The Rosenbaum Law Firm P.C. Blog

My latest article for JDSupra.com can be found here.

The SECURE Act created much-needed change to the safe harbor non-elective contributions, making it more of a weapon to combat failed discrimination testing. Previously, a plan sponsor could only adopt the non-elective contribution prior to the Plan Year with a notice. Now, the contribution can be added at any time during the year and even after the Plan Year has ended if the plan sponsor ups the contribution to 4% of pay (but the plan still needs to pass the matching ACP test if adopted after the year). Regardless of the timing, the notice requirement is gone for good.

For clients that have testing issues because of their demographics, this is something they should know about. The increased flexibility of adding the non-elective could go a long way in minimizing the need for deferral refunds or corrective QNEC contributions.

As a plan sponsor, you need to make sure that participant beneficiary forms are up to date. It’s not enough that you make sure that every participant has filled one out, you also have to make sure that they’re updated. Family lives and situations change, so it should make sense that what a participant may have selected as a beneficiary might change because of marriage, divorce, or death.

For any plan education and enrollment meetings, I would stress for the participants to update their beneficiary information because as an ERISA attorney, one of the most stressful jobs in trying to determine who a beneficiary is if an enrollment form is missing or there are issues that might threaten the validity of an executed form (such as a new marriage).

I’m not a fan of annuities, especially in 401(k) plans. Yet, it seems that the insurance industry got their say with the addition of annuities in the SECURE Act.

The SECURE Act includes three law additions that might expand the plan sponsors’ ability to offer annuities and other lifetime income products. First, it establishes an in-plan retirement income safe harbor that protects employers from litigation based on their selection of annuity providers. The SECURE Act also creates a new requirement that the Department of Labor (mandate and standardize the provision of recurring lifetime income projections for individual participants; and it institutes an in-plan annuity portability requirement, such that if an annuity offering is removed from a plan menu, participants must be allowed to roll that annuity investment into an IRA without penalty.

My concern is that bringing back annuities into 401(k) plans is only going to benefit the insurance industry.

There are many choices in developing options for a 401(k) plan and certain features such as automatic enrollment and Roth 401(k) have only been law since 2006. 14 years later, it would not be surprising that the percentage of plans adopting these options would level off.

According to the Plan Sponsor Council of America’s PSCA’s 62nd Annual Survey of Profit-Sharing and 401(k) Plans, 401(k) sponsor adoption of automatic enrollment features, Roth options, and target-date funds seems to be leveling off.

This should come as no shock because you’re never going to get 100% adoption of these features and there are certain stumbling blocks for individual plan sponsors to adopt them. A perfect example is automatic enrollment, certain plan sponsors are happy enough with their participation rates or don’t want the perceived nuisance of this feature.

Shell Oil, along with Fidelity is the target of a class action 401(k) lawsuit. As typical with a suit against a large billion-dollar 401(k) plan, plaintiffs allege that Shell failed to use the multi-billion dollar 401(k) plan’s bargaining power to benefit participants and beneficiaries in the form of lower recordkeeping and asset management fees.

The lawsuit also claims that Shell allowed Fidelity (the plan’s recordkeeper) to use plan participants’ highly confidential data, including Social Security numbers, financial assets, investment choices and years of investment history to aggressively market lucrative non-plan retail financial products and services, which enriched Fidelity at the expense of participants’ retirement security. The lawsuit also alleges that Shell has retained more than 300 designated investment options in the plan, “most of which are Fidelity’s proprietary mutual funds.

Without fail, every day I get emails that want to target one or more of my important online accounts. Whether it’s Amazon or my email, so online crook is trying to phish for me online access by trying to trick me.

As a retirement plan provider, these threats are graver because hacking could make you liable for losses from the assets of your client’s retirement plans. You need a process in place to make sure cyber attacks don’t negatively impact your business. That means hiring cybersecurity specialists to make sure that someone who shouldn’t have access to your systems, doesn’t.

My latest newsletter can be found here.

When it comes to changes to your retirement plan, make sure your employees know changes in the law that affect them.

Section 72(t) of the Internal Revenue Code provides that withdrawals from a qualified retirement plan are subject to a 10% tax on early distributions, with certain exceptions. Included in the list of exceptions are distributions made after attainment of age 59 ½; disability; early retirement after age 55; distributions for certain medical expenses; and distributions made to an individual called to active military duty.

The SECURE Act amends the tax code to add exception from the 10% early distribution tax:  any qualified birth or adoption distribution up to $5,000.  This $5,000 limit applies to all plans maintained by you. If you have multiple plans will need to make sure that an employee is not allowed to exceed the $5,000 limit by withdrawing from more than one plan. This limit is for each individual, so it would be possible for each spouse to request a $5,000 distribution. The distribution may be taken from an IRA or a qualified employer plan, including a 401(k), 403(b) or governmental 457(b) plan, but not a defined benefit plan. The distribution must be made during the 1 year beginning on the date the child is born or the date the adoption is finalized.

The adoption may be for any individual who is under the age of 18 or is incapable of self-support due to physical or mental limitations. An “eligible adoptee” does NOT include the child of the taxpayer’s spouse (so legally adopting a step-child would not qualify). The distribution amount may be repaid to an eligible retirement plan or IRA to which the individual is eligible to contribute a rollover contribution. The repayment can be accomplished via one payment or multiple payments, not to exceed the amount of the distribution. The taxpayer is treated as having received the distribution as an eligible rollover distribution and if it is repaid, the repayment is treated as a direct rollover made within 60 days of distribution. No time limit is prescribed for making the repayment, so the taxpayer could repay the distribution at any time in the future. The Act is not specific about how the repayment will be handled on the tax return for the year(s) in which it is repaid.

This distribution under this provision may be allowed regardless of whether other in-service distributions are allowed under your plan. The automatic 20% withholding doesn’t apply, instead, the 10% optional tax withholding will apply, meaning the employee will have 10% federal tax withholding taken unless he opts out or elects a different percentage. The distribution is not tax-free, there is just no early distribution penalty. The taxpayer will be required to report information about the child on the tax return filed for the year of the distribution.

While everyone is talking about multiple employer plans as being changed by the SECURE Act, I think the biggest change that will affect 401(k) plan sponsors on day to day basis is the mandate that long term, part-time employees must be made eligible for the deferral portion of the plan after 3 consecutive years of completed 500 hours of service.

Thankfully, plan sponsors don’t have to start counting until 2021. The problem is getting them to understand they have to monitor these employees and consider whether part-timers should also be eligible for profit-sharing contributions. If not, then they will have two different eligibility requirements. I predict in the end, that many plan sponsors and third-party administrators will take far too long to get used to this new rule when it starts to count in 2024 (after 3 years of 500 hours of service). That means a lot of compliance errors and possible makeup QNEC contributions of it’s caught too late.

In the end, let’s let plan sponsors know what will happen and develop a process to track it and properly notify the employees that may get to achieve this new liberal deferral eligibility requirements.