Recent Legal Changes for Retirement Plans and IRAs
In the last six months, two new significant laws have been enacted that impact employer-sponsored retirement plans and individual retirement accounts (IRAs). Most recently, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was enacted in response to the COVID-19 pandemic and includes several provisions that affect employer-sponsored retirement plans and IRAs. In addition, late in 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law as part of the year-end consolidated spending bills, and was intended to expand benefits for retirement savings and provide administrative improvements.
Banks that sponsor retirement plans or offer IRAs in 2020 should be aware of the CARES Act and SECURE Act changes to ERISA and the Internal Revenue Code as outlined below.
CARES Act Relief Available under Retirement Plans.
- Coronavirus-Related Distributions (available until Dec. 31, 2020). The CARES Act permits Coronavirus-Related Distributions (CRDs) from retirement plans or IRAs for an eligible individual who (1) has been diagnosed with COVID-19 with a test approved by the Centers for Disease Control and Prevention (CDC), (2) has a spouse or dependent who was diagnosed with COVID-19 with a CDC-approved test, or (3) experienced “adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease…” Total distributions treated as CRDs cannot exceed (1) $100,000 or (2) 100% of the participant or IRA owner’s account balance. Such a distribution offers certain tax benefits, including exemption from the 10% early withdrawal tax, the ability to be included in income over three years, and the ability to repay the distribution to the retirement plan or IRA within three years.
- Increased Plan Loan Limits and Extended Repayment Period (available until Dec. 31, 2020). The CARES Act also increases the limits on loans from employer-sponsored retirement plans from $50,000 to $100,000, and the benefit percentage limit from 50% to 100% of the present value of the employee’s vested benefit. In addition, any outstanding plan loans with payments due from March 27, 2020, to Dec. 31, 2020, may be delayed one year. The increase in plan loans and the extended loan repayment period are only available to qualified individuals who have a coronavirus-related diagnosis based on a CDC-approved test, a spouse or dependent who was diagnosed based on a CDC-approved test, or certain adverse financial consequences due to COVID-19.
- Required Minimum Distributions (RMDs) Waived for 2020. Employer-sponsored retirement plans and IRAs are typically required to make minimum distributions after a participant or IRA owner reaches a certain age (as discussed in more detail below). The RMD requirements do not apply for calendar year 2020.
SECURE Act Notable Retirement Plan Changes Effective in 2020.
- RMD changes (effective Jan. 1, 2020).
- Increased RMD Age from 70½ to 72. Under prior law, an employer-sponsored retirement plan was required to begin distributions to a non-actively employed participant by April 1 of the year after the participant reaches age 70½. Similarly, under prior law, the owner of a traditional IRA was required to begin distributions by April 1 of the year after reaching age 70½. For participants and traditional IRA owners who reach age 70½ on or after Jan. 1, 2020, the SECURE Act delays when the individual must begin receiving required minimum distributions from age 70½ to 72.
- Limits “Stretch” RMDs. The SECURE Act makes changes to certain inherited accounts. It requires certain non-spouse designated beneficiaries to withdraw the entire inherited interest within 10 years after the participant’s death. Notably, this change will not apply to surviving spouses, a minor child, a disabled or chronically ill person, or any other designated beneficiary who is not more than 10 years younger than the participant.
- Repeal of Maximum Age for Traditional IRAs. Under prior law, an individual who had attained age 70½ by the close of a year was not permitted to make a tax-deductible contribution to a traditional IRA. Beginning Jan. 1, 2020, the SECURE Act repealed this maximum age and permits tax-deductible contributions to a traditional IRA after age 70½.
- No Retirement Plan Loans Through a Credit Card. Under existing law, employer-sponsored retirement plans may provide loans to participants. Any retirement plan loans to participants made on or after Dec. 20, 2019, through the use of a credit card (or similar arrangement) will be deemed a distribution. If an employer offers this type of arrangement in a retirement plan, the employer should take a fresh look at the arrangement as soon as possible.
- Optional Birth or Adoption Distributions. Under existing law, a distribution from a retirement plan or IRA may be subject to a 10% additional tax (early withdrawal tax) if made before the participant or IRA owner reaches age 59½. Beginning Jan. 1, 2020, the SECURE Act permits a penalty-free distribution of up to $5,000 for qualified child birth or adoption expenses. Such distributions will not be subject to the 10% early withdrawal tax and are available to participants of all ages. However, before offering this type of distribution in an employer-sponsored retirement plan, the employer should consider whether the distribution will become a protected benefit.
Notable SECURE Act Changes after 2020.
- Long-Term, Part-Time Employee Eligibility. For plan years beginning after Dec. 31, 2020, long-term, part-time workers who work at least 500 hours a year, for at least three consecutive years, and who are age 21 by the end of the three years, must be offered the opportunity to contribute to their employer’s plan. However, employers may exclude from nondiscrimination and coverage testing employees who become eligible through this provision.
- Lifetime Income Disclosures.
- Pension benefit statements will need to include disclosures about lifetime income.
- More details, as well as a model lifetime income disclosure, are expected from the Department of Labor in 2020.
Other Optional and Miscellaneous SECURE Act Retirement Plan Changes.
- Increases automatic escalation cap for those automatically enrolled in certain qualified automatic contribution arrangement safe harbor plans from 10% to 15% of compensation.
- Eliminates the annual safe harbor notice requirement for a safe harbor 401(k) plan that provides a nonelective contribution and meets certain conditions.
- Creates a new, open, multiple employer (pooled) option for employer retirement plans to potentially reduce fiduciary exposure.
- Provides relief for closed defined benefit plans from certain nondiscrimination testing.
- Permits in-service distributions at age 59½ for defined benefit pension and money purchase pension plans (reduced from age 62).
- Consolidates annual reporting obligations on Forms 5500 for similar plans.
- Increases penalties for failing to file tax returns, Forms 5500, annual registration statement, and other filing penalties.
- Provides additional relief and incentives for small employers.
Plan Amendment Deadlines. Employers who sponsor a retirement plan should be aware of the following plan amendment deadlines for the CARES Act and SECURE Act:
- By the last day of the plan year that begins in 2022, for most employers, plan documents must be amended to reflect the CARES Act and SECURE Act changes.
- By the last day of the plan year that begins in 2024, governmental and collectively bargained plans must be amended to reflect the CARES Act and SECURE Act changes.
Next Steps. It’s important to be aware of the CARES Act and SECURE Act changes for employer-sponsored retirement plans and IRAs and to implement the various changes required or available in 2020. In addition, it’s not too early to start planning for changes effective in 2021 and beyond that affect employer-sponsored retirement plans and IRAs.