Early 2021 Grab Bag of Legal Updates for Retirement Plans
From new federal legislation to upcoming plan amendment deadlines, employers sponsoring retirement plans have a number of new issues to consider in 2021.
The Consolidated Appropriations Act, 2021 (“CAA”), which became law on December 27, 2020, provides new relief for retirement plans in response to the COVID-19 pandemic. While the CAA’s impact on retirement plans is limited, some of the relief provisions are noteworthy.
Here is a brief discussion of the major relief provisions found in the CAA, and other recent retirement plan topics that sponsors of retirement plans should consider as 2021 gets underway.
Consolidated Appropriations Act, 2021
Partial Plan Terminations. Employers who had reductions in force or layoffs should consider whether a “partial plan termination” may have occurred. Generally, a plan may have a partial termination if at least 20% of its participating employees ceased to be participants in a particular plan year because of an employer-initiated action. The law requires all “affected employees” to be fully vested in their account balance as of the date of a partial plan termination.
The CAA provides temporary relief from the partial plan termination rules. Specifically, a partial termination will not be triggered for any plan year which includes the period beginning on March 13, 2020 and ending on March 31, 2021, if the number of active participants covered by the plan on March 31, 2021, is at least 80 percent of the active participants covered by the plan on March 13, 2020. This is generally good news for employers who terminated a substantial percentage of their employees after March 13, 2020 and rehire many of them by March 31, 2021. But, it may not be possible for employers to “un-ring the bell” if the employer has already fully vested the “affected employee” participants under the partial plan termination rules in effect before the CAA became law.
Miscellaneous Provisions. The CAA also provides optional disaster relief for federally-declared disasters that are not related to COVID-19 (e.g., the California wildfires, Hurricane Laura, etc.), retroactively amends the CARES Act to allow “coronavirus-related distributions” under money purchase pension plans, and provides relief for overfunded pension plans electing to transfer excess funds to a retiree health account or retiree life insurance account.
Extended Remote Signature Procedures for Qualified Plans
Retirement plans with annuity payment options as the normal form of payment generally require spousal consent before a married participant can elect any payment option other than a joint and survivor annuity. For example, spousal consent may be necessary for a participant to elect a lump sum distribution. As a general rule, the spousal consent must be witnessed in the “physical presence” of a plan representative or notary public.
Last year, under IRS Notice 2020-42, the IRS provided relief from the physical presence requirement from January 1, 2020 through December 31, 2020. During this time period, the IRS allowed plan representatives and notary publics to witness participant elections or spousal consents by videoconference, provided that certain requirements are met (for a description of the requirements, see our previous client alert here). On December 22, 2020, the IRS issued Notice 2021-03, which extended the relief from the physical presence requirement through June 30, 2021.
Restatement Window for Pre-Approved Defined Contribution Plans
As a reminder, the IRS announced that, starting August 1, 2020, employers with a pre-approved defined contribution plan will have a two-year time period (until July 31, 2022) to restate their plan documents. In general, an employer that uses a pre-approved plan must restate its plan every six years. Miller Johnson has an updated pre-approved 401(k) plan which can be adopted by clients.
Required Minimum Distribution Rules
The Setting Every Community Up for Retirement Enhancement Act (“SECURE Act”), enacted on December 20, 2019, increased the age at which required minimum distributions (“RMDs”) must begin from 70½ to 72. This is effective for individuals born after June 30, 1949.
In addition, following the death of the participant, distributions generally must be made by the end of the 10th calendar year following the year of death, and the ability of beneficiaries to stretch distributions over their own life expectancies has been significantly curtailed. Prior rules provided that the distributions must be made by the end of the fifth year following the participant’s year of death if the distribution did not begin within one year of death and was not payable over the beneficiary’s life expectancy.
The new rule for defined contribution plan distributions after death applies to beneficiaries of participants who die after December 31, 2019, except as follows:
- For governmental plans, the new rule applies to beneficiaries of participants who die after December 31, 2021.
- For collectively bargained plans, the new rule applies to beneficiaries of participants who die after December 31, 2019, or, if later, the date on which the last collective bargaining agreement terminates, but no later than December 31, 2021. It is not entirely clear at this time what the effective date of the rules is if a plan includes both union and non-union employees.
The deadline for amendments reflecting SECURE Act revisions is generally the last day of the plan year beginning on or after January 1, 2022. For calendar year plans, the deadline is December 31, 2022. However, later deadlines may apply to governmental plans or collectively bargained plans.
Employers sponsoring retirement plans should be aware of these changes for 2021. New federal legislation (including the CAA), government agency guidance from the IRS and DOL (which we will summarize in a separate client alert), and upcoming plan amendment and restatement deadlines are among some of the issues that plan sponsors should consider as 2021 progresses.
If you have any questions, please contact one of the Miller Johnson employee benefits attorneys.