To say 2020 was fraught with more change than any of us anticipated would be a gross understatement, and this couldn’t be truer for businesses that sponsor retirement plans. Changes began rolling in pre-pandemic times with the SECURE Act of 2019 and continued with two COVID-19 relief bills in 2020, the CARES Act and COVID-Related Tax Relief Act.
But, what exactly has changed and what should plan sponsors be looking out for?
1. Changes Are Still Trickling Down from the SECURE Act of 2019
The SECURE Act was one of the most influential retirement plan tax bills in recent history and did a few things for retirement plan sponsors in 2020, including:
- Helped offset start-up costs for new plans.
- Protected employers from liabilities when offering an annuity option in their plan.
- Increased contributions to a defined contribution plan from 10% of wages to 15% after the employee’s first year.
- Awarded a $500 tax credit to those who added automatic enrollment to their plans.
- Required businesses to open plans to certain part-time employees.
PEPs are the new MEPs and Could Eliminate Audit Requirements
The SECURE Act ushered in many changes, but one of the most significant changes didn’t take effect until this year. Beginning in 2021, any business can join a new type of Multiple Employer Plan (MEP) known as a Pooled Employer Plan (PEP). Why the new retirement plan structure? The rules restricting the benefits of the MEP to employers with commonality limited the usefulness of this option for many businesses.
The PEP allows for broader participation in that it does not require employers to have business commonality to pool participants and assets into a single plan administered by a single pooled plan provider (PPP). The benefits include reduced fiduciary responsibility, reduced administrative responsibility, more reasonable investment pricing, and reduced plan expenses.
But perhaps one the greatest selling points is that PEPs with over 120 total employees may be able to escape the IRS required audit. In the past, if a plan had more than 100 or 120 participants, as applicable, an audit was automatically required. But, the SECURE Act’s PEPs allow multiple small plans to band together into one large plan (up to 1,000 participants) and avoid this potential headache.
The SECURE Act legislation caught the attention of many plan sponsors since its origination in 2019, but it was quickly overshadowed by the more pressing matters of the pandemic. Between March 2020 and January 2021, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act and the COVID-Related Tax Relief Act (COVIDTRA), both of which also made changes to retirement plan sponsorship.
2. Reporting and Collecting CRD Documentation from the CARES Act
One of the most notable provisions affected both parties and allowed plan participants to withdraw up to $100K from their retirement accounts in 2020 so long as they self-certified they were financially impacted by COVID-19. Participants could withdraw the funds without incurring the 10% early withdraw penalty and have three years to settle the taxes on that income. These withdrawals were known as Coronavirus Related Distributions (CRDs) and were only available through the end of 2020.
Although CRDS cannot be taken in 2021, participants who opted to take distributions in 2020 must notify their plan providers that their withdraws were considered CRDS. Plan sponsors should make sure to collect the appropriate certification documents from their employees in 2021 if they haven’t begun doing so already.
3. The Suspension of Plan Termination and Qualified Disaster Exceptions Under COVIDTRA
COVIDTRA, one of the many bills passed under the Consolidated Appropriations Act of 2021, included something similar to a CRD known as a Qualified Disaster Distribution Exception. This exception is very similar to the CRD in that it allows plan participants to withdraw up to $100K from their retirement accounts, but begins in 2021. Like with the CRD, the 10% early withdraw penalty will be waived if an individual sustained an economic loss to their principal home from a qualified disaster. However, COVIDTRA excludes COVID-19 related disasters.
The Act also increased the amount that a qualified individual can withdraw as a plan loan due to disaster. Typically, a loan from a retirement plan is limited to the lesser of $50,000 or 50% of the participant’s vested account balance in the plan. But the Act increased the maximum amount to the lesser of $100,000 or 100% of the participant’s vested account balance.
But the buck doesn’t stop there. COVIDTRA also changed the rules for plan termination. In 2020, many small businesses were forced to lay off scores of workers, which typically would incur a partial plan termination penalty. This possibility was especially frustrating for business owners who planned to re-hire their workforce once conditions improved.
Luckily, COVIDTRA provided an exception. It deemed that no partial plan termination for the 2020 reporting year would be necessary if the active participant count on March 31, 2021 was at least 80% of the active participant count on March 13, 2020 (or the date the White House declared the pandemic a national emergency).
Being a responsible plan sponsor isn’t an easy job. Not only are you tasked with determining plan parameters, making investment choices, and providing contribution payments, but you must also stay up to date on annual changes made to retirement and healthcare plans.
Most business owners find these tasks to bog them down and take their focus off what is truly important to them—growing their business. In more cases than not, outsourcing these jobs to a plan administrator is the best course of action.
At RiversEdge Advisors, we simplify retirement plans for business owners by acting as (1) the plan advisor, (2) a fiduciary partner, and even (3) the participant educator. From fund selection to plan customization, compliance documentation and progress monitoring, we handle it all.
If you are a privately held business with 1-1000 employees and are looking for a partner to act as a co-fiduciary for your business’s retirement plan, RiversEdge Advisors may just have the solution you are looking for. We are located in Wilmington, DE but also serve business owners in need around the country. Schedule a call with one of our advisors today to discuss your concerns and learn how RiversEdge can help.