Legislative Update Part Two

April 26, 2021

Legislative Update Part Two

In our previous Legislative Update on February 18, 2021, we informed you of a series of retirement plan documentation changes required by the Internal Revenue Service (IRS). In that update, we made you aware of the requirement to restate your plan and amend the plan for the Hardship Distribution Amendment, the SECURE Act, and the CAREs Act. 

As you can imagine, bringing retirement plans into compliance requires far more than rewriting and amending plan documents, as it takes a deep understanding of how to apply these rules and regulations. Even with the timing of this update, the government has not given us a full explanation of how to interpret some of these laws. However, they still of course require employers to adopt their new rules.

For some employers, there are provisions that come into play at this time. For others these rules, although effective now, may not impact you until a later date and the following is a list of the many changes you need to know. If any one of these changes strikes you as an immediate concern or issue, please call our experienced plan administrators at Benefit Equity Inc. (BEI) and we will be happy to help.  In our ongoing role as your TPA, we will alert you if, and when, you need to take specific action.

What changes does this new legislation include?  

  • Part-time employees working 500 hours or more, must be offered the 401(k) plan for their deferrals, matching is not required, but employers must keep track of hours starting 1/1/2021. We are also aware of a bill in congress that will speed this requirement up to as soon as 2022.
    Note: Employers need to include all employees on the annual census report and BEI will help keep track of these employees.

  • Inherited money from someone other than your spouse, must be withdrawn within ten years.
    Note: We encourage you to check your records carefully to be certain every plan participant has a beneficiary form on file. 

Legislative Update
Part Two, Page Two

  • Rules extending rollover period for Qualified Plan Loan Offset Amounts
    Note: When a plan participant has a loan outstanding at the time of their termination of employment, they have more time to pay it back before it is considered taxable income.

  • Final regulations providing guidance on mid-year changes to Safe Harbor 401(k) Plans
    Note: Although more leeway is provided, there is still timing and notice requirements to follow. Generally, it is easier to stop and start a Safe Harbor contribution.

  • Required Minimum Distribution (RMD) extended from age 70 1/2 to age 72

  • Required Minimum Distributions waived for 2020

  • Rules for defined contribution plans, such as 401(k) and profit-sharing plans, holding qualifying longevity annuity contracts
    Note: Buying an annuity provides a guaranteed income and reduces the required minimum contribution (RMD) at age 72. Maximum annuity is 25% of account value, not to exceed $135,000 (2021 limit).

  • Clarifying changes relating to the application of same-sex marriage rules

  • Qualified Natural Disaster Relief provided by the IRS, including but not limited to, Louisiana storms, Hurricane Matthew, Hurricane Irma, Hurricane Maria, and California Wildfires

  • Revised disability claims procedures

  • Safe Harbor rules are more lenient for mid-year changes and starting a Safe Harbor Plan

  • $5000 penalty free withdrawal for childbirth or adoption

  • $500 tax credit for three years, if you adopt an automatic deferral election process, and allowing automatic deferrals up to 15% of your total pay

  • “Difficulty of Care” payments can be treated as compensation for purposes of section 415 of the Internal Revenue Code

  • Tax relief for participant distributions if the participant or family member had COVID-19

  • Hardship Distribution rules have also changed:

Legislative Update
Part Two
, Page Three

  1. You do not have to take a participant loan to apply for a hardship.

  2. You will not be suspended from participation in the 401(k) for six months.

  3. A distribution will not be considered necessary to satisfy an immediate and heavy financial need, if the employee has other resources available (including assets of an employee's spouse and minor children, with available resources determined based on facts and circumstances).

The government is requiring a separate Hardship Distribution Amendment in addition to the Cycle 3 restatement. The IRS would not include these new rules into the restatement.

What Comes Next?

  1. BEI will restate your plan in its entirety and include the Hardship Distribution Amendment.

  2. If you would like to make any changes to your plan, please let us know and there will be no charge to make changes at this time.

  3. You will receive an email directing you to electronically sign the plan documents.

  4. We will repeat this process for the SECURE Act and CARES Act amendments at a later time.

There is a tremendous amount of administrative compliance involved with these new laws. As mentioned earlier, BEI will provide counsel when these issues affect your plan. 

Please reach out to your representative at BEI if you have questions by phone at 714-480-1364 Ext. 212 or email us and we will be happy to provide further guidance.

Author: Robert Gorelick, APA, Founder Benefit Equity Inc.