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.”