On May 6, 2021, the United States Court of Appeals for the Ninth Circuit upheld a District court’s dismissal of a complaint filed by the Howard Jarvis Taxpayer’s Association (HJTA), challenging California’s state mandated IRA program, CalSavers, as being preempted by ERISA.

CalSavers is California’s mandated auto-enrollment payroll deduction IRA program that requires employers of a certain size, that don’t provide their employees with a retirement plan, to automatically withhold contributions from such employee’s pay and pay them into IRAs managed by CalSavers.  However, employees can opt out.  ERISA is a federal law that preempts any state law that “relates to any employee benefit plan” except for certain exceptions.   HJTA maintained that the CalSavers law was preempted because it required an employer to adopt an ERISA plan or enroll employees in CalSavers, which it maintained was itself an ERISA plan.  The lower court dismissed the complaint twice.  See, CalSavers Not Preempted By ERISA!.  HJTA appealed to the Ninth Circuit.

Originally the U.S. Department of Labor filed an amicus brief in support of preemption under the Trump Administration.  However, after President Biden won the election the Department withdrew its support of HJTA.  See, Will DOL Withdrawing Support Doom Revival Of ERISA Challenge To CalSavers?

The Ninth Circuit first held that the Department of Labor’s 2016 repeal of a safe harbor rule that would exempt CalSavers from ERISA did not resolve the preemption issue because it was merely a safe harbor meant to remove uncertainty and avoid costly litigation over preemption.  The repeal simply rejected the notion that state mandated and run programs like CalSavers were automatically exempt.

The court then held CalSavers is not preempted because it is not an ERISA plan nor does it “relate to” ERISA plans by imposing administrative obligations on employers.  The court found CalSavers is not an ERISA plan because it is established and maintained by the State of California, not employers, relying on Golden Gate Restaurant Association v. City & County of San Francisco.

To relate to ERISA plans a state law must either have “reference to” ERISA plans or have an “impermissible connection” with ERISA plans.  A law refers to ERISA plans if it acts immediately and exclusively on ERISA plans or where the existence of ERISA plans is essential to its operation.  The court found that since CalSavers specifically exempts employers that maintain ERISA plans, it does not act on ERISA plans at all.

A law has an impermissible connection if it governs a central matter of plan administration  or interferes with nationally uniform plan administration.  The court rejected HJTA’s argument that if these state run programs are not preempted, multi-state employers will be forced to comply with differing pension plan requirements in different states contrary to ERISA’s goal of nationally uniform plan administration.  The court stated that an employer’s own retirement plan is still subject to one uniform law, ERISA, and the ministerial obligations CalSavers imposes on employers do not resemble the establishment or maintenance of an ERISA plan.   The court also stated that while it’s ruling means that every state could now enact its own version of CalSavers, subjecting multi-state employers to many state laws, that is simply a function of our federal system and no different than varying state laws in other areas.

This ruling probably means that CalSavers is here to stay.  There has been no word from HJTA on an appeal to the Supreme Court.  Additionally, as it is the first Appellate Court case on preemption of these state run mandatory IRA programs no Circuit split exists.  California employers with more than 50 employees that do not provide a retirement plan for employees must register with CalSavers by June 30, 2021 or face penalties.

Under the federal health coverage continuation law, known as COBRA, a private employer with 20 or more employees that sponsors a group health plan must let individuals elect to continue their health coverage when it would otherwise end for certain reasons (such as job loss, divorce or the employee’s death). Qualified beneficiaries with COBRA continuation rights include employees, spouses and dependents who would lose coverage because of the event. Employers can charge individuals electing COBRA the full cost of coverage, plus an additional 2% to cover administrative costs. Individuals who lose employer coverage because of job loss (voluntary or involuntary) or a reduced work schedule can elect to continue COBRA coverage for up to 18 months (COBRA Continuation Period).

The American Rescue Plan Act signed by President Biden on March 12, 2021 contains relief  from paying COBRA continuation coverage premiums, known as the COBRA subsidy (Subsidy), for former employees who lost healthcare coverage due to an involuntary termination of employment (except for gross misconduct) or a reduction in hours.  Qualifying individuals can elect COBRA coverage and receive coverage without paying any premium.  The coverage is subsidized by the federal government by allowing the employer refundable credits against its Medicare taxes.  While the Subsidy is aimed at former employees who have lost health coverage due to the COVID-19 Pandemic, there is no requirement that the termination or reduction in hours be the result of the Pandemic.  Identifying and communicating with former employees eligible for the Subsidy and administering it presents challenges for employers who should be taking action now to comply.

Action Needed.  Any individual whether an employee or family member that has lost health coverage or will lose coverage during the period beginning April 1, 2021 and ending September 30, 2021 (Subsidy Period) are eligible for the Subsidy.  The Subsidy should automatically apply to individuals receiving COBRA continuation coverage on April 1.  Additionally, individuals who lost coverage prior to April 1 but did not elect COBRA coverage or elected such coverage but subsequently terminated it, who still have time on their COBRA Continuation Period within the Subsidy Period, may elect COBRA coverage with the Subsidy.

An otherwise eligible individual is not eligible for the Subsidy if he or she becomes eligible for Medicare or other group health coverage under another plan such as through a spouse or new employer’s plan.  However, individual market coverage such as through Covered California does not disqualify an otherwise eligible individual.

Additionally, employers can choose to have their group health plan permit individuals eligible for the Subsidy that are enrolled in COBRA coverage to switch to a different coverage option offered under the plan.  The COBRA premium for the new coverage option must be equal to or lower than the coverage the individual was enrolled in.  The plan must give individuals notice of their opportunity to switch coverage options and the individual has 90 days to make such election.  While the intent of this provision is to allow those already on COBRA coverage to elect a less expensive option, providing this election complicates compliance even more.  Additionally, because eligible individuals do not pay premiums during the Subsidy Period, there is no premium savings for switching to lower-cost coverage, unless their COBRA Continuation Period continues after the Subsidy Period ends on September 30.

Employers must give notice of the availability of the Subsidy to all eligible individuals by May 31, 2021.    However, this means employers must identify all eligible individuals, provide them notice of the availability of the Subsidy, and provide them 60 days to elect coverage.  Additionally, employers must provide such individuals with a notice when the Subsidy will end due to the end of the COBRA Continuation Period or due to the end of the Subsidy Period. Such notice must be provided no sooner than 45 days before the end of the applicable period but at least 15 days before the end of such period.  The Department of Labor has issued model notices that employers can use to be considered in good faith compliance.

Steps employers must take include the following:

1.  If the group health plan provides more than one option of coverage, decide whether to permit individuals on COBRA continuation to switch options.

2.  Review the employment records of all COBRA eligible employees that lost health coverage due to involuntary termination (other than for gross misconduct) whose COBRA continuation coverage would reach April 1, 2021.  This generally goes as far back as October 1, 2019.  Likewise, the same review must be done for those eligible for COBRA coverage for an involuntary reduction of hours.

3.  Provide the notice of the availability of the Subsidy and opportunity to elect such coverage to all such former employees and their family members who lost coverage as a result of the employee’s loss of coverage.

4.   Receive the elections to provide the coverage.

5.  Provide the notice of the termination of the Subsidy or COBRA continuation coverage period.

Employers need to develop their compliance strategy now.

 

I just published, on March 1, my article “New President, New Hope, New ESG Policy. . . Maybe.”  discussing how the Biden administration would be reviewing the Department of Labor regulations finalized on November 13, 2020 (under the Trump administration) and effective January 12, 2021, regarding the investment duties of fiduciaries under ERISA plans and the factors to consider when making decisions.  The article discussed how the Biden administration would be reviewing the new rules and changes are likely but changing a final regulation could take a year or more.  Now on March 10, the Department of Labor announced in an enforcement policy statement that it will not be enforcing the new regulation against any fiduciaries until it publishes further guidance.   The statement also states that the Department will not be enforcing the final regulation on proxy voting that was finalized on December 16, 2020 which adopted amendments regarding investment duties and obligations of fiduciaries when voting proxies for plan investments.  Both actions are to comply with President Biden’s Executive Order titled “Protecting Public Health and the Environment and Restoring Science to Tackle the Climate Crisis” issued January 25, 2021, according to the statement.

A lot has happened in 2021 already.  The election of Joe Biden as President was certified by the Senate after an unprecedented attack on the Capitol on January 6.  The House of Representatives impeached former President Donald Trump one week later.  Biden was inaugurated on January 20 at a heavily secured ceremony.

The inauguration was the final step in the most contentious election in American history.  One where before votes were cast, the incumbent President signaled that if he didn’t win, the election was fraudulent.  A sentiment that he continued after his loss, through dozens of lawsuits challenging results and was only silenced by the certification and social media companies suspending his accounts.

Through all this it might have been easy to miss that before the election, the Department of Labor had finalized a regulation relating to ERISA plan fiduciary’s consideration of environmental, social, and governance (ESG) factors when making investment decisions for ERISA plans.   The final regulation significantly changed the DOL’s proposed rule that was issued in June of 2020.  The final regulation became effective January 12, 2021.  However, it appears that the Biden administration will attempt to reverse the regulation because it is not very climate friendly, but that effort will take considerable time.

The ESG Issue.  The issue is to what extent plan fiduciaries can consider how a mutual fund or company that the plan might invest in addresses ESG factors in deciding whether to invest or offering the investment for participants to invest.  Fiduciaries owe a duty of loyalty and a duty of prudence to plan participants.  In a nutshell the duty of loyalty requires fiduciaries to act solely in the interest of plan participants and beneficiaries for the exclusive purpose of providing benefits and defraying expenses of administering a plan.  The duty of prudence requires the fiduciary to act in the same manner that a reasonable expert would.  That is, with the care, skill, prudence, and diligence that a prudent person acting in a like capacity and familiar with such matters would use.

Thus, a plan fiduciary should not invest in electric cars because he/she thinks its good for the environment if doing so is putting his/her concern for the environment above the interests of plan participants.  Likewise, if a reasonable expert fiduciary would not make the investment, doing so would not be prudent.

The Proposed Regulation.  The proposed regulation was fairly hostile toward ESG investments.  It generally provided that a fiduciary should only consider economic or pecuniary factors and cannot consider ESG factors in an investment decision except in the case when all pecuniary factors between alternative investments were equal.  A fiduciary cannot subordinate the interests of participants by forgoing return or accepting higher risk due to a noneconomic factor such as ESG factors.  Further, if ESG factors are considered to break a tie, the fiduciary was required to document why it found the pecuniary factors equal and why it chose the investment.  Additionally, the proposed regulations provided that an ESG investment could not be a qualified default investment alternative (QDIA) where a participant’s account would be invested if they don’t make an affirmative election.

The Final Regulation.  The final regulation departs from the proposed regulation and softens the rule a bit.  This was likely due to the fact that the DOL received thousands of negative comments on the proposed regulation.  The final regulation eliminates using the term “ESG” because the DOL found that it lacks a precise definition.  Instead, the final rule emphasizes pecuniary factors over non-pecuniary factors.  A pecuniary factor is defined as a factor that a fiduciary prudently determines will have a material effect on the risk or return of an investment based on appropriate investment horizons consistent with the plan’s investment objectives and policies.  The DOL acknowledged that ESG factors could be compatible with a purely financial analysis of an investment option or strategy.

The final rule eases the tie breaker scenario by changing the language to allow non-pecuniary factors to be considered when a fiduciary is unable to distinguish between investment options based on pecuniary factors alone.  The decision must still be documented.  However, when choosing an investment option for an individual account plan the decision to include an investment option that contains ESG factors in its investment goals need not be documented if the decision is made on only pecuniary factors.  An investment whose objectives, goals, or strategies use non-pecuniary factors still cannot be made the plan’s QDIA investment.  Plans have until April 30, 2021 to remove any such investments considered QDIAs.

Biden Administration.  Within hours of taking office the new President signed an Executive Order on “Protecting Public Health and the Environment and Restoring Science to Tackle the Climate Crisis” ordering an immediate review of all federal regulations issued in the last four years, and, as appropriate and consistent with applicable law, take action to address regulations and other actions that conflict with the important national objectives of listening to the science to improve public health, protect the environment,  and bolster resilience to the impacts of climate change.

The ESG final regulation is among the regulations to be reviewed.  It is clear that the Biden administration is in favor of policies that protect the environment.  Therefore, there is likely to be yet another change in these rules.  Proponents would like to see guidance issued clarifying what ESG criteria are pecuniary or to rewrite the regulation completely.  While the former might be able to be accomplished relatively soon, revising the final regulation could take over a year to accomplish.

Better guidance is clearly needed in this area.

 

On February 5, 2021, the United States Department of Labor withdrew its amicus brief supporting the Howard Jarvis Taxpayers Association’s (HJTA) appeal of the dismissal of its lawsuit challenging CalSavers as being preempted by ERISA.  See No Fooling HJTA Appeals Dismissal Of CalSavers Preemption Decision.  CalSavers is California’s payroll deduction IRA program requiring employers, who don’t otherwise offer a retirement plan to employees, to automatically deduct amounts from employees’ pay and contribute such amounts to the state-run IRAs.   The notice was filed with the United States Court of Appeals for the Ninth Circuit that is hearing the appeal of the lower court’s dismissal of HJTA’s claim that CalSavers is preempted by ERISA.  See CalSavers Not Preempted By ERISA!   The notice simply says:

“After the change in administration, the acting Secretary of Labor has reconsidered the matter and hereby notifies the court that he no longer wishes to participate as amicus in this case and that he does not support either side.”

In June of last year, the Trump administration’s Labor Department filed the amicus brief supporting the preemption argument.  The move by the Biden administration is not surprising as President Biden voiced support for auto-IRA type programs during the 2020 Presidential race.  Seven states in total have adopted some type of payroll deduction IRA programs.

While the notice says the Labor Department is not taking sides, it is difficult to believe that the withdrawal of support from the federal government agency charged with enforcing ERISA won’t negatively impact HJTA’s chances of prevailing.

Happy Holidays!  You may have a pep in your step with the news that the FDA has approved the Pfizer vaccine to combat COVID-19.  This is certainly a reason for optimism.  However, 2021 promises to be quite PEPPY for another reason.  Pooled Employer Plans (or PEPs) can begin operating in 2021.  PEPs are Multiple Employer Plans (or MEPs) that were authorized as part of the SECURE Act enacted in 2019.  See 2020 Appropriations Bill.  They are individual account retirement plans adopted and maintained by more than one employer where the employers need not be related by geography or industry.

For years industry experts have believed that open MEPs could encourage more employers to adopt retirement plans by permitting smaller employers to join together to get economies of scale in the administrative costs of operating retirement plans.  A major drawback to such plans was that unless the MEP was “closed” such that it could only be adopted by employers in a common industry or geographic area, it wasn’t treated as a single plan for 5500 return purposes.  In addition, even in a closed MEP, the qualification failure of a single employer, could disqualify the plan for all employers under the “one bad apple” rule.  The one bad apple rule doesn’t apply to PEPs.

A PEP must be sponsored by a Pooled Plan Provider (or PPP) that agrees to be the named fiduciary of the plan responsible for all administration and Tax and Labor law compliance, and registers with the Treasury and Labor Departments as a PPP.  On November 12, the Department of Labor finalized regulations on PPP registration.

PPPs are required to register with the Department of Labor at least 30 days before beginning operations by electronically filing new EBSA Form PR.  However there is an exception for the period Nov. 25, 2020 to Jan. 31, 2021.  During this period, the 30-day requirement is waived and the registration must be made no later than the day operation of the PEP begins.  Registering with the Department of Labor also satisfies the requirement to register with the Treasury Department.  The final regulations also clarify that operation of the PEP begins when the first employer executes or adopts an agreement specifying that the plan is a PEP, or, if earlier, when the PEP’s trustee first holds any asset in trust.

The Department of Labor estimates that 3,200 PPPs will initially register.  PEPs may become popular with smaller employers, particularly in states like California that have state mandated payroll deduction IRA programs for employers that don’t otherwise offer a retirement plan.  See CalSavers Not Preempted By ERISA.  A PEP may offer a lower cost and better benefit option than the state IRA program.  Time will tell whether PEPs are popular and successfully encourage more employers to adopt retirement plans but if the Department of Labor’s estimates are correct there should be plenty of PEPs to choose from in the new year.

The Republican Senate has confirmed President Trump’s nomination of Amy Coney Barrett to the United States Supreme Court.  The confirmation is record breaking in a couple of ways.  First, it was the fastest confirmation of a Supreme Court Justice in history.  Second, it was the most partisan vote to confirm a Supreme Court Justice as no Senate Democrats voted to confirm.  It was also the first such hearing or confirmation to take place while citizens were voting in a Presidential election.  Democratic Senators protested the appropriateness of the hearings up to the deciding vote, maintaining that the next President should be the one to fill the vacancy on the high court left by the death of Justice Ruth Bader Ginsburg.

Many believe that this confirmation of another conservative to the high court means the Affordable Care Act (ACA) will be declared unconstitutional in the case of Calfornia v. Texas which will be heard on November 10.  See Death of RBG Could be Death of ACA.  In a case brought by Republican Attorneys General and supported by the Trump administration, a Texas District Court held that now that the penalty tax for failing to have health coverage under the individual mandate has been reduced to zero and the Supreme Court upheld the ACA as constitutional under Congress’ taxing power, the individual mandate is unconstitutional.  The court then also held that the individual mandate was so integral to the ACA that the entire statute must also be unconstitutional because no provisions could be severable from the mandate.   The United States Court of Appeals for the Fifth Circuit upheld the district court on the individual mandate but remanded the case to the lower court to go through the Act with a “finer tooth comb” to see if any part of it could be saved.  However, Democratic Attorneys General then appealed the case to the High Court.

Of course, severability is the big issue.  The Court could agree that the individual mandate is now unconstitutional but that the rest of the ACA is severable, and therefore, still law.  During her confirmation hearing Judge Barrett intimated that she might rule that the individual mandate is severable because the ACA “is obviously a very long statute” and answered “That is true” to Senator Graham’s question, “If you can preserve a statute, you try to, to the extent possible?”  She also stated that while she has been critical of prior decisions upholding the ACA, she does not believe that she has ever written on how she feels about severability.

Importantly, President Trump has said during the Presidential campaign and debates that he will “protect pre-existing conditions”.  However, if the entire ACA is declared unconstitutional by the Supreme Court, the protection for pre-existing conditions in the ACA disappears.  Legislation would be required to reinstate such protections.

The only way the Supreme Court can preserve the protection of pre-existing conditions in California v. Texas, is to uphold the entire ACA by finding the zeroed out individual mandate tax still constitutional or upon striking down the individual mandate, finding it severable from the rest of the ACA.

Wouldn’t it be a treat if that is how Trump keeps his campaign promise.

 

Our country lost a great lawyer, jurist, advocate, patriot, citizen, and icon on Friday.  And oh yeah, she happened to be a woman.  Of course, I’m talking about Supreme Court Justice Ruth Bader Ginsburg, the notorious RBG.  She will be missed on a court that is becoming more and more conservative and political.

The debate has already begun as to whether President Trump will be able to get his nominee appointed before the election or before Joe Biden takes office in January, should he win.  This issue is very important to the fate of the Affordable Care Act (ACA) as the high Court will hear the California v. Texas case and decide whether the ACA is void in the 2020 term that begins in October..

That case is an appeal of a Texas district court decision holding that because the individual mandate was upheld as constitutional under the taxing power of Congress in 2012, in National Federation of Independent Businesses, and the 2017 Tax Act reduced the tax for violating the individual mandate to zero, the mandate is no longer constitutional.  Additionally, since the individual mandate was such an integral part of the Act, the district court held the entire ACA must fall.  The United States Court of Appeals for the Fifth Circuit upheld the district court on the individual mandate but remanded the case to the lower court to go through the Act with a “finer tooth comb” to see if any part of it could be saved.  However, understanding the importance, several democratic state Attorneys General appealed the case to the Supreme Court and even asked for the Court to expedite the decision as to whether to hear it, so it could be heard last term.  The Court denied the request to expedite but agreed to hear the case in the 2020 term.  See Supremes: You Can’t Hurry Love or Constitutionality of ACA.

Arguments are scheduled for November 10 and a decision may not be made before the end of the year.  The current 8 Justice make up of the Court means that if a ninth Justice is not installed before the case is decided, the vote of the Justices could end in a tie.  This would mean the decision of the Fifth Circuit would stand.  That would mean the district court would have to decide whether any part of the Act could be saved and it is unlikely it would so find.  However, the Justices could agree to delay the case until there is a ninth Justice installed.

RBG knew the importance of her role as a liberal on the Court as she continued working while fighting cancer.  Last term she participated in the hearing of the Little Sisters case by phone from the hospital.  In that case, the majority upheld the Trump Administration’s expansive exemptions from the contraceptive mandate under the ACA for public companies objecting on religious beliefs and any employer objecting on strongly held moral grounds.  The contraceptive mandate requires health policies to cover contraceptive care for women with no co-pays.  RBG wrote a scathing dissent stating that the majority has placed religious rights over the rights of women.  The consequence of the exemption was that hundreds of thousands of women will lose coverage for contraceptive care resulting in the kind of sexual discrimination in health care that the contraceptive mandate was enacted to prevent. While her view did not prevail, she continued to speak truth to power and champion women’s rights.

RIP RBG.

 

 

On August 10, 2020, a California Superior Court Judge granted a preliminary injunction against rideshare companies Uber and Lyft requiring them to stop classifying their drivers as independent contractors violating AB5.  The injunction was stayed for 10 days to give the companies time to appeal.  AB5 codified the California Supreme Court’s Dynamex decision and became effective this past January. Boom Goes the Dynamex!.

The motion for a preliminary injunction was filed by California Attorney General Xavier Becerra, along with city attorneys from Los Angeles, San Diego and San Francisco. as part of a lawsuit filed in May.  The suit complains that Uber and Lyft gain an unfair competitive advantage by misclassifying workers as independent contractors and are depriving drivers of the right to minimum wage, overtime, access to paid sick leave, disability insurance and unemployment insurance.  Reclassifying such drivers as employees would likely cause Uber and Lyft to incur great additional expense as the drivers would become eligible for any employee benefits they offer to employees such as retirement and health plans.  If the company’s don’t offer a retirement plan, it would then have to enroll them into CalSavers.

Uber and Lyft appealed the granting of the preliminary injunction in the court that issued it but that appeal was rejected on August 14.  Both companies then filed for an emergency stay at the appeals court and threatened to cease all operations in California if the stay was not granted.  On August 20, the appeals court granted the emergency stay of the preliminary injunction until the court hears the appeal of the grant of the injunction, provided the companies file, by September 4, a preliminary plan for complying with AB5, should they lose the appeal and Proposition 22 (Prop 22) does not pass in November.  Arguments in the case are set for mid-October.

Uber and Lyft (along with DoorDash and Postmates) were successful in getting Prop 22 on the November ballot.  Prop 22 is a referendum to keep rideshare and delivery drivers as independent contractors.  That proposition would create a third classification of workers and change the California Labor laws to grant drivers certain protections, including a wage of 120% of minimum wage, thirty cents per mile reimbursement for expenses, a healthcare stipend, and certain automobile and accident insurance.

So Prop 22 and AB5 may converge this Fall as It is possible that the appeals court could uphold the injunction, requiring the rideshare drivers to be treated as employees in October, only to have Prop 22 pass in November, reclassifying them back to independent contractors.

 

Another one of my favorite guitarists is Eric Clapton who released an album titled “August” in 1986.  Recent guidance from the IRS providing certain relief for retirement plans as a result of the COVID-19 Pandemic brings this album to mind as it emphasizes action by the end of August.  Last month the IRS issued two important notices providing additional relief regarding allowing participants to repay 2020 required minimum distributions (RMDs) that were received prior to enactment of the CARES Act, and helping employers with safe harbor 401(k) or 403(b) plans to reduce or suspend employer contributions mid-year.  Both notices provide that August 31 is an important deadline for the relief.  These notices are discussed in this article.

2020 RMDs-Notice 2020-51.  RMDs are distributions that individuals are required to take because they have reached a certain age.  The age was 70 1/2 until enactment of the SECURE Act in late 2019, raising the age to 72 for individuals turning age 70 1/2 after 2019.  On June 23, 2020, the IRS issued Notice 2020-51 dealing with RMDs that have been received in 2020 despite the fact that the CARES Act eliminated RMDs for 2020.  The CARES Act was enacted on March 27, 2020 and provided that due to the economic downturn caused by the COVID-19 Pandemic that Participants did not have to take RMDs from defined contribution plans or IRAs for the 2020 calendar year.  However, since the first quarter of 2020 was almost over when the CARES Act was enacted some participants had already received some or all of their RMD for 2020.  In general RMDs do not qualify for tax free rollover treatment.  The CARES Act permitted distributions in  2020 that would be RMDs but for the CARES Act to be rolled over within 60 days.  However, people who had taken distributions in January couldn’t meet the 60-day after receipt rollover requirement.  In April, the IRS extended the rollover window to July 15 for any RMD received on or after February 1. Unfortunately, this still left those who received an RMD prior to February with no recourse.

In Notice 2020-51 the IRS remedies this by providing that any distribution received in 2020 that would be an RMD but for the CARES Act can be rolled over by the later of August 31, 2020 or 60 days after the date of distribution. It additionally permits nonspousal beneficiaries that inherit accounts to roll over 2020 RMDs.  It also provides that such rollovers are not counted as a rollover for the purpose of the “one rollover per year” rule for IRAs.

The Notice also contains Q&As and a sample plan amendment providing participants a choice whether to receive RMDs in 2020 and employers options with respect to a default if the participant does not make an election as well as options with respect to direct rollovers.  Adoption of the sample amendment preserves the employer’s reliance on a favorable opinion, advisory or determination letter from the IRS.

Mid-Year Reductions/Suspensions-Notice 2020-52.  Perhaps more impactful than the notice on RMDs was the next notice the IRS issued on June 29, 2020, permitting certain safe harbor plans to be amended to reduce or suspend safe harbor contributions after the start of the plan year.

Contributions to 401(k) plans must not discriminate in favor of highly compensated employees (HCEs).  A plan must meet certain nondiscrimination tests that compare the average percentage of deferrals of nonhighly compensated employees to that of HCEs known as the Actual Deferral Percentage (ADP) test.  Additionally, if the plan provides for employer matching contributions those contributions must also be tested in a similar manner under the Actual Contribution Percentage (ACP) test.  A 403(b) plan that provides employer matching contributions is also subject to the ACP test.

A safe harbor plan is a plan that is designed to provide all nonhighly compensated employees with a minimum required employer contribution sufficient to avoid having to be tested under the ADP or ACP tests.  The two general safe harbor formulas are an employer nonelective contribution for all nonhighly compensated employees of 3% of compensation or an employer matching contribution that matches the first 3% at 100% and the next 2% at 50% (for a total match of 4% on a 5% deferral).

In order to be a safe harbor plan, there are limits on changing the employer contribution formula  during the plan year.  Under regulations, amendments to the formula may be made only under two circumstances: 1) if the employer is operating at an economic loss for the plan year; or 2) if the safe harbor notice provided employees for the plan year states that the safe harbor contributions may be reduced or suspended during the plan year.  If either requirement is met and the employer wishes to reduce or suspend the contributions, it must provide a supplemental notice of the reduction/suspension to employees at least 30 days in advance of the change becoming effective.  This supplemental notice gives employees enough time to decide whether to change their elective deferral.

Employers could not foresee the COVID-19 Pandemic or its economic impact on the nation.  Many employers are facing unexpected financial issues trying to stay in business.  Saving money by reducing or suspending contributions to 401(k) plans could help in this regard.  However,  employers may not have had the forethought to include the statement about reducing or suspending safe harbor contributions in their notice to participants.  Likewise, they may not yet know whether they will operate at a loss for the plan year.

In Notice 2020-52, the IRS provided temporary relief from some of the amendment and notice restrictions for safe harbor plans.  First, the Notice clarifies that any contributions for HCEs are not considered safe harbor contributions.  Therefore, mid-year changes to reduce or suspend safe harbor contributions to HCEs does not impact safe harbor status.  Second, the Notice allows an amendment to reduce or suspend all safe harbor contributions mid-year even if the economic loss or notice requirements in the regulations are not met, provided the amendment is adopted by August 31, 2020.  If the amendment is adopted, the plan becomes subject to ADP/ACP testing for the plan year.

If the safe harbor contributions being suspended or reduced are nonelective employer contributions (as opposed to matching contributions), the 30-day requirement for supplemental notice will be considered met if the notice is provided no later than August 31, 2020 and the amendment is adopted no later than the effective date of the suspension or reduction.  However, if matching contributions are being reduced or suspended there is no relief from the 30-day requirement because the employee’s need time to decide whether to change their elective contributions.  Therefore, the supplemental notice must be provided at least 30 days before the effective date of the amendment.

Conclusion.  August 31 is an important date for the relief provided in these two IRS notices.  Employers need to decide how to handle 2020 RMDs and communicate the new rules to participants including notifying those who have already received them about their ability to roll those distributions back into the plan or IRA or another plan or IRA.  Employers wishing to reduce or suspend safe harbor contributions must also prepare now to meet the notice and amendment requirements.  August is just around the corner and the relief available in the IRS notices require action by employers.  It is not enough to know the information, “it’s in the way that you use it.”