IRS Plays Musical Chairs With Voluntary Correction Programs

Section 401(k) and other retirement plans are notoriously complicated to operate and no plan sponsor gets it 100% correct, 100% of the time. When problems arise, plan sponsors may correct certain errors – technically “failures” — under an IRS program called the Employee Plans Compliance Resolution System, or EPCRS. Failures corrected this way cannot later be the basis for revoking the tax-qualified status of the plan, or imposing other tax penalties or interest. EPCRS is set forth in a Revenue Procedure that the IRS updates every few years. On July 16, 2021 the IRS published the latest EPCRS upgrade in Revenue Procedure 2021-30, in which, like musical chairs, some ground is gained while some is taken away. Below is a summary of some of the key changes.

Expansion of Self-Correction Period

Under the Self Correction Program, a plan sponsor may at any time, without IRS review or approval, correct “insignificant” failures in the way a plan has been operated (operational failures), and failures relating to plan documentation such as missed amendment deadlines (plan document failures). Further, a plan sponsor may self-correct “significant” failures of these types, provided that the significant failure is identified and fixed within a set “correction period.”

In the past, the correction period ended on the last day of the second plan year following the plan year for which the failure occurred. The EPCRS upgrade adds a whole additional year to the correction period. Now, self-correction of significant failures may be made by the end of the third plan year following the plan year in which the failure occurred. Thus, a plan sponsor with a calendar plan year and a significant operational error occurring in 2018 will have until the end of 2021 to correct the error.

There are two follow-on effects of this extension:

  • The three-year self-correction period for significant operational failures does not begin to run until after the statutory correction period for ADP and ACP testing failures, which is the 12-month period following the close of the plan year for which the test was failed. In effect there is four years to correct these errors – the original statutory period of 12 months, followed by the three plan year self-correction period.
  • For errors involving a failure to offer or implement elective deferrals, corrective contributions equal to 50% of what would have been deferred generally must be made to the plan. That percentage is reduced to 25% of what would have been contributed if certain requirements are met, including that the period during which the error occurred lasted more than three months, but not longer than the self-correction period for significant failures. That period has now been extended a year, from two to three plan years.

Plan sponsors wishing to use the Self-Correction Program should be mindful not just of the correction period deadline, but of several other pre-requisites. First, the plan sponsor must have established compliance practices and procedures in place, and the error must have arisen due to a lapse in their normal application. Plan document failures may only be self-corrected if a “favorable letter” for the plan exists. The plan sponsor must also assess a number of facts and circumstances in order to determine whether the failure is “insignificant” or “significant.” For those seeking more information, the IRS provides helpful online guidance on Self-Correction (but the two-year correction period had yet to be updated as of the date of this post), as well as Self-Correction FAQs.

Anonymous VCP Repealed after 2021

In addition to Self-Correction, EPCRS includes the Voluntary Compliance Program (VCP), which involves an online submission, IRS approval of the proposed correction method, and payment of a VCP fee. Normally the name of the plan sponsor and the plan involved are revealed in the VCP submission process. However the IRS has for some years maintained an Anonymous VCP process, particularly for plan sponsors whose proposed corrections do not fit within the preapproved or “safe harbor” methods outlined in EPCRS. In Anonymous VCP, a representative of the plan sponsor, such as a law firm, files the submission without identifying the plan sponsor or plan. If the IRS approves the proposed correction, the plan sponsor reveals is identity and the process converts to a conventional VCP submission. If the IRS rejects the proposed correction method, the plan sponsor remains anonymous and has the option of later participating in regular VCP with an alternative proposed correction.

For reasons that it does not explain, the IRS is retiring Anonymous VCP and will not accept any more Anonymous VCP submissions after December 31, 2021. In its place the IRS is introducing a new program effective January 1, 2022, which it refers to as an “anonymous, no-fee VCP pre-submission conference.” This new program is intended for proposed corrections that fall outside the safe-harbor correction methods set forth in Appendices A and B to the EPCRS Revenue Procedure. The VCP pre-submission conference is available only if the plan sponsor is eligible for and intends to submit a conventional VCP submission. Following a VCP pre-submission conference, the IRS will provide oral feedback on the failures and proposed correction method that is “advisory only, is not binding on the IRS.” The IRS will only confirm in writing that a VCP pre-submission conference took place but will not appear to provide anything substantive in writing about what was discussed.

VCP pre-submission conferences are held only at the discretion of the IRS and “as time permits.” Given limited IRS funding and significant understaffing in recent years, one wonders how widely and promptly available this program will be. It is also unclear whether or not the introduction of the VCP pre-submission conference means that VCP coordinators at IRS will no longer informally discuss proposed corrections with attorneys and other practitioners, as has been the practice in the past.

Other Changes

  • EPCRS generally requires full correction of operational errors, but makes an exception for certain de minimis amounts. Effective July 16, 2021, the de minimis threshold increases from $100 to $250, and erroneous contributions (plus earnings) of $250 or less will not need to be pulled from a participant’s account or recouped after distribution to a participant.
  • In the past, when a participant received a lump sum distribution of a more than de minimis amount (“Overpayment”), the plan was required to seek recoupment in a lump sum repayment. Now, repayment in installments is also an option. For defined benefit plans, the Revenue Procedure describes certain conditions under which recoupment of Overpayments may be avoided altogether.
  • The Revenue Procedure restores a safe harbor correction method for failures arising from automatic contribution arrangements, which had expired on December 31, 2020. The new expiration date is December 31, 2023; until then no corrective contributions are required for certain automatic contribution failures that do not extend beyond 9 ½ months following the end of the plan year of the failure. Other correction criteria apply including provision of written notice to affected employees.
  • The Revenue Procedure substantially liberalizes self-correction of certain operational failures through a plan amendment that retroactively reflects how a plan has been operated. Such retroactive amendments must increase benefits, rights or features under the plan, rather than reduce them. In the past it has been required that the benefit increase or enhancement apply to all eligible participants under the plan, which made many proposed corrections unaffordable. The new Revenue Procedure lifts the universality requirement, so that a retroactive amendment may increase benefits only for those participants affected by the operational error. This will make this form of correction much more flexible and attainable for plan sponsors.

Photo credit: Federica Campanaro, Unsplash

The above information is a brief summary of legal developments that is provided for general guidance only and does not create an attorney-client relationship between the author and the reader. Readers are encouraged to seek individualized legal advice in regard to any particular factual situation. © 2021 Christine P. Roberts, all rights reserved.

Summertime Blues for Your 401(k) Plan, P.2: Eligibility Failures

This is the second installment in five posts covering the most common 401(k) plan operational issues that arise during Form 5500 prep season for calendar year plans, which happens to be summertime: the season of outdoors fun and enjoyment for folks outside the ERISA bubble. This time around we will focus on a few selected errors related to eligibility under the plan – who gets to participate in the plan, and when. (More information on fixing eligibility errors in a 401(k) plan, courtesy of the IRS, is found here.) Note that the following discussion relates to plans in which participants must affirmatively enroll; a separate post will cover operational errors arising from auto-enrollment features.

Error No. 2: Eligibility Failures

Eligibility speaks to who gets to participate in a 401(k) plan, and entry dates signal when their participation must begin. These related areas can result in a host of plan errors.

The two main criteria of plan eligibility are age and service, and a minimum age of 21 and one Year of Service (defined below) are common eligibility criteria, especially for receiving employer contributions. The minimum service requirements to make salary deferrals are commonly reduced to, say, three months of service or even a shorter period. Also, commonly, plans exclude employees covered by a collective bargaining agreement, and employees earning no U.S.-source income. These criteria are all fairly straightforward, but complications sometimes arise when plans exclude employees based on schedule or job category, such as part-time employees, temporary employees, and per diem employees. Applicable law requires that employees in these categories be allowed to participate once they have worked 1,000 hours in a 12-consecutive month period (“Year of Service”). This requirement is part of preapproved plan documentation (adoption agreement), but plan sponsors not infrequently fail to adhere to it in actual fact. So, it is not uncommon to find that a plan has been excluding employees classified as per diem, or part-time, even after they have attained 1,000 hours in a given plan year.

The correction for this error is generally to put the improperly excluded participant in the position they would have been in had the error not occurred, by making qualified nonelective contributions (QNECs), plus earnings, to replace the salary deferrals and matching contributions that they failed to receive while improperly excluded from the plan. Generally plan sponsors only need to replace 50% of the missed elective deferrals (lost opportunity cost), but in some cases when the error is caught and corrected quickly and a disclosure is made to affected participants, the lost opportunity cost is reduced to 25% of the missed elective deferral (period of failure exceeds three months, but is less than two years), or even 0% (period of failure is less than three months). 100% of the missed matching contribution or nonelective contribution needs to be replace, plus earnings.

Note that under the SECURE Act, Section 401(k) plans (other than collectively bargained plans) must cover “long-term, part-time employees” who work at least 500 but less than 999 hours in each of the last three consecutive years. Employers must start counting hours of service towards this standard in 2021, such that the first coverage of long-term, part-time employees will occur in 2024. Proposed legislation would reduce the three year measurement period to two years. A plan sponsor can be more generous than the minimum requirement and allow entry into their plan sooner than the SECURE Act deadline.

Entry dates add another area of potential error. Entry dates may be semi-annual (e.g., January 1 and July 1, for a calendar year plan) or more frequent, such as quarterly (January 1, April 1, July 1, October 1), or even monthly. Errors often occur when plans are amended to adopt a more frequent entry date schedule, but plan operation lags behind and continues to follow the old entry date schedule. Errors also arise because of the time period for counting the 1,000 hours (the initial eligibility computation period) is often misunderstood and thus misapplied. In most plans, but not always – check your Adoption Agreement! – the 1,000 hours are counted from the date of hire to the first anniversary of hire, and then the counting period switches to the plan year (in these examples, the calendar year). Sometimes plan sponsors keep using the anniversary date cycle and therefore don’t catch the correct point at which 1,000 hours is attained, and thus miss the correct entry date.

Other eligibility errors arise from permitting employees to participate before they have met eligibility criteria. Sometimes these errors can be corrected with a retroactive amendment permitting early participation by the otherwise eligible employee. However this might not be the correct approach if, for instance, most of the affected participants are highly compensated employees. In that scenario, return of contributions plus earnings may be appropriate.

Correction of eligibility errors is relatively straightforward, as noted. The real goal, however, is to avoid these operational errors in the first place. I’ll come back to my favorite recommendation to avoid unneeded plan interpretation mishaps – design your plan as simply as possible. Of course, “simplicity” will depend upon the sector your business is in and the rate of employee turnover you experience. Immediate eligibility may be simple to administer for a small shop of engineering professionals, but a six-month or longer eligibility period may make sense for a restaurant or other business that experiences high turnover. If immediate eligibility works for your business, keep in mind that there are other ways to incentivize employees to stay with you long term, for instance by way of a vesting schedule imposed on employer contributions.

In addition to a simple plan design, I also recommend the all-hands meeting among human resource and payroll personnel, whether in-house or outsourced, at which every attendee has a copy of the plan adoption agreement, and a description of employment categories such as full-time, part-time, temporary, per diem, etc. It may also be helpful to have a representative of the plan recordkeeper at the meeting. At this meeting, the key sections of the plan document are those on eligibility, hours of service, and entry dates. The attendees should review the age and service criteria for eligibility, the method of crediting hours of service (whether actual hours or elapsed time.), any exclusion categories, whether any exclusion categories are subject to the 1,000 hour exception, and how the eligibility computation period works. Walking through hypothetical new hires and whether and when they enter the plan is one way to make sure everyone is on the same page and to reduce the chances for misinterpretation of the plan documents. After the meeting, drinks with umbrellas in them may be in order!

Photo credit: A.J. Garcia, Unsplash

The above information is a brief summary of legal developments that is provided for general guidance only and does not create an attorney-client relationship between the author and the reader. Readers are encouraged to seek individualized legal advice in regard to any particular factual situation. © 2021 Christine P. Roberts, all rights reserved.

Summertime Blues for Your 401(k) Plan, Pt. 1

Summertime is for fun, relaxation and a break from work, but it is also a crucial period for calendar year 401(k) plans. Form 5500 Annual Return/Reports are due July 31 for these plans, and even if an extension to October 15 is obtained, the summer months are when plan operations and finances are under scrutiny.  This is particularly true for “large” plans – those with 100 or more participants on the first day of your last plan year. (Note that special transition rules apply when switching from small plan to large plan Form 5500 filing status and back again, under the “80/120 rule.”  A good explanation of the rule is found here.)   Sponsors of large plans must engage an independent qualified public accountant (IQPA) and attach the auditor’s report to their Form 5500. 

As a benefits attorney, I associate summer with calls from plan sponsors whose auditing CPAs have identified operational failures and other plan errors that require correction under Internal Revenue Service and Department of Labor voluntary compliance programs, including self-correction, when available.  This is the first in a series of five posts covering the 401(k) mishaps that are as reliable a feature of my summers as are the 4th of July, outdoor barbecues and sunscreen.

Error No. 1:  Mismatching Definitions of Compensation

Disconnects between payroll procedures, and the way that your 401(k) plan defines “compensation” for purposes of salary deferrals and employer contributions, generate a significant number of plan operational failures that I see. 

Examples include adding payroll codes to your system without applying participants’ deferral elections and employer contribution to those new payroll amounts, or carving out categories such as bonuses, commissions, and overtime from your plan’s definition of compensation, without stopping deferrals and employer contributions from those amounts.  Whole categories of pay – for instance, tips recorded on credit cards – can sometimes be overlooked in plan operations, as well.  These errors can be corrected fairly simply but the corrections can be expensive and/or time consuming if the errors cover multiple years. 

The best recommendation I can make to avoid compensation-based errors in operating your 401(k) plan is to use Form W-2, Box 1 as your plan’s definition of compensation, with no exclusions (other than gift cards or cash rewards, if your company uses them) and to regularly revisit your payroll codes and procedures to make sure that all pay items that appear in Box 1 are counted for purposes of participants’ salary deferrals and loan repayments. 

Specifically, you should consider holding a meeting each year, or more frequently, among human resources and payroll personnel (in-house or out-sourced) to review the definition of compensation in the Adoption Agreement, on the one hand, and a list of all payroll codes, on the other. Revisit this exercise every time you modify payroll practices, your payroll vendor or software, or of course any time you change the plan’s definition of compensation. 

If your plan defines compensation in a way that involves carve-outs, be especially careful to ensure that the salary deferrals and employer contributions are not applied to the payroll code amounts that correspond to the exclusions, whether bonuses, commissions, overtime, or other items. 

Be mindful, as well, that certain pay items may be excluded from “safe harbor” definitions of compensation, such as cash and/or non-cash fringe benefits, reimbursements or other expense allowances, and moving expenses, but that other exclusions, such as overtime, will trigger the need for annual testing of the definition of compensation under nondiscrimination rules. 

Lastly, there is a good bit of confusion over the scope of certain categories referenced in the safe harbor definitions of compensation, such as nontaxable fringe benefits, and differential wage payments.  As used in an adoption agreement, differential wage payments generally will relate to military service and are not the same as shift differentials.    When in doubt about any definition of compensation issue, check with your third party administrator, ERISA attorney or other benefits professional.  You want your only headache next summer to be from an ice cream cone, not your 401(k) plan.

The above information is a brief summary of legal developments that is provided for general guidance only and does not create an attorney-client relationship between the author and the reader. Readers are encouraged to seek individualized legal advice in regard to any particular factual situation. © 2021 Christine P. Roberts, all rights reserved.

Photo credit:  Krissara Lertnimanorladee, Unsplash

How Employers With 51 -100 Employees Can Meet Their CalSavers Deadline

The CalSavers Program applies to employers that do not maintain a retirement plan.  It automatically enrolls eligible employees in a state-managed system of Roth IRA accounts. June 30, 2021 is the deadline by which employers with 51 to 100 California employees must either establish that they are exempt from CalSavers (for instance, because they have their own plan) or enroll in the program.  Employers with more than 100 California employees were required to enroll by September 30, 2020

Although under legal attack for some time, on the grounds that the federal benefits law, ERISA, prohibited a state-run retirement program, the CalSavers program was just upheld by the Ninth Circuit Court of Appeals.  Money penalties apply to employers who don’t timely either establish their exempt status, or participate in the program.  Below is a how-to for employers in the 51+ group, who have approximately six weeks until their CalSavers deadline arrives:

  1. Already have a retirement plan (including a SEP or SIMPLE)?  Register or certify your exemption.  The link is here.  You will need your federal Employer Identification Number or Tax Identification Number and an access code that is provided on a notice you should have received from CalSavers via email or snail mail.  If you can’t find your notice, call (855) 650-6916. 
  2. Don’t have a retirement plan?  Consider establishing one in the time period left.  IRS Publication 560 contains information about setting up a SEP, SIMPLE, or a 401(k) plan for your small business.  Investment advisors to your business and even business CPAs can also help.  Don’t do it on your own, get expert advice as your choice of plan will have consequences!
  3. Don’t have a plan and don’t want one?  Register with CalSavers.  Again, you need your EIN, or TIN, and an access code.  If you don’t have an access code you can request one using this link. After you register, you will have 30 days to upload your employee roster and facilitate payroll contributions.  If you use an outside payroll provider, you will need to add them as your payroll representative.  More information on adding payroll representatives is provided once you register.
  4. Need more information about counting employees towards the 51 employee threshold?  Check out our prior blog post on the topic, which includes a discussion of use of staffing companies and the like, and also visit the CalSavers FAQ re eligibility.

The above information is a brief summary of legal developments that is provided for general guidance only and does not create an attorney-client relationship between the author and the reader. Readers are encouraged to seek individualized legal advice in regard to any particular factual situation. © 2021 Christine P. Roberts, all rights reserved.

Photo credit Levi Meir Clancy, Unsplash

IRS FAQs Address COVID-19 Partial Plan Termination Issues

On April 27, 2021 the IRS supplemented its online FAQs on COVID-19 relief for retirement plans and IRAs with information related to relief from partial plan terminations.  Under Division 33, Section 209 of the Consolidated Appropriations Act of 2021 (CAA), a plan is not treated as having a partial termination during any plan year which includes the period beginning on March 13, 2020, and ending on March 31, 2021, if the number of active participants covered by the plan on March 31, 2021, is at least 80% of the number of active participants covered by the plan on March 13, 2020.  For employers with a calendar year, this buys them three months of additional time to recover and add back participants, as usually a partial termination would have been determined based on participant levels as of their plan year end on December 31, 2020.  We reviewed the partial termination relief provisions of the CAA in this earlier post.

The new FAQs clarify the following issues:

  1. Definition of Active Participants Covered by the Plan  For purposes of the 80% retention rule, the FAQ advises that plan sponsors use a “reasonable, good-faith interpretation,” of the term “active participant covered by the plan,” applied in a consistent manner, when determining the number of participants covered by the plan on the March starting and ending dates.   In 401(k) plans, participants who meet the eligibility requirements to make salary deferrals generally have been required to be counted as active participants covered by the plan (See Q&A 40), even if they do not actively defer.   The FAQ does not address the distinction between “eligible” versus actively deferring.  Plan sponsors with questions about counting active participants should consult benefit counsel or other benefit advisors.
  2. Application of March to March Period to Calendar Plan Year  The FAQ clarifies that if any part of the plan year falls within the March 13, 2020 to March 31, 2021 period, then the relief applies to any partial termination determination for that entire plan year.   For a plan with a calendar plan year, the relief therefore applies to both the January 1 to December 31, 2020 plan year and the January 1 to December 31, 2021 plan year, because both years include a portion of the March 13, 2020 to March 31, 2021 determination period.
  3. Impact of New Hires on 80% Test  The FAQs make clear that the 80% test looks at the total population of active participants and not only at the pool of active participants who were covered on March 13, 2020.   In other words, new hires that met eligibility under the plan by March 31, 2021 may be counted, and plan sponsors do not need to take a snapshot of active participants as of March 13, 2020 and ensure that 80% of those exact people were still employed on March 31, 2021, in order for the relief to apply.  This is an expansion of normal rules for partial terminations, which would ordinarily require that a participant who is terminated be individually rehired in order not to count as having been affected by the partial termination.
  4. Relief Not Limited to COVID-Related Staff Reduction  The FAQs make clear that although March 13, 2020 happens to be the date that the COVID-19 national emergency was declared, the relief applies regardless of the reason for the reductions in active plan participants; the reductions need not be related to the COVID-19 pandemic. 

Plan sponsors should take heed of the CAA partial termination relief and make use of it when possible.  Form 5500 Return/Reports require plan sponsors to report the number of active participants at the beginning, and end, of each plan year, which permits IRS to IRS FAQs Address COVID-19 Partial Plan Termination Issues possible partial plan terminations.  Armed with this data, IRS earlier this year announced a compliance check program focused on partial terminations.  This is a form of soft audit that could lead to a more formal audit program in the future.

The above information is provided for general informational purposes only and does not create an attorney-client relationship between the author and the reader. Readers should not apply the information to any specific factual situation other than on the advice of an attorney engaged specifically for that or a related purpose. © 2021 Christine P. Roberts, all rights reserved.

Photo credit: Andrew Winkler, Unsplash

IRS Lists Solo 401(k) Plans as Audit Target

If your business sponsors a “solo 401(k)” plan, it may be in the crosshairs of the Internal Revenue Service.  The Service’s TE/GE (Tax Exempt and Government Entities) division has identified one-participant 401(k) plans as among its current audit initiatives.  In its web posting announcing the initiative, TE/GE states:  “[t]he focus of this strategy is to review one-participant 401(k) plans to determine if there are operational or qualification failures, income and excise tax adjustments, or plan document violations.”

By way of background, a solo 401(k) plan is a traditional 401(k) plan covering a 100% business owner with no employees, or that person and their spouse.  As this handy IRS info page describes, solo 401(k) plans are subject to the same rules and requirements as any other 401(k) plan, however because no common law employees participate, you do not have to worry about minimum coverage and nondiscrimination testing, top heavy rules, or most of the requirements of Title I of ERISA.  Solo 401(k) plans can be a great fit for some businesses, but those that stray outside the strict eligibility requirements for these plans have potentially high exposure to correction costs and sanctions in an audit setting.    

Below we list some common solo 401(k) compliance pitfalls.   If you are a solo 401(k) sponsor, check your plan design and operations to determine if these might be issues for you.  Take steps now to correct any compliance failures through use of EPCRS and other voluntary compliance programs, where applicable, so that, if an IRS audit does occur, it is resolved without incident.

  1. Employees Eligible for Benefits: One of the most frequent errors with solo 401(k) plans is that they lose their solo status when the business sponsoring them acquires employees, and the employees work the necessary number of hours required for eligibility under the plan.  (These generally cannot exceed 1,000 hours in a year of service.)  This will trigger application of minimum coverage, nondiscrimination, and top heavy rules, as well as ERISA reporting and disclosure requirements (Summary Plan Description, Form 5500-SF, etc.).  Failure to meet requirements under any of these sets of rules will be fodder for the IRS in an audit setting.  Business owners who need employees should probably avoid solo 401(k) plans unless they can be certain that the employees’ work hours never reach or exceed 1,000 hours in a year.   
  2. Controlled Group/Affiliated Service Group: This issue is related to the first in that, if the business that sponsors the solo 401(k) plan is under common control with a business that has common law employees, the answer to the question “who is the employer” — and who has employees — will be both businesses under common control, not just the business that sponsors the solo 401(k).  Generally, solo 401(k) status will be lost as a result.  The same potential coverage, testing, and top-heavy issues listed above can apply. Potentially, employees of the other business could be eligible for benefits under the (formerly) solo plan.
  3. Form 5500 Filing Duties: Solo 401(k) plans are exempt from filing Form 5500-EZ so long as plan assets remain under $250,000.  If plan assets exceed this threshold and a Form 5500-EZ is not filed, significant penalties could be assessed by IRS and by Department of Labor.  Participation in the Department of Labor Penalty Relief Program for Form 5500-EZ Late Filers should be considered in such instances. 
  4. Exceeding Contribution and Deduction Limits: The contribution and deduction limits that apply to group 401(k) plans apply to a solo 401(k) plan.  Employee salary deferrals cannot exceed the applicable dollar limit under Internal Revenue Code (“Code”) § 402(g) ($19,500 in 2021, plus $6,500 for those 50 and older).  The 415(c) limit equal to the lesser of 100% of compensation or $58,000 (in 2021) applies (and is increased by the age 50 catch-up limit, for a total of $64,500).  The maximum Code § 404(a) deduction of 25% of eligible plan compensation also applies, but in general the 415(c) limit will be reached first.  Failure to observe any of these dollar limits could be picked up on audit.
  5. Plan Document Errors: Businesses that sponsor a solo 401(k) need to update their plan document periodically to comply with the law just like any plan sponsor, meeting the adoption deadlines for preapproved plan remedial amendment cycles (the next one falls on July 31, 2022). Voluntary plan amendments also have to be properly documented and timely adopted.  Failure to meet these document requirements may be able to be corrected under EPCRS. 

The above information is provided for general informational purposes only and does not create an attorney-client relationship between the author and the reader. Readers should not apply the information to any specific factual situation other than on the advice of an attorney engaged specifically for that or a related purpose. © 2021 Christine P. Roberts, all rights reserved.

Photo Credit:  Markus Spiske, Unsplash

In Rehire Mode? Keep March 31, 2021 in Mind for Your 401(k) Plan

If your business is one of the many that reduced employees in the early days of the COVID-19 pandemic, you need to keep March 31, 2021 marked on your calendar, particularly if you are fortunate enough to be ramping up activity and adding workers back to your payroll.

As explained in our earlier post, when employer action, including as the result of an economic downturn, results in 20% or more of the population of an employee retirement plan being terminated from employment, a presumption arises that a “partial plan termination” has occurred, with the result that everyone affected by the partial termination must be fully vested in their plan accounts.

The partial termination rule is therefore relevant to plans that include employer contributions that are subject to a vesting schedule.

March 31, 2021 comes into play because it is the date set under Division EE, Section 1, Title II, Section 209 of the Consolidated Appropriations Act, 2021 as the snapshot date on which a partial plan termination may be avoided through rehires that restore earlier plan participation levels.  Specifically, a plan will not be treated as having experienced a partial plan termination if on March 31, 2021, the number of active plan participants is at least 80 percent of the number covered by the plan on March 13, 2020 (the beginning of pandemic-related stay at home orders).  For purposes of this rule, “active” status relates to the plan, not payroll, meaning that the individual maintains a plan account but may or may not be actively employed.  Clearly, however, adding new hires who establish accounts under the plan will result in increased plan participant numbers as the March 31, 2021 date approaches.

The partial plan termination relief applies during any plan year which includes March 13, 2020 to March 31, 2021 period.  If you have questions about application of this new rule to your 401(k) or other benefit plan, don’t hesitate to contact us. 

The above information is provided for general informational purposes only and does not create an attorney-client relationship between the author and the reader. Readers should not apply the information to any specific factual situation other than on the advice of an attorney engaged specifically for that or a related purpose. © 2021 Christine P. Roberts, all rights reserved.

Photo credit: Booke Lark, Unsplash

The Song Remains the Same: Few 2021 COLA Adjustments for Retirement Plans

On October 26, 2020, the IRS announced 2021 cost-of-living adjustments for annual contribution and other dollar limits affecting 401(k) and other retirement plans.  The maximum annual limit on salary deferral contributions to 401(k), 403(b), and 457 plans remained the same for 2021 as it was in 2020, at $19,500, and the catch-up contribution limit for employees age 50 and older also stayed the same at $6,500.  The SIMPLE employee contribution limit of $13,500 was also unchanged, as were the annual deductible IRA contribution and age 50 catch-up limits ($6,000 and $1,000, respectively).  The Section 415(c) dollar limit for annual additions to a retirement account was increased to $58,000 from $57,000 and the maximum limit on annual compensation under Section 401(a)(17) increased from $285,000 to $290,000.  Below we list the changed and unchanged dollar limits for 2021. Citations below are to the Internal Revenue Code. (Click on the chart for a larger image.)

In a separate announcement, the Social Security Taxable Wage Base for 2021 increased to $142,800 from the prior limit of 137,700 in 2020.

The above information is a brief summary of legal developments that is provided for general guidance only and does not create an attorney-client relationship between the author and the reader. Readers are encouraged to seek individualized legal advice in regard to any particular factual situation. (c) 2020 Christine P. Roberts, all rights reserved.

Photo Credit: Jude Beck, Unsplash

FAQ on New 401(k) Coverage Rules for Long-Term, Part-Time Workers

With a stated goal of encouraging retirement savings, the Setting Every Community Up for Retirement Enhancement Act expands eligibility to make salary deferrals under a 401(k) plan to “long-term, part-time workers.” The new rules under the SECURE Act, which became law on December 20, 2019, ramp up between 2021 and 2024. However, some employer action is already required, as explained below. The following Frequently Asked Questions walks you through the new rules, including those contained in IRS Notice 2020-68, published on September 3, 2020.

Q.1: What are the current rules for excluding part-time, seasonal, and temporary employees under 401(k) and other retirement plans?

A.1: Even of you exclude these categories by name, you must still track their hours of service and include them in the plan on the entry date coinciding with or following their completion of 1,000 or more hours of service within a 12-month period (or, if later, upon also attaining a minimum age not exceeding 21). This is required under Section 401(a) of the Internal Revenue Code. Different rules applicable under Section 403(b) plans are outside the scope of this FAQ.

Q.2: Over what period do you count the 1,000 hours of service?

A.2: You count them over an “eligibility computation period.” The first eligibility computation generally starts upon the date of hire and ends on the first anniversary of that date. The plan may then continue to use the anniversary of hire, or switch to a plan year cycle.

Example – Switch to Plan Year Cycle: Kyle is hired on June 15, 2021 under a plan that follows a calendar year cycle and uses quarterly entry dates. Kyle works 700 hours between June 15, 2021 and June 14, 2022, the first anniversary of hire. Kyle does not enter the plan on July 1, 2022. Kyle completes 1,000 hours between January 1, 2022 and August 15, 2022 and enters the plan on October 1, 2022.

Q.3: What is a “long-term, part-time worker”?

A.3: Section 112 of the SECURE Act defines a long-term, part-time worker as an employee who has worked 500 or more hours in each of 3 consecutive 12-month periods, and who has attained a minimum age, not to exceed 21, as of the end of that 36-month period. The 12-month eligibility computation periods may be based on the anniversary of hire or may switch to the plan year cycle as described above.

Q.4: What eligibility rules apply to long-term, part-time workers?

A.4: An employee who qualifies as a long-term, part-time worker must be allowed to make employee salary deferrals under a Section 401(k) plan as of the first applicable entry date following completion of the 36-month period. A plan is allowed to use 6-month entry dates for long-term, part-time workers (e.g., January 1 and July for a calendar year plan) or may use regular quarterly, monthly, or other entry dates for this group.

Q.5: When do you begin tracking hours of service for long-term, part-time workers?

A.5: You begin tracking on January 1, 2021. That means the first point at which an employee will qualify for participation in a 401(k) plan as a long-term, part-time worker is January 1, 2024.

Q.6: Must long-term, part-time workers receive matching contributions or other employer contributions?

A.6: No, only eligibility to make salary deferral contributions is required. However, an employer may voluntarily make long-term, part-time workers eligible for matching and other employer contributions.

Q.7: If we choose not to, does that mean we don’t have to track hours of service towards vesting, for long-term, part-time workers?

A.7: No, you must track hours of service towards vesting, even if you don’t make employer contributions for this group. That is because, if a long-term, part-time worker later meets the plan’s conventional eligibility requirements, the worker joins the plan as a “regular” participant as of the first subsequent plan year, and may become eligible for matching and other employer contributions at that point. All of the worker’s hours of service must be counted towards vesting at that point. If these are hourly workers, you may be tracking their hours of service automatically, as it is.

Q.8: Do special rules apply to tracking vesting service for long-term, part-time workers?

A.8: Yes. Notice 2020-68 provides that you count each year in which an employee has at worked least 500 hours of service as a year of service counted towards vesting. Further, you count all years of service with the company in which they reach that threshold, not just years of service worked from January 1, 2021 and onward (as you do for eligibility purposes). If the plan language allows, you may disregard only years worked before attaining age 18, years worked before the plan was adopted, or years that may be disregarded under specially modified break in service rules.

Q.9: Are the break in service rules modified for long-term, part-time employees?

A.9: Yes. Normally, a break in service is defined as a year in which an employee has not completed more than 500 hours of service. For long-term, part-time workers, it is defined as a year in which the employee did not complete at least 500 hours of service.

Q.10: Can a plan still exclude employees based on job function or job location, such as “employees at Location B,” without violating the long-term, part-time worker coverage rules?

A.10: Presumably, reasonable, job-based exclusion criteria that pass minimum coverage testing are still permissible and are not preempted by the long-term, part-time worker coverage rules, but more guidance from the IRS would be appreciated. Employers with specific questions should consult benefit counsel for individualized guidance.

Q.11: Are long-term, part-time workers counted towards nondiscrimination testing, including ADP/ACP, and minimum coverage testing?

A.11: No, you are not required to count them under these tests.

Q.12: Are you required to make minimum top-heavy contributions on behalf of long-term, part-time workers?

A.12: No, you are not required to do so.

Q.13: Do the long-term, part-time worker coverage rules apply to employees subject to a collective bargaining agreement?

A.13: No, they do not apply to collectively bargained employees.

Q.14: Instead of tracking new hires over 3 years, should I just allow all employees who complete 500 hours of service to participate in the salary deferral portion of my 401(k) plan as of the next entry date?

A.14: That is certainly a simplified alternative to the minimum requirements, and presumably the exceptions from nondiscrimination testing and top-heavy contributions would continue to apply to employees meeting these reduced eligibility criteria. However this route could bring its own complications, by increasing your plan participant headcount over the 100 participant threshold sooner than is required. See Q&A 17.

Q.15: How will the long-term, part-time worker rules apply to plans with automatic enrollment?

A.15: The SECURE Act currently only refers to the minimum semi-annual entry dates for long-term, part-time workers, so it would appear that the automatic enrollment provisions would not apply to them. More guidance would on this topic would be appreciated, however.

Q.16: What if my plan doesn’t use actual hours to track service, but instead uses the equivalency method (e.g., 45 hours credited per week, if any service is performed in the week)?

A.16: It would appear that you can continue to use this method of tracking service for employees who meet conventional eligibility criteria, and use actual hours to track eligibility of long-term, part-time workers. Nothing in the SECURE Act prohibits use of the equivalency method for tracking service of long-term, part-time workers.

Q.17: Should we just create a new, separate 401(k) plan for long-term, part-time workers?

A.17: That depends. As it stands, it appears that employees who meet the criteria of long-term, part-time workers – whether or not they actively defer under the plan – will be included in the plan participant headcount on the first day of a plan year. This headcount is used to determine whether or not the plan has 100 or more participants and must include an independent qualified auditor’s report with its 5500 for a given year. If inclusion of your long-term, part-time workers will push your existing plan over the 100 participant threshold, you might give thought to separating them out in a separate plan, such that both of your plans will be under the audit threshold. Both plans would still have to file a Form 5500-SF each year, of course.

The above information is a brief summary of legal developments that is provided for general guidance only and does not create an attorney-client relationship between the author and the reader. Readers are encouraged to seek individualized legal advice in regard to any particular factual situation. (c) 2020 Christine P. Roberts, all rights reserved.

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