An Employee Benefit Plan Sponsor’s 2021 End-of-the-Year “To Do List”
With the end of 2021 approaching, now is a good time to reflect on the various laws and legal updates enacted over the past year that may impact your employer-sponsored benefit plans. To help, we’ve compiled a brief end-of-the-year “to do list” for plan sponsors to consider:
ERISA Cybersecurity. The U.S. Department of Labor (“DOL”) issued formal cybersecurity guidance for plan sponsors. The guidance includes “Tips for Hiring a Service Provider” with strong cybersecurity practices and “Cybersecurity Best Practices” for implementing and maintaining a strong cybersecurity program. This guidance is not yet legally mandated, but the DOL makes clear that “ERISA requires plan fiduciaries to take appropriate precautions to mitigate” the risk of internal and external cybersecurity threats. The DOL has also begun issuing information and document requests under this new initiative that indicate serious inquiry into cybersecurity practices.
- TO DO: Review the DOL guidance and take steps to implement the necessary safeguards to protect plan assets and benefit data. Plan sponsors and fiduciaries should also review their current and future administrative service agreements to confirm service providers have appropriate cybersecurity policies and practices in place.
COBRA Premium Subsidy Credits. The American Rescue Plan Act of 2021 created a 100% COBRA premium subsidy from April 1, 2021, through September 30, 2021, for certain “assistance eligible individuals” to help accelerate the country’s recovery from the COVID-19 pandemic. Employers were required to pay 100% of COBRA premiums, but employers will be reimbursed for such payments via a payroll tax credit.
- TO DO: Report the credit and number of individuals who received the COBRA premium subsidy on the designated lines of IRS Form 941 (Employer’s Quarterly Federal Tax Return).
- TO DO: Retain all documentation, including employee self-certifications and employment records, to substantiate that an individual was eligible for the premium subsidy. Note that employers will be liable for any employment taxes owed due to improper claims.
Long-Term, Part-Time Employees. The Setting Every Community Up for Retirement Enhancement (“SECURE”) Act, passed in December 2019, aimed to increase participation in retirement plans for certain “long-term, part-time” employees by amending the maximum service conditions for 401(k) plans. Pursuant to the SECURE Act, a 401(k) plan cannot exclude an employee after the end of three consecutive 12-month periods in which the employee completed at least 500 hours of service in each 12-month period. The new rule affects all plan years beginning after December 31, 2020, but pre-2021 service can be disregarded.
- TO DO: Start counting service, including 2021 hours, to determine eligibility for long-term, part-time employees in 401(k) plans.
ESG Investments. The DOL released a final rule in October 2020 to clarify the fiduciary standards for selecting and monitoring investments held by ERISA plans. Under the new rule, fiduciaries must choose investments based only on pecuniary factors to meet the ERISA requirement that fiduciaries act solely in the interest of plan participants and beneficiaries. This rule significantly limits plan fiduciaries from considering policy goals such as environment, social, or governance (“ESG”) factors that may not achieve the highest possible return for the plan.
- TO DO: Analyze factors used when making investment decisions; if ESG factors are considered, ensure the DOL’s strict documentation and compliance requirements are met.
Lifetime Income Disclosures. The DOL now requires defined contribution retirement plans to provide participants with annual lifetime income disclosures to help workers understand how their savings under the plan translate to retirement income. The DOL requires the statements to show how much money participants could get each month if their total account balance were used to purchase an annuity. This rule applies to all ERISA-covered defined contribution plans regardless if the plan offers annuities or lifetime income investment options.
- TO DO: Defined contribution retirement plans must issue their first lifetime income disclosures no later than September 18, 2022. Administrative services agreements with the plan’s third-party administrator should be reviewed and may need to be updated to include the preparation of these mandated disclosures.
“Definitely Determinable” Standard. The IRS has indicated that the “definitely determinable” standard required under defined benefit plans will also apply to discretionary employer matching contributions in prototype defined contribution plans, for the upcoming Cycle 3 Restatement. With this requirement, the IRS seems to have confirmed our suspicions that the definitely determinable standard will apply across-the-board, including when applied to discretionary employer matching contributions.
- TO DO: Confirm discretionary employer matching contributions follow the definitely determinable standard, using a stipulated formula to calculate the contributions
2019 Required Amendments List. The deadline to comply with the final regulations regarding hardship distributions is fast approaching under the 2019 Required Amendments List. Plan sponsors of individually designed plans must amend their plans by December 31, 2021, to eliminate the 6-month suspension of employee contributions for hardship distributions made on or after January 1, 2020, and to update the administrative process required to document that the distribution is necessary to meet the immediate and heavy financial need of the participant.
- TO DO: For any individually designed retirement plans that allow hardship distributions, amend the plan to comply with the 2019 Required Amendments List no later than December 31, 2021.