Modifications to the pension plan, previous, current and future – employment and personnel
Changes to the retirement plan, past, present and future
December 10, 2020
McLane Middleton, professional association
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Published in NH Business Review (November 20, 2020)
In late 2019 and early 2020, Congress passed two major federal laws: the Act Establishing Every Ward for the Improvement of Retirement (the “SECURE Act”) and the Coronavirus Aid, Relief and Economic Security (the “CARES Act”), making substantial changes to the Act Provisions of the tax code that affect the employer’s pension scheme. Starting in June, the Internal Revenue Service and the US Department of Labor issued guidance to assist stakeholders in implementing the numerous changes in both laws that affect a wide range of regulations. As employers begin to implement mandatory changes and determine whether to provide optional provisions as guidelines, they should be aware that the landscape of retirement planning could change significantly after the November elections.
Guide to Payouts and Loans for Retirement Plans for COVID-19 Spending
On June 19, 2020, the Internal Revenue Service (“IRS”) released Notice 2020-50, which provided guidance on eligible coronavirus-related loans and special distributions for 2020 under the CARES Act. The CARES Act waives the normal 10% penalty tax on early distributions and the tax code rules that restrict early distributions from IRAs, 401 (k), 403 (b), and Section 457 (b) plans. Qualified individuals can withdraw up to $ 100,000 through 2020 without the 10% prepayment penalty, spread the reported income over three years, and repay the distribution within three years to avoid tax. Communication 2020-50 clarifies and expands the definition of who is a qualified person to take into account additional factors such as wage cuts, resignations from job vacancies and late start dates in relation to a person, as well as adverse financial consequences for a person resulting from the impact of the COVID-19 coronavirus on the person’s spouse or household member. Notice 2020-50 also clarifies that employers can rely on a worker to certify that he is a qualified person (and provide a sample certificate) and provide employers with a safe harbor to implement loan repayment suspension which are otherwise due by the end of 2020.
Guide to Illustrating Lifetime Income
On August 18, 2020, the Department of Labor issued an Interim Final Rule (“IFR”) to the SECURE Act that requires retirement plan information to include a lifelong earnings statement in order to provide employees with a realistic representation of their monthly retirement earnings. The IFR contains the important details required for the representation of lifetime income and the model language for the necessary explanations. In order to dispel liability concerns of employers and plan trustees, the IFR offers liability protection if the mapping of the lifetime income meets the requirements of the IFR. The IFR will come into effect on September 18, 2021, and although no income disclosures are required before that date, service providers will have to do significant work to implement the IFR.
Guidelines on Part-Time Tax Credit and Retirement Benefits
IRS Notice 2020-68, issued in September, provided the necessary guidance on several provisions of the SECURE Act, including a requirement that part-time workers be allowed to participate in a Section 401 (k) plan if the worker worked at least 500 hours per year with the has been an employer for at least three consecutive years and has reached the age of 21 (a “long-term part-time worker”). It is important that the hours worked before January 1, 2021 are not counted towards the required three-year period and that long-term part-time employees do not have to be entitled to employer contributions according to the 500-hour rule. However, the 2020-68 Notice clarifies that for the exercise of employer contribution purposes, the employer must grant an exercise credit for each 12-month period in which the employee has at least 500 hours of service from the employee’s hiring date. From the planning year 2021, employers must carefully track working hours so that qualified long-term part-time employees can start postponing their elections in the planning year 2024. The 2020-68 Communication also provides guidance on the details of an improved business tax credit for retirement plan start-up costs to make setting up retirement plans more affordable for small businesses (fewer than 100 employees) and the additional tax credits available to employers make an automatic registration feature.
How retirement plans could change
As employers implement the changes to the SECURE and CARES Act, they should be aware that Vice President Biden could make material changes to the pension plan. His legislative agenda is few in detail, but his website says he will make Section 401 (k) “more equitable” plans so that middle-class families can retire with enough savings to support healthy and safe retirement “and he advocates” a tax equalization “benefits of defined contribution plans. “His plan eliminates the treatment of deferred plans under Section 401 (k) of the Plan in favor of a tax credit of $ 26 per $ 100 an employee contributes, reducing the greater tax benefit that those in higher tax brackets receive under the current system. If he were and positively inclined to eliminate new majorities in the Democratic Congress, to remove the rules of the tax code that allow larger contributions for and for higher paid workers, this could lead some employers to evaluate whether to continue offering plans or themselves opt to contribute to a new government sponsored automatic 401 (k) savings option that also supports Vice President Biden.
To sum up, while employers are working to implement the many changes to the rules governing retirement provision in 2019 and 2020, they should be aware that even more profound changes could come in 2021, depending on the election results.
John E. Rich Jr. heads the tax department of the McLane Middleton, Professional Association.
The content of this article is intended to provide general guidance on the subject. You should seek advice from a professional about your particular circumstances.
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