On April 27, 2021, the IRS posted on its website its most recent updated operational compliance list for qualified retirement plans, including 401(k) plans. The purpose of the IRS operational compliance list is to help plans operate in compliance with legal qualification requirements by identifying changes in those requirements that are effective during a calendar year. The list is not intended to be a comprehensive catalog of all relevant IRS guidance, or of all new legislation that could potentially affect plan qualification requirements.
Revisions made to the new updated list that are effective in 2021 include changes in the 401(k) plan participation standards that we have previously reported on as being part of the Setting Every Community Up for Retirement Enhancement (“SECURE”) Act. There is also a change effective in 2022 involving updated life expectancy and distribution period tables used for purposes of determining required minimum distributions (“RMDs”), reflecting the SECURE Act’s change in the “required beginning date.” The updated list also now includes a SECURE Act business tax credit first effective in 2020 for retirement plans that feature certain eligible automatic contribution arrangements.
OBSERVATION: The updated operational compliance list does not present any requirements above and beyond those already part of the SECURE Act or existing regulations. The list is simply intended as a ready reference for employers, plan sponsors and benefits professionals in helping them identify those actions that may need to be undertaken by plans before the end of a particular calendar year.
DISCLAIMER: This article is intended as a general overview of provisions relating to the SECURE Act that have been newly added to the operational compliance list, and is not intended as a comprehensive overview of every provision, new or otherwise, included in the list itself. As always, be sure to consult with your own ERISA attorney or other professional advisor for individualized advice with respect to your plan’s unique situation.
Background – SECURE Act. On December 20, 2019, the SECURE Act, a comprehensive package of legislative provisions profoundly affecting retirement plans (including 401(k) plans), was signed into law. (See our articles titled “Congress Finally Passes SECURE Act – The Most Sweeping Pension Legislation in Over a Decade is Now Law”, “How Will the SECURE Act Affect Me? Highlights of Some of the Top New Provisions Affecting 401(k) Plans (Part One)”, and “How Will the SECURE Act Affect Me? Highlights of Some of the Top New Provisions Affecting 401(k) Plans (Part Two)” for details.) Since the enactment of SECURE, the IRS has issued a significant amount of official guidance interpreting and clarifying various provisions of the Act.
401(k) Participation Requirements. One of the many significant SECURE Act provisions directly affecting 401(k) plans was a change involving qualified retirement plan participation requirements. Under prior law, employers could generally exclude part-time workers who work fewer than 1,000 hours per year. After SECURE, most 401(k) plans are required to include a dual eligibility provision, under which an eligible employee must be permitted to participate upon completion of either:
- One (1) year of service (under the previous 1,000-hour rule); or
- Three (3) consecutive years of service, in which the employee completes more than 500 hours of service in each year.
In the case of employees who are eligible solely by reason of the new SECURE Act provision (i.e., more than 500 hours of service during three consecutive years), employers are generally permitted to exclude such employees from testing under the Internal Revenue Code’s nondiscrimination and minimum coverage testing rules, as well as from application of the Code’s top-heavy requirements.
Effective Date: The participation requirement changes under the SECURE Act are effective for taxable years beginning after December 31, 2020.
Business Tax Credit for Automatic Contribution Arrangements. The SECURE Act also provides a new business credit for an eligible employer that establishes an eligible automatic contribution arrangement (“EACA”) under a qualified 401(k) plan. The credit is equal to $500 for any tax year of an eligible employer that occurs during a “credit period” as defined under SECURE. (See our article titled “How Will the SECURE Act Affect Me? Highlights of Some of the Top New Provisions Affecting 401(k) Plans (Part Two)” for details.)
The IRS issued Notice 2020-68 on September 10, 2020 which offered clarifying guidance on various issues connected with, among other things, the business tax credit for EACAs.
Effective Date: The tax credit is effective for plan years beginning on and after December 31, 2019.
OBSERVATION: Although the effective date of the tax credit pre-dates 2021, the provision has only now been added to the updated operational compliance list.
Final Regulations Regarding RMDs. Separately, Final Treasury Regulations issued on November 12, 2020 update the life expectancy and distribution tables used to calculate RMDs from qualified retirement plans, including 401(k) plans. Among other things, the Final Regulations reflect the SECURE Act change in the required beginning date from the April 1st following the year a participant attains age 70 ½ (pre-SECURE Act rule) to the April 1st following the year he or she attains age 72 (current law). (See our Compliance Task titled “Required Minimum Distributions” for details on RMDs.) As a practical matter, for most 401(k) plans, the updated life expectancy and distribution tables are generally applied by plan actuaries and/or third-party administrators when calculating the precise amount of RMDs that must be taken by a participant in a particular calendar year.
Effective Date: The updated tables in the final regs apply for distribution calendar years beginning on or after January 1, 2022.
The information and content contained in this blog post are for general informational purposes only, and does not, and is not intended to, constitute legal advice. As always, for specific questions concerning your 401(k) retirement plan, or for help in operating your plan during the current COVID-19 crisis, please consult your own ERISA attorney or professional advisor.