IRS Issues Retirement Arrangement Guidance

Blog
July 16, 2020

Over the last several weeks, the Internal Revenue Service (IRS) has issued technical guidance that impacts retirement arrangements. This guidance is generally as a result of the COVID-19 pandemic or related to previous rule changes in response to the pandemic.

On June 29, 2020, the IRS issued Notice 2020-52. The purpose of the Notice was to provide a framework by which employers sponsoring safer-harbor 401k plans can reduce or eliminate safe-harbor contributions for the remainder of 2020. Prior to the Notice, many employers could not eliminate the safe-harbor contribution without jeopardizing its tax status. Under the notice, employers can eliminate the safe-harbor contribution for HCEs only, and maintain the safe-harbor status for 2020, or eliminate the safe-harbor contribution altogether and subject the plan to ADP and ACP testing for 2020.

Under either scenario, the plan must be amended. An amendment to eliminate the safe-harbor contribution altogether must be adopted no later than August 31, 2020. Non-elective contributions will cease upon adoption of the amendment while the amendment will go into effect 30 days after participants have been informed of the amendment to cease safe-harbor matching contributions. An amendment to cease contributions for HCEs only can be adopted at any time. Contributions will cease after HCEs have been provided notice within a reasonable period of time prior to stoppage but not longer than 30 days.

If you are contemplating making a change to your safe-harbor contribution, you should contact your third party administrator as soon as possible to gain a clear understanding of the discrimination testing ramifications and the timeline for making the change.

On June 23, 2020, the IRS issued Notice 2020-51 providing guidance on the waiver of required minimum distributions “RMDs” from defined contribution plans and IRAs. This guidance was a follow-up to the initial 2020 RMD waiver provisions passed as part of the CARES Act.

Under the initial CARES Act provisions, participants that took an RMD between February 1, 2020, and May 15, 2020, had until July 15, 2020, to “roll” the amount back into an eligible plan. There was no formal guidance on the status of RMDs taken prior to February 1. The Notice addresses this issue by permitting all previously taken RMDs to be rolled over by the later of 60 days from the date of the initial distribution or August 31, 2020. Effectively, any RMD taken prior to July 2, 2020, has until August 31, 2020, to be rolled into an eligible plan without suffering any adverse tax consequences while distributions taken after July 2, 2020, have 60 days to be rolled over to an eligible plan.

RMDs from a spousal inherited IRA can be returned to the same IRA by the August 31, 2020 deadline but the Notice does not grant similar relief for amounts paid to non-spousal beneficiaries.

Plans are not required to be immediately amended for these provisions to be able to apply them. They have until the last day of the first plan year beginning on or after January 1, 2022, as outlined in the CARES Act.

On June 19, 2020, the IRS released Notice 2020-50 related to COVID 19 loans and distributions under the CARES Act.

The Notice expanded the definition of individuals “qualified individuals” permitted to take enhanced COVID related loans and distributions as well as the expansion of what is defined as adverse financial conditions resulting from the pandemic. In general, the participant and their household can be considered a “qualified individual” when evaluating whether the financial impact of the pandemic on the entire household gives rise to eligibility for an enhanced plan distribution or loan under the CARES Act.

Additional guidance included:

  • A “safe-harbor” for the administration of loan suspensions due to the pandemic. The term of the loan must be extended by the suspension period and re-amortized. Interest must continue to accrue during the suspension period. Payments must restart in early 2021 when the suspension period ends.
  • Confirmation that employers can rely on a participant’s self-certification that they are a “qualified individual” without further investigation.
  • Plans that accept rollover distributions, should also accept the recontribution of COVID related distributions made within the CARES Act three year time period.

The COVID-19 pandemic has brought many challenges to plan management teams as they have had to navigate competing priorities in a rapidly changing world. We expect a continuous stream of IRS guidance over the next several months and possibly additional regulatory changes in response to the ongoing pandemic. Aronson is constantly monitoring these changes and evaluating how these changes impact our clients.

 If you have questions regarding this guidance or any other aspect of your plan(s), please feel free to contact Mark Flanagan of Aronson’s Compensation and Benefits Practice at mflanagan@aronsonllc.com or 301.231.6257.