Based on proposed regulations released by the U.S. Department of Treasury on November 14, 2018 (the “Proposed Regulations”), participants in 401(k) and 403(b) plans may find it easier to get hardship withdrawals as early as plan years beginning after December 31, 2018. Hardship withdrawals are permitted on account of financial hardships if the distribution is made in response to an “immediate and heavy financial need” and the distribution is necessary to satisfy that need. The Proposed Regulations incorporate various prior statutory changes, including changes imposed by the 2017 Tax Act, the Bipartisan Budget Act of 2018, and the Pension Protection Act of 2006. These changes are summarized below:

1. Safe Harbor Expenses. Under the current regulations, a withdrawal to cover an expense on the safe harbor list is deemed to be made on account of an immediate and heavy financial need. The Proposed Regulations expand the safe harbor list of expenses for which a participant may take a hardship withdrawal, which may be applied to withdrawals occurring on or after January 1, 2018. The primary changes to the safe harbor list made by the Proposed Regulations are:

  • the expansion of the category of individuals for whom a participant may take a hardship distribution for qualifying medical, educational, and funeral expenses incurred by a participant to include a “primary beneficiary under the plan”, i.e., the individual who the participant has designated as the beneficiary to receive the participant’s plan account upon the death of the participant;
  • the elimination of the requirement that expenses related to damage to a principal residence that would qualify for a casualty deduction under Section 165 of the Internal Revenue Code of 1986, as amended be attributable to a federally declared disaster, which was imposed by the 2017 Tax Act; and
  • the addition of a new item allowing for hardship distributions for expenses incurred as a result of certain disasters that occur in areas designated by the Federal Emergency Management Agency (“FEMA”) as eligible for individual assistance.

2. Six-Month Deferral Suspension Requirement Eliminated. Under current regulations, a plan participant must be prohibited from making elective deferrals and employee contributions for six months and must take any available plan loans before the hardship withdrawal. Under the Bipartisan Budget Act of 2018, the six-month suspension requirement must be eliminated by January 1, 2020 and the Proposed Regulations allow the six-month suspension to be eliminated for plan years after December 31, 2018 if the plan sponsor so elects. The elimination of the six-month suspension reflects the concern of Congress that a suspension would impede the employee’s ability to replace distributed funds. Plans, however, may elect to continue to require a plan loan prior to a hardship withdrawal.

3. Participant Representation. To determine whether a distribution is necessary to satisfy an immediate and heavy financial need, the Proposed Regulations rely on the following general non-safe harbor standard:

  • the withdrawal may not exceed the amount of the participant’s need; and
  • the participant must have obtained other available distributions under the employer plans.

Under the current regulations, the plan must use a facts and circumstances test to establish the general non-safe harbor standard. Effective as of January 1, 2020, a participant seeking a hardship withdrawal must represent that he or she has insufficient cash or other liquid assets to satisfy the financial need. The plan administrator may rely on the representation unless the plan administrator has actual knowledge to the contrary.

4. Expanded Sources. The current regulations generally only permit hardship withdrawals from elective contributions. Under the Proposed Regulations, a plan may permit hardship withdrawals from elective contributions, qualified non-elective contributions (QNECs), and qualified matching contributions (QMACs), and also from earnings on these contributions, regardless of when contributed or earned. Since contributions to a 401(k) safe harbor plan are subject to the same limitations as QNECs and QMACs, the Proposed Regulations provide that safe harbor contributions may also be a source for hardship withdrawals.

5. 403(b) Plans. The Proposed Regulations will have some impact on 403(b) plans. While income attributable to elective deferrals will not be eligible for hardship withdrawals under the Proposed Regulations, QNECs and QMACs that are not in a custodial account may be withdrawn on account of hardship.

6. Relief for Hurricane Victims. Because the Treasury Department and IRS recognized that employees adversely impacted by Hurricanes Florence and Michael might need expedited access to their plan accounts, the Proposed Regulations extend to these employees the relief provided by Announcement 2017-15 to victims of Hurricane Maria and the California wildfires. The new automatic FEMA safe harbor standard described above will provide greater certainty and expedited access for plan sponsors and participants that may be affected in the future by such disasters.

Effective Dates and Plan Amendments

As noted above, the Proposed Regulations generally apply to hardship withdrawals made in plan years beginning after December 31, 2018, with a few exceptions described above.

Once the Proposed Regulations are finalized, the deadline for adopting plan amendments related to the final hardship withdrawal regulations will be the end of the second calendar year that begins after the issuance of the Required Amendments List that includes the changes. However, since many of the changes included in the Proposed Regulations reflect statutory changes, plan sponsors may wish to adopt some of the required amendments in 2019 so that their plan documents are consistent with plan administration.

President Trump’s recently issued Executive Order entitled “Strengthening Retirement Security In America” (the “EO”) may be helpful to businesses that sponsor or participate in multiple employer retirement plans (“MEPs”), as well as single employer plans, even if the sponsors and employers are not small business owners. While the stated purpose of the EO, which was issued on August 31, 2018 (the “EO Date”), is to “promote retirement security for America’s workers,” the EO directs attention to small business owners (less than 100 employees), noting that such businesses are less likely than larger businesses to offer retirement benefits. The EO also notes that regulatory burdens and complexity can be costly and discourage businesses, especially small ones, from offering retirement plans to employees. This post summarizes the four actions identified in the EO that the Federal Government may take to promote retirement security. While these actions are intended to benefit small businesses, large businesses that participate may benefit as well.

First, the EO may expand the circumstances under which a business or organization can sponsor or participate in an MEP. The EO directs the Secretary of Labor to consider, within 180 days following the EO Date, proposing regulations to clarify when a group or association of employers or other appropriate business or organization can be treated as an “employer” within the meaning of Section 3(5) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). The definition of “employer” is significant, as an employee benefit plan, such as an MEP, is typically sponsored by an “employer”. (An “employee organization”, such as a labor union, may also sponsor an employee benefit plan.) If an MEP were sponsored by businesses that were not considered a “group or association of employers” pursuant to Section 3(5) of ERISA, the MEP would not be treated as a single plan covering all of the participating businesses. In that case, each business participating in the MEP would be treated as sponsoring its own plan for all purposes under ERISA and would have to separately comply with ERISA’s requirements, such as preparing a written plan document and summary plan description, having an ERISA bond, and filing a Form 5500. Clarification of the term “employer” may allow businesses that sponsor or participate in single employer plans to treat such plans as an MEP and thereby minimize their individual responsibilities under ERISA. The clarification may also create new opportunities for businesses to sponsor MEPs.

Second, the EO may reduce compliance burdens for MEP sponsors. The EO directs the Secretary of the Treasury to consider, within 180 days following the EO Date, amending regulations to modify the rule providing that if one participating employer in an MEP fails certain non-discrimination requirements, the entire MEP fails. For example, under current Treasury regulations, the actual deferral percentage test and actual contribution percentage test are applied separately to each participating employer in the MEP, as if that employer maintained a separate plan. If one participating employer fails one of the tests, then the MEP fails the test and could potentially be disqualified for all participating employers. This regulation can present a dilemma for MEP sponsors, as they cannot be certain that each participating employer will satisfy the non-discrimination requirements. Therefore, modification of the regulations should benefit businesses that sponsor MEPs.

Third, the EO may reduce the costs associated with required disclosures to participants in MEPs, and in single employer plans. The EO directs the Secretaries of Labor and Treasury to review, within one year following the EO Date, actions that could make retirement plan disclosures more useful for participants, while reducing costs for sponsors and participating employers.

Finally, the EO directs the Secretary of the Treasury to determine, within 180 days following the EO Date, whether the actuarial tables used to calculate the amount of required minimum distributions should be updated annually (or on another periodic basis) to reflect current mortality data. This update could reduce the amount of annual required minimum distributions, which would benefit participants in single employer plans, as well as in MEPs. Such change could also reduce the administrative burden on plan sponsors and participating employers associated with making these distributions.

Takeaways

If the actions described above result in changes in law, such changes should benefit businesses that sponsor or participate in MEPs and single employer plans.   In addition, such changes may provide new opportunities for businesses to sponsor MEPs. Given the time frames imposed by the EO, businesses might see proposed regulations or other guidance addressing some of these changes during 2019.

The New York City Council (the “NYCC”) has proposed to establish a “Savings Access New York Retirement Program” (the “NYC Retirement Program”) that would require New York City private-sector employers with at least 10 employees to offer a new savings program to employees who are not eligible to participate in an employer-provided savings plan (such as a 401(k) or 403(b) plan). Currently the NYCC proposal is in committee, and no further action has been taken to date.

Although passage of the NYC Retirement Program is far from certain, this proposal is consistent with other state and local government legislative efforts to increase the retirement savings of employees. To assist employers with long-range benefits planning, this blog provides a high-level summary of the NYCC proposal and the potential questions and issues that employers may face if required to implement the NYC Retirement Program.

Summary of the NYC Retirement Program

  • An employer, whether for-profit or otherwise, with a physical presence in NYC will be a “covered employer” subject to the NYC Retirement Program if the employer (i) currently employs no fewer than 10 employees and has employed no fewer than 10 employees for the prior calendar year, (ii) has been in continuous operation for at least two years, and (iii) has not offered, in the previous two years, a retirement plan to its “eligible employees” (as defined below).
  • An employee will be eligible for the NYC Retirement Program if such employee (i) is at least 18 years old, (ii) is employed part-time or full-time for compensation in New York City by a covered employer, and (iii) has not been offered a retirement plan by the covered employer during the preceding two years. Under the NYC Retirement Program, a “retirement plan” includes a qualified retirement plan under Section 401(a) and Section 403(a) and (b) of the Internal Revenue Code of 1986, as amended, however, many such retirement plans exclude certain classifications of employees, such as part-time or temporary employees that would be covered by the NYC Retirement Program.
  • The NYC Retirement Program provides for an automatic 3% contribution via payroll deduction by eligible employees to a Roth or traditional IRA. The employee will be permitted to opt-out of the program or to contribute an amount other than 3%.
  • Covered employers will have the following obligations:
    • Enrolling eligible employees;
    • Remitting payroll deductions for deposit in the NYC Retirement Program;
    • Providing information to eligible employees about the NYC Retirement Program; and
    • Maintaining records documenting compliance with the NYC Retirement Program.
  • Covered employers that fail to comply with the NYC Retirement Program may be subject to civil monetary penalties, the amount of which will be based on the number of eligible employees affected and the duration of the compliance failure.
  • Administrative fees for the NYC Retirement Program will be allocated pro rata to the accounts of eligible employees.
  • The NYC Retirement Program is intended to be exempt from the Employee Retirement Income Security Act of 1974, as amended, although the current proposal does not indicate the exemption that will be used.

Takeaways for Employers

Given the potential reach of the NYCC proposal and the ambiguities it raises, employers with a presence in New York City should monitor the status of the NYCC proposal. Even large employers who currently offer broad-based retirement plans may not be exempt from the NYC Retirement Program if retirement benefits are not offered to all eligible employees covered by the NYC Retirement Program.

Our colleague Sharon L. Lippett, at Epstein Becker Green, has a post on the Financial Services Employment Law blog that will be of interest to many of our health care and life sciences employers and plan sponsors: “Plan Sponsors: Potential Targets for IRS Compliance Examinations.”

Following is an excerpt:

The IRS recently released the Tax Exempt and Government Entities FY 2018 Work Plan (the “2018 Work Plan”) which provides helpful information for sponsors of tax-qualified retirement plans about the focus of the IRS’ 2018 compliance efforts for employee benefit plan.  While the 2018 Work Plan is a high-level summary, it does address IRS compliance strategies for 2018 and should assist plan sponsors in administering their retirement plans.…

Read the full post here.

Our colleague Sharon L. Lippett, a Member of the Firm at Epstein Becker Green, has a post on the Financial Services Employment Law blog that will be of interest to many of our readers in the health care industry: “Potential Impact of Trump Tax Reform Plan on Retirement Plans: What’s Old Could Be New Again.”

Following is an excerpt:

While Congress’ attention has most recently been focused on the American Health Care Act, that bill will most likely not be the only proposed legislation that Congress will consider in 2017. It appears that a tax reform plan (the “2017 Tax Proposal”), which could also have a wide-reaching impact, is also on the agenda.

If the 2017 Proposal includes provisions relating to defined contribution retirement plans sponsored by private employers, such as 401(k) plans, the impact will be felt by employers and investment managers, as well as by plan participants. While the Trump Administration has stated that the current version of its 2017 Tax Proposal does not reduce pre-tax contributions to 401(k) plans, speculation continues that a later draft may include curtailment of these contributions or other changes with a similar impact. …

Read the full post here.

Our colleague Sharon L. Lippett, a Member of the Firm at Epstein Becker Green, has a post on the Financial Services Employment Law blog that will be of interest to many of our readers in the health care industry: “New DOL FAQs Provide Additional Guidance (and Comfort) for Plan Sponsors.”

Following is an excerpt:

Based on recent guidance from the Department of Labor (the “DOL”), many sponsors of employee benefit plans subject to the Employee Retirement Income Security Act of 1974, as amended (“ERISA Plans”) should have additional comfort regarding the impact of the conflict of interest rule released by the DOL in April 2016 (the “Rule”) on their plans. Even though it is widely expected that the Trump administration will delay implementation of the Rule, in mid-January 2017, the DOL released its “Conflict of Interest FAQs (Part II – Rule)”, which addresses topics relevant to ERISA Plan sponsors.  As explained below, these FAQs indicate that the Rule, as currently designed, should not require a large number of significant changes in the administration of most ERISA Plans. …

Read the full post here.