Print Friendly Version Print Friendly Version

Lump Sum Distribution Triggers and NUA

“I recently took on a client who has stock of his employer in his retirement plan. Before he came to me, he took an in-service distribution of a portion of his account balance because he had turned age 59½. He continues to work. Does that early distribution eliminate his ability to take a lump sum distribution that includes the employer stock and take advantage of the net unrealized appreciation (NUA) tax strategy?”

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 California is representative of a common inquiry related to NUA in employer securities.

Highlights of the Discussion

The answer to this question hinges on the definition of lump sum.  A distribution made from a qualified plan is eligible for lump-sum treatment if it meets all three of the following requirements.

  1. The distribution(s) is/are made within one taxable year.
  2. The above distribution(s) represent(s) the “balance to the credit,” of the participant. In other words, the participant must receive the entire account balance (or balances of combined like plans of the same employer) in one taxable year. For this purpose, the IRS treats all pension plans maintained by the same employer as a single (like) plan.  Similarly, all profit-sharing plans maintained by the same employer would be considered a single (like) plan, and all stock bonus plans maintained by the same employer would be considered a single (like) plan [IRC Sec. 402(e)(4)(D)(ii)(I)].
  3. Finally, the distribution(s) is/are made because of
  • The participant’s death,
  • Attainment of age 59 ½,
  • Separation from service (not applicable for a self-employed participant), OR
  • Total and permanent disability (only applicable for a self-employed participant).

In this case, despite using up the “age 59 ½” distribution trigger, your client could still apply the separation from service distribution trigger to qualify for a lump sum if he leaves employment and is not self-employed. Or, if he is self-employed, the total and permanent disability trigger may apply, if he meets the definition. And, his beneficiaries could, potentially, receive a lump sum distribution upon the participant’s death, if the other requirements are met.

Conclusion

A plan participant who is interested in the special tax rules surrounding NUA should discussion his or her situation with a trusted tax professional because the rules are multifaceted. For example, as was discussed here, there are several nuances to the definition of lump sum for purposes of qualifying for NUA tax treatment. Having expert guidance is essential.

 

 

© Copyright 2021 Retirement Learning Center, all rights reserved
Print Friendly Version Print Friendly Version

PPP Loan and Deductible Employer Contributions

“My client received a PPP loan for his small business to help cover payroll expenses. He maintains a safe harbor 401(k) plan, and is wondering whether the business can use some of the PPP loan to make the contribution and deduct the full amount of the 401(k) employer safe harbor contribution?”

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 Massachusetts is representative of a common inquiry related to the Paycheck Protection Program (PPP) loan.

Highlights of the Discussion

This question can only be fully answered by your client’s tax professional and/or CPA.  The following response provides some general information on the topic based on the guidance issued to date. It’s for informational purposes only and cannot be relied upon as tax advice.

As to the first question, we have confirmation (from IRS Q&A 7 of the General Loan Forgiveness FAQs and Line 7 of the PPP Schedule A of the revised loan forgiveness application that the employer-provided portion of retirement contributions (either defined contribution or defined benefit) are considered “eligible payroll costs,” and can count toward loan forgiveness if they are incurred or paid during the Covered Period or the Alternative Payroll Covered Period, and meet certain other criteria. Employee salary deferrals are excluded for this purpose. Note that payroll costs that were incurred during the Covered Period or the Alternative Payroll Covered Period that are paid after the Covered Period or the Alternative Payroll Covered Period still may count toward loan forgiveness if they are paid on or before the next regular payroll date after the Covered Period or Alternative Payroll Covered Period.

For each individual employee, the total amount of cash compensation eligible for forgiveness may not exceed an annual salary of $100,000, as prorated for the Covered Period. Be aware of the special cap on business owner (i.e., owner-employee or self-employed individual/general partner) compensation that applies for determining loan forgiveness (i.e., $20,833 per individual in total across all businesses in which he or she has an ownership stake during the 24-week period, or $15,385 if an 8-week period is elected).  Also, the treatment of retirement plan contributions made on behalf of such business owners depends on the type of business entity (e.g., C-Corp, S-Corp, Self-Employed, LLC, etc. Please see IRS Q&A 8 of the General Loan Forgiveness FAQs for more details).

As to the issue of deductibility, prior to the Consolidated Appropriations Act of 2021 (the Act), the IRS took the position (in Notice 2020-32 and Revenue Ruling 2020-27) that if a business uses a PPP loan for eligible expenses that would otherwise be deductible, the business could not also take the tax deduction. That would be double dipping because the PPP loan, once forgiven, is not taxable income to the business.

That stance has changed under the Act. Forgiven PPP loans will not be included as taxable income; and expenses paid with the proceeds of a PPP loan that is forgiven are tax-deductible. For example, employer contributions to a retirement plan that are used for PPP loan forgiveness are also deductible by the business. The change covers not only new loans but also existing and prior PPP loans, reversing previous guidance from the IRS, which did not allow deductions on expenses paid for with PPP proceeds. In addition, any income tax basis increase that results from the borrower’s PPP loan will remain even if the PPP loan is forgiven.

Conclusion

The PPP loan story for small business owners who receive them continues to evolve, making regular contact with a tax advisor essential. A new change under the Act affects the deductibility of employer contributions to retirement plans that are applied towards PPP loan forgiveness.

 

© Copyright 2021 Retirement Learning Center, all rights reserved