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Requesting Plan Documents—What’s Included?

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“I’ve been working with a 401(k) plan committee on governance issues. A participant has requested copies of plan committee meeting minutes and notes for the last four quarters. Does the committee have to comply with this request?”

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 North Carolina is representative of a common question related to plan documents.

Highlights of the Discussion

The answer is—maybe. One thing is sure—whatever the plan officials decide, there should be documentation in the plan files as to the reason for their decision. The documentation will be important should litigation arise.

Section 104(b) of the Employee Retirement Income Security Act of 1974 (ERISA) requires plan officials to provide the following documents within 30 days of a plan participant’s request:

  • Summary plan description,
  • The latest annual report,
  • Any terminal report,
  • The bargaining agreement,
  • The trust agreement,
  • Contract, and
  • “Other instruments” under which the plan is established or operated.

The plan administrator may charge a reasonable fee to cover the cost of furnishing such copies.

Committee meeting minutes and notes are not explicitly listed in these ERISA disclosure requirements. The Department of Labor (DOL) has issued some guidance on the matter, but nothing definitive. In Advisory Opinion 96-14A, issued on July 31, 1996, the DOL stated, “ … any document or instrument that specifies procedures, formulas, methodologies, or schedules to be applied in determining or calculating a participant’s or beneficiary’s benefit entitlement under an employee benefit plan would constitute an instrument under which the plan is established or operated.”  The DOL reiterated this stance in Advisory Opinion 1997-11A.

Thus, it could be argued if benefit-related decisions were made or even discussed at committee meetings then the minutes, or at least applicable portions of the minutes, would have to be provided. This issue is clearly open to interpretation and argument, and there have been legal cases where courts have differed on their rulings as to the treatment of committee meeting minutes. For example, in Faircloth v. Lundy Packing Co., 91 F.3d 648, 654–55 (4th Cir. 1996), cert. denied, 519 U.S. 1077 (1997); and Brown v. American Life Holdings, Inc., 190 F.3d 856, 861 (8th Cir. 1999) the courts found that plan officials were not required to disclose committee minutes. Whereas, in Bartling v. Fruehauf Corp., 29 F.3d 1062 (6th Cir. 1994) and Hughes Salaried Retirees Action Committee v. Admin. of the Hughes Non-Bargaining Retirement Plan, 72 F.3d 686, 689 (9th Cir. 1995) (en banc) the courts concluded that “other instruments” should be construed more broadly to include such items as committee minutes.

Consequently, a committee facing a participant’s request for meeting minutes should, as expeditiously as possible (remembering the 30-day requirement to provide and penalty of $110 per day for late responses), seek legal counsel for direction and guidance.

Conclusion

ERISA requires plan officials provide certain plan documents upon participant request.  There is some uncertainty as to the treatment of committee meeting minutes in this context. Seeking legal counsel would be a prudent course of action, and documenting the decision would be a fiduciary best practice.

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Real Estate Agents and Retirement Plans

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“A client of mine is a real estate agent who receives income that is reported on Form 1099-MISC, Miscellaneous Income. Can this individual contribute to a retirement plan?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business.
A recent call with an advisor in North Dakota is representative of a common question related plan eligibility.

Highlights of Discussion

• Some unique rules for retirement plan eligibility apply for real estate agents, based on their worker status as a “statutory nonemployee.” (Since each employment scenario is based on unique facts and circumstances; it is recommended that workers seek professional tax advice for a definitive determination in their particular situations.)
• Individuals who perform services for businesses may be classified as an independent contractor, a common law-employee, a statutory employee, or a statutory nonemployee. The IRS explains each classification in more detail in Publication 15-A, Employer’s Supplemental Tax Guide.
• There are three categories of statutory nonemployees: direct sellers, licensed real estate agents, and certain companion sitters. Licensed real estate agents include individuals engaged in appraisal activities for real estate sales if they earn income based on sales or other output.  Direct sellers and real estate agents are treated as self-employed for all Federal tax purposes, including income and employment taxes, if the following are true.

1. Substantially all payments for their services as direct sellers or real estate agents are directly related to sales or other output, rather than to the number of hours worked; and
2. Their services are performed under a written contract that provides they will not be treated as employees for Federal tax purposes.
Because real estate agents are considered self-employed, they are eligible to establish a retirement plan based on their earnings from self-employment. Please see IRS Publication 560, Retirement Plans for Small Businesses.

Conclusion
If a licensed real estate agent meets the above criteria, he or she could establish a retirement plan using his or her Form 1099-MISC income. Since each employment scenario is based on unique facts and circumstances, it is recommended that workers seek professional tax advice for a definitive determination.

 

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ERISA Fidelity Bond Failure—So what?

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“I’m aware of a business retirement plan that has not maintained an ERISA fidelity bond for the plan for the last several years.  What penalties is the plan facing?”

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 Texas is representative of a common question related to the Department of Labor’s (DOL’s) requirement for retirement plans to have ERISA fidelity bonds.

Highlights of Discussion

Through examinations of Forms 5500, the IRS has determined that one of the top two most common compliance issues among plans is not having adequate ERISA fidelity bond coverage. The DOL, pursuant to ERISA Sec. 412 and related regulations, generally requires every fiduciary of an employee benefit plan and every person who handles funds or other property of a plan be bonded to protect the plans from risk of loss due to fraud or dishonesty on the part of the bonded individuals. Please see the Department of Labor’s Field Assistance Bulletin 2008-04 for more details on ERISA Fidelity Bonds. The DOL also has a handy hand-out entitled Protect Your Employee Benefit Plan with An ERISA Fidelity Bond that provides an overview of the bonding requirements and how to obtain a bond.

Although the DOL imposes an ERISA fidelity bonding requirement on employee benefit plans,[1] the agency has not identified a specific penalty for failing to have an appropriate bond when one is required. In practice, plan officials who have failed to secure bonds have received a range of consequences from auditors’ admonitions to obtain the necessary bonds to court mandates for their removal as plan fiduciaries and plan termination.

There are substantial risks associated with not meeting ERISA’s bonding requirements:

  • Failing to report a sufficient bond on the Form 5500 can trigger a plan audit.
  • It is against ERISA law for plan officials to be without an ERISA bond.
  • Plan fiduciaries can be held personally liable for losses that could have been covered by a fidelity bond.

 

Consider the following court case.

In Chao v. Thomas E. Snyder and Snyder Farm Supply Inc. 401(k) Plan, Civil Action No. 1:00CV 889, a federal district court judge in Grand Rapids, MI, ordered the defendant (the owner of a company) to purchase and maintain a fidelity bond for the company’s 401(k) plan until the plan was terminated. The defendant also was ordered to direct the plan’s custodian to distribute or roll over the accounts of plan participants. Under the consent judgment and order obtained by the DOL, Snyder, who was a fiduciary of the 401(k) plan, further agreed to pay all expenses related to the distributions, rollovers, or plan termination, except for annual maintenance fees charged against each plan participant’s account.

Conclusion

Although no particular DOL penalty is prescribed for failing to have an ERISA fidelity bond when one is required, nonetheless, noncompliant plan officials must be aware they expose themselves, unnecessarily, to DOL audits, personal liability and potential lawsuits.

[1] Exceptions: The bonding requirements do not apply to employee benefit plans that are 1) completely unfunded or that are not subject to Title I of ERISA, or 2) maintained by certain banks, insurance companies and registered broker dealers.

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No More Age Restriction for Traditional IRA Contributions

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“My client is 80 and still working. She wants to put some money aside for when she might retire; however, she doesn’t have access to a workplace retirement plan. Is an IRA an option?”

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 New York is representative of a common question related to making traditional IRA contributions.

Highlights of Discussion

More power to your client! You bet; an IRA is a great option. Of course, the most prudent course of action is to encourage your client to discuss her contribution options with her tax advisor.

Provided your client has the right amount of earned income to support it, she could contribute to a Roth IRA or—because of a key law change—she could contribute to a traditional IRA. She could even do a combination of Roth and traditional IRA contributions as long as she doesn’t exceed the maximum contribution of $7,000 for a person > age 50 between the two accounts. And, because the IRS has granted a special delay to the usual April 15th tax filing deadline,[1] she still could make a 2020 IRA contribution (Roth or traditional) up until May 17, 2021!

Prior to 2020, once a person reached age 70 ½, he or she could not contribute to a traditional IRA any longer. That rule changed for 2020 and later years as a result of the Setting Every Community Up for Retirement Enhancement Act of 2019 (the SECURE Act) (see TITLE I, section 107 of the Further Consolidated Appropriations Act of 2020). The SECURE Act removed the age restriction for eligibility to make a traditional IRA contribution.  Roth IRA contributions have never had a maximum age limit, but they are subject to a maximum earnings limit. Consequently, for 2020 and beyond, the only requirement to be able to make a traditional or Roth IRA relates to having modified adjust gross income (MAGI) for the year—enough to make either a traditional or Roth IRA contribution, but not too much in the case of a Roth IRA contribution.

As to the question of deductibility, since your client does not participate in a workplace retirement plan—any traditional IRA contribution she may choose to make would be tax deductible, potentially. Active participation in a retirement plan can affect whether a traditional IRA contribution is tax deductible.  For details, please see a prior case: Active Participation May Affect IRA Deductibility

Conclusion

Recognizing that more people are working passed their 70s and may want to continue to save for retirement, the Administration saw fit to do away with the age limit for making traditional IRA contributions, effective for 2020 and beyond.

[1] Tax Day for individuals extended to May 17

 

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401(k) Plans for Owner-Only Businesses

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“Can an unincorporated, owner-only business have a 401(k) plan and, if so, are there any special considerations of which we need to be aware?”

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 North Carolina is representative of a common question related to owner-only businesses and retirement plans.

Highlights of Discussion

  • Yes, an unincorporated, owner-only business may have a 401(k) plan—commonly referred to as a(n) “individual (k)” or “solo (k)” plan.
  • Special considerations with respect to the solo (k) plan include, but would not be limited to, the
    • Deadline for establishing a 401(k) plan,
    • Deadline for making a salary deferral election, and
    • Owner’s compensation for contribution purposes.
  • The deadline for establishing a 401(k) plan for any eligible business changed beginning in 2021 to the business’s tax filing deadline plus applicable extensions.[1] The prior deadline was the last day of the business’s tax year (e.g., December 31 for a calendar year tax year). However, keep in mind the timing of when a salary deferral election must be made has not changed.
  • Salary deferrals can only be made on a prospective basis [Treasury Regulation (Treas. Reg.) 1.401(k)-1(a)(3)]. Therefore, the salary deferral election must be made prior to the receipt of compensation. For self-employed individuals (i.e., sole proprietors and partners), compensation is considered paid on the last day of the business owner’s taxable year. The timing is connected to when the individual’s compensation is “deemed currently available” [see Treas. Reg. § 401(k)-1(a)(6)(iii)]. Therefore, a self-employed person has until the end of his or her taxable year to execute a salary deferral election for the plan (e.g., December 31, 2020, for the 2020 tax year).
  • The definition of compensation for contribution purposes for an unincorporated business owner is unique [IRC 401(c)(2)(A)(I)]. It takes into consideration earned income or net profits from the business which then must be adjusted for self-employment taxes. Please refer to the worksheet for calculating compensation for and contributions to a solo (k) plan for a self-employed individual in Publication 560, Retirement Plans for Small Businesses. A business owner who wants to have a 401(k) plan should work with his or her CPA or tax advisor to determine his or her earned income and maximum contribution for plan purposes.
  • The 2020 contribution for an unincorporated business owner to a solo (k) plan with enough earned income could be as high as $57,000 (or $63,500 if he or she turned age 50 or older before the end of the year). For 2021, those limits are $58,000 and $64,500, respectively.

Example:

Ryan is a sole proprietor who would like to set up a solo k plan effective for 2020.  The IRS extended his tax filing deadline for 2020 to May 17, 2021, and if Ryan files for an extension, his extended tax deadline would be October 15, 2021. Therefore, the latest Ryan could potentially set up a solo k plan for 2020 would be October 15, 2021. Since Ryan is past the deadline for making a salary deferral election for 2020, however, his contribution would be limited to an employer profit sharing contribution based on his adjusted net business income for 2020. The sooner Ryan sets up the solo k for his business, the sooner he will be able to make employee salary deferrals for 2021.

Conclusion

For self-employed individuals and their tax advisors, there are several special considerations with respect to setting up and contributing to solo (k) plans, including, but not limited to, the deadline for establishing a 401(k) plan, the deadline for making a salary deferral election, and the owner’s compensation for contribution purposes.

[1] Section 201 of the Setting Every Community Up for Retirement Enhancement Act of 2020

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Retirement Plan Benefits and Prenuptial Agreements Do Not Mix

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“My client asked me what effect, if any, a prenuptial agreement would have on 401(k) plan assets?

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 question related to spouses as retirement plan beneficiaries.

Highlights of Discussion

Generally, a prenuptial or antenuptial agreement  is an agreement made between a couple before they legally marry by which they forfeit future rights to each other’s property in the event of a divorce or death. The short answer is that a prenuptial agreement has no impact on a spouse’s claim to 401(k) plan assets because it does not satisfy the applicable spousal consent requirements of Internal Revenue Code Section (IRC §) 417(a)(2) and Treasury Regulation Section (Treas. Reg.) 1.401(a)-20, Q&A 28.

In most cases, spousal consent is required before a plan can pay out benefits in a form other than a Qualified Joint and Survivor Annuity. The Retirement Equity Act of 1984 (REA) added the mandate to obtain spousal consent before a plan participant could take a distribution so that the nonemployee spouse would have some control over the form of benefit the participant chose, and would, at the very least, be aware that retirement benefits existed. There are exceptions to the spousal consent rule when

  1. The payable benefit is ≤ $5,000;
  2. There is no spouse or the spouse cannot be located;
  3. The spouse has been legal abandoned or the couple is legally separated;
  4. The spouse is incompetent; or
  5. The plan must satisfy requirement minimum distribution rules.

Even if a 401(k) plan is drafted as a “REA Safe Harbor Plan” (meaning it meets the criteria to be exempt from the QJSA requirements)[1], the spouse must generally consent in writing to the naming of anyone other than the spouse as primary beneficiary.

For its reasoning on antenuptial agreements, the IRS relied on several court cases, which found that the antenuptial agreements were not valid because, in part, they were signed by the participant’s fiancée (not spouse), and the agreements did not comply with REA since they did not specify the nonspouse beneficiary who would receive the benefit [See Hurwitz v. Sher, 982 F.2d 778 (2d Cir. 1992), cert. denied, 508 U.S. 912 (1993) and Nellis v. Boeing Co., No. 911011, 15 E.B.C. 1651 (D.Kan. 5/8/1992)].

Conclusion

Based on numerous court cases and Treasury Regulations, the IRS has made it clear that a prenuptial agreement has no impact on a spouse’s claim to 401(k) plan assets.

 

[1] Treas. Reg. 1.401(a)-20, Q&A 3

 

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Active Plan Participation May Affect IRA Deductibility

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“Active participation in an employer’s retirement plan can affect whether an IRA contribution made by the participant is deductible on the tax return. What does ‘active participation’ mean?”

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.  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 involving a taxpayer’s ability to make a deductible IRA contribution.

Highlights of Discussion

This is an important tax question that can only be answered definitively by a person’s own tax advisor.  Generally speaking, for purposes of the IRA deduction rules, an individual is an “active participant” for a taxable year if either the individual or the individual’s spouse actively participates during any part of the year in a(n)[1]

  • Qualified plan described in Internal Revenue Code Section [IRC §401(a)], such as a defined benefit, profit sharing, 401(k) or stock bonus plan;
  • Qualified annuity plan described in IRC §403(a);
  • Simplified employee pension (SEP) plan under IRC §408(k);
  • Savings incentive match plan for employees (SIMPLE) IRA under IRC §408(p);
  • Governmental plan established for its employees by the federal, state or local government, or by an agency or instrumentality thereof (other than a plan described in IRC §457);
  • IRC §403(b) plan, either annuity or custodial account; or
  • Trust created before June 25, 1959, as described in IRC §501(c)(18).

When an individual is considered active depends on the type of employer-sponsored plan.

Profit Sharing or Stock Bonus Plan:   During the participant’s taxable year, if he or she receives a contribution or forfeiture allocation, he or she is an active participant for the taxable year.

Voluntary or Mandatory Employee Contributions:  During the participant’s taxable year, if he or she makes voluntary or mandatory employee contributions to a plan, he or she is an active participant for the taxable year.

Defined Benefit Plan: For the plan year ending with or within the individual’s taxable year, if an individual is not excluded under the eligibility provisions of the plan, he or she is an active participant for that taxable year.

Money Purchase Pension Plan: For the plan year ending with or within the individual’s taxable year, if the plan must allocate an employer contribution to an individual’s account he or she is an active participant for the taxable year.

Refer to IRS Notice 87-16 for specific examples of active participation.

As a quick check, Box 13 on an individual’s IRS Form W-2 should contain a check in the “Retirement plan” box if the person is an active participant for the taxable year.

If an individual is an active participant, then the following applies for IRA contribution deductibility.  The maximum traditional IRA contribution for 2020 and 2021 is $6,000 for those under age 50 and $7,000 for those age 50 0r greater.

IF your filing
status is …		 AND your modified adjusted gross income (modified AGI)
is …		 THEN you can take …
single or
head of household		 $65,000 or less a full deduction.
more than $65,000
but less than $75,000*		 a partial deduction.
$75,000 or more no deduction.
married filing jointly or
qualifying widow(er)		 $104,000 or less a full deduction.
more than $104,000
but less than $124,000**		 a partial deduction.
$124,000 or more no deduction.
married filing separately2 less than $10,000 a partial deduction.
$10,000 or more no deduction.
Not covered by a plan, but married filing jointly with a spouse who is covered by a plan  $196,000 or less a full deduction.
  more than $196,000
but less than $206,000***		 a partial deduction.
Source:  IRS 2020 IRA Deduction Limits

 

 $206,000 or more no deduction.
*$66,000-$76,000 for 2021; **$105,000-$125,000 for 2021; and ***$198,000-$208,000 for 2021

 

Conclusion

Participating in certain employer-sponsored retirement plans can affect an individual’s ability to deduct a traditional IRA contribution on an individual’s tax return for the year. The IRS Form W-2 should indicate active participation in an employer-sponsored retirement plan. When in doubt, taxpayers should check with their employers.

 

 

[1] See www.legalbitstream.com for IRS Notice 87-16

 

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The Line Between Education and Fiduciary Advice

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Does the industry have a clear definition of what the Department of Labor (DOL) would consider investment education (not advice) in a 401(k) plan so that a financial advisor would not have to follow the requirements of Prohibited Transaction Exemption (PTE) 2020-02?

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 related to investment education.

Highlights of Recommendations

The DOL believes it provides a clear roadmap for determining when financial advisors are, and are not, investment advice fiduciaries under Title I of the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code (IRC) in PTE 2020-02 and Interpretive Bulletin (IB) 96-1. 

“Oldie but goodie” DOL IB 96–1 identifies four categories (or “safe harbors”) of investment-related educational materials that advisors or others can provide to plan participants and beneficiaries without being considered to have provided fiduciary investment advice: 1) Plan information, 2) General Financial and Investment Information, 3) Asset Allocation Models and 4) Interactive Investment Materials.

Plan Information

Information about the benefits of plan participation, the benefits of increasing plan contributions, the impact of preretirement withdrawals on retirement income, the terms of the plan, the operation of the plan, or descriptions of investment alternatives under the plan would not constitute investment advice.

General Financial and Investment Information

General financial and investment concepts, such as risk and return, diversification, dollar cost averaging, compounded return, and tax-deferred investment; historic differences in rates of return between different asset classes (e.g., equities, bonds, or cash) based on standard market indices; effects of inflation; estimating future retirement income needs; determining investment time horizons; and assessing risk tolerance would not constitute investment advice.

Asset Allocation Models

Examples would include pie charts, graphs, or case studies that provide a participant or beneficiary with asset allocation portfolios of hypothetical individuals with different time horizons and risk profiles.  Such models must satisfy the following requirements.

  1. The models must be based on generally accepted investment theories that take into account the historic returns of different asset classes (e.g., equities, bonds, or cash) over define periods of time.
  2. All material facts and assumptions on which such models are based (e.g., retirement ages, life expectancies, income levels, financial resources, replacement income ratios, inflation rates, and rates of return) must accompany the models.
  3. To the extent that an asset allocation model identifies any specific investment alternative available under the plan, the model must be accompanied by a statement that
    • Indicates that other investment alternatives having similar risk and return characteristics may be available under the plan;
    • Identifies where information on those investment alternatives may be obtained; and
    • Discloses that, when applying particular asset allocation models to their individual situations, participants or beneficiaries should consider their other assets, income, and investments (e.g., equity in a home, IRA investments, savings accounts, and interests in other qualified and non-qualified plans) in addition to their interests in the plan.

Interactive Investment Materials

Examples in this category could include, but are not limited to, questionnaires, worksheets, software, and similar materials that provide a participant or beneficiary the means to estimate future retirement income needs and assess the impact of different asset allocations on retirement income.

Such materials must

  1. Be based on generally accepted investment theories that take into account the historic returns of different asset classes (e.g., equities, bonds, or cash) over defined periods of time;
  2. Contain an objective correlation between the asset allocations generated by the materials and the information and data supplied by the participant or beneficiary;
  3. Include all material facts and assumptions (e.g., retirement ages, life expectancies, income levels, financial resources, replacement income ratios, inflation rates, and rates of return) that may affect a participant’s or beneficiary’s assessment of the different asset allocations (Note: These facts and assumptions could be specified by the participant or beneficiary);
  4. (To the extent they include an asset allocation generated using any specific investment alternatives available under the plan), include a statement indicating other investment alternatives having similar risk and return characteristics may be available under the plan and where information on those investment alternatives may be obtained; and
  5. Take into account or are accompanied by a statement indicating that, in applying particular asset allocations to their individual situations, participants or beneficiaries should consider their other assets, income, and investments (e.g., equity in a home, IRA investments, savings accounts, and interests in other qualified and nonqualified plans) in addition to their interests in the plan.

While the provision of investment education is not a fiduciary act, the designation of a person or entity to provide investment educational services to plan participants and beneficiaries is a fiduciary act. Therefore, persons making this designation must act prudently and solely in the interest of the plan participants and beneficiaries.

Conclusion

The DOL provides examples of investment education in IB 96-1 that, when delivered, would not be considered investment advice, thereby helping the educator to avoid fiduciary liability for the information. However, the act of selecting the individual or entity to provide investment education to 401(k) plan participants and beneficiaries is a fiduciary act, subject to the standards of loyalty and prudence.

 

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How to Make a Legit $28,000 IRA Contribution

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A colleague of mine said a 60-year-old couple who is a client of his just made a $28,000 IRA contribution. Is this some kind of new rule? I thought the maximum annual contribution was $6,000, with a potential additional $1,000 catch-up contribution for someone age 50 and over?

Highlights of Recommendations

  • A $28,000 IRA contribution for the couple is possible, courtesy of a combination of several IRS rules covering
  1. carry-back and current year contributions,
  2. spousal contributions and
  3. catch-up contributions.
  • From January 1, 2021 to May 17, 2021[1], it is potentially possible for a traditional or Roth IRA owner age 50 and over to make a $14,000 contribution: $7,000 as a 2020 carry-back contribution and $7,000 as a 2021 current-year contribution. That means a married couple filing a joint tax return could potentially make a $28,000 IRA contribution, with $14,000 going to each spouse’s respective IRA (either Roth or Traditional).
  • When making the contributions it is important to clearly designate to the IRA administrator that a portion is a carry-back contribution for 2020 and a portion is a 2021 current-year contribution in order to avoid having the full amount treated as a current-year contribution and, subsequently, an excess contribution for 2021.
  • Such a large combined contribution would only be possible if
    • The couple had not previously made a 2020 contribution to a traditional or Roth IRA,
    • Each spouse was age 50 or older as of 12/31/2020,
    • The couple has earned income for 2020 and 2021 to support the contributions, and
    • For a Roth IRA contribution, the couple’s income is under the modified adjusted gross income (MAGI) limits for Roth IRA contribution eligibility (see below).
  • Whether the traditional IRA contributions would be tax deductible depends upon “active participation” of either spouse in a workplace retirement plan[2] and the couple’s MAGI.
  • Please see the applicable MAGI ranges in the following chart.
Traditional IRA Eligibility for Deductible Contributions
Taxpayer Category 2021 MAGI Phase-Out Ranges 2020 MAGI Phase-Out Ranges
Married active participant filing a joint income tax return $105,000-$125,000 $104,000-$124,000
Single active participant $66,000-$76,000 $65,000-$75,000
Married active participant filing separate income tax return $0-$10,000 $0-$10,000
Spouse of an active participant $198,000-$208,000 $196,000-$206,000

Roth IRA Contribution Eligibility
Taxpayer Category 2021 MAGI Phase-Out Ranges 2020 MAGI Phase-Out Ranges
Married filing a joint income tax return $198,000-$208,000 $196,000-$206,000
Single individuals $125,000-$140,000 $124,000-$139,000
Married filing separate income tax return $0-$10,000 $0-$10,000

 

Conclusion

The deadline for making 2020 traditional or Roth IRA contributions is May 17, 2021. That means there is a window of opportunity that allows eligible couples to double up on IRA contributions (for 2020 as a carry-back contribution and one for 2021 as a current-year contribution) to the tune of $28,000.

 

 

[1] Usually, April 15th, but the IRS extended the 2020 tax filing deadline to May 17, 2021

[2] See Active Plan Participant and IRA Contributions

 

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Does the receipt of dividends on employer stock held in a 401(k) plan negate a lump sum distribution?

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“One of my clients is currently receiving quarterly dividend payments on employer stock he has in his 401(k) plan. Does the receipt of dividends on employer stock held in a 401(k) negate his ability to receive a lump sum distribution and, consequently, my client’s ability to take advantage of the special tax rules for net unrealized appreciation (NUA) in employer securities?”

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 New Jersey is representative of a common scenario involving participants with employer stock in a 401(k) plan.

Highlights of the Discussion

While payments of dividends are considered distributions for certain purposes (Temporary Treasury Regulation 1.404(k)-1T, Q&A3), the IRS has, in at least two private letter rulings (PLR 19947041 and 9024083[1]) concluded that such dividends are not treated as part of the “balance to the credit” of an employee for purposes of determining a lump sum distribution under IRC § 402(e)(4)(D). Therefore, such distributions do not prevent a subsequent distribution of the balance to the credit of an employee from being considered a lump sum distribution for NUA purposes if all other requirements are met.

For more information on the definition of lump sum distribution, please see RLC’s Case of the Week Lump Sum Distribution Triggers and NUA.

Conclusion

A participant’s receipt of dividends from employer stock held in a qualified plan do not prevent a subsequent distribution of the balance to the credit of the participant from being a lump sum distribution for NUA tax purposes.

 

[1] See www.legalbitstream.com

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