New Federal Rules To Tackle the Retirement Crisis

A retirement crisis is unfolding in America, prompting some states to mount an intervention. The federal government has also been making moves through new regulations designed to tackle the growing retirement crisis.

This article dives into 3 of these new federal rules:

1. DOL final rule on Multiple Employer Plans
2. IRS final rule on hardship withdrawals
3. The SECURE Act

1. DOL final rule on Multiple Employer Plans

Studies show a significant number of small- to medium-sized businesses do not offer a retirement savings plan, with many citing cost as the reason.

Consequently, on July, 29, 2019, the United States Department of Labor (DOL) announced a final rule giving small and midsize businesses greater access to retirement savings options. Published in the Federal Register on July 31, 2019, the rule targets Multiple Employer Plans (MEPs).

Studies show a significant number of small- to medium-sized businesses do not offer a retirement savings plan, with many citing cost as the reason.

A MEP is a type of retirement plan that’s adopted by 2 or more employers. The MEP works by allowing employers to band together as an employer association or group to jointly sponsor a single retirement savings plan for their employees.

MEPs can also be sponsored by Professional Employer Organizations (PEOs) — which are human resource firms that undertake many of their clients’ employment responsibilities, including the provision of employee benefits.

By letting employers combine their plan participants and assets into one larger plan, MEPs deliver economies of scale through the sharing of administrative costs and reduced fiduciary responsibilities. MEPs also enable small businesses to offer their employees the same low-cost funds that larger businesses provide.

To establish a MEP, the employer association or group must meet the Employee Retirement Income Security Act’s definition of “employer.” Further, the association or group must satisfy the “commonality” threshold.

The DOL final rule

1. Makes it easier for small and midsize employers to offer retirement savings options via an Association Retirement Plan (ARP), which is a type of MEP. More specifically, the rule relaxes the once-stringent “commonality” threshold by allowing employers to join an ARP if they meet one of these criteria: they operate in the same industry or they operate in a common geographic region — such as state, city, county, or metropolitan area
2. Permits working owners who have no employees, including sole proprietors, to partake in an ARP as long as certain conditions are met
3. Clarifies that PEOs can sponsor MEPs and explains the PEO’s role in administering retirement plans

The DOL final rule took effect on September 30, 2019.

2. IRS final rule on hardship withdrawals

According to a 2019 report by Fidelity, the primary reasons for retirement plan hardship withdrawals over the last 10 years were:

1. Foreclosure or eviction
2. Medical
3. Education
4. Home purchase or repair
5. Funeral

The road to making hardship withdrawals isn’t simple, and it comes with consequences. On September 23, 2019, the IRS published a final rule easing certain restrictions for making hardship withdrawals from 401(k) and 403(b) plans.

In terms of 401(k) plans, the IRS final rule is:

Removes the 6-month suspension on new contributions

As mandated by the Bipartisan Budget Act of 2018, the final rule eliminates the suspension period, which prevented those who take hardship withdrawals from making new contributions to their 401(k) for 6 months. This is a mandatory change that employers must implement by January 1, 2020.

Relaxes the hardship verification process

Prior to the final rule, employers had to weigh “all relevant facts and circumstances” when deciphering whether a hardship withdrawal is needed. The final rule simplifies this verification process. Now, the only requirements are that the hardship withdrawal amount cannot exceed what the employee needs and the employee must certify in writing that they lack sufficient cash to satisfy the financial need. This is a mandatory change that took effect on January 1, 2020.

Ends the loan-first requirement

Employers no longer have to require that participants take all available 401(k) loans before they can be eligible for a hardship withdrawal. This is an optional change, which means employers can keep the loan-first requirement if they want to.

To qualify for a hardship withdrawal, the employee must have an immediate and heavy financial need, as defined by the IRS.

More sources of hardship withdrawals

Before the new rule, participants could take hardship withdrawals only from contributions. The final rule expands the available sources to include earnings on elective deferrals plus qualified matching contributions, safe harbor matching contributions, qualified nonelective contributions as well as earnings on these contributions. This is an optional change, so employers do not have to permit these additional sources.

Safe harbor for federally declared disasters

To qualify for a hardship withdrawal, the employee must have an immediate and heavy financial need, as defined by the IRS. The final rule adds losses or costs stemming from a federally declared disaster to the list of expenses that qualify as an immediate and heavy financial need. This is an optional change, so employers can choose not to include this safe harbor.

3. The SECURE Act

Signed into law on December 20, 2019 by President Donald Trump, the Setting Every Community Up for Retirement Enhancement (SECURE) Act is a landmark bill intended to bolster retirement security across the nation.

Key provisions of the SECURE Act

• Small, unrelated employers can participate in a MEP; there doesn’t need to be a “commonality”
• Small businesses can get a tax credit of up to $5,000 for starting a retirement plan, depending on how many non-highly compensated employees are eligible to join the plan. Prior to the SECURE Act, the tax credit cap was $500
• Establishes a new tax credit of up to $500 for small businesses that adopt a 401(k) plan with automatic enrollment
• Employers with a safe harbor 401(k) plan can raise the salary deferral maximum for automatic enrollment from 10% to 15%
• Long-term, part-time employees with at least 500 hours of service per year for 3 consecutive years must generally be given access to the plan
• Defined contribution plans in a “related” group can file a single, consolidated Form 5500 for all plans in the group, so long as they all share the same plan year, plan administrator, trustee, and investments or investment options
• Repeals the maximum age (which was 70 ½) for making traditional IRA contributions. Workers over age 70 ½ can now keep contributing to their traditional IRA
• Increases the required minimum distribution (RMD) age from 70 ½ to 72.
• Parents can take early withdrawals of up to $5,000 penalty-free for qualified expenses associated with the birth or adoption of a child
• Up to $10,000 can be withdrawn from a 529 plan to repay student loan debt
• Eliminates the “one bad apple” rule, which said that if one employer in a MEP violates the plan qualification rules then the qualification status of all employers in that MEP may be jeopardized as well

There’s a lot more to these federal rules, especially the SECURE Act, than presented in this article. So, if you’re a business owner and you offer — or intend to offer — a 401(k) plan, consult with a retirement plan expert for details and guidance on the best path forward.