Print Friendly Version Print Friendly Version

Relief for Variable Rate PBGC Premiums

“My client is delaying a portion of her defined benefit plan contribution that is due in 2020 until January 1, 2021, as allowed under the Coronavirus Aid, Relief and Economic Security (CARES) Act. However, she already filed and paid her PBGC premiums for 2020, which showed an underfunding liability because of the delayed contribution. Consequently, she was required to pay more in variable rate premiums than she would have had to pay if she had made her contributions in 2020. Is she stuck with the higher variable-rate premium, or is there a way for her to get back the overpayment?”

ERISA consultants at the Retirement Learning Center (RLC) 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 New Jersey is representative of a common inquiry related to the payment of Pension Benefit Guaranty Corporation (PBGC) premiums.

Highlights of the Discussion

Yes, there is a way to get a refund of an overpayment in variable-rate premiums in this unusual situation. Fortunately, the PBGC realized the discrepancy that was created, and came up with a way to rectify the matter in its September 2020 Technical Update 20-2. Under this guidance, a prior year contribution received after the PBGC premium was filed and on or before January 1, 2021, may be included in the asset value used to determine the variable-rate premium. This relief did not change the premium due dates, however, (e.g., October 15, 2020, for calendar year plans), and does not permit a premium filing to reflect a contribution that has not yet been made. Therefore, plan sponsors that want to take advantage of this relief must amend their 2020 PBGC premium filing by February 1, 2021, to revise the variable-rate premium data to add in contributions due in 2020 that are made on or before January 1, 2021. Once the PBGC approves the amended filing, it will refund any excess variable-rate premium, or credit the excess to the plan’s “My Plan Administration Account” (whichever option the plan sponsor elects).

For a bit of background, the PBGC is the governmental entity that insures private sector defined benefit plans. All single employer defined benefit plans are required to pay a flat rate premium annually to the PBGC for coverage based on the number of participants in the plan. Additionally, for plans that are underfunded (i.e., where plan liabilities exceed assets), a variable-rate premium also applies based on the plan’s unfunded vested benefits (UVBs).

Conclusion

Plan sponsors who remitted their PBGC premiums on time for 2020, who also are delaying a contribution due in 2020 until January 1, 2021, pursuant to the CARES Act, may have become subject to or were required to pay higher variable-rate premiums because of the delayed plan contribution. Such sponsors may be entitled to a refund of some or all of the variable-rate premiums paid. They can reclaim an overpayment by submitting an amended PBGC premium filing by February 1, 2021, to claim a refund or credit.

 

© Copyright 2020 Retirement Learning Center, all rights reserved
Print Friendly Version Print Friendly Version

Are conduit IRAs still a thing?

“My client wants to take an in-service distribution from his 401(k) plan and roll it to an IRA.  He wants to know if he should roll it to a new, separate IRA (i.e., a conduit IRA) or if it is OK to commingle the rollover with the assets in his existing IRA?”   

ERISA consultants at the Retirement Learning Center (RLC) 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 Florida is representative of a common inquiry related to qualified plan-to-IRA rollovers.

Highlights of the Discussion

While there is no law or regulation that requires an individual to segregate assets rolled over from a qualified retirement plan in a separate or conduit IRA that holds only those assets, there are some tax and creditor protection reasons why your client may want to consider a conduit IRA. Below are three examples.

Retain the ability to roll the assets back to an employer-sponsored plan.

If your client intends to roll over the IRA assets that originated in a qualified retirement plan to another qualified retirement plan at a later date, he should be aware that some retirement plans will only accept rollovers that have been maintained in a conduit IRA and not commingled with other assets. Plan language will dictate which assets from an IRA, if any, a plan will accept as a rollover.

Preserve certain tax benefits for those born before January 2, 1936.[1]

Plan participants who were born before January 2, 1936, who receive lump-sum distributions from qualified plans may be able to elect special methods of figuring the tax on the distributions. First, assets in the plan from active participation before 1974 may qualify as capital gains, subject to a 20 percent tax rate (instead of ordinary income tax rates). Second, such individuals also may be able to use a 10-year tax option (i.e., 10-year forward averaging) to figure the taxes on the ordinary income portion of their lump sum distributions. This special option allows an eligible individual to figure the tax on his/her lump-sum distribution by applying 1986 tax rates to 1/10th the amount of a lump sum distribution, then multiplying the resulting tax amount by 10. This tax is payable for the year in which a person receives the lump-sum distribution. Taxpayers who qualify for the capital gains or 10-year forward averaging tax treatments who are contemplating a rollover must use a conduit IRA in order to preserve their ability to take advantage of these options should they later roll the assets back to a qualified plan (IRS Fast Sheet 2003-04).

Ensure creditor protection in bankruptcy is preserved.

As a result of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, individuals can exempt certain qualifying assets from their estates for bankruptcy protection. Assets in a defined contribution plan (including a 401(k) plan), or in a defined benefit, 403(b), 414, 457 or 501(a) plan are protected from bankruptcy in their entirety with no limit. Even old “Keogh” plans (qualified retirement plans for owner-only businesses) have unlimited protection in bankruptcy situations. Assets rolled over from one of the protected plans to an IRA retain the unlimited bankruptcy protection given to them while held in the plan. In contrast, contributory assets in a traditional or Roth IRA are protected from bankruptcy up to the 2020 limit of $ $1,362,800 (i.e., 1,000,000 adjusted periodically for inflation). When determining bankruptcy protection, it may be advantageous from a recordkeeping standpoint for an individual to keep rollover assets from a retirement plan in a conduit IRA separate from assets in his/her contributory IRA.

Conclusion

While not mandated by the IRS or DOL, conduit IRAs may still play a helpful role for some individuals. Before completing a qualified plan-to-IRA rollover, it would be prudent for plan participants to consult with their tax and legal advisors about whether they would benefit from using a conduit IRA.

[1] IRS Form 4972, Tax on Lump Sum Distributions

 

© Copyright 2020 Retirement Learning Center, all rights reserved
Print Friendly Version Print Friendly Version

State-sponsored retirement plans for private-sector workers

“Which states, if any, have enacted or proposed legislation that would enable them to offer retirement savings programs to private-sector workers?”

ERISA consultants at the Retirement Learning Center (RLC) 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 Illinois is representative of a common inquiry related to states and retirement plans.

Highlights of the Discussion

As of October 6, 2020, 12 states have succeeded in enacting laws creating retirement savings programs for private-sector workers. [1] One city—Seattle, WA—has also enacted an auto IRA program.[2] The following represents a high-level overview of the various plans.

State/City Plan Name Type of Plan
1.     California California Secure Choice Retirement Savings Program Automatic Roth IRA
2.     Colorado Colorado Secure Savings Program Automatic Traditional IRA
3.     Connecticut Connecticut Retirement Security Program Automatic Traditional or Roth IRA
4.     Illinois Illinois Secure Choice Savings Program Automatic Roth IRA
5.     Maryland Maryland Small Business Retirement Savings Program Automatic Traditional IRA
6.     Massachusetts Massachusetts Defined Contribution CORE Plan

 

A multiple employer plan that is a pre-tax and post-tax 401(k) savings plan developed for employees of eligible small nonprofit organizations.
7.     New Jersey New Jersey Small Business Retirement Marketplace

 

A marketplace for diverse retirement plans, including, at least, life insurance plans, Savings Incentive Match Plans for Employees (SIMPLE) IRAs and payroll-deduction IRAs.
8.     New Mexico The New Mexico Work and Save Act

 

Voluntary Payroll Deduction Roth IRA
9.     New York New York State Secure Choice Savings Program Voluntary Payroll Deduction Roth IRA
10.  Oregon OregonSaves

 

Automatic Roth IRA
11.  Vermont Vermont Green Mountain Secure Retirement Plan

 

A multiple employer plan that is a tax-deferred, pre-tax 401(k) savings plan with optional future employer contributions
12.  Washington Washington’s Small Business Retirement Marketplace

 

A marketplace where qualified financial services firms offer low-cost retirement savings plans to businesses and individuals
13.  Seattle, WA Seattle Retirement Savings Plan

 

Automatic Traditional or Roth IRA

Additionally, another 21 states have introduced legislation on this topic that is still under consideration. Those states include: Arizona, Georgia, Iowa, Indiana, Kentucky, Louisiana, Maine, Michigan, Minnesota, New Hampshire, Nebraska,  North Carolina, North Dakota, Ohio, Pennsylvania, Rhode Island, South Carolina, Utah, Virginia, West Virginia and Wisconsin.

For additional information, please see State-Administered IRA Programs: Overview and Considerations for Congress from the Congressional Research Service.

Conclusion

Concerned with the retirement security of their workers, some state legislatures have enacted laws that create state-sponsored retirement savings plans for private-sector workers. Many other states are considering similar action. The industry can expect more activity in this area in the coming months.

 

[1] AARP Public Policy Institute, State Retirement Savings Resource Center, October 2020

[2] Chapter 14.36, Seattle Retirement Savings Program

 

 

© Copyright 2020 Retirement Learning Center, all rights reserved
Print Friendly Version Print Friendly Version

Terminating a defined contribution plan

“My client is thinking of terminating the 401(k) plan for her business. She has numerous employees. What are the steps to plan termination?”

ERISA consultants at the Retirement Learning Center (RLC) 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 California is representative of a common inquiry related plan terminations.

Highlights of Discussion

Before terminating a plan, it is best to check with the plan’s record keeper or third-party administrator to determine the set procedure for executing a plan termination. Be sure to document the reasons for and all actions taken to terminate the plan.

Generally, under treasury regulations and other official guidance, the steps to terminate a defined contribution plan that covers common-law employees include the following.

  1. Execute a board resolution to authorize the plan termination and set the date of termination.
  2. Amend the plan to establish a plan termination date and make the language of the plan current for all outstanding law changes or qualification requirements effective as of the plan’s termination date.
  3. Make all required contributions accrued as of the plan termination date.
  4. Fully vest the benefits of all affected participants[1] and beneficiaries as of the set termination date.
  5. Notify all plan participants and beneficiaries about the plan termination.
  6. Authorize the plan to distribute all benefits in accordance with plan terms as soon as administratively feasible after the termination date.
  7. Provide a rollover notice to participants and beneficiaries who may elect to receive eligible rollover distributions.
  8. Distribute all plan assets as soon as administratively feasible (generally within 12 months) after the plan termination date.
  9. File a final Form 5500 series return, whichever is appropriate.
  10. Although not required, the plan sponsor may file for an IRS determination letter upon plan termination, using Form 5310 PDF, Application for Determination for Terminating Plan, to ask the IRS to make a ruling about the plan’s qualified status as of the date of termination. If a filing is done, the plan sponsor must notify interested parties about the determination application.

Conclusion

Terminating a defined contribution plan involves multiple steps. The plan sponsor and committee must carefully execute and document each step to ensure plan fiduciaries fulfill their obligations to affected participants and beneficiaries. For additional guidance, please see Chapter 12. Employee Plans Guidelines, Section 1. Plan Terminations.

 

 

[1] Applies to any employees or former employees with an account balance as of the termination date

© Copyright 2020 Retirement Learning Center, all rights reserved