As we settle into the third decade of the 21stcentury, there is no shortage of concerns to occupy 403(b) plan sponsors and administrators. (Purists may object that the new decade actually starts in 2021, but that debate is beyond the scope of this article). Some of these issues have been with us for some time, and some have been newly introduced by the Setting Every Community Up for Retirement Enhancement Act of 2019 (the “SECURE Act”) which was signed into law on December 20, 2019. We have compiled a short list of some of the more notable items that you might want to be thinking about in the new year if you sponsor or administer a 403(b) plan.
1. March 31, 2020 Deadline for Restatement of Your Plan Document. As we have described in previous newsletters (See A One Time Offer from the IRS for the 403(b) Plans Nears its Expiration Date) the IRS has provided an unusual remedial amendment period (“RAP”) for 403(b) plans which is coming to an end on March 31, 2020. Under the RAP, a 403(b) plan document can be amended or restated to retroactively correct defects in the form of the written 403(b) plan. The document may be retroactively adopted to the first day of the RAP, which is January 1, 2010 (or, if later, the date the plan was initially adopted). To take advantage of the RAP, a plan sponsor can adopt a pre-approved 403(b) plan issued by a plan service provider or other document provider and any defects in the form of the plan will be deemed as corrected for all years after 2009. Boutwell Fay can also provide you with a pre-approved plan document. But in order to obtain the retroactive relief, the document must be restated by March 31, 2020.
Therefore, there is not much time to act to obtain the benefits of the retroactive relief. The practical deadline is even shorter, because to obtain a pre-approved 403(b) document the plan must go through the process established by the document provider to complete the plan’s adoption agreement. It appears that at least some document providers are establishing cutoff dates well before March 31 after which they will not guarantee that the document will be issued by March 31. If you have not commenced this process yet and would like to get the benefits of the RAP, you will want to contact a plan service provider that is offering a pre-approved plan document immediately.
To be clear, it is not a legal requirement to restate your plan onto a pre-approved document by March 31, 2020. And doing so does not correct any operational errors (e.g., using the incorrect definition of compensation). Operational errors still must be corrected under the IRS’ correction program, EPCRS. But we have found that in most cases it is beneficial to obtain the retroactive relief as well as the other advantages (for example the sponsor of the pre-approved document generally provides required amendments going forward) that result from adopting a pre-approved document.
2. Conduct a Compliance Check of the Operation of the Your Plan. Restating your plan document presents an excellent opportunity to make sure that the plan is being operated in accordance with the terms of the document. You want to make sure that the restated document correctly reflects the administration of the plan. Some plan provisions to which you should pay particular attention include the definition of compensation, the application of the universal availability rules, and the eligibility to receive employer contributions.We have recently seen an uptick in the number of IRS examinations of 403(b) plans, and earlier in 2019 there were indications from the IRS that it was going to increase its focus on 403(b) plan compliance.
3. Analyze how the SECURE Act affects your plan. The SECURE Act (the “Act”) contains a variety of significant changes that will affect the operation of your 403(b) plan. Some requirements are already effective. Here is a high level list of just some of the Act’s provisions that apply to 403(b) plans:
The required distribution age has been increased from 70 ½ to 72. This rule is effective for distributions required to be made after December 31, 2019, with respect to individuals who attain age 70½ after such date. Also, the distribution rules governing certain plan beneficiaries have been changed so that distributions to those beneficiaries will need to be made over 10 years and cannot be made over the life of the beneficiary. This change applies generally to employees who die after December 31, 2019, but exempts certain annuity contracts from which lifetime payouts have begun or under which the employee has made an irrevocable election of the payout method before the enactment of the Act.
A new exception to the 10% excise tax for early distributions has been added for a distribution from a plan for a qualified birth or adoption that does not exceed $5,000. A qualified birth or adoption distribution is one that is made within a year of the child’s birth or the finalization of the adoption, and the distribution can be repaid to the plan. This rule is effective for distributions made after December 31, 2019.
The Act makes it easier to terminate 403(b) plans by allowing custodial accounts to be distributed to participants after the plan is terminated. Much like the treatment of annuity contracts that are distributed after a 403(b) plan terminates, the custodial account will be maintained by the custodian in accordance with the rules of 403(b). Participants receiving the custodial account will enforce their rights under the account with the custodian and not with the plan. The Act requires the IRS to issue guidance to effect this change, and it will be retroactive to 2009.
The Act greatly eases the barriers to establishing open multiple employer plans or “MEPs”. We have previously discussed the rules around MEPs (See Multiple Employer Plans and Saving the Barrel from the One Bad Apple & Multiple Employer Retirement Plans: The DOL Opens the Door (A Little)). The Act makes it possible for unconnected employers to form a MEP together under the auspices of a “pooled plan provider”. A pooled plan provider is an entity, such as a financial service provider, that agrees to be the plan fiduciary and administrator, and performs other functions with respect to the plan. There has been a considerable amount of interest in the establishment of 403(b) MEPs in recent years, and the Act could encourage this trend. The new provision in the Act by its terms applies to qualified (401(a)) plans and not to 403(b) plans, but 403(b) MEPs are being established that follow the rules that apply to qualified plans.
The Act introduces two new rules facilitating the selection of lifetime income options for defined contribution plans. One rule provides a fiduciary safe harbor for the choice of the lifetime income provider, and the other allows lifetime income contracts to be rolled into another plan or IRA under certain circumstances. Although many 403(b) plans are already funded with annuity contracts providing lifetime income options, it is possible that the safe harbor can be used to provide some additional safeguards for 403(b) plan fiduciaries.
These are just a few of the changes contained in the SECURE Act. We will discuss the Act in more detail in future newsletter articles.
If you have any questions about this article, please contact a Boutwell Fay attorney.
© Boutwell Fay LLP 2020, All Rights Reserved.This handout is for information purposes only, and may constitute attorney advertising. It should not be construed as legal advice and does not create an attorney-client relationship. If you have questions or would like our advice with respect to any of this information, please contact us.The information contained in this article is effective as of January 16, 2020.