Washington Pulse

Washington Pulse: IRS Makes Important Changes to Plan Correction Program

The IRS has released Revenue Procedure (Rev. Proc.) 2021-30, which contains significant updates to the Employee Plans Compliance Resolution System (EPCRS). Employers use EPCRS to correct certain retirement plan qualification failures so that they can continue to maintain a tax-favored retirement plan. EPCRS consists of the Self-Correction Program (SCP), the Voluntary Correction Program (VCP), and the Audit Closing Agreement Program (Audit CAP). Rev. Proc. 2021-30 supersedes the previous EPCRS guidance (in Rev. Proc. 2019-19) and affects each of these three programs.

 

Summary of EPCRS Changes

The new Rev. Proc. contains some anticipated changes as well as some unexpected revisions. Here is a summary of these modifications.

  • Sunset provision for correcting elective deferral failures is extended for three years. Proc. 2021-30 contains a special safe harbor correction method that can be used when an employer fails to properly implement elective deferrals for eligible employees. This method—which applies to plans with an automatic contribution feature—sunsetted as of December 31, 2020, under Rev. Proc. 2019-19. This left employers without clear guidance about whether they could continue to correct deferral failures with this method. But Section .05(8)(d) of Appendix A now extends this sunset provision, applying it to such failures that begin on or before December 31, 2023.This important extension, although expected, is welcome relief for the industry. This correction method allows employers to avoid making a QNEC for a missed elective deferral if certain conditions are satisfied. Because many providers have come to rely on this approach, the three-year extension gives continuity to plan corrections.
  • Deadline is extended for self-correction of certain significant operational failures. The last day for self-correcting certain significant operational failures and plan document failures has been extended by one year. The new deadline is the last day of the third plan year following the plan year for which the failure occurred. (The previous deadline was the last day of the second) This simple EPCRS change will allow more plans to remain qualified under the SCP process, which permits self-correction without a fee and without IRS involvement.
  • Anonymous submissions are eliminated. Effective January 1, 2022, the existing anonymous VCP submission procedure is eliminated. The existing process allows a proposed correction to be submitted to the IRS without revealing the employer or the plan. Employers currently use the anonymous submission to determine the likelihood of the IRS accepting the proposed correction method. Once the IRS and the employer’s authorized representative reach an agreement on the submission, the employer comes forward and carries out the terms of the correction agreement.Although the IRS will not process an anonymous submission made on or after January 1, 2022, Rev. Proc. 2021-30 has a new procedure to replace it: the no-fee anonymous VCP pre-submission conference. Starting on January 1, 2022, an employer’s representative may request an anonymous meeting with the IRS to discuss proposed corrective actions—before submitting a VCP application. A VCP pre-submission conference may be requested only
    • for matters on which a compliance statement may be issued under Rev. Proc. 2021-30,
    • with respect to proposed corrections that are not listed as safe harbor corrections in Rev. Proc. 2021-30, and
    • if the employer is eligible and intends to submit a VCP application.

The Rev. Proc. states that “VCP conferences are held only at the discretion of the IRS, and as time permits.” The process requires submitting a pre-submission conference request (using Form 8950) and providing sufficient details about the failure so that the IRS can evaluate the request. At the conference, the IRS will provide oral feedback, which is advisory only and cannot be relied upon as a basis for obtaining relief under EPCRS.

  • New correction methods are added for defined benefit overpayments. Existing defined benefit overpayment correction methods, including single sum repayments and adjustments to future periodic payments, have been expanded to provide overpayment recipients with the option of repaying the plan through an installment agreement. Additionally, the Rev. Proc. adds two new correction methods.
    • Funding exception correction method – Employers with single-employer defined benefit plans that are subject to the requirements of Internal Revenue Code Section (IRC Sec.) 436 can avoid corrective payments if the plan’s adjusted funding target attainment percentage (AFTAP) is equal to at least 100 percent. Future benefit payments to an overpayment recipient must be reduced to the correct benefit payment amount. No corrective payments or further benefit reductions are required.
    • Contribution credit correction method – This method allows overpayments to be “credited” or reduced by the cumulative increase in the plan’s required minimum funding that is caused by the overpayment amounts and any additional contributions in excess of the required minimum funding after the first overpayment. If overpayments remain after application of the contribution credit, the employer, or another party, must reimburse the plan for the remainder of the overpayment.
  • De minimis threshold is increased. Proc. 2021-30 increases the threshold for corrective distributions and for recovery of overpayments. The previous de minimis amount was $100; it has been raised to $250. So now employers will not have to seek the return of overpayments of $250 or less. They also will not have to notify affected participants that the overpayment is ineligible for rollover or other favorable tax treatment. Similarly, employers are not required to distribute or forfeit excess contribution amounts of $250 or less. But if an excess contribution or allocation exceeds a statutory limit, the participant or beneficiary must be notified that the amount is ineligible for rollover. This change in the de minimis threshold amount shows that the IRS understands that employers could spend considerable time and effort trying to restore or distribute relatively small amounts, which may not necessarily be in the best interest of participants and beneficiaries.
  • Correcting an operational failure by a plan amendment is easier under SCP. Qualified plan and 403(b) plan operational failures may be corrected by a plan amendment that conforms the plan terms with the plan’s actual operations. This can be done only if 1) the amendment results in an increase of a benefit, right, or feature and 2) such an increase is permitted under the IRC.
    Rev. Proc. 2021-30 has removed the condition (in Rev. Proc. 2019-19) that “the increase in the benefit, right, or feature applies to all employees eligible to participate in the plan.” So now these corrective plan amendments need not apply to all employees—provided that the amendment satisfies the Rev. Proc.’s correction principles (and any other applicable rules). For example, one of the main EPCRS tenets is that any method used for correcting nondiscrimination failures should provide benefits for nonhighly compensated employees.

 

Effective Date

Rev. Proc. 2021-30 is generally effective July 16, 2021. But the extension of the sunset provision for correcting certain elective deferral failures is retroactive to January 1, 2021. A few provisions, such as the anonymous pre-submission conference, become effective January 1, 2022.

 

Conclusion

The most recent update to EPCRS contains several significant revisions. For those who are involved with retirement plan correction work, it pays to become familiar with Rev. Proc. 2021-30. But even if you don’t deal with plan corrections routinely, knowing about the key changes listed above may prove helpful. As complicated as the retirement plan rules are, it is inevitable that employers will make mistakes. Knowing how to address those mistakes will help employers get back on track.

As always, Ascensus will follow any retirement plan guidance as it is released. Visit ascensus.com for the latest developments.

 

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Washington Pulse: Department of Labor Releases Cybersecurity Guidance

Recent cyberattacks have gotten a lot of attention. Some of these hacks have created turmoil through a broad swath of the business community. But another widespread menace threatens our financial security. In fact, even as you read this, the global threat of cybercrime continues around the clock as criminals try to steal retirement plan assets.

A recent Government Accountability Office (GAO) report recommended that the Department of Labor (among other things) establish minimum expectations for addressing cybersecurity risks in retirement plans. According to recent estimates, IRAs and defined contribution plans alone hold well over $10 trillion in assets. And they are ripe for exploitation. On April 14, the DOL’s Employee Benefits Security Administration (EBSA) issued—for the first time—guidance for plan sponsors, fiduciaries, recordkeepers, service providers, and plan participants on best practices for maintaining cybersecurity. This guidance comes in three pieces.

While the links above bring you to the full text of the DOL’s guidance, here are some of the highlights from each.

Tips for Hiring a Service Provider with Strong Cybersecurity

Business owners want to run their businesses. So they often hire third-party vendors to handle matters outside their core competencies. This is also true for administering a retirement plan. Employers regularly look to recordkeepers, third-party administrators, and other service providers to conduct a plan’s day-to-day operations. These suggestions may help business owners and others to select and monitor those who provide plan services.

  • Ask about security standards, audit results, and other practices and policies; look for service providers that use an outside auditor to review cybersecurity.
  • Look for contract provisions that allow a review of audit results to verify whether providers comply with industry standards.
  • Ask about past security breaches—and about the provider’s response to any such breaches.
  • Find out whether they have sufficient insurance coverage to cover losses caused by identity theft and other cybersecurity breaches (both internal and external).
  • Make sure that the contract requires ongoing compliance with cybersecurity and information security standards—and use caution if the contract limits responsibility for IT security breaches.
  • Try to include additional cybersecurity-enhancement terms in the contracts, such as
    • a requirement that the provider obtain an annual security audit;
    • clear provisions on using and sharing confidential information;
    • prompt notification of security breaches, and an investigation into the causes of any breaches;
    • assurance of compliance with all laws pertaining to privacy, confidentiality, or security of participants’ personal information; and
    • adequate insurance coverage (including for errors and omissions, cyber liability, and data breach), which employers should understand to avoid surprises.

Cybersecurity Program Best Practices  

This second EBSA piece points out that “responsible plan fiduciaries have an obligation to ensure proper mitigation of cybersecurity risks.” Keep in mind that many service providers carefully avoid taking on an employer’s fiduciary duties. This does not mean, however, that these providers are somehow abdicating their responsibilities. To the contrary, most service providers recognize that, in order to compete in today’s retirement plan marketplace, they must adhere to the highest compliance standards. And employers—as fiduciaries—must select and monitor providers to make sure that these standards are met. So these EBSA best practices can help employers meet their own fiduciary duties by “making prudent decisions on the service providers they should hire.” They can also help service providers see how their current practices measure up, and then take action to improve any deficiencies.

EBSA lists 12 practices that a plan’s service provider should adhere to.

  • A formal, well-documented cybersecurity program. The organization should fully implement a program that identifies internal and external cybersecurity risks.
  • Prudent annual risk assessments. The organization should document the assessment’s scope, methodology, and frequency.
  • Reliable annual third-party audit of security controls. An independent auditor should assess the organization’s security program—including any documented corrections of weaknesses.
  • Clearly defined and assigned information-security roles and responsibilities. An effective cybersecurity program must be managed at the senior executive level and executed by qualified personnel.
  • Strong access control procedures. This helps guarantee that users are who they say they are. It also ensures that they have access to the data they seek. These access privileges should be reviewed at least every three months and disabled or deleted in accordance with a clear policy.
  • Cloud-stored data-security reviews and independent assessments. Because cloud computing raises unusual security concerns, employers must be able to evaluate how a third-party cloud service provider operates. Protections should include certain minimum provisions, such as multi-factor authentication and encryption procedures.
  • Cybersecurity awareness training for all personnel. Because employees can be the weakest link in cybersecurity, frequent training on identify theft and current trends in security breaches is essential.
  • Secure System Development Life Cycle Program. Such programs ensure that regular vulnerability assessments and code review are integrated into any system development. Best practices include requiring validation if a distribution is requested following changes to an individual’s personal information, or if a request is made to distribute an individual’s entire account balance.
  • Business Resiliency Program. Providers need to quickly adapt to disruptions while keeping assets and data safe. Core components of an effective program include a business continuity plan (for business functions), a disaster recovery plan (for IT infrastructure), and an incident response plan (for responding to and recovering from security incidents).
  • Encryption of sensitive data stored and in transit. This includes encryption keys, message authentication, and hashing (which can be used, for example, to avoid storing plaintext passwords in a database).
  • Strong technical controls. Best security practices include robust (and current) antivirus software, intrusion detection, firewalls, and routine data backup.
  • Responsiveness to cybersecurity incidents or breaches. Prompt action should be taken to protect the plan, including notifying appropriate agencies and individuals (e.g., law enforcement, insurer, participants), investigating the issue, and fixing the problem.

Online Security Tips

The final installment of EBSA’s three-part release gives practical pointers that retirement account owners can use to reduce cybersecurity risk. Some tips are fairly self-evident reminders about creating and protecting passwords, avoiding free Wi-Fi networks, and recognizing phishing attacks. Some other tips may not be so obvious—and they bear mentioning here.

  • Register, set up, and routinely monitor online accounts for retirement plans. Failing to register for an online account may enable cybercriminals to assume an account owner’s online identify. Account owners that regularly check their accounts can help detect and respond to fraudulent activity.
  • Use multi-factor authentication. This requires a second credential (like texting or emailing a code) to verify the account owner’s identity before an inquiry or transaction is allowed.
  • Keep personal contact information current. Account owners should ensure that their contact data includes multiple ways to reach them (by phone, text, or email). This will enable more effective communication if there is a suspected security breach.
  • Close unused accounts. Even dormant accounts can contain personal information. If an account isn’t needed, close it. Why give fraudsters the opportunity to steal data?

Next Steps

The previously mentioned GAO report also recommended that the DOL formally state whether cybersecurity is a fiduciary responsibility under ERISA. The DOL declined. It stated that fiduciaries must already “take appropriate precautions to mitigate risks of malfeasance to their plans, whether cyber or otherwise.” Instead, the DOL identified minimum expectations for reducing cybersecurity risks, which should be undertaken by all private-sector employer-sponsored defined contribution plans.

This best-practice guidance (and other tips) does not specifically apply to other types of plans. Nevertheless, prudent employers, financial organizations, and service providers should certainly consider this guidance when determining their approach to cybersecurity for other plans, such as IRAs and healthcare plans. Any time that an entity maintains access to personal information of clients, it must rigorously protect that data. Adhering to EBSA’s cybersecurity best practices is a good place to start.

Ascensus will continue to monitor future guidance on this subject and on other retirement and healthcare plan topics. Visit ascensus.com for the latest updates.

 

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Washington Pulse: American Rescue Plan Act Provides Coronavirus Relief

President Biden has signed legislation that funds another round of assistance as the nation copes with the health and economic effects of the coronavirus pandemic. Several previous bills in 2020 provided direct cash benefits to Americans, created a small business lending program to help employers retain employees, and provided enhanced access to tax-favored retirement savings.

This latest round of relief, a $1.9 trillion stimulus bill known as the American Rescue Plan Act of 2021 (ARPA), contains a third round of direct payments to Americans, funding to help hard-hit industries, and many other provisions—including some that will affect health plans and defined benefit plans.

Health Plan Relief

ARPA’s health-related provisions are meant to help individuals who have suffered a job loss or a reduction of hours to maintain their health insurance coverage. The following text summarizes the most important health plan-related provisions.

COBRA Continuation Coverage Premium Assistance

ARPA provides premium assistance for COBRA continuation coverage. This type of coverage allows eligible individuals who lose their health benefits to continue participating in their group health plan for a limited period of time. The premium assistance is designed to help both employees and employers. For example, premium assistance can help former employees keep their employer health plan coverage at a critical time. COBRA coverage can be prohibitively expensive—individuals may have to pay up to 102 percent of the cost to the plan—which discourages enrollment in many circumstances. If the premium is subsidized, employees are more likely to opt for COBRA coverage. When faced with a serious medical event, individuals and families who have this coverage can avoid potentially catastrophic financial consequences.

Premium reimbursement can help employers by ensuring increased COBRA coverage enrollment. Having a large number of COBRA enrollees can help employers spread costs over a greater number of healthy individuals who will pay premiums without having significant claims (as opposed to having only individuals with substantial medical costs enrolled in COBRA coverage).

Premium Assistance Basics

ARPA effectively provides free COBRA coverage by creating a subsidy that pays 100 percent of the COBRA premiums. Normally, the individual who is enrolled in COBRA coverage would need to pay these premiums. ARPA authorizes payment for premiums arising from COBRA coverage during the period beginning on April 1, 2021, and ending on September 30, 2021. This premium assistance is available only for certain categories of individuals who are enrolled in COBRA coverage during this period. These “assistance eligible individuals” include the following persons:

  • Employees who are eligible for COBRA coverage because of involuntary termination of employment for reasons other than gross misconduct. (A key feature of the relief is that employees who voluntarily terminate are not eligible for the subsidy.)
  • Employees who are eligible for COBRA coverage because of a reduction in hours that causes them to lose eligibility for their employer’s health plan.
  • Dependents of the employees who have lost eligibility for the reasons indicated above.

COBRA-eligible individuals who meet these criteria and who either 1) have not yet enrolled in COBRA coverage, or 2) had already enrolled in COBRA coverage but discontinued their coverage, have an additional 60 days to elect COBRA coverage and to take advantage of the subsidy. The 60-day enrollment period will begin on the date that the individual receives an ARPA-required notice that explains both the subsidy itself and the individual’s extended opportunity to elect COBRA continuation coverage.

The subsidy is “paid” through a tax credit that is provided to the employer sponsoring the health plan or to the insurer providing the coverage when an individual enrolls in COBRA coverage.

ARPA also permits employers—at their discretion—to allow individuals who are eligible for the subsidy to enroll in different coverage also offered by the employer, as long as the other coverage is also offered to other similarly situated active employees and

  • does not exceed the premium cost of the health coverage initially enrolled in,
  • does not provide excepted benefits only, and
  • is not a qualified small employer health reimbursement arrangement (QSEHRA) or a flexible spending arrangement (FSA).

Premium Assistance Notification

Because awareness of the subsidy is critical to increasing COBRA enrollment, employers must communicate the availability of premium assistance and the option to enroll in different coverage (if allowed). Individuals must receive the additional notification within 60 days of becoming eligible. Employers may provide the disclosures by amending existing notices or by including a separate document with the COBRA election notice.

Within 30 days following the bill’s enactment, the Departments of Labor (DOL), Treasury, and Health and Human Services must issue model notice language in order to help employers comply with the COBRA premium assistance notification requirements. Specifically, the model notices must include

  • the forms necessary to establish eligibility for premium assistance;
  • the plan administrator’s or other party’s contact information—including name, address, and telephone number;
  • a description of the extended election period provided;
  • a description of the qualified beneficiary’s penalty for failure to notify the plan if eligibility for premium assistance ceases;
  • a description of the qualified beneficiary’s right to a reduced premium and any conditions on entitlement to the reduced premium; and
  • a description of the qualified beneficiary’s option to enroll in different coverage (if the employer permits).

Expiration of Premium Assistance

Eligible individuals will generally receive subsidized premiums for coverage beginning on April 1, 2021, and ending on September 30, 2021. Individuals will become ineligible for premium assistance during that period if they

  • reach the maximum period for COBRA coverage, or
  • become eligible to be covered under another group health plan.

For individuals who reach the maximum period of COBRA coverage, a notice must be provided 15 to 45 days before the expiration of premium assistance. The notice must prominently identify the expiration date. To help employers comply with the requirement, the DOL must produce model notices to communicate the expiration of premium assistance 45 days following ARPA’s enactment.

If, during the period of COBRA coverage, individuals receiving the subsidy become eligible for coverage under another health plan, they must notify the plan that they are no longer eligible for premium assistance. Failure to notify the plan will result in a $250 penalty. If an individual intentionally fails to notify the plan, the penalty could be up to 110 percent of the premium assistance amount. The penalty does not apply if there is a reasonable cause for the failure to notify.

Tax Provisions for Premium Assistance

The premium assistance amount will not be included in the individual’s gross income for federal tax purposes.

Defined Benefit Plan Relief

ARPA’s retirement-related provisions are designed to provide relief to single-employer and multiemployer defined benefit (DB) plans. Following is a high-level summary of these provisions.

Amortization Relief for Single-Employer DB Plans

ARPA treat a single-employer DB plan as having no funding shortfall bases, and no shortfall installments from the bases, in prior years and spreads out funding shortfall installments to 15 years. These changes have the effect of reducing an employer’s minimum required contributions.

Extension of Pension Funding Stabilization Percentages for Single-Employer DB Plans

The three segment rates used for the applicable interest rates are provided with minimum and maximum percentages, effectively stabilizing the rates to be applied in future years. ARPA provides funding relief in a time of lower interest rates by setting the minimum percentage at a five percent “floor.” A plan can elect not to have this provision apply in plan years before 2022.

Multiemployer DB Plan Relief

ARPA provides relief for certain underfunded multiemployer plans for 2020 and 2021 plan years—including retention of the preceding plan year’s plan status (endangered, critical, etc.), extension of the plan’s funding improvement period or rehabilitation period (whichever is applicable) by five years, and use of a 30-year amortization base when amortizing investment losses.

Special Assistance Program for Multiemployer Plans at the Pension Benefit Guaranty Corporation (PBGC)

A special fund will be created for struggling multiemployer plans that are most vulnerable. The fund will provide financial assistance in the form of a lump-sum payment sufficient to provide benefits through 2051. Plans receiving this assistance must comply with additional conditions, including reinstating previously suspended benefits. For plan years beginning after December 31, 2030, multiemployer plan premiums to the PBGC will increase to $52 per participant.

Community Newspaper DB Plans

Certain community newspapers with DB plans can elect to take advantage of more favorable interest rates and amortization periods. They can also avoid some at-risk DB plan requirements.

Next Steps

Employers with defined benefit plans should start reviewing the new rules so they can take full advantage of the relief provided by the American Rescue Plan Act. Single-employer DB plans may want to consider whether to opt into or out of the relief. The stabilization percentages will automatically apply for 2020 if employers don’t opt out.

Employers with health plans should

  • work with COBRA service providers (if applicable) to meet the new COBRA notification requirements,
  • understand how premium amounts are reimbursed through the payroll tax credit process, and
  • coordinate with payroll providers and tax professionals to help ensure proper documentation and tax payments.

Ascensus will closely monitor all future ARPA-related guidance. Visit ascensus.com for the latest updates.

 

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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.


Washington Pulse: DOL Releases Final PTE on Investment Advice

The Department of Labor (DOL) has released Prohibited Transaction Exemption (PTE) 2020-02, which addresses how a financial organization or financial professional can receive certain compensation that would otherwise violate the prohibited transaction rules. This DOL class exemption and interpretation—entitled Improving Investment Advice for Workers & Retirees, is important for those who provide investment services to retirement plan participants, IRA owners, retirement plan and IRA beneficiaries, and plan fiduciaries. The PTE becomes effective on February 16, 2021, and outlines the factors that determine whether financial professionals are considered fiduciaries—while giving clear guidance about how fiduciaries must comply with their responsibilities.

In July 2020, the DOL released the proposed investment advice PTE. At that time, Ascensus published a Washington Pulse, which detailed the provisions of the proposed guidance. Because the final PTE is similar to the proposed PTE, this article will focus on the final PTE’s modified guidance and its practical implications.

Background

Guidance on investment advice creating fiduciary duties has evolved throughout the years.

  • Giving investment advice may create a fiduciary duty. Fiduciary duty—a legal concept with important implications for retirement plans—requires certain people to act with the utmost care when they serve in a particular role. While this duty may apply in numerous situations, it is especially relevant in retirement plans when one person owes this special duty of care to another. For example, this includes an employee benefit plan administrator, who must, among other things, administer the plan in the participants’ sole interest. The Employee Retirement Income Security Act of 1974 (ERISA) addresses some specific roles that give rise to this fiduciary duty. ERISA Section 3(21)(A)(ii) specifically lists someone who “renders investment advice for a fee” regarding plan assets as a fiduciary. (Internal Revenue Code Section 4975(e)(3)(B) contains a parallel definition of “fiduciary.”)
  • Guidance on investment advice has shifted. Over the years, the DOL and other regulatory entities have issued guidance on what constitutes investment advice. They have tried to strike a balance between protecting participants’ retirement assets while avoiding overly burdensome rules that could limit participants’ access to meaningful investment counseling. We now have a complex array of rules that dictate when financial professionals are providing investment advice—and that govern when they are bound by a duty to act in the best interests of those they serve. Even as this “final” PTE is being implemented, the new administration has indicated that proposed regulations (and other pronouncements that have not yet gone into effect) may be suspended pending further review. Although we do not know whether (or to what extent) the DOL or other departments may add to or modify investment advice guidance, understanding the latest guidance is still important.

The DOL Makes Four Changes in the Final PTE

The DOL received more than 100 written comments in response to last summer’s proposed PTE. Although the final PTE “retains the proposal’s broad protective framework,” it makes four important changes.

  • The disclosure requirements have been changed. The final PTE now requires financial organizations to document the reason that a rollover recommendation is in the retirement investor’s best interest—and they must provide this documentation to the investor before the rollover transaction. This differs from the approach in the proposed PTE. The proposed PTE did not require that financial organizations provide this rollover documentation to retirement investors before engaging in the rollover transaction. Rather, they were required to make this documentation available to a potentially broad range of parties.
  • Recordkeeping requirements have been narrowed. The broad access allowed to a financial organization’s compliance records generated concern. The proposed PTE permitted access by any
  • authorized employee of the DOL;
  • plan fiduciary that engaged in an investment transaction under the PTE;
  • contributing employer and any employee organization whose members were covered by a plan that engaged in such a transaction; or
  • participant or beneficiary of a plan, or IRA owner that engaged in such a transaction.

Several commenters objected that allowing such broad access to records would create a significant burden on financial organizations. This access might encourage information requests for use in litigation, which in turn might lead financial organizations to avoid addressing compliance concerns for fear of disclosure. Consequently, the final PTE limits access to a financial organization’s records to the Departments of Labor and Treasury. (The Treasury Department’s access was added as part of the final PTE.)

  • Retrospective review certification rules have been relaxed. Financial organizations must still conduct an annual review that is designed to assist the organization “in detecting and preventing violations of, and achieving compliance with, the Impartial Conduct Standards and the policies and procedures governing compliance with the exemption.” But while the proposed PTE required that the financial organization’s Chief Executive Officer (or equivalent) certify the details of the report, the final PTE now allows a “senior executive officer”—which includes the chief compliance officer, the president, the chief financial officer, or one of the financial organization’s three most senior officers—to certify compliance.
  • A self-correction provision has been added. Based on comments, the DOL added a new provision to the final PTE: a self-correction feature. Under this provision, the DOL will not consider a prohibited transaction to have occurred because of a failure to meet the PTE’s conditions if the
    • violation did not create a loss to the investor or if the financial organization made the investor whole for the loss;
    • financial organization corrects the violation and notifies the DOL within 30 days of the correction;
    • correction occurs no later than 90 days after the financial organization learned (or should have learned) of the violation; and
    • financial organization notifies those responsible for conducting the retrospective review, and the violation and correction are specifically set forth in the written report of the review.

The “Five-Part Test” Still Determines Fiduciary Status

In 1975, the DOL established a five-part test to determine fiduciary status, paralleled under the definition of “fiduciary” in Treas. Reg. 54.4975-9(c)(ii)(B). In 2016, the DOL finalized a new regulation meant to expand the definition of “investment advice.” In 2018, this final regulation was vacated by the U.S. Court of Appeals for the Fifth Circuit. Consequently, the 1975 regulatory text was restored. Under the 1975 regulation, an investment professional or a financial organization that receives a fee or other compensation is considered a fiduciary if it meets all of the following prongs of the test.

  • The investment professional or financial organization gives advice on investing in, purchasing, or selling securities, or other property.
  • The investment professional or financial organization gives investment advice to the retirement investor on a regular basis.
  • Investment advice is given pursuant to a mutual agreement or understanding with a retirement plan, plan fiduciary, or IRA owner.
  • The retirement investor uses the advice as a primary basis for investment decisions.
  • The investment professional or financial organization provides individualized advice, taking into account the IRA’s or plan’s demographics, needs, goals, etc.

This five-part test relies on all the facts and circumstances that surround each scenario. But the DOL points out that not all recommendations, including recommendations to roll over plan assets to an IRA, would qualify as providing investment advice “on a regular basis.” Some such advice may truly be an isolated, one-time event. But other similar recommendations could be part of an ongoing relationship—or the start of an ongoing relationship—that could trigger fiduciary responsibilities. This is one reason that the DOL advises financial organizations and investment professionals to carefully consider their roles—even if they don’t think that their advice is provided on a regular basis.

The Final PTE Retains Four Main Requirements

Although the final PTE contains four provisions absent from the proposed PTE, the fundamental requirements remain. Briefly, here are those four elements.

  • Impartial Conduct Standards. The Impartial Conduct Standards impose three conditions.
    • The investment advice must be in the retirement investor’s best interest.
    • The compensation for the advice must be reasonable (and the best execution of the investment transaction must be sought, as required by federal securities laws).
  • The advice, when made, must not be materially misleading.
  • Before engaging in a transaction under the PTE, the financial organization must provide
    • a written acknowledgement that the financial organization and its investment professionals are fiduciaries under ERISA and the Internal Revenue Code (whichever applies);
    • a written description of the services to be provided and a conflicts-of-interest statement that is accurate and not misleading in all material respects; and
    • documentation that lists specific reasons for a rollover recommendation—before engaging in a rollover recommended under the PTE.
  • Policy and Procedures. Three requirements pertain to this element.
    • Financial organizations must establish, maintain, and enforce written policies and procedures prudently designed to ensure compliance with the Impartial Conduct Standards.
    • The policies and procedures must mitigate conflicts of interest to the extent that a reasonable person reviewing them as a whole would conclude that they do not create an incentive for the financial organization or investment professional to place their interests ahead of the retirement investor.
    • The financial organization must document the specific reasons that any recommendation to roll over assets from a plan to another plan or an IRA, from an IRA to a plan, from an IRA to another IRA, or from one type of account to another (such as from a commission-based account to a fee-based account) is in the retirement investor’s best interest.
  • Retrospective Review. Three requirements also apply to this provision.
    • The financial organization must conduct reviews (at least annually) that are designed to help achieve compliance with the Impartial Conduct Standards and with the policies and procedures governing compliance with the PTE.
    • A senior executive officer must receive a written report that addresses the methodology and results of the retrospective review.
    • A senior executive officer must certify each year that the retrospective review meets the detailed requirements in the PTE.

The DOL Rejects Its Analysis in the Deseret Letter

Throughout the final PTE, the DOL focuses on the potential conflicts of interest that rollover recommendations can pose. The final PTE cites the cumulative $2.4 trillion in ERISA Title I plans that was expected to be rolled over between 2016 and 2020. Given the enormous sums involved—and the general prohibition against an investment advice fiduciary receiving fees for recommending that a Title I plan participant roll over assets from a plan to an IRA—the DOL reaffirms an important assertion that it made in the proposed PTE.

In the final PTE, the DOL holds firm to its assertion in the proposed PTE that its analysis in Advisory Opinion 2005-23A (the “Deseret Letter”) was incorrect. The Deseret Letter stated that the advice to roll assets out of a Title I plan, even when combined with a recommendation as to how the distribution should be invested, did not constitute investment advice. The DOL now rejects this analysis. But the DOL has also indicated that it will not pursue claims for breach of fiduciary duty or prohibited transactions between the 2005 release of the Deseret Letter and February 16, 2021, “based on a rollover recommendation that would have been considered non-fiduciary conduct under the reasoning in the Deseret Letter.”

Other Takeaways from the Final PTE

The final PTE remains largely the same as the proposed PTE. But some of the DOL’s responses to the many comments it received—and other details contained in the preamble—seem worth noting.

  • Parties can clearly communicate that they do not intend to enter into an ongoing relationship to provide (or receive) investment advice. And a single sales transaction may not confer fiduciary status. So when reviewing the transaction, the DOL will consider the reasonable understanding of each of the parties. While statements forbidding reliance on advice are not determinative, they can be considered, as can marketing materials and other communications.
  • Compliance with the standards of other governing entities (such as the Securities and Exchange Commission) does not constitute compliance with the DOL’s final PTE. Although the DOL’s standards are intended to be consistent with securities law standards, the DOL has not provided a compliance safe harbor.
  • As mentioned above, before engaging in a transaction under the PTE, the financial organization (or investment professional) must provide the retirement investor with an acknowledgment of the organization’s fiduciary status in writing, a written description of the services to be provided (along with any material conflicts of interest), and—if recommending a rollover—documentation that lists specific reasons for the rollover recommendation. Although the PTE does not include model language that satisfies all aspects of the disclosure requirement, it does include model language that will satisfy an entity’s acknowledgment of fiduciary status. In addition, although the PTE does not require it, the DOL has included plain-language, model text that spells out a fiduciary’s obligations to the retirement investor.
  • What if investment professionals or financial organizations are uncertain about their fiduciary status? Clearly, they wouldn’t want to sign a fiduciary acknowledgement if they don’t meet each prong of the five-part test. And yet the final DOL indicates that parties cannot rely on the PTE “merely as back-up protection for engaging in possible prohibited transactions” while they try to deny the fiduciary nature or their investment advice. In particular, the DOL believes that, “in light of the broad scope of relief in the PTE, it is critical for [those] who choose to rely on the PTE to determine up-front if they intend to act as fiduciaries, and structure their relationship with the Retirement Investor accordingly.” So if investment professionals or financial organizations intend to act as fiduciaries, they should disclose this clearly; if they do not intend to act as fiduciaries, they should also disclose this—clearly and unequivocally—so that they do not tempt retirement investors to place unwarranted trust in them.
  • The DOL has extended the relief provided in Field Assistance Bulletin (FAB) 2018-02 until December 20, 2021. This FAB provides a transition period for parties to develop ways to comply with the final PTE. Specifically, the DOL indicates that “it [will] not pursue prohibited transaction claims against investment advice fiduciaries who worked diligently and in good faith to comply with Impartial Conduct Standards for transactions that would have been exempted in the new exemptions . . . .”

Looking Ahead

Over the past several years, we have experienced a whirlwind of investment advice guidance from different regulatory entities. This includes the DOL’s revising some of its own guidance. It is possible that, as a new administration evaluates priorities, it could revisit previously released guidance, including this final PTE. Ascensus will continue to analyze any new guidance as it is released. Visit ascensus.com for the latest developments.

 

 

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Washington Pulse: Spending Bill Contains Coronavirus Relief

On December 21, 2020, Congress passed additional measures to provide relief from the widespread economic effects of the coronavirus pandemic. On December 27, 2020, the president signed the bill into law. While both houses of Congress have been working on various provisions since the CARES Act was enacted last March, no agreements were reached until now. The coronavirus provisions are contained in a larger spending bill that funds the federal government through next September. The bill, entitled the Consolidated Appropriations Act, 2021 (CAA), contains relief for various industries, small businesses, and individuals. Although there is no broad employee benefit relief, the items discussed below may interest those that work with employers and with employer-sponsored plans.

Paycheck Protection Program Relief

The Coronavirus Aid, Relief, and Economic Security (CARES) Act provided significant relief to businesses adversely affected by the pandemic. The Paycheck Protection Program (PPP) allowed qualifying entities to borrow money through approved lenders, which are subject to the Small Business Administration’s (SBA’s) rules and oversight. Demand for the PPP funds was so great that last spring Congress approved a further infusion of federal aid to keep the program running. Employers who borrow PPP assets may have the loan forgiven if they follow the program rules, which generally include using the funds for payroll and certain other expenses, including funding a business’s retirement plan.

The CAA infuses nearly $300 billion of additional funding into the PPP to support small businesses. These are some of the significant provisions.

  • A second round of forgivable loans is available.
    • Businesses with 300 or fewer employees that have experienced at least a 25 percent revenue loss in any quarter of 2020—versus the same quarter in 2019—are eligible.
    • In addition to most payroll costs, expenses can now also include supplier costs and the cost of providing coronavirus protection (e.g., adding drive-through service or upgrading air filtration).
    • Business expenses paid with PPP loans are tax deductible.
    • There is a new simplified loan forgiveness process for PPP loans of $150,000 or less.
  • Funding is included for independent live-venue operators, including certain movie theaters and museums that were affected by COVID-19 restrictions.

Medical Expense Deduction Floor Reduced

The annual amount of unreimbursed medical expenses that individuals must incur in order to get a deduction has been permanently reduced from 10 percent of adjusted gross income to 7.5 percent. This provision applies to taxable years beginning on or after January 1, 2021.

Disaster Relief: Distributions and Loans

The CAA provides relief for those who have experienced an economic loss because of a “qualified disaster” and whose principal residence is located in a presidentially declared disaster area. This provision does not apply to any disaster declarations that are made only because of COVID-19. But this relief closely mirrors the coronavirus-related distribution (CRD) rules found in the CARES Act.

  • Individuals can distribute up to $100,000 for disasters that begin on or after December 28, 2019, and that end on or before December 27, 2020 (the date the CAA was signed into law). The disaster distribution must be taken within 180 days of December 27, 2020. If an individual is affected by multiple disasters, this dollar limit applies separately to each disaster.
  • As with CRDs, these disaster distributions
    • are not subject to a 10 percent early distribution penalty tax,
    • are taxed equally over 3 years (unless the taxpayer chooses taxation in the distribution year), and
    • may be repaid within 3 years of the distribution date.
  • Individuals can take distributions from IRAs and employer-sponsored retirement plans. Distributions from 401(k), 403(b), governmental 457(b), and money purchase plans are not treated as “eligible rollover distributions” for certain purposes: specifically, they are not subject to 20 percent withholding or to Internal Revenue Code (IRC) Sec. 402(f) notification.
  • Individuals who meet the following requirements may repay hardship distributions or first-time homebuyer distributions taken to purchase or construct a principal residence.
    • The individual received the distribution 180 days before the disaster (defined by FEMA) to 30 days after the disaster ended.
    • The principal residence is in the disaster area.
    • The individual did not use the distribution because of the disaster.
  • Loans may be taken for up to $100,000 or the participant’s vested account balance, whichever is less. This increased limit is available to eligible participants to who take a loan within 180 days following December 27, 2020.
  • Loan repayments may generally be delayed for a year (or if later, 180 days after December 27, 2020). But subsequent payments must reflect any interest accrued during the delay. This extended deadline applies to loan repayments that are due within the period beginning on the first day of the disaster and ending 180 days following December 27, 2020.

Although new disaster distributions or loans may be hard to process because the CAA was enacted so late in the year, these provisions may provide relief for qualified individuals who have already taken distribution or loans in 2020. As with CRDs, these disaster-related provisions are also optional for employer-sponsored retirement plans.

Money Purchase Plans May Offer Coronavirus-Related Distributions

The CARES Act authorized qualified individuals to take CRDs from IRAs and certain defined contribution retirement plans by December 30, 2020. Specifically, the CARES Act created a permissible distribution trigger for eligible retirement plans, including 401(k) plans, 403(a) and (b) plans, governmental 457 plans, profit-sharing plans, and IRAs. But this relief did not include money purchase pension plan assets, which are subject to in-service distribution restrictions. So the CAA amended the CARES Act to include money purchase pension plans in the types of plans that are treated as meeting the plan distribution requirements of IRC Sec. 401(a). This provision allows employers with money purchase pension plans to permit eligible participants to take CRDs as if such plans were originally included in the CARES Act.

Partial Plan Termination Relief

The coronavirus pandemic has caused countless employers to lay off or furlough portions of their workforce. Many of these employers took this action to preserve their businesses, hoping that they could rehire those workers once the economy started to recover. But under current rules, a partial plan termination generally occurs when there is a workforce reduction of more than 20 percent. This results in 100 percent vesting for the affected workers. To avoid treating all such temporary workforce reductions as partial plan terminations, the CAA changes the rules to give employers additional time to rehire workers. If the active participant count as of March 31, 2021, is at least 80 percent of the active participant count at the time the coronavirus national emergency was declared (March 13, 2020), a plan will not be treated as having a partial plan termination.

Qualified Future Transfer Elections

The CAA provides relief for certain defined benefit plan excesses transferred to health benefit accounts. This relief allows employers to make an election to end an existing transfer period if the election is made by December 31, 2021. Qualified future transfers allow excess pension assets to be transferred to health benefit accounts to pay for health or life insurance costs if certain requirements are met—including a minimum funding requirement.

Healthcare Provisions

Flexible spending and dependent care accounts. The CAA gives employers greater flexibility in permitting employees to carry over unused amounts in both their health flexible spending arrangements (FSAs) and their dependent care FSAs. All leftover amounts from 2020 can be carried forward to 2021. Employees can also carry over 2021 amounts to 2022. This is in addition to the CAA extending the normal grace period from 2½ months to 12 months for plan years ending in 2020 and 2021. Employees who stop participating in either kind of plan during calendar year 2020 or 2021 can continue to receive reimbursements through the end of the plan year in which they stopped. And finally—in addition to other minor changes—for plan years ending in 2021, participants in health and dependent care FSAs may modify their contributions without a change in status. Employers who choose to implement these optional provisions must operationally comply with them until they amend their plans to reflect the change.

Preventing surprise medical billing. A group health plan or a health insurance issuer that offers group or individual health insurance coverage to cover emergency services is required to provide such services without the need for prior authorization or other limitations, even if the healthcare provider is not considered a participating (in-network) provider. Any limitation that a plan or coverage contains cannot be more restrictive than requirements that apply to emergency services received from participating providers and facilities.

Other healthcare provisions. The CAA contains several other healthcare-related changes that may benefit employers or employees.

  • Families First Coronavirus Response Act (paid sick and family leave credit) extended This credit was set to expire on December 31, 2020, but the CAA extends this credit until March 31, 2021. The CAA also makes other minor changes.
  • Paid family and medical leave employer credit extended – This employer credit was also due to expire on December 31, 2020. The CAA extends the credit to December 31, 2025.

Education-Related Provisions

  • The CARES Act permitted employers to provide tax-free student loan repayment benefits of up to $5,250 to employees through 2020. The CAA now extends this benefit through December 31, 2025.
  • The CAA simplifies the Free Application for Federal Student Aid (FAFSA) program to make the application process easier and to make financial aid more predictable.
  • The CAA increases the income that individuals can earn and still receive the Lifetime Learning Credit—while repealing the deduction for qualified tuition and related expenses.

Looking Ahead

At nearly 5,600 pages, Ascensus will continue to analyze the bill for items pertinent to providers of retirement, healthcare, and education products and services. In addition, while the current Congressional session is winding down, many lawmakers have suggested that more coronavirus relief is needed. Ascensus will continue to monitor legislative activity pertaining to such relief. Visit ascensus.com for the latest information.

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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.

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Washington Pulse: IRS Issues Final Life Expectancy Regulations

On November 12, 2020, the IRS published final regulations updating life expectancy tables that are used for required minimum distributions (RMDs) and for other purposes. These new tables reflect an increase in life expectancies since the last tables were issued nearly 20 years ago. Although the updated tables do not apply until distribution years beginning in 2022, financial professionals should learn how the new life expectancy figures may affect their clients and should assess how their administrative systems will accommodate the changes.

 

Background

Two years ago, President Trump issued Executive Order 13847, which (among other things) directed the IRS to examine the life expectancy tables and to “determine whether they should be updated to reflect current mortality data and whether such updates should be made annually or on another periodic basis.” On November 8, 2019, the IRS published proposed regulations in response to the executive order. The IRS received numerous comments, but the only substantial change made in creating the final regulations was pushing back the applicability date to the 2022 calendar year.

Internal Revenue Code Section (IRC Sec.) 401(a)(9) and associated RMD regulations require “employees” to begin distributing their accumulated retirement assets by their required beginning date. (In this article, we will use the term “employee” because that is the term found in the Internal Revenue Code. It includes qualified plan participants, IRA owners, and all those who must take RMDs (e.g., beneficiaries).) The RMD rules help ensure that employees start taking distributions, and they permit payments over their life expectancy to avoid outliving their retirement savings. The IRS life expectancy tables determine the distribution period over which defined contribution-type retirement plans must be paid. The regulations specifically apply to RMDs taken from

  • qualified trusts (such as a 401(k) trust);
  • individual retirement accounts and annuities described in IRC Secs. 408(a) and (b);
  • eligible deferred compensation plans under IRC Sec. 457; and
  • IRC Secs.403(a) and §403(b) annuity contracts, custodial accounts, and retirement income accounts.

The life expectancy tables determine the distribution period for RMDs. The final regulations revise the three life expectancy tables found in Treasury Regulation (Treas. Reg.) 1.401(a)(9)-9. The Uniform Lifetime Table is used to determine the distribution period for those employees who must take RMDs during their lifetime. This table begins at age 72, which is the age at which RMDs must first be calculated under the SECURE Act rules. The distribution periods listed are simply the joint life expectancy of the employee at a certain age and a beneficiary who is exactly 10 years younger. Years ago, the IRS simplified the RMD process by allowing all employees—regardless of their beneficiary’s actual age—to use the Uniform Lifetime Table.

The Joint and Last Survivor Table reflects the life expectancy of two individuals. The ages in the table range from 0 to 120 years, and it shows the likely number of years that at least one of the two individuals will live. Despite listing all combinations of ages up to 120, this table is used in the RMD context for one purpose: to determine the distribution period for an employee who has named the spouse as the sole designated beneficiary—when the spouse is more than 10 years younger than the employee. This allows the employee to calculate the RMD using a longer life expectancy than under the Uniform Lifetime Table, resulting in a smaller RMD.

The third life expectancy table, the Single Life Table, is required in several situations. Perhaps the most common use is for determining the distribution period that a beneficiary must use when an employee dies. For example, assume that an IRA owner dies this year at age 75 and has named his 70-year-old sister as the sole beneficiary. Next year, his sister will determine her distribution period using the Single Life Table. The life expectancy for a (now) 71-year-old is 16.3 years under the current table.

The tables are also used for “substantially equal periodic payments” under IRC Sec. 72(t)(2)(A)(iv). The Internal Revenue Code contains an exception to the 10 percent early distribution penalty tax for certain pre-59½ distributions. Payments must be properly structured using the life expectancy tables contained in the regulations—and they must continue for at least five years and until the recipient reaches age 59½. This payment stream permits access to retirement funds while also preventing excessive fund depletion. The details of setting up such equal periodic payments are found in Revenue Ruling 2002-62, which the IRS expects to update to reflect the changes in the final life expectancy regulations.

 

The Transition Rule

The one provision that will likely create the most activity—and questions—is the final regulation’s “transition rule.” The IRS states that this rule is “designed to recognize that the general population has longer life expectancies than the life expectancies set forth in the formerly applicable Treas. Reg. 1.401(a)(9)-9.” The transition rule allows a beneficiary who has already locked into a life expectancy for RMD payouts to use a “one-time reset” to take advantage of the longer life expectancies in the new tables. This situation occurs when the employee died before January 1, 2021, and the beneficiary was using the old life expectancy tables to determine the RMD. Starting in 2022, the beneficiary’s RMD is based on the new tables, using the age for which the life expectancy was originally determined. An example may help.

Example: Frank died at age 80 in 2018. Frank’s nonspouse beneficiary, Rose, was 75 in the year he died. In 2019, the distribution period that Rose must use is 12.7 (the single life expectancy of a 76-year-old). For her distribution in 2021, Rose reduces that figure to 10.7 years: one year for 2020 and one year for 2021. Normally, Rose would then reduce her distribution period by one more year for 2022, to 9.7. But the transition rule permits Rose to reset her distribution period based on the new tables. Rose still uses her age in the year following Frank’s death, but she simply replaces the old life expectancy, 12.7, with the new one, which is 14.1. She then reduces that figure one year for each subsequent distribution year (2020, 2021, and 2022) to arrive at 11.1 instead of 9.7 (under the old tables).

Although this transition rule makes only incremental decreases in the amount that beneficiaries must distribute, this reset provides some relief for those who wish to distribute the smallest amount required in order to preserve assets. On the other hand, redetermining the distribution periods for beneficiaries who had commenced required distributions before 2022 will entail additional effort by financial organizations, plan administrators, and other advisers.

Note: The proposed regulations seemed to limit the circumstances under which a beneficiary could use the one-time reset. This apparent limitation was likely unintentional. But the final regulations revised the transition rule wording enough to verify a more expansive interpretation of the rule. So irrespective of how a beneficiary came to use the old Single Life Table, the new table can now be used. For those required to use “nonrecalculation” (by reducing the life expectancy by one year for each successive distribution year), the starting age remains the same. Spouse beneficiaries, who may use the “recalculation” method, simply start using the new tables in 2022.

 

Key Takeaways

The final regulations are nearly identical to the proposed regulations. While these new regulations are straightforward, there are still some important points to remember.

  • The new tables apply for distribution calendar years beginning on or after January 1, 2022.
  • The transition rule allows certain beneficiaries a one-time reset to use the longer life expectancies.
  • The IRS expects to review these tables every 10 years (or when new mortality studies are published).
  • The final regulations will require a significant number of individual RMD payout redeterminations.
  • Software platform providers and others may face sizeable programming tasks.

 

Looking Ahead

Fortunately, the IRS heeded commenters’ requests and delayed the final regulations’ applicability date to 2022. This will allow more time for all affected parties to integrate the new tables into their processes. The IRS will also release guidance regarding SECURE Act provisions, such as the rule that replaces certain beneficiary life expectancy payments with a requirement to deplete beneficiary accounts after 10 years. As guidance is released, rely on Ascensus to monitor developments and to publish helpful analysis.

 

 

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Washington Pulse: IRS Provides Additional SECURE Act Guidance

At the end of 2019, the President signed the most comprehensive retirement reform package in over a decade: the Setting Every Community Up for Retirement Enhancement (SECURE) Act. The SECURE Act is one of multiple bills that were included in the Further Consolidated Appropriations Act, 2020 (FCAA).

The SECURE Act’s primary goals include expanding retirement savings, simplifying existing rules, and preserving retirement income. As with any major legislation, the SECURE Act created numerous outstanding questions. And while the IRS has previously provided some answers, no SECURE Act guidance has been as detailed as the recently released IRS Notice 2020-68. In addition to providing guidance on the SECURE Act, this Notice provides guidance on the Bipartisan American Miners Act, which is also part of FCAA.

 

SECURE Act Guidance

Qualified charitable distributions and the repeal of the Traditional IRA contribution age limit

Effective for 2020 and later taxable years, taxpayers with eligible compensation can make Traditional IRA contributions at any age, not just for years before reaching age 70½. Notice 2020-68 states that financial organizations that accept such contributions must amend their Traditional IRA plan agreements and disclosure statements and provide the amended documents to IRA owners.

Although most financial organizations  are likely to adopt the relaxed eligibility requirements, Notice 2020-68 states that they are not required to accept such contributions. Keeping the old contribution limitation—or delaying implementing the new rule—may benefit organizations who face possible programming concerns.

The Notice confirms that, because IRA contributions and required minimum distribution (RMDs) are reported as two separate transactions, IRA owners may not offset their RMD amount for a taxable year by the amount of contributions made for the same year. So while Traditional IRA owners may contribute past age 70½ (if they are otherwise eligible), they may also have to take an RMD for the same year.

In addition to allowing individuals to make contributions after age 70½, the SECURE Act made changes to qualified charitable distributions (QCDs). Beginning at age 70½, IRA owners and beneficiaries may donate—while satisfying their RMDs—up to $100,000 of IRA assets tax-free to a qualified charity.

The SECURE Act requires that IRA owners age 70½ and older who make deductible Traditional IRA contributions reduce the amount that they can exclude from income when taking a QCD. Notice 2020-68 confirms the formula that IRA owners should use to determine this amount.

Example: In 2020, Mike attains age 70½ and makes a $7,000 deductible contribution to his Traditional IRA. Mike also takes a $9,000 distribution payable directly to his church, which is a qualified charity. How much of the $9,000 QCD can Mike exclude from income?

Excludable QCD amount = A – (B – C)

A = the QCD amount for a year before any reduction

B = the aggregate deductible contributions made for all tax years beginning with Mike’s 70½ year

C = prior year income exclusion reductions made as a result of the SECURE Act

Excludable QCD amount = $2,000, which is $9,000 – ($7,000 – $0)

NOTE: In future years, deductible contributions made after age 70½ will continue to lessen the amount by which QCDs will be excluded from income. Contributions that reduced the excludable QCD amount in previous years are ignored; contributions that have not reduced prior-year excludable QCD amounts are aggregated with current-year deductible contributions to determine what amount of the current QCD is included in income.

 Participation of long-term, part-time employees in 401(k) plans

Effective for 2021 and later plan years, employees who have three consecutive 12-month periods with at least 500 hours of service (and who satisfy the plan’s minimum age requirement) generally must be allowed to make elective deferrals in an employer’s 401(k) plan. The current, more restrictive, eligibility rules could continue to be applied to other contribution sources (such as matching contributions) and to ADP/ACP safe harbor plans. Employers may also exclude such part-time employees from coverage, nondiscrimination, and top-heavy test rules. The SECURE Act states that no 12-month period that begins before January 1, 2021, is considered when determining the three years of service for eligibility.

Notice 2020-68 confirms that an employer can apply the new eligibility rule to employer contributions that are subject to vesting requirements. But then for vesting purposes, the employer must generally consider each 12-month period for which the employee has at least 500 hours of service starting from the employee’s date of hire—including periods of service incurred before January 1, 2021. An employer may, however, continue to exclude periods of service described in Internal Revenue Code Section (IRC Sec.) 411(a)(4) (such as periods of service incurred before age 18 or before the plan was established).

It may be difficult for some employers to determine the correct periods of service for an employee who was previously excluded from the employer’s plan. As a result, the IRS is seeking comments on how to reduce possible administrative concerns related to counting years of vesting service beginning before January 1, 2021.

Small-employer automatic-enrollment tax credit

The SECURE Act created a new tax credit for small employers that include an eligible automatic contribution arrangement (EACA) feature in their new or existing qualified employer plan. A “qualified employer plan” includes a 401(a) plan, a 403(a) plan, a simplified employee pension (SEP) plan, and a savings incentive match plan for employees of small employers (SIMPLE) plan. To be eligible for the credit, employers must have had 100 or fewer employees who earned at least $5,000 in compensation during the previous calendar year. The maximum annual tax credit is $500 for each of the first three years that the employer includes an EACA in a qualified employer plan. This provision is effective for 2020 and later taxable years.

Notice 2020-68 clarifies that employers may receive a credit for each year during a single three-year period, starting in the first year that an employer adds an EACA. In addition, employers that maintain more than one qualified employer plan must offer an EACA in the same qualified employer plan for each year of the three-year period. For example, an employer that maintains two different 401(k) plans cannot receive a tax credit in 2021 if it adds an EACA to Plan A in 2020, amends to remove the EACA from Plan A in 2021, and then amends to add the EACA to Plan B in 2021.

Notice 2020-68 also clarifies that each eligible employer that participates in a multiple employer plan (MEP) may receive the tax credit. The three-year period begins with the first taxable year that an eligible employer includes an EACA under a MEP. An employer will continue to be eligible for the credit even if it spins off and establishes its own single-employer plan.

Qualified birth or adoption distributions (QBADs)

As of January 1, 2020, distributions taken within 12 months of the birth of a child or adoption of an “eligible adoptee” are exempt from the 10 percent early distribution penalty tax. An eligible adoptee is a child under the age of 18 or an individual who is physically or mentally incapable of self-support. An eligible adoptee does not include a child of the individual’s spouse. Each parent may distribute up to $5,000 in aggregate, per birth or adoption event, from an IRA, a 401(a) defined contribution plan, a 403(a) or 403(b) annuity plan or contract, or a governmental 457(b) plan.

Individuals may repay these amounts to an IRA or eligible retirement plan. While there is currently no stated deadline for repaying a QBAD, the Treasury Department plans to issue regulations under IRC Sec. 72(t) that will address recontribution rules, including rules related to the timing of recontributions.

Notice 2020-68 clarifies that individuals are “physically or mentally incapable of self-support” if they meet the disability definition found in IRC Sec. 72(m)(7). According to this definition, an individual is disabled if he “is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or to be of long-continued and indefinite duration.”

In addition, the Notice addresses several other matters.

  • Individuals may receive a QBAD for each birth and each adoption. For example, an individual who gives birth to twins may distribute $10,000 from her IRA and treat the entire amount as a QBAD.
  • A QBAD is not treated as an eligible rollover distribution for purposes of the direct rollover rules, the IRC Sec. 402(f) notice requirement, and the 20 percent mandatory withholding requirement.
  • A QBAD is an optional distributable event, so employers are not required to add the feature to their plans.
  • A plan administrator may rely on a reasonable representation that the individual is eligible for a QBAD, unless the administrator has actual knowledge to the contrary.
  • An eligible retirement plan must accept QBAD recontributions if 1) the retirement plan permits QBADs, 2) the individual received a QBAD from that plan, and 3) the individual is otherwise eligible to make a rollover contribution to that plan at the time he wishes to recontribute the QBAD to the plan.
  • A QBAD that is recontributed to an eligible retirement plan is deemed to be an eligible rollover distribution that meets the 60-day rollover rule.
  • A participant who receives an in-service distribution from a plan that does not offer QBADs may still claim that distribution as a QBAD on her income tax return and recontribute the amount to an IRA.

Difficulty-of-care compensation eligible for IRA contributions

Certain foster care providers receive payments that are not includable in taxable income and therefore were not considered to be compensation. As a result, such individuals may not have been able to contribute to a retirement plan. Now such after-tax “difficulty-of-care payments” will qualify as eligible compensation for IRAs and defined contribution plans. This provision is effective for IRA contributions made after December 20, 2019, and for contributions made to defined contribution plans in 2016 and later plans years.

Notice 2020-68 confirms that difficulty-of-care payments to an employee must be made by the employer in order to be treated as eligible compensation. Employers that make difficulty-of-care payments to their employees must amend their retirement plans to include difficulty-of-care payments in their plan’s definition of compensation. Notice 2020-68 also notes that the IRS will release future guidance to address whether the six percent penalty tax will apply to excess IRA contributions that are based on difficulty of care payments.

 

Bipartisan American Miners Act Guidance

Under IRC Sec. 401(a)(36), pension plans could allow in-service distributions at age 62. Effective for 2020 and later plan years, the Bipartisan American Miners Act allows in-service distributions at age 59½ to participants in governmental 457(b) plans and 401(a) pension plans.

Notice 2020-68 verifies that allowing participants to take in-service distributions starting at age 59½ does not solely affect the plan’s normal retirement age. A pension plan’s definition of normal retirement age must still meet the requirements of Treas. Reg. 1.401(a)-1(b)(2), which states that a plan’s normal retirement age may not be earlier than the earliest age that is reasonably representative of the typical retirement age for the industry in which the covered workforce is employed. A normal retirement age that is age 62 or later is deemed to satisfy the reasonably representative requirement. Notice 2020-68 also states that employers may continue to rely on the proposed regulations that were issued in 2016 for governmental pension plans. Employers are not required to offer the age 59½ in-service distribution.

 

Amendment Guidance

To help synchronize amendment deadlines for the SECURE Act, the Bipartisan Miners Act, and the Coronavirus Aid, Relief, and Economic Security Act, Notice 2020-68 states that employers with qualified retirement plans and 403(b) plans that are not maintained by a public school will have until the last day of the first plan year beginning on or after January 1, 2022, to amend their plans for the SECURE Act and the Bipartisan American Miners Act. This is a change from the Bipartisan Miners Act, which gave employers until the end of their 2020 plan year to amend their plan documents. Those employers with qualified governmental plans under IRC Sec. 414(d), collectively bargained (union) plans, and 403(b) plans maintained by a public school have until the last day of the first plan year beginning on or after January 1, 2024.

Governmental 457(b) plan administrators must amend their documents for the SECURE Act and the Bipartisan American Miners Act by the later of the last day of the first plan year beginning on or after January 1, 2024, or if applicable, the first day of the first plan year beginning more than 180 days after the date of notification by the IRS that the plan was administered in a manner that is inconsistent with the requirements of IRC Sec. 457(b).

Notice 2020-68 provides long awaited IRA amendment guidance. The Notice states that financial organizations must amend their IRA plan agreements and disclosure statements for the SECURE Act by December 31, 2022, or a later date as prescribed by the Treasury Secretary. The IRS expects to issue revised model IRA documents and an updated Listing of Required Modifications (LRMs). The LRMs will contain sample language that document providers may use when updating their IRA prototype documents. Employers must amend their deemed IRA documents based on the deadline applicable to the retirement plan under which the deemed IRA is established.

 

Next Steps

If they haven’t already, employers and financial organizations should educate themselves and their staff on the new requirements and determine whether they will offer any of the optional provisions. They should also start considering the amendment process for their retirement plan and IRA documents.

The IRS is requesting comments on the topics covered in Notice 2020-68—especially on the provision relating to long-term, part-time employees. Comments must be submitted on or before November 2, 2020, and should refer to Notice 2020-68. The Treasury Department and IRS are still expected to provide further guidance—including new regulations—on the SECURE Act and Bipartisan American Miners Act.

Ascensus will continue to follow any new guidance as it is released. Visit ascensus.com for the latest developments.

 

 

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