An Employee Benefit Plan Sponsor’s 2022 End-of-the-Year “To Do List”
As the close of 2022 approaches, we present our annual end-of-the-year “to do list” for plan sponsors to consider as they reflect on the various laws and legal updates enacted over (or effective beginning) the past year.
2021 and 2022 Required Minimum Distributions Under the 10-Year Rule. In February 2022, the IRS issued a proposed rule that addressed the changes to the required minimum distribution (“RMD”) rules established by the Setting Every Community Up for Retirement Enhancement (“SECURE”) Act of 2019. (For more information on the SECURE Act, click here.)
As background, the SECURE Act eliminated the ability for certain beneficiaries (except for “eligible designated beneficiaries”) to “stretch” a participant’s account balance over the beneficiary’s life or life expectancy. Instead, a beneficiary who is not an eligible designated beneficiary must cash out the entire balance of the participant’s account within 10 years of the participant’s death (the “10-year rule”).
The SECURE Act did not specify how often the distributions must be made to comply with the 10-year rule, so most experts assumed a beneficiary could wait until the 10th year to cash out the entire account balance. However, the IRS’s proposed rule in February interpreted the SECURE Act as requiring beneficiaries to take annual distributions for each of the 10 years after the participant’s death.
Most plans were not administered in 2021 or 2022 to provide for these annual distributions, nor did most beneficiaries take such distributions. And since the IRS’s proposed rule, issued in February, has still not been finalized, plan sponsors have been left in a state of uncertainty.
In October 2022, the IRS published Notice 2022-53 which provided welcome relief from RMD compliance for post-death distributions under the 10-year rule in 2021 and 2022. The Notice provides that (1) the proposed regulations will not be effective before the 2023 distribution calendar year; (2) no correction must be made for any “missed” RMD payments in 2021 under the proposed regulations; and (3) no 2022 RMD payments need to be made for beneficiaries receiving RMD payments under the 10-year rule.
- TO DO: Note that the annual distributions under the RMD rules will likely be effective for the 2023 distribution year. Accordingly, monitor the requirements and be prepared to make required distributions pursuant to the proposed regulations in 2023.
Lifetime Income Disclosures. The SECURE Act added new required disclosures for all defined contribution retirement plans. These “lifetime income disclosures” must be provided to participants each year 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.
- TO DO: Defined contribution retirement plans must have issued their first lifetime income disclosures by September 18, 2022. Continue providing these disclosures.
Long-Term, Part-Time Employees. The SECURE Act added a mandate starting in 2021 for 401(k) plans to track long-term, part-time employees and permit them to make elective deferral contributions to the 401(k) plan. For purposes of this requirement, a long-term, part-time employee is any employee who has completed at least 500 hours of service in 3 consecutive 12-month periods.
- TO DO: Continue counting service, including 2021 and 2022 hours, to determine eligibility for long-term, part-time employees in your 401(k) plan.
- TO DO: Amend your 401(k) plan by December 31, 2025, to include long-term, part-time employees.
CARES Act Amendments. In March 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) made several changes impacting retirement plans. Specifically, the CARES Act allowed certain penalty-free coronavirus-related distributions, waived required minimum distribution requirements for 2020, and extended and expanded retirement plan loans. While the plan amendments were originally required to have been made by the end of the 2022 plan year, the IRS recently extended the deadline to December 31, 2025.
- TO DO: Monitor and track whether you permitted any special CARES Act-related distributions, loan extensions, or RMD waivers in 2020. If so, amend your plan by December 31, 2025, as applicable.
Surprise Medical Bills. The No Surprises Act provides relief from some of the more common scenarios when an individual may experience unexpected medical costs. Enforcement of the No Surprises Act begins January 1, 2023. (For more information on the No Surprises Act, click here )
- TO DO: Work with your third-party administrator to incorporate the new surprise billing rules and implement processes to comply with the rules.