Coronavirus Relief Part VI - IRS Guidance on RMD Rollovers

On June 23, 2020, the IRS published Notice 2020-51 which provides additional guidance related to Section 2203 of the CARES Act which waived Required Minimum Distributions for 2020 for certain plans and IRAs. For our previous coverage of Section 2203, see Coronavirus Relief Part III - RMD Waivers. The notice also provides an update on the RMD changes made by the SECURE Act.

Deadline Extended

The CARES Act was signed into law on March 27, 2020, and effective on that date, there were no more RMDs for 2020 (for participants in defined contribution plans and holders of IRAs). This was a great relief for anyone who had not yet taken their 2020 RMD, as they would no longer be required to take a distribution during the volatile market environment. However, many individuals who were subject to 2020 RMDs might have already taken their distributions prior to the enactment of the CARES Act.

Once the CARES Act became law, any distribution taken between January 1, 2020 and March 27, 2020 which had been classified as an RMD was now considered an eligible rollover distribution. Generally, an eligible rollover distribution which is not directly rolled over may still be paid to an IRA or to the trustee of an eligible retirement plan and be excluded from income, as long as the payment happens within 60 days of the distribution. Individuals who received RMDs in February or March 2020 would still have had some time after the enactment of the CARES Act to take advantage of this 60-day rollover period. However, those who took their RMDs in January 2020 would have missed the window to pay back their RMD.

Notice 2020-51 provides relief. The IRS officially extended the 60-day rollover window to August 31, 2020, to roll over any RMD payment (other than from a defined benefit plan) made in 2020 to an eligible retirement plan or IRA. Thanks to this relief, participants who took an RMD at any time in 2020 now have until August 31, 2020 to repay the amount of their RMD and exclude it from income in 2020.

Exception to One-Rollover-per-Year-Rule

Ordinarily, the holder of an IRA is not permitted to make more than one rollover contribution in any 12-month period. Notice 2020-51 provides an exception to this rule with respect to the re-contribution of amounts which were distributed as RMDs as described in the previous section. Therefore, an amount which was distributed as an RMD during 2020 may be repaid to an IRA at any time up through August 31, 2020, regardless of whether the account holder has made (or will make) another rollover contribution within a year.

Plans not Required to Treat 2020 RMDs as Eligible for Rollover

The SECURE Act increased the age at which RMDs must begin from 70½ to 72, effective for individuals attaining age 70½ in 2020 or later. However since the SECURE Act was passed very late in 2019, it did not give much time for recordkeepers and other service providers to update their systems and procedures before the new rule took effect. As a result, some distributions may have been paid out during 2020 and treated as RMDs, even if they were no longer actually RMDs.

A distribution which is not an RMD is generally eligible for rollover. The administrator of a plan which makes an eligible rollover distribution must comply with certain requirements, including providing a special tax notice to the participant, and withholding 20% for federal income tax purposes.

If a distribution was made during 2020 and was treated as an RMD by the payor, but after the application of the SECURE Act and/or the CARES Act, it would no longer be an RMD, and therefore could be an eligible rollover distribution. However the plan would have failed to comply with the notice and withholding requirements by treating the distribution as an RMD.

Notice 2020-51 provides relief, by allowing payors to treat distributions, which would have been RMDs for 2020 if not for the provisions of the SECURE Act and the CARES Act, as if they were not eligible rollover distributions, with respect to the notice and withholding requirements.

If you have any questions about your RMD obligations for 2020 or beyond, please contact us.

Coronavirus Relief Part V - Expansion of Qualifying Factors, and Clarification from IRS

We are pleased to return to the topic of section 2202 of the CARES Act. For previous discussion of section 2202, see Part I - Coronavirus-Related Distributions and Part II - Loans of our Coronavirus relief series.

On June 19, 2020 the IRS released Notice 2020-50. This notice takes advantage of the provision in the CARES Act which permits the Treasury Department to provide additional factors to consider when determining who is a qualified individual for purposes of Coronavirus-related distributions and loans. The notice additionally provides some clarification on certain issues related to section 2202, including the suspension of loan payments for a qualified individual.

New Qualifying Factors

The text of the CARES Act provides that an individual is eligible for the special distribution and loan provisions if they suffered “adverse financial consequences” due to COVID-19. These consequences include being quarantined, being furloughed or laid off, being unable to work due to lack of childcare, a reduction in hours worked, or the closing or reduction in hours of operation of a business that they owned. However all of these only applied to the participant themselves. Notice 2020-50 expanded all of these factors to also include the individual’s spouse, and members of their household (defined as anyone sharing the same principal residence).

In addition, two entirely new qualifying factors were added. An individual is now qualifying if they, their spouse or member of their household experienced a reduction in pay or self-employment income due to COVID-19. An individual is also now qualifying if they, their spouse or member of their household had a job offer rescinded or start date delayed due to COVID-19.

To recap, a qualifying individual is one:

• Who is diagnosed with SARS-CoV-2 or the coronavirus disease 2019 (collectively referred to as "COVID-19");

• Whose spouse or dependent is diagnosed with COVID-19; or

• Who experiences adverse financial consequences as a result of any of the following, or whose spouse or a member of whose household experiences adverse financial consequences as a result of any of the following due to COVID-19:

  • Being quarantined, laid off, or furloughed;

  • Having work hours reduced;

  • Being unable to work due to lack of child care;

  • Closing or reduction in hours of operation of a business that they own;

  • Reduction in pay or self-employment income; or

  • Having a job offer rescinded, or start date delayed.

Participant Self-Certification of Qualifying Status

The IRS reaffirmed in Notice 2020-50 that a Plan Administrator may rely upon a participant’s certification that they meet the definition of a qualified individual when determining whether to allow a coronavirus-related distribution or loan. However, they may not rely upon the participant’s certification if they have actual knowledge to the contrary. The Plan Administrator is not required to investigate the veracity of the participant’s claim; they would only be required to deny it if they already possessed knowledge contradicting the claim.

The IRS also clarified that while the Plan Administrator may rely upon the certification without verifying it, the participant is not entitled to treat the distribution as a coronavirus-related distribution on their personal tax return (with respect to the waiver of the excise tax under sec. 72(t) and the spread of income over a 3-year period) unless they actually are a qualified individual.

Suspension of Loan Payments

One of the more puzzling pieces in the text of section 2202 regards the suspension of loan payments. There was some confusion because the wording of the Act permits a qualified individual to suspend, for a one year period, loan payments which were scheduled to be due between March 27, 2020, and December 31, 2020.  This is unclear because although it says payments are suspended for one year, the range of dates for which it says payments may be suspended is itself less than one year. So the question is, what happens at the end of the year?

For example, if a payment was originally due on March 31, 2020, and was delayed for one year, it would now be due March 31, 2021. However, there was no suspension permitted in the law for a payment due in January 2021. If payments are required to begin in January, then the participant did not have their payments suspended for one year as the law seems to require. 

Furthermore, the Act says that the original term of the loan will be extended by the length of the suspension period. If payments resume 9 months after the suspension, is the term extended by 9 months or by the 1 year referenced in the Act?

Notice 2020-50 provides a safe harbor method for compliance with this section. Under the safe harbor, the suspension period must end on December 31, 2020 and payments must resume after that date, however the original term of the loan is extended by 1 year. The outstanding balance of the loan as of the beginning of the suspension period must be increased for interest through the end of the year, then amortized into level payments for the remainder of the term (including the 1 year extension).

The notice also recognizes that there may be other ways to comply with the loan suspension provision of the CARES Act, however they may be more complex than the safe harbor method. For example, the payments beginning in January 2021 may be made as originally scheduled, and then increased payments may be required to begin only starting on the anniversary of the original suspension date. In this case, the outstanding balance would be computed as of the 1-year anniversary of the start of the suspension period, taking into account accrued interest during the suspension period, but also taking into account the payments made between January 1, 2021 and the anniversary date. That balance would then be amortized into level payments over the remaining term of the loan, including a 1-year extension.

In any case, it is clear that repayments must begin again on the first repayment date after December 31, 2020. It is not permissible to wait until one full year after the loan suspension date to begin repayments.

Other Items

The notice grants that, for a participant in a Section 409A Nonqualified Deferred Compensation Plan, if the participant receives a Coronavirus-Related Distribution from an eligible retirement plan, that distribution will be considered a hardship distribution for purposes of permitting a cancellation of the participant’s deferral election under the nonqualified plan. The election may only be cancelled, not postponed or delayed.

The notice also discusses the impact on various individual income tax scenarios of making repayments of Coronavirus-related distributions. Since these affect individual tax planning, and not retirement plan design or administration, they have not been covered here. However, if you have questions about it, or anything else related to the CARES Act, please don’t hesitate to contact us.

Preferred Pension Planning Corporation Attains CEFEX-ASPPA Administration Certification 5 Years In A Row

Preferred Pension Planning Corporation was founded on principles of accuracy, integrity, and exceptional client service. We are also committed to continual improvement. Our dedication to doing what is best for you, our clients, prompted us to engage CEFEX, the Centre for Fiduciary Excellence, LLC to audit our processes. 

Since 2015, Preferred Pension Planning Corporation has engaged the CEFEX organization to conduct a comprehensive independent review. The process is rigorous and their assessment takes months to complete. Now, after going through their audit process and carefully evaluating our internal procedures, we are proud to share with you that Preferred Pension Planning Corporation has attained the CEFEX certification for the 5th year in a row. 

“Having this certification gives us an edge in a competitive industry where clients are discerning about who to trust” said Lawrence Zeller, President. That is why, we believe the CEFEX-ASPPA certification process and audit aligns with our mission.

Our CEFEX-ASPPA certification signifies our commitment to adhere to a standard of excellence and a dedication to retirement plan services best practices.

CEFEX is an independent global assessment and certification organization. They work closely with industry experts to provide comprehensive assessment programs to improve the practices of investment advisors, stewards (retirement plans, foundations and endowments, etc.), investment managers, and other financial service providers. CEFEX also confers a formal certification for those firms that are willing to undergo a comprehensive audit and able to demonstrate that they fully conform to high standards that are substantiated in law and proven best practices.

Specifically, for our firm, we sought The American Society of Pension Professionals & Actuaries (ASPPA) Certification for Service Provider Excellence.  This certification program was developed to recognize firms providing recordkeeping and/or administration services to retirement plans that adhere to a standard of excellence and a dedication to best practices. The program, which requires an annual certification renewal, encourages a culture of good governance and oversight at certified firms. The certification allows firms to distinguish themselves in a competitive marketplace and establish credibility with current and prospective clients and advisors. 

The CEFEX-ASPPA certification offers testament to the fact that we understand the importance of paying close attention to everything from high level strategies and policies all the way down to the details of our business practices. The CEFEX Mark signifies that our clients can be confident that we are worthy of their trust.

Retirement Plans Paying for Themselves

Expenses associated with maintaining a qualified retirement plan are often paid directly by the employer sponsoring the plan. However, in many cases, expenses can also be paid by the plan itself. In this article we will examine this feature and its limitations.

Fiduciary

The Plan Administrator, generally the sponsoring employer, has the responsibility to determine what expenses will be paid by the plan. This is a fiduciary decision, and in that role, the Plan Administrator must act solely in the benefit of plan participants and beneficiaries. Under section 404(a)(1)(A) of ERISA, the fiduciary may exercise this power in only two ways:

1. To provide benefits to participants and beneficiaries, and

2. To defray reasonable expenses of administering the plan.

As a fiduciary decision, the determination of what expenses will be paid by the plan must be made solely considering the interests of the participants and beneficiaries of the plan; the Plan Administrator may not consider what benefit it might bring to the employer. This can be a tricky consideration when the Plan Administrator and the employer are the same person! However, the fiduciary may consider that the employer could be required to terminate the plan or scale it back if expenses become too burdensome to be paid by the employer.

Reasonable Expenses

The determination of whether a given expense is reasonable is also a fiduciary action. The fiduciary must act prudently when making this determination.

Settlor Expenses

The Department of Labor has expressed the view that certain expenses, known as “Settlor Expenses,” are to the primary benefit of the employer, and thus may not be paid from the plan. Settlor expenses generally include any discretionary action taken by the plan sponsor with regard to the design or operation of the plan.

A non-exhaustive list of settlor expenses, which may not be paid from the plan, includes:

• Cost to initially adopt a qualified plan;

• Cost of drafting amendments which change the plan’s eligibility, vesting schedule, method of satisfying ADP/ACP test, definition of compensation, or any other discretionary change to the plan’s specifications;

• Costs to freeze or terminate a plan; and

• Costs of corrections under the IRS Voluntary Correction Program (VCP).

Plan Expenses

Plan-related expenses which are reasonable, and are not settlor expenses, may be paid from the plan. Examples of expenses which may be paid from the plan include:

• Cost to prepare required amendments (due to new regulations or law changes);

• Required plan restatements;

• Nondiscrimination testing;

• Preparation of Form 5500;

• Audit by IQPA;

• PBGC premiums;

• Bonding; and

• Costs associated with processing participant benefit distributions, including QDROs.

Method of Paying Expenses

The plan document must allow for reasonable expenses to be paid from plan assets, or, at least, must not prohibit such payment. Most pre-approved plan documents will allow the payment of reasonable expenses from plan assets, but it is important to check to be sure. If the plan document does not permit expenses to be paid from plan assets, the document must be amended before any expenses can be paid.

Payment should be made directly from the plan to the service provider or other payee. The plan should not reimburse the plan sponsor for expenses, even if the expense was reasonable and was not a settlor expense. Such a transfer of plan assets to the sponsor could result in a prohibited transaction.

Disclosures

In a participant-directed plan, participants must be regularly notified of expenses which have been or may be charged against their account. In addition they must be notified of their rights under the plan.

Department of Labor regulation 2550.404a-5 lays out both an annual notice requirement and a quarterly notice requirement. The annual notice must contain:

• Information about how the participant can direct their investments, and any limitations on their ability to do so;

• Information about any designated investment alternatives offered under the plan;

• A description of any pass-through voting rights and any restrictions on such rights;

• A description of any brokerage windows or self-directed brokerage accounts available under the plan;

• An explanation of any fees and expenses which may be charged against their account for general plan administrative services (legal, recordkeeping, etc.), and the basis by which such fees are allocated to the participant’s account (pro rata, per capita, etc.); and

• An explanation of any fees and expenses that may be charged against their account for individual services (loan and distribution requests, etc.).

If any of the information in the annual notice changes, an updated notice must be provided at least 30 days, but not more than 90 days, in advance of the change. This can affect the timing for sponsors who wish to begin having expenses paid from their plans. If the most recent annual notice did not inform participants that administrative expenses may be paid from the plan, an updated notice must be provided, and the expenses may not be paid until at least 30 days after the updated notice has been provided.

The quarterly notice must contain:

• The dollar amount of the fees and expenses actually paid from the participant’s account for general plan administrative expenses during the preceding quarter, a description of the services to which the fees relate (legal, recordkeeping, etc.), and, if applicable, a statement that some of the plan’s administrative expenses were paid from revenue sharing arrangements, 12b-1 fees, sub-transfer agent fees, or similar; and

• The dollar amount of the fees and expenses actually paid from the participant’s account for individual services during the preceding quarter, and a description of the services to which the fees related (loan and distribution requests, etc.).

As a practical matter, the quarterly notices are often included with quarterly participant account statements.

Plans which do not have participant-directed accounts, such as pooled account plans, are not subject to these notice requirements.

If you would like more information about paying expenses directly from your plan, please contact us.