Tag Archives: Kara Tedesco

COVID-19: So many questions for employers about their 401(k) plans (pt. 2, updated December 2020)

The year 2020 saw COVID-19 challenges for plan sponsors and participants across the retirement industry. My prior blog asked the following questions: (1) Are 401(k) savings plans facing “partial plan terminations”? (2) What will happen with 401(k) safe harbor plan contributions? (3) Can employer matching contributions be suspended?

This update addresses a change for partial plan terminations.

What about partial plan terminations? Hot off the press, in the $900 billion COVID-19 stimulus package just passed by Congress, partial terminations are addressed.  As a refresher, “partial termination” is a term in the tax code. It means there has been more than a 20% reduction in an employer’s workforce due to unforeseen business circumstances causing financial issues or a business downturn during the year. It results in 100% vesting of retirement benefits for those employees affected, meaning the employees who lost their jobs.

The bill states: A plan shall not be treated as having a partial termination (within the meaning of 411(d) (3) of the Internal Revenue Code of 1986) during any plan year which includes the period beginning on March 13, 2020, and ending on March 31, 2021, if the number of active participants covered by the plan on March 31, 2021 is at least 80 percent of the number of active participants covered by the plan on March 13, 2020.

What does this mean? Plan sponsors of defined contribution retirement plans—401(k), profit sharing—will not incur a partial plan termination if the active participant count in the plan at March 2021 is 80% of the active participant count at the time the COVID-19 national emergency was declared.

Although the new legislation is for this time period only, it may help alleviate financial difficulties for businesses across all industries. For businesses that have been able to successfully weather the financial downturn, rebuild their business, and hire and rehire more staff, a partial termination worry is not there.

For information on these topics or the Coronavirus Aid, Relief, and Economic Security (CARES) Act related to COVID-19, contact your Milliman consultant.

COVID-19: So many questions for employers about their 401(k) plans

COVID-19 is causing the retirement plan world to rapidly change and keeping up with the pace is challenging.

  • Are 401(k) savings plans facing “partial plan terminations”?
  • What will happen with 401(k) safe harbor plan contributions?
  • Can employer matching contributions be suspended?

The questions are coming from all sides and even showing up on page 1 of the Wall Street Journal. Not every situation has a clear-cut answer, let alone the right answer.

What about partial plan terminations? “Partial termination” is a term in the tax code. It means there has been more than a 20% reduction in an employer’s workforce due to unforeseen business circumstances causing financial issues or a business downturn during the year. It results in 100% vesting of retirement benefits for those employees affected, meaning the employees who lost their jobs.

The current economic environment is causing financial difficulties for businesses across all industries, and we are starting to see some 20% or more reductions of staff in workforces. Partial terminations are based on facts and circumstances as well as the time period of economic difficulty. If the business is able to successfully weather the financial downturn, rebuild its business, and hire and rehire more staff, then there is not a partial termination. If over the next year a business is not able to recover, and more employees lose their jobs, then we might assume there is a partial termination and 100% vesting for terminated participants applies.

What about the required 401(k) safe harbor contributions? How can employers continue these contributions if they are facing financial difficulties? As in past adverse business conditions, employers should be able to suspend the safe harbor match or the safe harbor nonelective contribution midyear but only if one of these two conditions is met:

  1. The employer is operating at an economic loss for the plan year.
  2. The notice provided at the beginning of the 2020 plan year includes a statement that the employer may reduce or suspend the contribution midyear.

If one of these two conditions is met, then the employer provides a supplemental notice at least 30 days before the effective date of the suspension, which then allows employees to have a reasonable opportunity to change their deferral elections before the suspension.

Administratively it is more work for the employer to make this change midyear. The 401(k) plan has to complete its actual deferral percentage (ADP) testing for the entire year using the current testing method. This may result in test failures and refunds of employee contributions.

If the employer contributions are discretionary, then the employer is not required by any regulation to make a contribution nor is there a mandatory participant disclosure requirement about the suspension. In addition, there is no plan amendment needed to discontinue the contribution.

If the employer contribution is defined in the plan document, then employers must ensure that suspending the contribution doesn’t reduce participant benefits already accrued by the amendment date, as accrued benefits are protected. For example, if the employer contribution is a 3% match and it is only allocated to participants if they make salary deferrals, future matching contributions can be suspended or reduced as they are not yet accrued and so not considered protected.

For information on these topics or the Coronoavirus Aid, Relief, and Economic Security (CARES) Act related to COVID-19, contact your Milliman consultant.

Hurricane Irma victims: Hardship and loan relief available

Good news: the Internal Revenue Service (IRS) announced that 401(k) plans and similar defined contribution (DC) employer-sponsored retirement plans can make loans and hardship distributions to victims of Hurricane Irma and members of their families. Similar relief was provided to victims of Hurricane Harvey. Plans will be allowed to make loans and hardship distributions before they are formally amended to provide for these features. This relief applies to 401(a), 403(a), 403(b), and certain 457(b) plans. Defined benefit (DB) plans and money purchase plans cannot make hardship distributions unless they contain either employee contributions that are separately accounted for or rollover amounts.

Loans and hardship distributions will provide the financial resources needed to those suffering in the wake of the hurricanes. Announcement 2017-13 states that both current and former employees are able to take loans or hardship distributions if their principal residences on September 4, 2017, were located in the Florida counties identified for individual assistance by the Federal Emergency Management Agency (FEMA) because of the devastation caused by Hurricane Irma, or whose places of employment were located in one of these counties on that applicable date, or whose lineal ascendant or descendant, dependent, or spouse had principal residences or places of employment in these counties on that date.

Plans can ignore the reasons that normally apply to hardship distributions, thus allowing the funds to be used, for example, for food and shelter. If a qualified plan requires certain documentation before a distribution is made, the plan can relax this requirement and still be considered qualified. The amount available for a hardship distribution is still limited to the maximum amount available under the IRS Code. In addition, there are no post-distribution contribution restrictions required as there normally are in plans, if the distribution is being made for hurricane relief. Employees still have to pay income taxes on hardship distributions and may have to pay the 10% early penalty tax. Loans, if not repaid, but rather defaulted, become taxable income to the participant.

There is a window of time in which employees can take advantage of this relief. The distributions must be taken from a qualified plan on or after September 4, 2017, but no later than January 31, 2018. Employers need to amend their retirement plans to provide for loans or hardship distributions generally by December 31, 2018.

Why this relief is important does not need debating, but the significant impact it may have on retirement plans and employee retirement accounts remains to be seen. It is challenging for employees to save money and, with an unforeseeable emergency in front of them, employees will turn to where they have most if not all of their savings. Employees may also stop saving for the future indefinitely because of their need for current income to survive now. All of this can’t help but compromise their future retirements.

Should 401(k) sponsors continue offering employer stock?

There are several valuable reasons why companies include employer stock in 401(k) plans. However, increased risk of litigation has caused many employers to reconsider the decision to offer employer stock as an investment option. In her article “Employer stock in a 401(k) plan,” Milliman’s Kara Tedesco outlines initiatives for plan sponsors to consider when deciding to maintain or discontinue their employer stock offering.

Final fiduciary rules: Frustrations and the unknown

Tedesco-KaraOn June 8, 2016, the U.S. Department of Labor (DOL) final fiduciary rules became effective, but these new rules are not actually applicable until April 10, 2017. The final rules outline what advisers, financial institutions, and employers need to do to adhere to them. Daunting? Yes. Impossible? Maybe, but some believe the fiduciary rules have been a long time coming. The new rules require advisers and financial institutions to comply with and uphold the fiduciary standards surrounding ERISA when advising clients for a fee. This is significant, as it has the potential to impact how some advisers help their clients with retirement planning. Some advisers may decide to stop helping.

As participants become more and more responsible for their own retirement savings, employers are finding they need to turn to their retirement plan experts for help. A plan adviser who gives fiduciary advice receives compensation for the recommendation he or she makes, and usually the recommendation is based on the specific needs of the participant. The advice is given so that an action will be taken. The final rules clearly state this expert is a fiduciary and the recommendation made has to be in the best interest of the participant and not the pocketbook of the employer and or adviser.

Why is this so important? Because millions of participant dollars have been rolled into IRAs that have high fees and expenses associated with them. Participants don’t understand the fees, they don’t understand their investments, and often they lack the proper tools to help them make educated decisions. It bears asking the question, should an adviser make a recommendation to roll or transfer account balances to another plan or IRA, when a participant might be better off staying put? The answer could be yes, and employers may find that terminated employees are staying with them because it is a better financial decision.

How do advisers and employers feel about this? Many advisers are frustrated they will have to comply with the best interest contract exemption. It has several requirements, but it means advisers may need to modify or fine tune their current practices to satisfy the rules. Plan sponsors will have to take another look at their advisers and service providers and understand their fiduciary responsibilities. It’s important they confirm that any rollover assistance is administrative in nature and cannot be perceived as advice from non-fiduciary human resources (HR) staff or service providers. However, plan sponsors can now feel good knowing that the general education they offer to participants about plans and investments is acceptable; it does not mean they are providing investment advice or taking on additional fiduciary responsibility.

With all of this said, could the election results change, delay, or repeal the final fiduciary rules? There is speculation this could happen, which makes the financial services industry happy, but for those pushing for reform, very unhappy.

Top Milliman blog posts in 2014

Milliman consultants had another prolific publishing year in 2014, with blog topics ranging from healthcare reform to HATFA. As 2014 comes to a close, we’ve highlighted Milliman’s top 20 blogs for 2014 based on total page views.

20. Mike Williams and Stephanie Noonan’s blog, “Four things employers should know when evaluating private health exchanges,” can help employers determine whether a PHE makes sense for them.

19. Kevin Skow discusses savings tools that can help employees prepare for retirement in his blog “Retirement readiness: How long will you live in retirement? Want to bet on it?

18. The Benefits Alert entitled “Revised mortality assumptions issued for pension plans,” published by Milliman’s Employee Benefit Research Group, provides pension plan sponsors actuarial perspective on the Society of Actuaries’ revised mortality tables.

17. In her blog, “PBGC variable rate premium: Should plans make the switch?,” Milliman’s Maria Moliterno provides examples of how consultants can estimate variable rate premiums using either the standard premium funding target or the alternative premium funding target for 2014 and 2015 plan years.

16. Milliman’s infographic “The boomerang generation’s retirement planning” features 12 tips Millennials should consider when developing their retirement strategy.

15. “Young uninsureds ask, ‘Do I feel lucky?’” examines the dilemma young consumers face when deciding to purchase insurance on the health exchange or go uninsured.

14. Last year’s #1 blog, “Retiring early under ACA: An unexpected outcome for employers?,” is still going strong. The blog authored by Jeff Bradley discusses the impact that the Patient Protection and Affordable Care Act could have on early retirees.

13. Genny Sedgwick’s “Fee leveling in DC plans: Disclosure is just the beginning” blog also made our list for the second consecutive year. Genny explains how different fee assessment methodologies, when used with a strategy to normalize revenue sharing among participant accounts, can significantly modify the impact of plan fees in participant accounts.

12. Doug Conkel discusses how the Supreme Court’s decision to rule on Tibble vs. Edison may impact defined contribution plans in his blog “Tibble vs. Edison: What will it mean for plan sponsors and fiduciaries?

11. In her blog “Retirement plan leakage and retirement readiness,” Kara Tedesco discusses some problems created by the outflow of retirement savings. She also provides perspective on how employers can help employees keep money in their plans.

Continue reading