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Relief For 2020 RMD Waivers and Rollovers Extended By IRS

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The Coronavirus Aid, Relief, and Economic Security (CARES) Act, enacted on March 27, 2020, waived required minimum distributions (RMDs) from tax-qualified defined contribution retirement plans (such as 401(k) and 403(b) plans) and individual retirement accounts (IRAs) that were otherwise due in 2020 to help Americans cope with the uncertainty caused by the COVID-19 pandemic. This was welcome relief for those who wanted to skip RMDs for the year, but the law created many unanswered questions—especially for those who had taken distributions before the law’s enactment. This relief does not apply to RMDs from defined benefit plans.
 
The Internal Revenue Service (IRS) issued guidance in late-June to clarify these issues and ensure that anyone who received an RMD in 2020 from a defined contribution plan or IRA can now roll the funds back into a similar plan. Most notably, IRS Notice 2020-51 extends the deadline for participants to return an unwanted RMD to their retirement accounts to August 31, 2020 (or 60 days after the distribution, whichever is later). The notice also expands the RMD waiver and rollover opportunity to owners of non-spousal inherited IRAs.

Key Elements of Notice 2020-51

The recent IRS notice contains five key provisions affecting plan sponsors and individuals who wish to skip RMDs in 2020 or roll previously taken 2020 RMDs back into their retirement accounts:

  • Individuals now have until August 31, 2020 to roll 2020 RMDs back into their retirement accounts; before Notice 2020-51, the deadline had been July 15, 2020.
  • The RMD waiver now applies to non-spousal inherited IRAs; previously, these accounts had been excluded from the waiver.
  • The usual limit of one rollover per year from IRAs does not apply to 2020 RMDs.
  • 2020 RMDs can go back to the plan they were taken from, as long as the plan allows it.
  • Plan sponsors (but not IRA vendors) will need to amend plans to reflect changes related to 2020 RMDs and rollovers; to help plan sponsors with this, the notice provides a two-part sample amendment that covers 1) giving participants the option of whether to take 2020 RMDs and 2) three options related to making direct rollovers available.

In addition, the notice includes a Q&A section that addresses several common issues related to the relief for RMDs and rollovers. In particular, the guidance specifies that plan sponsors do not have to accept rollovers and that the RMD waiver does not change an individual’s required beginning date to take RMDs—it only provides flexibility if RMDs started in 2020 (including 2019 initial RMDs that were allowed to be taken before April 1, 2020).

IRS Expands RMD Relief, but Deadline is Approaching
 
While the expansion of the RMD waiver coverage and the extension of the rollover deadline to August 31, 2020 is good news for many, the deadline is fast approaching. Plan sponsors need to act swiftly to see whether their plan allows rollovers of RMDs back into the plan. Those who wish to amend their plan to allow such rollovers should consider using the sample amendment provided in the notice or modify it to fit their plan’s circumstances.

Strategic Considerations Why Private Companies Should Adopt Public Company Controls

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Often viewed as a “public company problem,” private organizations may want to consider implementation of internal controls similar to Sarbanes-Oxley (SOX) Section 404 requirements. The inherent benefits of a strong control environment may be of significant value to a private company by providing: enhanced accountability throughout the organization, reduced risk of fraud, improved processes and financial reporting, and more effective inclusion of the Board of Directors.

Private organizations, while not always smaller, often have limited resources in specialty areas, including accounting for income tax. This resource constraint—the work being done outside the core accounting team—combined with the complexity of the issues, means private companies are ideal candidates for, and can achieve significant benefit from, internal controls enhancements. Thinking beyond the present, the following are five reasons private companies may want to adopt public-company-level controls:

  1. Future Initial Public Offering (IPO) – Walk before you run! If the company believes an IPO may be in its future, it’s better to “practice” before the company is required to be SOX compliant. A phased approach to implementation can drive important changes in company culture as it prepares to become a public organization. Recently published reports analyzing IPO activity reveal that material weaknesses reported by public companies were disproportionately attributable to recent IPO companies. Making a rapid change to SOX compliance can place a heavy burden on a newly public company.
  2. Private Equity (PE) Buyer – If the possibility of the company being sold to a PE buyer exists, enhanced financial reporting controls can provide the potential buyer with an added layer of security or comfort regarding the financial position of the company. Further, if the PE firm has an exit strategy that involves an IPO, the requirement for strong internal controls may be on the horizon.
  3. Rapid Growth – Private companies that are growing rapidly, either organically or through acquisition, are susceptible to errors and fraud. The sophistication of these organizations often outpaces the skills and capacity of their support functions, including accounting, finance, and tax. Standard processes with preventive and detective controls can mitigate the risk that comes with rapid growth.
  4. Assurance for Private Investors and Banks – Many users other than public shareholders may rely on financial information. The added security and accountability of having controls in place is a benefit to these users, as the enhanced credibility may impact the cost of borrowing for the organization.
  5. Peer-focused Industries – While not all industries are peer-focused, some place significant weight on the leading practices of their peers. Further, some industries require enhanced levels of security and control. For example, utility companies, industries with sensitive customer data (financial or medical), and tech companies that handle customer data often look to their peer group for leading practices, including their control environment. When the peer group is a mix of public and private companies, the private company can benefit from keeping pace with the leading practices of their public peers.

Private companies are not immune from the intense scrutiny of numerous stakeholders over accountability and risk. Companies with a clear understanding of the inherent risks that come from negligible accounting practices demonstrate their ability to think beyond the present, and to be better prepared for future growth or change in ownership

Protect Cash Flow By Reviewing Expenses And Plan Design

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Managing cash flow is an ongoing priority for any business.  Protecting an organization’s cash flow in times of economic distress is paramount. To retain liquidity in the short term, many organizations are examining their retirement plans for flexibility in cash outflows.
 
Adjusting or temporarily putting a hold on employer contributions to retirement plans stands out as a prominent option for some, but other less obvious tools can help plan sponsors operate more efficiently during a crisis as well.
 
Before making any changes, employers need to consider both the short-term and long-term consequences of these actions. While such decisions can provide some immediate cash flow relief, they can also increase long-term costs or negatively impact an organization’s employee morale and competitive positioning.
 

Eliminating or Suspending the Employer Match

Eliminating or suspending the employer match, while a potentially effective tool employers can use to shore up cash, may not be an option, depending on how the plan document is written.   Plans that include an annual safe harbor 401(k) contribution may include restrictions relating to the suspension or elimination of these contributions. Plan documents must be thoroughly reviewed before reaching a decision.
 
Even if eliminating or suspending the employer match is an option, employers should approach these decisions with care as they may negatively affect an organization’s ability to attract new employees. This potential backlash may be the reason many employers are hesitating to suspend contributions, even as we anticipate a continued quarantine. A recent survey by the Plan Sponsor Council of America (PSCA) showed that only 16 percent of benefit plans expect to suspend contributions.
 

Eliminating Inactive Participants to Reduce Administrative Costs

Another option could be to reduce the number of participants in a plan to archive a lower administrative cost in upcoming quarters. Employers can achieve this is by removing inactive participants from the plan. The Internal Revenue Service (IRS) allows plan sponsors to cash out inactive participants with $1,000 or less in their accounts, and plan sponsors don’t need permission from the individual to do this. In addition, plan sponsors can roll accounts with balances of $5,000 or less into Individual Retirement Accounts (IRAs).
 
Participants with more than $5,000 in their accounts can’t be forced out of the plan, but plan sponsors are permitted to contact such participants and inquire if they would like to be cashed out. As always, it’s important for plan sponsors to refer to their plan documents before seeking to reduce the number of inactive participants or issue distributions.
 

Review “Lost Money” in the Plan

Several other tools exist that may help plan sponsors operate more efficiently:

  • Forfeitures: Partially vested employees who terminate employment are the most common source of forfeitures. Plan sponsors most commonly use forfeitures to offset employer contributions, but they can also be used to pay for certain permitted plan expenses.
  • ERISA Spending Accounts: ERISA spending accounts present an opportunity to reduce the total costs charged to the plan.  If there isn’t a spending account already, plan sponsors should communicate with service providers to determine whether there may be an opportunity to negotiate one.
  • Evaluate Fees: Plan sponsors have a fiduciary obligation to monitor fees to ensure they are reasonable. Plans should examine their investment, administrative, and consulting fees to determine if saving cash may be possible. Now may be a good time to reach out to service providers to ask for fee reductions. Plan sponsors can also consider shifting some administrative costs, such as audit expenses, from the company to the plan and using forfeitures or ERISA spending accounts for these costs.
  • Changing Eligibility and Matching Provisions: Changing eligibility requirements and / or matching provisions can also help to conserve cash. For example, plan sponsors could require employees to work for at least one year before becoming eligible for a retirement plan.

Insight: Evaluate Cash Conservation Tools Thoughtfully
 
When examining the potential tools at your disposal for conserving cash, it’s important that employers don’t make these decisions in a vacuum. While certain actions can be taken to improve cash flow now, they could lead to greater expenses in the long term—and changes to retirement savings plans may ultimately weaken an organization’s ability to recruit and retain talent.  
Your representative is available to help evaluate your plan and look for opportunities to create valuable flexibility while still being mindful of the long-term impacts of these changes.