IRS Issues Guidance on CARES Act Retirement Plan Distributions, Loans and RMDs

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IRS Issues Guidance on CARES Act Retirement Plan Distributions, Loans and RMDs

In June 2020, the Internal Revenue Service (IRS) issued guidance in Notices 2020-50 and 2020-51 on retirement plan distributions, loans and required minimum distributions (RMDs) as provided under the Coronavirus Aid, Relief and Economic Security (CARES) Act, enacted on March 27, 2020.

IRS Notice 2020-50 includes clarifications on the categories of individuals eligible to access the enhanced CARES Act distributions and loans.  It is intended to assist employers and plan administrators, trustees and custodians, and qualified individuals in applying Section 2202 of the CARES Act.  The Notice provides guidance on how plans may report coronavirus-related distributions and how individuals may report these distributions on their individual federal income tax returns.

IRS Notice 2020-51 provides guidance relating to the waiver of 2020 RMDs from certain retirement plans under Section 2203 of the CARES Act.  In addition, it provides transition relief for plan administrators and payors in connection with the change in required beginning date for RMDs under Section 401(a)(9) of the Code pursuant to Section 114 of the SECURE Act.

Notice 2020-50 is available here and Notice 2020-51 is available here.

 

National Organizations Issue Report on State and Local Fiscal Facts for 2020

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National Organizations Issue Report on State and Local Fiscal Facts for 2020

In June 2020, the National Governors Association (NGA), National Conference of State Legislatures (NCSL), National Association of State Retirement Administrators (NASRA), Government Finance Officers Association (GFOA) and seven other organizations representing public sector officials and employees published a report titled, State and Local Fiscal Facts – 2020.  The annual report covers the fiscal condition of states and localities, municipal bonds, and public pensions.  It provides detailed information regarding state, county and local finances; municipal bankruptcy; types and level of municipal debt and their security; and the fiscal condition of state and local pensions.  The 2020 report also includes the economic impacts of the COVID-19 pandemic on operations, revenues, and demands on government services.  Some of the stated facts include:

  • Over the last two consecutive years, most state fiscal conditions have had moderate-to-robust growth in general fund revenue that exceeded budget projections in fiscal year (FY) 2018 and FY 2019.
  • In FY 2019, 25 states spent less than the pre-recession peak in 2008, in real dollar terms.
  • In FY 2019, 46 states reported preliminary revenues that exceeded their revenue projections.
  • Most states continue increasing their rainy-day funds.  In FY 2019, 41 states reported balance increases and the median balance grew to 7.6% as a share of general fund spending, up from a low of 1.6% in FY 2010.
  • Since 2009, every state and many local governments have made changes to pension benefit levels, financing arrangements, or both.
  • Due to the economic downturn resulting from the pandemic, local governments anticipate budget shortfalls of over $360 billion between 2020 and 2022.
  • State and local retirement systems reported withstanding the COVID-19 crisis by having administrative operations working remotely, monthly benefit payments being paid on a timely basis, and public pension fund assets continuing to be managed and invested in the financial markets.

The report is available here.

SLGE Releases Survey Report on Public Sector Employee Views on Finances and Employment

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SLGE Releases Survey Report on Public Sector Employee Views on Finances and Employment

On June 18, 2020, the Center for State and Local Government Excellence (SLGE) released its survey report, Public Sector Employee Views on Finances and Employment Outlook Due to COVID-19.  The national online survey of over 1,000 state and local government employees assessed their views of the effect of the Coronavirus (COVID-19) pandemic on their finances, job, debt profile and other related issues.

Key findings include:

  • 56% of respondents indicated that they and their family have been negatively impacted by the pandemic;
  • 65% are concerned that the pandemic and related economic crisis will impact being able to retire when expected;
  • 74% are concerned about being financially secure throughout retirement;
  • 85% are concerned about the impact on the nature of their job and 63% of those are faced with difficulties adjusting to job changes, particularly remote work;
  • 74% have at least some remote job and only 18% worked remotely prior to the pandemic; and
  • 65% are very or extremely confident about making financial decisions on their own and 53% are very or extremely confident doing so during the pandemic and related economic crisis.

The report is available here and the infographic is available here.

NASRA Analyzes the Impact of Economic and Market Declines on Public Pension Plans

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NASRA Analyzes the Impact of Economic and Market Declines on Public Pension Plans

In June 2020, the National Association of State Retirement Administrators (NASRA) released its report, Recession and Market Decline Impacts on Public Pension Plans.  NASRA analyzed two periods of market decline and economic recession that occurred since 2000 that may help to provide insight on the potential impact of recent events on public pension plans and their sponsoring governments. 

According to the report, the effects of market decline and recession will vary for pension plans and their sponsors.  The impact will be greatly impacted by future investment performance as well as the effect of the recession on state and local government revenue collections. 

The report concludes, “Because every public pension is unique, the effect of the recent period of market volatility and the recession currently underway also will be unique for each pension plan.  As a result, each plan and plan sponsor will need to determine what response to these events, if any, is most appropriate.”

The report is available here.

American Academy of Actuaries Reports on the Effects of COVID-19 on Health Insurance Premiums for 2021

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American Academy of Actuaries Reports on the Effects of COVID-19 on Health Insurance Premiums for 2021

On June 10, 2020, the American Academy of Actuaries (AAA) released its issue brief, Drivers of 2021 Health Insurance Premium Changes: The Effects of COVID-19.  According to the brief, during the first six months of 2020, increased health spending due to the direct costs of diagnosing and treating COVID-19 seems to be offset by a reduction in non-COVID-19 health services.  However, it is uncertain how trends will continue throughout the end of 2020.  

Furthermore, the COVID-19 pandemic has presented significant uncertainty related to projecting 2021 claims levels.  The effects of COVID-19 on premiums for 2021 will depend on assumptions related to: 1) the emergence of subsequent COVID-19 waves in 2020 or in 2021; 2) whether non-COVID-19 utilization continues to be deferred or eliminated in 2021 or whether treatment deferred in 2020 is provided in 2021; 3) the pandemic’s economic effects on shifts in insurance coverage and risk pool composition; and 4) COVID-19 testing and treatment costs, the availability of new treatments and vaccines, increases in mental health and substance treatment needs, changes to telehealth utilization and costs, and changes to provider reimbursement rates.

The brief is available here.

IRS Issues Snapshot on Catch-Up Contributions Under 457(b) Plans of Governmental and Tax-Exempt Employers

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IRS Issues Snapshot on Catch-Up Contributions Under 457(b) Plans of Governmental and Tax-Exempt Employers

On June 5, 2020, the Internal Revenue Service (IRS) issued its snapshot, Catch-Up Contributions Under Section 457(b) Plan of Governmental and Tax-Exempt Employers.  The snapshot discusses catch-up contributions under an Internal Revenue Code (IRC) Section 457(b) plan.  The annual deferrals that participants make to a Section 457(b) plan are limited by the basic annual limitation unless a catch-up provision applies, in which case they are higher.  Section 457(b) plans may permit special 457 catch-up contributions during the last three taxable years before a participant’s normal retirement age. 

In addition, governmental 457(b) plans may permit age 50 catch-up contributions.  Governmental 457(b) plans may allow participants who are age 50 or older during the tax year to make deferrals in excess of the basic annual limitation under IRC Sections 457(e)(18) and 414(v).  The catch-up contributions for 457(b) eligible deferred compensation plans are the same as catch-up contributions for other plans.  The additional deferral amount is limited to the lesser of:

  • the IRC Section 414(v) applicable dollar amount, which is $6,500 in 2020; or
  • 100% of the participant’s compensation (when added to the other deferrals for the year). While IRC § 414(v)(1) refers to additional “elective deferrals,” IRC §§ 414(v)(6)(B) and 414(u)(2)(C) clarify that “elective deferral” includes any deferral of compensation under an eligible deferred compensation plan as defined in IRC § 457(b).

A participant of a governmental 457(b) plan may not use both the age 50 catch-up and the special 457 catch-up in the same year.

The snapshot is available here.

CMS Releases Compliance Letter for Non-Federal Governmental Health Plans on COVID-19

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CMS Releases Compliance Letter for Non-Federal Governmental Health Plans on COVID-19

On June 5, 2020, the Centers for Medicare & Medicaid Services (CMS) and U.S. Department of Health and Human Services (HHS) released its Compliance Letter for Non-Federal Governmental Health Plans related to COVID-19.  The letter highlights COVID-19 guidance relevant to non-Federal governmental plan sponsors including:  1) a requirement to cover COVID-19 diagnostic testing and certain related Items and services without cost-sharing or medical management; 2) temporary period of relaxed enforcement of certain timeframes related to group market requirements under the Public Health Service Act; and 3) expanding and promoting access to telehealth options and prescription drugs during the COVID-19 pandemic.

The letter is available here. 

SLGE Releases Survey Findings on Public School Employees’ Views on Job and Benefits

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SLGE Releases Survey Findings on Public School Employees’ Views on Job and Benefits

On June 4, 2020, the Center for State and Local Government Excellence (SLGE) released its report, Survey Findings: K-12 Public School Employee Views on Job and Benefits.  Since schools are facing extraordinary challenges due to the COVID-19 pandemic, the survey examines K-12 public school employees’ views on their job and benefit satisfaction, knowledge of mutual funds and annuities, sources of financial information, debt, and school diversity. 

  • Overall, K-12 public school employees are satisfied with their employer with 83% of respondents being satisfied with the ability to serve their community, 77% with their job security, and 75% with the personal satisfaction they receive from their job.
  • 75% of employees would be most likely to leave their job if significant cuts were made to their salary, 60% if cuts were made to their defined benefit (DB) pension plan, and 58% if cuts were made to their health insurance.
  • Employees vary in how frequently they review their defined contribution (DC) retirement account results with 21% being very comfortable investing and managing their DC accounts, and 51% being somewhat comfortable doing so.
  • About 33% of those with a DC plan are given the option by their employer to invest in annuities and in mutual funds. Of those given the option, 75% invest in annuities and 82% invest in mutual funds.
  • Employees report varying levels of confidence regarding making retirement plan decisions on their own with 40% indicating that they consult with a non-financial professional (i.e., family member or friend) and 34% consult with a financial professional associated with their employer.
  • Employees also indicate that it is important for schools to have a racially/ethnically diverse faculty and staff, regardless of the composition of the student population.

The report is based on the results of a national online survey of 400 state and local government K-12 public school employees that was conducted in March of 2020 by SLGE and Greenwald & Associates. 

The report is available here.

NCPERS Reports Public Pensions Have Staying Power Despite Short-Term Economic Setbacks

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NCPERS Reports Public Pensions Have Staying Power Despite Short-Term Economic Setbacks

On June 2, 2020, the National Conference on Public Employee Retirement Systems (NCPERS) published its Research Series article, In Tranquility or Turmoil, Public Pensions Keep Calm and Carry On.  The purpose of the article is to examine whether public pension debt is sustainable despite the negative impact of the current coronavirus pandemic on financial markets.  According to NCPERS, “Public pensions have the economic capacity to keep paying benefits in difficult times notwithstanding short-term hitches caused by the COVID-19 health crisis.” 

Key findings include:

  • As a result of the COVID-19 pandemic, the loss in the value of state and local pension funds is estimated to be about $1.16 trillion.
  • On a conservative basis, it would cost a maximum of $3.86 billion per year to rebound over the next 30 years to maintain a stable ratio of pension debt to gross domestic product (GDP), which amounts to 0.02% of annual GDP.
  • As measured by GDP, economic growth greatly exceeds the growth in pension liabilities when compared using a 30-year time period.

The report concludes, “public pension debt is sustainable in perpetuity if a stable ratio of debt to GDP is maintained.  This can be achieved by monitoring this ratio on a regular basis and making minor adjustments along the way.  In the meantime, policy makers must continue to follow good pension funding policies and discipline and align their revenue systems with their economies to best exploit the economic capacity of their states.”

The report is available here. 

James Rizzo to Present at FGFOA Virtual Conference

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June 9, 2020

James Rizzo to Present at FGFOA Virtual Conference

Jim Rizzo will present the topic “Pension Budgets in a COVID-19 New Normal” at the Florida Government Finance Officers Association’s (FGFOA) 2020 Virtual Educational Conference.

Session Description: Pension budget forecasts (near-term and longer-term) are significantly affected by pension plans’ experience in the past and their assumptions about the future, especially for investment returns. The impact of COVID-19 on the markets and the investment return assumptions will affect this years’ actuarial valuations for the Florida Retirement System as of June 30 and local retirement systems as of September 30.

We know there is no free lunch and someone has to pay the tab. We will take a peek at how the 2020 and later valuations might look, and what happens if the return assumptions are not met in the future.