The Setting Every Community Up for Retirement Enhancement (“SECURE”) Act made a number of changes designed to increase the availability of lifetime income options in defined contribution retirement plans, such as 401(k) plans. Among those changes was a new fiduciary safe harbor for choosing an annuity provider, including an “in-plan” annuity-type product. Although this provision may not have received as much attention due to the COVID-19 pandemic, plan sponsors and committees should be aware of the new safe harbor option, particularly in light of the upcoming requirement to provide lifetime income disclosures to participants, which is set to become effective later this year (discussed here).
On January 12, 2021, the Department of Labor (“DOL”) issued guidance that is intended to help retirement plan fiduciaries meet their ERISA obligations to locate and distribute benefits to missing or nonresponsive participants.
Buried in the year-end Consolidated Appropriations Act (CAA) is a provision that requires group health plan brokers and consultants to make comprehensive fee disclosures similar to those that apply to retirement plans. As discussed further below, the new fee-disclosure requirements will result in additional compliance obligations for group health plan sponsors, brokers, and consultants, starting in December 2021.
As background, ERISA generally prohibits transactions between an ERISA plan and a party-in-interest, such as a service provider to the plan. However, a statutory exemption (known as the ERISA 408(b)(2) exemption) allows such transactions so long as the plan pays only reasonable compensation to a party-in-interest to provide necessary services to the plan. In 2012, the Department of Labor (DOL) issued regulations under which the ERISA 408(b)(2) exemption is available for a retirement plan only if a covered service provider makes a number of fee and service disclosures to the plan’s fiduciary to enable the fiduciary to make a determination as to whether the fees are reasonable. These are generally referred to as the 408(b)(2) fee disclosures. The DOL regulations implementing this fee-disclosure requirement specifically omit health and welfare plans.
On December 22, 2020, the Internal Revenue Service (“IRS”) issued an advance version of Notice 2021-03 (the “Extension Notice”) to extend the temporary relief from the “physical presence” requirement for participant elections under retirement plans that was previously granted in Notice 2020-42 (the “Relief Notice”).
On November 16, 2020, the Internal Revenue Service (IRS) issued Notice 2020-82 (the Notice), to further extend the deadline for required minimum contributions for single-employer defined benefit pension plans that would otherwise be due during the 2020 calendar year, from January 1, 2021, to January 4, 2021. On the same day, the PBGC issued complementary guidance, in Technical Update 20-2 (the PBGC Update), to reflect the January 4, 2021, deadline established by the IRS in the Notice when calculating variable-rate premiums.
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) previously established a January 1, 2021, deadline for certain required minimum contributions that would otherwise be due during the 2020 calendar year. This pension funding holiday applies for contributions to single-employer defined benefit pension plans required under Section 430(j) of the Internal Revenue Code (the Code). Under Code Section 430(j), single-employer defined benefit pension plan sponsors are required to make certain minimum contributions that are designed to keep the plan sufficiently funded. For a given contribution to apply for a plan year, generally the contribution must be made no later than 8-1/2 months after the plan year ends. However, when a plan has a funding shortfall for the prior plan year, the plan sponsor is required to pay four quarterly installments toward the required minimum contribution for the plan year (due on April 15, July 15, and October 15 of the plan year, and January 15 of the following year, for a calendar year plan). The CARES Act gave plan sponsors additional time to make these required minimum contributions, by providing a January 1, 2021, due date for amounts otherwise due during 2021.
In the Notice, the IRS recognized the legislative intent to defer a plan sponsor’s payment obligation to calendar year 2021. The IRS acknowledged that this deferment to 2021 would not be possible with a January 1, 2021, deadline, given that January 1, 2021, is a bank holiday, and financial institutions cannot transfer funds on the January 1, 2021, due date. As a result, the Notice extends the deadline to January 4, 2021, the next business day after January 1, 2021. For amounts that are contributed on January 4, 2021, and treated as timely made pursuant to the Notice, the amount of the required minimum contribution that is considered satisfied by the contribution is determined by computing the applicable interest adjustment based on the actual contribution date.
The Notice also extends the deadline for a plan sponsor of a single-employer defined benefit pension plan to make certain elections related to the plan’s prefunding balance. These extended deadlines relate to (a) an election to add contributions made in excess of the minimum required contribution for a plan year to the plan’s refunding balance (i.e., a balance that may be used at the plan sponsor’s election to offset minimum required contributions for a later plan year) and (b) an election to use an existing prefunding balance or funding standard carryover balance to offset a required minimum contribution for a plan year. The deadline for those elections is now also January 4, 2021, for a plan year for which the extended due date for required minimum contributions applies. Note, however, that the Notice does not impact the treatment of certain missed quarterly installment contributions otherwise due on January 1, 2021, pursuant to the CARES Act. Further, the extended deadline (previously January 1, 2021, and now January 4, 2021) does not apply for a multiemployer plan, a money purchase pension plan, a “cooperate and small employer charity” (CSEC) plan, or a fully insured plan as described in Code Section 412(e)(3).
Prior to this Notice, the IRS had issued guidance on the CARES Act funding rules for single-employer defined benefit pension plans in Notice 2020-61. That notice addressed the payment of annual premiums to the Pension Benefit Guaranty Corporation (PBGC) (as well as interest adjustments for minimum required contributions, the actuarial certification of a plan’s adjusted funding target attainment percentage (AFTAP), and Form 5500 reporting for contributions made with respect to the 2019 plan year that were made after the filing deadline for the 2019 plan year).
The PBGC Update referenced above addresses the IRS guidance and its impact on the PBGC premium filings by providing that, for premium filings due on or after March 1, 2020, and before January 1, 2021, the date by which prior-year contributions must be received by the plan to be included in plan assets used to determine the variable-rate premium is extended to January 4, 2021. If such a contribution is made by January 4, 2021, a plan sponsor may amend the premium filing to revise the originally reported asset value and the applicable variable-rate premium. Note that the PBGC relief does not impact the premium due dates, and it does not allow a plan sponsor to include a contribution that has not yet been made in the premium filing.
Contact your Faegre Drinker attorney for more information on the extended deadline for required minimum contributions, the variable-rate premium contribution calculation and deadlines, and other aspects of the CARES Act relief for single-employer defined benefit pension plans.
In Notice 2020-76 (Notice), the IRS extended the deadline from January 31, 2021, to March 2, 2021, for furnishing Forms 1095-B and 1095-C to individuals for reporting year 2020. Note that the Notice does not extend the deadline to file Forms 1094-B, 1095-B, 1094-C or 1095-C with the IRS. Those forms must be filed with the IRS by March 1, 2021 or if filed electronically, by March 31, 2021.
The Notice also extends “good-faith” reporting relief for employers that report incomplete or incorrect information on their returns (such as missing taxpayer identification numbers or dates of birth). This relief is available only when the employer can show it made a good-faith effort to comply with the filing requirements, such as gathering and transmitting the necessary data to an agent to prepare the data for submission, or testing its ability to transmit information to the IRS. The IRS has provided this good-faith relief in the past, but the Notice states that the 2020 reporting year will be the final year this type of relief is available.
The Setting Every Community Up for Retirement Enhancement (SECURE) Act included several provisions related to lifetime income strategies under retirement plans, including a requirement that pension benefit statements for defined contribution plans disclose the “lifetime income stream equivalent” of each participant’s current account balance – both as a single life annuity (SLA) and as a qualified joint and survivor annuity (QJSA). On August 18, 2020, the Department of Labor (Department) issued an interim final rule implementing this requirement that includes a model disclosure and assumptions for converting benefits (the Rule), and a fact sheet.
As background, under ERISA, administrators of defined contribution plans (such as 401(k) and 403(b) plans) are required to provide pension benefit statements quarterly if the plan allows participant-directed investment, otherwise annually. Among other requirements, the benefit statements must include the participant’s current account balance.
The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 changed a number of requirements for retirement plans in 2020 and beyond.
Certain changes under the SECURE Act already are in effect in 2020, including changes to the required minimum distribution rules for participants and beneficiaries, and changes to qualified automatic contribution arrangements under defined contribution plans, as discussed in more detail in our prior alert.
On July 24, 2020, President Trump signed four Executive Orders related to drug pricing that direct the Secretary of Health and Human Services (HHS) to take a number of actions aimed at lowering prescription drug prices. These HHS actions generally are not expected to apply directly to employer-sponsored group health plans. However, the Executive Order on “Lowering Prices for Patients by Eliminating Kickbacks to Middlemen” (the Order) could have an indirect impact on such plans, or provide an indication of things to come.
On June 19, 2020, the Internal Revenue Service (IRS) issued Notice 2020-50 (the Notice) to provide guidance on coronavirus-related distributions, increased plan loan limits, and deferment of plan loan repayments allowed pursuant to the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The Notice provides further guidance for retirement plan sponsors on implementing changes under the CARES Act provision, and supplements prior IRS guidance issued in the form of FAQs, as discussed in a prior post.
Key elements of the Notice include:
An Expanded Definition of “Qualified Individual”
Under the CARES Act, coronavirus-related distributions, the increased plan loan limits, and the deferral of plan loan repayments are available only to “qualified individuals.” A “qualified individual” is someone who has been diagnosed with the virus SARS-CoV-2 or the coronavirus disease 2019 (each referred to herein as “COVID-19”); whose spouse or dependent has been diagnosed with COVID-19; or who experiences adverse financial consequences stemming from COVID-19 as a result of being quarantined, furloughed, laid off, having reduced work hours, being unable to work due to lack of child care, the closing or reduction of hours of a business owned or operated by the individual, or other factors as determined by the Department of the Treasury.
In the Notice, the IRS exercises this authority and expands the definition of “qualified individual” to include an individual who experiences adverse financial consequences as a result of one or more of the following:
- Having a reduction in pay (or self-employment income) due to COVID-19
- Having a job offer rescinded or a start date for a job delayed due to COVID-19
- The individual’s spouse or member of the individual’s household being (1) quarantined, furloughed, laid off, or having work hours reduced due to COVID-19; (2) being unable to work due to lack of childcare due to COVID-19; (3) having a reduction in pay (or self-employment income) due to COVID-19; or (4) having a job offer rescinded or start date for a job delayed due to COVID-19
- The closure or reduction of hours of a business owned or operated by the individual’s spouse or a member of the individual’s household due to COVID-19.
A “member of the individual’s household” means someone who shares the individual’s principal residence.
NOTE: This broadens the already expansive definition of qualified individual, and allows a greater number of plan participants to benefit from the favorable tax treatment of a coronavirus-related distribution (discussed in more detail in our earlier alert).
Clarification of Rules Allowing Reliance on Self-Certification of “Qualified Individual” Status
The Notice also resolves an open issue about whether a plan administrator may rely on an individual’s self-certification that he or she is a “qualified individual” for purposes of the expanded plan loan provisions. The CARES Act and earlier FAQ guidance allowed plan administrators to rely on self-certification, but only for coronavirus-related distributions. The Notice makes it clear that plan administrators may rely on self-certification for purposes of the plan loan changes as well. In both instances, reliance on an individual’s self-certification is permitted if the administrator does not have actual knowledge that is contrary to that certification. For purposes of this standard, a plan administrator is not obligated to inquire into whether the individual has satisfied the conditions to be a “qualified individual.” The Notice also includes a sample certification.
Clarification that CARES Act Changes Are Optional
The Notice clarifies that retirement plan sponsors are not required to allow coronavirus-related distributions, increase the plan loan limits, or suspend plan loan repayments. These changes are optional, and plan administrators may develop any reasonable procedures for identifying which distributions are treated as coronavirus-related distributions under its retirement plans, provided the plan is consistent in its treatment of similar distributions.
Regardless of whether a plan is amended to allow coronavirus-related distributions, a qualified individual may obtain favorable tax treatment by treating a distribution that would otherwise satisfy the CARES Act requirements as a coronavirus-related distribution on his or her federal income tax return.
A Safe Harbor for Administration of Suspended Loan Payments
The CARES Act includes a rule under which the due date for repayments on a qualified individual’s outstanding plan loan that would otherwise be due during the period beginning March 27, 2020, and ending on December 31, 2020, may be delayed for one year. Subsequent loan repayments are required to be adjusted to reflect the delay and any interest accruing during the delay, and the period of the delay is disregarded in determining the five-year maximum repayment period.
Prior to the Notice, there were a number of open questions related to administration of this provision and re-amortization of repayments otherwise due during the suspension period. The Notice establishes a safe harbor that is available when a qualified individual’s obligation to repay a plan loan is suspended for any period beginning March 27, 2020, and ending not later than December 31, 2020 (the “suspension period”), provided: (1) the loan repayments resume after the end of the suspension period; (2) interest accruing during the suspension period is added to the remaining principal of the loan; and (3) the loan is re-amortized and repaid in substantially level installments over the remaining period of the loan (which may be extended by up to one year from the date the loan was originally due to be repaid). If a plan administrator satisfies the safe harbor, the plan is treated as complying with the applicable requirements of section 72(p) of the Internal Revenue Code of 1984, as amended (the Code). Compliance with the safe harbor is not required, however, and the Notice acknowledges that there may be other, reasonable ways to administer this provision in the CARES Act.
NOTE: This safe harbor for re-amortization of suspended repayments is substantially similar to the relief the IRS provided following Hurricane Katrina and the similar loan rules established in the Katrina Emergency Tax Relief Act of 2005. This guidance is welcome relief for plans and administrators who hoped the IRS guidance would align with past administrative practices.
In addition to the changes listed above, the Notice provides guidance on a number of other aspects of coronavirus-related distributions, including: tax reporting by plans and individuals; the types of distributions that can and cannot be designated as a coronavirus-related distribution; the types of distributions that may be recontributed to a retirement plan or IRA; accepting recontributions; special tax notice and mandatory/optional withholding requirements; and the $100,000 total distribution limit.
Along with the guidance on the CARES Act, the Notice also briefly addresses nonqualified deferred compensation plans. The Notice permits the cancellation of a service provider’s deferral election under such a plan when the service provider receives a distribution from a retirement plan that constitutes a coronavirus-related distribution by deeming such a distribution a hardship distribution for purposes of existing regulations under Code section 409A. Note that it is required that the deferral election be cancelled; it cannot be delayed.
Please contact your Faegre Drinker attorney with questions and/or to request more detailed information about implementing these CARES Act changes and the impact of the Notice.