contributions. But Internal Revenue Code Sections (IRC Secs.) 401(k)(12) and 401(k)(13) contain provisions that allow employers to avoid the ADP test. And if certain other conditions are satisfied, they can also avoid the ACP and top-heavy tests. Plans known as traditional safe harbor plans and QACA safe harbor plans must meet the requirements of IRC Secs. 401(k)(12) and (13), respectively. Employers that have these plans must make the proper matching or nonelective contributions to non-highly compensated employees.

Employers with traditional safe harbor 401(k) plans must make either a matching contribution to those who defer income into the plan, or a nonelective contribution of 3 percent, which goes to all employees that are eligible to participate in the plan. Employers with QACA safe harbor plans must make similar contributions and must enroll eligible employees in the plan automatically. These employees must have at least 3 percent of their compensation deferred into the plan in the first year—unless they opt out or choose a different deferral amount. Each year, the deferral percentage is increased by at least 1 percent. When an employee’s deferral percentage reaches 6 percent, it can remain there, or it can continue to increase until the percentage cap is reached. Before the SECURE Act, the cap was set at 10 percent.

For all the benefits of adopting a traditional or a QACA safe harbor plan, there have been some concerns about the requirements that apply to these plans.

  • Employers must generally maintain the plan under the traditional or QACA safe harbor rules for the entire plan year.
  • Detailed notice requirements—in addition to other 401(k) notices—accompany these plans.
  • The QACA 10 percent automatic deferral cap may not provide employers with enough plan design flexibility or may not encourage a high enough savings rate.

 

SECURE Act Provisions

The SECURE Act, generally effective for plan years beginning on or after January 1, 2020, provides relief from some of the restrictions of the previous rules.

QACA plans now have a higher cap on deferral percentages Instead of the previous 10 percent cap on automatic deferrals, QACAs now have a maximum 15 percent default deferral rate. During the initial plan year, employers may automatically enroll eligible employees at a default rate ranging from 3 percent to 10 percent of their compensation. Employers may then automatically increase the deferral rate to 15 percent in the second year. Most employers, however, will likely increase the deferral rates more gradually. (The QACA rules still require the automatic deferral amount to be at least 4 percent in the second year, 5 percent in the third year, and 6 percent in the fourth year.)

Employers that make nonelective contributions may have reduced notice requirements and more opportunities to adopt a safe harbor feature – Under the old rules, an employer could amend an existing 401(k) plan to add a safe harbor nonelective contribution up to 30 days before the end of the plan year. But this was only allowed if the employer provided a contingent notice before the start of the plan year and a follow-up notice 30 days before the end of the plan year. Now, an employer may more easily adopt a safe harbor nonelective contribution design mid-year—without first providing notices—but only if the contribution is made on employees’ full-year compensation. This change allows employers to amend their plans, for example, if they discover that they are failing the ADP test for the current year. By adopting a safe harbor nonelective contribution feature, an employer may avoid the ADP test—and usually the ACP and top-heavy tests, as well. But specific contribution and timing rules apply.

  • As before, an employer may amend the plan up to 30 days before the end of the current plan year. Eligible participants must still receive a 3 percent nonelective contribution based on their full-year compensation. But in some cases, the SECURE Act removed the need to provide a contingent and follow-up notice.
  • The SECURE Act now allows an employer to amend the plan up to the end of the following plan year, but only if eligible participants receive a 4 percent nonelective contribution based on full-year compensation. For example, an employer could add a safe harbor feature to a calendar-year plan for 2020 up until December 31, 2021.

 

Notice 2020-86 Provides Details

Notice 2020-86 offers guidance on both the QACA default deferral cap and on electing safe harbor 401(k) status. The notice also acknowledges that more complete guidance is needed, stating that the notice “is intended to assist taxpayers by providing guidance on particular issues while the Treasury Department and the IRS develop regulations to fully implement these sections of the SECURE Act.”

While more than half of the notice deals with a variety of specific notice issues, the following items are the most relevant.

The 15 percent cap on QACA default deferrals – Employers may choose to amend their QACA plans to reflect the increase in the maximum automatic deferral percentage to 15 percent. For example, an employer with a plan that expressly limits the default deferral percentage to 10 percent may retain this provision.

But the notice also addresses other plans that may incorporate the maximum default percentage by reference to the statute. Because the SECURE Act raised the statutory cap to 15 percent, those employers that apply the statutory limit in the plan will raise the plan’s cap to 15 percent by default. On the other hand, for a plan that incorporates the statutory limit, the employer could keep the cap at 10 percent. But the employer would have to document this decision, continue to consistently apply this cap, and amend the plan by the deadline (discussed below).

Notice requirements – Traditional and QACA safe harbor regulations have allowed a safe harbor provision to be added to a 401(k) plan mid-year if the employer 1) gives the nonelective safe harbor contribution (versus a matching contribution) and 2) provides the proper notices. The regulations required two distinct notices: a contingent notice and a follow-up notice. The contingent notice was required to be given a reasonable time before the beginning of each plan year, specifying that the plan may be amended mid-year to provide a nonelective contribution to satisfy the safe harbor rules. A follow-up notice would be required—at least 30 days before the end of the plan year—if the employer amended the plan mid-year to adopt the safe harbor provision.

  • The SECURE Act eliminated the notice requirements in IRC Secs. 401(k)(12) and 401(k)(13) for employers that adopt a nonelective safe harbor feature. For example, consider a 401(k) plan that has only a deferral feature and no employer contributions. If an employer determines during the year that the plan will fail the ADP test, providing a 3 percent nonelective contribution will allow the plan to be treated as passing the test. (If no other contributions are made, the plan is also deemed to pass the ACP test and the top-heavy test.)
  • The SECURE Act did not, however, eliminate the notice requirements of IRC Sec. 401(m)(11), which address the ACP test requirements for plans that provide for matching (or after-tax) contributions. Consequently, plans that allow for matching contributions that fall within the ACP test safe harbor limitations (e.g., no match on deferrals that exceed 6 percent of a participant’s compensation) are still subject to the notice requirements that normally apply to traditional safe harbor plans. The result is different for QACA arrangements where employers are making safe harbor nonelective contributions. This is because the SECURE Act did eliminate the safe harbor notice requirement under IRC Sec. 401(m)(12) for those plans. QACA arrangements are, however, still subject to annual notice requirements that allow plan participants to opt out of automatic contributions.
  • Notice 2020-86 uses several examples to illustrate when various notices are required. Some of these examples also show the complexities of the notice requirements. In Q&A 4, the notice uses an example of a 401(k) plan that meets the ADP safe harbor nonelective contribution requirement and also provides matching contributions that are not intended to satisfy ACP safe harbor rules. The plan does not need to satisfy the ADP or ACP safe harbor notice requirements, but it must satisfy the ACP test.
  • Notice 2020-86 points out that the requirements for permissible reduction or suspension of safe harbor contributions have not changed. For example, if an employer wishes to amend a plan to remove the safe harbor contribution requirements during a plan year, it either 1) must be operating at an economic loss, or 2) must have included in the notice a statement that the plan may be amended during the year to reduce or suspend contributions. While certain notice requirements have been eliminated, employers wishing to retain the option to reduce or suspend contributions should continue providing this language to participants.
  • Notice 2020-86 addresses numerous combinations of nonelective and matching contributions for both traditional and QACA safe harbor plans. But because the IRS is expected to release additional guidance, employers may choose to continue providing the same safe harbor notices that they have been providing—even if they may not be required to in every case.
  • To assist with providing notices in general, Q&A 7 contains further relief. For the first plan year beginning after December 31, 2020, safe harbor notices will be considered timely if given to each eligible employee 30 days before the beginning of the plan year or January 31, 2021, whichever is later. For calendar-year plans, this gives employers approximately 60 days more than normally allowed.

Amendment requirements – Throughout Notice 2020-86, the IRS points out that employers must generally amend their plans for SECURE Act provisions by the end of the plan year that starts on or after January 1, 2022. (Governmental plans have two additional years to amend.) Of course, plans must operationally comply with whatever plan provision is in effect before the formal amendment. In addition, a plan may be amended after the applicable SECURE Act plan amendment deadline, in accordance with the plan amendment provisions that apply to adopting the nonelective safe harbor provisions in the SECURE Act. So if adopting a 3 percent nonelective contribution in the current year, the employer must amend the plan before the 30th day before the end of the plan year. If adopting a 4 percent nonelective safe harbor contribution for the previous plan year, the employer must amend the plan by the end of year following the year to which the amendment applies.

Contribution deductibility – The notice also addresses contribution deductibility when a plan adopts the 4 percent nonelective safe harbor feature. It clarifies that, to claim a deduction for the year for which the contribution is made, the contribution must be made by the tax return due date, plus extensions, for the business. If the employer makes the safe harbor contribution after that date, the deduction may be taken for the taxable year in which the contribution is made, to the extent otherwise deductible under IRC. Sec. 404.

 

Looking Ahead

While Notice 2020-86 provides needed guidance on a few particular issues, the IRS has indicated that more comprehensive regulatory guidance is coming. Ascensus will continue to follow any new guidance as it is released. Visit ascensus.com for further developments on this and other guidance.

 

Click here for a printable version of this issue of the Retirement Spotlight.

 

 

 

1The ADP test—or the actual deferral percentage test—compares the highly compensated employees’ (HCEs’) deferral percentage with the nonHCEs’ average deferral percentage. This test helps ensure that HCEs do not contribute a disproportionate percentage of deferrals in relation to nonHCEs.

2The ACP test—or the actual contribution percentage test—is like the ADP test. But the ACP test compares the HCEs’ percentage of matching and after-tax contributions with the nonHCEs’ percentages of such contributions.


IRS Proposes Regulations for Automatic Deadline Postponements for Federally Declared Disasters

The IRS has released a pre-publication version of proposed regulations that would create an automatic 60-day postponement of deadlines for certain time-sensitive, tax-related acts in circumstances of federally-declared disasters.

The tax-related acts covered by this guidance are defined in Internal Revenue Code Section 7508A. This is the authority that historically has been cited for postponement of deadlines in cases of localized disaster declarations. Such localized relief is announced by the IRS in news release form, describing the area affected—generally on a county-by-county basis—and describing the length of the deadline postponements.

These individually designated postponements may have a duration of as much as 120 days. Some are less. The new proposed regulations would create an automatic 60-day postponement in cases of federally declared disasters, ensuring that there would be at least 60 days to complete the tax-related acts covered by the guidance. The proposed regulations also define what that term “federally-declared disaster” will mean for purposes of this 60-day period.

In addition to extending certain tax filing and tax payment deadlines, the postponements addressed in this guidance include completion of the 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, making retirement plan loan payments, etc.

A period of 60 days for submitting comments on the guidance, or to request a public hearing, will begin upon publication in the Federal Register.


IRS Issues Deadline Relief for Mississippi Victims of Hurricane Zeta

The IRS has issued News Release MS-2021-01, announcing the postponement of certain tax-related deadlines for Mississippi victims of Hurricane Zeta, for hurricane-related events beginning October 28, 2020. 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, making retirement plan loan payments, etc.

The area included in the relief at this time includes George, Greene, Hancock, Harrison, Jackson, and Stone counties. Taxpayers in other locations will automatically be added to the relief if the disaster area is further expanded.

Affected taxpayers with a covered deadline on or after October 28, 2020, and on or before March 1, 2021, will have until March 1, 2021, to complete the act(s). “Affected taxpayer” automatically includes anyone who resides or has a business located within the designated disaster area. Those who reside or have a business located outside the identified disaster area, but have been affected by the disaster, may contact the IRS at 866-562-5227 to request the relief.