In the past few months, we have seen significant changes to the laws governing employee benefits, from the new hardship withdrawal regulations for 401(k) participants, to the SECURE Act, to the new individual coverage health reimbursement arrangement (“HRA”). Here is what you need to know for 2020:
Starting December 20, 2019:
- Qualified Plan loans may no longer be distributed through credit cards or similar arrangements.
- Employers sponsoring defined contribution plans have an optional safe harbor method they can use to satisfy the prudence requirement in their selection of an insurer as an in-plan annuity provider if they engage in an objective, thorough, and analytical search for the insurer and determine that the insurer is financially capable and the relative cost is reasonable.
Starting January 1, 2020:
- Employers may offer individual coverage HRAs to certain classes of employees to whom they do not offer health insurance.
- The age for required minimum distributions from a retirement plan has increased from 70 ½ to 72. Participants who turned 70 ½ in 2019 will fall under the old rules and will receive their initial RMD prior to April 1, 2020.
- The age for allowable in-service distributions from a pension or 457(b) plan has decreased from age 62 to 59 ½.
- Participants may withdraw up to $5,000, penalty free, within a 1-year period from their retirement plan for any qualified birth or adoption.
- Certain retirement plans may make trustee-to-trustee transfers to another employer-sponsored retirement plan or IRA of a lifetime income investment or distribution.
- If an employer offered a nonelective “safe harbor plan”, the employer was required to provide a safe harbor notice to its participants prior to the beginning of the plan year informing the participant of his or her rights and obligations under the plan and meeting other content requirements. The safe harbor notice requirement is now eliminated.
- The default contribution rate under an automatic enrollment safe harbor plan is increased from 10% to 15% for years after the participant’s first deemed election year. The cap on the default rate for the first deemed election year is 10%.
- Under a safe harbor plan, the plan either provided for a matching contribution or provided for a nonelective contribution of at least 3% of an employee’s compensation. Now, the plan may decide which method to use up until the 30th day before the close of the plan year. Any amendments after that time but before the close of the following plan year are allowed if a nonelective contribution of at least 4% of compensation is made.
- Changes in nondiscrimination rules applicable to closed pension plans will allow existing participants to continue to accrue benefits.
- Retirement plans adopted after the close of a tax year but before the due date of the employer’s return may be considered adopted as of the previous year.
- Plans must be in operational compliance with the following hardship withdrawal regulations:
- Plans are no longer allowed to suspend deferrals when a participant requests a hardship withdrawal.
- Hardship withdrawals may be made for losses incurred on account of a FEMA-declared disaster, provided the participant lives or works in the designated area.
- Participants may take a hardship withdrawal for the qualifying medical, educational, and funeral expenses of primary beneficiary.
- With respect to a hardship withdrawal request, the plan administrator may rely upon the participant’s written representation that he/she has insufficient cash or liquid assets to satisfy the financial need.
The cap on start-up tax credits for establishing a retirement plan will increase to up to $5,000 (depending on certain factors) from $500. Small employers who add automatic enrollment to their plans also may be eligible for an additional $500 tax credit per year for up to three years.
And if you are planning for the future, starting January 1, 2021, employers must allow part-time employees who work at least 500 hours per year for 3 consecutive years to participate in 401(k) plans. These employees will be excluded from nondiscrimination and coverage testing and top-heavy rules.