Congress could act to amend 401(k) benefits and credits

It goes without saying that the new Congress has its hands full as it begins 2021, and among the important tasks at hand is weighing the merits of a new bill dubbed SECURE 2.0, which has several proposed changes in how 401(k) plans are designed and managed.

According to Keith Clark, managing partner at DWC, the bill as proposed includes the following changes that will be of definite interest to plan sponsors:

• Increasing the required minimum distribution (RMD) age from age 72 to age 75.
• Increasing the catch-up contribution limit to $10,000 for those over age 60.
• Enabling part-time employees to be eligible to make deferrals after two years (instead of the current 3-year requirement).
• Increasing small business tax credits for starting new 401(k) plans.
• Allowing for more flexibility on plan failures through self-correction.
• Requiring that at least one participant statement per year be provided in hard copy, in spite of the Department of Labor’s recent regulation that allows electronic distribution as the default.
• Introduced in the 2020 session, SECURE 2.0 is “really more of a placeholder now,” awaiting the will of the new Congress, Clark explains.

The initial SECURE Act proposed several monumental changes, and the proposed changes with the SECURE Act 2.0 will be even more influential on the 401(k) plan, according to Jared Porter, CEO and co-founder at 401GO.

“If anything, these changes promote a focus and priority of retirement plans, and will only improve the benefits to businesses,” Porter says.

It is also possible that Congress could add further tax incentives to encourage lower income employees to participate in the retirement plans, these experts agree.

Pooled employer plans will dominate discussions in 2021

But there are other major trends to watch in 2021 regarding 401(k) plans, some proposed in government and some led by the industry.

“I think that multiple employer plans, such as the newly-designed pooled employer plans, or PEPs, will be the hot topic for much of 2021,” Porter stresses. “Next, we’ll probably see an increased focus on the student loan dilemma and using the 401(k) as a method to reduce that for participants by being rewarded with an employer contribution when they make a student loan payment. Last, and certainly not less important or ‘trendy’ will more than likely be an uptick in cash balance plans. When we look at the changes to the Safe Harbor Non-Elective, and giving more flexibility in establishing a 401(k) plan that is more conductive for a cash balance plan, then those will certainly rise in popularity.”

Plan sponsors should brace for a lot of marketing materials professing PEPs as the ultimate plan solution, Clark advises.

“They will be sold as low cost, low or no liability for the plan sponsor, with cool technology, ease of use, and whatever else sounds cool in a sale,” Clark explains. “This message has been around for many years; PEPs are simply the new kid on the block. Plan sponsors should be wary of anything that sounds too good to be true, because it probably is.”

But companies can never completely eliminate their liability, and they are always responsible for the service providers they engage, Clark stresses.

“Low cost is often incorrectly referred to as out-of-pocket cost to the plan sponsor rather than correctly including all fees paid by the participants and plan sponsors,” Clark says. “Besides that, two of the largest PEO MEPs in the country have recently been sued for self-dealing and excessive fees. With the Group of Plans (GOP) solution available in 2022 and Exchanges offered by certain record-keepers with proven fair priced solutions, PEPs may end up as just another service solution that quietly moves to the background.”

Will Congress act to extend CARES Act provisions regarding 401(k) payouts?

Another area to watch in the early stages of 2021 is what Congress may do about the CARES Act provision that increased participant loan limits. Passed in the spring of 2020 to aid the public during the first surge of the pandemic, that bill expired at the end of 2020, and the current COVID relief bill does not extend its benefits.

There is some disagreement over whether Congress will pass a similar measure this winter, but agreeing that some sort of relief action is likely by Congress is Craig Larson, president of Larson Financial Advisors.

“More than likely we’ll see either an extension of some CARES Act features or some new type of legislation to ease the economic impacts of COVID,” Larson says.

Porter is another who believes that some sort of action will be taken.

“I think that there will be an overlap or extension allowing participants to pull from their 401(k) accounts,” Porter says. “Although there is a vaccine out (actually two as of this writing), there will still be those affected by COVID-19, and will probably need some relief. From what I’ve seen, account withdrawals have not been as dramatic as originally anticipated, such as a ‘raid’ on retirement savings. I do think some have taken advantage of it, but most have approached it in a prudent manner. If 2021 allows for these withdrawals to continue, I don’t think the impact is going to be any more than what has already occurred.”