403(B) PLAN AMENDMENT DEADLINE - June 30, 2020
SECURE Act and Other Legislation Highlights

As we have been saying for several years, a sponsor of a 403(b) Plan that has not been amended to incorporate changes in the 403(b) rules that were effective after 2009 and before 2019, has until June 30, 2020 to amend and restate the 403(b) Plan to incorporate those changes. Recent IRS guidance has caused confusion about this deadline because the recent guidance provides that a sponsor of a 403(b) Plan has until the end of 2021 to amend the 403(b) Plan to incorporate changes in the 403(b) rules that are effective after 2018. This later deadline does not apply to the changes in the 403(b) rules that were effective before 2019. Also, discretionary amendments (design changes that are not required by any change to the 403(b) rules) still must be adopted by the last day of the Plan year for which they are effective.

Action Recommended: If your 403(b) Plan has not been updated for several years, contact us immediately so we can determine if changes are required and prepare an updated document that can be adopted before the June 30, 2020 deadline. If your 403(b) Plan is up to date through 2018, we should schedule a time for a call to discuss the changes that are required because of new 403(b) rules effective after 2018, and any other discretionary changes you may want to make to the 403(b) Plan.

SECURE Act and Other Legislation That Impact Benefit Programs

By now you likely have been deluged with summaries of the Setting Every Community Up for Retirement Enhancement Act of 2019 (the “SECURE Act”), which was included in the government funding legislation signed into law at the end of 2019. This legislation includes many provisions requiring or permitting changes to retirement, welfare and fringe benefit plans. In addition to briefly summarizing certain applicable provisions, the following indicates whether the provision requires a change to the plan documents, requires a change to the plan administration, or permits (but does not require) a change to the documents or administration.

UBIT for Qualified Transportation Fringe Benefits is Eliminated Retroactively.

The 2017 Tax Act contained a strange twist whereby tax-exempt entities were required to pay unrelated business income tax (or UBIT) on the value of certain transportation fringe benefit plans after December 31, 2017. For example, if a tax-exempt entity paid for its employees’ parking and did not tax the employees for that benefit (or allowed the employees to pay for the parking on a pre-tax basis), the tax-exempt entity was required to pay a 21% tax on the cost of the parking. Fortunately, the new legislation revokes this “parking tax” provision of the 2017 Tax Act retroactive to its original effective date.

Changes? Affected tax-exempt entities should file for a refund of UBIT paid. Fringe benefit plans that were eliminated or revised to address or avoid the UBIT now may be reinstated, if desired.

403(b) Plan with Custodial Accounts Now Can Be Terminated.

Pending the issuance of guidance from the Treasury Department (which the SECURE Act requires by July 2020), a 403(b) Plan that holds assets in custodial accounts will be able to complete a termination of the Plan by distributing the custodial accounts in kind to the participants/beneficiaries. Prior guidance allowed the distribution of individual annuity contracts under a terminating 403(b) Plan but did not allow the distribution of individual custodial accounts. This welcome change will allow 403(b) Plan sponsors who have been unable to terminate a 403(b) Plan because it held custodial accounts to proceed with a complete termination of the Plan.

High Cost Health Plan Cadillac Tax Repealed, Finally, but PCORI Fees Extended.

Employers have long dreaded the imposition of the “Cadillac tax,” which was a scheduled tax on plan sponsors equal to 40% of the value of employee health benefits exceeding certain thresholds. The recent legislation repeals the wildly unpopular tax. While the tax was never implemented, many employers included future liabilities for the tax on their financial statements (which now can be reversed).

In contrast, the equally unpopular, and already implemented, PCORI fees have been extended 10 years through 2029. The PCORI fee subjects employers/plan sponsors of self-insured group health plans and insurers of insured group health plans to a fee generally based on “covered lives” under the plan. Plan sponsors of self-funded plans who may have been thinking that they were relieved on this responsibility will still have to file the Form 720 and pay the 2019 fee by July 31, 2020 (and plan sponsors of insured plans may see premiums increase).

Changes? No changes to documents or administration is required, but employers may now keep or consider adding health plan features without taking into account any future application of the Cadillac tax.

RMD Age Increased to 72.

The SECURE Act delays the required beginning date for distributions from tax-qualified retirement plans (and 403(b) plans and 457(b) plans) and IRAs from age 70½ to 72. This change is effective for plan participants and IRA owners who reach age 70½ after December 31, 2019. This means that a former employee who turned 70½ in 2019, must still receive a required minimum distribution by April 1, 2020. Plan sponsors should review and revise their operations, Plan documents, SPDs, and distribution notices to reflect these new rules. There are several subtleties to this new law that make it somewhat more complicated than meets the eye—for example, defined benefit plans are still required to provide actuarial increases to a participant’s benefit that does not commence at age 70½.

Changes? Almost certainly requires changes to plan documents and plan administration

RMD Creates New “Ten Year Rule” for Most Beneficiaries after Death.

For distributions with respect to individuals whose death occurs after December 31, 2019, the SECURE Act shortens the time period for which certain beneficiaries are required to take their inherited retirement plan or IRA balances. Previously, any remaining benefit following the death of a participant (including an IRA owner) could be distributed annually over the life expectancy of a designated beneficiary, generally beginning in the year after the participant’s death. However, if the participant died before minimum distributions began, the entire benefit generally was required to be paid by the end of the fifth year following the year of the participant’s death.

The SECURE Act continues to permit the distribution of the participant’s benefit over the life expectancy of a designated beneficiary following the death of a participant, if the beneficiary is (i) the participant's spouse; (ii) a child under the “age of majority” (which ends at the age of majority); (iii) disabled or chronically ill (as defined by the Internal Revenue Code), or (iv) no more than 10 years younger than the participant.

However, for all other beneficiaries, the SECURE Act requires that the entire benefit be distributed by the end of the tenth calendar year following the year of the participant’s death, regardless of whether the participant died before or after minimum distributions began.

Changes? Plan sponsors should update their operations, Plan documents, SPDs, beneficiary forms, and distribution notices to reflect these provisions. It is anticipated that the IRS will issue guidance further elaborating on these complex rules.

Emphasis on Lifetime Income in Defined Contribution Plans.

The SECURE Act includes three provisions that emphasize the DOL’s focus on lifetime income options—i.e., ways to encourage employees generally to use retirement plans for lifetime retirement income (instead of spendable lump sum payments).

First, the SECURE Act provides fiduciary protection for the selection of a lifetime income provider (e.g., annuity companies, etc.) as an investment option under defined contribution plans. Specifically, it affords investment fiduciaries an optional safe harbor to satisfy the ERISA “duty of prudence” requirement with respect to the selection of insurers of a guaranteed retirement income product and provides protection against certain liability. This protection is effective immediately. Plan fiduciaries should reach out to S&D counsel to discuss potential risk and implementation steps because strict adherence to the safe harbor is well-rewarded in this potentially high-risk area.

Second, the SECURE Act allows participants to make direct rollovers (or transfers of annuity contracts) to an IRA or other employer-sponsored plan of their “lifetime income investments” if the investment is no longer authorized to be held as an investment option under the applicable plan (e.g., qualified defined contribution plans, 403(b) plans, or governmental 457(b) plans). This portability rule is effective for plan years beginning after December 31, 2019.

Third, the SECURE Act requires that plan sponsors provide a lifetime income disclosure at least once every 12 months that will show the monthly annuity amount that could be purchased with the lump sum value of the participant’s account (based on predetermined assumptions). The DOL is required to issue a model statement for this purpose by December 31, 2020, and the disclosure requirement becomes effective 12 months after the DOL’s final guidance. Employers should standby for that guidance.

Note that the first two of these new rules do not require employers to offer lifetime income options (e.g., annuities) under their retirement plans—the rules simply provide guidance if an employer makes these options available. The third rule, however, would be applicable even to an employer that does not make these options available under its plan.

Changes? Permits, but does not require, changes to plan documents; requires an annual notice.

Long-Term Part-Time Employees (401(k) Plans).

Generally, a retirement plan can exclude employees that work less than 1,000 hours during the year. However, the SECURE Act prohibits a retirement plan with a deferral feature (e.g., a 401(k) Plan) from excluding employees from making elective deferrals if those employees have completed more than 500 hours of service in each of three consecutive 12-month periods. Note that this new rule does not require that such employees be made eligible for employer contributions, does not apply to union plans, and does not apply to 403(b) plans.

Under a strange effective date provision, this requirement has a long lead time. The requirement does not apply until years beginning after December 31, 2020, and for the determination of whether an employee has completed more than 500 hours in three consecutive 12-month periods, 12-month periods beginning before January 1, 2021 are not taken into account. Also, employees who are eligible for elective deferrals under this new requirement can be excluded for purposes of coverage, nondiscrimination and top-heavy testing.

Employers who currently exclude part-timer employees from making elective deferrals will need to start tracking hours beginning in 2021 to identify who might have to be offered participation in the elective deferral feature in the future.

Changes? Requires change to plan documents and plan administration if part-time employees are excluded from the 401(k) elective deferral feature.

Automatic Elective Deferral Escalator Cap Increased to 15%.

A qualified automatic contribution arrangement (QACA) for 401(k) plans is a useful design for many employers because it allows the automatic enrollment in the plan’s elective deferral feature with a free pass on nondiscrimination testing, while still allowing employers to keep a vesting schedule for the employer match. The design also permits automatic annual increases to the elective deferral percentage. Previously, the automatic increases were capped at 10% of compensation. The SECURE Act changed this cap to 15% of compensation.

Plan sponsors with QACA designs should evaluate whether they want to take advantage of this additional provision that will allow for greater savings by participants. This change is permitted in plan years beginning after December 31, 2019.

Changes? Permits, but does not require, change to plan documents and plan administration.

Delayed Adoption of 401(k) Safe Harbor Status Permitted.

Since the introduction of the 401(k) plan safe harbor alternatives, an employer could sponsor a 401(k) safe harbor plan by making (i) a certain level of matching contribution, or (ii) a 3% nonelective contribution on behalf of certain participants. Generally, this safe harbor status had to be implemented and announced before the beginning of each plan year. For plan years beginning after December 31, 2019, the SECURE Act provides greater flexibility by allowing an employer to convert to a safe harbor design and make a nonelective contribution (but not matching contribution) after the start of the plan year. However, the required nonelective contribution will increase to 4% if the plan amendment is not adopted at least 30 days prior to the end of the plan year in which the amendment will be effective.

Employers should evaluate their current plan design to ensure it is the best fit and/or to determine if the new flexibility provides any advantage to the employer. Employers already utilizing the nonelective contribution safe harbor should also note that they no longer need to provide an annual notice.

Changes? Not required, but permits greater flexibility in Plan design and administration.

In-Service Withdrawal Options for Birth and Adoption.

For distributions made after December 31, 2019, the SECURE Act authorizes defined contribution plans to allow withdrawal, and IRA owners to withdraw, free of the 10% penalty and whether in-service or not, up to $5,000 to pay childbirth or adoption expenses. Participants will have the opportunity to repay the withdrawn amounts. Plan sponsors should decide whether they will add this new in-service withdrawal feature for the benefit of its participants, and if so, they will have to update operations, Plan documents, SPDs, distribution forms, participant communications, and reporting processes.

Changes? Permits, but does not require, change to plan documents and plan administration.

Ten-Fold Increase in Form 5500 Penalties.

For filings due after December 31, 2019, the SECURE Act increases the penalties associated with a late filing of Form 5500 annual reports to $250 a day to a maximum of $150,000, up from the previous $25 a day and $15,000. Plan sponsors and advisors should view this ten-fold increase in penalties as a sure signal that the DOL – and, to a lesser extent, the IRS – will step up their enforcement of non-filers.

Changes? None required, but employers should ensure timely filings!

In-Service Distributions for Defined Benefits Plans Allowed at Age 59 ½.

For plan years beginning after December, 31, 2019, recent legislation lowers the age for permitted in-service distributions from defined benefit plans and governmental 457(b) plans to age 59 ½ from age 62 (for defined benefit plans) and from age 70 ½ (for governmental 457(b) plans). Note that allowing a participant to take a distribution while still in service is a permitted (not required) plan design option for an employer, and lowering the age at which an in-service distribution can take place also is optional.

These changes continue a trend to ease some plan sponsors’ concerns that denial of access to defined benefits encourage employees to retire early. These rules create some very technical issues, particularly for active plans. Plan sponsors of these types of plans should contact S&D counsel to discuss any potential changes before implementing these optional design features.

Changes? Permits, but does not require, changes to plan documents and plan administration.

Welcome News for Small Employers.

Effective for tax years beginning after December 31, 2019, the SECURE Act enhances tax credits for employers with 100 or fewer employees: (i) a credit of up to $5,000 (up from $500) for three years of up to 50% of start-up costs – defined loosely as costs paid or incurred in connection with “establishment or administration” or “retirement-related education” – related to the adoption of a new qualified retirement plan; and (ii) a three-year tax credit of up to $500 for employers that amend their existing 401(k) plans to add automatic contribution arrangements.

New Rules for MEPs.

Effective for Plan years beginning after December 31, 2020, the SECURE Act encourages “multiple employer plans” by creating an “open MEP” concept that will allow small employers to join together in a “pooled employer plan” (PEP) sponsored by “pooled plan providers” (PPPs). In addition to numerous requirements that will apply to PEPs, the legislation eliminated the “one-bad-apple rule” which is generally the most problematic aspect of MEPs. The open MEP concept will surely make it easier for small employers to sponsor a plan with far fewer compliance and administration headaches, although it still does not fully relieve such employers of all fiduciary liability associated with selection of the “PPPs”. (The full scope of MEPs/PEPs/PPPs is outside the scope of this alert, but please contact your S&D counsel if you want more information on this aspect.) At this time, we continue to recommend that a MEP is not the best option for any employer, unless there are corporate relationships that exist that do not result in a controlled group but justify a single plan for the separate entities.

Expanded Relief for Frozen Defined Benefit Plans.

The SECURE Act retroactively expands and extends the relief that has been provided under annual IRS guidance from the nondiscrimination rules for frozen defined benefit plans. These rules are complex and fact specific. Employers who continue to maintain a fully or partially frozen defined benefit plan, should consult with S&D counsel and the plan’s actuary to determine if the new rules should be incorporated into the plan documents or plan administration.

Expansion of Section 529 Plans.

For distributions made after December 31, 2018, the SECURE Act allows tax-free distributions from 529 education savings accounts to cover costs associated with registered apprenticeships and up to $10,000 of qualified student loan repayments (principal or interest).

Delay in Deadline to Adopt a New Qualified Retirement Plan.

For new plans adopted in tax years beginning after December 31, 2019, the plan will be treated as “adopted by the last day of the taxable year” if it is adopted no later than the due date (including extensions) of the employer’s tax return for the taxable year. This will give an employer who is considering the adoption of a new tax-qualified retirement plan significantly more time to make and implement that decision. Note that this extended deadline for adopting a new plan will not allow any retroactive elective deferrals under a 401(k) plan.

Naturally, all of the above will keep the regulatory agencies busy for 2020. Fortunately, the SECURE Act provides a plan amendment deadline of the last day of the 2022 plan year (2024 plan year for governmental plans) to reflect the changes. However, it also requires plans be operationally compliant with certain applicable provisions on specified effective dates, including January 1, 2020. Many changes will require additional guidance from the regulatory agencies. Employers should be sure they are complying with the provisions that require immediate action.

Please contact us if you want to discuss any of the above provisions. We would be happy to set up a call to walk through these provisions, focus you on the provisions that are impactful and help you make an action plan.

Categories: Legal Update