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Year-End Tax Reminders

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A recent call with a financial advisor in Pennsylvania is representative of a common inquiry involving year-end tax-related deadlines. The advisor asked: “Of what year-end tax deadlines should I remind my clients?”

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.

Highlights of the Discussion
There are several December 31, 2023, deadlines of which employers, retirement plan participants, IRA owners and other savers should be aware. The list below includes several but is by no means exhaustive. And—because December 31 falls on a Sunday this year, conservatively these actions should be completed by Friday December 29th to ensure they are completed no later than December 31st. 1

  • 2023 Roth conversion: In order for a taxpayer to consider either a Roth IRA or Roth 401(k) in-plan conversion for 2023 tax purposes, he or she must complete the conversion no later than December 31, 2023. (Don’t confuse the 2023 conversion deadline with the deadline for making a 2023 Roth IRA contribution, which is April 15, 2024.)
  • 2023 Qualified Charitable IRA Distribution: No later than December 31st, IRA owners and beneficiaries age 70½ or over can transfer up to $100,000 from their IRAs to an eligible charity, and exclude the amount from gross income. The excluded amount also can be used to satisfy any required minimum distributions that are due from their IRAs for 2023. New for 2023 and for later years, a QCD also can include a one-time gift of up to $50,000 (adjusted for inflation) to a charitable remainder unitrust, a charitable remainder annuity trust, or a charitable gift annuity. See a prior Case of the Week “There’s More to Love About QCDs” for other enhancements to QCDs as a result of SECURE Act 2.0.
  • 2023 Required minimum distributions for second or subsequent distribution years: Plan participants and IRA owners who have begun their required minimum distributions must take their second or subsequent years’ RMDs no later than December 31, 2023—or, potentially, face a 25% penalty on the amount not taken.
  • Discretionary Plan Amendments: Plan sponsors with calendar-year plans that made discretionary operational changes to their retirement plans during the year must generally amend their plan documents to reflect such changes no later than December 31, 2023.
  • Deferral Election: Though not a requirement, plan participants will want to make sure their employee salary deferral elections are properly set for the beginning of 2024.
  • Beneficiary Audits: Although there is no prescribed deadline, plan participants and IRA owners should make it a habit to review their beneficiary elections at least annual to ensure they are up to date.
  • 529 Plan Contribution: Although contribution rules vary by states, many states have a contribution deadline of the end of the calendar year (December 31) to qualify for a 529 education savings plan tax deduction on their tax returns for the tax year.

Conclusion
Before the New Year’s Eve celebration begins, individuals should check with their tax advisors to see if December 31, 2023, marks the deadline for important 2023 tax-related actions like those listed above. Happy Holidays!

1 When a particular act is tied to a prescribed IRS filing deadline there is an exception. In that circumstance, if the due date falls on a Saturday, Sunday, or legal holiday, then the due date is the next business day (IRC Sec. 7503).

© Copyright 2024 Retirement Learning Center, all rights reserved
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New Annual Reminder Notice for Unenrolled Participants

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“The recordkeeper for my client’s retirement plan announced that it would be incorporating a new notice into its plan notice distribution process as a result of SECURE 2.0. What is the “Unenrolled Participant Annual Reminder Notice?”

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 a plan notices.

Highlights of the Discussion
Some employees, although they may meet their retirement plan’s eligibility requirements to participate, choose not to. Prior to SECURE 2.0 (Public Law 117-328), plan sponsors were required to continue to provide these otherwise eligible but nonparticipants with all the same IRS and DOL plan notices as required for active participants. This task is often completed by a plan’s recordkeeper. Effective for 2023 and later years, SECURE 2.0 allows for a simpler way to satisfy plan notice requirements for these nonparticipants.

Pursuant to section 320 of SECURE 2.0, after the initial year of eligibility, sponsors of defined contribution, 401(k) and 403(b) plans may choose to give an otherwise eligible employee that elects not to participate a single “Unenrolled Participant Annual Reminder Notice” for a year in lieu of myriad other DOL and IRS notices typically required. Under the rule, the plan must provide

  1. An annual reminder notice of the employee’s eligibility to participate in the plan and any applicable election deadlines, and
  2. Any otherwise required document requested at any time by the otherwise eligible employee.

During the initial year of eligibility, all participants must receive all required notices related to initial eligibility, including the plan’s Summary Plan Description (SPD).

Beginning in 2024, it is possible that an eligible, nonparticipant who received the Unenrolled Participant Annual Reminder Notice timely (within a reasonable period before the beginning of the plan year) will no longer receive the following, unless requested:

• SPD
• Summary of Material Modifications (SMM)
• Safe Harbor, EACA and QACA notices
• Fund Changes
• Annual Participant Fee Disclosure
• Summary Annual Report

Depending on the plan’s recordkeeper, plan sponsors may see a reduction in their mailing volume and associated fees for the above-listed notices. Plan sponsors and their advisors should understand how their recordkeepers will be addressing this issue and be prepared to answer participant questions should they arise.

In its request for information (RFI) in August of 2023, the DOL inquired what additional guidance plan administrators may need to implement this simplified disclosure process, including whether the notice should include additional information and whether a model notice would be helpful. The DOL also asked whether it should provide additional criteria for determining if participants are unenrolled. Comments were due October 10, 2023, and we are still awaiting the outcome.

Conclusion
Effective for 2023 and later years, SECURE 2.0 allows for a simpler way to satisfy plan notice requirements for otherwise eligible participants who choose NOT to participate by providing a single Unenrolled Participant Annual Reminder Notice. Plan sponsors and their advisors should understand how their recordkeepers will be addressing this issue and be prepared to answer participant questions should they arise.

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Special Notice Requirements for 401(k) Discretionary Matching Contributions

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“Can you explain the special written disclosure rules that apply to certain 401(k) plans that use a discretionary matching contribution formula?”

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 Minnesota is representative of a common inquiry related to a discretionary matching contribution in a 401(k) plan.

Highlights of the Discussion

Sponsors using pre-approved plan documents for their 401(k) plans that apply a discretionary matching contribution formula must satisfy special notice requirements in years a match is provided. This requirement came about as a result of the Cycle 3 Restatement in 2022.

For businesses that elect to apply a fully discretionary matching contribution formula (i.e., where the rate or period of the matching contribution is not pre-selected) in their pre-approved plans, the IRS has made it clear that such plans still must satisfy the “definitely determinable benefits” requirement of Treasury Regulation Section 1.401-1(b)(1)(I). According to the regulation, a plan must provide a definite predetermined formula for allocating the contributions made to the plan. Consequently, any pre-approved document with discretionary matching contributions will have to have language that complies with the definitely determinable mandate, and adopting employers will have to

1. Provide the plan administrator or trustee written instructions no later than the date on which the discretionary match is made to the plan describing

  • How the discretionary match formula will be allocated to participants (e.g., a uniform percentage of elective deferrals or a flat dollar amount),
  • The computation period(s) to which the discretionary matching formula applies; and, if applicable,
  • A description of each business location or business classification subject to separate discretionary match formulas.

2. Provide a summary of these instructions to plan participants who receive an allocation of the discretionary match no later than 60 days following the date on which the last discretionary match is made to the plan for the plan year.

Example:

ABC Inc., has a calendar year, pre-approved 401(k) plan with a completely discretionary matching formula. For the 2023 plan year, ABC has decided to make a fully discretionary matching contribution on April 1, 2024. In this case, if ABC carries through with its intended matching contribution, the deadline to notify the plan administrator is April 1, 2024, and then the deadline to provide the participant communication is May 30, 2024.

Note that these requirements do not apply to pre-approved 403(b) plans as they are subject to a separate pre-approval process (Cycle 2) (See Q&A 11 of Q&As for 2nd Cycle Preapproved 403(b) Plan Providers).

As part of a prudent governance process, plan sponsors should work with their pre-approved document providers and recordkeepers to review their procedures surrounding their plans’ matching contributions to ensure compliance with these requirements. Some pre-approved document providers have sample communication language available for plan sponsors who give discretionary matching contributions.

Conclusion

Employers that use a pre-approved 401(k) plan and give discretionary matching contributions must satisfy additional administrator and participant communication requirements to satisfy the definitely determinable benefit requirement of treasury regulations.

© Copyright 2024 Retirement Learning Center, all rights reserved