Important Changes to Your Employee Benefit Plan: SECURE Act and CARES ACT

In recent years, legislation passed by the United States Congress poses many possible changes to your employee benefit plan that will require an amendment to the Plan Document. Below, we will touch on some of the key provisions from the CARES Act (2020) and SECURE Act (2019) that are likely to impact your benefit plan.

CARES ACT

The Coronavirus Aid, Relief and Economic Security Act (CARES Act), passed last March, provided relief to retirement plan participants by making it easier to withdraw funds from their 401(k) or 403(b) plan in light of financial hardship caused by the COVID-19 pandemic. The CARES Act allowed plan sponsors to expand distribution and loan provisions. Under the CARES Act, plans are permitted to allow a new type of withdrawal to be taken if the participant, spouse, or dependent was diagnosed with COVID-19. Also, if the participant experienced adverse financial consequences from being quarantined, furloughed, or laid off if they experienced a reduction of work hours or unable to work due to child care needs, from here they were referred to as “qualified individual.”

A coronavirus-related distribution is exempt from the 10% early withdrawal penalty tax and a maximum of $100,000. Participants who took the distribution during the period have two available options for which they can select one, none, or both.

• Participants can pay back the amount over three years, and the repayment would be treated as a tax-free rollover, not an employee contribution. If this option is selected, these repayments are not subject to the IRS’s maximum contribution limits.
• Participants can claim the distribution as income over a three-year period for income tax purposes

The CARES Act also allowed for up to $100,000 or 100% of the participant’s vested account balance to be taken as a loan during the period March 27, 2020, to September 23, 2020. Previously, the maximum was $50,000 and 50% of the participant’s balance. For all new or existing plan loans, repayments due before December 31, 2020, maybe delayed one year but are still required to be paid back within the original loan terms. This delay may require the plan sponsors to adjust the payroll deductions in 2021 for delayed payment loans.

Under the CARES Act, participants are permitted to defer their required minimum distributions (RMD) and avoid taking the distribution during 2020. This provision applies to all individuals that reach age 70.5 during the year, not just those directly impacted by the coronavirus as defined above.

SECURE ACT

The Setting Every Community Up for Retirement Enhancement Act (SECURE Act) aims to make saving for retirement easier for a wider range of employees and employers.

The SECURE Act takes effect for plan years beginning after December 31, 2019. Plan sponsors have until the end of the 2022 plan year to adopt an amendment reflecting changes to the plan related to the SECURE Act.

Outlined below are some of the significant changes affecting employee benefit plans.

1. Previously, participants were required to take mandatory distributions at age 70.5. The SECURE Act pushed back the age of mandatory distributions to 72 years old (effective for the 2020 plan year). For example, a participant who turned 71 in 2020 is not eligible for the required minimum distribution but will be eligible in 2021.
2. The Auto Enrollment cap increased from 10% to 15% with the SECURE Act, effective for plan years beginning after December 31, 2019.
3. Long-term, part-time employees are required to be permitted into the plan given they work at least 500 hours in three consecutive years. This change is effective for plan years beginning after December 31, 2020; years before January 1, 2021, do not need to be considered for the three-year eligibility period. Therefore, long-term, part-time employees are eligible for the plan in 2024 if they reach the 500 hours in each year beginning 2021. When these employees enter the plan, there is no requirement for employer matching contributions or nonelective contributions. Plan sponsors should keep a record of long-term part-time employees’ hours, starting in 2021, to accurately count years of consecutive service for eligibility purposes beginning in 2024.
4. The SECURE Act allows for penalty-free distributions of up to $5,000 for the birth or adoption of a child within one year of the birth or adoption. Each parent could take up to $5,000 of a penalty-free withdrawal during the year.
5. The SECURE Act also makes it easier for small businesses to start a defined contribution employee benefit plan by expanding the accessibility of multiple employer plans. Employers that do not share a common interest can form a multiple employer plan to spread the costs and make it more affordable to form a benefit plan. The Act also protects participating employers from the wrong-doings of the other employers within the established plan.

Future Legislation: SECURE ACT 2.0

A new bill called Securing a Strong Retirement Act of 2020, also known as SECURE 2.0, was introduced on October 27, 2020. This bill is not yet law, but some updates may be put into effect in 2022.

If passed, SECURE 2.0 will require newly established 401k, 403b, and SIMPLE plans to automatically enroll participants in the plan when they are eligible. The initial employee contribution amount must be at least 3% but no larger than 10%. Contributions are not mandatory as participants can still opt-out of auto-enrollment.

SECURE 2.0 would also raise the required minimum distribution age to 75 instead of 72 (updated in the SECURE Act) and decrease the consecutive years of service for long-term part-time employees to two years instead of three.

Navigating Changes to Your Plan

Rules and regulations impacting employee benefit plans continue to evolve. It’s a lot to follow, but we’ve got your back. The Employee Benefit Plan team at Maner Costerisan is available to help on all issues related to your plan, including changes required by the SECURE and CARES Act.