401(k) Update: Q1 2021
by Vita, on January 11, 2021
2020 Year-End Census Information Due Now!
It’s that time again! Perhaps one of the most pressing compliance matters is the submission of census data to begin compliance testing. Sponsors of calendar-year 401(k) plans subject to the Average Deferral Percentage (“ADP”) or Average Contribution Percentage (“ACP”) Tests (i.e. all Non-Safe Harbor Plans) must submit their 2020 census data now to ensure timely results.
Be sure to submit your annual census data and compliance questionnaires to your recordkeepers by their specific deadlines. Typically, this information is due no later than January 31st, though we have seen due dates as early as January 15th. This allows the recordkeepers sufficient time to process the year-end tests and deliver results to you before March 15th, which is the deadline for employers to process corrective refunds (for failed ADP tests, if applicable) without paying a 10% excise tax. Please contact Vita Planning Group if you have questions regarding your recordkeeper’s year-end requirements.
For other important dates on the horizon, download our online Compliance Calendar.
2021 Contribution Limits1
As a reminder, the employee contribution limits for 2021 are remaining the same as last year, with the standard limit set at $19,500 and the age 50+ catch up amount set at $6,500. For your convenience, we have illustrated below the maximum per pay period deferral amounts based on two common payroll cycles.
- $19,500 max:
26 pay periods - $750.00
24 pay periods - $812.50
- $26,000 max (age 50+):
26 pay periods - $1,000.00
24 pay periods - $1,083.33
Plan Document Restatements
Approximately every 6 years, the IRS requires employer-sponsored retirement plans to update their plan documents through a process called “restating” the document. Most 401(k) and 403(b) plans use an IRS-pre-approved plan document created by their recordkeeper or third-party administrator and this cyclical process ensures that documents are updated to incorporate regulatory changes from any mandatory or voluntary amendments that may have been adopted since the last time the document was restated.
This process is owned by your plan’s recordkeeper or third-party administrator so be on the lookout for this task over the coming months. Generally, the restatement involves providing you with the updated plan document for review and adoption (i.e. signature). The deadline2 to restate plan documents is July 31, 2022, however we expect recordkeepers and third-party administrators to begin rolling out the process this year.
CARES Act COVID-19 Provisions End
The COVID-19-related loan and distribution provisions of the CARES Act ceased at the end of December 2020.3 Any loan repayments that were suspended under the CARES Act will need to resume with the first payroll in January 2021. Please ensure that you receive an updated amortization schedule from your retirement plan recordkeeper and update your payroll records accordingly.
While the CARES Act withdrawal provisions ended, FEMA has declared the COVID-19 pandemic a disaster in all 50 states, hence the hardship withdrawal provisions passed as part of the SECURE Act remain in force. It is important to note that disaster-related hardship distributions, in the context of the SECURE Act, do not provide the same tax relief that COVID-19-related distributions offered under the CARES Act and would be subject to normal hardship distribution rules.
Consolidated Appropriations Act, 2021
The Consolidated Appropriations Act, 2021 was signed into law on December 27, 2020. The comprehensive bill provides funding for the federal government and provides additional COVID-19 relief to individuals and businesses. Although the CARES Act was not extended as part of the passage of this legislation, the Act included retirement plan provisions that provide some relief to plan sponsors and participants.
For example, the Act enables certain retirement plan sponsors that laid off or furloughed employees due to the COVID-19 pandemic to potentially avoid a partial plan termination.
The bill4 states: “A plan shall not be treated as having a partial termination (within the meaning of 411(d)(3) of the Internal Revenue Code of 1986) during any plan year which includes the period beginning on March 13, 2020, and ending on March 31, 2021, if the number of active participants covered by the plan on March 31, 2021, is at least 80% of the number of active participants covered by the plan on March 13, 2020.” Essentially this allows relief to companies who rehire previously laid off workers by avoiding a partial plan termination.
The Act also allows for “qualified disaster distributions” from retirement plans for participants affected by disasters declared by the President under the Stafford Act, other than the COVID-19 pandemic. Participants in 401(k), 403(b), money purchase pension and government 457(b) plans may take up to $100,000 in aggregate from their retirement plan accounts without tax penalties. Income tax on those distributions may be spread over three years, and participants may repay them into a plan that is designed to accept rollovers within three years. The bill states that participants have until 180 days after enactment of the bill to take qualified disaster distributions.
Markets in the fourth quarter of 2020 were buffeted in by countervailing forces: between the upswing in COVID-19 cases around the globe and the delivery of a vaccine; between the result of the US Presidential election and the attempts to contest its validity; between the timing of continued governmental economic support and its scale. Despite several sharp declines during Q4 2020, asset markets finished up for the quarter and for the year overall. The S&P 500 rose nearly 12% in Q4, taking the index up over 18% for the year. The pace of US bond market appreciation slowed with the BarCap US Aggregate Bond Index up 0.64% in Q4, resulting in a rise of 7.5% for the year. Overseas, the MSCI All Country World ex US index surged 14% in Q4, leaving the index up 6.5% for the year. The rollout of COVID-19 vaccine programs as well as the expectation of continued fiscal and monetary support should be positive for asset markets in early 2021.
At the end of 2020, US GDP and employment were struggling to regain their levels seen at the beginning of the year with progress being impeded by the spike upward in the number of COVID cases in the US and the resulting social distancing measures re-introduced to control their spread. 2020 Q3 US GDP was revised upward to 33.4% annualized rate, up from the record 31.4% plunge in Q2. Despite this strong bounce back, GDP is still about 3.5% below its 2019 Q4 level. Strong consumer spending in October and an increase in industrial production in November have resulted in estimates for GDP growth in Q4 2020 as high as 5%. At the end of November 2020, unemployment was at 6.7%, and 56% of jobs lost at the outbreak of the pandemic have been regained. The slower-than-expected nonfarm payroll increase of 245,000 in November may signal that job gains will moderate at the end of 2020 and into 2021.
The rollout of COVID-19 vaccines continued governmental economic support and stimulus, and the release of pent-up consumer and corporate demand is leading to expectations of continued support for asset markets, both in the US and overseas in 2021. US equities in 2021 should benefit from increasing corporate earnings, due both to higher margins and improving GDP growth. However, the easy monetary policy and massive fiscal spending that helped bond markets appreciate in 2020 have pushed the 10 Yr US Treasury yield below 1% and compressed credit spreads making the outlook for bonds, in terms of either income or capital appreciation, more difficult to project. Even with the run up in overseas equity prices in Q4 2020, both overseas emerging and developed markets appear cheap relative to US equities, trading well below historical price-to-book and price-to-earnings ratios. The same health, economic support and demand factors that are supportive of US equities, appear as compelling overseas as we begin 2021.
This commentary is provided for informational purposes only and does not pertain to any security product or service and is not an offer or solicitation of an offer to buy or sell any product or service. Nothing in this commentary constitutes investment, legal, accounting or tax advice or a representation that any investment strategy or service is suitable or appropriate to your individual circumstances.
Securities are offered only by individuals registered through AE Financial Services, LLC (AEFS), member FINRA/SIPC. Investment advisory services offered through Liberty Wealth Management LLC, a Registered Investment Adviser with the SEC. Insurance offered through Vita Insurance Associates, Inc. CA Insurance License 0581175. DBA Vita Companies. AEFS is not an affiliated company with Liberty Wealth Management, or Vita Companies.
5 JPMorgan Asset Management, Guide to the Markets – U.S. Economic and Market Update, 1Q 2021 December 31, 2020.