2020 Required Amendments Have Little Impact on 401(k) Plans
On November 20, 2020, the IRS released Notice 2020-83 (Required Amendments List for Qualified Retirement Plans and § 403(b) Retirement Plans), its annual list of required amendments (“RA List”) for individually designed qualified retirement plans, including 401(k) plans. But the news this year for many 401(k) plans is “no news,” as there is only one change required this time around – and that single change affects only 401(k) plans that are affected by a new law provision that counts “difficulty of care payments” as “compensation” for purposes of annual additions.
Background. The IRS issues RA Lists at the end of each calendar year to identify changes in the Internal Revenue Code’s qualification requirements that may require a “remedial” plan amendment to be made to an individually designed qualified retirement plan (such as a 401(k) plan) in order to avoid potential plan disqualification. The RA List is divided into two parts – Part A covers changes in qualification requirements that generally would require an amendment to most plans (or to most plans that are affected by the change); whereas Part B covers changes in qualification requirements that might require a plan amendment because of an unusual provision in a particular plan.
NOTE: The RA List is geared toward remedial amendments made to individually designed plans. Many 401(k) plans are pre-approved plans (sometimes known as “master and prototype plans” or “volume submitter plans”), which generally must be amended and maintained by the preapproved plan vendor or supplier in accordance with a different timeframe. Consult with your professional ERISA counsel or other advisor if you are unsure about your particular 401(k) plan.
2020 List – Part A Changes. For 2020, there are no changes listed in Part A (requirements that generally would require an amendment to most plans, or to most plans of the type affected by the change).
2020 List – Part B Change. For 2020, there is only one change listed in Part B that has a potential effect on certain 401(k) plans, which is described below:
“Difficulty of Care Payments” Treated as “Compensation” for Purposes of Section 415 Contribution Limitations. Last year, Congress enacted the Setting Every Community Up for Retirement Enhancement (“SECURE”) Act (see our previous blog Congress Finally Passes Secure Act – The Most Sweeping Pension Legislation in Over a Decade is Now Law), a long-awaited compilation of retirement plan reforms and related provisions. One of the SECURE Act’s lesser known provisions changed the annual additions limit (“415 limit”) for retirement plans to include any “difficulty of care payments” made by the sponsoring employer. Generally stated, these are tax-exempt payments received by foster-care providers on behalf of physically, mentally, or emotionally handicapped individuals, if they are designated as difficulty-of-care payments by the placement agency. In other words, if the plan sponsor makes these payments on behalf of employees who are covered by the plan, then the dollar value of the payments is included in “compensation” used for purposes of determining “annual additions,” the annual limit on contributions that may legally be made to the plan.
Deadline for Adopting Plan Amendments. Generally, in the case of a qualified retirement plan such as a 401(k) plan, the remedial amendment period for a disqualifying provision arising as a result of a change in qualification requirements extends to the end of the second calendar year that begins after the issuance of the RA List on which the change in qualification requirements appears. Accordingly, since the change permitting “difficulty of care payments” to be including in plan compensation appears on the 2020 RA List, the deadline for amending a 401(k) plan to reflect this change is December 31, 2022.
If a sponsoring employer changes its practice and begins to make “difficulty of care payments” to its employees in future years, then the plan must be amended to include the payments in its definition of Section 415 “compensation” by the end of the second calendar year following the calendar year in which the employer begins to make the “difficulty of care payments.”
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.