pension benefits
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Hybrid retirement plans

“Is ‘hybrid’ just another name for a cash balance defined benefit plan?”

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 Colorado is representative of a common inquiry related to hybrid plans.

Highlights of the Discussion

Sort of—a cash balance plan is a type of hybrid defined benefit plan; a pension equity plan is another type of hybrid plan. The term hybrid applies to a category of defined benefit plan that uses a lump-sum based formula to determine the guaranteed benefit (rather than a formula based on years of service and compensation as is the case with most traditional defined benefit plans). A participant must refer to plan documentation to determine which type he or she may have.

Functionally, hybrid plans combine elements of traditional defined benefit plans and defined contribution plans. Hybrid plans specify contributions to an account (or balance) like a defined contribution plan, but guarantee final benefits like a defined benefit plan. Such plans grow throughout an employee’s career and allow employees to see that growth through an account balance. There are basically two types of hybrid plans: cash balance and pension equity. The account for each participant in a hybrid plan is theoretical, and is not actually funded by employer contributions. The employer contributes to the plan as a whole (covering all eligible workers in the plan) to ensure that sufficient funds will be available to pay all benefits.

Cash balance plans were the first type of hybrid plan, emerging in the late 1980s.[1] Under a cash balance plan an employee’s hypothetical account balance is determined by reference to theoretical annual allocations based on a certain percentage of the employee’s compensation for the year and hypothetical earnings on the account. In a typical cash balance plan, a participant’s account is credited each year with a pay credit (such as 5 percent of compensation from his or her employer) and an interest credit (either a fixed rate or a variable rate that is linked to an index such as the one-year Treasury bill rate).

Another common type of hybrid plan is a pension equity plan or PEP. While pension equity plans and cash balance plans share methods of accumulating value, a major difference is the earnings used to determine the benefit. Cash balance plans specify a credit each year, based on that year’s earnings, whereas pension equity plans apply credits to final earnings (IRS Notice 2016-67).

While traditional defined benefit plans specify the primary form of distribution as an annuity (with lump sums sometimes given as a optional form of benefit), hybrid plans specify the primary form of distribution as a lump sum, which can be converted to an annuity (see Treasury Regulation 1.411(a)(13)–1). Pursuant to Revenue Procedure 2019-20, the IRS provides a limited expansion of IRS’s determination letter program for individually designed retirement plans to allow reviews of hybrid plans, as well as merged plans.

The Bureau of Labor Statistics has put together the following comparison table showing the similarities and differences between cash balance and pension equity plans.

table

Conclusion

The term hybrid plan refers to a category of defined benefit plans that uses a lump-sum based formula to determine guaranteed retirement benefits. Cash balance and pension equity plans are the two most common types of hybrid plans. The provisions of the governing plan document will specify which type of hybrid plan a participant may have.

[1] Bureau of Labor Statistics

 

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Where, oh where, have my retirement benefits gone?

“I have a client who has worked in the banking industry for decades and has changed jobs numerous times. Many of his former employers have merged with other institutions or no longer exist. He is not currently receiving any retirement benefits from these past employers, but feels certain he should be. How can he locate his lost retirement plan benefits?”

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 locating lost retirement plan benefits.

Highlights of the Discussion

Given the frequency with which the average U.S. worker changes jobs throughout his or her career (i.e., 12 times)[1], and the merger and acquisition activity in the past decades, it should not be surprising that some workers have lost track of their retirement plan assets. The Employee Retirement Income Security Act of 1974 (ERISA) requires plan sponsors to make efforts to find missing plan participants.[2]

Former participants can take matters into their own hands and search for retirement benefits to which they believe they are entitled. Below is a list of options for locating lost retirement plan assets. There may be other resources as well.

  1. Contact former employer(s) directly if they still exist. Check old tax forms, Forms W-2 and other employment-related documents.
  2. Contact the plan’s recordkeeper or third-party administrator (TPA). This information likely appears on an old plan statement, if available.
  3. Search the Department of Labor’s (DOL’s) Form 5500 database of filings (Form 5500/5500-SF Filing Search) for plan administrator contact information. Many qualified retirement plans are required to file this annual plan report with the IRS and DOL. Using the employer’s tax identification number may be helpful in locating employers and plans that have been merged or changed names.
  4. Try the DOL’s searchable database of abandoned plans, which contains information on retirement plans that have been forsaken by their sponsors.
  5. The Pension Benefit Guaranty Corporation (PBGC) has two ways to assist in benefits searches. First, search the PBGC’s database for unclaimed defined benefit plan pensions. Searchers can also try to locate a plan by whether it is insured or trusteed by the PBGC. Second, search the PBGC’s list of missing participants. As of January 1, 2018, terminating defined contribution plans have the option of transferring missing participants’ benefits to the PBGC for eventual distribution.[3]
  6. Every state has some type of unclaimed property program. Plan sponsors who have failed to locate missing participants or beneficiaries may have escheated the retirement plan assets to their respective state programs. The National Association of Unclaimed Property Administrators is a not-for-profit organization that maintains a database of state programs to help individual’s find missing property.
  7. Searchers could check with The National Registry of Unclaimed Retirement Benefits to see if a former employer has listed a particular person as a missing participant. The registry is a nationwide, secure database listing of retirement plan account balances that have been left unclaimed.
  8. Watch for a notice from the Social Security Administration (SSA): Potential Private Retirement Plan Benefit Information. It is a reminder about private employer retirement benefits that an individual may have earned, also called “deferred vested benefits.” The IRS provides the information to the SSA. It comes from the plan administrators of the private retirement plans in which workers participated.
  9. The nonprofit organization Pension Help America may be able to link searchers with local and regional governmental offices to help locate retirement plan assets and/or solve other benefit issues.

Conclusion

Individuals who have lost track of their retirement plan benefits for whatever reason have several federal, state, regional and local resources available to help them find the retirement benefits to which they are entitled.

[1] https://www.bls.gov/news.release/pdf/nlsoy.pdf

[2] https://www.irs.gov/retirement-plans/missing-participants-or-beneficiaries

 

[3] https://www.pbgc.gov/prac/missing-p-defined-contribution

 

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Deadlines to deposit elective deferrals

“I get confused by the various deposit deadlines for employee salary deferrals. Can you summarize them for me, please?” 

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 North Carolina is representative of a common inquiry related to depositing employee salary deferrals.  

Highlights of the Discussion

The following table summarizes the Department of Labor’s (DOL’s) deferral deposit deadlines for various plan types.

Plan Type Deadline Citation
Small 401(k) Plan

A plan with fewer than 100 participants

 

Safe Harbor Rule: The plan sponsor has seven business days following the day on which such amounts were withheld to deposit them to the plan. DOL Reg. 2510-3-102(a)(2)

 

Large 401(k) Plan

A plan with 100 or more participants

The plan sponsor must deposit deferrals as soon as they can be reasonably segregated from the employer’s assets, but not later than 15 business days following the month the deferrals are withheld from the participants’ pay. DOL Reg. 2510-3-102(a)(1) and (b)(1)

 

Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) IRA Deferrals must be deposited within 30 days after the end of the month in which the amounts would otherwise have been payable to the employee. DOL Reg. 2510.3-102(b)(2)

 

Salary Reduction Simplified Employee Pension (SAR-SEP)

An IRA-based plan with 25 or fewer employees.

Safe Harbor Rule: The plan sponsor has seven business days following the day on which such amounts were withheld to deposit them to the plan. DOL Reg. 2510-3-102(a)(2)

 

Conclusion

The DOL’s top compliance concern is the timely deposit of employee salary deferrals to their respective plans. Plan sponsors and service providers must ensure policies and procedures are in place to ensure deferral deposit deadlines are met.

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Rollovers to Qualified Retirement Plans

“My client changed jobs and was hoping to move at least a portion of his prior 401(k) plan balance to his new employer’s 401(k) plan? When he inquired about the rollover with the new employer, he was told that the plan cannot accept his rollover. I thought all qualified retirement plans had to offer rollovers. What could be the issue here?”  

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 to rollovers to qualified retirement plans.

Highlights of the Discussion

Some qualified plan distributions simply are not eligible for rollover (e.g., required minimum distributions, excess contributions, substantially equal periodic payments, etc.).[1]  But, in this case, I think the new employer may be refusing the rollover because its plan does not accept some or all rollover amounts—period.

While is it true that pursuant to Internal Revenue Code Section (IRC §) 401(a)(31) the IRS requires qualified plans to offer distribution recipients a direct rollover option of their eligible rollover distributions of $200 or more to an eligible retirement plan, it imposes no such requirement that an eligible retirement plan accept rollovers. Thus, a plan can refuse to accept rollovers if the language of the governing plan document does not address the ability of the plan to receive eligible rollover distributions. Even if a plan accepts rollovers of eligible amounts, a plan could limit the circumstances under which it will accept rollovers. For example, a plan could limit the types of plans from which it will accept a rollover or limit the types of assets it will accept in a rollover (See Treasury Regulation Section 1.401(a)(31)-1, Q&A 13). Plan administrators must apply their policies regarding the acceptance of rollovers in a nondiscriminatory and uniform manner to all participants.

Statistically speaking, 97 percent of all qualified retirement plans accept some types of rollovers.[2] That number declines based on the size of the receiving plan. It is more likely that a plan will limit the sources of rollover contributions. For example, 66 percent of all plans surveyed accept rollovers from IRAs; 46 percent accept rollovers from defined benefit pension plans; and 40 percent accept rollovers from governmental 457(b) plans.[3]

Some plans will limit when they will accept rollover contributions. For example, some plans make new hires wait until they satisfy the eligibility requirements to make deferrals before being eligible to bring in a rollover contribution.

The best guidance is to have your client confirm with the new plan administrator—perhaps through the HR Department—whether or not rollovers are allowed according to the plan document, and, if so, what type of contributions the plan will accept and when.

The IRS has a number of helpful links on its website covering rollover information; here are a few:

Conclusion

A plan can refuse to accept or limit rollovers coming in depending on the language of the governing plan document. When in doubt—check the plan document provisions regarding rollovers. Plan administrators must apply their policies regarding the acceptance (or nonacceptance) of rollovers in a nondiscriminatory and uniform manner to all participants.

[1] Treas. Reg.§ 1.402(c)-2(Q&A 3 and 4)

 

[2] Plan Sponsor Council of America, 61st Annual Survey, 2018

[3] Ibid

 

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Roth 401(k)s and the Five-Year Clock

“Can you explain how the ‘five-year clock’ applies to Roth 401(k) contributions?”

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 to designated Roth contributions in a 401(k) plan.

Highlights of the Discussion

Distributions of Roth 401(k) contributions (i.e., designated Roth contributions) can be taken tax and penalty free if the participant meets certain conditions for a “qualifying distribution.” A qualifying distribution is one that is made after a five-taxable-year period of participation (“the five-year clock”), and the participant has attained age 59 ½, has become disabled, or in the case of a beneficiary, following the participant’s death.

The five-year clock begins on the first day of the participant’s taxable year in which he or she first makes designated Roth contributions to the plan. If the first Roth contribution is a rollover of designated Roth contributions from another 401(k) plan, the starting of the five-year clock depends on whether the rollover is direct or indirect.

If the participant completes a direct rollover from a designated Roth account under another 401(k) plan, the five-year period is deemed to have begun on the first day of the taxable year that the employee made Roth 401(k) contributions to the other plan. In contrast, an indirect rollover contribution restarts the five-year clock under the receiving plan for a participant who has made no prior Roth 401(k) contributions to the receiving plan (Treasury Regulation 1.402A-1, Q&A 4).

Conclusion

Since the five-year clock for determining a tax-free, qualifying distribution of Roth 401(k) contributions begins on the first day of the participant’s taxable year in which he or she first makes a designated Roth contribution to the plan, it may be wise for a participant—if he or she has the option—to designate even $1 of elective contributions as a Roth 401(k) contribution right away in order to start the ticking of the five-year clock. And if a participant is rolling over Roth 401(k) contributions—a direct rollover is the only way to avoid restarting the five-year period.

 Ro

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IRS Self Correction Program

“I’ve heard that plan sponsors now have more opportunities to self correct their retirement plans without IRS submission than before. Could you explain?”

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 Texas is representative of a common inquiry related to a plan sponsor’s ability to self correct its retirement plan without any IRS filing or fees.

Highlights of the Discussion

New Revenue Procedure (Rev. Proc.) 2019-19, effective April 19, 2019, contains updates to the IRS’s Employee Plans Compliance Resolution System (EPCRS), primarily with respect to the Self Correction Program (SCP) contained within. The other correction programs under EPCRS are the Voluntary Correction Program (VCP) and the Audit Closing Agreement Program (Audit CAP). In the past, SCP was reserved for the correction of certain Operational Failures (i.e., failures in which the sponsor did not operate the plan according to the terms of the plan document). SCP is expanded under Rev. Proc. 2019-19 and, under specific criteria, now allows for self correction of

  1. Certain plan document failures for 401(k) and 403(b) plans;
  2. Certain plan loan failures; and
  3. More operational failures by plan amendment.

SCP-eligible plan document failures

Rev. Proc. 2019-19 was revised to allow self correction for 401(k) and 403(b) plans that fail to adopt a required or interim amendment timely. Keep in mind these document failures are always treated as “significant failures” in the IRS’s eyes. That means, in order to use SCP, the plans must be substantially corrected, in most cases, by the last day of the second plan year following the plan year of the failure (see Section 9 of the Rev. Proc. 2019-19).

EXAMPLE

A calendar-year plan missed an interim amendment that should have been adopted by March 15, 2018. The sponsor can correct under SCP no later than the end of 2020.

Plan document failures may be corrected under SCP only if the plan, as of the date of correction, has a favorable IRS approval letter (e.g., opinion, advisory, or determination). 403(b) plan sponsors must have timely adopted a written plan effective January 1, 2009, or have corrected the document already under VCP or Audit Cap.

SCP-eligible plan loan failures

Errors relating to the failure to repay a plan loan according to plan terms (a defaulted loan) may now be corrected under SCP. The correction methods are 1) a single-sum repayment of the loan, 2) re-amortization of the outstanding loan balance for the remaining loan period, or 3) a combination of the two.

The failure of a plan to obtain spousal consent for a plan loan, when necessary, may now be corrected through SCP. The plan sponsor must notify the affected participant and spouse, so that the spouse can provide spousal consent. If the plan sponsor does not obtain spousal consent, the failure must be corrected using either the IRS’s VCP or Audit CAP.

Finally, if a participant takes more loans from the plan than the governing document says he or she can, an Operational Failure occurs. The sponsor may choose to self correct this type of error by adopting a retroactive plan amendment.

SCP-eligible operational failures

Aside from those listed above, other operational failures may qualify for correction by plan amendment under SCP. In order to be eligible, the following three conditions must be satisfied:

  1. The amendment results in an increase of a benefit, right, or feature for participants;
  2. The increase is available to all eligible employees; and
  3. Providing the increase is permitted under the Internal Revenue Code, and satisfies the general correction principles of EPCRS Section 6.02.

Conclusion

Plan sponsors can use the expanded provisions of the SCP according to Rev. Proc. 2019-19 to correct more plan failures without having to file with the IRS and pay a user fee.

 

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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 August 20, 2019, 10 states have succeeded in enacting laws creating retirement savings programs for private-sector workers. [1]

State Plan Name Type of Plan
1.     California California Secure Choice Retirement Savings Program Automatic Roth IRA
2.     Connecticut Connecticut Retirement Security Program Automatic Traditional or Roth IRA
3.     Illinois Illinois Secure Choice Savings Program Automatic Roth IRA
4.     Maryland Maryland Small Business Retirement Savings Program Automatic Traditional IRA
5.     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.
6.     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.
7.     New York New York State Secure Choice Savings Program Payroll Deduction Roth IRA
8.     Oregon OregonSaves

 

Automatic Roth IRA
9.     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
10.  Washington Washington’s Small Business Retirement Marketplace

 

A marketplace where qualified financial services firms offer low-cost retirement savings plans to businesses and individuals

Another 24 states have introduced legislation on this topic that is still under consideration: Arizona, Colorado, Georgia, Iowa, Indiana, Kentucky, Louisiana, Maine, Michigan, Minnesota, New Hampshire, Nebraska, New York, North Carolina, North Dakota, Ohio, Pennsylvania, Rhode Island, South Carolina, Utah, Vermont, Virginia, West Virginia and Wisconsin.

Conclusion

Considering that federal legislation to address the retirement security of American works has progressed at a snail’s pace, some state legislatures have taken on the task and enacted laws that create state-sponsored retirement savings plans for private-sector workers. Many other states are considering similar action.

[1] AARP Public Policy Institute, State Retirement Savings Resource Center, August 2019

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What is a 10b5-1 plan?

“Is a 10b5-1 plan a type of qualified retirement plan?”

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 Kansas is representative of a common inquiry related to trading securities.

Highlights of the Discussion

No, it is not a “qualified plan” in the sense of a 401(k) or profit sharing plan, which meets requirements for favorable tax treatment under Internal Revenue Code 401(a). A 10b5-1 plan is a buy/sell agreement for securities that meets the requirements of the Securities Exchange Commission’s Rule 10b5-1 related to “insider trading.”

Legal insider trading occurs when corporate insiders—officers, directors, and employees—buy and sell stock in their own companies and report their trades to the SEC. Illegal insider trading refers to an insider using material, nonpublic information to buy or sell securities to his or her  advantage.  A 10b5-1 plan is a written contract between an insider and his or her broker to buy or sell company stock at a time when the insider is not in possession of any restricted information related to the stock. A 10b5-1 plan is a way for insiders to trade company securities and minimize legal exposure by giving them an affirmative legal defense. An affirmative defense is not a safe harbor nor will it protect a person from allegations of wrongdoing. It allows a person to refute allegations of wrongdoing.

In order for a 10b5-1 plan to serve as a defense against charges of insider trading, it must meet the following criteria:

  1. Entered into in good faith without intent to abuse Rule 10b5-1;
  2. Adopted when the individual trading the security was not aware of any material, nonpublic information;
  3. The terms of the plan contains a pre-set formula for determining the amount, price and date of transactions;
  4. The individual subsequently cannot affect criterion #3 once it is in place;
  5. The purchase or sale of the security was made according to the plan.

Anyone can adopt a 10b5-1 plan, although it is generally used by large stock holders, directors and officers of the company. A company’s internal trading policies should address 10b5-1 plans, if they are offered.

EXAMPLE

Erin, an executive at Enrun Corporation, executes a written, one-year contract between herself and her broker that instructs the broker to sell 10,000 shares of Enrun on the first trading day of each month and twice as many shares (20,000) if the price has increased by 5% since the prior sale date. On the surface, this contract, generally, would meet the requirements to be a 10b5-1 plan.

Conclusion

A properly executed 10b5-1 plan can stand as an affirmative defense against allegations of insider trading for someone who is in a position to have material, nonpublic information. Extreme care should be used when establishing and using such plans as they are not infallible, however. Consult a legal expert.

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Financial Wellness

“I’ve heard the broad term ‘financial wellness or wellbeing’ more and more frequently in relation to retirement plan participants. What is financial wellness?” 

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 Colorado is representative of a common inquiry related to plan participant education.

Highlights of the Discussion

The phrase likely started with the Consumer Financial Protection Bureau (CFPB). It seems the CFPB had concluded employee financial education has not been successful in encouraging plan participants to save more for retirement. The CFPB suggests the way to fix the problem of faulty employee education is by redefining 1) what the goal of financial education is, and 2) how employees can get there, within the context of behavioral economics/finance.

In 2015, the CFPB defined the goal of financial education as “financial wellbeing,” in its report Financial Well-being: The Goal of Finance Education. Financial well-being is a state of being wherein a person can fully meet current and ongoing financial obligations, can feel secure in his or her financial future, and is able to make choices that allow enjoyment of life. The CFPB has concluded overall financial wellness consists of four elements as illustrated below.

In the last four years, the percentage of plans that offer a comprehensive financial wellness program has grown from 16% to 23%, according to the Plan Sponsor Council of America. What are the most common employee concerns addressed by financial wellness programs?

  • Getting overall spending under control (41%),
  • Preparing for retirement (39%),
  • Paying off debt (31%),
  • Saving more for major goals (e.g., purchases, home, education) (27%),
  • Better management of my investments/asset allocation (23%), and
  • Better manage of healthcare expenses/saving for future healthcare expenses (12%).

The Employee Benefits Research Institute (EBRI) found an overwhelming majority of workers thought the following financial wellness programs would be either very or somewhat helpful:

  • Help calculating how much to save for a secure retirement (75%);
  • Help calculating how much to anticipate spending each month in retirement (72%);
  • Planning for health care expenses in retirement (72%); and
  • Help with comprehensive financial planning (68%).

The CFPB conducted a five-year study on consumer financial education, which culminated in a 2017 report in which it identified five principles of financial education that make the biggest difference between financial success and failure.

Principle 1: Tailor information to the specific circumstances, challenges, goals, and situational factors of the individuals served. Avoid a one-size-fits-all approach.

Principle 2: Provide timely information that is relevant and actionable to a specific situation or goal, so that information and skills are more likely to be retained.

Principle 3: Improve key financial skills.

Principle 4: Help people build qualities that strengthen and reinforce their determination to take specific steps to achieve their financial goals.

Principle 5: Help create habits and systems so that it’s easy to follow through on decisions.

The CFPB has a resource guide available on how to launch a workplace financial wellness program by following eight basic steps:

  1. Focus on your human resources (HR) strategy;
  2. Identify possible internal challenges;
  3. Understand your workforce’s unique needs;
  4. Decide which financial topics to highlight;
  5. Leverage existing employee benefits;
  6. Expand your employee offerings with more financial education resources;
  7. Use existing or new channels and opportunities to deliver resources; and
  8. Establish metrics for success for your financial wellness program.

Conclusion

Financial wellness is more than educating plan participants. It is taking financial education to the next level to help plan participants fully meet current and ongoing financial obligations, feel secure in their financial future, and be able to make choices that allow enjoyment of life.

 

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What is a stretch IRA?

“What is a stretch 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 Arkansas is representative of a common inquiry related to beneficiary payout timelines.

Highlights of the Discussion

Contrary to popular belief, a stretch IRA is not a unique type of IRA. It is simply a type of distribution strategy that allows beneficiaries, and beneficiaries of beneficiaries, to base IRA payouts on the longest life expectancy permitted under the circumstances. Any regular IRA, simplified employee pension (SEP) IRA, saving incentive match plan for employees (SIMPLE) IRA or Roth IRA can be a stretch IRA. The stretching feature is achieved by applying standard distribution rules that allow beneficiaries to prolong payouts over an applicable life expectancy.

According to Treasury regulations, following the death of an IRA owner or plan participant, typically, the beneficiary has the option to take life expectancy payments. Moreover, if the beneficiary has not exhausted the payments upon his or her death, a subsequent beneficiary may continue the payments over the course of the remaining schedule. Note that some IRA beneficiary forms allow a beneficiary to name a beneficiary, whiles others do not. Most qualified retirement plan beneficiary forms do not permit a beneficiary to name a beneficiary.

EXAMPLE

Herb, age 75, has an IRA valued at $2 million. His wife, Judith, who is 20 years his junior, is his beneficiary. The couple has a special-needs child, Richard, who is 30 years old. Herb has been taking RMDs based on the joint life expectancy of Judith and himself (because she is more than 10 years younger than he). As a result of failing health, Herb passes away. Rather than treat the IRA as her own, which would subject her to the early distribution penalty tax for any amounts taken before she reaches age 59 1/2, Judith begins life expectancy payments as a beneficiary. Because the IRA forms permitted it, Judith named Richard as the beneficiary of her inherited IRA. At age 58, Judith dies. Richard may continue distributions from the IRA over Judith’s remaining life expectancy, nonrecalculated.

The ability to do a stretch IRA may come to an end if HR 1994 Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) is enacted into law. Section 401 of the bill would modify the required minimum distribution rules with respect to defined contribution plans and IRAs upon the death of the account owner. Under the legislation, depletion of the account would be required by the end of the 10th calendar year following the year of the employee or IRA owner’s death. A few exceptions would apply.

Conclusion

A stretch IRA is not a specific type of IRA but, rather, is a distribution strategy that allows beneficiaries, and beneficiaries of beneficiaries, to continue IRA payouts on the longest life expectancy permitted pursuant to the given circumstances. A stretch IRA is only permitted if the underlying beneficiary forms can accommodate a beneficiary naming a beneficiary. Legislative changes have been proposed that would, if enacted, eliminate stretch IRAs.

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