Compliance News | December 9, 2021

December 31, 2021 Reminders for Retirement Plan Sponsors

Amendments implementing the 401(k) and 403(b) plan hardship distribution changes of the Bipartisan Budget Act of 2018 are the main amendments needed by December 31, 2021. This deadline applies for both calendar-year and fiscal-year plans. The amendments generally need to be retroactive to each provision’s effective date.

Calendar-year plans, but not fiscal-year plans, must make any discretionary amendments by December 31, 2021. Fiscal-year plans have until the last day of the plan year for which the change is effective to make retroactive discretionary amendments.

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Amendments required by December 31, 2021

The changes discussed below must be made by December 31, 2021.

Hardship distributions in 401(k) and 403(b) plans

By December 31, 2021, 401(k) and 403(b) plans that allow hardship distributions must adopt several amendments, regardless of whether the plan year is a calendar or fiscal year:

  • Elimination of the six-month suspension rule — Plan sponsors may no longer suspend a participant’s ability to make elective deferral contributions or employee contributions in any plan of the employer on account of a hardship withdrawal in the sponsor’s 401(k) or 403(b) plan beginning on or after January 1, 2020.
  • Participant representation standard — Plans must use a new general standard to determine whether a distribution satisfies a financial need, instead of the prior “facts-and-circumstances” standard. Under the general standard, a participant represents that they have insufficient cash or other liquid assets to satisfy the financial need. This change had to be effective for distributions made on or after January 1, 2020. Plans could apply the change as early as January 1, 2018.

Plans were required to comply with the hardship distribution rules in operation earlier. See IRS Notice 2019-64, the 2019 Required Amendment List (RAL).

The December 31, 2021 amendment date also applies to the items below, if the plan has adopted these optional changes and wants retroactive coverage.

  • Available loans first requirement — Plan sponsors could eliminate the requirement that a participant must take all available plan loans prior to requesting a hardship distribution.
  • Additional hardship distribution sources — Plan sponsors of 401(k) plans could permit hardship distributions to be made from qualified nonelective contributions (QNECs), qualified matching contributions (QMACs) and safe-harbor contributions from traditional and qualified automatic contribution arrangements, as well as from elective deferrals. Hardship distributions also could be allowed to be made from earnings attributable to amounts in any of the above accounts.

Special rules apply to 403(b) plans. Earnings are never a permissible source of hardship distributions for 403(b) plans. In addition, hardship distributions may be made from QNECs and QMACs only if the contributions are not in a custodial account.

Plan sponsors may decide in future plan years to eliminate a loans-first requirement or to permit hardship distributions from the expanded list of sources. This would be a discretionary amendment, so any plan making such a change should amend its plan document by the end of the plan year in which the change is effective.

We previously summarized these changes to the hardship distribution rules in our March 13, 2020 insight.

Market rate of interest in collectively bargained cash balance plans

The IRS regulation (TD 9743) on the market rate of interest for a hybrid plan, such as a cash balance plan, delayed the effective date for collectively bargained plans. The effective date was the later of:

  • January 1, 2017 and
  • The earlier of January 1, 2019 and the date on which the last of the collective bargaining agreements in effect terminates (determined w/o regard to any extension thereof on or after November 13, 2015)

If the plan has not already been amended, an amendment must be adopted no later than December 31, 2021.

See IRS Notice 2019-64, the 2019 Required Amendment List (RAL).

Operational change in required minimum distribution tables

Qualified retirement plans use life expectancy tables in the Treasury regulations to determine the amount of required minimum distributions. Virtually all plans include these tables in plan documents by cross-reference. Treasury has changed the tables in the regulation effective for distribution calendar years beginning on or after January 1, 2022.

The new tables do not apply to the first distribution for those with a required beginning date of April 1, 2022, which is considered the distribution for the 2021 distribution calendar year. The new tables do apply to the distribution for the 2022 distribution calendar year, which must be made by December 31, 2022. 

While no amendment will be needed for plans that incorporate the tables by cross-reference to the regulation, plans need to be administered in accordance with the new tables.

CARES Act and SECURE Act amendments

The Coronavirus Aid, Relief and Economic Security Act (CARES Act) and the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) both had provisions effective on or after their enactment. These laws provided delayed dates for amendment and that such dates could be further delayed by Treasury administrative action. The IRS has used its administrative authority to delay many of the legislations’ amendment dates even further. Amendments for CARES Act and SECURE Act provisions are not yet required.

Action items

Plan sponsors should make required retroactive amendments by December 31, 2021. Calendar-year plans should also make any discretionary amendments for 2021 by December 31, 2021.

Plan sponsors should also make certain that plans are operating in accordance with legislative effective dates even though the plan need not yet be amended. Retroactive amendment is allowed only to the extent there was operational compliance in accordance with the eventual amendment.

Plan sponsors should discuss with their legal counsel and consultants whether adopting an amendment earlier than required or creating operational procedures would help operational compliance.

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This page is for informational purposes only and does not constitute legal, tax or investment advice. You are encouraged to discuss the issues raised here with your legal, tax and other advisors before determining how the issues apply to your specific situations.

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