Compliance June 8, 2021

IRS Reminds Plan Sponsors of Plan Qualification Requirements

The IRS updates its Operational Compliance List periodically to reflect new legislation and IRS guidance, and it reflects that many provisions of the SECURE Act are in effect.

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Plan sponsors that might have been distracted by the COVID-19 pandemic and its related legislation and impact on employees have a reminder from the IRS of important rules that should be in effect or will be effective next year.

The Setting Every Community Up for Retirement Enhancement (SECURE) Act was passed in December 2019, just prior to COVID-19’s arrival in the U.S. and the passage of the Coronavirus Aid, Relief and Economic Security (CARES) Act. Changes made by these bills and others are included on the IRS’ updated Operational Compliance (OC) List. The list identifies changes in retirement plan qualification requirements and Internal Revenue Code (IRC) Section 403(b) requirements.

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Many provisions of the SECURE Act went into effect in 2020. For example, Section 102 of the bill increased the 10% cap for the automatic enrollment safe harbor after the first plan year to 15% (but retains the 10% limit for the first plan year in which an employee defers).

Section 103 removed the requirement to provide an annual safe harbor notice for nonelective safe harbor IRC Section 401(k) plans. This section also permits plan sponsors to adopt a safe harbor IRC Section 401(k) plan with nonelective contributions any time before the 30th day before the close of the plan year. Plan sponsors that make nonelective safe harbor contributions of at least 4% of compensation for a plan year may adopt this safe harbor design.

Section 109 of the SECURE Act provided that qualified 401(k) and 403(b) plans may permit certain transfers and distributions of lifetime income investment options in cases in which they are no longer authorized to be held as an investment option under the plan.

The SECURE Act also provides for penalty-free withdrawals from retirement plans for individuals in case of birth or adoption, and increases the age for required minimum distributions (RMDs) from 70.5 to 72. Section 205 of the SECURE Act changed the nondiscrimination testing requirements (generally relating to testing contributions or benefits and compliance with the minimum participation rules) for a grandfathered group of employees with respect to a closed defined benefit (DB) plan by providing alternative nondiscrimination testing methods that the plan sponsor may choose to use.

For 2021, plan sponsors must allow long-term employees working at least 500 but less than 1,000 hours per year to participate in their plans. This section of the SECURE Act applies to plan years beginning after December 31, 2020, except that 12-month periods beginning before January 1, 2021, are not taken into account for purposes of determining a long-term, part-time employee’s eligibility to participate. That is, plan sponsors must start counting hours for their long-term, part-time employees this year.

For distribution calendar years beginning on or after January 1, 2022, the IRS has issued final regulations updating the life expectancy and distribution period tables that are used to calculate RMDs from qualified retirement plans, individual retirement accounts (IRAs), annuities and certain other tax-favored employer-provided retirement arrangements.

Plan sponsors can keep an eye on the IRS’ OC List webpage to ensure they achieve operational compliance.

Ask the Experts June 8, 2021

Statutory Limits to Use for Non-Calendar Year Plans

Experts from Groom Law Group and CAPTRUST answer questions concerning retirement plan administration and regulations.

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“Our ERISA 403(b) plan has a non-calendar year plan year: July 1 to June 30. Our recordkeeper insists that in calculating the 415 contribution limit, we should use the dollar limitation for the calendar year in which our plan year ENDS, but for calculating the 401(a)(17) compensation limit, we should use the dollar limitation for the calendar year in which the plan year BEGINS. Could that possibly be correct?” 

Charles Filips, Kimberly Boberg, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, answer:

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Assuming the 415 limitation year in your plan is the plan year, your recordkeeper is indeed correct! Though it is not consistent and thus might not make sense to you, the dollar limitation for the calendar year in which the plan year begins is indeed used for 401(a)(17) limit purposes, while the opposite is the case for 415 limit purposes; the applicable dollar limit for that purpose is the calendar year in which the plan year ends. Keep in mind that, in almost all cases, the 415 limits for a 403(b) plan apply on the calendar year basis and not a plan year basis. See Treas. Reg. section 1.415(j)-1(e). 

It is this complexity, as well as for other reasons, that many plan sponsors opt to use a calendar year as their plan year. A calendar year plan year results in straightforward contribution limit calculations, as most of the limits are calendar-year based.

 

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice. 

Do YOU have a question for the Experts? If so, we would love to hear from you! Simply forward your question to Rebecca.Moore@issgovernance.com with Subject: Ask the Experts, and the Experts will do their best to answer your question in a future Ask the Experts column.

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