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BCLP Benefits 3Q Review: IRS, DOL, & PBGC Guidance

In this edition of our newsletter, we have summarized key third quarter guidance from the Internal Revenue Service, Department of Labor, and Pension Benefit Guaranty Corporation. As we look back on the third quarter of 2020, there has been a noticeable shift at the federal level from a focus on guidance related to the COVID-19 pandemic and the Congressional response in the first half of the year to a return to executing the regulatory agendas of the federal agencies and the priorities of President Trump’s administration. Despite this shift, federal agencies have continued to issue new, amended, or extended COVID-19 guidance as the circumstances of the COVID-19 pandemic continue to evolve. We have, therefore, included both COVID-19 and non-COVID-19 guidance in this newsletter and group the summaries by these categories.

Read the full newsletter by clicking here.

If you have any questions about a topic included in this newsletter, please contact a member of our Employee Benefits & Executive Compensation Group.

Unraveling U.S. Retirement Savings – How a Global Pandemic Threatens to Undo Decades of Planning

With the economy in a free-fall and the U.S. government scrambling to create a financial safety net for citizens, giving access to tax-qualified retirement savings was a natural piece of Congress’ plan to loosen the grip on needed funds.  And yet, plan sponsors should pause before adopting the new in-service withdrawal and loan options wholesale.  The options made available under the CARES Act are permissive, not required.  Implementing a thoughtful, needs-based, COVID-19 withdrawal/loan policy could protect employees’ financial security for decades to come.

Plan sponsors can adopt an incremental approach to COVID-19 in-service withdrawals or loans, and should consider doing so in the interest of helping participants not decimate hard-won savings in a panic.

What Options do Plan Sponsors Have?

COVID-WithdrawalsThe CARES Act allows a new category of withdrawals, COVID-19 Distributions, which allows participants to take a withdrawal of the lesser of 100% of their vested account balance or $100K, anytime between January 1, 2020 – December 31, 2020, if they satisfy certain requirements. Click here to read our summary of the CARES Act withdrawal rules.

Plan sponsors can design a COVID-19 withdrawal program within the parameters of the CARES Act without allowing the full $100K withdrawal at once – or at all.  The statute does not require that a plan go from 0 to 100!  Further, while the new law allows plan administrators to rely on the representation of participants that they qualify for the in-service withdrawals, plan sponsors can impose any reasonable substantiation

COVID-19: Mid-Year Changes to 401(k) Plans

U.S. employers looking to reduce operating costs in the short term in response to the disruption caused by the COVID-19 pandemic may seek to reduce or suspend their matching or nonelective contributions in their 401(k) plan. The following summarizes the key issues facing employers in making the determination to suspend or reduce safe-harbor contributions.

Suspending or Reducing Employer Contributions in Non-Safe-harbor Plans

Discretionary employer matching and nonelective contributions generally may be immediately suspended or reduced through appropriate corporation action.  Employers should consider the following in connection with a suspension or reduction of employer contributions:

  • Does the Plan have Discretionary Employer Contributions?

If the plan does not include provisions setting out a formula or specific amount of employer contributions, the board simply needs to take action to change the amount of the employer matching contribution, which could include suspending the contribution until the board takes further action.

  • Does The Plan have a Set Formula for Determining Matching or Nonelective Contributions?

If the retirement plan or related documents set out a formula for determining the employer contributions (that is, the amount of the contributions are “hard-wired” into the plan), the plan will need to be amended to change the formula.  Companies may also consider removing specific formulas entirely and replacing them with provisions stating that the amount of the employer nonelective or matching contributions is discretionary and will be determining by the board from time to time.

  • When may the Reduction or

CARES Act Would Expand U.S. Retirement Plan Access to Participants Impacted by the Coronavirus Pandemic

The proposed Coronavirus, Aid, Relief and Economic Security Act (“CARES ACT”) would, if enacted, provide legislative relief to participants impacted by the Coronavirus pandemic.  This relief is expected to be agreed upon and enacted – although likely with some modifications.  We will update this post and provide additional detail at that time.

As currently drafted, the CARES ACT would provide the following relief with respect to hardship distributions and loans.

Hardship Distributions

The 10% early distribution tax would be waived for the following virus related hardships:

  • Participant is diagnosed with COVID-19;
  • Participant’s spouse or dependent is diagnosed with COVID-19;
  • Participant experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, experiencing a reduction of work hours, inability to work due to lack of child care caused by COVID-19, the closing or reduction of hours by a business owned or operated by such participant due to COVID-19; or
  • Other circumstances as determined by the Treasury Secretary.

The CARES Act would provide additional tax relief in the form of a three-year period for (i) payment of tax on the distribution and (ii) tax-free repayment of the distribution to the plan.

Plan Loans

The maximum loan that could be taken would be increased to the lesser of $100,000 or 100% of a participant’s vested account balance.  This limit would be double the current limit of the lesser of $50,000 or 50% of a participant’s vested account balance.  In addition, qualifying participants with outstanding loan

IRS Releases 2020 Adjusted Qualified Plan Limitations

The Internal Revenue Service released the cost-of-living adjusted qualified retirement plan limitations effective January 1, 2020.  For ease of reference and comparison to prior years, we have placed the adjusted limitations in the table below.  For more information, refer to the Internal Revenue Service’s news release and Notice 2019-59 and to the Social Security Administration’s October 10, 2019, fact sheet.

Qualified Plan Limits

Type of Limitation 2020 2019 2018 2017 2016 Elective Deferrals (401(k), 403(b), 457(b)(2) and 457(c)(1)) $19,500 $19,000 $18,500 $18,000 $18,000 Section 414(v) Catch-Up Deferrals to 401(k), 403(b), 457(b), or SARSEP Plans (457(b)(3) and 402(g) provide separate catch-up rules to be considered as appropriate) $6,500 $6,000 $6,000 $6,000 $6,000 SIMPLE Salary Deferral $13,500 $13,000 $12,500 $12,500 $12,500 SIMPLE 401(k) or regular SIMPLE plans, Catch-Up Deferrals $3,000 $3,000 $3,000 $3,000 $3,000 415 limit for Defined Benefit Plans $230,000 $225,000 $220,000 $215,000 $210,000 415 limit for Defined Contribution Plans $57,000 $56,000 $55,000 $54,000 $53,000 Annual Compensation Limit $285,000 $280,000 $275,000 $270,000 $265,000 Annual Compensation Limit for Grandfathered Participants in Governmental Plans Which Followed 401(a)(17) Limits (With Indexing) on July 1, 1993  

$425,000  

$415,000  

$405,000  

$400,000  

$395,000 Highly Compensated Employee 414(q)(1)(B) $130,000 $125,000 $120,000 $120,000 $120,000 Key employee in top heavy plan (officer) $185,000 $180,000 $175,000 $175,000 $170,000 Tax Credit ESOP Maximum balance $1,150,000 $1,130,000 $1,105,000 $1,080,000 $1,070,000 Amount for Lengthening of 5-Year ESOP Period $230,000 $225,000 $220,000 $215,000 $210,000 Taxable Wage Base $137,700 $132,900 $128,400 $127,200 $118,500

IRS Expands Determination Letter Program for Mergers of Qualified Plans Following Corporate Transactions

The IRS recently reversed course on the availability of the determination letter program for merged qualified retirement plans – thereby providing new alternatives for integrating qualified retirement plan benefits in the context of corporate transactions.

Merged Plan Relief:  Rev. Proc. 2019-20, released on May 1, 2019, expands the IRS’ determination letter program for individually designed qualified retirement plans (e.g., defined benefit plans or defined contribution plans) that result from a merger of two or more qualified retirement plans following a corporate merger, acquisition or other similar business transaction (a “Merged Plan”).  The newly expanded program will be available beginning September 1, 2019 and continuing on an ongoing basis.

Eligibility:  To be eligible for the determination letter program:

  • The Merged Plan must be a combination of two or more qualified retirement plans maintained by previously unrelated entities (i.e., entities that are not members of the same controlled group under Section 414 of the Internal Revenue Code);
  • The plan merger must occur no later than the last day of the first plan year that begins after the effective date of the corporate merger, acquisition or other similar business transaction (the “Corporate Transaction”); and
  • A determination letter application for the Merged Plan must be submitted by the last day of the first plan year that begins after the effective date of the plan merger.

Pre-approved or prototype qualified retirement plans are not explicitly covered by the procedure  — additional IRS guidance will be needed to determine the applicability

IRS Takes Step Towards De-Risking Retiree Lump Sum Windows

On March 6, 2019, the IRS announced that it will not amend the minimum required distribution regulations under Code section 401(a)(9) to expressly prohibit lump-sum window elections for retirees who are already receiving annuity payments under a defined benefit pension plan.  This practice has never been clearly permissible under existing RMD regulations. Nevertheless, some plan sponsors seeking to “de-risk” their pension liability received private letter rulings in the past permitting such action.  Then the IRS issued Notice 2015-49 announcing that it would propose amendments to the RMD regulations clarifying that lump sum windows for retirees are not be permitted.  Now the IRS has altered course on this issue again with Notice 2019-18.

Thoroughly confused?  Not surprising given the shifting positions of the IRS on this issue.

Existing Regulations

Existing regulations state that once annuity payments have commenced over a period of time, the period may only be changed in accordance with certain exceptions enumerated in Treas. Reg. 1.401(a)(9)-6, Q&A-13.  One enumerated exception is for annuity payment increases described in Q&A-14.  The regulations under Q&A-14 provide that annuity payments may increase to allow a beneficiary to convert the survivor portion of a joint and survivor annuity into a single-sum distribution upon the employee’s death.  They do not expressly recognize a similar right to convert an annuity into to a lump sum during the employee’s lifetime.  They do, however, permit the payment of “increased benefits that result from a plan amendment.”  Plan sponsors interested

2019 Qualified Plan Limits Released

The Internal Revenue Service released the 2019 dollar limits for retirement plans, as adjusted under Code Section 415(d). We have summarized the new limits (along with the limits from the last few years) in the chart below.

Type of Limitation

2019 2018 2017 2016 2015 Elective Deferrals (401(k), 403(b), 457(b)(2) and 457(c)(1)) $19,000 $18,500 $18,000 $18,000 $18,000 Section 414(v) Catch-Up Deferrals to 401(k), 403(b), 457(b), or SARSEP Plans (457(b)(3) and 402(g) provide separate catch-up rules to be considered as appropriate) $6,000 $6,000 $6,000 $6,000 $6,000 SIMPLE Salary Deferral $13,000 $12,500 $12,500 $12,500 $12,500 SIMPLE 401(k) or regular SIMPLE plans, Catch-Up Deferrals $3,000 $3,000 $3,000 $3,000 $3,000 415 limit for Defined Benefit Plans $225,000 $220,000 $215,000 $210,000 $210,000 415 limit for Defined Contribution Plans $56,000 $55,000 $54,000 $53,000 $53,000 Annual Compensation Limit $280,000 $275,000 $270,000 $265,000 $265,000 Annual Compensation Limit for Grandfathered Participants in Governmental Plans Which Followed 401(a)(17) Limits (With Indexing) on July 1, 1993  

$415,000  

$405,000  

$400,000  

$395,000  

$395,000 Highly Compensated Employee 414(q)(1)(B) $125,000 $120,000 $120,000 $120,000 $120,000 Key employee in top heavy plan (officer) $180,000 $175,000 $175,000 $170,000 $170,000 Tax Credit ESOP Maximum balance $1,130,000 $1,105,000 $1,080,000 $1,070,000 $1,070,000 Amount for Lengthening of 5-Year ESOP Period $225,000 $220,000 $215,000 $210,000 $210,000 Taxable Wage Base $132,900 $128,400 $127,200 $118,500 $118,500 IRAs for individuals 49 and below $6,000 $5,500 $5,500 $5,500 $5,500 IRAs for individuals 50 and above $7,000 $6,500 $6,500 $6,500 $6,500 FICA Tax for employees and employers 7.65% 7.65%

A Mistake a Day: Top 5 401(k) Compliance Mistakes & Best Practices

Last week, we discussed four of the five most common compliance mistakes made by 401(k) plan administrators and fiduciaries, the potential liability associated with such mistakes, and steps you can take to avoid making them yourself.

On Monday, we discussed failures to timely update plan documents.

On Tuesday, we discussed an SPD’s failure to accurately describe the terms of a plan.

On Wednesday, we discussed a plan’s definition of compensation.

On Thursday, we discussed delinquent contributions.

We hope you enjoyed this refresher on best compliance practices.  For our last post in this five-part series, we discuss a topic that never goes out of style…

Plan Governance

Description

Plan governance generally encompasses the oversight policies and procedures that plans enact to ensure good process and operational compliance. The following discussion addresses two specific aspects of plan governance—those which are among the most commonly neglected.  Fortunately, these requirements for good plan governance are also extremely easy to satisfy.

Potential Liability

Errors stemming from poor plan governance can result in plan operational failures with potential consequences ranging from minor to loss of a plan’s qualified status.  To the extent poor plan governance stems from or results in a fiduciary breach, fiduciaries may be held personally liable.

Examples

Fiduciary Training. Plan fiduciaries should receive regular and thorough training on best practices in plan governance. Common errors resulting from a failure to receive such training include failure to properly establish and engage

A Mistake a Day: Top 5 401(k) Compliance Mistakes & Best Practices

This week, we are discussing the five most common compliance mistakes made by 401(k) plan administrators and fiduciaries, the potential liability associated with such mistakes, and steps you can take to avoid making them yourself.

On Monday, we discussed failures to timely update plan documents.

On Tuesday, we discussed an SPD’s failure to accurately describe the terms of a plan.

On Wednesday, we discussed a plan’s definition of compensation.

In this, our penultimate post, we discuss the most common mistake of all: delinquent contributions.

Delinquent Contributions

Description

Employers are required to contribute employees’ elective deferrals to the plan on the earliest date that the contributions can reasonably be segregated from the employer’s general assets, and in no event later than the fifteenth (15th) business day of the month following the month in which the participant contributions are withheld or received by the employer. The Department of Labor takes the position that this rule requires the employer to deposit elective deferrals into the plan trust as soon as reasonably practicable – which would in virtually all cases be significantly sooner than the above described outside limit. An employer’s deposit history may establish a basis for what is possible. When employers contribute withheld amounts later than the time frame described above, the contributions are considered delinquent.

Potential Liability

When an employer mixes an employee’s contribution to a 401(k) plan with its general assets longer than necessary, it engages in a prohibited transaction. To

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