With summer fast approaching, defined contribution retirement plan sponsors should prepare to adopt plan amendments for required year-end plan changes. While defined contribution plans (primarily 401(k)s) often are maintained on a pre-approved form document (prototype or volume submitter) where a vendor prepares the amendment for review and adoption by the plan sponsor, plan sponsors who maintain their plans on an individually designed document need to take action to ensure the plan is timely amended to retain its tax-qualified status based on recent legal changes.
Any plan changes made pursuant to the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) and the Coronavirus Aid Relief and Economic Security Act (CARES Act) must be adopted by a formal amendment by December 31, 2022 (for calendar year plans). Note, as of the date of this publication, the SECURE Act 2.0 has passed the House and is being considered by the Senate. If SECURE Act 2.0 is signed into law, we anticipate additional changes, albeit not requiring 2022 amendments.
The SECURE Act
The SECURE Act (1.0) required all defined contribution retirement plans to implement certain changes during 2020. While most plan sponsors implemented these changes, the plan documents must be formally amended to reflect these required changes - with amendments executed by December 31, 2022.
The changes for which plans must adopt a formal amendment are:
- Required Minimum Distributions (RMDs): Plans must adopt an amendment increasing the required beginning date for RMDs from April 1 following the calendar year in which a participant reaches age 70½ to April 1 following the calendar year in which a participant reaches age 72. This change is only applicable to participants born after June 30, 1949. [As an aside, SECURE Act 2.0 proposes to further delay RMDs, if adopted.]
- Distribution Rules for Non-Spouse Beneficiaries: Plans must also adopt an amendment changing the distribution timing rules for benefits paid upon the death of a participant. Specifically, for participants who die on or after January 1, 2020, distributions must be completed within 10 years after the participant’s death, unless the participant’s beneficiary is the participant’s spouse or another “eligible designated beneficiary.” Note that most plan administrators handle the execution of this rule; however, alignment with the HR/benefits team answering any inquiries on this front is also integral.
Additionally, if a plan implemented any of the optional SECURE Act changes (too numerous to list here), formal plan amendments for those changes also must be executed by December 31, 2022.
The CARES Act
The CARES Act, adopted as the first major piece of legislation on the heels of the initial declaration of the COVID-19 public health emergency, enacted optional temporary changes that plan sponsors could make to their plans. Any optional changes implemented pursuant to the CARES Act must also be adopted by a formal amendment by December 31, 2022.
Some of the key optional provisions the CARES Act includes are:
- Suspension of RMDs: Plan sponsors of defined contribution plans were permitted to waive RMDs that would have been due in 2020 for an additional year.
- Coronavirus-Related Distributions: Plan sponsors of defined contribution plans were permitted to allow qualified individuals to take coronavirus-related distributions (CRDs) of up to $100,000 in 2020 and waived the 10% early withdrawal tax penalty and 20% mandatory federal income tax withholding that would have otherwise applied to the distribution. As a reminder, repayment of CRDs generally must be allowed in the three-year period following distribution in a manner aligned with the rollover rules.
- Increased Limits on Plan Loans and Extended Loan Repayment Period: For defined contribution plans that allow plan loans, plan sponsors were permitted to increase the limit on participant loans granted to qualified individuals between March 27, 2020 and September 22, 2020 to the lesser of $100,000 or 100% of the participant’s vested balance under the plan. Additionally, for any loan repayments due between March 27, 2020 and December 31, 2020, plan sponsors were permitted to extend the repayment date for up to one year.
The December 31, 2022, deadline for changes pursuant to the SECURE Act and the CARES Act in this alert only apply to defined contribution plans, such as 401(k)s. There are different deadlines that apply to defined benefit plans and union plans.
Pre-Approved Plans (Cycle 3 Restatement)
Retirement plan sponsors of defined contribution plans (such as that use IRS pre-approved plans (i.e., prototype documents and/or volume submitted documents)) should also prepare to adopt the Cycle 3 restatement by July 31, 2022. This Cycle 3 restatement should have already been shared with the point of contact for the plan; plan sponsors should be prepared to timely review internally and/or with legal before adoption to ensure that the restatement accurately reflects the current and intended plan design (and aligns with employee communications, such as the summary plan description (SPD)).
The IRS requires all plans using IRS pre-approved plan documents to update their plan documents every six years with a plan restatement. The updates reflect legislative and regulatory changes that occurred since the prior restatement. For defined contribution plans, the current restatement cycle is Cycle 3. The Cycle 3 restatement reflects changes enacted prior to February 1, 2017. The Cycle 3 restatement window began on August 1, 2020, and has a final deadline of July 31, 2022. There is a different deadline for defined benefit plans and 403(b) plans. Also, the Cycle 3 restatement does not apply to individually designed plans that are not maintained using IRS pre-approved plan documents. The July 31, 2022 Cycle 3 restatement adoption deadline is mandatory and, if missed, the plan will be considered noncompliant and the plan sponsor could face penalties.
Please note that the Cycle 3 restatement does not cover any plan changes made pursuant to the SECURE Act and CARES Act (noted above). Any changes implemented as a result of the SECURE Act and/or the CARES Act must be adopted by a separate, standalone amendment by December 31, 2022 (for calendar year plans).