The start of a new year often signals an opportunity to do things differently, and this couldn’t be truer for businesses that sponsor retirement plans. In response to three recent tax bills, employers are implementing new provisions that both improve engagement with retirement plan participants and alleviate their own administrative burdens. Now that the dust has settled from 2020, business owners can more clearly see how these three pieces of legislation work in tandem as they and their plan participants head into 2021.

Tax Law Changes

One of the most influential retirement plan tax bills in recent history was the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which was passed at the end of 2019. This legislation caught the attention of most plan sponsors, but it was quickly overshadowed by the more pressing matters of the pandemic. In response to the pandemic, Congress passed the Coronavirus Aid, Relief, and Economic Security (SECURE) Act and the COVID-Related Tax Act of 2020, both of which also made changes to retirement plan sponsorship.

SECURE Act

The SECURE Act did a few things for retirement plan sponsors beginning in 2020:

Helped offset start-up costs for new plans.

Businesses that establish a defined contribution or pension plan are eligible for a tax credit, which can range from $500 to $5,000 depending on the plan type, business size, and number of eligible participants.

Protected employers from liabilities when offering an annuity option in their plan.

If they follow certain guidelines, businesses will be protected from lawsuits brought by participants who allege that annuity payouts were less than they expected.

Made it easier to encourage participation.

Employers have previously been able to automatically enroll their employees in a defined contribution plan at 10% of wages, but starting in 2020, automatic enrollment after the employee’s first plan year can be increased to 15%. Additionally, employers can receive a $500 credit by establishing an automatic enrollment feature to their plan.

But a few SECURE Act provisions are still coming down the pike. Beginning in 2021, the SECURE Act:

Requires businesses to open their plans to certain part-time employees.
Beginning in 2021, employers cannot exclude from participation employees who (1) work at least 1,000 hours per year, or (2) work at least 500 hours per year in three consecutive years and are at least 21 years of age. Part-time employees may still be excluded from employer contributions without violating nondiscrimination rules.

Establishes PEPs.

The SECURE Act permits the use of pooled employer plans (PEPs) beginning in 2021. PEPs allow smaller businesses to pool their participants and assets into a single plan, administered by a single pooled plan provider (PPP). By sharing the administrative burden of operating a plan and boosting their collective purchasing power, small businesses can offer more competitive retirement options to their employees. On November 16, 2020, the Department of Labor published a final rule that explains how service providers can establish themselves as PPPs which lays the foundation for employers to launch PEPs sometime this year.

CARES Act

The CARES Act provided relief to retirement plan participants and plan sponsors alike. One of the Act’s provisions that affected both parties was the Coronavirus Related Distribution (CRD) Exception, which allowed plan participants to withdraw up to $100,000 from their retirement accounts in 2020 – without penalty – if they self-certified they were financially affected by COVID-19. Although participants cannot take CRDs in 2021, they still have time to notify plan providers that 2020 distributions qualified as CRDs. Plan sponsors should collect the appropriate certification documents from their employees in 2021 if they haven’t done so already.

COVIDTRA

COVIDTRA, which was just one of the many bills passed as part of the omnibus Consolidated Appropriations Act of 2021, did not reinstate CRDs, but it created something similar: the Qualified Disaster Distribution (CDD) Exception. The CDD Exception allows participants to withdraw up to $100,000 from their retirement accounts beginning in 2021 – without penalty – if they sustained an economic loss to their principal abode from a qualified disaster. Qualified disasters under COVIDTRA specifically exclude COVID-19-related disasters. This means that distributions for COVID-19-related emergencies will be subject to the 10% penalty in 2021.

COVIDTRA also changed the rules for partial plan termination.

A partial termination of a retirement plan will occur if there is a significant reduction – typically more than 20% – in plan participation resulting from employer-led terminations. If this happens, terminated employees are considered 100% vested in their account. In 2020, many small businesses had no choice but to lay off workers en masse, and the partial plan termination penalty was frustrating for businesses that planned to rehire those workers when the economy picked back up again. Fortunately, COVIDTRA provides an exception.

There would be no partial plan termination in the 2020 reporting year if the active participant count at March 31, 2021 is at least 80% of the active participant count on March 13, 2020, the date the White House declared a national emergency for COVID-19. This means that plan sponsors can use the next couple months to boost plan participation if they want to avoid partial plan termination.

If you have questions on the above changes, contact your Meaden & Moore advisor today for assistance.