The Families First Act and CARES Act
They used to say that March comes in like a lion and leaves like a lamb. Not March of 2020. Thirty days ago, little did we know the month we'd be enduring. Two new laws have been enacted to calm the struggling economy in response to the pandemic of the Coronavirus, helping both employers and employees with a safety net of benefits. We will go over the specific items that relate to pension and payroll issues explained below.
The Families First Coronavirus Response Act, signed on March 18, 2020 and scheduled to take effect on April 1, 2020 provides benefits for employees that need to take time off to care for themselves or family members due to COVID-19, without worry of a loss of income. The law requires employers with fewer than 500 employees to offer fully paid sick leave for up to 10 days, if:
1) The employee is subject to a federal, state or local quarantine or isolation order related to COVID-19.
2) The employee has been advised by a healthcare provider to self-quarantine due to COVID-19.
3) The employee is experiencing symptoms of COVID-19 and is seeking a medical diagnosis.
Employers must provide paid leave at 100% of the employee's regular rate of pay, up to $511 per day and $5,110 in total. In other situations, employers must provide paid sick leave at two-thirds of the employee's regular rate of pay, up to $200 per day and $2,000 total, if:
1) The employee is caring for an individual who
a. Is subject to a federal, state, or local quarantine or isolation order related
to COVID-19, or
b. Has been advised by a healthcare provider to self-quarantine due to
2) The employee is caring for a child whose school or childcare provider has been closed or is otherwise unavailable due to COVID-19 precautions.
3) The employee is experiencing any other symptoms similar condition specified by the Secretary of Health and Human Services in consultation with the Secretary of the Treasury and the Secretary of Labor.
The law further expanded the Family Medical Leave Act to provide for up to 12 weeks of job-protected leave, 10 weeks of which would be paid, for any employee unable to work or telework because they have to care for a child under the age of 18 whose school or care provider is made unavailable for reasons related to COVID-19. This expansion requires the employee to be paid at two-thirds regular pay, up to $200 per day and $10,000 total, after the first 10 days. Those first 10 days are still unpaid, although they may be paid through accrued vacation, personal or sick leave.
The law provides refundable payroll tax credits to reimburse the employer for these costs. The tax credit applies to wages the employer pays through December 31, 2020.
Keep in mind, unless your Plan Document specifically provides otherwise, paid sick leave is eligible for 401(k) contributions, pension credits, matching and other similar employer contributions.
The Coronavirus, Aid, Relief and Economic Security (CARES) Act, signed into law on March 27, 2020, made sweeping changes to pension and 401(k) plans as well:
1) Coronavirus Distributions – The CARES Act waives the 10% early withdrawal penalty tax on withdrawals up to $100,000 from a retirement plan or IRA for any individual diagnosed with COVID-19, whose spouse or dependent is diagnosed, or is experiencing financial difficulties as a result of being quarantined, furloughed, laid off, having hours reduced or unable to work due to lack of child care due to COVID-19. Those individuals are permitted to pay tax on the income from the distribution over a three-year period, and they may repay the distribution to the plan over the next three years. The repayments would not be subject to the individual retirement plan contributions limits, and the individual can apply for a tax deduction for the taxes they will have paid as a result of the premature distribution.
2) Plan Loans – The CARES Act increases the current retirement plan loan limits to the lesser of $100,000 or 100% of the participant's vested interest, and any existing loans with a repayment due date of March 27, 2020 through the end of the year can delay their loan repayments for up to one year.
3) Required Minimum Distributions – The Act waives required minimum distributions (RMDs) for defined contribution plans for the 2020 calendar year. Note, this is only for 401(k) 403(b), 457(b), profit sharing or money purchase pension plans. Defined Benefit Plans, including Cash Balance plans, are not exempt from the requirement. Although not considered a corporate plan, IRA holders may waive the RMD for 2020 as well.
4) Single Employer Defined Benefit Funding Rules – in general, pension contributions are due by September 15th, or 8 ½ months after the end of the plan year for minimum funding purposes. The CARES Act delays that required due date until January 1, 2021.
5) Expansion of the Department of Labor – as somewhat of a catch-all provision, the Act expands the DOL authority to change or postpone certain deadlines under ERISA. While not specific, this would generally allow limited changes without legislative acts in the future.
As regulations and further legislation is passed, EJReynolds will keep you informed and up to date. We are taking all necessary precautions and monitoring the situations, but we are here for you and want to assure you we will continue to provide the level of service you have come to expect. We hope you, your families and circle of friends are and remain healthy. We will get through this, one day at a time.
SECURE Act Increases Tax Credit for New Retirement Plans
As part of the Further Consolidated Appropriations Act late last year, the SECURE Act greatly increased the tax credit available for "small employers" who adopt a new retirement plan. Previously, a tax credit of 50% of eligible plan-related expenses was available for the first 3 years, with a maximum credit of $500 per year. Under the new law, the maximum credit is increased to $5,000 per year with certain limitations.
In addition, the new law added a $500 credit for 3 years for new and existing plans that add an eligible automatic enrollment feature.
Which employers are eligible for the tax credit?
There are several conditions that must be satisfied in order to be eligible for the credit:
The employer must have had no more than 100 employees in the prior year with compensation of $5,000 or more (employees who earned less than $5,000 are not considered for this purpose).
The new retirement plan must cover at least one employee who is non-highly compensated (NHCE). Generally, an NHCE is a non-owner with compensation in the prior year that is less than the applicable threshold ($125,000 in 2019). In other words, the credit is not available for "owner-only" or "Solo 401(k)" plans.
The employer cannot have maintained a retirement plan covering substantially the same employees in any of the previous 3 years (for this purpose, a retirement plan includes the same types of plans described below).
Which types of retirement plans qualify?
401(k) plans
Any other type of qualified plan, including profit sharing plans, money purchase pension plans, traditional defined benefit plans, and cash balance plans
403(b) plans
SEP IRAs
SIMPLE IRAs
What types of expenses qualify for the start-up credit?
Expenses paid by the employer in connection with establishing the plan (e.g. plan document fees), administering the plan, or providing related employee education.
How is the start-up tax credit calculated?
For taxable years beginning after December 31, 2019, the maximum credit is equal to the lesser of (1) $5,000, or (2) $250 times the number of NHCE covered under the plan. The new law also added a minimum credit of $500.
For example, assume a plan covers the owners of a business and 10 NHCEs. Additionally, assume that plan-related expenses for the first plan year were $6,000. The available tax credit would be $2,500 for that year (10 NHCEs x $250). The credit available for the next 2 years would depend on the number of NHCEs covered and actual plan-related expenses.
If the employer adopts a 401(k) plan and a cash balance plan, is the start-up credit available for both plans?
Yes, however, the plans are aggregated for purposes of determining the maximum credit. In other words, expenses paid for both plans can be considered, but the credit is determined based on the expenses paid for the plans on a combined basis.
What are the requirements for the automatic enrollment tax credit?
Small employers (as described above) who add an eligible automatic contribution feature (EACA) to a new OR existing plan are eligible for a $500 tax credit for 3 years. This credit is available without regard to plan expenses and is effective for plan years beginning after December 31, 2019.
How are the credits claimed?
IRS Form 8881 is used to claim both tax credits. They are reported differently depending upon structure of employer (i.e. sole proprietorship, partnership, corporation, etc.).
How can I learn more?
If you are currently working with a client to adopt a retirement plan for their employees or if you would like to learn more about this important tax incentive, please contact us.
Age for Required Minimum Distributions Increased under the SECURE Act
The SECURE Act, passed as part of Further Consolidated Appropriations Act late last year, increased the age for required minimum distributions (RMDs) from age 70 ½ to age 72. The new rule applies to RMDs required to be made after December 31, 2019 for individuals who attain age 70 ½ after that date.
Under the old rules, RMDs were required to begin no later than April 1st following the later of the calendar in which the participant attained age 70 ½ or retired. RMDs must have commenced, however, for "5-percent" owners no later than April 1st following the calendar year in which the participant attained age 70 ½ even if the owner was still working. Under the new rules, the age requirement was increased to 72 without making changes to the other requirements.
If a participant turned 70 ½ in 2019, do they still have to take their 2019 RMD by April 1, 2020?
Yes. As mentioned above, the new rules only apply to individuals who attain age 70 ½ after December 31, 2019. The old rules continue to apply to any individuals who were 70 ½ on or before that date. This also means that if RMDs have commenced, they cannot be suspended until the participant attains age 72.
Does the plan have to be amended before using the new rules?
No. A plan can implement the new rules operationally before adopting the amendment. Currently, the deadline for adopting the required amendment is December 31, 2022 for calendar year plans.
Do the same rules apply to IRAs?
Not exactly. Under the old rules, the requirement for IRAs was that RMDs must have commenced no later than April 1st of the calendar year following the calendar year in which the individual IRA owner attained age 70 ½ . There was (and is) no exception based on whether the individual was actively employed. Under the new rules, the age was increased to 72 for individuals who attain age 70 ½ after December 31, 2019.
Were there other changes made with respect to IRAs?
Yes. Previously, individuals could not make deductible contributions to traditional IRAs if they were age 70 ½ or older. The new law removed this restriction entirely, rather than increasing the age to 72. As a result, for taxable years beginning after December 31, 2019, there is no longer an age restriction for making deductible IRA contributions.
Were there changes made to death benefits payable to beneficiaries?
Yes. Generally, the life-time distribution option (often referred to as a "stretch IRA") was eliminated for beneficiaries who are not considered to be "eligible designated beneficiaries". Death benefits to these beneficiaries generally must be paid the end of the 10th calendar year following the year the participant or IRA owner died.
For this purpose, "eligible designated beneficiaries" include the decedent's spouse, minor children, disabled or chronically ill individuals, and other beneficiaries who are less than 10 years younger than the deceased participant or IRA owner.
Note: The new rules only apply if the participant (or IRA owner) dies after December 31, 2019.
How can I learn more about these rules?
The rules regarding RMDs are quite complex, and the consequences of failing to issue RMDs in a timely manner are severe. Please contact your EJReynolds Consultant to learn more about these rules.