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Relief for Variable Rate PBGC Premiums

“My client is delaying a portion of her defined benefit plan contribution that is due in 2020 until January 1, 2021, as allowed under the Coronavirus Aid, Relief and Economic Security (CARES) Act. However, she already filed and paid her PBGC premiums for 2020, which showed an underfunding liability because of the delayed contribution. Consequently, she was required to pay more in variable rate premiums than she would have had to pay if she had made her contributions in 2020. Is she stuck with the higher variable-rate premium, or is there a way for her to get back the overpayment?”

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 the payment of Pension Benefit Guaranty Corporation (PBGC) premiums.

Highlights of the Discussion

Yes, there is a way to get a refund of an overpayment in variable-rate premiums in this unusual situation. Fortunately, the PBGC realized the discrepancy that was created, and came up with a way to rectify the matter in its September 2020 Technical Update 20-2. Under this guidance, a prior year contribution received after the PBGC premium was filed and on or before January 1, 2021, may be included in the asset value used to determine the variable-rate premium. This relief did not change the premium due dates, however, (e.g., October 15, 2020, for calendar year plans), and does not permit a premium filing to reflect a contribution that has not yet been made. Therefore, plan sponsors that want to take advantage of this relief must amend their 2020 PBGC premium filing by February 1, 2021, to revise the variable-rate premium data to add in contributions due in 2020 that are made on or before January 1, 2021. Once the PBGC approves the amended filing, it will refund any excess variable-rate premium, or credit the excess to the plan’s “My Plan Administration Account” (whichever option the plan sponsor elects).

For a bit of background, the PBGC is the governmental entity that insures private sector defined benefit plans. All single employer defined benefit plans are required to pay a flat rate premium annually to the PBGC for coverage based on the number of participants in the plan. Additionally, for plans that are underfunded (i.e., where plan liabilities exceed assets), a variable-rate premium also applies based on the plan’s unfunded vested benefits (UVBs).

Conclusion

Plan sponsors who remitted their PBGC premiums on time for 2020, who also are delaying a contribution due in 2020 until January 1, 2021, pursuant to the CARES Act, may have become subject to or were required to pay higher variable-rate premiums because of the delayed plan contribution. Such sponsors may be entitled to a refund of some or all of the variable-rate premiums paid. They can reclaim an overpayment by submitting an amended PBGC premium filing by February 1, 2021, to claim a refund or credit.

 

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Are conduit IRAs still a thing?

“My client wants to take an in-service distribution from his 401(k) plan and roll it to an IRA.  He wants to know if he should roll it to a new, separate IRA (i.e., a conduit IRA) or if it is OK to commingle the rollover with the assets in his existing 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 Florida is representative of a common inquiry related to qualified plan-to-IRA rollovers.

Highlights of the Discussion

While there is no law or regulation that requires an individual to segregate assets rolled over from a qualified retirement plan in a separate or conduit IRA that holds only those assets, there are some tax and creditor protection reasons why your client may want to consider a conduit IRA. Below are three examples.

Retain the ability to roll the assets back to an employer-sponsored plan.

If your client intends to roll over the IRA assets that originated in a qualified retirement plan to another qualified retirement plan at a later date, he should be aware that some retirement plans will only accept rollovers that have been maintained in a conduit IRA and not commingled with other assets. Plan language will dictate which assets from an IRA, if any, a plan will accept as a rollover.

Preserve certain tax benefits for those born before January 2, 1936.[1]

Plan participants who were born before January 2, 1936, who receive lump-sum distributions from qualified plans may be able to elect special methods of figuring the tax on the distributions. First, assets in the plan from active participation before 1974 may qualify as capital gains, subject to a 20 percent tax rate (instead of ordinary income tax rates). Second, such individuals also may be able to use a 10-year tax option (i.e., 10-year forward averaging) to figure the taxes on the ordinary income portion of their lump sum distributions. This special option allows an eligible individual to figure the tax on his/her lump-sum distribution by applying 1986 tax rates to 1/10th the amount of a lump sum distribution, then multiplying the resulting tax amount by 10. This tax is payable for the year in which a person receives the lump-sum distribution. Taxpayers who qualify for the capital gains or 10-year forward averaging tax treatments who are contemplating a rollover must use a conduit IRA in order to preserve their ability to take advantage of these options should they later roll the assets back to a qualified plan (IRS Fast Sheet 2003-04).

Ensure creditor protection in bankruptcy is preserved.

As a result of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, individuals can exempt certain qualifying assets from their estates for bankruptcy protection. Assets in a defined contribution plan (including a 401(k) plan), or in a defined benefit, 403(b), 414, 457 or 501(a) plan are protected from bankruptcy in their entirety with no limit. Even old “Keogh” plans (qualified retirement plans for owner-only businesses) have unlimited protection in bankruptcy situations. Assets rolled over from one of the protected plans to an IRA retain the unlimited bankruptcy protection given to them while held in the plan. In contrast, contributory assets in a traditional or Roth IRA are protected from bankruptcy up to the 2020 limit of $ $1,362,800 (i.e., 1,000,000 adjusted periodically for inflation). When determining bankruptcy protection, it may be advantageous from a recordkeeping standpoint for an individual to keep rollover assets from a retirement plan in a conduit IRA separate from assets in his/her contributory IRA.

Conclusion

While not mandated by the IRS or DOL, conduit IRAs may still play a helpful role for some individuals. Before completing a qualified plan-to-IRA rollover, it would be prudent for plan participants to consult with their tax and legal advisors about whether they would benefit from using a conduit IRA.

[1] IRS Form 4972, Tax on Lump Sum Distributions

 

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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 October 6, 2020, 12 states have succeeded in enacting laws creating retirement savings programs for private-sector workers. [1] One city—Seattle, WA—has also enacted an auto IRA program.[2] The following represents a high-level overview of the various plans.

State/City Plan Name Type of Plan
1.     California California Secure Choice Retirement Savings Program Automatic Roth IRA
2.     Colorado Colorado Secure Savings Program Automatic Traditional IRA
3.     Connecticut Connecticut Retirement Security Program Automatic Traditional or Roth IRA
4.     Illinois Illinois Secure Choice Savings Program Automatic Roth IRA
5.     Maryland Maryland Small Business Retirement Savings Program Automatic Traditional IRA
6.     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.
7.     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.
8.     New Mexico The New Mexico Work and Save Act

 

Voluntary Payroll Deduction Roth IRA
9.     New York New York State Secure Choice Savings Program Voluntary Payroll Deduction Roth IRA
10.  Oregon OregonSaves

 

Automatic Roth IRA
11.  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
12.  Washington Washington’s Small Business Retirement Marketplace

 

A marketplace where qualified financial services firms offer low-cost retirement savings plans to businesses and individuals
13.  Seattle, WA Seattle Retirement Savings Plan

 

Automatic Traditional or Roth IRA

Additionally, another 21 states have introduced legislation on this topic that is still under consideration. Those states include: Arizona, Georgia, Iowa, Indiana, Kentucky, Louisiana, Maine, Michigan, Minnesota, New Hampshire, Nebraska,  North Carolina, North Dakota, Ohio, Pennsylvania, Rhode Island, South Carolina, Utah, Virginia, West Virginia and Wisconsin.

For additional information, please see State-Administered IRA Programs: Overview and Considerations for Congress from the Congressional Research Service.

Conclusion

Concerned with the retirement security of their workers, some state legislatures have enacted laws that create state-sponsored retirement savings plans for private-sector workers. Many other states are considering similar action. The industry can expect more activity in this area in the coming months.

 

[1] AARP Public Policy Institute, State Retirement Savings Resource Center, October 2020

[2] Chapter 14.36, Seattle Retirement Savings Program

 

 

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Terminating a defined contribution plan

“My client is thinking of terminating the 401(k) plan for her business. She has numerous employees. What are the steps to plan termination?”

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 California is representative of a common inquiry related plan terminations.

Highlights of Discussion

Before terminating a plan, it is best to check with the plan’s record keeper or third-party administrator to determine the set procedure for executing a plan termination. Be sure to document the reasons for and all actions taken to terminate the plan.

Generally, under treasury regulations and other official guidance, the steps to terminate a defined contribution plan that covers common-law employees include the following.

  1. Execute a board resolution to authorize the plan termination and set the date of termination.
  2. Amend the plan to establish a plan termination date and make the language of the plan current for all outstanding law changes or qualification requirements effective as of the plan’s termination date.
  3. Make all required contributions accrued as of the plan termination date.
  4. Fully vest the benefits of all affected participants[1] and beneficiaries as of the set termination date.
  5. Notify all plan participants and beneficiaries about the plan termination.
  6. Authorize the plan to distribute all benefits in accordance with plan terms as soon as administratively feasible after the termination date.
  7. Provide a rollover notice to participants and beneficiaries who may elect to receive eligible rollover distributions.
  8. Distribute all plan assets as soon as administratively feasible (generally within 12 months) after the plan termination date.
  9. File a final Form 5500 series return, whichever is appropriate.
  10. Although not required, the plan sponsor may file for an IRS determination letter upon plan termination, using Form 5310 PDF, Application for Determination for Terminating Plan, to ask the IRS to make a ruling about the plan’s qualified status as of the date of termination. If a filing is done, the plan sponsor must notify interested parties about the determination application.

Conclusion

Terminating a defined contribution plan involves multiple steps. The plan sponsor and committee must carefully execute and document each step to ensure plan fiduciaries fulfill their obligations to affected participants and beneficiaries. For additional guidance, please see Chapter 12. Employee Plans Guidelines, Section 1. Plan Terminations.

 

 

[1] Applies to any employees or former employees with an account balance as of the termination date

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Plan Overdraft Services

“A bank serves as the trustee of my client’s retirement plan. It offers overdraft protection services to the plan. Wouldn’t that be an extension of credit to a plan and, therefore, considered a prohibited transaction?”

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 Hawaii is representative of a common inquiry related prohibited transactions.

Highlights of Discussion

A bank’s provision of overdraft protection services to a qualified retirement plan may be exempt from the prohibited transaction rules, provided the bank complies with the requirements of Department of Labor Advisory Opinion (DOL AO) 2003-02A and Prohibited Transaction Class Exemption 80-26 (PTE 80-26).

Overdrafts in a plan may occur as the result of securities transactions or check clearings. The covering of overdrafts in these scenarios represents the lending of funds from a depository institution (e.g., a bank or other financial institution) to an ERISA plan. Under the rules of the Employee Retirement Income Security Act of 1974 (ERISA), the depository institution is considered a “party in interest” either because it is a fiduciary to the plan (e.g., bank-owned deposits in the plan or a provider of trustee services to the plan). ERISA Secs. 406(a)(1)(B), 406(a)(1)(D) and 406(b)(2) prohibit interest free loans and other extensions of credit from parties in interest to employee benefit plans.

The Department of Labor (DOL) recognized that most plan overdrafts are short-lived and not abusive. As a result, the DOL provided relief for such transactions in PTE 80-26. PTE 80-26 covers loans or other extensions of credit used for the payment of ordinary operating expenses of the plan, or for a period of no more than three days for a purpose incidental to the ordinary operation of the plan. In order to qualify for the PTE, the overdraft coverage arrangement with the plan must meet the following requirements.

  • The financial institution may not charge the plan interest or any other fee, and the plan cannot receive a discount for payments made in cash;
  • The proceeds of the loan or extension of credit are used only for 1) the payment of ordinary operating expenses of the plan, including the payment of benefits in accordance with the terms of the plan and periodic premiums under an insurance or annuity contract, or 2) for a period of no more than three business days, for a purpose incidental to the ordinary operation of the plan;
  • The loan or extension of credit must be unsecured;
  • The loan or extension of credit may not be made, directly or indirectly, by an employee benefit plan.

The DOL provided further clarification on the topic in an advisory opinion issued February 10, 2003, which specifically discusses the provision of overdraft protection services in connection with securities and other financial market transactions. In DOL AO 2003-02A, the DOL opined that, under certain circumstances, the extension of an overdraft to a plan in connection with the settlement of a securities or other financial market transaction would satisfy the requirements for the exemptions provided in ERISA Sections 408(b)(2) and 408(b)(6).

Conclusion

The covering of overdrafts in a qualified retirement plan by a financial institution that occur as the result of securities transactions or check clearings could be a prohibited transaction. Fortunately, the DOL has provided relief in PTE 80-26 and AO 2003-02A.

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Two Plans–Two Limits?

“My client is a fireman who participates in the department’s 457(b) plan. He also runs his own electrical business. Can he set up a 401(k) plan and contribute to both plans?”

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 Massachusetts is representative of a common inquiry related to multiple retirement plans.

Highlights of Discussion

This is an important tax question that your client should discuss with his tax professional to make sure all the facts and circumstances of his financial situation are considered. Generally speaking, however, the IRS rules would allow your client to contribute to both his 457(b) plan and 401(k) plan up to the limits in both.

For 2020, 457(b) contributions (consisting of employee salary deferrals and/or employer contributions combined) cannot exceed $19,500, plus catch-up contribution amounts if eligible [Treasury Regulation Section (Treas. Reg. §1.457-5)]  and 457(b) contribution limit].  The same maximum deferral limit applies for 401(k) plans in 2020 (i.e., $19,500, plus catch-up contributions). The catch-up contribution rules differ slightly between the two plan types.

401(k) and 457(b) Catch-Up Contribution Rules

401(k) 457(b)
Age 50 or Over Option

 

Employees age 50 or over can make catch-up contributions of $6,500 beyond the basic 402(g) limit of $19,500 for 2020.

 

Age 50 or Over Option

 

Employees age 50 or over can make catch-up contributions of $6,500 beyond the basic 457 deferral limit of $19,500 for 2020.

 

Special “Last 3-Year” Option

 

In the three years before reaching the plan’s normal retirement age employees can contribute either:

 

•Twice the annual 457(b) limit (in 2020, $19,500 x 2 = $39,000),

 

Or

 

•The annual 457(b) limit, plus amounts allowed in prior years not contributed.

 

Note:  If a governmental 457(b) allows both the age-50 catch-up and the 3-year catch-up, one or the other—but not both—can be used.

Since 2002, contributions to 457(b) plans no longer reduce the amount of deferrals to other salary deferral plans, such as 401(k) plans. A participant’s 457(b) contributions need only be combined with contributions to other 457(b) plans when applying the annual contribution limit. Therefore, contributions to a 457(b) plan are not aggregated with deferrals an individual makes to other types of deferral plans. Consequently, an individual who participates in both a 457(b) plan and one or more other deferral-type plans, such as a 403(b), 401(k), salary reduction simplified employee pension plan (SAR-SEP), or savings incentive match plan for employees (SIMPLE) has two separate annual deferral limits.

Another consideration when an individual participates in more than one plan is the annual additions limit under IRC Sec. 415(c),[1] which typically limits plan contributions (employer plus employee contributions for the person) for a limitation year [2] made on behalf of an individual to all plans maintained by the same employer. It this situation, the annual additions limit is of no concern for two reasons:  1) there are two separate, unrelated employers; and 2) contributions to 457(b) plans are not included in a person’s annual additions [see 1.415(c)-1(a)(2)].

Conclusion

IRS rules would allow a person who participates in a 457(b) plan and a 401(k) plan to contribute the maximum amount in both plans. However, it is important to work with a financial and/or tax professional to help determine the optimal amount based on the participant’s unique situation.

[1] For 2020, the limit is 100% of compensation up to $57,000 (or $63,500 for those > age 50).

[2] Generally, the calendar year, unless the plan specifies otherwise.

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Reduction in Workforce and Partial Plan Terminations

“My client had a 35 percent reduction in workforce in January 2020. Does that automatically mean the business suffered a partial plan termination?”

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 Massachusetts is representative of a common inquiry related to reductions in workforce.

Highlights of Discussion

Not necessarily; it all depends on the facts and circumstances, and whether those terminated employees are rehired by the end of 2020.

The IRS presumes there is a partial plan termination when an employer reduces its workforce (and plan participation) by at least 20 percent during the plan year. This presumption is rebuttable, however. The IRS makes it clear that an actual determination of a partial plan termination is based on all the facts and circumstances of a particular scenario [Treasury Regulation § 1.411(d)-2(b)]. The IRS’s Revenue Ruling 2007-43 provides further guidelines to help determine if a partial plan termination has occurred. For additional coverage, please see RLC’s related Case of the Week.

The most recent guidance on this issue comes from the IRS’s Coronavirus-related relief for retirement plans and IRAs questions and answers, Q&A 15 (added July 2020). As a result, for purposes of determining whether a partial termination of a retirement plan occurred during the 2020 plan year, the IRS will not treat plan participants who were furloughed as having an employer-initiated severance from employment during the year if the business rehires them by the end of 2020. If that is the case, then immediate vesting of employer contributions would not apply.

Determining whether a plan is partially terminated is important because the IRS requires that all participants covered under the portion of a plan that is deemed terminated become 100 percent vested in matching and other employer contributions if the contributions were subject to a vesting schedule [IRC §411(d)(3) and Treasury Regulation 1.411(d)-2]. That could be very expensive, and something to think about if rehiring is a viable option.

Conclusion

The determination of whether or not a partial plan termination has happened depends on the facts and circumstances that occur over (at least) a full plan year. Although not binding legal authority, the IRS’s FAQ on rehires during 2020 provides plan sponsors insight into how the IRS will view such activities this year.

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Plan Permanency

“I have a client who set up a defined benefit plan last year and now, because of a financial downturn in his business, wants to terminate the plan. Does the IRS require an employer to maintain a defined benefit (DB) or defined contribution (DC) plan for a certain number of years?”

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 Michigan is representative of a common inquiry related to plan permanency.

Highlights of Discussion

  • While the IRS does not require that a plan sponsor maintain its plan (DB or DC) for a certain number of years, it does state in its Treasury regulations, “The term ‘plan’ implies a permanent, as distinguished from a temporary, program,” [Treasury Regulation 1.401-1(b)(2)].
  • The regulation goes on to say, although the plan sponsor may reserve the right to change or terminate the plan, and to discontinue contributions thereunder, the abandonment of the plan for any reason other than business necessity within a few years after it has taken effect will be evidence that the plan, from its inception, was not a bona fide program for the exclusive benefit of employees in general. The IRS, in such an instance, could deem the plan was never qualified and, consequently, revoke its tax-favored status—making the plan’s assets immediately taxable to participants, and any tax deductions taken null and void.
  • For a bit more insight, the IRS has ruled in Revenue Ruling 72-239 that a plan that has been in existence for over 10 years can be terminated without a business necessity. In IRS Revenue Ruling 69-25, the IRS provided that if a plan is terminated within a few years of its inception and there were no unforeseeable, negative developments in the business that made it impossible to continue the plan, then this is evidence that the employer did not intend the plan as a permanent program. The employer can rebut this presumption by showing that it abandoned the plan as a result of an unforeseeable business necessity. Business necessity, in this context, means adverse business conditions, not within the control of the employer, under which it is not possible to continue the plan, including bankruptcy or insolvency, and discontinuance of the business, along with merger or acquisition of the plan sponsor, as long as the merger or acquisition was not foreseeable at the time the plan was created.
  • In the end, the IRS will judge a plan as permanent or temporary based on the facts and circumstances of the surrounding case. The IRS’s Employee Plans Guidelines for Plan Terminations at 7.12.1.3 outlines what examiners will consider for permanency requirements and what reasons for termination will be considered valid for business necessity.
  • The regulation further states, “In the event a plan is abandoned, the employer should promptly notify the district director, stating the circumstances which led to the discontinuance of the plan.”
  • A plan sponsor’s decision to terminate and reasons for terminating its qualified retirement plan should be thoroughly documented and retained.

Conclusion

Employers who have established or who may be contemplating establishing a qualified retirement plan must be aware that the IRS expects the arrangement will be a permanent one.  And although plan sponsors reserve the right to terminate their qualified retirement plans, the IRS views “business necessity” as the only legitimate reason for plan abandonment.

 

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August 31 Is 2020 RMD Rollover Deadline For Some

“Can you remind me of the key points related to the waiver of RMDs 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 Maryland is representative of a common inquiry related to the 2020 waiver of required minimum distributions (RMDs) and rollovers of such amounts.

Highlights of the Discussion

  • You ask a timely question as August 31, 2020, is a key deadline by which certain rollovers of 2020 RMDs must be accomplished.
  • Section 2203 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act (CARES Act) waives RMDs for IRAs, defined contribution, 403(a) qualified annuity, 403(b) or governmental 457(b) plans for 2020.
  • Defined benefit plans are not covered by this wavier.
  • As an added bonus under the CARES Act, and as clarified by Notice 2020-51, a distributed amount that otherwise would have been an RMD for 2020 is eligible for rollover, including
    • First-year 2019 RMDs that were taken by April 1, 2020,
    • First-year 2020 RMDs due to be taken by an April 1, 2021; plus
    • Amounts that are part of a series of periodic payments (that include a 2020 RMD) made at least annually over life expectancy, or over a period of 10 or more years.[1]
  • The deadline for rolling over 2020 RMDs is the later of August 31, 2020, or 60 days after receipt of the distribution;
  • A 2020 RMD that is rolled over by the August 31, 2020, deadline does not count toward the one-rollover-per-12-month rule applicable to IRA-to-IRA rollovers;
  • Nonspouse beneficiaries also are allowed to roll over 2020 RMDs, if they do so by August 31, 2020; and
  • A 2020 RMD from a plan or IRA may be rolled back into the same plan or IRA (provided the plan permits incoming rollovers).

Conclusion

The CARES Act waives the necessity to take 2020 RMDs from IRAs and most qualified retirement plans. August 31, 2020, is a key deadline by which certain rollovers of 2020 RMDs must be accomplished. Please refer to IRS Notice 2020-51 for additional guidance.

 

[1] Not to be confused with substantially equal periodic payments exempt from the 10% early distribution penalty tax under IRC Sec. 72(t)

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SSA’s “Heads Up” on Private Pension Benefits

“My client received a notice from the Social Security Administration (SSA) titled, ’Potential Private Pension Benefit Information.’ Why did he receive this form and what does it mean?”

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 Pennsylvania is representative of a common inquiry related to notices from the SSA.

Highlights of the Discussion

  • Your client received a Form SSA-L99-C1, Potential Private Pension Benefit Information from the SSA to inform him that he “ … MAY be entitled to some private pension upon retirement.” His family may be entitled to retirement or survivor benefits as well.
  • He received the form because, when an individual files a claim for Social Security benefits, the SSA automatically issues this notice to alert the individual that the SSA has knowledge of potential other retirement benefits that he or she may be entitled to receive under a defined contribution plan and/or defined benefit plan maintained at his former private employers.
  • According to a study,[1] 26 percent of terminated individuals over a 10-year period left their assets in their former employers’ plans, which equated to 61 percent of plan assets in motion. One reason for this may be that former participants with higher plan balances are more likely to leave their plan balances behind than those with smaller plan balances.
  • Your client may already be well aware of these additional benefits—and may have already received some of or all of them. But if not, you should review the plan information on the notice with your client and contact the plan administrator identified to make a claim for any benefits that may be due.  Some or all of these benefits may be eligible for rollover.
  • The SSA keeps a database of individuals who have been identified by the IRS as having qualified retirement plan benefits under private employer-sponsored plans. When a former employee leaves behind accrued retirement benefits in an employer’s retirement plan, the employer must report such information to the IRS.
  • The information on the SSA form is somewhat limited. Fortunately, the Department of Labor (DOL) put together a helpful Q&A piece on this topic FAQs on SSA Potential Private Retirement Benefit Information.
  • Your client can contact the DOL with additional questions as well either on-line at “Ask EBSA” or by calling 1-866-444-3272.

Conclusion

Consider the Form SSA-L99-C1, Potential Private Pension Benefit Information  issued by the SSA, as a friendly, “heads-up” notice regarding private retirement benefits to which an individual may be entitled.

[1] Alight, “What do workers do with their retirement savings after they leave their employers,” 2018

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