Benefit Plan Provisions in the Year-End Spending Bill
The Consolidated Appropriations Act, 2020, released at the end of 2019 to continue government operations, contained numerous changes and updates to retirement and health plans. Review the content below for more details on each change.
For quick access to specific changes, select the links below:
While the medical device excise tax, the excise tax for “Cadillac” health plans (employer plans that provide benefits in excess of a set value) and a tax on health insurance providers are all repealed, fees for insured and self-insured plans, originally set to expire 2019, are extended to 2029. These fees, also known as PCORI taxes, are used to fund the Patient-Centered Outcomes Research Trust Fund and paid annually on Form 720.
The employer credit for paid family and medical leave, set to expire 2019, is extended for one year, through 2020. This is a credit of up to 25 percent for family leave paid to employees whose wages do not exceed a specified amount ($75,000 in 2018, for the 2019 credit) as long as the employer has a written plan that provides all employees, including part-time employees, at least 50 percent of wages for at least two weeks of family and medical leave per year.
Prior law includes a three-year credit equal to $500 for qualified start-up costs when an employer first adopts a retirement plan. This credit is increased to the lesser of $5,000 or $250 times the number of non-highly compensated employees covered by the plan. In addition, there is a new $500 credit, which can be used in conjunction with the start-up cost credit, for start-up costs related to automatic enrollment in section 401(k) and SIMPLE plans. Automatic enrollment occurs when new employees are automatically enrolled in the employer’s section 401(k) plan, unless they choose to not participate.
In one of the more controversial provisions, rules regarding required minimum distributions to beneficiaries were changed to limit the tax deferral opportunity for retirement plan savings. Many plan participants name a member of a younger generation (e.g., children, grandchildren) as a designated beneficiaries of retirement plan benefits. Doing so allowed income to be deferred over a longer lifetime than naming an individual in the same generation as the plan participant.
The new law eliminates this opportunity by requiring that post-death distributions to other than a designated beneficiary (i.e, a spouse, minor child, disabled person, chronically ill person or individual no more than 10 years younger than the plan participant) to be made within 10 years. The exception for minor children expires when that child reaches majority with the remaining assets distributed within 10 years of that date. In addition, when a designated beneficiary dies, amounts need to be distributed within 10 years. This rule applies to individuals dying after 2019, with exceptions for commercial annuity contracts in place on December 20, 2019, under which irrevocable annuity payments have begun. For individuals who died before 2020, the rules apply to the beneficiary of the individual’s designated beneficiary.
Retirement Plan Changes
Beginning in 2020, employers can adopt qualified retirement plans after the end of the taxable year as long as the adoption is done by the due date of the employer’s tax return (including extensions). This will enable many employers to retroactively adopt a retirement plan after determining the financial results of a business for the prior year.
Unrelated small employers often ban together to adopt a retirement plan known as a Multiple Employer Plan (MEP). Under prior rules, if one employer violated plan rules, the entire plan could be affected. This was known as the one-bad-apple rule. Those rules are now changed so that the portion of the plan failing to meet the requirements is removed from the plan and the rest of the plan continues unaffected. In addition, under prior rules, MEPs were restricted to employers with a common business interest and a purpose in joining together other than to provide benefits. Those requirements have been removed so any employer can join with other employers in what is known as an Open MEP for adopting a plan, thereby decreasing administrative duties and costs for the individual employer.
In addition, employers will be able to provide a group annuity as an investment alternative without risk of fiduciary liability if the annuity provider selected has, for the preceding seven years, been licensed by a state insurance commissioner to provide guaranteed income contracts, filed audited financial statements in accordance with state law and maintained reserves that satisfy all statutory requirements for all the states in which the annuity provider does business. In addition, the insurer needs to undergo, at least every five years, a financial examination by the state insurance commissioner and notify the fiduciary of any changes to these requirements which were represented at the time the contract was purchased. The statute makes clear that there is no requirement to select the lowest cost annuity, rather a fiduciary should consider the value of the contract’s features and benefits, the insurer’s attributes including its financial strength and the cost of the contract. An employee participating in lifetime income investments can transfer such assets to another plan or IRA without surrender charges or other fees.
Additional Retirement Changes
An individual participating in a section 401(k) plan that provides for auto enrollment which allows for increased percentages of compensation contributed to the plan each year can have up to 15 percent of compensation contributed in any year. The former cap was 10 percent.
In addition, employers will be able to adopt a safe harbor section 401(k) plan after the beginning of the plan year as long as an employer contribution of up to four percent of compensation is made to the plan. This will allow employers to avoid distributing excess contributions to highly compensated employees who determine that the section 401(k) discrimination tests cannot be met.
Section 401(k) plans must allow non-collectively bargained part-time employees who are at least age 21 and work at least 500 hours in at least three consecutive 12-month periods to participate in the section 401(k) plan. These employees do not have to receive employer non-elective, matching contributions or top heavy contributions or be included in the plan discrimination tests.
While many retirement plan distributions to individuals younger than age 59 and ½ are subject to a 10 percent penalty tax, distributions of no more than $5,000 on account of a qualified birth or adoption will avoid this tax. Distributions on account of a qualified birth or adoption are those which occur within one year of the birth or adoption. In addition, the amounts distributed can be repaid and treated as a roll over contribution.
Under the new rules, employers or third party administrators will be required to provide plan participants, at least annually, an illustration of the amount of lifetime income that can be generated from the plan participant’s account balance. This will be based on reasonable assumptions provided by the Department of Labor. In addition, defined contributions plans using the same trustee and administrator and allowing participants the same investment options can file a consolidated Form 5500, lowering plan compliance costs by consolidating plan reporting.
The penalty for failure to file Form 5500 has been increased from $25 per day to $250 per day, not to exceed a maximum penalty of $150,000.
In addition to delaying required minimum distributions until age 72 and limiting the deferral opportunities for beneficiaries other than spouses, individuals can now contribute to a traditional IRA as long as they have earned income. Contributions are no longer prohibited after age 70 and ½. IRA charitable contribution distributions will become taxable in an amount equal to the amount of contributions made to an IRA after an IRA owner reaches age 70 and ½.
If you have questions or concerns on any of the above provisions, or how they may affect you and your company, please reach out to Deb Walker or your trusted Cherry Bekaert advisor. We are here to help.