Category Archives: Retirement

Retirement Plan Relief for Employees under the CARES Act – Expanded Distributions and Loans

Contributed by Kelly Haab-Tallitsch, April 7, 2020

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Recent legislation providing COVID-19 relief to individuals and businesses includes provisions allowing more flexibility under retirement plans for individuals impacted by COVID-19. The CARES Act permits special hardship distributions of up to $100,000 from most tax-qualified retirement plans without early-withdrawal penalty taxes, increases the maximum 401(k) loan available for participants impacted by the pandemic and allows a delay in existing loan repayments. Required minimum distributions from defined contribution plans are waived for 2020.

Coronavirus-Related Hardship Distributions and Loans

The CARES Act allows plan sponsors to adopt special provisions expanding distributions and loans for “qualified participants.” A “qualified participant” is a plan participant who: (1) is diagnosed with COVID-19, (2) has a spouse or dependent diagnosed with COVID-19, or (3) experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, or being unable to work due to COVID-19.

  • Coronavirus-Related Distributions – A “qualified participant” may take a coronavirus-related distribution of up to $100,000 from an eligible retirement plan between January 1, 2020 and December 31, 2020. Eligible retirement plans include 401(k) and other profit sharing plans, 403(b) plans, government 457(b) plans and IRAs.

The 10% early withdrawal penalty does not apply to a coronavirus-related distribution. The distribution is taxable to the participant ratably over a three-year period, instead of all in the year of distribution. A participant can elect to repay the funds to the plan within three years and the taxable amount of the distribution will be reduced.

  • Increased 401(k) Loan MaximumThe maximum amount available for 401(k) plan loans taken between March 27, 2020 and September 23, 2020 by a “qualified participant” is doubled to the lesser of $100,000 or 100% of the participant’s vested account balance. The amount available is reduced by any other loans outstanding in the last twelve months.

Plan sponsors can choose to impose a lower loan maximum and may impose other limits that currently apply under a plan (minimum loan amounts, loans from only certain contribution sources, number of loans outstanding, etc.).

  • Delay in Loan Repayments – Loan repayment due dates between March 27, 2020 and December 31, 2020 may be delayed for up to one year for a “qualified participant.” Any subsequent repayment due dates may be adjusted to reflect the delay. The period of delay shall not be taken into account in determining the five-year term or repayment period of the loan.

Plans may begin taking advantage of these provisions immediately and do not need to be amended until the last day of the plan year beginning on or after January 1, 2022. 

Required Minimum Distributions NOT Required in 2020

Required Minimum Distributions (RMDs) from defined contribution plans (including 401(k), 403(b) and government 457(b) plans) and IRAs are waived for 2020 under the CARES Act.  RMDs that would otherwise been required to be made for those participants reaching age 72 during 2020 may be delayed until 2021. The delay does not apply to RMDs under defined benefit plans. Plans must be amended to reflect the waiver by the last day of the plan year beginning on or after January 1, 2022.

The SECURE Act Part 1: Immediate Changes to Retirement Plans

Contributed by Kelly Haab-Tallitsch, February 18, 2020

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Congress recently passed the Setting Every Community Up for Retirement Enhancement Act of 2019 (the SECURE Act), the largest package of retirement plan reforms in more than ten years.  This sweeping federal legislation aimed at the private employer-based retirement system is not to be confused with the Illinois Secure Choice Act, passed in 2015, which created a state-run retirement savings program.

The SECURE Act includes a myriad of provisions from multiple bills intended to make it easier for businesses to offer retirement plans and for individuals to save for retirement. The law impacts defined contribution (DC) plans, defined benefit (DB) plans, individual retirement accounts (IRAs) and 529 plans. The Act contains both mandatory and optional provisions, some effective as early as January 1, 2020. This article is Part 1 in a two-part series and highlights the most significant changes impacting existing retirement plans. Part 2 will discuss the small business tax incentives and changes to multiple employer plan rules in the SECURE Act aimed at encouraging employers to offer retirement plans.

Required Minimum Distributions (Mandatory, 1/1/2020)

The SECURE Act increases the required minimum distributions age from 70 ½ to 72. This change applies to both DC and DB plans and is effective for participants who turn 70 ½ after December 31, 2019.

Additionally, post-death distributions from DC plans and IRAs must now be made by the end of the 10th calendar year following the year of death in most cases, instead of permitting distribution over the beneficiary’s life expectancy. This 10-year cap generally does not apply to certain beneficiaries, such as a surviving spouse or minor child. This change applies to deaths after December 31, 2019.

Plans must be in operational compliance with the new required minimum distribution rules as of January 1, 2020.

Part-time Employee Participation (Mandatory, 1/1/2021)

401(k) plans will be required to extend participation to any part-time employee who has worked at least 500 hours in each of the immediately preceding three consecutive 12‑month periods. Eligible part-time employees must be allowed to make elective deferrals, but employers are not required to make matching or other employer contributions on their behalf.

These new eligibility rules apply to plan years beginning on or after January 1, 2021. However, because the 12-month periods for purposes of counting the 500-hour requirement are not counted before 2021, actual eligibility for a plan will not occur until the 2024 plan year.

Optional Provisions

The SECURE Act includes several optional changes plan sponsors can take advantage of if they choose, effective for plan years beginning January 1, 2020 or later. Key provisions include:

  • In-Service Withdrawals for Childbirth or Adoption Expenses – Defined contribution plans (and IRAs) can permit withdrawals of up to $5,000 for eligible child care and adoption expenses (not subject to the 10% early withdrawal tax). 
  • Lower Age for In-Service Withdrawals – Pension and Governmental 457(b) plans can permit in-service withdrawals at age 59 ½, lowered from 62 and 70 ½, respectively.
  • Expanded Disaster Relief – Plans can allow participants impacted by certain listed hurricanes and other nationally declared disasters between January 1, 2018 and February 18, 2020, to take up to a $100,000 distribution or a loan (with no 10% early withdrawal tax), which can be recontributed within 3 years. Participants have until June 17, 2020 to take advantage of this relief. Special plan amendments must be adopted by the end of the 2020 plan year.
  • Increased Maximum Automatic Deferral RateFor safe harbor 401(k) plans with a Qualified Automatic Contribution Arrangement (QACA) the limit on the maximum automatic deferral rate is increased from 10% to 15%, except for the participant’s first year, which remains 10%.

Plan sponsors should be aware that the SECURE Act requires immediate changes to retirement plan administration. Employers should consult with third-party administrators and advisors to ensure plans are in operational compliance and timely amended as needed.

Illinois Mandatory Retirement Program Enrollment Deadlines Coming Later this Year

Contributed by Kelly Haab-Tallitsch, March 27, 2019

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Illinois employers that have 25 or more employees and have been in business at least two years will be required to participate in the state-run retirement savings program or offer another qualifying retirement plan later this year.

The status of the Illinois Secure Choice Program was uncertain last fall following an amendatory veto issued by former Governor Bruce Rauner making the program optional, instead of mandatory, as discussed in a previous blog post. The Illinois legislature generally opposed making the program optional, and chose not to act on the amendment, effectively overriding the veto. As a result, the Secure Choice Program remains mandatory for covered employers that do not offer another retirement program. 

Employers with 100 – 499 employees must register for the Illinois Secure Choice Savings Program by July 1, 2019 and employers with 25 – 99 employees must register by November 1, 2019 (employers with 500+ employees were required to register in late 2018). The Illinois State Treasurer’s office will notify employers directly (by mail or email) when they are required to register. Employers will receive two notifications – an early registration notice 120 days prior to the required registration date and a second notice 30 days prior to the registration date. 

During the registration process, employers will provide basic information for the state to determine if the employer must participate in the Secure Choice Program (e.g., number of employees, and whether another retirement plan is offered). Participating employers will be required to automatically enroll employees in the savings program, withhold five percent of an employee’s compensation (up to an annual IRS maximum), and remit employees’ contributions to the state-run savings program, unless the employee elects a different amount or opts out of the program. Employer contributions to the plan are not permitted.

After registration, employers will be given instructions on how to enroll employees and remit payroll contributions, and provided enrollment forms and communication materials to give to employees. Employees will have 30 days to opt out or make adjustments to their savings rate or investment choices. At the end of this 30 day period, the employer must record employees’ elections in an online employer portal. Payroll deductions must begin within the following 30 days. Employers can remit employee contributions to the Secure Choice Program by ACH, wire transfer or check.

Employee contributions will be deposited into Roth Individual Retirement Accounts (IRAs) for each participant and invested at the participant’s direction among a menu of investment alternatives.

An Illinois employer that offers another qualifying retirement plan is exempt from the Secure Choice Program. This includes a 401(k) plan, 403(b) tax-sheltered annuity plan, 403(a) qualified annuity plan, Simplified Employee Pension plan, SIMPLE IRA plan, governmental 457(b) plan, or any other plan qualified under Internal Revenue Code section 401(a) (payroll deduction IRAs are not included). As such, employers required to participate in the Secure Choice Program should examine the options available to determine whether implementing a qualified retirement plan may be a better alternative. 

Employers can find additional information on the Illinois Secure Choice website.

Future of Illinois’ Mandatory Retirement Program Uncertain

Contributed by Kelly Haab-Tallitsch, September 12, 2018

The future of Illinois’ mandatory retirement savings program, Illinois Secure Choice, is up in the air after Governor Bruce Rauner issued an amendatory veto to change the word “shall” to “may” in key passages of the law, making the program optional, instead of mandatory.  The program is scheduled to roll-out in a series of “waves” starting this November.

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The Illinois Secure Choice Savings Act (Secure Choice Act), enacted in 2015, requires private employers with more than 25 employees that have been operating in Illinois for at least two years to participate in the Illinois Secure Choice program or offer another qualified retirement plan. Covered employers will be required to automatically enroll employees in the program and withhold five percent (5%) of an employee’s compensation (up to an annual IRS maximum), unless the employee elects a different amount or opts out of the program. Employers then remit employees’ contributions to the state-run program. Employer contributions are not permitted.

In his veto message, issued August 14, 2018, Governor Rauner pointed to concerns that the mandatory program could lead to fewer small employers offering retirement plans and the termination of existing small plans and changes in federal guidance on the relationship of state-run retirement programs with the Employee Retirement Income Security Act of 1974 (ERISA), as reasons behind his veto. He also cited the Secure Choice program’s history of delays and poor implementation.

It is unclear whether the veto will stand, or whether the Illinois Legislature will override it. A vote may not occur until November, when the legislature is scheduled to be in session next. Illinois State Treasurer Michael W. Frerichs, the state official responsible for implementation of the program, opposes the Governor’s action and has vowed to work with both parties to override the veto.

The Secure Choice program is set to roll out in a series of “waves” beginning November 1, 2018 with larger employers. Under current rules employers with 500 or more employees have until December 2018 to enroll employees, with payroll deductions beginning in January 2019. Implementation is scheduled to begin July 1, 2019 for employers with 100-499 employees and November 1, 2019 for employers with 25-99 employees.

What Should You Do?

For now, Illinois employers will have to sit tight and wait for more information. Those most likely to be affected by mandatory participation in the Secure Choice program – employers with less than 500 employees – have until at least July 1, 2019 to comply. If you do not currently offer a retirement plan you should examine alternatives, including traditional savings plans (i.e. 401(k)) and plans designed for small employers, such as a SIMPLE IRA or SEP, to determine the best option for your business. Employers with 500 or more employees (who do not offer another retirement plan) should be prepared to enroll employees later this year, if necessary.