Late last year, Congress passed the Further Consolidated Appropriations Act of 2020, which included a number of pension provisions to facilitate retirement savings, many of which with an effective date of January 1, 2020. Since that time, plan sponsors and their service providers have been working hard to understand the scope of the changes and how best to implement them.

This column highlights just some of the Internal Revenue Code changes that are problematic and that will need the careful hand of Treasury and the Internal Revenue Service (IRS) to provide guidance, along with generous transition guidance for plan sponsors maintaining tax-qualified plans.

Pooled Employer Plans

Coming in the near future, there will be an opportunity for unrelated employers to enter into a new arrangement, called a pooled employer plan (PEP), which has some very favorable ERISA protections. However, on the tax side, work is needed to navigate the existing multiple employer plan rules under Code Sec. 414(c), as these rules typically bring in tracking and counting service for all employers with the PEP for eligibility and vesting service, and typically restrict a distribution on termination of employment if the worker gets reemployed with another employer in the same PEP. They also bring in an aggregate Code Sec. 415 limit on contributions that can be difficult to understand why an unrelated employer plan contribution may be restricted due to plan contributions made by an unrelated employer. And lastly, there is the historic "one bad apple" rule that is provided some relief in the SECURE Act but will need to work with IRS and Treasury regarding the steps needed to be taken to ensure that a single plan in the PEP does not impact the tax qualified status of the remainder of the plans. The current proposed regulations were a step in the right direction, but they are not without their burdens.

Updated 402(f) Rollover Notice

Plan sponsors and service providers are eager to receive the updated sample notice from the IRS with the SECURE Act changes. This is important because the old Notice, Notice 2018-74, cannot technically be relied upon as the SECURE Act provisions are now effective. And failure to provide a 402(f) notice can trigger a $100 per notice penalty. The Notice will need to reflect the change in the age 70-½ to age 72 for the required beginning date for minimum required distributions for individuals born after July 1, 1949.

The Notice will also need to reflect the exception to the Code Sec. 72(t) (10% additional tax for early withdrawals) (and that the amount is not eligible for rollover) for certain child birth and adoptions. It may also address some of the details regarding the post-death changes to defined contribution plans and IRAs (so called elimination of the stretch IRA).

In-Service Distribution for Child Birth and Adoptions

Plan sponsors (other than sponsors of defined benefit plans) may be interested in offering a special in-service distribution right of up to $5,000 for a child adoption or birth, to help new parents with the costs associated with raising a child. But prior to implementation, there are a number of issues that need to be addressed to ensure that the plan's tax qualified status is not put in jeopardy.

The SECURE Act provided a number of changes to qualified plans, but full and proper implementation will require IRS and Treasury guidance, which we all eagerly await.

First, it appears the intent is to permit $5,000 for each child (so twins get $10,000), but this should be confirmed in addition to what documentation will be required prior to making the distribution. Will a selfcertification alone be sufficient, similar to how hardship expenses through a streamed-line process is permitted (with the participant retaining documentation of the birth or the final adoption paperwork), or will a birth certificate or final adoption paperwork be required to be maintained by the employer? Second, it is presumed that this special in-service right is an optional plan design that requires a plan amendment, which should be confirmed by the IRS, along with the ability to add restrictions on such payments (e.g., only from fully vested accounts, or from certain sources). And if elected, it appears that an unlimited right to repay the distribution back to the plan must be preserved without a time restriction (unlike other repayment rights that generally have a three year period to facilitate a tax refund for the returned funds). This adds added complexity to the proper sources of these funds, and the rules for subsequent distribution. And once a decision is made to offer the withdrawal right, can it be later eliminated or is there an anti-cutback concern with eliminating the new in-service distribution?

Third, for plans that do not want to offer this special in-service distribution right, questions arise whether they need a plan amendment to expressly exclude from rollover contributions such child/adoption repayments. Ideally, confirmation that all is required for an otherwise eligible distribution from the plan is to indicate on Form 1099-R if the participant is not yet age 59-½ and no other code applies that Code 1 in box 7 is appropriate. This will permit a participant to file Form 5329 with their income tax return to claim an exemption for the Code Sec. 72(t) tax. Moreover, guidance should clarify that the plan sponsor has no other duty even if the participant notifies the plan sponsor that the distribution will be used for such an event—so no reporting or withholding issues for treating the payment as eligible for rollover, withholding 20% federal income taxes, and providing a 402(f) notice.

Minimum Required Distributions— Lifetime Payments

For lifetime payments, the required beginning date was changed from April 1 of the calendar year following the year the participant turns age 70-½ (or retires, if later and not a 5% owner) to the later of April 1 of the calendar year following the year the participant turns age 72 (or retires, if later and not a 5% owner) for participants who turn 70-½ after December 31, 2019. Notably, there was no change to the actuarial adjustment that is required post age 70-½ for defined benefit plans. This results in a number of complexities for plan sponsor and service providers, which maintaining multiple sets of rules for MRDs (some with age 70-½ and others with age 72, based on their birth date) puts added pressure of obtaining the correct birthday and proper compliance.

Originally published 13 May, 2020

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.