The last six to eight months has seen a whirlwind of legislative and regulatory change. This week, we will look at several changes to retirement plans, which impact both plan sponsors and participants, as a result of these changes. We also highlight a few other material changes. I will say that this year has been like watching a movie. For many, the price of admission has been a bit more than they had in mind.
The SECURE Act was signed into law in December 2019 and was effective January 1, 2020. For purposes of this commentary, its impact was primarily on IRA owners.
Effective January 1, 2020, Required Minimum Distributions aren’t required until age 72. There is no longer an age limit for making traditional IRA contributions, though income limits still apply. Stretch payments on inherited/beneficiary IRAs are eliminated for all but an entirely new class of “Eligible Designated Beneficiaries”.
IRS Notice 2020-18
The Treasury Department and IRS announce the federal income tax filing due date is extended from April 15 to July 15, due to the Covid-19 related national emergency declared on March 13, 2020.
Also known as the Coronavirus Aid, Relief, and Economic Security Act was signed into law on March 27. It was the single largest direct payments piece of legislation in the history of the world. It authorized direct payments to households of $1200 per individual, federal unemployment benefits, and the well-known PPP or Paycheck Protection Program. The PPP was designed as a loan managed through SBA and SBA lenders for businesses, to allow them to keep their employees fully employed. It featured loan forgiveness, and the details continue to develop. The CARES Act also made several changes to retirement plans for tax/calendar/plan year 2020.
The original funding round of $349 billion was spoken for within the first two weeks of April. The PPP Flexibility Act was signed into law on June 5, 2020, and added loan funds. This act also reduced the loan amount attributable to payroll, in order to qualify for complete loan forgiveness, from 75% to 60%. The PPPFA also extended the timeframe for fund use from eight weeks to 24 weeks. The PPPFA also pushed back the rehire deadline from June 30 to December 31, 2020, and eased rehiring requirements. Finally, the PPPFA extended the loan term from two years to five years.
Awareness and Action
If you as a business owner are a PPP loan recipient, know that the timeframe for settling with the SBA has been extended. Also know that only 60% of loan proceeds must be used for payroll, in order to qualify for complete forgiveness. We recommend tracking the use of funds carefully, and simply wait to hear from your bank, which we believe will be September or October.
Retirement Plan Sponsors
The CARES Act and other rulings have made for a full year of change for retirement plan sponsors. The CARES Act created Coronavirus Related Distributions, or CRD’s. CRD rules allow any plan participants who have been impacted by the C-19 virus, and actions related to it, to access retirement plan funds on a favorable basis. For those of you who are plan sponsors, the TPA or institution which handles compliance and administration of the plan should have incorporated these changes into your plan. If you have questions regarding how to interpret the CRD rules, and your responsibility under the CRD regs, please call or email us.
Awareness and Action
Be aware that you as a plan sponsor are not required to document that a plan participant qualifies for a CRD related distribution. Participants self-certify. Be aware that your TPA should have updated their guidelines and procedures to assist you in interpreting how the CRD regs interface with your plan. You may choose not to allow CRD distributions from the plan, though we would encourage you to make them available. Be aware that the IRS updated guidance related to CRD distributions with Notice 2020-50. Let us know if you would like a summary of this notice.
For those of you who own IRAs, and are in RMD territory, by virtue of age or being a beneficiary, the CARES Act waived the RMD requirement for 2020. For those who took RMDs prior to date of the legislation, IRS Notice 2020-51, released on June 21, 2020, gives you until August 31, 2020, to repay unwanted RMDs, regardless of source, including Inherited/Beneficiary IRAs.
Awareness and Action
Be aware that you as IRA owner can waive RMDs for 2020. You may also continue to take them, whether as taxable distributions or as Qualified Charitable Distributions, up to the $100,000 annual limit. If you have taken distributions, and want to return them, you have until the end of August to do so.
Other Retirement Plan Provisions
In addition to legislation and its related regulations, the Department of Labor (DoL) and IRS have offered other guidance to plan sponsors. We summarize them below.
On May 27, the DoL said that plan sponsors may deliver plan notices electronically by posting to a website, making available on a mobile app, or via email delivery. Participants may continue to opt-out and receive hard copy delivery. This rule applies only to retirement plan notices required under ERISA. Employers are not required to use the new regulation.
Per DoL guidance issued June 3, 2020, and as discussed in a recent column, the DoL has for the first time endorsed the use of private equity as an investment option in 401(k) plans. For almost 100% of plan participants, this is not a good idea. We do not recommend the use of funds that invest in private equity, as an investment option in a 401(k) plan.
On June 23, 2020, the DoL proposed a rule warning that ERISA requires that economic considerations be the sole focus in selecting investments within a retirement plan. This rule is in response to the pressure plan sponsors are experiencing to include ESG (environmental, social, governance) screens in their investment selection. If you as a plan sponsor wish to include an ESG filter in investment selection, this new guidance suggests that economic considerations remain paramount in the selection process.
Finally, in Notice 2020-52, issued June 29, 2020, the IRS allows 401(k) plans which offer “safe harbor” employer contributions, whether matching or not, to suspend or reduce those contributions after March 13, 2020, and for the rest of the calendar year. The employer need not be suffering an economic loss. However, to take advantage of this relief, the employer must adopt the plan amendment making this change by August 31, 2020.
It has been a year of change, including on the legislative and regulatory front. If you are an IRA owner, a retirement plan participant, or a plan sponsor, and you have questions or would simply like to visit in order to understand better how these various provisions impact you, you are always welcome to call or email.