Author: Jordan Schreier

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IRS Guidance on Retirement Plan Qualified Birth or Adoption Distributions

The Setting Every Community Up for Retirement Enhancement Act of 2019 (“SECURE Act”) established a new in-service distribution known as a qualified birth or adoption distribution (“QBOAD”). Generally, a QBOAD is any distribution of up to $5,000 from an “eligible retirement plan” (other than a defined benefit plan), made to an individual during the one-year period beginning on the date a child of the individual is born or the legal adoption of an eligible adoptee is finalized. Eligible retirement plans include 401(k) plans, 403(a) plans, 403(b) plans, 457(b) plans, and IRAs. On September 2, 2020, in Notice 2020-68, the IRS issued guidance on QBOADs.

Among other things, this guidance provided that:

  • Each parent may receive a $5,000 QBOAD for the same child.
  • Parents may receive a separate QBOAD for separate children (including multiple births).
  • An adopted child includes an individual not yet 18 years old and individuals physically or mentally incapable of self-support.
  • A plan is not required to permit QBOADs.
  • A plan that permits QBOADs is treated as satisfying the distribution rules that apply to cash or deferred arrangements (i.e., the rules that limit the circumstances in which in-service distributions are permitted).
  • A plan may permit distributions from elective deferrals, QNECs, QMACs, and even safe harbor contributions.
  • A plan administrator may rely on a reasonable representation from an individual that the individual is eligible for a QBOAD, unless the plan administrator has actual knowledge to the contrary.
  • An eligible individual may recontribute a QBOAD back to the same plan from which the distribution was made (or to an IRA), if the individual is eligible to make a rollover to that plan.
  • To qualify as a QBOAD, an individual must include the name, age, and taxpayer identification number of the child or adoptee on the individual’s tax return for the year in which the distribution is made.
  • QBOADs are includable in an individual’s gross income, but are not subject to the 10% early distribution excise tax under Code Section 72(t).
  • A QBOAD is not treated as an eligible rollover distribution (no mandatory withholding, no rollover rights, no special tax notice, etc.).
  • Even if a plan does not permit QBOADs, an individual may still treat a qualifying distribution as a QBOAD for tax purposes.

If a plan permits QBOADs, the plan must be amended no later than the last day of the first plan year beginning on or after January 1, 2022 (December 31, 2022 for calendar year plans). However, the last adoption date for a qualified governmental plan, a public school, or a collectively bargained plan is the last day of the first plan year beginning on or after January 1, 2024. If a plan implements a QBOAD after these deadlines, the plan must be amended no later than the last day of the plan year of implementation.

Many employers delayed consideration of adding QBOADs to their plans, waiting for IRS guidance. Now that this guidance has been issued, plan sponsors should consider whether they want to add QBOAD provisions to their plans for the 2021 plan year. The QBOAD rules provide a source of previously restricted cash that new parents often need. However, it is also another new (see Coronavirus Related Distributions) rule that could work to decrease the money that individuals will need when they reach retirement age.

About the Author: Jordan Schreier is a Member in Dickinson Wright’s Ann Arbor office and Chair of the Firm’s Employee Benefits and Executive Compensation Practice Group. His practice primarily involves advising both for-profit and non-profit employers on planning and compliance issues involving all aspects of employee benefits, including welfare benefits, qualified retirement, and other deferred compensation plans. He can be reached at 734-623-1945 or JSchreier@dickinson-wright.com and you can visit his bio here.

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Employee Benefit Provisions in the CARES Act Provide Employer and Participant Relief

The Coronavirus Aid, Relief, and Economic Security (“CARES”) Act became law on March 27, 2020.  The Act includes important provisions that impact employer sponsored benefit plans.  Consistent with its name, the Act provides participants enhanced access to retirement plan money, provides employers relief regarding defined benefit pension plan funding, aids employees by requiring payment of certain Covid-19 related medical expenses, and expands employee access to health accounts to pay for over-the-counter medical products.  A summary of the employee benefits portions of the Act follows.

Retirement Plan Provisions

New Distribution Option for Coronavirus Related Distributions and Waiver of 10% Early Withdrawal Excise Tax

The Act permits (but does not require) retirement plans including qualified plans, 403(b) plans and 457 plans to permit a new type of distribution to participants called a Coronavirus Related Distribution (“CRD”).  CRDs are distributions (including in-service distributions regardless of age) of up to an aggregate of $100,000 made between January 1 and December 30, 2020 (the Act says December 30, not December 31) for participants impacted by the Coronavirus.  Specifically, a CRD is a distribution to a plan participant who:

  • is or whose spouse or dependent is diagnosed with COVID-19 or its virus, or
  • experiences adverse financial consequences as a result of quarantine, furlough, layoff, or reduced work hours due to the virus, or
  • can’t work due to lack of child care due to the virus or due to closing or reduced hours of a business owned or operator by the participant due to the virus.

The Act permits a plan administrator to rely on an employee’s certification that the distribution qualifies as a CRD.  For purposes of the $100,000 limit, all plans sponsored by members of the same controlled group, group of trades or businesses under common control and affiliated service group are aggregated.  CRDs are not permitted from nonqualified plans.

The Act waives the normal 10% Internal Revenue Code Section 72(t) excise tax that applies to early distributions (e.g., in-service prior to age 59 ½) from eligible retirement plans.

Under the Act, a participant may (but is not required to) spread the amounts required to be included in gross income from a CRD over three tax years.  A participant may also repay the amount of CRDs to an eligible retirement plan any time during the three-year period beginning on the date of the distribution.  Any repayment is treated as an eligible rollover distribution and is not counted against plan contribution limits. This is similar to the repayment of amounts distributed to a participant for a qualified birth or adoption under the SECURE Act.  At this time, the income tax treatment of a repayment is not clear from the Act.

A CRD is not considered an eligible rollover distribution so the usual 20% income tax withholding requirement does not apply. Instead, a 10% withholding applies unless the participant elects otherwise.

A plan sponsor is not required to permit CRDs but many will as a means of providing employees struggling financially due to the Coronavirus national emergency a source of tax favorable cash.  Many plan record keepers have or are in the process of adjusting their systems to administer the CRD provision.  Plan sponsors should promptly check with their record keepers to determine when CRDs will be available.

A plan is permitted to operate in compliance with the new rules pending adopting plan amendments, but plan sponsors must adopt conforming amendments no later than the last day of the plan year that begins on or after January 1, 2022 (2024 for governmental plans).

Improvement of Plan Loans

The Act increases the $50,000 maximum plan loan limit to $100,000 for loans made in the 180-day period from the date of the Act for participants who satisfy the CRD definition above.  The Act eliminates the limit that a loan cannot exceed 50% of the present value of a participant’s benefit.  This appears to allow a participant to borrow against his or her entire vested plan benefit, although importantly, the Act did not change the legal requirement that a plan loan be adequately secured.  Any due dates for loans due between the date of the Act and December 31, 2020 are extended one year, with the amount due adjusted for interest.  The additional year is not counted for purposes of the five-year plan loan amortization rule.

This enhanced loans rules are also optional but most plans will also adopt the provisions.  Plan sponsors should check with their record keepers to determine when the record keepers can administer the loan provisions.

A plan is permitted to operate in compliance with the new rules pending adopting plan amendments, but plan sponsors must adopt conforming amendments no later than the last day of the plan year that begins on or after January 1, 2022 (2024 for governmental plans).

Temporary Waiver of Required Minimum Distribution Rules

The Act waives for the 2020 year all required minimum distributions (“RMD”) for participants under defined contribution plans (e.g., 401(k), profit sharing, etc.), 403(a) and 403(b) plans, and 457(b) plans maintained by governmental employers (but not tax-exempt employers), including for participants who turned age 70 ½ in 2019 but have not yet take a RMD in 2020.  Given that 2020 RMDs are based on the value of participant accounts on December 31, 2019, the waiver will help participants avoid having to liquidate accounts based on values that may be substantially lower than at the valuation date.  The Act provides a complete waiver for 2020.  Participants are not required to double up on RMDs for 2021.

A plan is permitted to operate in compliance with the new rules pending adopting plan amendments, but plan sponsors must adopt conforming amendments no later than the last day of the plan year that begins on or after January 1, 2022 (2024 for governmental plans).

Delay in Pension Minimum Required Contributions and AFTAP Reliance

The Act provides cash flow relief to sponsors of single employer defined benefit pension plans by delaying the due date of all minimum required contributions due in 2020 until January 1, 2021.  On that date, all 2020 minimum required contributions are due, with interest from the original due date to the payment date.

For plan years which include 2020, defined benefit pension plans can rely on their adjusted funding target attainment percentages (applicable to determine certain pension plan accrual and distribution restrictions) from the last plan year ending before January 1, 2020.  Many pension plans obtain AFTAP certifications by April 1, 2020, so this relief is timely. It is not clear whether an AFTAP that has already been certified can be rescinded if the prior year’s AFTAP is more favorable.  Plan sponsors should discuss with the plan’s actuary the implications of using the prior year v. current year AFTAP certification.

Welfare Benefits Provisions

Group Health Plan Coverage of Covid-19 Services

The Act expands the types of COVID-19 diagnostic tests which must be paid for by health insurance and group health plans with no cost sharing (as originally provided for in the FFCRA). Under the Act, these diagnostic services must be reimbursed at the in-network rate, or for out of network providers, at the cash price posted by the provider on its website, or a lower rate negotiated with the provider.  Group health plans and insurers must also provide as a no cost-sharing preventative benefit, certain qualifying coronavirus preventive services.  A “qualifying coronavirus preventive service” is an item, service, or immunization that is intended to prevent or mitigate COVID-19 that satisfy certain federal standards.  The coverage aspects of these provisions should be handled by an employer’s insurance company or third party administrator.

HDHPs May Pay for Telehealth Pre-Deductible

The Act allows a high-deductible health plan with a health savings account to cover telehealth or other remote care services prior to a participant reaching the deductible limit.  This increases services available to participants who may have been exposed to or have COVID-19 without resulting in the participant being ineligible for an HSA contribution.  This applies for plan years beginning on or before December 31, 2021.

Purchase of Over the Counter Medical Products from HSAs/FSAs/MSAs/HRAs

The Act allows participants to use funds in health savings accounts, flexible spending accounts, Archer medical savings accounts, and health reimbursement arrangements, to purchase over-the-counter medications (expanded to include menstrual products), including those needed in quarantine and social distancing, without a prescription.  This change is effective for amounts paid/expenses incurred after December 31, 2019.

Miscellaneous Provisions

DOL Authority to Delay Reporting and Disclosure Deadlines

ERISA provides that the DOL can delay any obligation such as reporting and disclosure deadlines for up to one year in the event of disasters and terrorist attacks.  Public health emergencies have been added to the reasons for the delay.

Tax-Free Employer Paid Student Loan Repayments

Section 2206 of the Act allows employers to pay up to $5,250 annually on a tax-free basis to help a student repay a student loan between date of the Act and January 1, 2021.  This applies to new and existing loan repayments and other educational assistance (e.g., tuition, fees, books) provided by the employer under current law.

About the Author:

Jordan Schreier is a Member in Dickinson Wright’s Ann Arbor office and Chair of the Firm’s Employee Benefits and Executive Compensation Practice Group.  His practice primarily involves advising both for-profit and non-profit employers on planning and compliance issues involving all aspects of employee benefits, including welfare benefits, qualified retirement, and other deferred compensation plans. He can be reached at 734-623-1945 or JSchreier@dickinson-wright.com and you can visit his bio here.

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Early Holiday Gift for Employers – IRS Extends 2019 ACA Reporting Deadline

As it has done in past years, the IRS has extended the Affordable Care Act (“ACA”) deadline for health plan sponsors to furnish individuals IRS Forms 1095-B and 1095-C by 30 days (IRS Notice 2019-63). Under the extension, the deadline for providing individuals Forms 1095-B and 1095-C is March 2, 2020 instead of January 31, 2020 (actually 31 days – the extra day is attributable to 2020 being a leap year and March 1, 2020 being a Sunday). Because of the automatic due date extension, the IRS will not review or grant reporting extensions requested by plan sponsors.

However, the IRS did not extend the due date for filing the 2019 Forms 1094-B, 1095-B, 1094-C, or 1095-C with the IRS. This due date remains February 28, 2020 for paper filings and March 31, 2020 for electronic filings.

The 2017 Tax Cuts and Jobs Act reduced to zero the individual shared responsibility payment that applied to individuals who did not have minimum essential coverage beginning January 2019. Because the individual penalty is eliminated and individuals do not need the information reported on Form 1095-B to complete their income tax returns, Notice 2019-63 also provides that the IRS will not assess a penalty against reporting entities (e.g., employers with less than 50 full-time employees) which fail to furnish Form 1095-B if (1) the reporting entity posts a prominent notice on its website stating that individuals may receive a copy of Form 1095-B upon request, with an email address and physical address to which a request may be sent, and a contact telephone number, and (2) the reporting entity furnishes a 2019 Form 1095-B to an individual requesting the form within 30 days of the date the request is received.

This relief does not extend to applicable large employers who must provide a Form 1095-C to full-time employees, but the relief does apply to an individual who is a not a full-time employee for any month in 2019 who must be furnished a Form 1095-C.

Finally, Notice 2019-63 provides that no penalty will apply to reporting entities which report incorrect or incomplete information if the entities can show they made good faith efforts to comply with the information reporting requirements. Entities that fail to file information returns with the IRS or provide statements to covered individuals are not eligible for this relief.

If you have questions about this information, please contact Jordan Schreier in Dickinson Wright’s Ann Arbor, Michigan office at 734-623-1945 (jschreier@dickinsonwright.com).

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Don’t Believe Everything You Hear – You Can Terminate Your 401(K) Safe Harbor Match Formula Mid-Year (Usually)

I have recently had two separate employers tell me that they wanted to stop making safe harbor matching contributions to participants in their 401(k) retirement plans in the middle of a plan year. The employers had very different reasons for wanting to eliminate their safe harbor match mid-year, but they had identical stories about what their plans’ institutional record keepers told them when they asked the record keepers what procedures to follow to terminate the match. Both employers were told that terminating a safe harbor match mid-year was not permissible and that they could only terminate the match effective for the next plan year.

Under the tax code, a 401(k) plan that meets certain “safe harbor” conditions for a plan year is deemed to satisfy the actual deferral percentage (ADP) and the actual contribution percentage (ACP) discrimination tests and will not be considered top heavy for that plan year. One method for satisfying the safe harbor rules requires the employer to make minimum matching contributions to the accounts of all participants who make elective deferrals (and employee contributions) for the plan year and to provide a notice to eligible employees before the start of the plan year informing the employees, among other things, of the plan’s safe harbor match formula and intent to be a safe harbor plan for the plan year. One additional condition for safe harbor status is that in general, a plan’s safe harbor provisions must remain in effect for the entire plan year.

Despite the entire plan year requirement, and despite what the employers I talked to were told, it is permissible to terminate a 401(k) safe harbor formula mid-year, provided certain conditions are satisfied. These conditions are that:

  • The employer must be operating at an economic loss, or the plan’s notice of safe harbor status included a statement that the plan may be amended during the plan year to reduce or suspend the safe harbor matching contribution and that the reduction or suspension will not apply until at least 30 days after all eligible employees are provided notice of the reduction or suspension;
  • All eligible employees are provided a supplemental notice that explains the consequences of the amendment that reduces or suspends future safe harbor contributions, the procedures for the employees to change their deferrals or contributions to the plan, and the effective date of the amendment;
  • The reduction or suspension is not effective earlier than the later of the date the amendment is adopted or 30 days after the supplemental notice is provided to eligible employees;
  • Eligible employees are given a reasonable opportunity after receipt of the supplemental notice and prior to the reduction or suspension to change their deferrals or contributions to the plan;
  • The plan is amended to provide that the ADP and ACP tests will be satisfied for the entire plan year using the current year testing method; and
  • The plan satisfied the safe harbor requirements through the effective date of the amendment.

For employers sponsoring 401(k) plans with safe harbor matching contributions, there are two immediate takeaways from my recent experience. The first is to check their plan’s annual safe harbor notices to ensure that they include language stating that their plans may be amended mid-year to reduce or suspend the safe harbor match with at least 30 days’ notice. The second is think carefully about the guidance their record keepers provide. If their answer does not sound logical or fair, or does not help them achieve their business objectives, they should consult with a qualified employee benefits attorney. General statements about what the law allows are a start, but in the employee benefits world, details matter.

If you have questions about this information, please contact Jordan Schreier in Dickinson Wright’s Ann Arbor, Michigan office at 734-623-1945 (jschreier@dickinsonwright.com).