Benefits Monthly Minute

A More Secure 402(f) Notice | Pushing the Need on Affordability - 2021 Increase to 9.83% | Open for Business in Cycle 3 | Tax Treatment of COVID-19 Leave-Based Donation Programs

A More SECURE 402(f) Notice

On August 7, 2020, the IRS updated the safe harbor explanations that may be used to satisfy the 402(f) notice requirements for recipients of eligible rollover distributions. Notice 2020-62 updates the safe harbor explanations to reflect changes implemented under the SECURE Act. As reported in the February, 2020 Legal Alert, the SECURE Act provides an exception to the 10% early withdrawal penalty for a distribution up to $5,000 for a qualified birth or adoption and amounts withdrawn may be recontributed to the plan subject to certain requirements.  In addition, under the SECURE Act, individuals who attain age 70 ½ after 12/31/2019 are not required to take minimum distributions until age 72. The SECURE Act’s exception to Section 72(t)’s 10% tax for qualified birth or adoption distributions and the increase in age for required minimum distributions to age 72 are both reflected in the updated 402(f) safe harbor explanations.    The recently updated safe harbor explanations  (one for payments not from a designated Roth account, and one for payments from a designated Roth account) are both appended to Notice 2020-62, and reflect these changes, along with certain other minor clarifications.

KMK Comment: now that model language has been released, it’s a good time for plan sponsors to review their rollover notices and confirm that these updates are accurately reflected in participant communications.  

Pushing the Needle on Affordability -- 2021 Increase to 9.83%

The IRS recently announced increases to the affordability threshold which applies to both the ACA’s § 4980H employer shared responsibility penalties and individual premium tax credit determinations. In Rev. Proc. 2020-36,  the IRS increased the employer shared responsibility affordability percentage from 9.78% in 2020 to 9.83% in 2021. For purposes of determining an individual’s premium tax credit eligibility under § 36B, the affordability threshold will also increase to 9.83% in 2021.

KMK Comment: with the newly updated affordability percentage in mind, employers should evaluate whether their health plan cost sharing requirements are maximizing employee contributions for 2021 while still steering clear of ACA penalty risk.

Open for Business in Cycle 3

As explained in Announcement 2020-7, beginning August 1, 2020, and ending July 31, 2022, the IRS is accepting from any employer eligible to submit a determination letter request an application for an individual determination letter under the third six-year remedial amendment cycle for preapproved defined contribution plans. In general, eligibility for individual determinations letters has been significantly cut back in recent years. For those who are eligible, Rev. Proc. 2020-4 includes specific procedures for making determination letter requests and sets forth updated user fees. (Note: also see IRS Announcement 2020-14 which sets forth user fees effective as of January 4, 2021, and includes an IRS mailing address change.)  In addition, most pre-approved defined contribution plans for Cycle 3 have been approved and must be adopted by plan sponsors by July 31, 2022.

KMK Comment: plan sponsors should consider seizing this opportunity given an individual determination letter from the IRS can be a valuable asset, particularly in case of an IRS audit and also in corporate merger and acquisition settings.

Tax Treatment of COVID-19 Leave-Based Donation Programs

There is now official guidance on the federal income and employment tax treatment of cash payments made by employers under leave-based donation programs to aid victims of the ongoing COVID-19 pandemic. Under leave-based donation programs, employees can elect to forgo vacation, sick, or personal leave in exchange for cash payments that the employer makes to certain 170(c) charitable organizations. As more fully described in Notice 2020-46, these cash payments made by an employer to a 170(c) organization will not constitute wages to the employee or otherwise be included in gross income if the payments are: (1) made to the organizations for the relief of COVID-19 pandemic victims and (2) paid to the organizations before January 1, 2021. (Similarly, employees electing to forgo leave will not be treated as having constructively received gross income or wages.) Further, an employer may deduct these cash payments (as charitable contributions or business expenses) if the employer otherwise meets the applicable requirements.

KMK Comment: without an official exception, leave-based charitable donations would need to be included in gross income. This new guidance provides welcomed clarification that employees who elect to give up PTO in exchange for employer payments to a 170(c) charitable organization for COVID-19 relief may exclude such amounts in gross income.

The KMK Law Employee Benefits & Executive Compensation Group is available to assist with these and other issues.

Lisa Wintersheimer Michel

John F. Meisenhelder

Helana A. Darrow

Antoinette L. Schindel

Kelly E. MacDonald

KMK Employee Benefits and Executive Compensation email updates are intended to bring attention to benefits and executive compensation issues and developments in the law and are not intended as legal advice for any particular client or any particular situation. Please consult with counsel of your choice regarding any specific questions you may have.

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