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Reasonable interest rate on plan loans

“What interest rate should a plan apply as part of its plan loan program?”

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, qualified retirement plans and other types of retirement savings 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 from Ohio is representative of a common inquiry related to 401(k) plan loans.

Highlights of Discussion

Loans to 401(k) plan participants are generally prohibited unless they

  • Are available to all plan participants and beneficiaries on a reasonably equivalent basis;
  • Are not made more readily available to highly compensated employees, officers or shareholders than they are to other employees;
  • Are made in accordance with specific provisions set forth in the plan;
  • Are adequately secured; and
  • Bear a reasonable rate of interest [see DOL Reg. § 2550.408b-1].

The Department of Labor (DOL) gives us a guideline for what is reasonable, but with room for interpretation. According to DOL Reg. § 2550.408b-1(e), a plan’s loan interest rate is reasonable if it is equal to commercial lending interest rates under similar circumstances (see also DOL Advisory Opinion 81-12A). In an example, the DOL explained, “The trustees, prior to making the loan, contacted two local banks to determine under what terms the banks would make a similar loan taking into account the plan participant’s creditworthiness and the collateral offered.”

The IRS has similar requirements in order for a plan loan to avoid excise tax under Internal Revenue Code Section (IRC §) 4795(c) and (d)(1) for prohibited transactions. In a September 12, 2011 IRS phone forum, IRS personnel stated informally: “… as a general rule the Service generally considers prime plus 2% as a reasonable interest rate for participant loans.”

The prime rate is an interest rate determined by individual banks, and is often based on a review of the Federal Reserve Boards’ H.15 Selected Interest Rates release of prime rates posted by the majority of the largest 25 banks in the U.S.  Prime is often used as a reference rate (also called the base rate) for many types of loans.[1] Conceivably, adding one or two percentage points to the prime rate makes the interest rate charged to a participant more consistent with general consumer rates, as individuals can rarely get a loan at the going prime rate.

In its Winter 2012 publication, “Retirement News for Employers,” the IRS suggests asking the following questions to determine if a loan interest rate meets the reasonable standard:

  • What current rates are local banks charging for similar loans (amount and duration) to individuals with similar creditworthiness and collateral?
  • Is the plan rate consistent with the local rates?

According to Internal Revenue Manuals, Part 4, Section 4.72.11.4.2.1.1, IRS examination steps related to verifying a reasonable rate of interest include

  • Determining whether the plan loans’ interest rates and other conditions are comparable to the terms of similar commercial loans in the relevant community; and
  • Checking the overall rate of return on plan assets when a large percent of the plan’s assets are invested in participant loans.

On the second point above, even if the interest rate on the loans is reasonable, the overall rate of return might be unreasonable. This could occur if it is determined that a plan’s substantial investment in participant loans is causing the overall rate of return to be materially less than what could have been earned in other investment options under the plan. The DOL has opined that a participant loan as an investment would not be prudent if it provided the plan with less return, relative to risk, than comparable investments available to the plan.

Conclusion

Determining reasonableness is a question of fact and circumstances, and there is no DOL or IRS “safe harbor” rate. Plan sponsors’ must 1) take into consideration relevant current market conditions, and 2) conduct periodic reviews of the interest rate to ensure it continues to reflect current market conditions. Anytime a participant loan is refinanced, the interest rate should be reviewed and updated, if needed. Above all, plan sponsors must be able to document the process they used to determine reasonable interest rates for participant loans in order justify their selection.

[1] https://www.federalreserve.gov/faqs/credit_12846.htm

 

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After-Tax Contribution Limits in 401(k) Plans

“What are the considerations for a 401(k) plan participant who wants to “max out” his/her after-tax contributions in the 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, qualified retirement plans and other types of retirement savings 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 from Ohio is representative of a common inquiry related to after-tax contributions in 401(k) plans.

Highlights of Discussion

  • There are several considerations for making after-tax contributions to a 401(k) plan, including whether the plan allows for after-tax contributions and, if so, what limits apply.
  • In order for a participant to make after-tax contributions to his or her 401(k) plan, the plan document must specifically allow for this type of contribution. For example, using our “Plan Snapshot” library of employer plan documents, RLC was able to confirm that the 401(k) plan in question does permit after-tax contributions.
  • Additional considerations when making after-tax contributions include any plan specified contribution limits; the actual contribution percentage (ACP) test; and the IRC Sec. 415 annual additions test.
  • Despite having a plan imposed contribution limit of 50 percent of annual compensation according to the plan document, the advisor determined his client could maximize his pre-tax contributions and still make a large after-tax contribution as well.
  • After-tax contributions are subject to the ACP test—a special 401(k) test that compares the rate of matching and after-tax contributions made by those in upper management (i.e., highly compensated employees) to the rate made by rank-and-file employees (i.e., nonhighly compensated employees) to ensure the contributions are considered nondiscriminatory. Even safe harbor 401(k) plans are required to apply the ACP test to the after-tax contributions if any are made. If the plan fails the ACP test, a typical corrective method is a refund of after-tax contributions to upper management employees.
  • In addition, each plan participant has an annual total plan contribution limit of 100 percent of compensation up to $54,000 for 2017 and $55,000 for 2018, plus an additional $6,000 for catch-up contributions, under IRC Sec. 415 (a.k.a., the annual additions limit). All contributions for a participant to a 401(k) (e.g., salary deferrals, profit sharing, matching, designated Roth and after-tax) are included in a participant’s annual additions. If a participant exceeds his annual additions limit, a typical corrective method is a refund of contributions.
  • In general, a 401(k) plan participant can convert his after-tax account balance to a Roth IRA while working as long as 1) the plan allows for in-service distributions; 2) the after-tax contributions and their earnings have been segregated from the other contribution types in a separate account; and 3) the participant follows the standard conversion rules (IRS Notices 87-13, 2008-30 and 2014-54).

Conclusion

Roughly one-third of 401(k) plans today offer participants the ability to make after-tax contributions.[1]  While this may be viewed as a benefit from many perspectives, there are several important considerations of which plan participants must be aware.

[1] Plan Sponsor Council of America, 59th Annual Survey; and Retirement Learning Center Plan Document Database, 2018

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Plan Compensation and Imputed Income

“What is imputed income and how does it affect a 401(k) plan, if at all?”

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, qualified retirement plans and other types of retirement savings 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 from Virginia is representative of a common inquiry related to compensation.

Highlights of Discussion

Imputed income relates to group term life insurance (GTLI). Offering GTLI may affect the administration of an employer’s qualified retirement plan, depending on the definition of compensation selected for plan purposes.

The first $50,000 of employer-provided GTLI is excludable from an employee’s taxable income pursuant to Internal Revenue Code Section (IRC) §79. Once the amount of coverage exceeds $50,000, the imputed cost of coverage, based on the IRS Premium Table, is subject to income, Social Security and Medicare taxes (see IRS Publication 15-B). The imputed income is considered a taxable fringe benefit to the employee.

An employer must report the amount as wages in boxes 1, 3, and 5 of an employee’s Form W-2, and also show it in box 12 with code “C.” At an employer’s discretion, it may withhold federal income tax on the amount.

As taxable income, the amount may be included in the definition of compensation that is specified in the governing documents of an employer’s retirement plan. For example, with respect to the safe harbor definitions of compensation that plans may use, treatment of imputed income is as follows.

Compensation Type Form W-2 3401(a) 415 Safe Harbor
Taxable premiums for GTLI Included Excluded Included

 

Conclusion

Imputed income from GTLI coverage may be includible compensation for retirement plan administrative purposes. Employers and plan administrators must always refer to the specific definition of compensation elected in the plan document to know when to include or exclude imputed income.

 

 

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Mid-Year Changes to Safe-Harbor 401(k) Plans

“What changes, if any, can an employer make to a safe harbor 401(k) plan during the plan year, while maintaining safe harbor status?”

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, qualified retirement plans and other types of retirement savings 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 from Washington D.C. is representative of a common inquiry related to making changes to a safe harbor 401(k) plan.

Highlights of Discussion

Sponsors of safe harbor 401(k) plans[1] have a limited ability to alter their plans mid-year without jeopardizing their safe harbor status. Any change must be one the IRS views as “permissible” and, oftentimes, employees must receive notification and have a new deferral election opportunity.

Notice 2016-16 provides that a mid-year change to a safe harbor plan or to a plan’s safe harbor notice does not violate the safe harbor rules merely because it is a mid-year change, if the

  • Plan satisfies the notice and election opportunity conditions, if applicable, and
  • Change is not a prohibited mid-year change as listed in Notice 2016-16.Permissible Changes
  • According to the notice, permissible mid-year changes include
  1. Increasing future safe harbor non-elective contributions from 3% to 4% for all eligible employees;
  2. Certain increases to matching contributions adopted at least three months before the end of the plan year;[2]
  3. Adding an age-59 ½, in-service withdrawal feature;
  4. Changing the plan’s default investment fund;
  5. Altering the plan rules on arbitration of disputes;
  6. Shifting the plan entry date for employees who meet the plan’s minimum age and service eligibility requirements from monthly to quarterly; and
  7. Adopting mid-year amendments required by applicable law (for example, newly effective laws).

Changes 1-4 require an updated notice and an additional election period as explained next.

Notice Requirements

When required, sponsors must provide an updated safe harbor notice that describes the mid-year change and its effective date within a reasonable period before the effective date of the change. Providing the notice 30-90 days before the effective date is deemed reasonable. If is it not possible for the plan sponsor to distribute the updated safe harbor notice before the effective date of the change, it must provide the notice as soon as practicable, but not later then 30 days after the date the changes is adopted.

Election Requirement

When required, sponsors must give each notified employee a reasonable period of time to change his or her cash or deferral election after receipt and before the effective date of the change. A 30-day election period is deemed reasonable. However, if it is not possible to provide the election opportunity before the effective date of the change (e.g., retroactive plan amendment), then the election opportunity must begin as soon as practicable after the notice date, but not later than 30 days after the date the change is adopted.

EXAMPLE Plan M:

  • Traditional 401(k) matching safe harbor plan
  • Operated on a calendar year
  • Match is calculated on a per payroll-period basis
  • A mid-year amendment is made August 31, 2018, to 1) increase the safe harbor matching contribution from 4% to 5%; and 2) change from a payroll-period match to a full-plan-year match
  • Both changes are retroactively effective to January 1, 2018

Due to the retroactive effective date of the change, the sponsor cannot provide an updated notice and give an additional election opportunity to employees prior to the January 1, 2018, effective date. On September 3, 2018, the first date that an updated notice and additional election opportunity can practicably be provided, the sponsor distributes an updated notice that describes the increased contribution percentage and gives an additional 30-day election period starting September 3, 2018. The mid-year change is a permissible change, and notice and election requirements are met.

Conclusion

Sponsors of safe harbor plans often wonder if they can make changes to their plans mid year. The answer is yes, provided any change is of the permissible variety, and notice and election requirements are met.

 

[1] IRC §§ 401(k)(12) or 401(k)(13) and/or 401(m)(11) or 401(m)(12), and 403(b) plans that apply the IRC § 401(m) safe harbor rules pursuant to IRC § 403(b)(12).

[2] Adopted at least three months before the end of the plan year, made retroactively effective, revocation of payroll period allocation, and new notice and election period apply.

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Can a plan sponsor merge 401(k) and 403(b) plans?

“I have at least one of my plan sponsor clients who has both a 401(k) plan and a 403(b) plan. Could my client merge the two plans in order to consolidate the assets?”

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 New York is representative of a common inquiry involving the merging of retirement plans.

Highlights of Discussion

  • Save for two exceptions, no, your client cannot merge 403(b) assets with an unlike plan (e.g., a profit sharing, 401(k), 457(b) plan, etc.) without causing the 403(b) assets to become taxable to the participants. Such a transfer could also jeopardize the tax-qualified status of the 401(k) plan.
  • 403(b) plan assets may only be transferred to another 403(b) plan. Further, the final 403(b) regulations are clear that neither a qualified plan nor a governmental 457(b) plan may transfer assets to a 403(b) plan, and a 403(b) plan may not accept such a transfer (see Treasury Regulation Section 1.403(b)-10 and Revenue Ruling 2011-07).
  • The two exceptions noted previously are plan-to-plan transfers by participants to governmental defined benefit plans in order to 1) purchase permissive service credits; or to make a repayment of a cash out.
  • This does not preclude a 403(b) or 401(k) participant with a distribution triggering event (such as plan termination) to distribute and complete a rollover to another eligible plan [e.g., a 401(k) or 403(b) plan] that accepts such amounts.

Conclusion

While there are similarities between a 401(k) plan and 403(b), the IRS treats them as unlike plans and, therefore, incompatible, for the purpose of plan-to-plan transfers or mergers. Participant rollovers, on the other hand, are potentially possible between the two.

 

 

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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?

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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.

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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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