Important New Requirements for 401k Plans—Is Your Plan Compliant?
The following article was first posted on the Carmody Torrance Sandak & Hennessey LLP’s Labor and Employment blog and is reposted here with permission.
In 2022, sponsors and administrators of 401(k) plans should be aware of a newly effective lifetime income disclosure statement, as well as written plan amendments that must be adopted by calendar year plans by the end of 2022.
Enacted in 2019, the SECURE Act made a number of important changes to 401(k) plans. A few of those changes are noted below:
- The required beginning date for distributions is now age 72. Keep in mind that most plans do not require a distribution until the later of age 72 or retirement. Five percent owners must continue to commence distributions at the required beginning date, even if still employed. This change is already in effect for any participant turning 70½ after Dec. 31, 2019. Plans that have not already been amended or restated to provide for this later required beginning date will need to be amended or restated by the end of their 2022 plan year.
- Long-term, part-time employees must be allowed to participate in salary deferrals if they work 500 hours or more in three consecutive years. This new rule is in addition to the eligibility requirement of 1,000 hours of service in a year. The need to track part-time employee hours for this purpose began with the 2021 plan year, so entry into the plan for salary deferrals could begin in 2024 if an employee has attained age 21. Note that your plan may still require 1,000 hours of service in a single year to qualify for employer matching or profit sharing contributions. Plans that have not already been amended or restated to provide for this change will need to be amended or restated by the end of their 2022 plan year.
- Qualified birth or adoption distributions is an optional feature which may be added to your plan at any time. Distributions of $5,000 made within a year of a qualified birth or adoption are exempt from the 10% penalty normally imposed on distributions made to employees under age 59½. Such distributions may also be recontributed to the Plan.
- Lifetime income disclosure information will need to be added to your 401(k) participant statements at least once per year with one of the statements issued (typically quarterly) after Sept. 18, 2021. The U.S. Department of Labor has issued FAQs clarifying the effective date. Since the effective date was Sept. 18, 2021, and the disclosure statement must be provided within one year of the effective date, the first lifetime income illustration can be provided as late as with the second quarter statement for the quarter ending June 30, 2022. The statements will have to show the lifetime annuity which the account balance could provide at age 67. DOL has issued a model statement that may be used as a template for this purpose.
About the authors: Mark Williams is an attorney who specializes in all aspects of employee benefits with Carmody Torrance Sandak & Hennessey LLP. Timothy Klimpl is an attorney with experience providing ERISA advice.
This information is for educational purposes only to provide general information and a general understanding of the law. It does not constitute legal advice and does not establish any attorney-client relationship.
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