In a recent dialogue with the PLANADVISER/PLANSPONSOR editorial team, two expert lawyers offered helpful advice to pension plan sponsors and service provider fiduciaries when it comes to meeting the requirements and opportunities presented by two key pieces of legislation: the Every Community Establishment for Retirement Enhancement Act (SECURE) and the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
The full recording of the hour-long discussion with Percy Lee, associate attorney at Ivins, Phillips & Barker; and Aliya Robinson, senior vice president of pension and compensation policy at the ERISA Industry Committee (ERIC); is available here. Highlights of the discussion are presented below, focusing on the critical topics of Required Minimum Distributions (RMDs) and tracking different types of hardship withdrawals, in particular Coronavirus Related Distributions (CRDs). Speakers also discussed the importance of tracking the working hours of part-time employees in 2021, 2022 and 2023, given that these workers must become eligible for pension plan participation after three years of service, assuming that ‘they reach 500 hours every year.
Percy Lee on part-time workers
Thinking back to the SECURE Act may seem like an eternity ago for many plan sponsors. It became law at the end of 2019, before any real discussion on the pandemic. More importantly, it delayed RMD’s age from 70.5 to 72 years old.
This was perhaps the most significant change related to the plan made under the SECURE Act. Other significant changes included allowing penalty-free withdrawals for birth or adoption, expanding eligibility for long-term part-time employees in 401(k) plans, and changing the rules for disclosure of lifetime income and portable lifetime income products. And, of course, the SECURE law created a new market for employer-sponsored group plans (PEPs), while making other changes to health and welfare plans. Plan sponsors should pay attention to all of these things.
In practice, for this audience, a takeaway is that they should immediately start tracking the hours of part-time employees. The SECURE Act states that plans must allow long-term and part-time employees to participate after accumulating three consecutive 12-month periods with 500 or more hours of service. To this end, the counting of hours began on January 1, 2021. The same date applies even for plans and employers operating outside the calendar year. This means that employees who work 500 hours per year from 2021 to 2023 will become eligible again in 2024, and they must be allowed to participate.
It should be noted that employees who are to be covered by the SECURE Act expansion may receive, but are not required to receive, matching employer contributions. Additionally, they may be excluded for non-discrimination testing purposes. There are still places where we hope to get some clarifying guidance, but, for now, the main thing for employers is to prepare for 2024 by starting in 2021 to track the hours of part-time employees.
Lee on RMD Confusion
Based on my practice, there is currently severe RMD confusion, in part due to what the SECURE Act has done versus what the CARES Act has done. Simply put, the RMD date is the deadline by which distributions must begin, and so by delaying the RMD point from 70.5 to 72, the SECURE Act allowed participants to wait longer to begin these distributions. However, we must bear in mind that individual plans are permitted to have earlier required distribution ages. Indeed, they could “grandfather” at the age of 70.5 RMD if they wish.
Another point of attention is that, even after the adoption of the SECURE law, RMDs who had already started at the required age of 70.5 years cannot be stopped. Under previous law and under current law, once RMDs start from an account, they must continue. What caused the confusion was that the CARES Act provided for a pause in 2020 for RMDs that had already started. To be clear, suspending RMDs and stopping RMDs altogether are not the same thing.
The CARES Act also added to the confusion in that it included specific provisions that provided special retroactive rollover treatment for some very specific RMDs that were launched in 2020 that would have been treated as RMDs without the CARES Act. It is important to slow down and review all of these interconnected requirements.
Aliya Robinson on Difficulty Distributions and Resubmissions
Whether it’s provisions in the SECURE Act or the CARES Act that allow people to re-contribute money, either to catch up in terms of preparing for retirement or to avoid the taxation of withdrawals for difficulties, this will present a real logistical challenge for plan sponsors. Take, for example, the provision of the SECURE law which allows people to withdraw funds without penalty in the event of a birth or adoption, while giving them the option of redistributing the funds later.
First of all, a registration is required at the beginning, when the money comes out of the scheme. This initial record is fairly easy to create, as the various guidelines confirm that plan sponsors can generally rely on self-certification from plan members unless they have full knowledge that the member is making misrepresentations. . However, this record should be accurately labeled as a withdrawal for a birth/adoption, compared to, for example, a normal plan loan or Coronavirus Hardship Distribution (CRD).
You need to have a system in place that can keep track of this over a potentially long period of time, and then the most important questions come up at the end. If a person wants to re-contribute a certain amount of money, how do you differentiate those dollars from other types of new contributions? Can the person contribute beyond the normal limits when part of their contribution is the reimbursement of such a distribution? Should it all go into the same account or should those dollars be separated in terms of pre-tax or after-tax dollars? What if the money came from an after-tax fund in the first place? All of these issues and the related tax ramifications are complex.
It will be much easier to manage expanded loans authorized by CARES because this record keeping infrastructure is already in place. CRDs, on the other hand, are an entirely new distribution. It’s not a hardship withdrawal and it’s not a plan loan, so you have to set up different systems to make sure you can keep up with it.
Robinson on CRDs and retirement security
At this time, we are past when you can take CRDs, but we need to find out about the refund process. These distributions can be redistributed, but they don’t have to be. Effectively, plan sponsors will need to track all of this over the next three years and then report at some point whether the money that left their plan did so as a taxable distribution.
Looking back, I think the biggest question and concern is the potential impact on retirement security. Will people repay these distributions? It’s not clear. What we hear from plan sponsors is that they want to push plan members to pay that money back, but they don’t know how much pressure they can actually push. When do they go beyond education and their role?
And what if you move from one employer to another employer? Are you allowed to transfer money from an old plan into a new employer’s plan? There are some big open questions here, and we’ll be watching for additional advice.