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Life Insurance in Qualified Plans

I’ve heard that sponsors of qualified retirement plans can offer life insurance as a type of investment within the plan. If that is true—what are the requirements to do so?”

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business.  A recent call with a financial advisor in Colorado is representative of a question we commonly receive related to life insurance in qualified plans.

Highlights of Discussion

While life insurance is prohibited within IRAs, it is true that some qualified plans permit participants to purchase life insurance with a portion of their individual accounts within their workplace retirement plans. [See Treasury Regulation §§1.401-1(b)(1)(i) and (ii).]

If life insurance is offered as an investment within a retirement plan, the following are some critical points to keep in mind.

Death benefits must be “incidental,” meaning they must be secondary to other plan benefits. For defined contribution plans, life insurance coverage is considered incidental if the amount of employer contributions and forfeitures used to purchase whole or term life insurance benefits under a plan are limited to 50 percent for whole life, and 25 percent for term policies. No percentage limit applies if the participant purchases life insurance with company contributions held in a profit sharing plan for two years or longer. [See IRS Revenue Ruling 54-51  and PLR 201043048.

For a defined benefit plan, life insurance coverage is generally considered incidental if the amount of the insurance does not exceed 100 times the participant’s projected monthly benefit.

If the plan uses deductible employer contributions to pay the insurance premiums, the participant will be taxed on the current insurance benefit. This taxable portion is referred to as the P.S. 58 cost. Insurance premiums paid by self-employed individuals are not deductible.

A participant with a life insurance policy within a retirement plan, generally, may not roll over the policy (but he or she may swap out the policy for an equivalent amount of cash, and roll over the cash).

Participants may exercise nonreportable “swap outs.” In a life insurance swap out, the participant pays the plan an amount equal to the cash value of the policy in exchange for the policy itself. This transaction allows the participant to distribute the full value of his or her plan balance (including the cash value of the policy), and complete a rollover, while allowing the participant to retain the life insurance policy outside of the plan.

Swap Out Example:

Anne has a life insurance contract in her 401(k) plan with a face value of $150,000, and a cash value of $25,000. She elects to swap out the policy and gives the administrator a check for $25,000. In return, the administrator reregisters the insurance policy in Anne’s name (rather than in the plan’s name), and distributes the contract to her. There is no taxable event and Anne may take a distribution (once she has a triggering event) and roll over the entire amount received if that is in her best interest.

Conclusion

It is possible that a qualified retirement plan may allow participants to invest in life insurance under the plan. Check the terms of the document to determine whether it is an option and follow the incidental benefit rules.

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December 2017 IRA and Retirement Plan Deadlines

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans.  We bring Case of the Week to you to highlight the most relevant topics affecting your business. A recent call with an advisor in California is representative  of a common inquiry involving December deadlines.

Highlights of Discussion

There are several IRA and retirement-plan related deadlines that occur in December as summarized next.

December 1, 2017 Deadline for calendar-year plans to provide plan participants with safe harbor, qualified default investment alternative (QDIA) and automatic enrollment notices.
December 15, 2017 ERISA extended deadline for distributing the Summary Annual Report to plan participants (for plans that filed Form 5500 with an extension)
December 29, 2017* Deadline for IRA owners and retirement plan participants to satisfying their second and subsequent years’ required minimum distributions for 2017
Deadline for making qualified nonelective contributions or qualified matching contributions to correct failed actual deferral percentage (ADP) or actual contribution percentage (ACP) tests in the previous plan year for plans using the current-year testing method
Deadline for removing an ADP or ACP excess contribution for the prior plan year with a 10% excess tax in order to avoid an IRS correction program
Deadline to complete a 2017 Roth IRA conversion or designated Roth in-plan conversion
Deadline to amend an existing 401(k) plan to a safe harbor design for 2018
Deadline to amend a 401(k) safe harbor plan to remove safe harbor status for 2018
Deadline to amend plan for discretionary changes implemented during the 2017 plan year

*Generally, December 31st.  However, December 31, 2017, falls on a Sunday.

Conclusion

December is a busy month for IRA and retirement-plan related deadlines. Have you marked your calendar?

© Copyright 2017 Retirement Learning Center, all rights reserved
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Allocating Revenue Sharing Payments

How should revenue sharing payments in a 401(k) plan be properly allocated to participant accounts?

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor in Colorado is representative of a question we commonly receive related to 401(k) plans and revenue sharing.

Highlights of Discussion

Generally, revenue sharing is compensation from plan investments (typically, mutual funds) that a plan uses to offset plan expenses. For example, if a plan contracts to pay an annual fee of $20,000 to one or more service providers and receives revenue sharing (or credits) of $2,000 the amount paid by the plan is only $18,000. The next question is how revenue sharing dollars are equitably allocated among plan participants. Specifically, which participants receive a share of the revenue sharing offset and how much is received?

Plan fiduciaries must follow a documented, prudent process in determining how to handle revenue sharing payments if they exist. If the plan document specifies how revenue sharing is to be used, the fiduciaries have a duty to follow the terms of the plan, unless it would clearly be imprudent to do so.

If the document is silent on revenue sharing, plan fiduciaries could decide to use the payments to pay plan expenses and/or allocate the revenue sharing to the accounts of plan participants.

The three ways to allocate revenue sharing payments to plan participants are 1) pro-rata; 2) per capita or 3) equalization. A pro rata allocation would be a percentage of the payment per participant in proportion to their account balances. A per capita allocation would assign the same dollar amount to each participant account. Under revenue equalization, a fund’s revenue sharing would be allocated to those participants investing in the respective fund.  For example, participants who invested in a fund that paid more in revenue sharing than the record keeper charged in administrative fees would receive a credit to their plan accounts, while participants invested in funds with no revenue sharing would receive a debit for their share of the recordkeeping fee.

There is no specific guidance from the DOL on the preferred process for allocating revenue sharing—only that the process itself must be a prudent one. However, the industry has turned to Field Assistance Bulletin (FAB) 2003-03 (regarding the allocation of plan expenses) and FAB 2006-01 (regarding the allocation of mutual fund settlement proceeds) as stand in guidance based on similar concepts. The process for determining how revenue sharing is allocated must

  1. Be deliberative and documented;
  2. Weigh the competing interests of various classes of participants and the effects of various allocation methods on those interests;
  3. Be carried out solely in the interest of participants;
  4. Bare a reasonable relationship to the services being provided to the participants;
  5. Avoid conflicts of interest; and
  6. Include a rational basis for the selected method.

 

Conclusion

While there is no preferred method for allocating revenue sharing payments, plan fiduciaries must follow a documented, prudent process in determining how to handle such payments if they exist, taking into account several key considerations enumerated above.

© Copyright 2017 Retirement Learning Center, all rights reserved
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401(k)s−The Magnificent $4.8 Trillion Dollar Failure

By W. Andrew Larson, CPC

Retirement Learning Center

 

Independent thought leadership—it’s not just a lame tagline to us. At the Retirement Learning Center, we believe thought leadership must go beyond simply parroting the common media narrative. That’s why in this and future blog posts, as well as elsewhere, we strive to rise above the inane chatter to explore and challenge the real retirement-related issues and trends facing consumers and the industry in general.

In a previous blog we alluded to what some have called the supposed failure of the 401(k) experiment to provide retirement income security to U.S. workers. Let us now honestly explore the purported shortcomings of the 401(k) plan, and discuss possible enhancements to help the plan better meet the needs of the current workforce.

Have 401(k) plans failed? Hardly! According to the Investment Company Institute (ICI), 401(k) plans hold $4.8T.[1]  That amount represents a doubling of 401(k) plan assets in the last 10 years. I contend $4.8T is a magnificent failure, and is a lot of money earmarked to support millions in their retirement. In addition to supporting retirees and their families, 401(k) plan distributions will provide significant tax revenue to the Federal and many state governments.

Let’s take a look at how much money is accumulating in participant accounts. According to EBRI/ICI Participant-Directed Retirement Plan Data Collection Project[2] the average balance by age group is as follows:

Age                        Balance

20s                         $26,428

30s                         $61,757

40s                         $117,863

50s                         $176,922

60s                         $171,641

Perfect? No, but 401(k) plans seem to be working for the traditional, full-time employee segment. But there is always room for improvement.

Imagine for a moment a counter reality where 401(k) plans did not exist. Assume further that Congress never contemplated any other type of self-contributing, tax-favored retirement savings arrangements [e.g.,  IRAs, Roth IRAs, 403(b)s, 457s, Savings Incentive Match Plans for Employees (SIMPLEs), etc.]. You get the idea. In this counter reality where would the $4.8T of 401(k) assets be today? I suspect most of the money would not have been saved for retirement. It probably would have been spent on the myriad of earthly consumer delights tugging at our wallets.

401(k) plan participation rates among full-time employees are good. Eighty-two percent of workers are making employee pre-tax contributions to 401(k)-like plans.[3]  This is a good start. Can we do better? Certainly; for example, part-time workers were not on Congress’ mind when it enacted the Revenue Act of 1978, which created 401(k) plans. And, if a plan is available, the average percentage of income contributed to 401(k) plans—6.8%[4]−could be higher.

But notice it’s not the plan’s fault. 401(k) plans do not succeed or fail. Claiming 401(k) plans have failed is, frankly, foolish. As my esteemed colleague Nevin Adams succinctly opined, “Blaming the 401(k) for the retirement crisis is like blaming the well for the drought.” 401(k) plans don’t fail – we fail. Success is a choice.

Saving for retirement is a personal choice. Not saving enough or at all for retirement, ultimately, is a reflection of personal priorities. Recently, my spouse and I had dinner with friends of many years. The couple related their newly married daughter and her new husband just got back from a trip to Ireland, are busy decorating a new home and looking to purchase motorcycles. Both work for large corporations with good retirement programs. However, neither is participating in his/her respective company’s 401(k) plan. Plan participation is not a priority for them at this time.

But better retirement outcomes through increased plan participation is in the best interest of our society overall. Several policy changes come to mind that could address the mindset of this young couple and make the 401(k), no to make us, more effect in building retirement readiness.

First, let’s take a page from many state and local governmental plans that mandate employee contributions as a condition of employment. Many governmental plans mandate employees contribute 5 , 6, 8 or even 10% or more of compensation to their plans as a condition of employment. These contributions are irrevocable, and the money remains in the plan until retirement or separation from service.

Perhaps a national mandate requiring all employees (and independent contractors) to contribute a certain percent of compensation to a retirement plan would be a sensible step to improving retirement outcomes. Every time I mention this strategy I get the, “What if they can’t afford it,” objection? My response: They (and ultimately all of us) can’t afford not to have more people save for retirement.

It’s not about affordability; it’s about priorities. When retirement readiness is a priority people save for retirement. Let’s not overthink this. To illustrate the shift of priorities over time, let’s take a look at housing. According the June 2, 2016, edition of the Wall Street Journal, the median square footage of a family home is 61% larger than the median size of a family home 40 years ago, and is 11% larger than a decade ago. The larger home decision is based on priorities.

In addition to contribution mandates, a coordinated public policy initiative focused on savings and retirement readiness is essential. Let’s quit bashing 401(k) plans and push public policy initiatives to change investor behaviors and priorities.

We as a society are effective at changing mores and behaviors through public policy initiatives. A great example is smoking. The effective messaging of smoking’s ills created an all but smoke-free public environment; and we did it rapidly. Those of us over 40 remember when smoking was ubiquitous. Our younger colleagues may find it shocking to discover that people once smoked in airplanes, restaurants, theatres, hotels and cars. Smoking was cool and sexy. Anyone remember when the airline industry began to offer “No Smoking” sections on planes?

Let’s move the retirement readiness needle through the same type of public policy messaging. The campaign’s focus is one of encouraging saving and retirement readiness. It’s doable. It’s not political. Congress tends to listen to those who speak up.  You can contact your senators and representatives directly and, to make your voice even louder, join with trade groups like the National Association of Plan Advisors (NAPA). It’s in everyone best interest.

[1] 2017 ICI Fact Book, Figure 7.9

[2] ICI Research Perspective, September 2016, Vol. 22, No. 5

[3] Bureau of Labor Statistics, National Compensation Survey-Benefits, 2016 https://data.bls.gov/cgi-bin/dsrv

[4] Plan Sponsor Council of America, 59th Annual Survey, 2016

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When are safe harbor 401(k) employer contributions distributable?

“My client is age 47. Can he take a distribution of his safe harbor 401(k) plan matching contributions while he is still working?”

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans.  We bring Case of the Week to you to highlight the most relevant topics affecting your business. A recent call with an advisor in Ohio is representative of a common inquiry involving safe harbor 401(k) employer contributions.

Highlights of discussion

  • No, safe harbor 401(k) employer contributions—either matching or nonelective—may not be distributed earlier than separation from service, death, disability, plan termination, or the attainment of age 59 ½ [IRC §§ 401(k)(12) and 401(k)(2)(B)]. This would include the earnings on such amounts as well.
  • IRS Notice 98-52, Section IV, H. provides further clarification on the distribution of safe harbor 401(k) employer contributions: “Pursuant to § 401(k)-(2)(B) and § 1.401(k)-1(d)(2)(ii), hardship is not a distributable event for 401(k) safe harbor contributions other than elective contributions.”
  • The distribution rules for safe harbor 401(k) employer contributions are different (more restrictive) than those for non-safe harbor 401(k) plans, where it may be possible, under the terms of the plan, to take an in-service withdrawal of employer matching or profit sharing contributions prior to age 59 ½.
  • Safe harbor 401(k) employer contributions must be fully vested when made. They cannot be subject to a vesting schedule as is the case with non-safe harbor 401(k) employer matching or profit sharing contributions.
  • The bottom line is to always refer to the provisions of the plan document or summary plan description for a definitive answer on when plan assets are distributable.

Conclusion

The IRS’ distribution rules for safe harbor 401(k) employer contributions are different (more restrictive) than those for non-safe harbor 401(k) plans. The soonest that a working participant would be able to request a withdrawal of safe harbor 401(k) employer  contributions would be age 59 ½.

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Non Statutory Stock Options and 401(k) Deferrals

“My client has participants in his company’s 401(k) plan who are receiving cash as a result of exercising their stock options. The client is going to report the income on the participants’ IRS Form W-2 for the year. Is this eligible/included as compensation for purposes of withholding salary deferrals? ”

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans.

Highlights of discussion

  • Whether income from the exercise of stock options is includable as W-2 income as defined in 1.415(c)-2(d)(4) income for purposes of making salary deferrals to a 401(k) plan depends on whether the stock options are statutory or nonstatutory.
  • W-2 income includes income from the exercise of nonstatutory stock options for the year the options are exercised.
  • In contrast, income from the exercise of statutory stock options is excludable from W-2 income.
  • Therefore, when a participant exercises nonstatutory stock options, he or she will have additional taxable income, reported on IRS Form W-2, which can increase the amount of money the individual has available for making 401(k) employee salary deferrals.
  • The IRS has several publications with helpful information regarding the taxation of stock options: Topic 27, Publication 525, IRS CPE Compensation, Instructions Form W-2.

Conclusion

  • Income from the exercise of nonstatutory stock options is included in W-2 income, and is eligible for deferral into a 401(k) plan up to the maximum annual limit.

 

© 2017 Retirement Learning Center, LLC, a subsidiary of Retirement Literacy Center

 

 

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Change in Plan Blackout Ending Date

 

“My client is changing his 401(k) plan to a new record keeper and is under a blackout. We anticipate the blackout may go longer than what he initially disclosed to the participants. What are the participant notification requirements when the end of a blackout period is extended?”

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans.

Highlights of discussion

  • Pursuant to DOL Reg. Sec. 2520.101(b)(4), if a plan’s blackout period will run for a longer period than was initially disclosed to the participants, the plan sponsor must furnish a new notice to indicate the change.
  • The updated notice must
    • 1. Explain the reasons for the change; and
    • 2. Identify all material changes in the information contained in the prior notice.
  • The plan sponsor must furnish the updated notice to all affected participants and beneficiaries as soon as reasonably possible, unless such notice in advance of the termination of the blackout period is impracticable.
  • The DOL also expects that where a plan administrator has the ability to provide notice to some participants earlier than others, the administrator should provide the notice even if notice to other participants would not be practicable.

Conclusion

If a 401(k) plan’s blackout period will run past the previously disclosed end date, the plan sponsor has the obligation to issue a second updated notice to affected participants and beneficiaries.

 

 

 

 

 

 

 

 

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The Golden Age of Pensions: Another Fairy Tale

By W. Andrew Larson, CPC

Retirement Learning Center

 

Independent thought leadership—it’s not just a lame tagline to us.  At the Retirement Learning Center, we believe thought leadership must go beyond simply parroting the common media narrative. That’s why in this and future blog posts, as well as elsewhere, we strive to rise above the inane chatter to explore and challenge the real retirement-related issues and trends facing consumers and the industry in general.

“We are in a retirement crisis!” “401(k) plans have failed!” Media outlets frequently chant both of these mantras. Often underlying these assertions is the subtext that we need to return to the good old, defined benefit pension plan days when retirees lived happily ever after, supported by their generous pension checks.  Images of contented pensioners enjoying their golden years with golf, gardening, shuffleboard and an occasional game of bingo may warm the heart—but are not accurate.

Sadly, this vision of a blissful, pension-supported retirement world is—for the most part—a fantasy. Very few, lucky individuals actually experienced the good old pension days. It’s time to face reality and dispel some long-held myths associated with defined benefit plans so that we can get on to real-world solutions.  

Myth #1. Once upon a time most people retired with a pension.

  • Reality check: As with many myths, this one contains a grain of truth. Until the late 1970s, a larger percentage of the workforce was, in fact, participating in defined benefit plans over other types of retirement savings arrangements. According to the Employee Benefits Research Institute, the high-water mark of defined benefit plan coverage in the private sector probably occurred in 1980 when nearly 35 million workers were covered by defined benefit pension plans. This represented 46 percent of the private sector workforce. Since that time the overall pension coverage rate has declined. The Bureau of Labor Statistics reports fewer than 18 percent of private sector workers are currently covered by pension plans.
  • The important take away is the misleading nature of the pension coverage statistic. Pension coverage does not necessarily equate to ultimately receiving a pension benefit. Many workers may have been covered by pensions in the past, but few ever received a benefit.

Why?

One simple answer is the pension rules were different back in the 70s and 80s than they are today.  Let me illustrate with a personal example.

In the 1970s, I worked at a grocery store stocking shelves and carrying out groceries. Despite the part-time status of the job I participated in the Amalgamated Meat Cutters Pension Plan. I was one of the 46 percent of workers covered by a pension plan. However, after I left employment at the store I received no pension benefit. I didn’t work there long enough and had to leave my benefit behind. My former employer used this “left behind” amount to help pay for benefits of participants with 30 years of service. These amounts became what are now called forfeitures.

Under the old defined benefit plan rules, in some cases, eligibility to receive a benefit required 30 years of service and employment with the plan sponsor through the retirement age of 65. Workers leaving before retirement usually got nothing, and their accruals were used to fund benefits for those who retired and earned a benefit. In fact, only about 10 percent of the covered workers ever stayed long enough to receive a benefit. If you made it to age 65, and had enough service—congratulations—you got a monthly check!

The forfeitures helped control plan costs by reducing the size of employer contributions. So, while fewer people received benefits in the old days, the dollars left behind helped keep plans more affordable for employers. As a result of modern-day vesting and accrual rules, many more employees who separate early—even before retirement age—still receive at least some benefit.  Consequently, with fewer forfeitures today plan sponsors need to increase their contributions. Do you see the trade off? Under the modern rules, because less money is left behind, the plan is more expensive for the plan sponsor (and less appealing). There is no such thing as a free lunch.

Myth #2. Pension benefits were generous back in the good old days.

Actually, benefits were quite modest. According to study by Walter Kolodrubetz, published in the Social Security Journal, the average pension benefit was about $137 a month up until 1970. The Pension Rights Center’s research indicates the current monthly benefit today is approximately $781 a month.

Adding insult to injury, most pre-1970s retirees lost half their purchasing power during the inflationary surge of the 70s and early 80s. As an example, a retiree with a $1,000 monthly pension check in 1970, by the early 80s had about $160 of inflation-adjusted buying power. In other words, during this period, inflation eroded about 86 percent of retirees’ buying power.

This brings us back to reality. There never really was a golden age for pension plans.  And, today, defined benefit plans are becoming too expensive for employers to continue. Pensions are not coming back. So, what should be done?

First of all, we need to challenge proponents of the “let’s bring back pensions” notion. Demographics and economics make that idea a nonstarter.

Next, we should propose and advocate modern 401(k)/IRA enticements, designs and products to enhance retirement readiness, such as

  • Automatic enrollment,
  • Automatic escalation,
  • Automatic investment,
  • Lifetime income options,
  • Availability of saver’s credits,
  • Expansion of multiple employer plans (MEPs), and
  • Incorporating HSAs into retirement planning.

So let’s focus on developing strategies and policies that fit in the real world.

© Copyright 2017 Retirement Learning Center, all rights reserved
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Federal Withholding on an In-Plan Roth Conversion

“How do the federal withholding rules apply to an in-plan Roth conversion in a 401(k) plan?”

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

Highlights of Discussion

  • The federal withholding rules for in-plan conversions to a designated Roth account in a 401(k) plan are similar to the rules that generally apply for eligible rollover distributions that are rolled over directly to another eligible plan versus rolled over indirectly (i.e., within 60 days) (Internal Revenue Code Section 3405). The IRS has provided specific guidance for in-plan Roth conversions in Notice 2013-74 Q&A 4.
  • If the conversion of assets in-plan is done as a direct rollover to the designated Roth account, and the participant does not receive any of the assets, the plan sponsor should not withhold taxes. Neither can a participant request voluntary withholding under IRC Sec. 3402(p). Since a conversion is generally a taxable event, a plan participant making a direct in-plan Roth conversion may need to increase his or her withholding or make estimated tax payments to avoid an underpayment penalty from the IRS.
  • In contrast, if a plan participant receives a distribution in cash from the plan, the plan sponsor must withhold 20 percent federal income tax even if the participant later rolls over the distribution to a designated Roth account within 60 days. Because plan sponsors do not apply federal income tax withholding to a direct in-plan Roth conversion, a plan participant may need to increase his or her withholding or make estimated tax payments to avoid an underpayment penalty from the IRS.

Conclusion

Because plan sponsors do not apply federal income tax withholding to a direct in-plan Roth conversion, a plan participant may need to increase his or her withholding or make estimated tax payments to avoid an underpayment penalty from the IRS.

 

 

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What does it take to be a QACA?

“Does the IRS have specific requirements that apply to an automatic escalation feature in a qualified automatic contribution arrangement (QACA) 401(k)?

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

Highlights of discussion

  • Yes, in addition to other requirements for a QACA, the auto-enrollment and escalation features in a QACA must satisfy a minimum and maximum amount related to the percentage of compensation (“default percentage”) that, in the absence of an affirmative election, is automatically deducted from employees’ wages and contributed to the plan as elective contributions [Internal Revenue Code Section (IRC §) 401(k)(13)(C)(iii)].
  • Under Treasury Regulation 1.401(k)-3(j)(2), in general, a default contribution percentage is a qualified percentage only if it is “uniform” for all eligible employees, does not exceed 10%, and satisfies certain minimum percentage requirements. The default percentage must be at least
  • 3% during the “initial period;”
  • 4% during the first plan year following the initial period;
  • 5% during the second plan year following the initial period;
  • 6% during the third and subsequent plan years following the initial period.
  • The initial period is the date an employee is first covered by the QACA through the end of the following plan year. For example, if an employee is eligible under the QACA on 02/01/17, the initial period may run through 12/31/18
  • A uniform percentage, generally, means that the default percentage must be the same for every employee with the same number of years or portions of years since the beginning of the employee’s initial period. The percentage can vary to accommodate certain statutory restrictions, however. For example, the default election is not applied during the period an employee is not permitted to make elective contributions because of a six-month suspension following a hardship withdrawal under Treas. Reg. 1.401(k)-3(c)(6)(v)(B). (Please see Part 4 Examining Process Section 4.72.2.14.3 of the IRS’ Manual for further details and exceptions.)
  • A plan could avoid these automatic increases in the default percentage, often referred to as an “escalator,” by having just one default percentage of between 6 and 10% of compensation.
  • The IRS provides further clarification of QACAs in Revenue Rulings 2009-30.  Plan sponsors must be aware that the auto-enrollment and escalation features in a QACA must satisfy minimum and maximum contribution percentage requirements.

Conclusion

Plan sponsors must be aware that the auto-enrollment and escalation features in a QACA must satisfy minimum and maximum contribution percentage requirements.

 

 

 

 

 

 

 

 

 

 

 

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