As employers learn recent revisions, more reworking could loom

In late 2019 and early 2020, Congress passed two major pieces of federal legislation — the Setting Every Community Up for Retirement Enhancement Act (the SECURE Act) and the Coronavirus Aid, Relief and Economic Security (CARES) Act — that made significant changes to the rules affecting employer retirement plans.

Beginning in June, the Internal Revenue Service and the U.S. Department of Labor began issuing guidance to assist stakeholders in implementing the numerous changes under both acts, which impact a broad range of provisions. As employers begin to implement mandatory changes and determine whether optional provisions should be adopted as guidance is issued, they should be aware that the retirement plan landscape could change significantly.

On June 19, the IRS provided guidance on permitted coronavirus-related loans and special 2020 distributions under the CARES Act. The act waives the normal 10% penalty tax on early distributions and waives rules restricting early distributions from IRAs, 401(k), 403(b) and Section 457(b) plans.

Qualified individuals can withdraw up to $100,000 during 2020 without the 10% early distribution penalty, spread the reported income over three years and repay the distribution within three years to avoid taxation.

The guidance clarifies and expands the definition of who is a qualified individual to take into account additional factors such as reductions in pay, rescissions of job offers and delayed start dates with respect to an individual, as well as adverse financial consequences to an individual arising from the impact of Covid-19 on the individual’s spouse or household member.

It also clarifies that employers can rely on an employee’s certification that he or she is a qualified individual (and provides a sample certification), and provides employers a safe harbor procedure for implementing the suspension of loan repayments otherwise due through the end of 2020.

Another notice issued by the IRS was issued in September that provides guidance on several SECURE Act provisions, including the requirement that part-time employees must be allowed to participate in a 401(k) if the employee has worked at least 500 hours per year with the employer for at least three consecutive years and has attained age 21.

Importantly, time worked before Jan. 1, 2021, does not count toward the required three-year period, and long-term, part-time employees are not required to be eligible to receive employer contributions based on the 500-hour rule.

However, the notice clarifies that, for vesting of employer contribution purposes, the employer must give vesting credit for each 12-month period in which the employee has at least 500 hours of service starting from the employee’s date of hire.

Starting with the 2021 plan year, employers need to track hours so qualifying long-term, part-time employees can begin making elective deferrals in the 2024 plan year.

The notice also provides guidance on the details of enhanced business tax credit for retirement plan startup costs to make setting up retirement plans more affordable for small businesses (fewer than 100 employees) and additional tax credits available to employers that adopt an automatic enrollment feature.

As employers implement the changes, they should be aware that President-elect Biden could make major retirement plan changes.

His legislative agenda is short on details, but his campaign website states he will make 401(k) plans “more equal so that middle-class families can enter retirement with enough savings to support a healthy and secure retirement.” It also states he favors “equalizing the tax benefits of defined contribution plans.”

His plan eliminates the pre-tax treatment of 401(k) plan deferrals in favor of a tax credit reportedly equal to $26 for every $100 an employee contributes, which will reduce the greater tax benefit those in higher tax brackets receive under the current system.

If he and Congress were to eliminate tax code rules that permit larger contributions to and for higher-paid employees, it could cause some employers to evaluate whether to continue to offer plans or opt to contribute to a new government-sponsored automatic 401(k)-type savings option, which Biden also supports.

While employers work to implement the numerous changes to the retirement plan rules made in 2019 and 2020, they should be aware that even more profound changes could be coming in 2021.

John E. Rich Jr., chair of the Tax Department at McLane Middleton, can be reached at john.rich@mclane.com or 603-628-1438.