I’m not sure anyone would disagree that the past 12 months have been stressful and a whirlwind, but they’ve also been eventful. This has been particularly true with all the recent regulatory changes impacting retirement plan accounts. In fact, the last 12 months have brought some of the most significant changes to retirement plan law in more than a decade. It started with the Setting Every Community Up for Retirement Enhancement (SECURE) Act signed in December of 2019, and was followed closely by the Coronavirus Aid, Relief and Economic Security (CARES) Act signed in early 2020.
Both regulations introduced a number of new retirement plan provisions ranging from enhanced tax credits and extended deadlines for plan establishment aimed at encouraging the creation of new retirement plans, to new safe harbor 401(k) guidelines, updated lifetime income provisions and relaxed plan distribution provisions due to the COVID-19 pandemic. Given the flurry of changes to many retirement plan provisions over the last year, it seemed appropriate to highlight some of the key provisions created through the SECURE Act and CARES Act as we head into 2021.
Many of the key retirement plan provisions in both legislative acts became effective this year, including changes to the RMD starting age (from age 70½ to age 72), a special waiver for 2020 RMDs due to COVID-19, disclosure simplification for safe harbor 401(k) plans, expansion of tax credits to encourage new retirement plan startups, and less restrictive plan distribution and loan rules for plan participants financially impacted by Covid-19. And while many provisions are already in place, there are still some important provisions still to come, along with a few expiring soon that plan sponsors and plan participants should be aware of as they prepare for 2021. A few highlights include:
Retirement Account Withdrawals (CARES Act) – The CARES Act provided financial relief for individuals impacted by COVID-19 by permitting penalty-free withdrawals from IRA and 401(k) plans of up to $100,000. However, this special withdrawal feature is not permanent, with the deadline for withdrawals quickly approaching on December 30, 2020.
Long-Term Part-Time Employees (SECURE Act) – Beginning with the 2024 plan year, long-term part-time employees who have attained age 21 and worked at least 500 hours per year for 3 consecutive years must be given the opportunity for elective deferrals into a 401(k) plan. Although the official effective date starts with the 2024 plan year, 2021 is the first year that plan sponsors must start tracking hours to determine if a participant would meet the 500 hours for 3 consecutive years requirement.
Lifetime Income Disclosure (SECURE Act) – All defined contribution retirement plans (i.e. 401(k) plans) will be required to include a lifetime income illustration on all annual participant benefit statements. The illustration is intended to show the monthly income a participant would receive if their total account balance were used to provide a lifetime income stream. In September of this year, the Department of Labor published additional guidance for this provision in the Federal Register, with final compliance required one year after the guidelines were published (which would be September 2021). This rule will effectively now apply to retirement plan benefit statements furnished after September 2021.
Pooled Employer Plans (SECURE Act) – A Pooled Employer Plan (PEP) allows unrelated employers to participate in one retirement plan that is administered by a single plan provider – referred to as a “pooled plan provider.” These programs could be helpful in providing small business owners a cost effective and less complex alternative for offering retirement plan benefits to their employees. These programs can be effective beginning January 1, 2021.
What’s exciting about all the retirement plan legislation over the past 12 months is that many aspects have focused on key retirement readiness issues, including expanded accessibility for employees to retirement benefits and retirement income enhancements. As we conclude 2020 and head into 2021, employers should take some time to consult with their retirement plan administrator and/or retirement plan provider to review the impacts of the SECURE Act and CARES Act provisions for their retirement program, and contact your financial advisor for help with any retirement planning questions.