Print Friendly Version Print Friendly Version

Retirement Proposals in the 2024 U.S. Budget

/in /by

“I heard the 2024 Budget for the U.S. contains some restrictions on retirement savings and Roth conversions. Can you explain the provisions and when they take effect?”

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 involved a question on President Biden’s 2024 Budget.

Highlights of Discussion

Let’s start with the second half of your question first—when do the provisions take effect? The federal budget contains estimates of federal government income and spending for the upcoming fiscal year (October 1 through September 30) and includes suggestions or proposals—not laws—on how to achieve income and spending goals. Consequently, while there are recommended effective dates tied to the provisions of the budget, nothing has been enacted. The provisions are merely suggestions. The president’s release of the budget to Congress is an early step in the entire budget process.

That said, the budget does reflect what is on the Administration’s mind, and the retirement proposals are ones that are recurring themes (e.g., included in the 2021 “Build Back Better” bill). The related General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals includes a description of “modifications to rules relating to retirement plans.”

Among other items, the budget suggests imposing $10 million and $20 million caps on savings in tax-favored retirement accounts for “high income taxpayers,” and requiring distributions of a portion of the excess based on the applicable cap.

A high-income taxpayer would be someone with gross income over

  • $450,000, if the taxpayer is married and filing jointly (or is filing as a surviving spouse); or
  • $425,000, if the taxpayer is a head-of-household; or
  • $400,000, in other cases.

High-income taxpayers with accumulations of more than $10 million would be required to distribute 50 percent of the excess amount, and if accumulations exceeded $20 million, then the required distribution would be the lessor of the excess or all Roth accumulations.

Second, plan administrators of a tax-favored retirement arrangements would be required to report to the Treasury Secretary any vested account balance of a plan participant or beneficiary that exceeds $2.5 million.

Third, certain Roth conversions would be eliminated for high-income taxpayers (as described above).

While action on these initiatives is not expected this year, targeting large retirement account balances has some populist appeal, and has had the support of Democrat policymakers for some time. The idea of capping retirement accumulations is likely to persist beyond the next election.

Conclusion

The president’s budget proposal, containing suggestions on how to achieve income and spending goals, is an early step in the budget process. None of the budget’s provisions are law at this point. But several themes targeting excessive retirement savings in the budget reflect the current focus of the Administration and are likely to be points of discussion and debate in Congress.

© Copyright 2023 Retirement Learning Center, all rights reserved
Print Friendly Version Print Friendly Version

What Are PS 58 Costs?

/in /by

“My client has life insurance in her 401(k) plan. Her accountant told her that the “PS 58 costs” are taxable to her.  Can 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 an advisor in Illinois involved a case related to life insurance.

Highlights of Discussion

Your client’s accountant is correct. If the plan uses deductible employer contributions to purchase life insurance for her, then the cost of the protection (the premium paid) is included in her gross income [Treas. Reg. § 1.72-16(b)(2)].  The cost of this coverage is called the “PS 58 cost,” and is includible in income for the taxable year during which the plan pays the premium.

The plan administrator reports the taxable cost of life insurance (the PS 58 cost) annually on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., even when there has been no physical distribution from the plan. Since these amounts have already been taxed, they create a basis in the plan. That means your client will not be taxed again on the cumulative PS 58 costs when the insurance contract is distributed to her or when the life insurance proceeds are distributed to her beneficiaries.

Conclusion

If the plan uses deductible employer contributions to purchase life insurance for a participant, then the cost of the protection (PS 58 cost) is reported on Form 1099-R. The participant must include the amount in taxable income for the year the premium is paid.

© Copyright 2023 Retirement Learning Center, all rights reserved
Print Friendly Version Print Friendly Version

Partial Plan Termination and the Applicable Period

/in /by

“My client suffered an accident and cannot keep employees on at his business. He was wondering if he could lay off employees over time to avoid triggering full vesting for 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 Ohio involved a case related to a partial plan termination.

Highlights of Discussion

  • The IRS will determine whether a partial plan termination has occurred based on the facts and circumstances of a particular scenario [Treasury Regulation § 1.411(d)-2(b)]. According to Revenue Ruling 2007-43, one of the circumstances considered is the employee turnover rate during “the applicable period.”
  • The applicable period is a plan year (or, in the case of a plan year that is less than 12 months, the plan year plus the immediately preceding plan year) or a longer period if there are a series of related severances from employment. Consequently, in your client’s situation, because the layoffs would all occur as a result of a single event—the IRS would consider them related severances.
  • There are other guidelines in Revenue Ruling 2007-43 that are helpful in determining if a partial plan termination has occurred.
  • A partial termination may be deemed to occur when an employer reduces its workforce (and plan participation) by 20 percent.
  • The turnover rate is calculated by dividing employees terminated from employment (vested or unvested) by all participating employees during the applicable period.
  • The applicable period is generally the plan year but can be deemed longer based on facts and circumstances. An example would be if there are a series of related severances of employment the applicable period could be longer than the plan year.
  • The only severances from employment that plan sponsors DO NOT factor in when determining the 20 percent ratio are those that are out of the employer’s control (e.g., an employee death, disability, retirement or depressed economic conditions).
  • Partial plan terminations can also occur when a plan is amended to exclude a group of employees that were previously covered by the plan or vesting is adversely affected.
  • In a defined benefit plan partial plan termination can occur when future benefits are reduced or ceased.
  • The IRS adopted the 20 percent guideline in Rev. Rul. 2007-43 from a 2004 court case Matz v. Household International Tax Reduction Investment Plan, 388 F. 3d 577 (7th Cir. 2004), which, ironically, was dismissed in 2014 after its fifth appeal [Matz v. Household Int’l Tax Reduction Inv. Plan, No. 14-2507 (7th Cir. 2014)]. The 20 percent threshold still stands under the IRS’s revenue ruling.
  • Keep in mind that employee turnover is not the only reason for a partial termination. A partial termination can also happen if a sponsor adopts amendments that adversely affect the rights of employees to vest in benefits under the plan, excludes a group of employees that previously had been included, or reduces or ceases future benefit accruals that can result in a reversion to the employer (in the case of a defined benefit plan), the IRS may find that a partial termination occurred, even if the turnover rate is under 20 percent (Issue Snapshot-Partial Plan Termination).
  • If a partial termination may be an issue, a plan sponsor may seek an opinion from the IRS as to whether the facts and circumstances amount to a partial termination. The plan sponsor can file, IRS Instructions for Form 5300, Application for Determination for Employee Benefit Plan with the IRS to request a determination of partial plan termination.

Conclusion

Based on facts and circumstances over the applicable period, a company could be deemed to have a partial plan termination. The participants affected by the partial plan termination must become 100 percent vested in their account balances upon termination. Plan sponsors should monitor their companies’ turnover rates and amendment activities to be aware of potential partial plan terminations.

 

 

© Copyright 2023 Retirement Learning Center, all rights reserved
Print Friendly Version Print Friendly Version

401(k)s, 403(b)s and MEPs

/in /by

“One of my clients is a health care association, the members of which offer both 401(k) plans and 403(b) plans to employees. The association is considering offering a multiple employer plan (MEP). Would there be any issues in creating one MEP that would include both the 401(k) plans and the ERISA 403(b) 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 Illinois involved a case related to multiple employer plans (MEPs).

Highlights of Discussion

  • Under Section 106 of SECURE Act 2.0 of 2022 (SECURE 2.0), we now have certainty that 403(b) plans have access to MEPs and Pooled Employer Plans (PEPs) on par with 401(k) plans. A MEP is a single plan that covers two or more associated employers that are not part of the same controlled group of employers. A PEP covers two or more unrelated employers under a single plan.
  • However, existing treasury regulations do not allow mergers or transfers of assets between 403(b) and 401(k) plans [Treasury Regulation 1.403(b)-10(b)(1)(i)]. Further, the IRS has stated in at least one private letter ruling (PLR) (e.g., PLR 200317022) that if a 403(b) plan is merged with a plan that is qualified under IRC Sec. 401(a), the assets of the 403(b) plan will be taxable to the employees. Combining 401(k) and 403(b) assets in one trust could also jeopardize the tax-qualified status of the 401(k) plan.
  • Therefore, it would not be possible to maintain one MEP that covers both 403(b) and 401(k) plans. The association could use one 401(k) MEP to cover the 401(k) plans and a separate MEP for 403(b) plans.

 

Conclusion

While the law permits both 403(b) MEPs and 401(k) MEPs, it is not possible to have one MEP that covers both types of plans. The IRS treats 403(b)s and 401(k)s as unlike plans and, therefore, incompatible, for the purpose of plan-to-plan transfers or mergers.

 

 

© Copyright 2023 Retirement Learning Center, all rights reserved
Print Friendly Version Print Friendly Version

Can investors still complete Roth Recharacterizations?

/in /by

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 Wisconsin is representative of a common inquiry related to recharacterizations.

“A colleague of mine told me that it is still possible to complete a Roth recharacterization. I thought those transactions were discontinued. If recharacterizations still exist, does that mean my client can recharacterize an unwanted Roth IRA conversion?”

Highlights of the Discussion

While investors still have the ability to recharacterize Traditional or Roth IRA annual contributions as the other type of IRA contribution if done so by their tax return due date plus extensions, investors no longer have the ability to recharacterize Roth IRA conversions.

Prior to 2018 investors did have the ability to undo or recharacterize a conversion (rollover) of IRA or retirement plan assets to Roth IRAs. However, effective January 1, 2018, pursuant to the Tax Cuts and Jobs Act (Pub. L. No. 115- 97), a conversion from a traditional IRA, simplified employee pension (SEP) or savings incentive match plan for employees (SIMPLE) IRA to a Roth IRA cannot be recharacterized. Likewise, the law also prohibits recharacterizing amounts rolled over or converted to a Roth IRA from workplace retirement plans, such as 401(k) or 403(b) plans.

Conclusion

Recharacterizations still exist, but only to treat a regular annual contribution made to a Roth IRA or to a traditional IRA as having been made to the other type of IRA.

© Copyright 2023 Retirement Learning Center, all rights reserved
Print Friendly Version Print Friendly Version

Plan Establishment and “Compensation”

/in /by

“My client is a shareholder in an S-Corporation. Can the business still set up a retirement plan for 2022 and can she contribute to the plan based on her S-Corporation distributions?”

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 Georgia is representative of a common inquiry related to setting up and contributing to qualified retirement plans.

Highlights of the Discussion

Because this question deals with specific tax information, business owners and taxpayers should always seek the guidance of a tax professional for advice on their specific situations.  What follows is general information based on IRS guidance and does not represent tax or legal advice, and is for informational purposes only.

With respect to setting up a plan for 2022, the short answer is, yes, provided the S-Corporation has an extension to file its 2022 tax return. Regarding contributions for your client, she could not base plan contributions on her S-Corporation distributions for 2022. She could only receive a contribution if she also had wages as an employee, which were reported on Form W-2, Wage and Tax Statement. (Please refer to Retirement Plan FAQs Regarding Contributions – S Corporation.)

Now for a bit of background. Under the SECURE Act 1.0, for 2020 and later tax years, a business has until its tax filing deadline, plus extensions for a particular tax year, to set up a plan. The plan establishment deadline is tied to the type of business entity and its associated tax filing deadline as illustrated below. [Note: Simplified employee pension (SEP) plans have historically followed the below schedule; and special set-up rules apply for SIMPLE and safe harbor 401(k) plans.]

Business Tax Status IRS Business Tax Filing Form Filing Deadline (and deadline to establish a retirement plan unless an extension to file applies) Extended Filing Deadline (and latest deadline to establish a retirement plan) Starting Point for Compensation or Earned Income for Plan Contributions
S-Corporation (or LLC taxed as S-Corp) Form 1120-S, U.S. Income Tax Return for an S Corporation

 

 March 15 September 15 Form W-2, Wage and Tax Statement

 
Partnership (or LLC taxed as a partnership) Form 1065, U.S. Return of Partnership Income

 

 March 15 September 15 Schedule K-1 (Form 1065), Partner’s Share of Income, Deductions, Credits, etc. *

See adjustments below
C-Corporation (or LLC taxed as C-Corp) Form 1120, U.S. Corporation Income Tax Return

 

 April 15 October 15 Form W-2, Wage and Tax Statement

 
Sole Proprietorship (or LLC taxed as sole prop) Form 1040, U.S. Individual Income Tax Return with Schedule C

 

 April 15 October 15 Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship)

 

Schedule F (Form 1040), Profit or Loss From Farming

See adjustments below

*Not to be confused with Schedule K-1 for Forms 1120s or 1041

The definition of compensation for contribution purposes for unincorporated business owners (i.e., sole proprietors or partners) is unique  [IRC 401(c)(2)(A)]. It takes into consideration earned income or net profits from the business [reported on Schedule C (Form 1040), Schedule F (Form 1040) or Schedule K-1 (Form 1065)], which then must be adjusted for self-employment taxes. The result is the individual’s “adjusted net business income (ANBI).” A retirement plan uses ANBI to allocate plan contributions. Please see the worksheets for self-employed individuals in IRS Publication 560, Retirement Plans for Small Businesses.

And here’s something owner-only businesses can look forward to because of the SECURE Act 2.0 of 2022 (SECURE 2.0). Effective for plan years beginning after December 29, 2022, Section 317 of SECURE 2.0 allows sole proprietors or single member LLCs to make retroactive first year elective deferrals up to the date of the employee’s tax return filing date for the initial year. Currently, this is an issue as explained in a prior Case of the Week Establishing a Solo 401(k) Plan.

Conclusion

Pass-through businesses, including sole proprietorships, partnerships, limited liability companies and S-corporations have several special considerations with respect to setting up and contributing to retirement plans. Tax advisors and other financial professionals with expertise in this area can really add value and set themselves apart from the comp

© Copyright 2023 Retirement Learning Center, all rights reserved
Print Friendly Version Print Friendly Version

Faulty Form 5500 Filings and “Reasonable Cause”

/in /by

“My client who sponsors a 401(k) plan received a notice from the Department of Labor (DOL) that the DOL rejected the plan’s Form 5500 filing because it lacked certain required information. My client is now facing a $75,000 penalty.  Is there any way to correct this error and reduce the penalty?”

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 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 Illinois is representative of a common inquiry regarding faulty Form 5500 filings.

Highlights of Discussion

Unfortunately, since the plan sponsor has already received a formal notice from the DOL, the DOL’s Delinquent Filer Voluntary Correction Program (DFVCP) is not available to the sponsor to correct the failure with a minimal penalty. But—there still may be an option to correct the error and pay a lesser penalty using the “reasonable cause” argument.

The DOL is authorized to waive all or part of the civil penalty for a faulty Form 5500 filing if the plan sponsor demonstrates reasonable cause for its failure. The IRS has a similar waiver provision. Reasonable cause is based on all the facts and circumstances in the situation. The plan sponsor must establish it exercised all ordinary business care and prudence to meet the annual filing obligations but, nevertheless, was unable to comply with the duty within the prescribed time.

According to the IRS’s Delinquent Filing Penalty Relief Frequently Asked Questions, reasonable cause may include the following:

  • Fire, casualty, natural disaster, or other disturbances,
  • Inability to obtain records,
  • Death, serious illness, incapacitation or unavoidable absence of the taxpayer or a member of the taxpayer’s immediate family,
  • Other reasons that establish the plan sponsor used all ordinary business care and prudence to meet its filing obligations but, despite its best efforts, failed to meet the file standards.

RLC regularly works with a plan service provider who has had success using the reasonable cause argument when applicable. One example involved a plan sponsor that received a DOL notice rejecting its Form 5500 filing because the plan sponsor had not included the necessary audit report. According to the notice, the DOL was going to assess a $50,000 penalty. The plan service provider helped the plan sponsor draft a letter of reasonable cause, assisted with getting the audit done and refiled the Form 5500 within the prescribed 45-day correction window. As a result, the DOL lowered its penalty to $5,000.

Conclusion

Even in situations where the DFVCP can no longer be used because the plan sponsor has already received a DOL notice regarding a faulty Form 5500 filing, there still may be ways to lessen the penalty assessment by utilizing the reasonable cause argument.

© Copyright 2023 Retirement Learning Center, all rights reserved
new rules
Print Friendly Version Print Friendly Version

The New Way to Count Participants for Form 5500 Audits

/in /by

“I attended a conference where there seemed to be a great deal of confusion regarding the Department of Labor’s (DOL’s) newly released Form 5500 filing rules. One change relates to how plans count participants for the independent audit requirement. Can you clarify, please?”

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 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 Colorado is representative of a common inquiry regarding Form 5500 filing rules for defined contribution plans.

Highlights of Discussion

Perhaps the most important detail about the new Form 5500 filing rules is that they pertain to the 2023 plan year filing, which will be done in 2024. Plan sponsors must follow the current rules for the 2022 plan year filing.

The DOL requires sponsors of employee benefit plans subject to the annual Form 5500 series of returns and schedules to include an audit report from an independent qualified public accountant (IQPA). There is an exception to this requirement for “small plans” (i.e., those with fewer than 100 participants at the beginning of the plan year) (DOL Reg. 2520.104-46).  The current rules count individuals who are eligible to participate even if they have not elected to participate and do not have an account in the plan.

For plan years beginning on or after January 1, 2023, participant count for the audit waiver will be based on the number of participants with account balances at the beginning of the plan year. This change is intended to reduce the number of plans that need to have an audit, lower expenses for small plans and encourage more small employers to offer workplace retirement savings plans to their employees.

For both 2022 and 2023, a plan may qualify for the audit waiver even if there are more than 100 participants. Under the “80 to 120 Participant Rule,” if the number of participants covered under the plan as of the beginning of the plan year is between 80 and 120, and a small plan annual report was filed for the prior year, the plan administrator may elect to continue to file as a small plan and, therefore, qualify for the audit waiver.

For more information, please see the final regulations for Annual Reporting and Disclosure.

Conclusion

The Form 5500 filing regulations, among other things, change the method of counting participants for purposes of determining when a defined contribution plan must file as a small plan, which also factors into whether the plan may be exempt from the IQPA audit requirement. Specifically, for 2023 and later plan years, plans are directed to count only the number of participants/beneficiaries with account balances as of the beginning of the plan year, as compared to the current rule that counts all the employees eligible to participate in the plan.

 

 

© Copyright 2023 Retirement Learning Center, all rights reserved
Print Friendly Version Print Friendly Version

Distributions Affect Saver’s Tax Credit

/in /by

“My client wants to claim a Saver’s Tax Credit for 2022 but has taken some distributions in the past. Will those withdrawals affect the amount of credit for which he will qualify?”

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 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 Rhode Island is representative of a common inquiry regarding available tax credits for personal contributions to eligible plans.

Highlights of Discussion

This is a very important tax question for which your client should seek specific tax advice. Generally, yes, the amount of any contribution eligible for the Saver’s Credit is reduced by certain withdrawals taken for the last three years (See IRS Announcement 2001-106, Q&As 4 and 5). For example, for 2022 tax filings, distributions your client (and his spouse, if filing jointly) took after 2019 and before the due date of their 2022 tax return (including extensions) from the following types of plans will lower the credit amount:

  • Traditional IRAs,
  • Roth IRAs,
  • Achieving a Better Life Experience (ABLE) accounts,
  • 401(k) plans,
  • 403(b) plans,
  • Governmental 457(b) plans,
  • IRS Sec. 501(c)(18)(D) trusts created before June 25, 1959, to pay pension benefits,
  • Qualified plans under IRC Sec. 401(a),
  • Qualified annuities under IRC Sec. 403(a),
  • Simplified Employee Pension (SEP) IRA plans,
  • Savings Incentive Match Plans for Employees (SIMPLE) IRA plans,
  • the Federal Thrift Savings Plan (Federal TSP).

However, they should not count distributions

  • That are not taxable as the result of a rollover or a trustee-to-trustee transfer,
  • That are taxable as the result of an in-plan rollover to a designated Roth account,
  • From an eligible retirement plan (other than a Roth IRA) rolled over or converted to a Roth IRA,
  • That are loans from a qualified employer plan treated as a distribution,
  • Of excess contributions or deferrals (and income allocable to such contributions or deferrals),
  • Of contributions made to an IRA during a tax year and returned (with any income allocable to such contributions) on or before the due date (including extensions) for that tax year,
  • Of dividends paid on stock held by an employee stock ownership plan,
  • From a military retirement plan (other than the Federal TSP) or
  • From an inherited IRA by a nonspousal beneficiary.

Your client and his tax advisor can read details of the credit in IRS Form 8880, Credit for Qualified Retirement Savings Contributions instructions and here Saver’s Credit.

Currently, the credit

  • Equals an amount up to 50%, 20% or 10% of eligible taxpayer contributions capped at $2,000 ($4,000 if married filing jointly), depending on adjusted gross income (as reported on Form 1040, 1040SR or 1040N (making the maximum credit $1,000 or $2,000 if married filing jointly);
  • Relates to contributions taxpayers make to their traditional and/or Roth IRAs, or elective deferrals to a 401(k) or similar workplace retirement plan (other plans qualify so see full list below); and
  • Is claimed by a taxpayer on Form 8880, Credit for Qualified Retirement Savings Contributions.

Contributors can claim the Saver’s Credit for personal contributions (including voluntary after-tax contributions) made to

  • A traditional or Roth IRA;
  • 401(k),
  • SIMPLE IRA,
  • SARSEP,
  • 403(b),
  • Governmental 457(b),
  • Federal Thrift Savings Plan,
  • ABLE account* or
  • Tax-exempt, union pension benefit plan under IRC Sec. 501(c)(18)(D).

In general, the contribution tax credit is available to individuals who

  1. Are age 18 or older;
  2. Not a full-time student;
  3. Not claimed as a dependent on another person’s return; and
  4. Have income below a certain level (i.e., for 2022 tax filings, the amount on Form 1040, 1040-SR, or 1040-NR, line 11, is $34,000 or less ($51,000 if head of household, or $68,000 if married filing jointly).

2022 Saver’s Credit Income Levels

Credit Rate Married Filing Jointly Head of Household All Other Filers*
50% of your contribution AGI not more than $41,000 AGI not more than $30,750 AGI not more than $20,500
20% of your contribution $41,001- $44,000 $30,751 – $33,000 $20,501 – $22,000
10% of your contribution $44,001 – $68,000 $33,001 – $51,000 $22,001 – $34,000
0% of your contribution more than $68,000 more than $51,000 more than $34,000

*Single, married filing separately, or qualifying widow(er)

The IRS has a handy on-line “interview” that taxpayers may use to determine whether they are eligible for the credit.

Conclusion

Every deduction and tax credit counts these days. Many IRA owners and plan participants may be unaware of the retirement plan-related tax credits for which they may qualify. Seeking qualified tax advice is essential to ensure accurate calculations.

 

 

 

 

 

© Copyright 2023 Retirement Learning Center, all rights reserved
Print Friendly Version Print Friendly Version

A SIMPLE Switch

/in /by

“Can I terminate my SIMPLE IRA plan and start a 401(k) plan mid-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 a financial advisor from Minnesota is representative of a common inquiry related to SECURE Act 2.0 of 2022 (SECURE 2.0).

Highlights of the Discussion

That’s a straightforward question that, currently, has a problematic answer due to the “exclusive plan rule,” which says the SIMPLE must be the only plan the business maintains for the year. Problem solved—thanks to SECURE 2.0 for plan years beginning after December 31, 2023.

For the 2024 plan year and later plan years, employers may replace their SIMPLE IRA plans mid-year with what we will call an “eligible 401(k) replacement plan.” The annual deferral limits are different for the two plan types. Therefore, under the new rules, the participant’s annual deferral limit will be prorated (by day) between the SIMPLE IRA plan and the eligible 401(k) replacement plan for the year.

An eligible 401(k) replacement plan, for this purpose, is a

  • SIMPLE 401(k),
  • Safe Harbor 401(k),
  • 401(k) with a qualified automatic contribution arrangement (QACA), or
  • Starter 401(k) (new under SECURE 2.0).

 

Eligible 401(k) Replacement Plan Key Characteristics
A SIMPLE 401(k)
  • Employer has 100 or fewer employees
  • Must be the only plan maintained by the employer
  • Must file a Form 5500 annually
  • Voluntary employee deferrals
  • Mandatory employer contributions (generally, 3% match or 2% nonelective)
  • Immediate vesting for contribution types
  • Additional information at IRS SIMPLE 401k facts
Safe Harbor 401(k)
  • No limit on number of employees
  • Voluntary employee deferrals
  • Mandatory employer contributions—3 options
  1. Basic match: 100% percent match on deferrals up to 3% of compensation and a 50% match on deferrals between 3% and 5%
  2. Enhanced match:  At least equal to the aggregate match under the basic match formula (e.g., 100% match on deferrals of 4% compensation) or
  3. A 3% nonelective contribution
QACA 401(k)
  • No limit on number of employees
  • Automatic enrollment of at least 3% with automatic escalation of at least 1% annually after the initial period, to at least 6% up to a maximum of 15%
  • Mandatory employer contributions—2 options
  1. Matching contribution: 100% match on deferrals up to 1% of compensation and a 50% match on deferrals between 1% to 6% of compensation; or
  2. A 3% nonelective contribution
  • Two-year vesting schedule could apply to employer contributions
  • Standard Form 5500 filing rules apply
  • Additional information IRS QACA facts
Starter 401(k)

Available for plan years after December 31, 2023
  • For employers without a qualified plan
  • Must be the only plan maintained by the employer
  • No limit on the number of employees
  • Automatic enrollment at 3% up to 15% of compensation
  • Deferrals limited to the annual IRA contribution limit (i.e., $6,000 indexed, plus $1,000 in catch-up indexed)
  • No employer contributions
  • Standard Form 5500 filing rules apply

What’s more, SECURE 2.0 will help SIMPLE IRA plan participants who are experiencing a mid-year plan switch, overcome another, potentially expensive, hurdle. Currently, SIMPLE IRA participants cannot roll over the assets from their SIMPLE IRAs to another plan within the first two years of participation without incurring a 25 percent penalty, unless they have a penalty exception (e.g., age 59 ½). During the initial two-year participation period participants can only transfer money to another SIMPLE IRA. SECURE 2.0 will waive that penalty starting with the 2024 plan year in certain circumstances. If an employer terminates a SIMPLE IRA plan and establishes a 401(k) plan (or, for rollover purposes, a 403(b) plan), rollovers between the SIMPLE IRAs to the new 401(k) plan are allowed if the rolled amount is subject to 401(k) distribution restrictions (e.g., age 59 ½, death, severance of employment, hardship, etc.).

Through the 2023 plan year, however, the current SIMPLE IRA rules are in place. Consequently, if an employer maintains another plan during the same year it has a SIMPLE IRA plan, the employer violates the exclusive plan rule and invalidates the SIMPLE IRA plan, technically, making all contributions to the SIMPLE IRA excess contributions. According to the IRS’s, SIMPLE IRA Plan Fix-It Guide, which is based on its Employee Plans Compliance Resolution System (EPCRS), the business owner may be able to file a Voluntary Correction Program (VCP) submission requesting that contributions made for previous years in which more than one plan was maintained remain in the employees’ SIMPLE IRAs. User fees for VCP submissions are generally based upon the current value of all SIMPLE IRAs that are associated with the SIMPLE plan. Self-correction is not available for this type of error. Further correction information is available here.

Options for 2023 when considering a mid-year plan switch from a SIMPLE IRA plan

  • Wait to start a new 401(k) plan until January 1, 2024, providing required notices prior.
  • If a switch to a 401(k) plan is made mid-year 2023, contemplate a VCP filing.

Options for 2024 when considering a mid-year plan switch from a SIMPLE IRA plan

  • Wait to start a new 401(k) plan until January 1, 2025, providing required notices prior.
  • Take advantage of the SECURE 2.0 change and adopt one of the eligible 401(k) replacement plans.

Conclusion

For 2023, switching from a SIMPLE IRA plan to another plan type mid-year is problematic, and may involve an IRS VCP filing (with fees). SECURE 2.0 provides relief for 2024 and later years for this scenario when adopting an eligible 401(k) replacement plan.

 

 

© Copyright 2023 Retirement Learning Center, all rights reserved