Looking back at 2020
As we begin a new year, I am reminded of the resiliency shown in 2020 by the American people, especially our farmers and their equipment suppliers. I am a staunch believer in the American entrepreneur and, in 2020, they continued to step up to the plate. A sincere “Thank you” to all of you.
One of the topics we have been discussing with our clients are changes to Qualified Plan contribution limits, Plan Document restatement, and why they are important. I thought it would be a good time to update you on some of these changes and requirements.
The changes
As you know, qualified retirement plans such as 401(k), 403(b) and profit-sharing plans receive unique tax advantages and benefits through satisfying certain requirements that are set by the Internal Revenue Service and Department of Labor. All plans have what is referred to as a Plan Document, which is required to be reviewed or “restated” every six years. Restatement allows plan sponsors to stay up to date with any regulatory changes in addition to reviewing any discretionary plan features and updating those as well.
Over the last few years, there has been multiple legislative enhancements that have required qualified Plan Document amendment or restatement. The SECURE Act and CARES Act require both plan amendments be added to the Plan Document by the last day of the 2022 plan year. Additionally, the Cycle 3 Restatement announcement from the IRS in July requires all qualified Plan Documents to be restated by July, 31 2022. This requires Plan Documents to be updated for all legislative and regulatory changes since 2008.
It is important to note that the Cycle 3 Restatement does not replaces the SECURE and CARES Act Amendments from being adopted. If you have questions about Plan Document restatement or the corresponding details, do not hesitate to reach out to your plan administrator or advisor.
The restatement process is also a great time to review your Plan Document and make sure your plan is designed to achieve what you want it to.
Some ideas and trends we are seeing across the 401(k) universe include adding a Roth feature, if you have not already done so, and creating an investment committee to review your fund’s line up, platforms, and plan features. We are also seeing more and more plans adding an automatic enrollment feature for newly eligible participants, as well as automatic contribution increases up to a preset maximum. These features are gaining popularity among employers as the responsibility for saving for retirement continues to fall on the employee.
Fiduciary accountability
With all of the above in mind, this time of year also presents an opportunity to consider your fiduciary liability. There are steps you can take as a plan sponsor to mitigate your liability and provide your employees with a great plan.
Having a §404(c) election permits employees to direct their investments inside their 401(k) accounts. This allows the participant to pick their investments and how much they are saving. A §3(16) fiduciary takes on the responsibility and liability for administrative functions like reporting and disclosure requirements, among other things. This responsibility can be outsourced, otherwise the plan sponsor automatically takes on the responsibility and liability for the plan remaining compliant with ERISA.
Another important step you can take as a plan sponsor is making sure your plan advisor or representative is a §3(21) fiduciary, which means that he or she provides investment advice or manages money for a fee. Your §3(21) helps you with investment recommendations and selecting the investment lineup, but does not make those decisions for you. A §3(21) fiduciary can also assist you in completing an Investment Policy Statement to help guide your decision making. Ultimately, a §3(21) fiduciary helps you, as a plan sponsor, make informed decisions and follow your IPS.
The last type of fiduciary protection we see used in the 401(k) universe is a §3(38) fiduciary. When you hire a §3(38) fiduciary, you are giving them the keys to the car to handle any liability over the plan’s investments. The 3(38) will select, monitor, and make changes to the investment lineup as they see necessary. This option will remove a majority of your fiduciary liability with regard to the plan investment lineup. When looking at and reviewing your fiduciary risk and responsibility it is important to complete your own due diligence about the services you are doing or outsourcing.
What to expect in 2021
Moving on to the newly announced 2021 Qualified Plan contribution limits, there are not many changes from 2020 to 2021. The maximum elective deferral amount stayed the same at $19,500. The catch-up limit also stayed flat at $6,500 for participants over 50.
However, there are a few changes to defined contribution limits and the annual compensation subject to qualified plan limits. The defined contribution limit increased from $57,000 to $58,000. This is the total dollar amount, which includes employee deferrals, employer match, and profit-sharing contributions. Additionally, the annual compensation subject to qualified plans increased from $285,000 to $290,000. Overall, these are not substantial changes to contribution limits, but can impact employee decision-making for the 2021 plan year.
As I always say, don’t hesitate to reach out to your plan advisor or representative with questions. We work for you and we are standing by to answer any and all questions you may have. With 2020 behind us, I want to wish all of you the best in 2021.
Article Written By David Wentz
David Wentz is CEO of Tax Favored Benefits, Overland Park, Kansas. Wentz is a graduate of the University of Kansas School of Law with a Juris Doctor degree. Wentz frequently speaks at various professional and business seminars about pensions, profit sharing, 401(k) plans, tax favored benefits, and investment programs. Western Equipment Dealers Association endorses Tax Favored Benefits as a 401(k) provider. No compensation is received. More information is available at www.taxfavoredbenefits.com.
