While saying goodbye to 2020 might be a welcomed event for many, year-end brings with it a number of responsibilities, especially for corporate retirement plan sponsors.
This year is particularly noteworthy, as the 2020 year-end cycle will require additional scrutiny and there are a number of changes coming in 2021 that will require added preparation. The best thing a plan sponsor can always be is prepared, so in order for 401k advisors to help them usher in a Happy New Year, consider these three important factors:
- Many companies faced greater than normal personnel changes
A typical year-end preparation includes submitting an end-of-year census file, which shows all employees with the company through December 31 of that year. But with the plethora of layoffs, furloughs, and leaves of absence in 2020, that data gathering process may be a little more complex than usual.
Recordkeepers use that year-end data for, among other things, confirming which employees are eligible to participate in the plan and confirming that they each were provided an opportunity to participate in the plan. Some plans may consider even a temporary leave of absence to constitute a “break in service” that would impact employees’ eligibility to participate in the plan.
Additionally, in order to receive certain kinds of benefits, such as an employer match, some plans require that participants must be employed by the company on the last day of the plan year.
With so many changes in employment status during 2020, advisors should encourage sponsors to set aside more time to review and confirm the accuracy of their year-end employment roster, and make sure to work with the plan’s recordkeeper and payroll provider for consistency in their records as well.
- CARES Act loans and distributions adds a layer of complexity
The CARES Act, which went into effect on March 27, 2020, allowed participants to take out loans and distributions from the retirement plan.
The ability to take out a CARES Act loan expired on September 22 and the deadline to take a CARES Act distribution expires on December 31, 2020. Both options allow the participant to repay the loan or distribution amount back into the plan over the following three years. Plan sponsors should be prepared for that.
This may also raise questions that are not answered in the legislation. For example, a participant may have been employed at the company when the CARES Act loan or distribution was taken, but might not be employed by the company in 2021. Can the participant still repay all or part of their loan or distribution amount back into the plan even though the participant is no longer employed at the company? Regulatory guidance is currently silent on this point, so sponsors should check their plan documents in order to be prepared to answer these questions.
- The SECURE Act is bringing new changes your way
The SECURE Act has some new changes that go into effect starting January 2021. The most significant is the new rule about long-term part-time employees. Those employees who work more than 500 hours for three consecutive plan years are permitted to participate in the plan.
This is a change from the current rule, which requires service of more than 1,000 hours during each plan year. This means that there will be a whole new group of employees who become eligible for the plan starting in 2024. There is plenty of time to prepare, of course, but employers should be aware, as this can impact the total amount an employer matches and compliance testing.
This is because a fair cross section of highly compensated and non-highly compensated employees must participate in the plan, and getting a new group of eligible employees can throw off that balance. It could also put the plan over the 100-participant mark, which means the plan would be required to undergo a plan audit. Since the provision begins counting three years at the beginning of 2021, plan sponsors should think about how they want to address this new category of eligibility.
Year-end is always a busy time, but without proper preparation, these new considerations could cause unnecessary headaches. Be sure to explore in advance how they may affect the 401k plans of your clients. Working closely with their advisor and recordkeeper can help plan sponsors mitigate these challenges before they arise.
That way, we can put 2020 behind us and enter what we’re all hoping will be a better year ahead!
Allison Brecher is General Counsel and Chief Compliance Officer at New York City-based digital retirement platform provider Vestwell. She has more than 20 years of legal and regulatory experience having handled high profile and complex litigation involving employee benefits, ERISA, regulatory matters, data privacy, and electronic discovery.