They used to say that March comes in like a lion and leaves like a lamb. Not March of 2020. Thirty days ago, little did we know the month we’d be enduring. Two new laws have been enacted to calm the struggling economy in response to the pandemic of the Coronavirus, helping both employers and employees with a safety net of benefits. We will go over the specific items that relate to pension and payroll issues explained below.

The Families First Coronavirus Response Act, signed on March 18, 2020 and scheduled to take effect on April 1, 2020 provides benefits for employees that need to take time off to care for themselves or family members due to COVID-19, without worry of a loss of income. The law requires employers with fewer than 500 employees to offer fully paid sick leave for up to 10 days, if:
1) The employee is subject to a federal, state or local quarantine or isolation order related to COVID-19.
2) The employee has been advised by a healthcare provider to self-quarantine due to COVID-19.
3) The employee is experiencing symptoms of COVID-19 and is seeking a medical diagnosis.

Employers must provide paid leave at 100% of the employee’s regular rate of pay, up to $511 per day and $5,110 in total. In other situations, employers must provide paid sick leave at two-thirds of the employee’s regular rate of pay, up to $200 per day and $2,000 total, if:
1) The employee is caring for an individual who
a. Is subject to a federal, state, or local quarantine or isolation order related
to COVID-19, or
b. Has been advised by a healthcare provider to self-quarantine due to
COVID-19.

2) The employee is caring for a child whose school or childcare provider has been closed or is otherwise unavailable due to COVID-19 precautions.

3) The employee is experiencing any other symptoms similar condition specified by the Secretary of Health and Human Services in consultation with the Secretary of the Treasury and the Secretary of Labor.

The law further expanded the Family Medical Leave Act to provide for up to 12 weeks of job-protected leave, 10 weeks of which would be paid, for any employee unable to work or telework because they have to care for a child under the age of 18 whose school or care provider is made unavailable for reasons related to COVID-19. This expansion requires the employee to be paid at two-thirds regular pay, up to $200 per day and $10,000 total, after the first 10 days. Those first 10 days are still unpaid, although they may be paid through accrued vacation, personal or sick leave.

The law provides refundable payroll tax credits to reimburse the employer for these costs. The tax credit applies to wages the employer pays through December 31, 2020.

Keep in mind, unless your Plan Document specifically provides otherwise, paid sick leave is eligible for 401(k) contributions, pension credits, matching and other similar employer contributions.

The Coronavirus, Aid, Relief and Economic Security (CARES) Act, signed into law on March 27, 2020, made sweeping changes to pension and 401(k) plans as well:

1) Coronavirus Distributions – The CARES Act waives the 10% early withdrawal penalty tax on withdrawals up to $100,000 from a retirement plan or IRA for any individual diagnosed with COVID-19, whose spouse or dependent is diagnosed, or is experiencing financial difficulties as a result of being quarantined, furloughed, laid off, having hours reduced or unable to work due to lack of child care due to COVID-19. Those individuals are permitted to pay tax on the income from the distribution over a three-year period, and they may repay the distribution to the plan over the next three years. The repayments would not be subject to the individual retirement plan contributions limits, and the individual can apply for a tax deduction for the taxes they will have paid as a result of the premature distribution.

2) Plan Loans – The CARES Act increases the current retirement plan loan limits to the lesser of $100,000 or 100% of the participant’s vested interest, and any existing loans with a repayment due date of March 27, 2020 through the end of the year can delay their loan repayments for up to one year.

3) Required Minimum Distributions – The Act waives required minimum distributions (RMDs) for defined contribution plans for the 2020 calendar year. Note, this is only for 401(k) 403(b), 457(b), profit sharing or money purchase pension plans. Defined Benefit Plans, including Cash Balance plans, are not exempt from the requirement. Although not considered a corporate plan, IRA holders may waive the RMD for 2020 as well.

4) Single Employer Defined Benefit Funding Rules – in general, pension contributions are due by September 15th, or 8 ½ months after the end of the plan year for minimum funding purposes. The CARES Act delays that required due date until January 1, 2021.

5) Expansion of the Department of Labor – as somewhat of a catch-all provision, the Act expands the DOL authority to change or postpone certain deadlines under ERISA. While not specific, this would generally allow limited changes without legislative acts in the future.

As regulations and further legislation is passed, EJReynolds will keep you informed and up to date. We are taking all necessary precautions and monitoring the situations, but we are here for you and want to assure you we will continue to provide the level of service you have come to expect. We hope you, your families and circle of friends are and remain healthy. We will get through this, one day at a time.

As part of the Further Consolidated Appropriations Act late last year, the SECURE Act greatly increased the tax credit available for “small employers” who adopt a new retirement plan. Previously, a tax credit of 50% of eligible plan-related expenses was available for the first 3 years, with a maximum credit of $500 per year. Under the new law, the maximum credit is increased to $5,000 per year with certain limitations.

In addition, the new law added a $500 credit for 3 years for new and existing plans that add an eligible automatic enrollment feature.

Which employers are eligible for the tax credit?

There are several conditions that must be satisfied in order to be eligible for the credit:

• The employer must have had no more than 100 employees in the prior year with compensation of $5,000 or more (employees who earned less than $5,000 are not considered for this purpose).
• The new retirement plan must cover at least one employee who is non-highly compensated (NHCE). Generally, an NHCE is a non-owner with compensation in the prior year that is less than the applicable threshold ($125,000 in 2019). In other words, the credit is not available for “owner-only” or “Solo 401(k)” plans.
• The employer cannot have maintained a retirement plan covering substantially the same employees in any of the previous 3 years (for this purpose, a retirement plan includes the same types of plans described below).

Which types of retirement plans qualify?

• 401(k) plans
• Any other type of qualified plan, including profit sharing plans, money purchase pension plans, traditional defined benefit plans, and cash balance plans
• 403(b) plans
• SEP IRAs
• SIMPLE IRAs

What types of expenses qualify for the start-up credit?

Expenses paid by the employer in connection with establishing the plan (e.g. plan document fees), administering the plan, or providing related employee education.

How is the start-up tax credit calculated?

For taxable years beginning after December 31, 2019, the maximum credit is equal to the lesser of (1) $5,000, or (2) $250 times the number of NHCE covered under the plan. The new law also added a minimum credit of $500.

For example, assume a plan covers the owners of a business and 10 NHCEs. Additionally, assume that plan-related expenses for the first plan year were $6,000. The available tax credit would be $2,500 for that year (10 NHCEs x $250). The credit available for the next 2 years would depend on the number of NHCEs covered and actual plan-related expenses.

If the employer adopts a 401(k) plan and a cash balance plan, is the start-up credit available for both plans?

Yes, however, the plans are aggregated for purposes of determining the maximum credit. In other words, expenses paid for both plans can be considered, but the credit is determined based on the expenses paid for the plans on a combined basis.

What are the requirements for the automatic enrollment tax credit?

Small employers (as described above) who add an eligible automatic contribution feature (EACA) to a new OR existing plan are eligible for a $500 tax credit for 3 years.  This credit is available without regard to plan expenses and is effective for plan years beginning after December 31, 2019.

How are the credits claimed?

IRS Form 8881 is used to claim both tax credits. They are reported differently depending upon structure of employer (i.e. sole proprietorship, partnership, corporation, etc.).

How can I learn more?

If you are currently working with a client to adopt a retirement plan for their employees or if you would like to learn more about this important tax incentive, please contact us.

The SECURE Act, passed as part of Further Consolidated Appropriations Act late last year, increased the age for required minimum distributions (RMDs) from age 70 ½ to age 72. The new rule applies to RMDs required to be made after December 31, 2019 for individuals who attain age 70 ½ after that date.

Under the old rules, RMDs were required to begin no later than April 1st following the later of the calendar in which the participant attained age 70 ½ or retired. RMDs must have commenced, however, for “5-percent” owners no later than April 1st following the calendar year in which the participant attained age 70 ½ even if the owner was still working. Under the new rules, the age requirement was increased to 72 without making changes to the other requirements.

If a participant turned 70 ½ in 2019, do they still have to take their 2019 RMD by April 1, 2020?

Yes. As mentioned above, the new rules only apply to individuals who attain age 70 ½ after December 31, 2019. The old rules continue to apply to any individuals who were 70 ½ on or before that date. This also means that if RMDs have commenced, they cannot be suspended until the participant attains age 72.

Does the plan have to be amended before using the new rules?

No. A plan can implement the new rules operationally before adopting the amendment. Currently, the deadline for adopting the required amendment is December 31, 2022 for calendar year plans.

Do the same rules apply to IRAs?

Not exactly. Under the old rules, the requirement for IRAs was that RMDs must have commenced no later than April 1st of the calendar year following the calendar year in which the individual IRA owner attained age 70 ½ . There was (and is) no exception based on whether the individual was actively employed. Under the new rules, the age was increased to 72 for individuals who attain age 70 ½ after December 31, 2019.

Were there other changes made with respect to IRAs?

Yes. Previously, individuals could not make deductible contributions to traditional IRAs if they were age 70 ½ or older. The new law removed this restriction entirely, rather than increasing the age to 72. As a result, for taxable years beginning after December 31, 2019, there is no longer an age restriction for making deductible IRA contributions.

Were there changes made to death benefits payable to beneficiaries?
Yes. Generally, the life-time distribution option (often referred to as a “stretch IRA”) was eliminated for beneficiaries who are not considered to be “eligible designated beneficiaries”. Death benefits to these beneficiaries generally must be paid the end of the 10th calendar year following the year the participant or IRA owner died.

For this purpose, “eligible designated beneficiaries” include the decedent’s spouse, minor children, disabled or chronically ill individuals, and other beneficiaries who are less than 10 years younger than the deceased participant or IRA owner.

Note: The new rules only apply if the participant (or IRA owner) dies after December 31, 2019.

How can I learn more about these rules?

The rules regarding RMDs are quite complex, and the consequences of failing to issue RMDs in a timely manner are severe. Please contact your EJReynolds Consultant to learn more about these rules.

Contributing to your employer’s 401(k) plan is a great way to save for retirement, but the type of contributions you choose can have a huge impact on your finances both for now and for the future. The issue is, most employees don’t understand the differences between the Pre-tax 401(k) and the Roth 401(k), or the impact such a decision will have on their later years.

There are several similarities.

Pre-tax and Roth 401(k) contributions are both deducted from payroll, so they are contributed throughout the year, rather than in one lump-sum. Both are invested for a long period of time, and the earnings are not taxable to you while they are invested. They have the same annual contribution limits (currently $19,500 a year for workers under 50 and $26,000 a year for those 50 and over).

This is an annual, individual limit, meaning the limit applies to the total of all contributions, no matter if pre-tax or Roth contributions, or a combination of the two. Both may have distribution options available to you while still employed, depending on the plan design, and both may receive a match from the employer, again, depending on the plan design.

The main difference between Pre-tax and Roth 401(k) contributions is the timing of the taxation – when tax is paid.

A Pre-tax 401(k) contribution is deducted before federal withholding taxes are calculated. They are still subject to FICA and Medicare taxes, but reduce your current taxable income. This means that on a paycheck of $1,000 with a 10% deferral, you are taxed on $900. Over the course of a year, this can result in a large tax savings if you are in a higher tax bracket. When you take those funds out later in life, the money you distribute is taxed as standard income.

A Roth 401(k) plan is an after-tax contribution. Using the same example above of a paycheck of $1,000, your withholding taxes are calculated on $1,000. When you access those funds at retirement, both the contributions and the earnings thereon are distributed completely tax-free, assuming certain criteria are met. You must be at least age 59 ½, and it must be at least five years from your first Roth 401(k) contribution in order to distribute tax-free. If you distribute the funds prior to the criteria being met, the income on those funds is taxable and subject to the 10% excise tax on premature distributions. Unlike Roth IRAs, Roth 401(k) accounts are subject to the minimum distribution requirements. They must be rolled out of the plan and over to a Roth IRA by the time you reach age 72, or terminate employment, whichever is later, so the minimum distribution rules do not apply. For owners or certain members of their family, the account must be rolled out prior to reaching age 72, even if you continue to work.

Which Plan is right for you?

Whether you contribute to a Pre-tax or Roth 401(k) account depends on your personal circumstances. Here are a few things to consider helping you make the right choice.

• Your age and the age you plan on retiring; a large part of the decision is to determine how long the funds will be invested and will the bulk of the money at retirement age be your own contributions or the earnings on those contributions. It may make sense to pay the tax on the contributions now in order to take out the earnings tax-free
• Your ability to make contributions; if the tax savings allows you to make a greater contribution now, the pre-tax method may make more sense for you. At a tax bracket of 15%, a Pre-tax deduction of $100 feels like $85, but a Roth deduction feels like $100. If you would make the same contribution either way, then paying the taxes on the contributions now so you don’t pay taxes on future distributions may work out better for you in retirement.
• Your current and expected future income; if you are just starting out in a field that will pay a much higher salary in the future, the current deduction may not make a difference to you now and will start the five year clock running, while you may want the deduction in the future.
• Your expected tax bracket when you retire; if the tax rate stays the same, then the net effect is the same either way. If your tax rate changes and you would hope to be in a lower tax bracket in retirement, the Pre-tax account gives you the benefit of the reduction of income now while you pay less in taxes in retirement.
• Your expected financial needs and other sources of income when you retire; keep in mind, any employer contributions (and the earnings thereon) will always be taxable to you when you receive them. Your tax professional may suggest taking all your non-taxable income first, or a combination of both in order to minimize your taxes based on your other income or financial needs.

In Conclusion:

The decision to make Pre-tax or Roth 401(k) contributions can be especially complex and vary from individual to individual. The decision should essentially be based on expectation of future income, needs and projected taxes. Don’t let the complexity keep you from contributing at all. The beauty of the situation is that nothing is carved in stone forever, your elections can be changed at least annually, depending on the rules of the plan. The most important thing is to start making contributions as soon as possible, as delays in contributions have a greater opportunity cost than any tax ramifications.

Feel free to ask your plan’s administrator, investment advisor or your own tax consultant to see what would be most beneficial to you.

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The 401(k) plan has quickly become the preferred retirement plan offered by most businesses today. Under the Safe Harbor Plan Design, plan sponsors can eliminate the 401(k) and 401(m) discrimination tests by providing certain minimum contributions: either by matching an individual employee’s contribution or making contributions to all eligible employees.  The SECURE Act, passed as part of Further Consolidated Appropriations Act late last year, made significant changes to rules related to Safe Harbor Non-elective contributions (the contributions to all employees approach), generally reducing the administrative burden and providing employers with greater flexibility.  Although these changes are effective for plan years beginning after December 31, 2019, the IRS has not provided guidance or updated the applicable regulations. As a result, plan sponsors may want to wait until guidance has been issued before making certain changes to their plans.

 

Caution: The law changes discussed below have no impact on plans that provide for Safe Harbor Matching contributions.  There were no changes made to the rules applicable for these plans.

What changes were made?

• The annual participant notice requirement was eliminated for plans that provide for Safe Harbor Non-elective contributions.
• Employers now have the option of adding a 3% Safe Harbor Non-elective contribution (used to satisfy the ADP test) up to 30 days before year-end without providing the advance “maybe” or follow-up notice.
• Additionally, employers now have the option of adding a 4% Safe Harbor Non-elective contribution after the 30-day deadline but on or before the deadline for correcting ADP testing failures (the last day of the following plan year) so that the ADP test is deemed satisfied.

If the plan provides for additional matching contributions intended to satisfy the ACP Safe Harbor requirements, do they still need to provide the annual Safe Harbor Notice?

Yes, if the plan is designed so that any matching contributions (fixed or discretionary) will satisfy the requirements to be exempt from the ACP test, the Safe Harbor notice would still be required.

If an employer makes a permissible change to an existing Safe Harbor Non-elective contribution plan mid-year, do they need to provide an updated Safe Harbor notice?

It does not appear so, given the plan doesn’t also provide for matching contributions intended to satisfy the ACP Safe Harbor requirements. Presumably, this also means that participants will not be required to be provided the opportunity to make changes to their deferral elections prior to the change, but the IRS has not yet provided updated guidance on this point.

Can an employer remove their current Safe Harbor Non-elective provision and take a “wait and see” approach?

It appears so, absent future IRS guidance to the contrary. While the new law specifically prohibits a plan that provided for Safe Harbor matching contributions at any time during the plan year from adopting a Safe Harbor Non-elective contribution retroactively for that same year, it makes no such distinction with respect to plans that provided Safe Harbor Non-elective contributions for a portion of the plan year.

Keep in mind, the plan would still need to meet the regulatory requirements to reduce or suspend the Safe Harbor Non-elective contribution mid-year, and again, the IRS has not yet updated the regulations. Apparently, the pre-plan year notice (regarding the employer’s right to reserve the ability to reduce or suspend Safe Harbor contributions mid-year) and the 30-day advance (mid-year) notice would not be required since the general notice requirement was eliminated. Participants will no longer need the option to make changes to their deferral elections prior to the change.  The plan sponsor would still need to make the Safe Harbor Non-elective contribution through the effective date of the amendment.  We anticipate additional guidance from the IRS on this issue. Hopefully, it will come sooner rather than later.

How does the new 4% Safe Harbor Non-elective contribution work?

Under the new rules a traditional 401(k) can be amended after the 30-day deadline but any time on or before the last day of the following plan year to provides for a 4% Safe Harbor Non-elective contribution so that the ADP test is deemed to be satisfied. Essentially, this change allows any traditional 401(k) plan to be a “maybe” Safe Harbor plan, without any participant notice requirements. This affords plan sponsors much greater flexibility, giving them the ability to amend the plan after the ADP test has been performed so they can weigh the cost of the 4% Safe Harbor contribution against the refunds that would otherwise be issued to the plan’s highly compensated employees.

Does a plan that adopts a 4% Safe Harbor Non-elective contribution retroactively for the prior year have to make a 4% Safe Harbor Non-elective contribution for the current year?

No, the Safe Harbor contribution would only be required for the prior year. The employer could still take a “wait and see” approach for the current year or amend the plan to the 3% Safe Harbor Non-elective contribution if amended before 30 days prior to the end of the current Plan Year. If the employer wants to change from the Safe Harbor Non-elective contribution to the Safe Harbor Match, they must wait till the beginning of the next plan year.

Were there any other changes to Safe Harbor plans?

Yes. Automatic Enrollment plans that use the Qualified Automatic Contribution Arrangement (QACA) Match have changed as well. The SECURE Act increased the maximum default deferral rate from 10% to 15% for QACA Safe Harbor plans, and, changed the cap on the maximum auto-escalation percentage from 10% to 15%.

How can I learn more?

If you would like to learn more about the new rules, please contact your EJReynolds’ Consultant.

Since it’s time for most 401(k) plans to perform annual nondiscrimination testing, it makes sense to review the requirements for the Average Deferral Percentage/Average Contribution Percentage (ADP/ACP) tests and the options for plans that fail one or both tests.

Note: Plans that provide for safe harbor matching or safe harbor nonelective contributions are generally deemed to satisfy both tests.

What are the ADP and ACP tests?

The ADP/ACP tests are performed to demonstrate that the plan does not discriminate in favor of highly compensated employees (HCEs) with respect to 401(k)/Roth deferrals and employer matching contributions. The ADP test compares the average deferral rates of the HCEs to that of the non-highly compensated employees (NHCEs); the ACP test does the same for matching contributions. Plans may use either the current year or prior year average of the NHCEs for this purpose; however, the method selected must be specified in the plan document.

In general, a plan passes these tests if the average of the HCEs does not exceed the lesser of (1) the NHCE average plus 2%, or (2) 2 times the average of the NHCEs.

Do catch-up contributions get counted in the ADP test?

No. If a participant makes catch-up contributions by either exceeding the statutory limit ($19,000 for 2019/$19,500 for 2020) or a plan-imposed limit, the amounts are excluded from the ADP test.

What happens if a plan fails these tests?

The plan sponsor must take corrective actions which typically involves issuing corrective distributions to certain HCEs. Although this is the most common way to correct failures, many plans also allow for the employer to make an additional contribution to the plan on behalf of certain NHCEs. These amounts, known as QNECs (Qualified Nonelective Contributions) and QMACs (Qualified Matching Contributions), must be 100% vested and are subject to certain distribution restrictions.

Note: It may be possible to correct or reduce the impact of an ADP testing failure by “reclassifying” deferrals of eligible HCEs as catch-up contributions. When this occurs, corrective distributions are reduced by the reclassified amounts to the extent they do not exceed the catch-up limit ($6,000 for 2019, $6,500 for 2020).

Is there a deadline for correcting failures?

Yes. Generally, corrective distributions must be issued within 2 ½ months following the close of the plan year to avoid a 10% excise tax imposed on the excess amounts. Plan sponsors of 401(k) plans that include an “eligible automatic contribution arrangement” have up to 6 months to issue corrective distributions without incurring excise taxes.

Regardless of the method chosen (i.e. corrective distributions or QNEC/QMACs), corrections must be made no later than the last day of the plan year following the plan year in which the testing failure occurred.

What happens if a plan doesn’t correct the failure in a timely manner?

In short, the qualified status of the plan may be jeopardized, and “late” corrections are much costlier for the employer. The IRS provides two methods for making late corrections under its Employee Plans Compliance Resolution System (EPCRS). Under the first option, the employer must make a QNEC on behalf of the NHCEs. This method is often more expensive than making a “normal” QNEC because the contribution must be made on behalf of all eligible NHCEs. Under the second option (the “one-to-one” correction method), the plan sponsor must issue corrective distributions and must make a QNEC in an amount equal to the corrective distributions. The QNEC is then allocated to the NHCEs.

Can a plan do anything to prevent failures?

Yes. As mentioned above, plans that provide for either safe harbor matching or safe harbor nonelective are generally deemed to pass these required tests. Additionally, there are other options available that may help reduce or eliminate ADP/ACP testing failures such as adding automatic enrollment, making a top-paid group election, or adding a plan-imposed limit for HCEs.

If you would like to learn more about these options or if you have any questions, please contact us.

Several tests must be performed each year to demonstrate that 401(k) plans do not discriminate in favor of highly compensated employees and that contributions do not exceed certain limitations. Since many 401(k) plans are on a calendar year basis, your clients are probably working on these tests now or in the next few weeks. It is probably a good idea to review some of the most common tests, including:

• ADP/ACP Tests
• Annual Deferral Limit
• Annual Additions Limit
• Coverage Test
• Top Heavy Determination

Highly Compensated and Key Employees

For purposes of all these tests, it is important to understand two basic definitions.

• Highly Compensated Employees (HCEs) are employees who (1) own more than 5% of the company*, or (2) earned compensation in excess of an annual dollar amount in the prior year (for example, earning over $180,000 in 2018 makes for an HCE in 2019, while earning over $125,000 in 2019 makes for an HCE in 2020). Some plans limit the number of employees considered to be highly compensated by making a “top paid group” election. Whether this is beneficial for a given plan depends on several factors including the demographics of the workforce.
• Key Employees are employees who at any time during the plan year (1) owned more than 5% of the company*, (2) owned more than 1% of the company* and had compensation in excess of $150,000, or (3) were officers of the company with compensation greater than a certain dollar amount ($180,000 for 2019, $185,000 for 2020).

*Stock attribution rules apply when determining ownership. This means direct relatives of the owner(s) are generally considered to “own” the same percentage for purposes of determining highly compensated and key employee status.

ADP/ACP Tests

The Average Deferral Percentage/Average Contribution Percentage (ADP/ACP) tests are performed to demonstrate that the plan does not discriminate in favor of highly compensated employees with respect to 401(k)/Roth deferrals and employer matching contributions. If the plan fails one or both tests, corrective actions must be taken which often includes issuing corrective distributions, generally by March 15^th of the following year. Note: Plans that provide for safe harbor matching or safe harbor nonelective contributions are generally deemed to satisfy both tests. Eligible Automatic Contribution Arrangements have until June 30^th to make these corrections.

Annual Deferral Limit

The annual deferral limit ($19,000 for 2019 plus $6,000 for participants age 50 or older, or $19,500 and $6,500 respectively for 2020) is a limit placed on the amount a participant may contribute through pre-tax deferrals and/or Roth contributions. This combined limit is always measured on a calendar year basis and applies to the individual. As a result, the participant has the responsibility of informing the plan administrator if they made excess deferrals and participated in an unrelated employer’s plan. The excess amount, along with related earnings, must be distributed no later than April 15th of the following year. If this deadline is not met the participant will be taxed on the excess amount in both the year of the deferral and the year of distribution.

Annual Additions Limit

Participants are also subject to an overall contribution limit known as the “415 limit” (the lesser of 100% of gross compensation or $56,000 for 2019, $57,000 for 2020). This limit generally includes all contributions made to the plan for a plan year; however, it does not include rollover contributions or catch-up contributions. If the limit is exceeded, corrective actions must be taken which normally involves issuing corrective distributions or forfeiting the excess amounts, adjusted for related earnings.

Coverage Test

The coverage test is performed to demonstrate that the plan meets the minimum coverage standards required by law. This test must be run separately for each contribution type or component of the plan (e.g. 401(k), match, and profit sharing). In general, the test is satisfied if the plan covers at least 70% of all the employees who have met the minimum statutory age and service requirements (i.e. age 21 and 1 year of service). In the event of a failure, the employer typically must make an additional contribution to the plan on behalf of non-highly compensated employees.

Top Heavy Determination

In general, a 401(k) plan is top heavy when more than 60% of plan assets are attributable to key employees as of the last day of the prior plan year. Top heavy plans are subject certain minimum contribution and vesting requirements.

Other Required Tests

This is a broad overview of the general testing requirements for 401(k) plans and is not meant to be comprehensive. Other tests may be required depending upon a plan’s design and its features. For example, plans that exclude certain types of compensation, such as commissions, or allocate profit sharing contributions to different groups of participants are subject to additional testing requirements.

To learn more about the testing requirements for your specific plan, please contact us.

On December 20, 2019, President Trump signed into law the Setting Every Community Up for Retirement Enhancement Act of 2019 (the SECURE Act) as part of a compromise bill to avoid a potential government shutdown. The SECURE Act contains many changes to retirement savings accounts in general. Although IRS guidelines have not yet been established, plan sponsors may take advantage of some of the changes in 2020. Following is a summary of new rules that current and potential 401(k) plan sponsors need to know:

• For Existing Plans
  • Safe Harbor Plans Have New Flexibility – The IRS requires that 401(k) plans conduct and pass compliance testing to ensure a plan does not discriminate against Non-Highly Compensated Employees. However, a plan sponsor can satisfy the testing requirements by implementing a Safe Harbor 401(k) Plan. Under the SECURE act, the following Safe Harbor plan designs have been given more flexibility:

• • • • Safe Harbor Nonelective (“SHNEC”): With this design, a plan sponsor can satisfy discrimination testing by making an employer contribution of at least 3% of compensation to all eligible employees. Under prior law, a sponsor can adopt a SHNEC 401(k) plan provided a notice was distributed to plan participants 30 days before the beginning of the plan year.  The SECURE Act eliminates the notice requirement in general and permits a plan sponsor to decide to have a nonelective safe harbor plan mid-year, provided they decide prior to 30 days before the end of the plan year. They may decide even later than that, potentially after the end of the plan year, provided they make a safe harbor contribution of at least 4% of compensation.  The notice requirement remains the same for plans that use the Safe Harbor Match design.

• • • • Safe Harbor Qualified Automatic Contribution Arrangement: Under this plan design, an eligible employee is automatically enrolled in the plan with a pre-set deferral deduction that automatically escalates the employee’s contributions each year. The cap on the automatic escalation will increase from 10% to 15%.

• • Part-Time Employees Must Be Covered in All 401(k) Plans – Currently, plans may exclude employees who don’t complete at least 1,000 hours of service in a 12-month eligibility computation period. This allowed a plan sponsor to exclude a part-time employee from the plan, if they worked less than 1,000 hours in a year. In 2021, the SECURE Act, will require that part-time employees who complete more than 500 hours of service in three consecutive eligibility years be permitted to contribute to 401(k) plans. They will not be required to receive employer contributions and will be excluded from non-discrimination testing but must be given the opportunity to contribute.

• • For Plans that have participant loans – Effective immediately, 401(k) plans are not permitted to make plan loans available by credit card. Existing programs using this form of payment must be discontinued.

• • Mandatory Distribution Date – Under current law, an owner or related employee, or any terminated participant must begin taking minimum distributions by April 1^st after turning age 70 ½, or face penalties of a 50% excise tax. The SECURE Act increases that age to age 72. This applies to individuals attaining age 70 ½ after December 31, 2019. This means that if you turn 70 in 2019 but were born on or before June 30, 1949, the age is still 70 ½, and you must take a distribution by April 1, 2020. However, anyone born July 1, 1949 or later can wait until April 1, 2023 before taking their first distribution.

• For Employers Considering Adopting a Plan
  • Higher Tax Credits May Be Available – The tax credit for small employers who start new retirement plans increases from $500 per year to as much as $5,000 per year for three years. There is also a new $500/year tax credit for up to three years for small employers that adopt new plans that include automatic enrollment. Small employers are considered those that had no more than 100 employees who earned at least $5,000 in the preceding year.

• • More Time to Adopt – Under current law, qualified plans must be adopted by the last day of the year for employers to make deductible contributions for that year. For Tax Years beginning in 2020, qualified plans can be adopted after the end of the tax year and up until the tax return due date. This will provide much needed flexibility to employers considering qualified plans but will not permit employees to make retroactive 401(k) contributions.

• • New Options under Multiple Employer Plans – The SECURE Act will make open multiple employer plans, called Pooled Employer Plans, or PEPs, available as an option beginning in 2021. These will be professionally managed plans that permit unrelated employers to participate.  Adopting employers will be relieved of much (but not all) of their fiduciary responsibilities. PEPs are a major step towards increasing small employer plan coverage, and they will be the subject of a separate upcoming post.

There are several other sections, including a tenfold increase in penalties for failure to file Form 5500 and certain other returns timely and easing the in-service distribution rules for the birth or adoption of a child that we will discuss in greater detail in future articles. For now, contact your EJReynolds’ Plan Consultant with any specific questions as to how the SECURE Act may affect your plan.

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The Bipartisan Budget Act of 2018 liberalized the rules applicable for hardship distributions in 401(k) plans. These changes impact the “safe harbor” hardship distribution rules (the ones most commonly used in plans) and will generally become effective for plan years beginning after December 31, 2018.

To assist plan sponsors with implementing these changes, the IRS issued proposed regulations in November 2018, and after months of public comment, issued final regulations on September 23, 2019.

What changed?

In general, the new rules make it easier for participants to qualify for hardship distributions, expand the sources available for such distributions, and remove the 6-month deferral suspension period following a hardship distribution. They also make it easier on plan sponsors by simplifying the substantiation process.

What qualifies for a hardship distribution under the new rules?

Under the existing rules, hardship distributions may only be made from a participant’s 401(k) and/or Roth account for the following:

1. Unreimbursed, tax-deductible medical expenses (without regard to the deduction limitation);
2. Certain costs associated with the purchase of a participant’s principal residence;
3. Post-secondary educational expenses for a participant, his or her spouse, children or dependents (for the next 12 months);
4. Funeral expenses for a participant’s spouse, parents, children or dependents;
5. Expenses necessary to repair damage to a participant’s principal residence incurred as a result of a casualty (tax-deductible loss); and
6. Amounts necessary to prevent foreclosure or eviction from a participant’s principal residence.

Under the new rules, the conditions under which a participant can obtain a hardship distribution have been expanded to include the following:

1. Expenses incurred as a result of a natural disaster in a federally-declared disaster area; and
2. Medical, post-secondary educational, and funeral expenses for a participant’s primary beneficiary.

Additionally, the proposed regulations clarify that if a participant’s principal residence is damaged as a result of a casualty, such as a fire or windstorm, it is not necessary for the participant’s home to be in a federally-declared disaster area. When the income tax law changed, it impacted the hardship distribution rules since the 401(k) regulations (current) require the casualty loss be tax-deductible.

What contribution types are available for hardship distributions?

Under the existing rules, hardship distributions can only be made from a participant’s 401(k) and/or Roth account, excluding any related earnings. In other words, a participant can only withdraw his or her contributions.

Under the new rules, the amount available for hardship distributions will include related earnings. In addition, Plan Sponsors may allow participants to take hardship distributions from safe harbor account balances as well as QNEC or QMAC account balances, if provided for under the terms of the plan document.

Note: Some plans permit hardship distributions that fell outside of the definition of “Safe Harbor” hardship distributions, which allowed distributions from other sources, such as profit sharing or matching account balances. These contribution sources are not “restricted” from taking in-service distributions prior to attainment of age 59 ½ (like 401(k), Roth, safe harbor, QNEC and QMAC account balances), so these distribution rules have not changed; it is still permissible to allow for hardship distributions from these accounts, if provided for under the terms of the plan document. 

How much can a participant receive as a hardship distribution?

The amount cannot exceed the lesser of (1) a participant’s financial need (grossed up for applicable income taxes), or (2) his or her available account balance. This rule has not changed, although the amount available has been expanded to include related earnings and additional contribution sources.

What substantiation is required for hardship distributions?

The proposed regulations provide new standards for determining whether a hardship distribution is deemed necessary to meet a participant’s financial need.

• The participant must have obtained all other available in-service distributions under any plans maintained by the employer; and
• The participant must represent that he or she does not have enough liquid assets to satisfy the financial need.

Currently, a participant is generally required to take a loan from the plan (if available) prior to receiving a hardship distribution, and the determination of whether a hardship distribution is deemed necessary to meet an “immediate and heavy” financial need is based on all relevant facts and circumstances.

The new standards remove the plan loan requirement and simplify the process for plan sponsors as they can rely on the participant’s representation, absent actual knowledge to the contrary.

How will the new rules for the 6-month deferral suspension apply? 

Under existing rules, plans are required to suspend participant deferrals for a period of 6 months following a hardship distribution. Under the new rules, plans will no longer be permitted to suspend participant deferrals.

Although there was flexibility in implementing these changes for 2019, for hardship distributions made on or after January 1, 2020, plans will be prohibited from imposing the 6-month suspension period.

When are these changes effective?

Generally, these changes are effective for plan years beginning after December 31, 2018.  Again, there are special rules that apply for certain purposes such as the 6-month suspension period.

Will these changes require a plan amendment?

Yes, these changes will require a plan amendment. It appears that plan sponsors will be able to implement the new rules prior to amending their plan, though. The IRS has made it clear that the plan need not be amended by the end of the 2019 Plan Year to remain in compliance, provided the amendment is adopted by the end of the 2020 Plan Year. For Plan Sponsors on the EJReynolds pre-approved (prototype) documents, we are in the process of preparing those amendments and expect to have those out by the end of second quarter of 2020.

How can I learn more about these requirements?

Please contact the Plan Consultants at EJReynolds to learn more about how these rules impact your plan and participants!

 

Trust your retirement plan development as well as your personal data with the retirement experts.

We often hear of data breaches with major corporations, even some whose main function is to protect your identity. How can you be sure your data is safe? EJReynolds would like to share with you the measures we take to safeguard the information we collect. Our cutting-edge cybersecurity commitment gives you the comfort and peace of mind that your information is always safe and secure.

How does EJReynolds handle and protect your personal information?

Our state-of-the-art cybersecurity program stems from our core principles of trust, integrity and ethics. We collect only the information necessary to enable us to consistently deliver the best products and services for our clients. We have implemented security standards and processes to ensure that access to client information is limited to your EJReynolds Plan Consultant.

Our Best Practice Cybersecurity Protocols Include:

–    Secure File Sharing with Citrix ShareFile^©

EJReynolds’ secure file sharing link provides a safe and secure way to transmit sensitive information online. This assures that files are sent and received with bank-level encryption. You will be required to register through ShareFile’s one-time enrollment process to send and receive files securely.

–    Networks Are Secured with State-Of-The-Art Advanced Firewall Security

EJReynolds’ Firewall Security system protects our computer network from being attacked online by hackers, worms, viruses, etc. It is designed to stop unauthorized access to the EJReynolds computer systems.

–    Internal Networks Are Completely Protected with Industry Leading Threat Protection

Advanced Threat Protection (ATP) helps to protect our organization from malicious attacks by:

• Scanning email attachments for malware
• Scanning web addresses (URLs) in email messages and office documents
• Identifying and blocking malicious files in online libraries
• Checking email messages for unauthorized spoofing
• Detecting attempts to impersonate users or organization’s custom domains

  –    Two-factor Authentication

EJReynolds implemented programs that require our Plan Consultants to use a two-factor authentication to protect our clients’ sensitive information. Once an EJReynolds employee logs into an account and enters their password, they receive a code via text or email at a pre-determined address. This code must be entered in a certain amount of time in order to access the account. This helps to ensure that any unauthorized attempts at drafts, distribution requests or other identity theft tricks are halted immediately.

–     Ongoing Training

Along with monthly training on the latest rules and regulations in the retirement plan area, each EJReynolds employee is required to complete a Phish Threat Security Awareness Training. Since the hackers are constantly changing their game, so must our defenses.

Our commitment to your security is just one more reason to trust your retirement planning to EJReynolds.