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CalSaver’s Plan and Federal Plan Startup Tax Credit

 “A number of my business clients have been required to adopt the Calsaver’s plan for their employees. Now I see the SECURE Act 2.0 of 2022 sweetened the federal tax credit for plan startup costs for businesses with 50 or fewer employees. If a business has adopted the CalSaver’s plan is the plan startup tax credit still available to them?”

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 dealt with a question on CalSaver’s plan.

Highlights of Discussion
The good news is, “yes,” small business owners that adopted the CalSaver’s plan will still qualify for the federal plan startup tax credit if they want to upgrade from the CalSaver’s plan to a simplified employee pension (SEP), savings incentive match plan for employees (SIMPLE) or qualified plan (e.g., 401(k) plan) and they otherwise qualify for the tax credit (i.e., had 100 or fewer employees who received at least $5,000 in compensation for the preceding year; and had at least one plan participant who was a nonhighly compensated employee).

The federal plan startup credit under IRC Sec. 45E is not available if, during the three-taxable year period immediately preceding the first taxable year for which the credit would otherwise be allowed, the employer or any member of any controlled group including the employer (or any predecessor of either), established or maintained a “qualified employer plan” with respect to which contributions were made, or benefits accrued, for substantially the same employees as are in the new qualified employer plan. A CalSaver’s plan is a payroll deduction Roth IRA—completely employee funded. It is not considered a qualified retirement plan that would preclude a small employer from being eligible to claim the plan startup credit if the employer is otherwise eligible.

Section 102 of the SECURE Act 2.0 of 2022 (see page 819) increases the plan startup credit from 50 percent to 100 percent of eligible plan startup cost up to $5,000 for the first three years for employers with up to 50 employees. Prior rules still apply for those with 51-100 employees. What’s more, there is an additional credit available for defined contribution plans that is a percentage of employer contributions made for five years on behalf of employees, up to a per-employee cap of $1,000. The contribution credit is phased out for employers with between 51 and 100 employees.

Conclusion
A CalSaver’s plan is a payroll deduction Roth IRA—completely employee funded. It is not considered a qualified retirement plan that would preclude a small employer from being eligible to claim the federal plan startup credit if the employer is otherwise eligible and establishes a SEP, SIMPLE or qualified plan.

 

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403(b)s and CITs—Yes or No?

“I’ve heard conflicting statements on whether SECURE Act 2.0 allows 403(b) plans to invest in collective investment trusts (CITs). Can you answer the question definitively?”

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 dealt with a question on 403(b) plans and CITs.

Highlights of Discussion

The ability for 403(b)s to invest in CITs is regulated by both the IRS under the tax code and the Securities Exchange Commission (SEC) under the Securities Act of 1933 (The ’33 Act), the Securities Exchange Act of 1934 and the Investment Company Act of 1940 (The ’40 Act). Section 128 of SECURE Act 2.0 of 2022 (SECURE 2.0) does amend the IRS’s Internal Revenue Code (IRC) at section 403(b)(7) to allow 403(b) plans to invest in CITs, effective January 1, 2023 (see page 872 for Section 128). 

However, Section 128 of SECURE 2.0, as enacted, does not, simultaneously, amend The ’33 Act [specifically, Section 3(a)(2)], the Securities Exchange Act of 1934 [specifically, Section 3(a)(12)(C)] and The ’40 Act [specifically, Section 3(c)(11)], to allow 403(b)s use CITs.  An earlier version of the provision (at that time Section 104), passed by the House of Representatives, would have made conforming amendments across all governing sources. When the dust settled, only the language amending the IRC remained in the final version of the law signed on December 29, 2022.

Conclusion

While amendments pursuant to SECURE Act 2.0 allow 403(b) plans to invest in CITs from the IRS’s perspective, SEC rules still prohibit such investing practices at this time.[1]

 

[1] Exception: 403(b)(9) retirement income accounts offered by church plans are not subject to the investment restrictions of 403(b)s.

 

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Group of Plans Audit Requirement

A recent call with a financial advisor from Minnesota dealt with a question on Group of Plans (GoPs). The advisor asked: “Did the DOL or IRS ever conclude whether a GoPs is subject to the annual Form 5500 audit requirement?”

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 Discussion

This is a timely question as the SECURE Act of 2022, enacted as part of the Consolidated Appropriations Act, 2023, addresses this question specifically.  Section 345 of the law clarifies that plans filing as a GoPs will submit an auditor’s opinion if a plan, individually, has 100 participants or more. In other words, any audit required shall relate only to each individual plan that would otherwise be subject to an independent audit. The new rule took effect on December 29, 2022.

For more details on GoPs, please see a related case: Group of Plans or Defined Contribution Group Plans.

Conclusion

The SECURE Act created a consolidated Form 5500 filing option for GoPs beginning with the 2022 plan year. SECURE Act 2.0 of 2022 clarified the application of the independent auditor’s report as applying to individual plans within the GoPs.

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Too Late for a SAR?

“My client has not distributed the summary annual report (SAR) for his 401(k) plan for 2021.  Is he past the deadline to provide the SAR to participants?”

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 in Florida relates to the timing of a plan’s summary annual report.

Highlights of Discussion

The date a plan sponsor must deliver a SAR to plan participants and beneficiaries is tied to the end of the plan year—unless the individual has an extension to file the plan’s Form 5500. (The SAR is a summary of Form 5500 information.) If your client had an extension to file the plan’s Form 5500 for the 2021 plan year, he may still have time to timely distribute a SAR.

The regulations require distribution of the SAR within nine months after the close of the plan year (or two months after the Form 5500 filing). The Form 5500 for a plan is generally due seven months after the end of the plan year (i.e., July 31st for a calendar year plan). So, generally, a calendar year plan has a SAR distribution deadline of September 30th following the end of the plan year.

However, if the plan sponsor has an extension to file Form 5500 for the year, the sponsor also has additional time to provide the SAR (i.e., two months after the close of the filing extension [DOL Reg. § 2520.104b-10(c)]. For example, if a calendar year plan has an extension to file Form 5500 until October 15th of the following year, the plan sponsor must distribute the SAR for the plan by December 15th.

Example:

Toy Time Inc., as a calendar year 401(k) plan that had an extension to file its Form 5500 for the 2021 plan year until October 15, 2022. That means, the SAR for Toy Time’s 401(k) plan is due to participants and beneficiaries by December 15, 2022.

Conclusion

A SAR is a summary of Form 5500 information that must be given to plan participants and beneficiaries annually and upon request. The regulations require distribution of the SAR within nine months after the close of the plan year or, if there is a filing extension for Form 5500, within two months after the close of the filing extension.

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The ABCs of 401(h) Plans

“My client asked what are considered qualified medical expenses for a 401(h) plan. Can you give me a rundown of the important points to know about these plans?”

Highlights of Discussion

A “401(h) plan” is a retiree medical benefit account that is set up within a defined benefit pension plan (or money purchase pension plan or annuity plan) to provide for the payment of benefits for sickness, accident, hospitalization and “medical expenses” for retired employees, their spouses and dependents. The arrangement must meet the requirements of Internal Revenue Code Section (IRC §) 401(h)(1)-(6).

The term medical expense means expenses for medical care as defined in section IRC §213(d)(1), which include amounts paid for

  • The diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body,
  • Transportation primarily for and essential to medical care,
  • Qualified long-term care services or
  • Insurance (including Part B Medicare premiums and any qualified long-term care insurance).

Note that the plan document language can modify timing of distributions, what benefits are covered and to whom the plan is offered as well, although a 401(h) account cannot discriminate in favor of officers, shareholders, supervisory employees, or highly compensated employees with respect to coverage or contributions and benefits.

The amount contributed to the 401(h) account may not exceed the total cost of providing the benefits, and the cost must be spread over the future service. According to Treasury Regulation § 1.401-14(c), a qualified 401(h) account must provide for the following:

  1. Retiree medical benefits must be “subordinate” to the pension benefits;
  2. Retiree medical benefits under the plan must be maintained in a separate account within the pension trust;
  3. For any key employee, a separate account must also be maintained for the benefits payable to that employee (or spouse or dependents) and, generally, medical benefits payable to that employee (or spouse or dependents) may come only from that separate account;
  4. Employer contributions to the account must be reasonable and ascertainable;
  5. All contributions (within the taxable year or thereafter) to the 401(h) account must be used to pay benefits provided under the medical plan and must not be diverted to any purpose other than the providing of such benefits;
  6. The terms of the plan must provide that, upon the satisfaction of all liabilities under the plan to provide the retiree medical benefits, all amounts remaining in the 401(h) account must be returned to the employer

The subordinate requirement is not satisfied unless the plan provides that the aggregate contributions for retiree medical benefits, when added to the actual contributions for life insurance under the plan, are limited to 25 percent of the total contributions made to the plan (other than contributions to fund past service credits). The 401(h) contribution limitation is sometimes referred to as the “subordination limit,” since its purpose is to insure that medical contributions are subordinate to the contributions for pension benefits.

Aside from employer and/or employee contributions to a 401(h) account, plan sponsors with overfunded, terminating defined benefit plans may make tax-free “qualified transfers” (a.k.a., “420 transfers”) to related 401(h) accounts. Limitations apply, and the amount transferred is not considered a reversion subject to either income or excise taxes. This provision is set to expire for transfers made after December 31, 2025.

Conclusion

Pension plan sponsors may find 401(h) accounts appealing as one way to provide for the payment of retiree medical benefits. Depending on the terms of the plan, a 401(h) account can receive employer and/or employee contributions as well as transfers of excess pension benefits, provided certain requirements are met. 401(h) account contributions are tax deductible; earnings are tax-deferred; and distribution can be tax free.

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Is There Still Time for a Safe Harbor Plan for 2022?

“My client, who has a traditional 401(k) plan, would like to change to a safe harbor plan for 2022. Is it too late to do that?”

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
It still may be possible for your client to have safe harbor plan with a nonelective contribution for 2022. December 1st is a key deadline—but there is also another option if she misses that deadline. 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.

Under Section 103 of the SECURE Act, plan sponsors may amend their plans to add a three percent (3%) 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 deadline would be allowed if the amendment provides

1) a nonelective contribution of at least four percent (4%) of compensation for all eligible employees for that plan year,

and

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

(See Issue Snapshot – Notice Requirement for a Safe Harbor 401(k) or 401(m) Plan)

EXAMPLE:

Safety First, Inc., maintains a calendar-year 401(k) plan. Based on the plan’s preliminary actual deferral percentage (ADP) test (which doesn’t look good), Safety First decides a safe harbor plan is a good idea for 2022. It’s too late to add a safe harbor matching contribution for 2022. However, the business could add a 3% safe harbor nonelective contribution for the 2022 plan year (without prior participant notice) as long as Safety First amends its plan document prior to December 1, 2022. While Safety First still could add a nonelective safe harbor contribution to the plan for 2022 after that date, the minimum contribution would have to be at least 4% of compensation, and the company would have to amend its plan document no later than December 31, 2023.

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 actual deferral percentage (ADP) tests for the year may find this type of plan amendment attractive as a correction measure

 

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The Dos and Don’ts of Aggregating Required Minimum Distributions

“I have a 72-year-old client who is retired.  He has numerous retirement savings arrangements, including a Roth IRA, multiple traditional IRAs, a SEP IRA and a 401(k) plan. Can a distribution from his 401(k) plan satisfy all RMDs that he is obliged to take for the year?

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 Minnesota is representative of a common question involving required minimum distributions (RMDs) from retirement plans.

Highlights of Discussion

No, your client may not use the RMD due from his 401(k) plan to satisfy the RMDs due from his IRAs (and vice versa). He must satisfy them independently from one another. Participants in retirement plans, such as 401(k), 457, defined contribution and defined benefit plans, are not allowed to aggregate their RMDs [Treasury Regulation 1.409(a)(9)-8, Q&A 1]. If an employee participates in more than one retirement plan, he or she must satisfy the RMD from each plan separately.

With respect to your client’s IRAs, however, there are special RMD “aggregation rules” that apply to individuals with multiple IRAs. Under the IRA RMD rules, IRA owners can independently calculate the RMDs that are due from each IRA they own directly (including savings incentive match plan for employees (SIMPLE IRAs, simplified employee pension (SEP) IRAs and traditional IRAs), total the amounts, and take the aggregate RMD amount from an IRA (or IRAs) of their choosing that they own directly (Treasury Regulation 1.408-8, Q&A 9).

RMDs from inherited IRAs that an individual holds as a beneficiary of the same decedent may be distributed under these rules for aggregation, considering only those IRAs owned as a beneficiary of the same decedent.

Roth IRA owners are not subject to the RMD rules but, upon death, their beneficiaries would be required to commence RMDs. RMDs from inherited Roth IRAs that an individual holds as a beneficiary of the same decedent may be aggregated, considering only those inherited Roth IRAs owned as a beneficiary of the same decedent.

403(b) participants have RMD aggregation rules as well. A 403(b) plan participant must determine the RMD amount due from each 403(b) contract separately, but he or she may total the amounts and take the aggregate RMD amount from any one or more of the individual 403(b) contracts. However, only amounts in 403(b) contracts that an individual holds as an employee (and not a beneficiary) may be aggregated. Amounts in 403(b) contracts that an individual holds as a beneficiary of the same decedent may be aggregated [Treasury Regulation 1.403(b)-6(e)(7)].

Conclusion

In most cases, individuals who are over age 72 are required to take RMDs from their tax-favored retirement accounts on an annual basis. There is some ability to aggregate RMDs for IRAs and 403(b)s, but one must be careful to apply the rules for RMD aggregation correctly. Failure to take an RMD when required could subject the recipient to a sizeable penalty (i.e., 50 percent of the amount not taken).

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Roth IRA or In-Plan Conversion Deadline for 2022 Taxation

“My client wants to complete a Roth conversion. Is there a conversion deadline?”

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 Roth conversion taxation.

Highlights of the Discussion

  • As with any tax-related question, I always start by suggesting individuals talk with their tax advisors regarding their personal financial situations.
  • According to IRS rules, the deadline for completing a Roth IRA or Roth in-plan conversion relates to the year in which your client wants to pay taxes on the conversion. A Roth conversion is taxable in the year it is completed. For example, in order to include the taxable portion of a Roth conversion in income for 2022, the conversion must be completed by December 31, 2022. There is no carryback period for a conversion as there is for making a regular Roth IRA contribution.
  • Note that the IRS just announced the new tax brackets for 2023, and while the same seven tax rates in effect for the 2022 tax year (i.e., 10%, 12%, 22%, 24%, 32%, 35% and 37%) still apply for 2023, there were quite sizeable changes in the width of the income ranges for the various brackets. Therefore, it may be advantageous for your client to compare his 2022 tax bracket to his anticipated 2023 tax bracket when considering the timing for a Roth conversion. Of course, there are other factors that may affect his decision on timing, including how the income from the conversion will affect his applicable tax bracket.

Example:  Soleste and her husband are part of the married-filing-jointly tax-filing category.  For 2022, they anticipate their taxable income will be $180,000. That would put them in the 24% tax bracket. Looking ahead to 2023, they anticipate their taxable income will be about the same (i.e., $180,000). Because of the tax bracket changes for 2023, they will fall into the 22% tax bracket in 2023. Of course, they will have to consider whether the income generated from the conversion will affect which tax bracket applies.

Year/Filing Status Anticipated Income Income Range Tax Rate
2022 Married Filing Jointly $180,000 $178,151 to $340,100 24%
2023 Married Filing Jointly $180,000 $  89,451 to $190,750 22%

Source:  Revenue Procedure 2022-38

Conclusion

The deadline for completing a Roth IRA or Roth in-plan conversion depends on the year in which an individual wants to include the taxable portion of the Roth conversion in income. A Roth conversion is taxable in the year it is completed. To be taxable for a particular year, the conversion must be completed by December 31st.

 

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Don’t Forget About the Benefits of a Qualified Charitable Distribution for 2022

“I have an 84-year-old client with a multi-million dollar IRA.  As you can well image, his required minimum distribution (RMD) for the year is quite large. Do you have any suggestions on how he might reduce the tax impact of such a large RMD?”

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 charitable giving.

Highlights of the Discussion

  • Yes, the first idea that comes to mind is making a qualified charitable distribution (QCD) by December 31, 2022. A QCD is any otherwise taxable distribution (up to $100,000 per year) that an “eligible IRA owner or beneficiary” directly transfers to a “qualifying charitable organization.”(The IRA owner cannot have received the amount.) QCDs were a temporary provision in the Pension Protection Act of 2006. After years of provisional annual extensions, the Protecting Americans from Tax Hikes Act of 2015 reinstated and made permanent QCDs for 2015 and beyond.
  • What are the benefits of making a QCD? Generally, IRA owners must include any distributions of pre-tax amounts from their IRAs in their taxable income for the year. A QCD
    • Is excludable from taxable income (up to $100,000),
    • May count towards the individual’s RMD for the year,
    • May lower taxable income enough for the person to avoid paying additional Medicare premiums and
    • Is a philanthropic way to support a favored charity.
  • Note that making a QCD does not entitle the individual to an additional itemized tax deduction for a charitable contribution.*
  • An eligible IRA owner or beneficiary for QCD purposes is a person who has actually attained age 70 ½ or older, and has assets in traditional IRAs, Roth IRAs, or “inactiveSEP IRAs or savings incentive match plans for employees (SIMPLE) IRAs. Inactive means there are no ongoing employer contributions to the SEP IRA or SIMPLE IRA. A SEP IRA or a SIMPLE IRA is treated as ongoing if the sponsoring employer makes an employer contribution for the plan year ending with or within the IRA owner’s taxable year in which the charitable contribution would be made (see IRS Notice 2007-7, Q&A 36).
  • Generally, qualifying charitable organizations include those described in 170(b)(1)(A) of the Internal Revenue Code (IRC) (e.g., churches, educational organizations, hospitals and medical facilities, foundations, etc.) other than supporting organizations described in IRC § 509(a)(3) or donor advised funds that are described in IRC § 4966(d)(2). The IRS has a handy online tool Exempt Organization Select Check, which can help taxpayers identify organizations eligible to receive tax-deductible charitable contributions.
  • Where an individual has made nondeductible contributions to his or her traditional IRAs, a special rule treats amounts distributed to charities as coming first from taxable funds, instead of proportionately from taxable and nontaxable funds, as would be the case with regular distributions.
  • Be aware there are special IRS Form 1040 reporting steps that apply to QCDs.
  • Section IX of IRS Notice 2007-7 contains additional compliance details regarding QCDs. For example, QCDs are not subject to federal tax withholding because an IRA owner that requests such a distribution is deemed to have elected out of withholding under IRC § 3405(a)(2) (see IRS Notice 2007-7, Q&A 40 ).

Conclusion

Eligible IRA owners and beneficiaries age 70 ½ and over, including those with inactive SEP or SIMPLE IRAs, should be aware of the benefits of directing QCDs to their favorite charitable organizations.

* Apart from a QCD, IRA owners who take taxable IRA distributions and donate them to charitable organizations may be eligible to deduct such amounts on their tax returns for the year if they itemize deductions (Schedule A of Form 1040).  See IRS Tax Topic 506 and IRS Publication 526, Charitable Contributions for more information

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401(k)s and Davis Bacon “Prevailing Wage” Rules

“One of my clients has employees who are subject to a prevailing wage determination. The employer has a QACA 401(k) plan. Could the plan sponsor use deferrals and matching QACA contributions to satisfy the fringe benefit portion of the prevailing wage determination?”

ERISA consultants at the Retirement Learning Center 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 plans, including nonqualified plans. 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 involved a qualified automatic contribution arrangement (QACA) covering participants doing covered employment under the Davis-Bacon Act (also known as prevailing wage).

Highlights of Discussion
Before answering the question, let us lay a bit of a foundation. The Davis-Bacon and Related Acts and Reorganization Plan No. 14 of 1950 (DBRA) requires contractors and subcontractors to pay laborers and mechanics employed on a covered project jobsite not less than the prevailing wage rates (including fringe benefits) listed in the contract’s Davis-Bacon wage. The purpose of the DBRA is to protect communities and workers from competition from nonlocal contractors who might obtain federal construction contracts in the area by underbidding local wage levels. Prevailing wage amounts for both wages and fringe benefits are determined by the Wage and Hours Division of the Department of Labor, however, the Employee Benefits Security Administration (EBSA) is responsible for regulating the application of the fringe benefits under DBRA.

The prevailing wage determination consists of two components: The basic hourly rate and the basic fringe benefit rate. For the purposes of satisfying the wage determination, employers may pay any combination of the basic hourly rate and the fringe benefit amount, so long as the total amount paid equals the total of the basic hourly rate plus fringe benefit in the determination. In other words, the plan sponsor may pay more in cash, and less in fringe benefits than the determination specifies, or vice versa. For a fringe benefit to satisfy the prevailing wage determination, it must be made to a bona fide prevailing wage plan.

With that background out of the way, let us get back to the original question. Elective deferrals made by an employee covered under the DBRA cannot satisfy the fringe benefit portion of the prevailing age determination, because the employer does not make them. Elective deferrals under the DBRA are considered employee contributions subject to the same taxation, testing and regulatory rules applicable to all 401(k) deferrals. As an aside, all contributions made by employees that are paid by employees for fringe benefits must be voluntary under the prevailing wage rules.

However, a plan sponsor can take credit for employer contributions made to a bona fide fringe benefit plan, and a QACA qualifies as such, but there is a catch. For an employer to take full credit for contributions to a bona fide fringe benefit plan, they must be fully vested, or they become subject to a process called “annualization.” A full explanation of annualization is beyond the scope of this discussion, but annualization basically requires a plan sponsor to spread any unvested contributions made to a fringe benefit plan over all the hours worked by a participant doing covered work under DBRA, as well as work that is not covered under DBRA, and it is very common that employees perform work under both DBRA and nonDBRA assignments. Because the employer must spread unvested contributions it makes related to DBRA covered work, over all hours worked by a participant, this typically serves to dilute the value of the contributions that can be used to satisfy the fringe benefit portion of the prevailing wage determination. With QACA plans, when a match is used to satisfy the safe harbor requirement, the match may be subject to a two-year vesting schedule, so there is a possibility that some DBRA-covered participants receiving the match will have their match annualized. Consequently, most Davis-Bacon plans provide for immediate eligibility and full vesting for contributions in order to avoid annualization [(29 C.F.R. § 5.5(a)(1)].

Conclusion
Although QACA matches can be used to satisfy the fringe benefit determination under work covered by the DBRA, an employer may not get full credit for a matching contribution if it is not fully vested. In addition, not all participants will receive the match if they elect not to defer into the plan, so the employer will have to provide those individuals who did not receive the match with an amount in cash commensurate to what the match recipients received. This would complicate the prevailing wage reporting and cost more, because whenever an amount is paid in cash rather than as a fringe benefit, it is subject to Federal Insurance Contributions Act (FICA) and other employment taxes, and these taxes cannot be used to satisfy the DBRA fringe benefit requirements.

Employers may want to consider satisfying their safe harbor requirements and their DBRA fringe benefit obligations by providing a fully vested nonelective safe harbor contribution rather than a nonvested contribution. This approach would be beneficial for several reasons, including,

1. Satisfying the safe harbor requirement for testing;
2. Avoiding annualization since safe harbor nonelective contributions are fully vested;
3. Simplifying the tracking of DBRA fringe benefits because all participants will get the same fringe benefit to the plan;
4. Cost savings on employment taxes since there would be no cash payments made to participants who did not receive a match; and
5. Using the contribution to satisfy the gateway test pursuant to Treasury Regulation 1.401(a)(4)-8(b)(1) if the plan also uses a new comparability profit sharing formula.

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