SECURE Act

SECURE Act Video Series: IRA Amendments

Ascensus is excited to present the SECURE Act Video Series. This multi-video series will provide a snapshot of retirement-related SECURE Act provisions, included in the Further Consolidated Appropriations Act, 2020.

For more coverage from our experts on the SECURE Act and its implications, check out our latest news.


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of the 10-year rule has been expanded to indicate that, if applicable, the entire balance of the IRA must be withdrawn by December 31 of the year containing the 10th anniversary of the owner’s death, and the beneficiary is allowed, but not required, to take a distribution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


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.


Securing a Strong Retirement Act Re-Introduced

House Ways and Means Committee Chairman Richard Neal (D-MA) and Ranking Member Kevin Brady (R-TX) have introduced the Securing a Strong Retirement Act (SSRA) of 2021, legislation that was first introduced in October 2020. It builds upon the Setting Every Community Up for Retirement Enhancement Act (SECURE) Act of 2019. The House Ways and Means Committee held a markup hearing Wednesday, May 5, and unanimously voted to advance this legislation to the full House of Representatives to vote on the measure.

This legislation is the first comprehensive bipartisan retirement legislation introduced in 2021. SSRA of 2021 expands upon and includes additional provisions from the SSRA of 2020. While this bill (and others) have been coined by many as “SECURE 2.0,” it is prudent to follow retirement legislation developments by bill name for clarity and think of “SECURE 2.0” in the context of retirement reform generally.

The new and amended provisions include the following changes from the 2020 proposal.

  • Requires automatic enrollment of eligible employees in 401(k) and 403(b) plans with certain exceptions and grandfathering provisions, but eliminates the same requirement for SIMPLE IRA plans that appeared in the 2020 proposal
  • Increases the required minimum distribution (RMD) age to 73 on January 1, 2022; to age 74 on January 1, 2029; and to age 75 on January 1, 2032. The SECURE Act previously increased the age from 70½ to 72.
  • Drops the provision aligning ESOP rules of S Corporations with those of C Corporations that appeared in the 2020 proposal, but adds a placeholder that it is a Congressional goal to preserve and foster employee ownership of S Corporations through ESOPs
  • Provides an additional, indexed higher tier of catch-up deferral contributions for those who are age 62, 63, and 64
  • Permits 403(b) plans to participate in multiple employer plan (MEP) arrangements, specifically including pooled employer plans (PEPs)
  • Reduces from three years to two years the period of service requirement for long-term, part-time workers, and disregards pre-2021 service for vesting purposes
  • Directs the Departments of Labor (DOL) and Treasury to issue regulations explaining what fiduciaries need to do to meet their fiduciary duty in searching for missing participants
  • Eliminates the provision permitting tax-free qualified charitable contributions to be made from employer-sponsored retirement plans that appeared in the 2020 proposal
  • Permits employers to perform top-heavy tests separately for defined contribution plans covering excludable employees
  • Limits repayment of qualified birth or adoption distributions to three years
  • Permits participants to self-certify that deemed hardship distribution conditions are met in certain circumstances
  • Permits participants who self-certify that they have experienced domestic abuse to withdraw the lesser of $10,000 or 50 percent of their account without being subject to the 10 percent early distribution penalty tax. The funds could be repaid to the plan over three years.
  • Makes changes to stock attribution rules under family attribution for coverage and nondiscrimination testing
  • Permits discretionary amendments that increase benefits to participants to be adopted by the due date of the employer’s tax return
  • Permits new 401(k) plans established after the end of the taxable year but before the employer’s tax filing date that are treated as having been established on the last day of the taxable year to receive elective deferrals up to the due date of the employee’s tax return for the initial year when they are sponsored by sole proprietors and single-member LLCs
  • Limits only the portion of an IRA used in a prohibited transaction to be treated as distributed, as opposed to current rules disqualifying and treating the entire IRA as distributed
  • Permits SIMPLE IRAs to accept Roth contributions, and, plan permitting, allows employees to treat employee and employer SEP contributions as Roth contributions
  • Matches hardship rules for 403(b) plans to the 401(k) plan rules
  • Requires catch-up contributions to be made on a Roth basis beginning January 1, 2022
  • Permits defined contribution plans to provide participants with the option of receiving match contributions on a Roth basis
  • Plan amendments pursuant to this legislation must generally be made by the end of the 2023 plan year (2025 for governmental plans); plan amendment dates under the SECURE Act, CARES Act, and the Taxpayer Certainty and Disaster Tax Relief Act of 2020 are revised to conform with the same new dates

 

This legislation carries forward the following provisions from the 2020 proposal.

  • Further enhances 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
  • Requires the IRS to promote the saver’s credit
  • Permits 403(b) plans to invest in collective investment trusts
  • Provides for indexing of IRA catch-up contributions
  • Permits certain student loan repayments to qualify for employer retirement plan matching contributions
  • Allows a small employer joining a MEP or PEP arrangement to potentially claim a small plan start-up credit during the first three years of the MEP/PEP arrangement’s existence
  • Provides a new small employer tax credit for enhanced plan eligibility for military spouses
  • Permits immediate de minimis financial incentives, in addition to a matching contribution, to individuals for contributing to a retirement plan
  • Enhances options for correcting employee salary deferral errors
  • Increases the qualifying longevity annuity contract RMD exemption
  • Permits increasing payments in IRA and defined contribution plan life annuity benefits
  • Allows retirement plan fiduciaries additional discretion in whether to seek recoupment of accidental overpayments
  • Reduces excise tax on certain failures to take RMDs
  • Changes disclosure rules for performance benchmarks for asset allocation funds
  • Directs Treasury, DOL, and the Pension Benefit Guaranty Corporation (PBGC) to review and report on reporting and disclosure requirements and makes recommendations to Congress to consolidate, simplify, standardized, and improve such requirements
  • Simplifies retirement plan disclosures to non-participating employees
  • Creates a national online “lost and found” database to connect individuals with unclaimed retirement account benefits
  • Expands the IRS retirement plan correction program to permit self-correction of certain inadvertent IRA errors
  • Eliminates “first day of the month” deferral election requirement for governmental 457(b) plans
  • Requires defined contribution plans to provide paper benefit statements at least once annually, unless a participant elects otherwise
  • Makes certain technical corrections to SECURE Act provisions

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.