Watson conceded during his virtual presentation that this has been an unprecedented year for America and for the retirement plan industry, but he said it would have been an unprecedented year even without COVID-19. “It’s one of the busiest years for retirement plans in long time,” he said. “The passage of the Setting Every Community Up for Retirement Enhancement, or SECURE, Act without question is one of the most significant pieces of retirement plan legislation in 14 years.”
The SECURE Act allows employers to adopt cash balance plans even after the end of their plan year. It allows for the late adoption of safe harbor 401(k)s, “in an effort to rectify really bad ADP [actual deferral percentage] tests,” Watson said. The legislation also allows for in-service distributions for the birth or adoption of a child. Watson noted that “there are a lot of open issues with this and we will be looking for more guidance.”
Watson said the headline news from the SECURE Act is pooled employer plans (PEPs). “Beginning next year, many of you may be solicited to join one,” he told attendees.
Also on the list of changes from the SECURE Act is a three-year tax credit for small employers to adopt an eligible automatic contribution arrangement (EACA) and a slight delay in the required beginning date for required minimum distribution (RMDs).
Watson called all these provisions the “good stuff,” and said, “We gotta pay for the good stuff somehow.” In that vein, the SECURE Act ends eligibility for most beneficiaries to stretch out individual retirement account (IRA) and retirement plan distributions beyond 10 years.
Another change from the SECURE Act, which Watson called an “intriguing feature we still have a lot of questions about,” is that, beginning in 2024, plan sponsors are required to allow long-term, part-time employees to defer into the plans. “We start that counting for eligibility next year and these employees will get vesting credited for their prior years of service,” he said.
With all that already piled onto plan sponsors’ plates, along came the Coronavirus Aid, Relief and Economic Security (CARES) Act. Watson reminded attendees that the provision allowing for coronavirus-related distributions (CRDs) expires December 30; however, the provision that expands the amount available for participants to take as a loan expires September 22, which is now.
The CARES Act also allowed loan repayments to be suspended for the rest of the year and, once they resume, the term for repayment may be extended for a year. Participants are also allowed to waive RMDs for this year. For defined benefit (DB) plans, the CARES Act allows for possibly favorable DB funding targets and an extension of time for depositing DB plan contributions.
Watson noted that the IRS has been very busy responding to the CARES Act. “By my count, it has issued 14 different notices,” he said. In addition, the IRS has issued the first piece of guidance about the SECURE Act and has proposed regulations on plan loan offsets.
Watson’s presentation also included a “flood of guidance over the last two months” from the Department of Labor (DOL).
All this shows how busy retirement plan sponsors have been. A graphic on Watson’s presentation had a white board with a numbered to-do list, but instead of items for each number, across the board was written “Everything!”
Plan sponsors have been and are going to be busy with plan documents. Watson noted that 403(b) plans and DB plans had important restatement deadlines this year, and the submission deadline for individually designed cash balance plans was this year. Also, the third restatement cycle for 401(k) and other defined contribution (DC) plans has started; the deadline is July 31, 2022.
Watson pointed out that COVID-19 isn’t the only disaster in town. Natural disasters—fires, floods and hurricanes—have also warranted relief for plan participants and sponsors. A standard package of relief that used to be issued after each disaster by the IRS and DOL was made permanent with the same legislation that gave us the SECURE Act, Watson said.
The deadline for most amendments related to legislation is at the end of the 2022 plan year. The deadline for amendments to hardship distribution rules is December 31, 2021.
Meanwhile, Employees Went Remote
To add to the crazy busy year, plan sponsors were faced with logistic issues as offices closed and employees transitioned to remote work. The DOL finally issued its final rule on electronic disclosures for retirement plan communications, which is helpful, Watson noted.
He warned, though, that while the rule says plan sponsors can use a business email for participants, it would be a good idea to get a backup email. “As soon as you get a bounce-back, the person is essentially opted out, so plan sponsors would have to go back to paper notices,” he said. “A backup [email] address seems like an important tool to deal with missing and lost participants. The key to satisfying the DOL and IRS desire to track missing participants is to not get them lost to begin with.”
To help with the new virtual work environment, the IRS issued new spousal consent requirements for 2020.
Watson pointed out that counting hours of service has always been problematic for salaried employees, and, now that employees work remotely, it is a challenge for more employees. “How do you measure hours of service when someone isn’t at work, especially when there are situations such as parents who are teaching children at home and need flexibility?” Watson queried. He said the “elapsed time” method may be the simplest way to count hours.
Plan sponsors also need to understand the differences between employees who are on a leave of absence, furloughed or laid off. “Those on temporary work stoppage may be entitled to benefits and vesting, and really this is not something a service provider is well-equipped to answer because different employers may mean different things when they say these words,” Watson told attendees.
Despite the major implications of the SECURE Act, legislators are working on more changes to retirement plans. The Retirement Security and Savings Act of 2019, sponsored by Senators Rob Portman, R-Ohio, and Ben Cardin, D-Maryland, includes new Qualified Automatic Contribution Arrangement (QACA) provisions, student loan debt help provisions and much more.
There’s also the Automatic Retirement Plan Act, sponsored by Representative Richard Neal, D-Massachusetts, House Ways and Means Chair, and the Wall Street Tax Act. Watson said the latter is being pushed by the progressive wing of the Democratic party and would have big implications for retirement plans. It would impose a tax of 0.1% on each sale of securities, and Watson pointed out that there is no exemption for retirement plans. “Every time you make a deferral, you purchase a security, every time you make a transfer, you purchase securities—it will all be taxed,” he said. “Vanguard has said it will take the average retirement saver 2.5 years longer to be ready to retire if the Wall Street Tax Act is passed as is.”
Dealing With Stress
With all of this swirling around in their heads, how can plan sponsors handle the stress? Watson shared his wife’s idea of a “dammit doll” which can be whacked on a desk or wall to alleviate frustration. However, he said his advice would be for plan sponsors to be gentle with themselves.
“It’s a challenging time. There’s lots of stress, but there’s lots we’re learning from this,” he said. He added that employees are going through the same stresses and advised plan sponsors to take the time to listen to employees, show them compassion and assist when possible.
“There’s definitely hope for brighter days ahead,” Watson said.
He ended his presentation by delighting attendees with a song he created about the CARES Act, set to the tune of Frank Sinatra’s song, “L.o.v.e.”
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