Lifetime income illustrations for plan benefit statements

Confronted by statistics that demonstrate how little money many American workers have set aside for their retirements, a growing number of individuals in government and business have spent the last several years focusing on the concept of retirement security and the most effective ways to ensure that most workers can attain it. The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) was one such effort in the greater scheme of helping Americans face their retirements with confidence.

Section 203 of the SECURE Act seeks to help workers in defined contribution plans better prepare for retirement by amending ERISA Section 105 to require plans to show participants how their account balance translates into monthly income in retirement. The provision requires administrators of individual account plans, such as 401(k) and 403(b) plans, to include two lifetime income illustrations on a plan participant’s benefit statements at least annually. The illustrations must show the participant’s account balance converted to a lifetime income equivalent—one as a single life annuity (SLA) and the other as a Qualified Joint and Survivor Annuity (QJSA).

The US Department of Labor (DOL) recently issued an Interim Final Rule (IFR) implementing Section 203.1 The IFR is effective on September 18, 2021, and applies to pension benefit statements furnished after that date.

Required information

The IFR specifies that the lifetime income disclosures must contain the following information:2

  • The beginning and ending dates of the statement period.
  • The value of the account balance as of the last day of the statement period. The account balance must include the outstanding balance of any plan loans (unless the loan is in default) and exclude the value of any deferred income annuity held by the account.
  • The monthly amount that the value of the account balance would pay as both an SLA and a QJSA, based on certain assumptions.

Assumptions

The IFR also states that monthly amounts must be calculated as if the lifetime income stream payments began on the last day of the statement period and as if the participant is 67 years old on such a date. If the participant is older than 67, then the calculation of the monthly amounts must use the participant’s real age. The calculation of the QJSA must assume that the participant and the spouse are the same ages, regardless of a participant’s actual marital status or the actual age of any spouse.3

Additional assumptions to be used:

  • The SLA will pay a fixed monthly amount for the life of the participant with no survivor benefit after the participant’s death.
  • The QJSA is a qualified joint and 100% survivor annuity, which will pay a fixed monthly amount for the life of the participant, and the same fixed monthly amount to the surviving spouse after the participant’s death.
  • The interest rate for the monthly payment calculations is the 10-year constant maturity Treasury rate as of the first business day of the last month of the statement period.
  • Life expectancy is based on the gender neutral mortality table in IRC Section 417(e)(3)(B).4

DOL offers an example

The DOL offers an example of what such an illustration should look like.

Account balance as of [DATE]

Account balance as of [DATE]

Monthly payment at 67 (single life annuity)

Monthly payment at 67 (single life annuity)

Monthly payment at 67 (qualified joint and 100% survivor annuity)

Monthly payment at 67 (qualified joint and 100% survivor annuity)

Account balance as of [DATE]

$125,000

Monthly payment at 67 (single life annuity)

$645/month for life of participant

Monthly payment at 67 (qualified joint and 100% survivor annuity)

$533/month for life of participant $533/month for life of participant’s surviving spouse

Additional language

The IFR requires plan administrators to caution participants that the lifetime income illustrations included in the benefit statements are not guaranteed. The IFR recommends that sponsors include the following language in the benefit statement: “The estimated monthly payments in this statement are for illustrative purposes only; they are not a guarantee.”5 In addition, participants should be advised that a variety of factors could cause their actual monthly income to be different from the amount in the illustration.

Protection from liability

For plan administrators and sponsors who expressed concerns about projecting future retirement income payments for plan participants, the IFR provides a safe harbor from liability to sponsors and fiduciaries who comply with the requirements of the IFR and who use the DOL’s model language.6

 

IRS provides guidance on SECURE Act changes

The Setting Every Community Up for Retirement Enhancement Act (SECURE Act) became law in 2019. However, since it was enacted, plan sponsors and others have sought clarification of certain provisions in the Act that they consider unclear. In Notice 2020-68,7 the IRS offers guidance on several issues, including those related to the participation of long-term, part-time employees in 401(k) plans; qualified birth or adoption distributions; expanded IRA contribution eligibility; and the small employer automatic enrollment credit.

The IRS states that the Notice is not intended to provide comprehensive guidance as to the specific provisions of the SECURE Act, but rather to provide guidance on particular issues to assist in the implementation of these provisions.

Participation of long-term, part-time employees in 401(k) plans

The SECURE Act mandates that employees with three consecutive 12-month periods with at least 500 hours of service and who meet the plan’s minimum age requirement generally must be allowed to make deferrals to their employer’s 401(k) plan.8 The provision is effective for 2021 and later plan years. However, 12-month periods beginning before January 1, 2021 are not taken into account for purposes of the eligibility rule.

The Notice indicates that each 12-month period for which the employee has at least 500 hours of service generally must be treated as a year of service for vesting purposes, subject to certain exceptions. Thus, while 12-month periods beginning before 2021 can be disregarded for purposes of applying the deferral eligibility rule, it cannot be disregarded for purposes of vesting in any employer contributions provided to these employees.

Distributions for qualified birth or adoptions

The SECURE Act adds a new exception under IRC Section 72(t) for “qualified birth or adoption distributions.”9 Under this exception, participants can withdraw up to $5,000 for each child or eligible adoptee from an eligible plan or IRA without having to pay the 10% additional income tax on early withdrawals. Participants must, however, include the distribution in their gross income.

An individual generally may recontribute a qualified birth or adoption distribution to an eligible retirement plan that accepts rollovers. However, a qualified birth or adoption distribution is not treated as an eligible rollover distribution, is not subject to the mandatory 20% withholding, and does not require the issuance of a rollover notice when the distribution is made. In addition, plan sponsors should be aware of the following issues relating to this type of distribution.

  • First, retirement plans are not required to offer in-service distributions for qualified births or adoptions. They can choose to offer this option.
  • Second, plan sponsors or administrators can rely on a reasonable representation from a participant that the participant is eligible for a qualified birth or adoption distribution unless the sponsor or administrator has actual knowledge to the contrary.
  • Also, if a retirement plan does not allow qualified birth or adoption distributions but a participant receives an otherwise permissible in-service distribution that meets the requirements of a qualified birth or adoption distribution, the participant may treat the distribution as a qualified birth or adoption distribution on his or her federal income tax return.
  • Plans must accept a recontribution of a qualified birth or adoption distribution from a participant under the following circumstances: (a) the plan permits qualified birth or adoption distributions; (b) the participant received a qualified birth or adoption distribution from the plan; and (c) the participant is eligible to make a rollover contribution to the plan at the time the participant opts to recontribute the distribution to the plan.
  • A recontribution is treated as the direct transfer of an eligible rollover distribution.

Expanded IRA contribution eligibility

Under IRC Section 219(d)(1), an individual was not permitted to make contributions to a traditional IRA for a taxable year if the individual had attained age 70½ by the last day of the year. The SECURE Act repeals this provision, allowing taxpayers with eligible compensation to make contributions to a traditional IRA at any age.10 However, the Notice says that financial institutions that serve as trustee, custodian or issuer for an IRA are not required to accept post-age 70½ contributions. Those financial firms that do choose to accept such contributions are required to amend their traditional IRA plan agreements and disclosure statements to reflect this change and provide these documents to the benefited IRA owners they service.

In addition, the Notice says that IRA owners are not permitted to offset their Required Minimum Distribution (RMD) amount for a taxable year by the amount of post-age 70½ IRA contributions made for the same year. Thus, owners of traditional IRAs may contribute past age 70½, but they may also have to take an RMD for the same year.

In a related provision, the SECURE Act amends IRC Section 408(d)(8)(A), which allows IRA owners, beginning at age 70½, to donate up to $100,000 of IRA assets to a qualified charity and exclude that amount from gross income (called a qualified charitable distribution, or QCD). The SECURE Act amendment provides that the excludable amount of a QCD is reduced by the aggregate amount of post-age 70½ IRA contributions deducted for the year and any earlier years. However, the excludable amount is not further reduced by the amount of post-age 70½ contributions that previously caused a reduction of the excludable amount for earlier years.

The Notice confirms the formula that IRA owners should use to determine the reduction amount.

The Small Employer Automatic Enrollment Credit The SECURE Act makes a business tax credit available to eligible employers that establish an Eligible Automatic Contribution Arrangement (EACA) under a qualified employer plan.11 This new IRC Section 45T credit is for up to $500 for each of the first three years that the employer includes an EACA in the plan. A qualified employer plan includes IRC Section 401(a) plans, 403(a) plans, simplified employee pensions under IRC Section 408(k) (SEPs) and SIMPLE retirement accounts under IRC Section 408(p). To be eligible for the credit, an employer must have 100 or fewer employees who earned at least $5,000 in compensation during the previous calendar year.

The Notice clarifies that employers may receive a credit for each year during a single three-year period starting in the first year that the employer adds an EACA in any qualified employer plan. To be eligible for the credit for the second or third years of the three-year credit period, an employer with more than one qualified plan must include the same EACA in the same qualified plan for each year of the three-year period.

The Notice additionally affirms that each eligible employer that participates in a Multiple Employer Plan (MEP) may receive the tax credit.

 

2021 retirement plan limits

Some of the annual dollar limitations that affect retirement plans will be higher for 2021 due to cost-of-living adjustments, while others will remain the same. The table below compares the limits for 2021 and 2020.12

 

 

2021

2021

2020

2020

 

Defined contribution plan dollar limit on annual additions

2021

$58,000

2020

$57,000

 

Defined benefit plan limit on annual benefits

2021

$230,000

2020

$230,000

 

Maximum annual compensation used to determine benefits or contributions

2021

$290,000

2020

$285,000

 

401(k), SARSEP, 403(b) and 457 plan deferrals
Catch-up

2021

$19,500
$6,500

2020

$19,500
$6,500 

 

SIMPLE deferrals
Catch-up

2021

$13,500
$3,000

2020

$13,500
$3,000

 

Compensation defining highly compensated employee

2021

$130,000

2020

$130,000

 

Compensation defining key employee (officer)

2021

$185,000

2020

$185,000

 

SEP annual compensation triggering a contribution

2021

$650

2020

$600

 

IRA contribution
Catch-up

2021

$6,000
$1,000

2020

$6,000
$1,000

 

PBGC maximum guaranteed monthly benefit for a 65-year-old retiree

2021

$6,034.09

2020

$5,812.50

 

Social Security taxable wage base (affects plans that consider Social Security in determining benefits or contributions)

2021

$142,800

2020

$137,700