legislative updates

President Trump signed into law Friday, June 5, the Paycheck Protection Program Flexibility Act of 2020, legislation that the Senate approved Wednesday night. The legislation extends elements of and makes certain other adjustments to the Paycheck Protection Program (PPP). This Small Business Administration lending program was created by the Coronavirus Aid, Relief, and Economic Security Act to help small employers meet payroll and other expenses as businesses and the nation deal with the economic effects of the novel coronavirus pandemic.

Importantly, if certain conditions are met, PPP loans can be forgiven and treated as a grant. Payroll expenses can include employer contributions to defined contribution and defined benefit retirement plans, as well as providing group health care coverage, including payment of insurance premiums.

Among its provisions, this legislation will have the following effects.

• Extends from 8 to 24 weeks from the time of loan origination the period in which expenses paid with a PPP loan could be eligible for loan forgiveness (not to extend beyond December 31, 2020)
• Reduces from 75 percent to 60 percent the portion of a loan that must be used for payroll expenses (vs. overhead, etc.) and remain eligible for loan forgiveness
• Extends from 2 to 5 years the period for loan repayment for borrowed amounts not forgiven
• Provides no impediment to loan forgiveness for the documented inability to hire similarly qualified placement employees or to rehire former employees
• Allows a borrower who received a PPP loan before enactment of this legislation to elect that the covered period run for 8 (vs. 24) weeks

On Wednesday night, the U.S. Senate approved by voice vote H.R. 7010, the House-passed Paycheck Protection Program Flexibility Act of 2020. The legislation extends elements of and makes certain other adjustments to the Paycheck Protection Program (PPP). This Small Business Administration lending program was created by the Coronavirus Aid, Relief, and Economic Security Act, to help small employers meet payroll and other expenses as businesses and the nation deal with the economic effects of the novel coronavirus pandemic.

Importantly, if certain conditions are met, PPP loans can be forgiven and treated as a grant. Payroll expenses can include employer contributions to defined contribution and defined benefit retirement plans, as well as providing group health care coverage, including payment of insurance premiums.

Among its provisions, the legislation now presented to President Trump—who is expected to sign it into law—would have the following effects.

• Extend from 8 to 24 weeks from the time of loan origination the period in which expenses paid with a PPP loan could be eligible for loan forgiveness (not to extend beyond December 31, 2020) 
• Reduce from 75% to 60% the portion of a loan that must be used for payroll expenses (vs overhead, etc.) and remain eligible for loan forgiveness
• Extend from 2 to 5 years the period for loan repayment for borrowed amounts not forgive
• The documented inability to hire similarly qualified placement employees or to rehire former employees will not be an impediment to loan forgiveness
• A borrower who received a PPP loan before enactment of this legislation may elect that the covered period run for 8 (vs 24) weeks

The U.S. House of Representatives passed by a 417-1 margin on Thursday, May 28, the Paycheck Protection Program Flexibility Act of 2020. This legislation would modify certain core terms of this Small Business Administration (SBA) emergency lending program. The Paycheck Protection Program (PPP) was created by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed into law on March 27, 2020. Under the program, qualifying small businesses may apply for loans from the SBA to retain employees on their payrolls, and—especially attractive to business owners—the loans are forgiven if certain conditions are met.

As provided in the CARES Act, PPP loans taken to cover 8 weeks of program-eligible expenses can be forgiven (no repayment required). Although mortgage, rent, and other business expenses are included, to be eligible for forgiveness, 75 percent of a loan amount must—under current rules—be used for employee payroll expenses. Certain employee benefits, including defined contribution and defined benefit plan employer contributions, health insurance benefits (including premium payments), and certain employee leave benefits can be considered payroll expenses.

Today’s House-passed legislation would extend the 8-week period to 24 weeks, and would change the 75 percent payroll requirement to 60 percent.

The legislation would also relax certain loan forgiveness provisions in recognition that an employer may be unable to rehire some former employees or to find similarly qualified employees. Loan amounts not forgiven could be repaid over a period of 5 years instead of 2 years as under current rules.

Members of the U.S. Senate have been discussing a similar bill, one said to expand the 8-week period to 16, not 24 weeks. If the Senate is unable to pass its version of PPP revisions this week, which seems likely, its bill could be taken up when the Senate returns to Washington, D.C., next week.

The House of Representatives late Friday passed H.R. 6800, the Health and Economic Recovery Omnibus Emergency Solutions (HEROES) Act, providing additional aid to many who are adversely affected by the novel coronavirus (COVID-19) pandemic. The bill also contained non-COVID-19-related provisions considered likely to prove controversial in the Senate.

Unlike the Families First Coronavirus Response Act, and the Coronavirus Aid, Relief, and Economic Security (CARES) Act—both of which moved fairly rapidly through Congress—the HEROES Act has been called “dead on arrival” by Senate Majority Leader Mitch McConnell (R-KY), who—with Republican colleagues—envisions a much less comprehensive bill. Sen. McConnell has also expressed a desire to move slowly and gauge the effectiveness of earlier relief. Most expect no additional COVID-19-related legislation to be enacted before sometime in June.

As announced last week, the House bill contains provisions for the following.

• Continued financial assistance to unemployed workers
• Financial assistance to state, local, tribal, and territorial government entities
• Waiver of 2019 required minimum distributions (RMDs)
• Waiver of the 60-day and one-rollover-per-12-month rules for otherwise-required RMDs waived for 2019 and 2020
• Amendments to the Emergency Family and Medical Leave Expansion Act
• Relief for participants in health flexible spending arrangements (FSAs)
• Codifying the ability of employers to deduct certain expenses covered by loans that are forgiven under the SBA Paycheck Protection Program
• Providing money purchase pension plans the early distribution and loan relief that the CARES Act provided to other qualified retirement plans
• A new retirement “composite plan,” with features that include those of 401(k) and defined benefit (DB) pension plan
• Relief for multiemployer (collectively-bargained) DB pension plans
• Amortization relief for single employer DB pension plans
• Further funding relief (beyond that provided by the SECURE Act) to certain community newspaper DB plans
• Aid to certain federal agencies affected by the pandemic, including the Departments of Homeland Security, Interior, Health and Human Services, Labor, Transportation, Housing and Urban Development, and Education
• Enhanced Medicare and Medicaid benefits
• Medical supply chain enhancement
• Testing and reporting enhancement
• National strategic stockpile for pandemic response
• Bankruptcy protections for homeowners
• Certain student loan relief and protections
• Additional aid to veterans during the COVID-19 pandemic
• Federal election early and by-mail voting procedure

The Department of Labor’s Employee Benefits Security Administration (EBSA) has issued a pre-publication version of highly-anticipated final regulations on default electronic delivery of retirement plan disclosures. These regulations become effective 60 days following their publication in the Federal Register, currently scheduled for Wednesday, May 27.

Retirement plan administrators and service providers have been awaiting these final regulations since they were issued in proposed form in October 2019. This guidance is expected to enhance the ability of retirement plans and their service providers to deliver required disclosures to participants and beneficiaries by electronic means.   

The House of Representatives late Friday passed H.R. 6800, the Health and Economic Recovery Omnibus Emergency Solutions (HEROES) Act, providing additional aid to many who are adversely affected by the novel coronavirus (COVID-19) pandemic. The bill also contained non-COVID-19-related provisions considered likely to prove controversial in the Senate.

Following passage by an overwhelming margin in the U.S. House of Representatives Thursday, President Trump today signed into law the Paycheck Protection and Healthcare Enhancement Act, infusing $320 billion in additional funding into the Small Business Administration’s Paycheck Protection Program (PPP).

For the past three years, Congress has attempted to pass major retirement reform legislation. It has finally succeeded with the year-end passage of two spending packages meant to avert a government shutdown. One of the packages, the Further Consolidated Appropriations Act, 2020 (FCAA), includes multiple bills—including the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which contains several major retirement-related provisions. These provisions are nearly identical to those included in an earlier version of the SECURE Act that was passed by the U.S. House of Representatives in May 2019. At the time of this publication, the President had not yet signed these bills into law. But it is widely anticipated that he will.

The SECURE Act provides the most comprehensive retirement reform package in over a decade. The primary goals of the SECURE Act are to expand retirement savings, improve plan administration, simplify existing rules, and preserve retirement income. The provisions summarized below will certainly give rise to questions in the coming days. Our aim is to provide an easy reference to the important retirement plan changes, while understanding that more federal guidance will be needed to resolve certain matters.

The FCAA also includes bills that provide disaster relief (discussed later) and new health and welfare provisions. The most significant health and welfare measure repeals the controversial “Cadillac Tax.” The Affordable Care Act had created a 40 percent excise tax on the most expensive employer-sponsored health insurance plans when benefits exceeded a certain threshold. This tax was supposed to become effective in 2018, but was previously delayed until 2022.

New Incentives to Establish or Enhance Employer Plans

The following SECURE Act provisions create new incentives and modify existing incentives for employers to establish retirement plans. They also broaden the time frame for employers to establish plans.

• Multiple employer plans (MEPs). Employers can more easily participate in a MEP or a new variant, a “pooled employer plan,” or PEP. Both have basic features in common, the latter to be administered by a pooled plan provider. (Effective for 2021 and later plan years.)
  • Multiple participating businesses with a common interest would generally be part of a MEP.
  • Multiple participating businesses with no common interest other than plan sponsorship would generally be part of a PEP.
  • Smaller MEPs and PEPs may be able to file a simplified short Form 5500-SF tax return for the plan.
  • Noncompliance by one participating employer will not disqualify the entire MEP/PEP arrangement, thus eliminating the “one bad apple” rule.
• Deadline to establish a plan. Employers may establish a qualified plan—such as a profit sharing or pension plan—as late as their business tax filing deadline, including extensions. (Under previous rules, employers had until the last day of their business year.) This extension will not apply to certain plan provisions, such as elective deferrals. (Effective for 2020 and later taxable years.)
• Small employer plan startup credit. The small employer retirement plan startup tax credit increases from $500 to a maximum of $5,000 per year, available to cover startup costs for the first three years that the plan is in effect. (Effective for 2020 and later taxable years.)
• Automatic enrollment credit. The SECURE Act provides a new tax credit to employers that include an automatic enrollment feature in their new or existing small 401(k) plans (100 or fewer employees) or SIMPLE IRA plans. The maximum annual tax credit is $500 for each of the first three years that the plan is maintained. (Effective for 2020 and later taxable years.)
• Election of 401(k) nonelective safe harbor design. Employers that make nonelective safe harbor plan contributions (versus a matching contribution) get two benefits: 1) they now escape the notice requirement, and 2) they have more time to amend their plans to implement this nonelective 401(k) safe harbor plan feature. Specifically, they may amend up to 30 days before the end of a plan year if they make a three percent contribution. But they may generally amend by the close of the following plan year if the plan is also amended to require a four percent nonelective safe harbor contribution. (Effective for 2020 and later plan years.)
• Annuity selection safe harbor. The SECURE Act creates a new safe harbor for a plan fiduciary to meet ERISA’s “prudent man rule” when selecting an insurer and an annuity contract in order to offer lifetime income options under a plan. (Effective on date of enactment.)

New Ways to Save More in Employer Plans

The next set of provisions lets employers automatically increase employees’ deferral contributions to a higher percentage, requires employers to give participants a future benefits projection, and promotes plan entry for certain part-time employees.

• Higher cap on deferrals in safe harbor 401(k) plans. Some 401(k) plans meet nondiscrimination requirements through automatic enrollment and automatic deferral increases. These qualified automatic contribution arrangements (QACAs) will now have a maximum 15 percent deferral rate instead of 10 percent. (Effective for 2020 and later plan years.)
• Lifetime income disclosure. Defined contribution plans must provide, at least annually, a projected lifetime income stream that a participant’s accrued benefit could generate. This disclosure does not create employer liability for the amounts projected. (Effective for benefit statements provided more than 12 months after the DOL issues guidance, including the interest assumptions to be used and a model disclosure. The bill prescribes that this guidance be completed within one year of the date of enactment.)
• Participation by less than full-time employees. Employees who have three consecutive 12-month periods of 500 hours of service and who satisfy the plan’s minimum age requirement must be allowed to make elective deferrals in an employer’s 401(k) plan. The current, more restrictive, eligibility rules could continue to be applied to other contribution sources (e.g., matching contributions) and to ADP/ACP safe harbor plans. Employers may also exclude such part-time employees from coverage, nondiscrimination, and top-heavy test rules. (Effective for 2021 and later plan years, but no 12-month period that begins before January 1, 2021, shall be taken into account.)

More Targeted Provisions Affecting Employer Plans

The SECURE Act contains a number of additional, more targeted provisions that apply to employer plans.

• Custodial accounts of terminating 403(b) plans. Plan administrators or custodians of a 403(b) custodial account may distribute the account “in kind” to a participant or beneficiary when the employer is terminating the 403(b) plan. (Retroactive; effective for 2009 and later taxable years.)
• Lifetime income portability. Participants in a qualified plan, 403(b) plan, or governmental 457(b) plan may roll over lifetime income investments to an IRA or another retirement plan without a traditional distribution triggering event if their plan no longer permits such investments. (Effective for 2020 and later plan years.)
• Higher penalties for plan reporting failures. Retirement plan information reporting failures will result in the following increased penalties. (Effective for filings and notices required January 1, 2020, and thereafter.)
  • Form 5500, $250 per day, up to a maximum of $150,000
  • Form 8955-SSA (deferred benefit reporting), $10 per day, up to a maximum of $50,000 for failing to file, $10 per day, up to a maximum of $10,000 for failing to file a notification of change
  • Withholding notices, $100 per failure, up to a maximum of $50,000 for all such failures during any calendar year
• Credit card loan prohibition. Retirement plan loans enabled through a credit card (or a similar program) will be treated as distributed from the plan and subject to taxation. (Applies to loans made after the date of enactment.)
• Shared Form 5500 filing. Employers sponsoring defined contribution plans that have the same trustee, administrator, fiduciaries, plan year, and investment options may file a common Form 5500. (Effective for 2022 and later plan years.)
• Nondiscrimination relief for closed pension plans. Defined benefit pension plans that are closed to new participants will get nondiscrimination relief that protects benefits for older, longer serving participants. (Effective upon enactment, or—if elected—for 2014 and later plan years).
• Community newspaper pension funding relief. Sponsors of certain plans maintained for community newspapers may calculate defined benefit plan contributions with interest rates and amortization periods that reduce funding requirements. (Effective for plan years ending after December 31, 2017.)
• Church retirement plan rules. New rules clarify which employees may participate in retirement plans sponsored by church-controlled organizations. (Effective for past, present, and future plan years.)
• Pension plans of cooperatives and charities. Certain cooperatives and charities may reduce their Pension Benefit Guaranty Corporation (PBGC) insurance premiums for defined benefit plans. (Effective for 2019 and later plan years).
• Lower minimum age for in-service distributions. This provision is not part of the SECURE Act, but is found in Division M—the Bipartisan American Miners Act, which is part of FCAA. This provision allows in-service distributions at age 59½ (instead of age 62 under current law) to participants in governmental 457(b) plans and certain pension plans. (Effective for 2020 and later plan years.)

New Provisions Affecting Employer Plans and IRAs

The following SECURE Act provisions affect both employer plans and IRAs.

• More rapid payouts to nonspouse (and other) beneficiaries. Most nonspouse beneficiaries of IRAs, qualified defined contribution plans, 403(b) plans, and governmental 457(b) plans will generally be required to distribute inherited amounts within 10 years. (Effective for plan participant/IRA owner deaths in 2020 or later years; 2022 or later years for governmental plans; special delay to accommodate contracts of certain collectively bargained plans.) Exceptions include those who, at the time of the account owner’s death, are
  • disabled individuals,
  • certain chronically ill individuals,
  • beneficiaries whose age is within 10 years of the decedent’s age,
  • minors (they would begin a 10-year payout period upon reaching the age of majority), and
  • recipients of certain annuitized payments begun before enactment of the SECURE Act.
• Delayed age for beginning RMDs. The age when required minimum distributions (RMDs) from Traditional IRAs, qualified plans, 403(b) plans, and governmental 457(b) plans must generally begin is increased from age 70½ to age 72. (Effective for distributions required in 2020 and later years, for those who reach age 70½ in 2020 or a later year.)
• Birth/adoption excise tax exception. The birth of a child or adoption of a child (or individual who is incapable of self-support) qualifies both as a plan distribution event and as an amount that is exempt from the 10 percent early distribution penalty tax (if applicable) for distributions of up to $5,000 in aggregate from IRAs and defined contribution qualified plans, 403(b) plans, and governmental 457(b) plans. These amounts may be repaid. (Effective for distributions in 2020 and later years.)
• “Difficulty of care” payments treated as eligible compensation for retirement plan funding. Because many home healthcare workers receive payment that is not taxable income, they haven’t been able to contribute to a retirement plan. Now such “difficulty of care” payments will qualify as eligible compensation for IRA and other plan contributions. (Effective upon enactment for IRAs, and for 2016 and later plans years for employer plans.)

More Flexibility for IRA Contributions

The following provisions specifically affect IRAs.

• Traditional IRA contributions at any age. Taxpayers with earned income can make Traditional IRA contributions at any age, not just for years before reaching age 70½, as under current law. (Effective for 2020 and later taxable years.)
• Graduate student IRA contributions. Certain stipend, fellowship, and similar payments to graduate and postdoctoral students will be treated as earned income for IRA contribution purposes. (Effective for 2020 and later taxable years.)

New Eligible Expenses for 529 Plans

The SECURE Act also broadens the definition of eligible expenses for qualified tuition or “529” plans. Individuals may now take a qualified, tax-free 529 plan distribution to pay for registered apprenticeships. They may also distribute up to $10,000 in order to make repayments of student loans for a 529 plan beneficiary—or a beneficiary’s sibling. (Effective for distributions in 2019 and later years.)

Disaster Relief Provisions

To provide relief for certain natural disasters that occurred during the last couple of years, the FCAA contains a bill entitled the Taxpayer Certainty and Disaster Tax Relief Act of 2019. Among other things, this bill provides disaster relief to individuals in presidentially declared disaster areas who have taken IRA and retirement plan distributions between January 1, 2018, and 180 days after enactment of this legislation. (Applicable to plans that are amended on or before the last day of the first plan year beginning on or after January 1, 2020, or later, if the IRS allows.)

• Qualified disaster distributions. Qualifying distributions of up to $100,000 from employer-sponsored retirement plans and IRAs are exempt from the 10 percent early distribution penalty tax and the normal withholding requirements. Individuals affected by more than one disaster may distribute up to $100,000 per disaster.
• Repayment options. Individuals may repay qualifying distributions within a three-year period. Distributions not repaid generally will be taxed ratably over a three-year period, unless individuals elect otherwise. Individuals may also repay distributions taken for cancelled home purchases.
• Relaxed loan requirements. Employers may allow participants to request a plan loan of up to $100,000. Participants may delay loan repayments for up to one year.

Effective Dates and Amendment Deadlines

Some effective dates are mere days away—January 1, 2020. These dates were retained from the May 2019 version of the legislation. But the final version of FCAA contains delayed amendment deadlines for employer-sponsored retirement plans. This will allow employers to implement changes immediately, while generally having until the end of their 2022 plan year (2024 for governmental and collectively-bargained plans) to amend for the changes.

As with any major piece of legislation, questions will arise as provisions are analyzed. We expect the IRS and Department of Labor to address these concerns in the coming months. Ascensus will continue to assess the effect of this legislation and any related guidance. Visit Ascensus.com for future updates.

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