SECURE Act

IRS Publication Provides Some Details on Beneficiary Rules and CRD Repayments

The 2020 tax year version of IRS Publication 590-B, Distributions From Individual Retirement Arrangements (IRAs), reflects the following noteworthy updates pursuant to the passage of the Setting Every Community Up for Retirement Enhancement (SECURE), Coronavirus Aid, Relief, and Economic Security (CARES), and Consolidated Appropriations Acts.

10-Year Rule

The publication confirms that designated beneficiaries who are not eligible designated beneficiaries are generally subject to a 10-year payout period. It indicates not to use any of the distribution tables if either the 5-year rule or the 10-year rule apply. The publication also cautions beneficiaries that if the 10-year rule applies, the amount remaining in the IRA, if any, after December 31 of the year containing the 10th anniversary of the owner’s death is subject to the 50 percent excise tax—further validating that the applicability of the 10-year rule is similar to the 5-year rule and no annual minimum distributions would be required, so long as the account was depleted by December 31 of the final year. However, an example within the publication (that was used in previous versions) illustrates a life expectancy calculation for a designated beneficiary where presumably one would not be required, raising questions as to its applicability or whether it was an oversight when the publication was updated.

Additionally, the publication implies that the 10-year rule is not an option for an eligible designated beneficiary if the IRA owner died on or after her required beginning date. Again, this raises questions as to whether this was also an oversight or the IRS is suggesting that the “at least as rapidly” rule would remain for such eligible designated beneficiaries, meaning that life expectancy payments must continue to be disbursed from the IRA once an IRA owner has reached her required beginning date.

Election Deadline for Eligible Designated Beneficiaries

There were outstanding questions on deadlines for making beneficiary elections. The publication states that the deadline for an eligible designated beneficiary making an election is the earlier of

  • December 31 of the year the beneficiary must take his first life expectancy payment or
  • December 31 of the year containing the 10th anniversary year of the owner’s death (or 5th anniversary year of the owner’s death if applicable).

Nonpersons as Beneficiaries

The sections of the publication addressing beneficiaries who are not individuals remain largely unchanged, confirming that pre-SECURE Act rules continue to apply to non-person beneficiaries such as estates, charitable organizations, and nonqualified trusts. Moreover, the sections addressing the “look through” provision for trust beneficiaries also remains unchanged, where there are numerous outstanding questions on how the SECURE Act provisions apply to trust beneficiaries.

CRD Repayments

The publication specifies that a coronavirus-related distribution (CRD) repayment is to be treated as a trustee-to-trustee transfer in that it is not included in income. This suggests that a CRD taken from a Traditional IRA could not be repaid to a Roth IRA, since trustee-to-trustee transfers may only occur between similar account types.

Proposed regulations addressing beneficiary and required minimum distribution rules under the SECURE Act are anticipated soon and should provide additional clarity.


Pandemic Relief Package Includes Multiple Retirement, Health Benefit Provisions

Legislation proposed by the House Ways and Means Committee to provide COVID-19 pandemic relief and economic stimulus includes several items that would affect retirement and health benefits. Among them are the following.

COLA Freeze for Certain Retirement Plan Limitations

The legislation would freeze cost-of-living adjustments (COLAs) for the following retirement plan limitations after 2030, to reduce federal tax expenditures in keeping with the budget reconciliation process under which this legislation is being managed.  (The freeze would not apply to collectively bargained plans.)

  • Annual additions limit for defined contribution plans ($58,000 for 2021)
  • Annual additions limit for defined benefit pension plans ($230,000 for 2021)
  • Compensation cap for determining retirement plan allocations ($290,000 for 2021

Defined Benefit Pension Plan Relief

  • Extends the single-employer plan funding shortfall amortization period from 7 to 15 years, to be applied to all plans beginning with 2020 plan years and, by election, 2019 plan years
  • Extends single-employer pension plan funding stabilization percentages, as follows
  • The 10% interest rate corridor would be reduced to 5%, effective in 2020.
  • The phase-out of the 5% corridor would be delayed until 2026, at which point the corridor would, as under current law, increase by 5 percentage points each year until it attains 30% in 2030, where it would remain.
  • A 5% floor would be placed on the 25-year interest rate averages.
  • Extends the SECURE Act funding relief for certain community newspapers to additional community newspapers
  • Permits a temporary delay in designation of a multiemployer (union) plan as being in endangered, critical, or critical-and-declining status
  • Permits a plan in endangered or critical status for a plan year beginning in 2020 or 2021 to extend its rehabilitation period by 5 years
  • Permits multiemployer plans to amortize investment losses over 30 rather than 15 years, as was granted to plans for 2008 and 2009 losses (for plan years ending on or after February 29, 2020)
  • Creates a financial assistance program under which cash payments would be made by the Pension Benefit Guaranty Corporation to financially troubled multiemployer plans to continue paying retiree benefits, such payments to be made by Treasury transfer

Health Benefit Provisions

The legislation also contains provisions to assist employees who have lost employer-provided health insurance benefits and employers that have provided benefit continuation assistance.

  • Provides premium assistance to cover 85% of the cost of COBRA continuation coverage for eligible individuals and families, effective the first of the month after enactment, through September 31, 2021
  • Extends the COBRA election period
  • Provides a refundable payroll tax credit to reimburse employers and plans that paid a subsidized portion of the premium on behalf of an assistance-eligible individual

A vote by the full House of Representatives is expected by the week of February 22. If passed, the legislation would be referred to the Senate for its consideration.


2021 Could See More Retirement and Health Legislation

Despite political partisanship that has marked much of the 116th Congress in 2019 and 2020, there have been some notable exceptions with bipartisan outcomes. The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 proved that cooperation is a possibility. That legislation, enacted in December 2019, made significant enhancements to tax-advantaged savings arrangements.

Enactment of the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March 2020 was a unified response to the pandemic that has disrupted many Americans’ lives in both economic and health terms. And, in December 2020, Congress was able to put aside differences in crafting legislation combining additional pandemic relief with needed last-minute federal agency appropriations.

What 2021 will bring is yet to be determined. The Democratic majority in the House of Representatives narrowed in the 2020 general election, and control of the U.S. Senate shifted to Democratic control by the narrowest of margins. A Democrat also now resides in the White House. His legislative agenda has yet to be revealed in detail, but—based on campaign messaging—may include the broadly-defined goal of “equalizing benefits across the income scale.”  This ambition aside, it can be difficult for any president to accomplish legislative objectives with such a narrowly divided Congress.

Unless, that is, these objectives align with those of a majority of lawmakers. Fortunately, tax-advantaged savings legislation has a history of being able to gather bipartisan support. It has win-win dimensions that tend to unify, rather than divide.  For this reason, there is optimism that one or more savings-focused bills could be enacted in 2021. Several introduced during the past two years will likely be re-introduced in the 117th Congress.

Securing a Strong Retirement Act

This legislation—called SECURE 2.0 by some, in reference to 2019’s SECURE legislation—is a further example of bipartisanship. It is jointly sponsored by House Ways and Means Committee Chairman, Representative (Rep.) Richard Neal (D-MA)— and GOP Ranking Member Kevin Brady (R-TX). Due to the prominence of these sponsors, the legislation is considered to have favorable prospects. It includes the following provisions.

  • Require employers—with exceptions for certain new and small businesses—to establish an automatic enrollment deferral-type retirement plan, such as a savings incentive match plan for employees of small employers (SIMPLE) IRA plan.

  • Provide an enhanced small employer plan start-up tax credit for such new plans.

  • Enhance the “saver’s credit” for IRA contributions and for deferral-type employer plan contributions, such as those made to a SIMPLE IRA plan.

  • Exempt up to $100,000 of accumulated IRA and employer-sponsored retirement plan assets from required minimum distribution (RMD) calculations.

  • Increase the RMD onset age from 72 to 75.

  • Reduce penalties for RMD failures.

  • Provide a second (age 60), higher IRA catch-up contribution limit.

  • Index IRA catch-up contributions for inflation.

  • Increase the limit for IRA and retirement plan assets that are exempt from RMD calculations under qualifying longevity annuity contract (QLAC) rules.

  • Reduce certain IRA error penalties and permit more self-correction.

  • Permit matching contributions, e.g., to SIMPLE IRAs—based on student loan payments.

Automatic IRA Act

It is widely accepted that up to 40 percent of American workers do not have access to a workplace retirement plan. A concept that dates back more than a decade proposes universal, automatic saving to an IRA through a worker’s place of employment, if no other retirement plan is available. This is the concept embodied in the Automatic IRA Act, legislation that has been introduced in several previous sessions of Congress.

In the absence of action at the federal level, many states have acted on their own to establish automatic IRA-based saving programs, which—while beneficial for those who are covered—has left geographic gaps, and a patchwork with differing program rules. A uniform national automatic IRA program could close these gaps and address differences.

  • Employers in business less than 2 years or employing fewer than 10 employees would be exempt.

  • Employees would be automatically enrolled and contributions withheld from pay, but they would be able to opt out.

  • Accounts would be Roth IRAs unless a Traditional IRA was elected.

  • Contributions would likely begin at 3 percent of pay, but with latitude to range between 2 percent and 6 percent.

  • Investments would include balanced, principal preservation, and target-date funds, as well as guaranteed insurance contracts.

 Past sponsors of automatic IRA legislation have included Rep. Richard Neal (D-MA) and U.S. Senator Sheldon Whitehouse (D-RI).

HSA Enhancements

Affordable health insurance for Americans continues to be an extremely challenging goal. One increasingly common option—an alternative to the comprehensive “major medical” health insurance model—is a high deductible health insurance plan linked to a savings and spending account known as a health savings account, or HSA.

This approach is intended to offer a path to lower health insurance premiums, and to allow individuals to save in a tax-advantaged manner for expenses that are below their health plan deductible, and for co-pay amounts they owe. What initially began as a temporary test program under medical savings account (MSA) nomenclature later evolved into the HSA we know today.

With many U.S. employers offering employees an HSA-based program as one—or perhaps the only—health insurance option, much focus has been on how the HSA might be tweaked to improve its usefulness. Following are some of the proposed HSA modifications, a composite of provisions from several bills introduced in the 116th Congress. Some, or all, could be proposed again in the 117th Congress that has just been sworn in.

  • Increase maximum annual HSA contributions; some have proposed doubling the limits.

  • Expand the treatments for which a plan’s high deductible need not be met before benefits commence, such as chronic care services and more medications, including nonprescription drugs.

  • Permit care at onsite employer or retail clinics without forfeiting HSA contribution eligibility.

  • Treat costs of participating in a fixed-fee primary care arrangement as HSA-eligible expenses.

  • Allow coverage of offspring under a parent’s HSA-compatible health plan to age 26; would mirror the Affordable Care Act (ACA).

  • Define ACA bronze-level and certain catastrophic health insurance plans as HSA-compatible.

  • Treat a defined portion of HSA accumulations spent for “fitness and health” as HSA-eligible expenses.

  • Allow a fixed amount from health flexible spending accounts (health FSAs) and health reimbursement arrangements (HRAs) remaining at year’s end to be rolled over to an HSA.

  • Allow Medicare-eligible individuals enrolled only in Part A (Medicare-provided hospital care) to remain HSA contribution-eligible.

Other Legislative Ambitions

Beyond the possibilities noted above, other initiatives that may be in play in the 117th Congress could include getting closer to universal availability of 401(k)-type workplace retirement plans and addressing the solvency of under-funded defined benefit pension plans. These could be more contentious, carrying as they might the stigmas of “mandate,” and “bailout,” both of which draw resistance from a substantial number of lawmakers.

Stay tuned for more details on proposed legislation and regulatory updates that stand to impact the savings plan landscape. In the meantime, check out our latest analysis on industry and regulatory news here on ascensus.com.


IRS Signals Compatibility of Pre-Approved Plan Documents and PEPs

The IRS in its January 20, 2021 edition of Employee Plans News has revealed that pre-approved qualified retirement plan documents may be used to establish arrangements known as pooled employer plans, or PEPs. These arrangements are a type of multiple employer plan (MEP) in which several employers may participate in this common plan structure. But PEPs are less likely to have common interest or common ownership among participating employers than is required of conventional MEPs.

The IRS indicated in Employee Plans News that it is creating language that can be used to amend current pre-approved qualified retirement plan documents to add a PEP feature. Document providers are not required to use IRS-drafted amendment language, but if drafting their own they “will not have reliance on those provisions,” the IRS states.

The PEP structure was created by provisions of the Setting Every Community up for Retirement Enhancement (SECURE) Act of 2019. PEPs are intended to consolidate plan administration functions, and these functions are to be carried out by a pooled plan provider that must register as a named fiduciary with the Department of Labor’s Employee Benefits Security Administration.


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 Notice Addresses 401(k)/403(b) Safe Harbor SECURE Act Provisions

The IRS has issued Notice 2020-86, providing guidance for implementing provisions of the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019. Specifically, the SECURE Act provisions addressed deal with features and procedures of 401(k) and 403(b) plans that incorporate safe harbor designs for satisfying nondiscrimination testing requirements, and automatic enrollment and automatically increased deferral rates.

In general, provisions of the SECURE Act increased from 10 percent to 15 percent the maximum automatically-increased elective deferral rate for automatic-enrollment safe harbor plans, eliminated certain safe harbor notice requirements for plans making safe harbor nonelective contributions, and added provisions for retroactive adoption of a safe harbor design.

Notice 2020-86 provides guidance in question-and-answer format and includes the following issues.

  • Voluntary nature of the SECURE Act’s higher maximum automatic-increase deferral rate
  • Amending for the SECURE Act’s enhanced safe harbor design and adoption provisions
  • Elimination of certain safe harbor notice requirements for plans that meet specified nonelective contribution requirements
  • Interaction between delayed safe harbor design adoption and employer notice of possible contribution suspension
  • Safe harbor status of plans that suspend and subsequently resume safe harbor contributions
  • Deductibility of prior-year contributions under late-adopted safe harbor provisions

Washington Pulse: DOL Releases Final Rule for Pooled Plan Provider Registration

The SECURE Act makes pooled employer plans (PEPs) a reality as of January 1, 2021. Many details need to be clarified by the Department of Labor (DOL) and IRS. But one initial hurdle has been cleared: The DOL has issued final regulations on registering as a pooled plan provider (PPP), which is one of the initial steps that such providers must take before offering PEPs. While the final rule is quite similar to the proposed rule (published on September 1, 2020), it contains several noteworthy revisions, including a provision that makes it easier to register in time for the January 1 PEP effective date.

Background

Last December, the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 was enacted. The SECURE Act revised both ERISA and the Internal Revenue Code to allow unrelated employers to participate in a pooled employer plan, which is a type of open multiple employer plan (MEP). While we expect detailed guidance on many other aspects of PEP implementation, we now have a clear picture of the registration process. This article focuses on the PPP registration requirements. For more background information on PEPs, see Ascensus’s September 11, 2020 Washington Pulse.

The SECURE Act added pooled plan provider language both in Internal Revenue Code Sec. 413(e) and in ERISA Sec. 3(44). These parallel provisions require that PPPs

  • designate and acknowledge in writing that the PPP is a named fiduciary and plan administrator under ERISA,
  • act as the person responsible to perform all administrative duties to ensure that the plan meets Internal Revenue Code and ERISA requirements,
  • ensure that all those who handle plan assets or act as plan fiduciaries meet ERISA’s bonding rules, and
  • register as a pooled plan provider.

Participating employers delegate significant responsibility to the PPP. This is why the last requirement—that PPPs register with the DOL and IRS—is so important. Registration before beginning operations enables both of these entities to immediately monitor those who become pooled plan providers. Information about PPPs and participating employers would eventually be captured when employers filed Form 5500, Annual Return/Report of Employee Benefit Plan. But there would be a lengthy delay between plan establishment and the first Form 5500 return due date. Hence the rule that PPPs must file a registration statement before operating a PEP.

Specific Registration Requirements

The DOL’s Employee Benefits Security Administration has released Form PR – Registration for Pooled Plan Provider in conjunction with publishing the final regulations. PPPs must file this form with the DOL electronically, which will ensure that the DOL and IRS receive all required information. (Filing the Form PR with the DOL satisfies the SECURE Act requirement to register with the IRS.) This electronic format will also expedite information requests made by interested stakeholders performing due diligence on PPPs.

Filing obligations. PPPs must file Form PR in several different contexts, with all filings intended to keep the DOL and IRS fully informed of any changes to a provider’s PEP operations.

  • Initial registration – The PPP must register at least 30 days before beginning operations. Under the proposed regulations, this meant at least 30 days before publicly marketing a PEP. But some entities may initiate certain public marketing activities before they decide to commit to entering the PEP market. So the final rule defines “initiating operations” of a PEP as “when the first employer executes or adopts a participation, subscription, or similar agreement for the plan specifying that it is a pooled employer plan, or, if earlier, when the trustee of the plan first holds any asset in trust.”
  • Supplemental filings – The final regulations identify two types of supplemental filings: one upon actual commencement of operations and the second when any changes happen after the initial registration. In the first type of supplemental filing, the PPP may not have submitted certain information (e.g., plan number and trustee data) with the initial registration. In this case, a supplemental filing is needed. But if all the required information had already been provided with the initial registration, the PPP would not need a supplemental filing before beginning PEP operations. PPPs must also submit a supplemental filing within the later of 30 days after the calendar quarter in which a change occurs or 45 days after the change. This deadline is later than what the proposed regulations called for. The following changes (or “reportable events”) require the PPP to submit a supplemental filing:
  • Changes in information previously reported.
  • Changes in corporate or business structure.
  • Receipt of notice of new administrative proceedings or enforcement actions.
  • Receipt of notice of finding of fraud, dishonesty, or mismanagement.
  • Receipt of notice of filing of criminal charges
  • Amendment and correction of registration information – Errors and omissions related to the initial registration and supplemental filings must be corrected by amending the filing within a reasonable period following discovery. The DOL expects to add a new question on the Form 5500 that would ask whether the PPP has filed its registration and any required updates. This will enhance the DOL’s power to enforce the registration process.
  • Final Filing – The PPP must complete a final filing when it terminates the last PEP it administers and all assets have been properly distributed. This final Form PR must be filed by the later of 30 days after the calendar quarter in which the final Form 5500 was filed or 45 days after such filing.

Consistent with regulatory efforts to simplify procedures and become paperless, the DOL will administer the registration process online with the same “EFAST 2” electronic filing system currently used to receive the Form 5500.

Special transition period. Because the final regulations were released so close to the commencement date for PEPs, they became effective immediately upon publication in the Federal Register on November 16, 2020. They also contain a special provision that allows a PPP to file an initial registration any time before February 1, 2021, provided that it is filed on or before the PPP begins operations. This modification essentially waives the 30-day waiting period between registration and the start of plan operations—as long as the PPP files the registration by February 1, 2021.

Registration content requirements. In developing Form PR, the DOL tried to balance three overlapping considerations: 1) its own need for information to oversee PPPs, 2) employers’ need for information as they perform due diligence on PPPs, and 3) the possible administrative burden and expense involved for PPPs and the plans they operate. Form PR requires specific information on PPPs.

  1. Legal business name and any trade name (“doing business as”).
  2. Federal employer identification number (EIN).
  3. Business mailing address and phone number.
  4. Address of any public website or websites.
  5. Name, mailing address, telephone number, and email address for the PPP’s “responsible compliance official.”
  6. The PPP’s agent for service of legal process (that is, the person or entity that is authorized to receive legal documents) and the address at which these documents may be served on the agent.
  7. Approximate date when pooled plan operations are expected to commence.
  8. Description of the administrative, investment, and fiduciary services that will be offered or provided in connection with the PEPs, including a description of the role of any affiliates in such services.
  9. Statement disclosing any ongoing federal or state criminal proceeding (or any criminal convictions) against the PPP (or any officer, director, or employee) related to services to any employee benefit plan. (This generally applies to matters within 10 years of the registration date.)
  10. Statement disclosing any ongoing civil or formal administrative proceedings against the PPP (or any officer, director, or employee) involving fraud or dishonesty with respect to any employee benefit plan, or involving mismanaging plan assets.

While the final Form PR requires largely the same information that was required in the proposed regulations, the DOL did revise a number of items. For example, it clarified that a “compliance officer” can be identified by name, title, or office and that a PPP does not have to hire or promote an individual with any particular degree or certification. The DOL also more precisely defined “administrative proceeding” to exclude routine regulatory oversight activities and to specifically limit the term to formal administrative hearings.

More to Come

The DOL and IRS will certainly release more guidance on PEPs and PPPs. For instance, we’ll need detailed direction on the “one bad apple” rule—and how to remove such a noncompliant employer from the PEP. And we will need standard IRS text for amending prototype documents in addition to broad guidance on PEP administrative concerns. But at least regarding the registration requirements, we have a clear path. The DOL and IRS have coordinated to develop the final regulation. So registration with the DOL also satisfies the requirement to register with the IRS. And we expect continued coordination as further guidance is released. Meanwhile, the DOL has reiterated in the final regulations an important safe harbor: employers and pooled plan providers who comply in good faith with a reasonable interpretation of the SECURE Act’s PEP and PPP provisions before guidance is issued will not be treated as failing to meet such guidance once it is issued.

Ascensus will continue to follow any new guidance as it is released.

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


IRS Issues Updated Life Expectancy and Distribution Tables for Determining RMDs

The IRS has issued a pre-publication version of final regulations containing guidance and life expectancy tables to be used in the calculation of required minimum distributions (RMDs) from IRAs and other tax-qualified retirement savings arrangements, such as 401(k) plans. Those affected will include IRA owners, plan participants, beneficiaries, and employer-sponsored retirement plan administrators.

These final regulations will take effect on the date of their publication in the Federal Register, and the life expectancy tables they contain are to be used for calculations for distribution calendar years beginning January 1, 2022. The purpose for providing these updated life expectancy and distribution tables is to ensure that future required payments from retirement savings arrangements better reflect actual life expectancies of those who receive such payments.


Sequel to SECURE Act Introduced in Final Days Before General Election

House Ways and Means Committee Chairman Richard Neal (D-MA) and GOP Ranking Member Kevin Brady (R-TX) have introduced the Securing a Strong Retirement Act of 2020, legislation that is described as building on major retirement legislation enacted in December 2019. The new legislation is being referred to as “SECURE 2.0,” a reference to the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 that preceded it.

It is not generally expected that this legislation will be acted upon before the November 3 elections, or necessarily even during the “lame duck” period between November 3 and the seating of the 117th Congress in January. Instead, it could represent the first attempt at bipartisan retirement legislation to be considered in 2021.

The following provisions are included in the proposed legislation.

  • Require automatic enrollment of eligible employees in 401(k), 403(b) and SIMPLE IRA plans with certain exceptions and grandfathering provisions
  • Further enhance the small retirement plan start-up credit, with a maximum credit of 100% (vs. the current 50%) for employers with no more than 50 employees
  • Increase the amount of, and eligibility for, the “saver’s credit” for taxpayers making IRA contributions or deferral contributions to employer-sponsored retirement plans
  • Exempt up to $100,000 of accumulated retirement account balances from required minimum distribution (RMD) requirements
  • Reduce the penalty for failure to satisfy RMD requirements from 50% to 25%; if an IRA RMD failure is timely corrected, the penalty would be further reduced to 10%
  • Permit 403(b) plans to invest in collective investment trusts
  • Increase the RMD age to 75 from 72 (increased from 70½ to 72 by the SECURE Act)
  • Align ESOP rules of S Corporations with those of C Corporations
  • Provide for indexing of IRA catch-up contributions
  • Provide a second, higher tier of catch-up deferral contributions for those age 60 and older, with indexing provision
  • Permit 403(b) plans to participate in multiple employer plan (MEP) arrangements
  • Permit certain student loan repayments to qualify for employer retirement plan matching contributions
  • Allow a small employer joining a MEP or pooled employer plan (PEP) arrangement to potentially claim a small plan start-up credit during the first three years of the MEP/PEP arrangement’s existence
  • Provide a new small employer tax credit for enhanced plan eligibility for military spouses
  • Enhance options for correcting employee salary deferral errors
  • Increase the qualifying longevity annuity contract (QLAC) RMD exemption
  • Permit increasing payments in IRA and defined contribution plan life annuity benefits
  • Allow retirement plan fiduciaries additional discretion in whether to seek recoupment of accidental overpayments
  • Simplify retirement plan disclosures to non-participating employees
  • Create a national online “lost and found” database to connect individuals with unclaimed retirement account benefits
  • Expand the IRS retirement plan correction program to permit self-correction of certain inadvertent IRA errors
  • Permit tax-free qualified charitable contributions to be made from employer-sponsored retirement plans (now permitted only from IRAs)
  • Make certain technical corrections to SECURE Act provisions

House Passes Revised Pandemic Relief Bill, Disagreements Remain

The House of Representatives has passed by a vote of 214-207 a revised version of the HEROES Act estimated at $2.2 trillion to provide pandemic relief. As mentioned earlier this week, there are several benefits-related provisions included in the bill.

  • Targeted small business loan relief and other revisions of the Paycheck Protection Program
  • Coverage for COVID-19-related treatment with no cost sharing
  • Amendments to the Emergency Paid Leave Act
  • Relief for struggling union pension plans
  • Relief for single-employer pension plans
  • Extension of the deadline to roll over waived 2019 and 2020 RMDs
  • Clarification of the CARES Act’s application to money purchase pension plans
  • Grants to assist low-income women and victims of domestic abuse in obtaining qualified domestic relations orders
  • Technical corrections to SECURE Act provisions regarding funding for community newspaper pension plans
  • Creation of a union “composite plan” consisting of 401(k) and defined benefit plan provisions

The revised package has been reduced from the approximately $3.4 trillion stimulus bill that was passed by the House in May. Disagreements remain with Senate Republicans on several components of the relief package as well as the overall price tag—which is significantly higher than their proposed “skinny” package that was blocked by Senate Democrats just weeks ago. With elections just over a month away, time is running out on negotiations, as many legislators will be heading back out on the campaign trail.