Remember These Retirement Plan Provisions for 2020
13 Oct 2020
Each year retirement plan sponsors spend time reviewing the latest changes to determine where plan updates may need to be made. Often these are triggered by changes in the plan size or by new compliance requirements mandated by the Internal Revenue Service (IRS) or the Department of Labor (DOL). Much of the attention over the last few months has centered on the COVID-19 pandemic and various government orders’ economic challenges. Many have focused on finding ways to enhance the business’s financial vitality through cost-cutting and working capital infusions. However, now that many are planning for long-term recovery, it is important not to forget about the regulatory changes and requirements mandated on retirement plans. The SECURE Act of 2019 and the CARES Act, which was passed earlier this year, outlined several important changes. Although not every change is mandated, there are several which require operational updates or new amendments. Looking forward to the 2020 plan audit, it is important these requirements are properly addressed to avoid any complications. To help clients, prospects, and others, JLK Rosenberger has provided a summary of key points below.
SECURE Act Changes
- RMD Eligibility – Under prior regulations, Required Minimum Distributions (RMDs) did not have to be taken until the participant reached age 70 and one half. The SECURE Act increased the age at which RMDs must be taken to age 72. The change is effective for distributions made after December 31, 2019, and beginning with individuals who reach 70 and a half after that date. Plan sponsors may need to make immediate operational changes to ensure distributions comply with the new RMD requirement.
- Part-Time Employees – There was a change to part-time employees’ eligibility criteria to participate in qualifying retirement plans. Employers are now required to permit part-time employees to participate when they reach one year of service or three consecutive years with at least 500 hours. For the latter, plan sponsors are not required to make contributions until normal age and service requirements are met.
- Elimination of “Stretch IRA” Payments – Under prior regulations, a “stretch IRA” allowed distributions from an inherited IRA to a non-spousal beneficiary to be made according to the beneficiary’s life expectancy. Since the age of a beneficiary is often much younger than the original owner, it meant distributions extended for a longer period reducing annual taxes. The SECURE Act changed this, requiring all distributions to be made by the 10th year following the owner’s death. Plan sponsors will need to make an operational change to ensure compliance.
- Lifetime Income Disclosures – So participants understand the importance of retirement savings, plan administrators are now required to provide two illustrations of a participant’s account balance converted to show the lifetime equivalent value. The disclosure must be made at least annually. The interim final rule issued by the DOL requires calculations to use specific assumptions. It also provides model language, which can be included in the disclosure.
- Plan Loans Through Credit Cards – The new regulations prohibit sponsors from making plan loans through a credit card medium. The change was effective on December 20, 2019, and loans made using credit cards after this date run the risk of being classified as a taxable distribution and may result in plan disqualification.
CARES Act Changes
- Coronavirus Related Distributions (CRD)– Qualified individuals can take this new type of distribution without incurring early distribution penalties. CRDs are any distributions (up to $100,000) taken from an eligible plan in 2020 and can be repaid over three years to reverse tax consequences.
- RMD Waiver – To help individuals cope with the financial challenges raised by the COVID-19 pandemic, an RMD waiver for 2020 was enacted. Plan sponsors could immediately implement the change but still need to update the plan document to reflect the modification.
- Withdrawal for Birth/Adoption – Under prior regulations, any retirement plan withdrawal was subject to the 10% early withdrawal tax. However, the CARES Act changed the rule to allow up to a $5,000 penalty-free withdrawal made for a qualified birth or adoption. It is important to note the distribution may be recontributed.
- Expanded Plan Loan Limits – Under prior regulations, plan loans were limited to the lesser of the account balance or $50,000 and required a regular repayment schedule. The CARES Act changed this to increase loan amounts to the lesser of the account balance or $100,000 for loans made between March 27, 2020, and December 31, 2020. Also, repayment is suspended for one year for an outstanding loan as of March 27, 2020.
The number of operational changes to retirement plans this year have left many unsure if they comply. Before starting the 2020 benefit plan audit, it is important to carefully review plan operations and amendments to ensure all changes have been made. If you have a question about the information outlined above or need assistance with your upcoming benefit plan audit, JLK Rosenberger can help. For additional information, call us at 972-931-6803 or click here to contact us. We look forward to speaking with you soon.
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