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Suspending Social Security retirement benefits

My client, who is 62 years old, just lost his job. He wants to file for Social Security retirement benefits and look for new employment. A friend told him he could suspend his Social Security benefits at a future date if he found new employment and, by suspending his benefits, he would not need to repay Social Security benefits already received. Is that correct?

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 Ohio is representative of a common inquiry related to Social Security benefits.

Highlights of the Discussion

No, that is not correct. “The friend,” although well-meaning, is mixing up a couple of key Social Security concepts.

Social Security retirement benefits can be stopped in two ways. The first method is referred to as the “withdrawal of application” and the second is “suspension of benefits.” Each has unique rules as noted below.

Withdrawal of Application

  • Must occur within 12 months of filing for benefits
  • The individual may elect this one time only
  • All benefits received must be repaid
  • Future benefits will be calculated as though the initial filing never occurred

Suspension of Benefits

  • Can occur only after reaching full retirement age and before age 70
  • No repayment is required
  • Delayed retirement credits are available prospectively until age 70

Thus, for a 62-year-old, because the individual has not reached full retirement age the only way to stop Social Security retirement benefits is through a withdrawal of application, which requires the repayment of benefits.

Conclusion

The rules related to Social Security withdrawal of application and suspension of benefits are complex, and other issues such as family benefits and Medicare considerations may come into play. Anyone contemplating theses decisions should seek expert advice from a tax and/or legal advisor.

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Retirement Plans for Statutory Employees

“One of my business-owner clients employs ‘statutory employees.’ Does the owner have to cover these workers under a retirement plan established for the business?”

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 York is representative of a common inquiry related types of employees and retirement plans.

Highlights of the Discussion

  • If the workers have been properly classified as statutory employees [IRC §3121(d)(3)], then your client would not have to cover them under a retirement plan established for the business—as long as the business is not selling life insurance.
  • Generally, statutory employees are independent contractors who meet certain conditions related to Social Security and Medicare taxes, and are
  1. Agent-drivers or commission-drivers,
  2. Full-time life insurance salespersons,
  3. Home workers, and
  4. Traveling or city salespersons.
  • Statutory employees remain independent contractors for employee benefit purposes in the eyes of the IRS. As such, they are not eligible to participate in an employee benefit plan sponsored by the business owner for employees. However, as statutory employees, because the IRS views them as independent contractors, they could establish and maintain their own retirement plans based on their self-employment earnings.
  • The one exception to the above rule is for full-time life insurance salespersons. They are treated as employees not only for Federal Insurance Contribution Act (FICA) tax withholding purposes, but also for certain employee benefit programs maintained by the business [IRC 7701(a)(20)]. As a result, they may participate in the business owner’s qualified deferred compensation or retirement plans under IRC §401(a).  They are also entitled to other employee benefits such as group term life insurance, accident and health plans and cafeteria plans. Note that a full-time life insurance salesperson may not base contributions to a self-employed retirement plan on the compensation received from the insurance business (Part 4, Chapter 23, Section 5 of the Internal Revenue Manual Technical Guidelines for Employment Tax Issues).

Conclusion

An individual who performs services for a business may be classified as 1) an independent contractor, 2) a common law-employee, 3) a statutory employee or 4) a statutory nonemployee. Proper employee classification is critical for tax and employee benefit purposes. Therefore, it is prudent for business owners to seek competent tax guidance when making these determinations. The IRS explains each classification in more detail in Publication 15-A, Employer’s Supplemental Tax Guide.

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Still Time for a 2020 Nonelective Safe Harbor Plan?

“Although it is already November, can my client amend her traditional 401(k) plan to be a safe harbor plan for 2020?”

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 safe harbor plans.

Highlights of the Discussion

Yes, but she must hurry. The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 relaxed the deadline for amending a 401(k) plan to add a safe harbor nonelective contribution for the current year.

Under Section 103 of the SECURE Act, plan sponsors may amend their plans to add a three percent safe harbor nonelective contribution at any time before the 30th day before the close of the plan year. The SECURE Act also did away with the mandatory participant notice requirement for this type of amendment.

Furthermore, amendments after that time would be allowed if the amendment provides

1) a nonelective contribution of at least four percent of compensation for all eligible employees for that plan year,

and

2) the plan is amended no later than the close of the following plan year.

EXAMPLE:

Safety First, Inc., maintains a calendar-year 401(k) plan. Based on the plan’s preliminary actual deferral percentage (ADP) test (which the plan is failing), Safety First decides a safe harbor plan is a good idea for 2020. It’s too late to add a safe harbor matching contribution for 2020. However, the business could add a three percent safe harbor nonelective contribution for the 2020 plan year (without prior participant notice) as long as Safety First amends its plan document prior to December 1, 2020. While Safety First still could add a nonelective safe harbor contribution to the plan for 2020 after that date, the minimum contribution would have to be at least four percent of compensation, and the company would have to amend its plan document no later than December 31, 2021.

Conclusion

Thanks to the SECURE Act, 401(k) plan sponsors have more flexibility to amend their plans for “safe harbor” status. Plan sponsors who are failing their ADP tests for the year may find this type of plan amendment attractive as a correction measure.

 

 

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CARES Act “Clean-Up in Aisle 9”

By W. Andrew Larson, CPC

Ah yes, how quickly we forget. Remember the Coronavirus Aid, Relief, and Economic Security (CARES) Act hurriedly passed by Congress and signed by President Trump on March 27th of this year?  Then the rush was on as plan sponsors incorporated the seeming plethora of participant-friendly, COVID-related provisions into their qualified plans. And, in many cases, even if a plan sponsor did not add the COVID-related features themselves, the plan’s record keepers did so through negative response defaults. The upshot is many plans have incorporated the COVID-related provisions− so now what?

In contrast to the rushed decisions of the early COVID days, let’s step back and take the time to assess these provisions before the close of the year. Such an assessment can ensure the changes are administered correctly and coordinated between internal staff and service providers. Lastly, the changes need to be communicated to participants and documented in the plan’s records to insure the conforming amendments are done accurately.

To start, let’s revisit the CARES Act’s COVID-related provisions before we commence the CARES Act “clean-up in aisle 9.”

The CARES Act permitted plan sponsors to temporarily liberalize distribution and loan options for participants impacted by COVID-19. To take advantage of these features participants self-certify that they, or a family member, were impacted by COVID-19. Plan sponsors can rely on the self-certifications without additional inquiry.

The CARES Act permitted plan sponsors to implement COVID-related distributions (CRDs) of up to $100,000 from qualified plans, 403(b)s, simplified employee pension (SEP), savings incentive match plan for employees (SIMPLEs) and IRAs. Again, as noted above, a participant self-certifies he or she  qualifies for a CRD. CRDs have unique rules relating to taxation, withholding and rollovers. Specifically, CRDs need not be fully taxed in 2020. Rather, the individual may elect to spread the taxable income over three years, respectively. Next, the mandatory 20 percent withholding on eligible rollover distributions from qualified plans is waived. Lastly, the participant has a three-year window in which he or she may re-roll the CRD back into a qualified arrangement.

A second key provision of the CARES Act dealt with plan loans. Under the Act, the plan loan limitation was temporarily increased to the lessor of 100 percent of a participant’s account balance or $100,000. In addition, loan repayments can be temporarily suspended.

Okay, the next step for plan sponsors and committees is determining exactly which of the CARES Act provisions they affirmatively adopted and which were defaulted to by the record keeper. What did the committee decide to do? What was the record keeper told? What were the participants told? Did the record keeper notify the plan sponsor of CRD-related defaults that were implemented automatically? Clear documentation of the decisions or defaults is essential in order to ensure the plan is operated accordingly.  Once we’ve ascertained which COVID-related provisions apply, the next step is clearly documenting the decisions. Plan documents need not be amended until the end of the 2022 plan year and memories are often short. Therefore, we urge good documentation now of the precise decisions made so when formal amendments happen they are accurate. The Retirement Learning Center has a handy dandy worksheet that can help capture COVID-related decisions for the records. The worksheet can be found at CARES Act Pre-Amendment Checklist.

Once we have identified the CARES Act-related plan decisions, it is then time to ensure the plan’s stakeholders are aware of the decisions and to verify the plan operations are consistent with these decisions. Has there been communication with the record keeper to confirm it is aware of the elected COVID-related provisions? Is the TPA aware of the new provisions? Are the benefits and HR staff members clear regarding the elections and the implications for the participants? What communications have gone out or should go out to plan participants regarding these changes?

All of these questions should be asked and the responses documented in the plan’s records. Things were moving pretty fast earlier in the year. Let’s not assume everyone “got the memo.” A modest effort now in terms of a CARES Act “clean-up in aisle 9” will serve to save much time and effort when the conforming plan amendments are required to be executed.

 

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401(k) Plan and Embezzlement

“If a former employee embezzled money from his employer (who sponsors a 401(k) plan), can the employer/plan sponsor use the terminated employee’s 401(k) plan balance to help offset the financial loss to the business?”

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 Georgia is representative of a common inquiry related to the anti-alienation rules under the Employee Retirement Income Security Act of 1974 (ERISA).

Highlights of the Discussion

No, the anti-alienation provisions of ERISA protect the former employee’s 401(k) account balance in this case, and prohibit the plan sponsor from using plan assets as an offset for the stolen funds, unless one of the following exceptions applies.

ERISA provides for only four narrow exceptions to its strict anti-alienation rules:

  1. For payments to alternate payees pursuant to qualified domestic relations orders (QDROs) in cases of divorce or legal separation [ERISA Sec. 206(d)(3)];
  2. For payments of IRS tax levies [Treasury Regulation 1.401(a)-13];
  3. For payments of federal court garnishments stemming from the imposition of criminal fines and orders of restitution [Mandatory Victim Restitution Act of 1996 and United States v. Novak, 476 F.3d 1041 (9th Cir. 2007)] ; and
  4. To satisfy liabilities of the participant to the plan due to criminal convictions, civil judgments, or administrative settlements involving the participant’s misconduct with respect to the plan [Taxpayer Relief Act of 1997, ERISA Sec. 206(d)(4) and IRC Sec. 401(a)(13)].

Conclusion

The anti-alienation rules of ERISA make it difficult for anyone except the plan participant to lay claim to qualified retirement plan assets, although there are a few exceptions.

 

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