2021 Benefit Limits Announced

The Internal Revenue Service has announced the cost of living adjusted dollar limits applicable to benefit plans for 2021 (see IRS Notice 2020-79). The key limits are listed below:

In addition, the Social Security taxable wage base will increase from $137,700 for 2020 to $142,800 for 2021.

Affordable Care Act Employer Mandate Reporting Deadline Extended

The Internal Revenue Service (IRS) has given applicable large employers an additional 30 days to furnish individuals with IRS Form 1095-C (or, where applicable, IRS Form 1095-B). The deadline for providing these forms has been extended from January 31, 2021, to March 2, 2021. Under the Affordable Care Act (ACA), applicable large employers must furnish their full-time employees (and, in addition, any employee enrolled in a self-insured medical plan) with an IRS Form 1095-C. This IRS form provides information regarding the affordable medical coverage offered to individuals during each month of the previous calendar year. Employers should note, however, the deadline for filing Form 1094-C with the IRS has not changed. Applicable large employers must electronically file IRS Form 1094-C with the IRS no later than March 31, 2021 (February 28, 2021 for paper filers). In addition to extending one of the ACA reporting deadlines, the IRS also extended the good faith transition relief for this year’s reporting. Under this temporary relief, the IRS will not impose penalties for incorrect or incomplete information if employers can show that they have made good faith efforts to comply with the reporting requirements. No relief is provided for employers that cannot show a good faith effort to comply with the reporting requirements, or for employers that fail to timely file or furnish a statement. This is the last year the Treasury Department and the IRS intend to provide good faith compliance relief. (IRS Notice 2020-76)

IRS Issues Guidance Clarifying Implementation of SECURE Act Retirement Plan Provisions

IRS Notice 2020-68 provides guidance concerning the implementation of several retirement plan provisions of the Setting Every Community Up for Retirement Enhancement Act of 2019 (“SECURE Act”) and the Bipartisan American Miners Act of 2019 (“Miners Act”). This article focuses on the most significant provisions related to qualified retirement plans, including:

• Expanded eligibility and vesting for long-term part-time employees in 401(k) plans;
• Qualified birth or adoption in-service distributions;
• Reduced age limitation on in-service distributions from defined benefit plans; and
• Plan amendment deadlines.

Ability of Long-Term Part-Time Employees to Make Elective Deferrals to 401(k) Plans

Effective January 1, 2021, the SECURE Act requires employers to allow employees to make elective deferrals to a tax qualified 401(k) plan if the employee has worked at least 500 hours per year for three consecutive years, and has attained age 21 by the end of the three year period (a “long-term part-time employee”). While employers may exclude long-term part-time employees from eligibility for matching and nonelective employer contributions, the employees must receive vesting credit for any year in which they complete 500 hours of service.

Notice 2020-68 makes clear that periods of service prior to January 1, 2021 are excluded from consideration in determining a long-term part-time employee’s ability to make elective deferrals. However, employers must count all periods of service with the employer, including periods before January 1, 2021, when determining whether a long-term part-time employee has vested in any employer matching or nonelective contributions, unless Code Section 411(a)(4) permits the service to be ignored under another rule.

Previously, employers could exclude from eligibility, contributions and vesting those employees who did not completed a year of service (1,000 hours). This may make implementation of the vesting service requirements problematic for employers who have not tracked service for part-time employees, an administrative concern about which the IRS has requested comments.

Administration of Qualified Birth or Adoption Distributions

The SECURE Act created a new in-service distribution option for tax qualified defined contribution retirement plans, qualified annuities under Code Section 403(a), 403(b) plans and governmental 457(b) plans. Effective after December 31, 2019, such eligible retirement plans may now permit participants to take up to $5,000 as an in-service distribution in the one-year period after the birth or legal adoption of a child. An eligible adoptee is a child (other than a child of the taxpayer’s spouse) who has not attained age 18 or is disabled.

Notice 2020-68 clarifies that each parent may take a qualified birth or adoption distribution from an eligible retirement plan for the same child, both up to the $5,000 limit. In addition, the Notice addresses situations of multiple births, and allows the $5,000 maximum distribution to be made respecting each child. A qualified birth or adoption distribution may be made from a variety of contribution sources, including elective contributions, qualified non-elective contributions, qualified matching contributions, and safe harbor contributions. Plan administrators can rely on the participant’s reasonable representation that s/he is eligible for a qualified birth or adoption distribution unless the plan administrator has actual knowledge to the contrary.

Qualified birth or adoption distributions are not subject to the 10% tax under Code Section 72(t) on early distributions, and are not subject to mandatory 20% withholding. Participants may recontribute qualified birth or adoption distributions to an eligible retirement plan, and it will be treated favorably as an eligible rollover or trustee-trustee transfer, excludable from income. Plans that offer qualified birth or adoption distributions are required to accept such recontributions.

Qualified birth or adoption distribution must be reported on the individual’s tax return, which must include the tax identification number of the child. Even if the participant’s retirement plan does not provide for qualified birth or adoption distributions, and the participant takes another type of in-service distribution under the plan, s/he may still claim relief from the 10% excise tax on a tax return if the circumstances would have satisfied the requirements for a qualified birth or adoption distribution, had the plan allowed it.

Reduction in Minimum Age for In-Service Distributions from Defined Benefit and Governmental 457(b) Plans

The Miners Act lowers the minimum age for in-service distributions under Code Section 401(a)(36) for defined benefit plans from age 62 to age 59½. Governmental 457(b) plans may now permit in-service distributions at age 59 ½, formerly age 70 ½. Notice 2020-68 makes clear that such changes are optional, and do not by operation of law change the plan’s current definition of normal retirement age.

Plan Amendment Deadlines

A plan amendment to conform to the SECURE Act or Miners Act, whether discretionary or mandatory, must be adopted by the last day of the plan year beginning on or after January 1, 2022 (January 1, 2024, for governmental plans and collectively bargained plans).

Actuarial Equivalence Lawsuits Update: One Case Against AT&T Dismissed

We have reported from time to time on the recent wave of actuarial equivalence lawsuits that have been brought against sponsors of defined benefit pension plans. The claims, broadly speaking, allege that factors used to determine actuarially equivalent forms of benefit, or to actuarially reduce early retirement benefits, are outdated. As a result, participants bringing such lawsuits are alleging that they are not receiving all the vested retirement benefits to which they are entitled, which would be an ERISA violation.

As we noted in an article for our October 2019 Employee Benefits Newsletter (view here), AT&T is one of the prominent employers that sponsors a defined benefit pension plan and faced a lawsuit alleging AT&T’s pension plan has been using outdated actuarial equivalence factors. The plaintiffs in the AT&T case alleged that both the early retirement factors as well as the joint and survivor annuity factors used by AT&T’s plan to calculate benefits were old and did not reflect the general longevity of Americans which ultimately translated into benefit payments to participants that were less than the actuarial equivalent of their protected retirement benefits.

AT&T filed a motion to dismiss the plaintiffs’ claims. AT&T argued the plaintiffs lacked standing to sue because they did not adequately demonstrate injury based on the application of the plan’s early retirement and joint and survivor annuity factors. The judge concluded that AT&T showed the factors used by the plan were formulated in accordance with statutory requirements (i.e., Internal Revenue Code Section 417(e)), which contradicts the plaintiffs’ allegations in support of their claim. Because the plaintiffs bear the burden of demonstrating injury and they failed to meet that burden, the lawsuit was dismissed for lack of standing. (Eliason v. AT&T Inc., N.D. Cal. 2020)

AT&T, however, is not entirely out of the woods on this type of actuarial equivalence claim. After being granted a dismissal in the Eliason case, AT&T faces a new class-action lawsuit filed on October 12 that again alleges violations of ERISA’s actuarial equivalence, anti-forfeiture, joint and survivor annuity, and early retirement benefit requirements with respect to AT&T’s pension plan.

Extended Deadline Available for Certain Discretionary Amendments to Pre-approved Qualified Retirement Plans/403(b) Plans

In general, a discretionary amendment to a pre-approved qualified retirement plan or 403(b) plan is considered to be timely adopted if the amendment is adopted by the end of the plan year in which the plan amendment is operationally put into effect. Recently, we have seen examples of legislation like the SECURE Act and the CARES Act are offering longer periods (one or two years later) within which to adopt conforming amendments for discretionary plan changes (e.g., an amendment allowing coronavirus-related distributions under the CARES Act). To accommodate a statute or regulation that prescribes a later deadline to timely adopt a discretionary amendment, the existing guidance establishing the deadline for pre-approved plans to adopt discretionary amendments needed to be modified. That modification was published in the form of IRS Rev. Proc. 202-40, which revises and updates pre-existing guidance. The modifications made by Rev. Proc. 2020-40 are effective September 2, 2020. These modifications are consistent with the extensions of the plan amendment deadlines for discretionary amendments already allowable with respect to qualified individually designed plans and 403(b) individually designed plans.