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Discretionary plan trustee vs. directed trustee

“What defines a discretionary plan trustee vs. a directed plan trustee?”

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 and income plans, including nonqualified plans, stock options, and Social Security and Medicare. 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 Kentucky is representative of a common inquiry related to retirement plan trustees.

Highlights of the Discussion

ERISA Section 403(a) (see page 207 of linked information) provides that the assets of a qualified retirement plan must be held in trust by one or more trustees. The trustee will be either named in the plan document or appointed by a person who is a named fiduciary. The appointment of a plan’s trustee(s) is an important fiduciary decision that must be undertaken in a prudent manner by the plan sponsor or retirement plan committee with the proper authority.

Not all trustees, however, have the same authority or discretion to manage or control the assets of a plan. A trustee that has exclusive authority and discretion to manage and control the assets of the plan is a discretionary trustee. A discretionary trustee may be an employee of the company, but, more than likely, this role is outsourced to a third party.

However, a plan can expressly provide that the trustee is subject to the direction of a named fiduciary who is not a trustee. This is a directed trustee. The scope of a directed trustee’s duties is “significantly narrower than the duties generally ascribed to a discretionary trustee …” (Field Assistance Bulletin 2004-03). While a directed trustee is still a plan fiduciary, his or her fiduciary liability is limited, because he or she is required to act upon the direction of another plan fiduciary. The use of a directed trustee is a common plan model in the retirement industry. Many organizations serve as directed trustees.

“Direction” of the trustee is proper only if it is “made in accordance with the terms of the plan” and “not contrary to the Act [ERISA].” Accordingly, when a directed trustee knows or should know that a direction from a named fiduciary of the plan is not made in accordance with the terms of the plan or is contrary to ERISA, the directed trustee should not, consistent with its fiduciary responsibilities, follow the direction.

Conclusion

There are two basic flavors of qualified retirement plan trustee: discretionary and directed. Check the terms of the governing plan document and trust agreement for a particular plan to determine which applies.

 

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Retirement Savings Tax Credit

“What contributions are eligible for the retirement savings tax credit?”

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 and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business. A recent call with an advisor in Oklahoma is representative of a common inquiry regarding available tax credits for retirement contributions.

Highlights of Discussion

IRA owners and retirement plan participants (including self-employed individuals) may qualify for a retirement savings contribution tax credit. Details of the credit appear in IRS Publication 590-A and here Saver’s Credit.

The credit

  • Equals an amount up to 50%, 20% or 10% of the taxpayer’s retirement plan or IRA contributions up to $2,000 ($4,000 if married filing jointly), depending on adjusted gross income (as reported on Form 1040, 1040A or 1040NR);
  • Relates to contributions taxpayers make to their traditional and/or Roth IRAs, or elective deferrals to a 401(k) or similar workplace retirement plan; and
  • Is claimed by a taxpayer on Form 8880, Credit for Qualified Retirement Savings Contributions.

Contributors can claim the Saver’s Credit for personal contributions (including voluntary after-tax contributions) made to

  • A traditional or Roth IRA;
  • 401(k),
  • Savings Incentive Match Plan for Employees (SIMPLE) IRA,
  • Salary Reduction Simplified Employee Pension (SARSEP) IRA,
  • 403(b) or
  • Governmental 457(b) plan.

In general, the contribution tax credit is available to individuals who

1) Are age 18 or older;

2) Not a full-time student;

3) Not claimed as a dependent on another person’s return; and

4) Have income below a certain level.

2018 Saver’s Credit Income Levels

Credit Rate Married Filing Jointly Head of Household All Other Filers*
50% of your contribution AGI not more than $38,000 AGI not more than $28,500 AGI not more than $19,000
20% of your contribution $38,001 – $41,000 $28,501 – $30,750 $19,001 – $20,500
10% of your contribution $41,001 – $63,000 $30,751 – $47,250 $20,501 – $31,500

*Single, married filing separately, or qualifying widow(er)

The IRS has a handy on-line “interview” that taxpayers may use to determine whether they are eligible for the credit.

Conclusion

Every deduction and tax credit counts these days. Many IRA owners and plan participants may be unaware of the retirement plan related tax credits for which they may qualify.

© Copyright 2018 Retirement Learning Center, all rights reserved
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Defined contribution plans and QJSA/QOSA/QPSA requirements

“Are defined contribution plans subject to the survivor annuity requirements for distributions?”

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 and income plans, including nonqualified plans, stock options, and Social Security and Medicare. 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 Massachusetts is representative of a common inquiry related to the survivor annuity rules for qualified plans.

Highlights of the Discussion

As you may know, all defined benefit (DB) plans are subject to the survivor annuity requirements. There are also some defined contribution (DC) plans that must satisfy these rules as well, although they are few and far between (IRC Secs. 401(a)(11) and 417).

As background, for plans that must satisfy the survivor annuity rules, if a participant dies before plan distributions are required to begin (i.e., the annuity starting date), benefits must be paid to the surviving spouse in the form of a qualified pre-retirement survivor annuity (QPSA). If a participant dies after the annuity starting date, the participant’s account balance must be used to purchase a qualified joint and survivor annuity (QJSA) Treas. Reg. § 1.401(a)-20, Q&A 8(a)]. 1.401(a)-20.

Under the Pension Protection Act of 2006 (PPA), starting with plan years beginning on or after January 1, 2008, a plan is required to offer a qualified optional survivor annuity (QOSA) in the event a participant waives the QJSA. A QOSA is an annuity that is

  • For the life of the participant;
  • Has a survivor annuity for the life of the spouse equal to 75 percent if the QJSA was less than 75 percent, or 50 percent if the QJSA was greater than or equal to 75 percent;
  • Payable during the joint lives of the participant and the spouse; and
  • The actuarial equivalent of a single annuity for the life of the participant.

First, any DC plan to which the minimum funding standard of IRC Sec. 412 applies (such as a money purchase pension plan) must follow the QJSA/QOSA/QPSA rules. However, even if a DC plan is not subject to the minimum funding standard, it may still have to meet the QJSA/QOSA/QPSA requirements. In order to avoid the survivor annuity mandate the plan must meet all of the following stipulations:

  1. The plan must provide that the participant’s spouse is entitled to the full, nonforfeitable account balance upon the participant’s death. (If there is no surviving spouse or the surviving spouse properly waives the benefit, the designated beneficiary must be entitled to the account balance.)
  2. The participant does not elect a life annuity.
  3. The account balance is not from a “transferee plan” that is subject to the survivor annuity requirements, or separate accounting between transferred benefits and any other benefits under the plan has been established. (Separate accounting means the plan must allocate all gains, losses, withdrawals, contributions, forfeitures and other charges and credits on a reasonable and consistent basis between the accrued benefits subject to the survivor annuity rules and other benefits that are not. If such accounting does not exist, then the plan must make all benefits subject to the survivor annuity requirements.)

A DC plan is a transferee plan for any participant if it

  • Holds a participant’s benefit that had been transferred to it by a DB plan after January 1, 1985;
  • Is a DC plan subject to the minimum funding standard under IRC 412; or
  • Is a DC plan that is otherwise subject to the survivor annuity rules.

Note that a rollover contribution (including a direct rollover) is not a direct or indirect transfer that would cause the survivor annuity requirements to apply.

Conclusion

The following schematic illustrates when a DC plan may be subject to the QJSA/QOSA/QPSA requirements.

© Copyright 2018 Retirement Learning Center, all rights reserved