Defined Contribution Legislative and Regulatory Update
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GOVERNMENT CLIENTS | MARCH 2021
Defined Contribution
Legislative and
Regulatory Update
We are committed to providing the In this issue
information and tools you need to meet
your fiduciary responsibilities as a plan
sponsor and offer your employees an FROM THE HILL
exceptional retirement plan.
2020 Post-election outlook revisited
This newsletter is designed to inform
Consolidated Appropriations Act, 2021
you about the latest legislative and
regulatory developments that may
affect your plan.
FROM THE REGUL ATORY SERVICES TEAM
Special 457(b) catch-up contributions
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FROM THE HILL
2020 Post-election outlook revisited
In our December issue, we discussed the potential impact of the 2020 elections. At the
time of that writing, we were awaiting the results of two Senate runoff elections in Georgia.
Conventional wisdom thought that Republicans would likely win at least one of the seats
and retain control of the Senate. As we all know, the Democratic challengers, Jon Ossoff and
Raphael Warnock, won their respective races. This resulted in a 50/50 tie in the Senate that
gives Vice President Kamala Harris the tie-breaking vote and Democrats control of both
chambers of Congress.
The razor-thin Democratic control of the Senate means that in order to put the vice president
in the position of breaking a tie, the new majority leader, Senator Chuck Schumer (D-NY),
cannot afford to lose any Democratic support unless he’s able to pick up Republican support.
The effects of this have already been seen when an attempt to end the filibuster (more on
the filibuster later) died when Democratic Senator Joe Manchin (D-WV) and Senator Kyrsten
Sinema (D-AZ) announced they would not support any change.
The change in control also has ramifications on Senate committees. The last time we saw a
tied Senate was in 2001, with Vice President Dick Cheney being the tie-breaker. At that time
the two Senate leaders, Trent Lott (R-MS) and Tom Daschle (D-SD), reached a power-sharing
arrangement. On February 3, 2021, Majority Leader Schumer and Minority Leader Senator
Mitch McConnell (R-KY) reached a similar agreement. Under the terms of the agreement,
Democrats and Republicans will have equal membership on Senate committees. Should there
be a tie vote in committee, either leader could make a motion to move legislation to the Senate
floor. While the motion to consider the legislation would not be subject to the filibuster, the
underlying legislation would be.
This power-sharing arrangement has allowed Democrats to take control of Senate committees.
On the two committees with direct jurisdiction over retirement matters, Senator Ron Wyden
(D-OR) will become chairman of the Senate Finance Committee, and Senator Mike Crapo (R-ID)
will be the ranking Republican. Senator Patty Murray (D-WA) assumes leadership of the Senate
Health, Education, Labor and Pension Committee, with Senator Richard Burr (R-NC) as the
ranking member.
As is well known, under Senate rules the minority may use a filibuster to indefinitely extend
debate and prevent legislation from being brought to a vote on the floor. A filibuster may be
ended by a vote of 60 senators. Given the 50/50 tie in the Senate, Democrats would need to
convince at least 10 Republican senators to join them.
While the thin majorities in both the House and Senate will present challenges in moving
legislation, the unified control of Congress does give Democrats an important tool in
advancing their legislative agenda: budget reconciliation. Under budget reconciliation rules
the time of debate is limited. After that time has passed, a bill would move to the floor
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where a simple majority could pass the legislation, with the Vice President breaking any tie.
Provisions that may be included in the reconciliation process are limited to federal spending,
tax revenues and the debt limit. Any provision not directly related to those three areas may
be challenged as being extraneous to reconciliation. In such cases, the non-partisan Senate
parliamentarian would make a ruling as to whether the provision needs to be removed. The
reconciliation process may be used once per fiscal year (October 1 to September 30). Since
1980 it has been used 21 times to pass legislation, most recently in 2017 during the Trump
administration to pass the Tax Cuts and Jobs Act.
On February 5, both chambers passed budget resolutions to begin the process of passing the
American Rescue Plan (ARP), the Biden administration’s $1.9 trillion COVID-19 relief package.
The ARP does not touch on many retirement-related issues. The primary impact is on defined
benefit plans and includes provisions that we saw in the Health and Economic Recovery
Emergency Solutions (HEROES) Act, a COVID and stimulus bill that passed the House last year
but was not considered in the Senate. Under ARP, multi-employer defined benefit plans would
receive financial assistance and funding relief. In addition, single-employer defined benefit
plans would also receive some funding-stabilization relief.
Democrats could use the budget-reconciliation process a second time in 2021 with respect
to the next fiscal year. This could potentially be used to move a Biden administration
infrastructure or tax package.
Consolidated Appropriations Act, 2021
On December 27, 2020, President Trump signed the Consolidated Appropriations Act, 2021
(CAA). While the CAA made some changes to retirement plan laws, the overall impact was
minimal. Most notable was what the CAA did not do: It did not extend coronavirus-related
distributions (CRDs) past December 30, 2020.
Below is a summary of the CAA and its impact on defined contribution plans.
Money purchase pension plans
The CARES Act provided special tax treatment for CRDs from defined contribution plans.
However, 401(a) money purchase pension plans limit in-service withdrawals to participants
who have attained age 62 (or, if the plan has adopted the in-service provision under the
SECURE Act, age 59½), and the CARES Act did not create a separate in-service distribution
option in these plans. This restriction also applies to money purchase pension money sources
in 401(k) plans.
The CAA resolved this issue by specifically allowing CRDs from money purchase pension
plans and money sources retroactive to the passage of the CARES Act (March 27, 2020).
Unfortunately, while this fix was originally proposed in the HEROES Act in the spring of 2020,
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it did not make its way into legislation until the end of the year. For many money purchase
pension plans that adopted CRDs, it came too late to act on.
Disaster relief
Similar to other disaster relief measures in previous years, the CAA allowed for participants
to take advantage of “qualified disaster distributions” and “qualified disaster loans” as
optional plan provisions. For plans that choose to adopt these distributions, plan document
amendments are required for this relief. For non-governmental plans, the adoption of the
amendment can be delayed until 2022. For governmental plans, the plan amendment can be
delayed until 2024.
QUALIFIED DISASTER DISTRIBUTIONS APPLICABLE TO IRAS, 401(A), 401(K), 403(B) AND GOVERNMENTAL
457(B) PLANS
A ‘‘qualified disaster distribution’’ is defined as a distribution made on or after the first day of
the incident period (determined by FEMA) of a qualified disaster (which occurred on or after
December 28, 2019, through December 27, 2020) and by June 24, 2021, to an individual who
has sustained an economic loss and whose principal residence is in a qualified disaster area.
A qualified disaster does not include COVID-19.
The amount to be taken can be up to $100,000 per disaster (but is limited by aggregate
qualified disaster distributions taken in prior tax years). While there are separate $100,000
limits for each disaster, the $100,000 is limited across all plans in a controlled group.
The tax advantages of a qualified disaster distribution mirror those associated with CRDs:
• The participant can repay the distribution within three calendar years after the date on
which the distribution was received.
• Repayments are considered indirect eligible rollovers.
• Unless otherwise elected, related income is spread ratably over three years.
• No 10% early withdrawal penalty applies.
QUALIFIED DISASTER LOANS APPLICABLE TO 401(A), 401(K), 403(B) AND GOVERNMENTAL 457(B) PLANS
The CAA also allowed for qualified disaster loans. A participant whose principal place of
residence at any time during the incident period is in a qualified disaster area and who has
sustained an economic loss would qualify for this assistance for a maximum amount that
does not exceed the lesser of (1) 100% of the participant’s vested account balance or (2)
$100,000 minus the difference between the highest outstanding loan balance during the last
12-consecutive-month period and the outstanding loan balance on the date the loan is made.
For qualifying participants in eligible plans, if a loan is outstanding and any repayment on the
loan is due from the beginning of the first day of the incident period through 180 days after
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the last day of the incident period, that due date would be delayed under the plan for up to
one year (or, if later, until 180 days after the date of the enactment of the CAA). Any payments
after the suspension period are adjusted to reflect the delay and any interest accrued during
the delay. Applying the process identified in section 5.B. of Notice 2005-92, the payments
resume with a reamortization of the loan and an extension of the loan maturity to take into
account the delayed repayments, remaining repayments and accrued interest.
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FROM THE REGUL ATORY SERVICES TEAM
Section 457(b) plan catch-up contributions
The following is a synopsis of the Issue Snapshot published by the IRS in 2020 focusing on
participant catch-up contributions in state and local government and tax-exempt organization
457(b) plans.
Background
Contributions to a 457(b) plan that are not subject to a substantial risk of forfeiture are
considered annual deferrals in the calendar year deferred. 457(b) plans must limit annual
deferrals to the basic annual limitation under §457(b)(2), which includes salary reduction
contributions and nonelective employer contributions, unless a catch-up provision applies.
See Treas. Reg. §1.457-2(b)(1). The basic annual limitation is the lesser of the applicable dollar
amount or 100% of the participant’s includible compensation.
Special 457 catch-up
Governmental and tax-exempt 457(b) plans may permit special 457 catch-up contributions
under which the maximum annual deferrals cannot exceed the lesser of (1) twice the §457(b)
applicable dollar amount or (2) the underutilized limitation. Special 457 catch-up contributions
can be made during the last three calendar years ending before the calendar year in which a
participant attains their normal retirement age (NRA).
NORMAL RETIREMENT AGE (NRA) — A participant’s NRA is the earlier of age 65 or the age the
participant has a right to retire and receive full benefits under their governmental or tax-
exempt entity-sponsored defined benefit or money purchase plan. An NRA can’t be later than
age 70½. A plan can either set the NRA for all participants or permit each participant to select
an NRA within the above parameters. The plan administrator must then verify that the catch-
up contributions are made in the appropriate years. See Treas. Reg. §1.457-4(c)(3)(v).
Note: Age 70½ continues to be the latest age for NRAs for purposes of special 457(b) catch-up
contributions. Age 70½ is set by Treasury Regulation §1.457-4(c)(3)(v) and was NOT changed to age
72 by the SECURE Act. Age 72 only applies to the required beginning date for required minimum
distributions. Additionally, age 70½ is still the date that a 457(b) participant can take an in-service
distribution from a 457(b) plan. In-service distributions continue to be allowed at age 70½ (not age 72)
unless the employer chooses to amend the plan to allow in-service distributions at age 59½ pursuant
to the Bipartisan American Miners Act of 2019, which was included in the Appropriations Act.
THE UNDERUTILIZED LIMITATION — consists of both:
• The basic annual limitation for the taxable year.
• The basic annual limitation in prior taxable years less annual deferrals the participant made for
those prior taxable years (but not age 50 catch-up deferrals). See Treas. Reg. 1.457-4(c)(3)(ii).
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FROM THE REGUL ATORY SERVICES TEAM
Accurate recordkeeping of each participant’s vested contribution to the current employer’s
457(b) plan for all taxable years as well as contributions to other employer plans for years
before 2002, if applicable, must be maintained by the plan administrator. In addition, the
plan administrator should verify that any special 457 catch-up contributions are made by a
participant only during the three taxable years ending before their normal retirement. The
IRS warns in the Issue Snapshot that if a plan administrator does not track prior contributions
in a 457(b) plan, it may cause the participant to have excess deferrals and the plan to
be nonqualified.
Age 50 catch-up — Governmental 457(b) plans only
Governmental 457(b) plans, but not tax-exempt organization plans, may allow participants
who are age 50 or older during the calendar year to make deferrals in excess of the basic
annual limitations found in Internal Revenue Code (IRC) §§457(e)(18) and 414(v). The additional
deferral amount is limited to the lesser of either of the following:
• The §414(v) applicable dollar amount, which is $6,500 in 2021
• 100% of the participant’s compensation (when added to the other deferrals for the year)
For governmental 457(b) plans with both special 457 catch-up and age 50 catch-up
contributions a participant may not use both the age 50 catch-up and the special 457 catch-up
in the same year per IRC §§ 457(e)(18) and 414(v)(6). See also Treas. Reg. 1.457-4(c)(2). In order
to avoid a compliance issue, the plan administrator should:
• Calculate the maximum deferral amount under the special 457(b) catch-up and the age 50
catch-up to determine which catch-up yields the larger amount for eligible participants.
• Recordkeep the eligible participants’ maximum deferral amounts under each catch-up type
to ensure participants do not have excess deferrals.
IRS issue indicators or audit tips
The Issue Snapshot contains a step-by-step issue identification guide that a plan administrator
should refer to when reviewing a plan’s catch-up procedures to ensure compliance with these
rules. In addition, plan administrators should expect that an IRS auditor would examine these
items as well. Here is the list of issues for plan administrators to review as provided by the IRS:
• Determine if the employer is a governmental or a tax-exempt entity.
• Verify that the terms of the plan document appropriately provide for special 457(b) catch-
up contributions.
• Note the plan’s NRA and verify that it is not greater than age 70½ and no less than age 65 or
the age at which the participant may retire and receive full benefits from the pension plan
sponsored by the employer.
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FROM THE REGUL ATORY SERVICES TEAM
• Verify a participant-elected NRA is within the above parameters if the plan permits a
participant to elect their NRA.
• Verify the underutilized amounts: Determine the first date the participant was eligible
to participate in the employer’s 457(b) plan, the original effective date of the plan, the
participant’s annual deferrals for all prior years and the basic annual limitation in effect for
those years. See the examples in Treas. Reg.§1.457-4(c)(3)(iv)(D).
• Verify that the plan document has the language for age 50 catch-up contributions, and that
the plan sponsor is a governmental entity.
• Verify that no participant in a governmental §457(b) plan used both the special 457 catch-up
and the age 50 catch-up in the same year.
• Review the plan’s operations by including a participant’s vested salary reduction and non-
elective employer contributions in determining whether annual deferrals comply with the
basic annual limitation and the increased limit under the applicable catch-up provisions.
Plan sponsor considerations
The maximum 457(b) deferral limits can get complicated. Given that the IRS will focus on
catch-up contribution issues in 2021, plans may want to consider proactively reviewing plan
documents regarding eligibility for, and calculation of, catch-up contributions as well as
ensuring plan operations are complying with the plan documents.
FOR PLAN SPONSOR OR FINANCIAL PROFESSIONAL USE ONLY. 7The research, views and opinions contained in these materials are intended to be educational, may not be suitable for all investors and are not tax, legal, accounting or investment advice. Readers are advised to seek their own tax, legal, accounting and investment advice from competent professionals. Information contained herein is believed to be accurate at the time of publication; however, it may be impacted by changes in the tax, legal, regulatory or investing environment. Securities offered and/or distributed by GWFS Equities, Inc., Member FINRA/SIPC. GWFS is an affiliate of Empower Retirement, LLC; Great-West Funds, Inc.; and registered investment advisers, Advised Assets Group, LLC and Personal Capital. Investing involves risk, including possible loss of principal. This material is for informational purposes only and is not intended to provide investment, legal or tax recommendations or advice. ©2021 Empower Retirement, LLC. All rights reserved. GEN-FBK-WF-954807-0321 RO1552219-0321 FOR PLAN SPONSOR OR FINANCIAL PROFESSIONAL USE ONLY.
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