It’s the Final Countdown . . . PEPs

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By Kevin Selzer 

Starting in January, unaffiliated employers can band together and participate in a new type of collective retirement plan, called a “pooled employer plan” or PEP. PEPs are expected to be attractive to plan sponsors because of the ability to lower plan fees and expenses by leveraging assets, simplifying administration, and shifting fiduciary risk to the PEP provider. We first posted about PEPs back in January. Nearly 11 months and a pandemic later, many questions remain, but PEPs are slowly starting to take shape.

A variety of industry players have already announced an intention to offer PEPs. Ironically, and in true PEP spirit, many unaffiliated service providers have partnered to offer PEPs, with third-party administrators/recordkeepers often partnering with investment advisors/consultants. PEPs will come in many flavors and sizes. Expect to see both national PEPs offered by well-known providers as well as smaller regional PEPs. While the strategy of pooling assets may have been aimed at smaller plans – since those plans seem to have the most to gain from a cost cutting perspective – it appears that PEPs will be marketed to larger plans ($100M+ plans) as well.

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FAME! I’m Gonna Live Forever….and My Retirement Account Might Last That Long, Too!

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by Becky Achten

Section 401(a)(9) requires most retirement plans and individual retirement accounts to make required minimum distributions (“RMDs”) over the lifetime of the individual (or the lifetime of the individual and certain designated beneficiaries) beginning no later than such individual’s required beginning date (generally, April 1 in the year following attainment of age 72).  This minimum amount is determined by dividing the individual’s account balance by the applicable distribution period found in one of the life expectancy and distribution tables (the “Tables”).

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Your [es]Cheating Heart … Might Be Useful to Retirement Plans Dealing With Missing Participants

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by Beth Nedrow

Retirement plan administrators have for years sung the sad lament of what to do with missing participants. Ol’ Hank Williams himself could have written a hit song about the problem. Recent guidance from the IRS may have the retirement community singing a slightly different tune, however.

The hassle of keeping plan accounts open for lost or deceased former employees can be a real problem, especially for terminating plans. When participants go missing, retirement plan administrators have few alternatives. One alternative that has been discussed is the use of state unclaimed property funds (sometimes called by their old-fashioned name, “escheat” law). Plans previously were reluctant to escheat unclaimed retirement accounts to state funds due to concerns over how to report tax and withholding. But recent guidance from the IRS (Revenue Ruling 2020-24) makes clear that if a plan escheats funds to the state, it is appropriate for the plan to treat the payment as being includible in gross income and subject to federal income tax withholding, reportable on a Form 1099-R.

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In the Year 2021…IRS Limits Announced Today

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by Lyn Domenick

Today the IRS announced the 2021 cost-of-living adjustments to qualified plan limits. Please refer to our chart for easy reference.

I’m Just Waiting on an… End to the Extended ERISA Deadline Periods

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by Brenda Berg

Early in the pandemic, the IRS and DOL issued a temporary rule (published May 4, 2020) extending certain deadlines applicable to retirement plans and health and welfare plans. (See Deadlines and Commitments: DOL and IRS Temporary Rule for COVID for more information about that extension.) Under that temporary rule, the deadlines were generally extended until 60 days after the announced end of the National Emergency due to COVID-19, which was referred to as the “Outbreak Period.” The deadlines are essentially “tolled” during the Outbreak Period. The National Emergency began on March 1, 2020, as declared by President Trump’s Proclamation.

The examples in the temporary rule assumed an end date of April 30, 2020 for the National Emergency, which would have extended the Outbreak Period through June 29, 2020. As we all now know, this National Emergency did not end on April 30, and in fact it is still in place. So we are still waiting for the National Emergency period to end and trigger the normal deadlines.

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Don’t You . . . Forget About Special Tax Notices

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by Leslie Thomson

The Internal Revenue Code requires plan administrators of qualified retirement plans (e.g., 401(k) plans, defined benefit plans and ESOPs), 403(b) plans, and eligible 457(b) plans maintained by a governmental employer to provide a written explanation to any recipient of an eligible rollover distribution. This notice is typically referred to as the Special Tax Notice.

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That’s Life . . . New Defined Contribution Plan Disclosures

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By Kevin Selzer 

What’s in a number?  Retirement plan participants may soon better understand how account balances translate to retirement readiness.  The SECURE Act enacted last December requires defined contribution plans to show participants the value of their account balances if converted into a monthly lifetime stream of income.  The disclosures are aimed at reminding participants that retirement plan balances are meant to last for life – and busting the “wealth illusion” that single sum account balances present.  

The details on the disclosures are starting to take form following an interim final rule recently released by the Department of Labor (“DOL”).  Under the interim final rule, plans must provide participants with two lifetime income illustrations: the value of the benefit converted to (1) a single life annuity, and (2) a qualified joint and 100% survivor annuity (assuming the participant is married with a spouse of equal age). The DOL clarified in the final rule that the projections will be based on the participant’s current account balance (rather than a future projected value) and will show what that balance would buy purchasing an annuity at age 67 (or the participant’s actual age, if older).

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Back in the Saddle Again … How Rehired Employees Affect Partial Termination Analysis

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by Beth Nedrow

In June, we wrote about one of the multitude of issues raised by COVID-19 furloughs – the possibility of triggering vesting in the company’s qualified retirement plan under the partial plan termination rules. Recently the IRS issued new guidance that will be relevant to employers who might be rehiring employees before the end of 2020. On its website, the IRS posed this question: “Are employees who participated in a business’s qualified retirement plan, then laid off because of COVID-19 and rehired by the end of 2020, treated as having an employer-initiated severance from employment for purposes of determining whether a partial termination of the plan occurred?” The IRS then answered the question, “Generally, no.” This means that the employer may be able to continue to maintain vesting (and enforce forfeitures) in its retirement plan if enough formerly furloughed employees are brought back before the end of the year. While this answer isn’t earth-shattering or even frankly surprising, it’s welcome clarity in a time of so many uncertainties.

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One Last Time: The DOL Returns to the Fiduciary Rule for Retirement Plans

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by Bret Busacker

The Department of Labor has returned to the Fiduciary Rule once again with its third attempt to provide a regulatory framework that protects retirement investors while not imposing unnecessary burdens on investment advisors and consultants. 

Plan sponsors of 401(k) plans should be aware that the DOL will once again apply the historical “five-part-test” in evaluating whether 401(k) advisors are plan fiduciaries.  The return of the five-part-test is the result of the Fifth Circuit invalidating the DOL’s 2016 version of the fiduciary rule, which had temporarily replaced the five-part-test.  Under the “new-again” five-part-test, an investment advisor to a 401(k) plan or plan participant is deemed to be a plan fiduciary if the advisor makes investment recommendations on a regular basis pursuant to an agreement or understanding with the 401(k) plan or plan participant and the advisor’s recommendations serve as the primary basis for making the decision to invest in specific investment options.  A 401(k) plan advisor determined to be a fiduciary under the five-part-test cannot receive variable compensation tied to a 401(k) participant’s investment decision (generally, referred to as conflicted compensation).

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Tell Me Something Good: IRS Eases Restrictions on Mid-Year Changes to Safe Harbor Contributions

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by Brenda Berg

The IRS has eased the restrictions on mid-year changes to safe harbor contributions, in response to the hardships caused by the coronavirus pandemic.

Employers are generally not allowed to reduce or suspend safe harbor matching or nonelective contributions mid-year unless either (1) the annual safe harbor notice included a statement that the employer could amend the plan mid-year to reduce or suspend the safe harbor contribution, or (2) the employer can demonstrate that it is operating at an economic loss during the plan year. Even if the employer satisfies one of these requirements, the employer must provide a 30-day advance notice before the effective date of the suspension. The suspension of the safe harbor contribution will also mean that the plan becomes subject to nondiscrimination testing for the current plan year.

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