TSC Translator - Spring 2021

Spring 2021

Spring is right around the corner, and while we at TSC continue with business as usual, we’re also aware that this year looks quite different due to the ongoing pandemic and the adoption of several major legislative acts—the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the Setting Every Community Up for Retirement Enhancement (SECURE) Act, and the Consolidated Appropriations Act.

This issue of the Translator will shed some light on a few of the biggest changes under these acts; specifically, new rules regarding Safe Harbor plans, extended deadlines to adopt new plans, and partial plan termination relief available to employers impacted by the pandemic.

TSC remains committed to providing our clients and partners with the same high level of service during these changing times, and we will continue to offer updates as we receive further guidance on important industry changes. As always, thank you for giving TSC the opportunity to work with you to make your retirement plan successful.

Preparing for ADP/ACP Testing

Nondiscrimination testing is required annually for Qualified Retirement Plans that allow participants to defer pre-tax 401(k) and/or Roth 401(k) contributions. The Average Deferral Percentage (ADP) test compares the average deferral ratios of highly compensated employees (HCEs) to that of non-highly compensated employees (NHCEs). Deferrals are 401(k) contributions made by the participants from their compensation. HCEs are usually defined as:

Anyone with greater than 5% ownership of the company in the current or previous plan year;
Any spouse, parent, grandparent, or child of greater than 5% owners; or
Any participant earning greater than the applicable HCE compensation limit for the prior year ($130,000 in 2020, indexed to $135,000 in 2021)

Total deferrals are divided by testing compensation to determine each participant’s average deferral rate. Catch-up deferral contributions elected by employees aged 50 or older are not considered towards a participant’s individual deferral percentage.

Highly compensated employees are allowed an acceptable range as an average percentage that can be deferred from plan compensation based on the following:

NHCE Percentage Maximum HCE Percentage

2% or less NHCE % X 2

2% - 8% NHCE % + 2%

More than 8% NHCE% X 1.25

In the event of an ADP Test failure the most common correction method is .... Read more

New Legislation Grants Partial Plan Termination Relief

Over the last year many employers have experienced substantial changes in their workforce due to COVID-19 impacts and other recent business conditions. Normally, substantial reductions in an employer’s workforce can result in a partial plan termination which requires the affected employees to be made 100% vested in all of their employer accounts. IRS Revenue Ruling 2007-43 provides a good history of the guidance and court cases related to partial plan terminations. The Revenue Ruling specifies that if a plan's participant turnover rate is at least 20% during the applicable period (usually the plan year) it is presumed that a partial plan termination has occurred. However, the IRS has said this is not a bright line rule and the determination will also depend on the facts and circumstances including the normal turnover rate of the employer, the closing of a location or store, or other business factors.

The passage of the Consolidated Appropriations Act in December of 2020 establishes a temporary bright line rule which provides some much-needed relief for employers. Under the temporary rule, if the number of active participants in the plan on March 31, 2021 is at least 80% of the number of active participants as of March 13, 2020, the plan will not be treated as having a partial plan termination for any plan year which includes any portion of this period. The purpose is to provide some relief to employers who had to lay off a number of their employees but were able to subsequently rehire or replace most of them.

If you have any concerns whether your plan has a partial plan termination or would like additional information on this topic, please reach out to your TSC Retirement Plan Consultant.

The SECURE Act Changes to Safe Harbor

On December 9, 2020, the IRS issued Notice 2020-86 providing guidance on the changes made under the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) with respect to safe harbor plans. The changes are in effect for plan years beginning after December 31, 2019.

Increased automatic enrollment percentage for QACA Safe Harbor Plans

Elimination of the safe harbor notice requirement for plans that provide safe harbor nonelective contributions

Retroactive Adoption of Safe Harbor Nonelective 3% Contributions

Need a new retirement plan? The deadline to adopt has been extended!

Among the many changes included in the SECURE Act is expanded time for employers to adopt a new retirement plan. Before 2020, employers had to adopt a calendar year plan on or before December 31^st in order for the plan to be effective for that year. Under the SECURE Act, employers now have until their tax filing deadline—including extensions—to adopt a new plan.

For example, calendar-year employers adopting a plan for 2020 may have as late as September or October of 2021 depending on the business type and if a tax extension has been filed.

It’s important to note that this extended deadline generally only applies to profit sharing or cash balance plans and not 401(k) plans, since elective deferrals can only be made after a plan has been adopted. Nevertheless, this extension brings new flexibility to employers as they consider including a new retirement plan as part of their year-end tax strategy. For more information on setting up a retirement plan, please contact TSC Sales at 952-806-4300.