Retirement plan compliance is constantly evolving. How do you make sure your plan stays competitive and compliant with all the changing laws and regulations? It requires a good understanding of your employee demographics and plan document, formal policies and procedures regarding operation of plan provisions, communication with your plan participants, constant attention and a close working relationship with your third-party administrator.
There are new rules that may require changes to your processes and new threats that will require extra care. Here are five things you should know about recent developments in retirement plan compliance and operation.
1. Hardship distribution rules relief
Some retirement plans let participants to take money out of the plan before they reach retirement age for certain financial hardship events. As part of the Bipartisan Budget Act of 2018, several changes were effective for hardship distributions processed in plan years beginning after December 31, 2018.
In general, for plans that permit hardship distributions, the changes will make it easier for participants to receive a larger distribution and alleviate some of the employer administrative burden related to processing hardship distributions. The changes include the elimination of the six-month suspension of elective deferral contributions following the hardship distribution, removal of the requirement that the participant exhaust all plan loan options before taking a hardship distribution and providing participant access to earnings on elective deferrals (in addition to elective deferral contributions) and qualified non-elective and qualified matching contributions, including safe harbor contributions.
In addition, the hardship events were expanded to include qualifying expenses incurred due to events in federally declared disaster areas and the inclusion of the primary beneficiary under the plan as an eligible individual for whom qualifying expenses may be incurred. Implementation of these new rules may require a plan amendment to adopt. It is also important to note that the hardship rules regarding 403(b) plans are slightly different.
2. Student loan matching contribution
Many young employees postpone participation in their employer’s retirement plan because they are strapped with student debt payments. The cost of starting retirement savings later in their career decreases the odds of a successful retirement outcome.
In addition, many middle-aged employees are borrowing from their retirement accounts at increasing rates to help their children pay for college. This creates the same dreary retirement outcome.
In a Private Letter Ruling in August 2018, an unnamed employer was permitted to make employer “matching” contributions to the retirement accounts of participants who make qualifying student loan payments in lieu of making 401(k) contributions. While the special employer contribution is not affected by the employee’s 401(k) deferrals, the regular match that an employee would otherwise be entitled to is reduced if the employer is matching the student loan payments. This IRS ruling is directed only at the employer that requested it, and is not a general ruling for all employers; however, it does suggest what might be to come. Until the IRS issues expanded guidance, employers wanting to implement a program like this should consult with their legal counsel to assess potential liability.
3. Qualified participant loan offsets
A provision of the Tax Cuts and Jobs Act (TCJA) of 2017 provides retirement plan participants who have certain qualified plan loan offset amounts with an extended period of time to roll over these loan offset amounts. A distribution of a plan loan offset amount occurs when the participant’s accrued benefit is reduced in order to repay the participant’s plan loan.
Prior to the new rule, the individual’s rollover period for distributions and loan offset amounts was 60 days following the distribution. The new rule provides individuals the ability to roll over the amount of a plan loan offset by their tax filing deadline, including extensions, for the tax year in which the offset occurs (if the loan offset occurred in 2018, the participant has until the due date of their 2018 individual tax return to complete the rollover). The extension of the 60-day rollover period only applies to offsets that are the result of a plan termination or the employee’s separation from service.
4. SECURE Act approved by House of Representatives
On May 23, 2019, the House of Representatives passed the “Setting Every Community Up for Retirement Enhancement (SECURE) Act.” The major provisions of this act include an increase in the tax credit offered to businesses that implement a new retirement plan from $500 to $5,000 and an additional $500 credit for small employers that include an automatic enrollment feature.
Additional provisions include an increase in the required minimum distribution age from 70.5 to 72, simplification of the 401(k) Safe Harbor rules and notice requirements, and inclusion of long-term part-time employees in 401(k) plans.
In addition, the proposed legislation permits businesses to adopt a qualified retirement plan by the due date of the tax return for the taxable year and treat the plan as having been adopted as of the last day of the year, much like the rules for establishing a SEP. At the time of this writing, a similar bill is currently before the Senate, the “Retirement Enhancement Securities Act (RESA)”. If RESA passes the Senate, it would be reconciled with SECURE Act and then sent to President Trump to sign.
5. Cybersecurity threats
In the current environment of cyberattacks and attempted fraud, retirement plans are not exempt. Fraudulent requests for plan distributions and loans are on the rise. Hackers are accessing participant accounts using stolen or weak login credentials or vulnerabilities in organizational controls or software programs. Fraudsters then request distributions or loans of their account balances with the proceeds sent to a fraudulent account.
Increased security around access to plan data, multifactor authentication, software updates and patches that protect participant information, strong passwords and unique challenge questions mitigate substantial threats. Ensure that your plan service providers have multiple security measures to address potential fraud, including sending notifications of account changes to both old and new contact data, implementing freeze periods of account distributions following any changes to the participant’s home or email address, or issuing loans and distributions only by a physical check mailed to the participant’s address of record.
The best way to accomplish this is to obtain and review your service provider’s SOC report, which would explain the measures they are taking and the controls they have in place to prevent and detect any suspicious activity. If you are not familiar with the SOC report, a Wipfli retirement plan auditor will be able to walk you through the report if you wish.
Fiduciaries have a very high expectations set for them when it comes to managing the retirement funds of plan participants, so it is of upmost importance that you stay up to speed on recent developments within the retirement plan arena. There are many positive things happening in the retirement plan industry. At the same time, it is important not to overlook the threats.
Now is the time to review your retirement plan provisions and policies to make sure you have a competitive plan. It is also important to make sure that you have the proper policies and procedures in place to ensure the plan’s provisions are followed and the assets are protected. If you have any questions about these five topics or any other retirement plan concerns or questions, do not hesitate to reach out to a Wipfli specialist.