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Form 5500 and the “80-120 Rule”

“My client was told by the record-keeper for her plan that it would be filing the plan’s IRS Form 5500 annual report under the “80-120 Rule.” Can you explain what that rule is?

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.

Highlights of the Discussion

Generally, plans with more than 100 participants are required to file the long version of Form 5500, Annual Return/Report of Employee Benefit Plan, as a “large plan.” However, there is an exception referred to as the “80-120 participant rule” that allows certain plans that would otherwise be considered large to continue to file as “small plans” following the streamlined Form 5500-SF, Short Form Annual Return/Report of Small Employee Benefit Plan, requirements (see 2018 Form 5500 Instructions).

The DOL defines small plans for Form 5500 purposes as plans with fewer than 100 participants at the beginning of the plan year. Small plans file Form 5500-SF and Schedule I Financial Information—Small Plans, (instead of Form 5500 and Schedule H Financial Information), plus certain other applicable schedules. However, small plans, typically, are exempt from the independent audit requirement that applies to large plans.

Under the 80-120 participant rule, if your client filed as a small plan last year and the number of plan participants is fewer than 121 at the beginning of this plan year, your client may continue to follow the Form 5500-SF requirements for this year.

EXAMPLE: For the 2017 plan year, Smally’s Inc., had 93 participants, so the plan administrator filed a Form 5500-SF and applicable schedules as a small plan.  The number of plan participants at the beginning of the 2018 plan year rose to 112.  Under the 80-120 participant rule, Smally’s Inc., may elect to complete the 2018 Form 5500-SF, instead of the long-form Form 5500 and schedules, in accordance with the instructions for a small plans.

Conclusion

The 80-120 participant rule may allow some plans that would otherwise be required to follow the arduous large plan filing requirements for Form 5500 to, instead, continue to file under the streamlined Form 5500-SF process.

 

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Contribution limits with combined DB/DC plans

“I am meeting with a new client who has a defined benefit (DB) plan and would like to add an “individual k” plan. Can he do this and, if so, what are the contribution limitations?”

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 a financial advisor from Rhode Island is representative of a common inquiry related to an employee covered by two plans.

Highlights of the Discussion

There are several layers to consider in your client’s situation. First, keep in mind that an individual k plan is a type of 401(k) plan that is designed to cover only small business owners and their spouses, (i.e., businesses without eligible common-law employees).

To answer your question, yes, a business owner can have both a 401(k)/profit sharing plan and a DB plan. The question on contribution limitations depends on whether the DB plan is covered by the Pension Benefit Guaranty Corporation (PBCG—the governmental entity that insures private sector DB plans). If a sponsor has a question about coverage, it can ask the DOL to make the call: Requesting a coverage determination

The PBGC insures most private-sector (i.e., non-governmental) DB plans [ERISA 4021(a)]. There are some notable exceptions to coverage, however ([ERISA 4021(b)].

Among others, the PBGC does not insure the following types of plans:

  • Governmental plans;
  • Small professional service plans;
  • Substantial owner plans;
  • Certain Puerto Rico plans;
  • Certain church plans.

Please see the PBGC’s definitions for the above listed exemptions on the PBGC’s website at PBGC Insurance Coverage.    

Where a DC and DB plan are combined, and the DB plan is covered by the PBGC, then there is no combined contribution limit. The deduction limits for contributions to DC and DB plans apply separately. A business owner, in this case, can fully contribute to both a DC and a PBGC-covered DB plan within the prescribed limits for each.

In the case at hand, one must be mindful of the substantial owner exemption from PBGC coverage. A private-sector DB plan is exempt from PBGC coverage if it is established and maintained exclusively for substantial owners of the plan sponsor (i.e., if all participants are substantial owners).

A participant is a substantial owner if, at any time during the last 60 months, the participant:

  • Owned the entire interest in an unincorporated trade or business, or
  • In the case of a partnership, is a partner who owned, directly or indirectly, more than 10 percent of either the capital or profits interest in such partnership, or
  • In the case of a corporation, owned directly or indirectly more than 10 percent in value of either the voting stock or all the stock of that corporation.

Where a DC and DB plan are combined, and the DB plan is not covered by the PBGC, as would be the case in an owner-only situation, then there is a combined contribution limit as follows:

If there is an employer contribution to the DC plan, then the maximum deductible contribution to both types of plans combined is the greater of

  • 25 percent of the aggregate compensation of all participants; or
  • the amount necessary to meet the minimum funding standard for the defined benefit plan.

Consequently, the plan sponsor would fund the DB plan up to the required amount, then fund the DC plan if there is still room.

For this purpose, the IRS says the first six percent of deductible contributions made to the DC plan is ignored for the above limits; and salary deferrals to the 401(k) plan are not counted toward the deduction limit.

Conclusion

Determining the maximum deductible contribution that a plan sponsor can make to a DB and DC plan that are combined can be tricky. Business owners should always seek advice from their tax advisors when calculating plan contribution limits.

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Universal Availability Rule

“Can you explain the universal availability rule and does that apply to 401(k) plans?”

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 a financial advisor from Illinois is representative of a common inquiry related to 403(b) plans.

Highlights of the Discussion

The universal availability requirement is a rule that relates to eligibility to make elective deferrals in 403(b) plans—not 401(k) plans. It is the nondiscrimination test for 403(b) elective deferrals. Universal availability requires that if the sponsor of a 403(b) plan allows any employee to make elective deferrals to the plan, it must permit all employees to make elective deferrals as well [Treas. Reg. Sec. 1.403(b)-5(b)]. There are a few limited exceptions explained next.

The IRS allows a 403(b) plan sponsor to disregarding the following excludable employees when applying the universal availability test to their plans:

  • Nonresident aliens with no U.S. source income;
  • Employees who normally work fewer than 20 hours per week (or a lower number if specified in the plan document);
  • Student workers performing services as described in Treas. Reg. Sec. 31.3121(b)(10)–2 (note that medical residents are not considered to be students for this purpose);
  • Employees whose maximum elective deferrals under the plan are less than $200; and
  • Employees eligible to participate and make elective deferrals under another 401(k), 403(b) or 457(b) plan sponsored by the same employer.

Under the fewer-than-20-hours-per-week and student worker exclusions listed above, if any employee who would be excluded under either exclusion is permitted to participate, then no employee may be excluded under that exclusion [ Treas. Reg. Sec. 1.403(b)-5]. Consequently, if the plan allows an employee working fewer than 20 hours per week to participate, the plan cannot exclude any employee using the fewer-than-20-hours-per-week exclusion.

A 403(b) plan may not exclude employees based on a generic classification such as the following:

  • Part-time,
  • Temporary,
  • Seasonal,
  • Substitute teacher,
  • Adjunct professor or
  • Collectively bargained employee.

However, if these employees fall under the fewer-than-20-hours criterion, then they may be excluded on that basis. For examples on the application of the exclusion, please see IRS 403(b) Universal Availability. The key to this exclusion is that a plan must determine eligibility for making 403(b) elective deferrals based on whether the employee is reasonably expected to normally work fewer than 20 hours per week and has actually never worked more than 1,000 hours in the applicable 12-month period.

And don’t forget, an employee is not considered to have had the right to make a deferral election unless he or she has had what the IRS calls an “effective opportunity” to make such an election. Effective opportunity is a facts-and-circumstances test. Essentially, at least once during a plan year, employees must receive a deferral notice and have a window of time to make or change a deferral election.

If a plan violates the universal availability rule, the effect can be loss of IRC 403(b) status. In that extreme case, contributions to the plan would become subject to income tax, employment tax and withholding. But the IRS wants to avoid that, so it provides correction remedies in its Employee Plans Compliance Resolution System (See the IRS’s 403(b) Fix-It Guide and Rev. Proc. 2019-19 for remedies.)

Conclusion

The ability to make elective deferrals in a 403(b) plan must be universally available to all eligible employees of a 403(b) plan sponsor. Be aware of the subtle nuances and follow IRS guidance on applying this important rule.

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Valuing employer stock in an ESOP

“My client has an employee stock ownership plan (ESOP). How does he value the stock within the plan if it is not traded on a securities market?”

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 a financial advisor from Wisconsin is representative of a common inquiry related to valuing stock of the sponsoring employer in qualified retirement plans.

Highlights of the Discussion

For employer securities that are not readily tradable on an established securities market, the IRS requires the shares be valued by an independent appraiser [IRC 401(a)(28)(C)]. Valuation by an independent appraiser is not required in the case of employer securities that are readily tradable on an established securities market.

There are a number of factors to consider when determining the value of an asset within a qualified retirement plan. In its examination guidelines, the IRS supports the use of Revenue Ruling 59-60, which relates to valuing assets for estate tax and gift tax purposes, for valuing assets in qualified retirement plans as well.

In valuing the stock of closely held corporations or the stock of corporations where market quotations are not available, all available financial data, as well as all relevant factors affecting the fair market value must be considered. For example, some factors to consider include the following:

  • Nature and history of the business issuing the security;
  • General economic outlook and the outlook for the specific industry;
  • Book value of the securities and the financial condition of the business;
  • Company’s earning capacity;
  • Company’s dividend paying capacity;
  • Goodwill value; and
  • Recent stock sales.

The list of factors to consider in Rev. Rul. 59–60 is not an exclusive list for valuing closely-held employer securities. It may be necessary to consider other factors when appropriate. Also, not all of the listed factors will be relevant to all companies and transactions. The IRS’ examination guidelines note that the independent appraisal will not, in and of itself, be a good faith determination of value unless all relevant factors are considered.

IRS examiners will look at Form 5500 (Schedule R, line 12) to the question: Does the ESOP hold any stock that is not readily tradable on an established securities market? If the answer is yes, examiners are directed to determine if the securities were valued that year and by whom in order to confirm it was done by an independent, third-party auditor.

Conclusion

An ESOP that holds employer securities that are not readily tradable on an established securities market must follow specific guidelines for annual asset valuation. The valuation requires the use of an independent auditor who observes the requirements of Rev. Rul. 59-60.

 

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Retirement and life insurance in a qualified retirement plan

“My client has a life insurance policy inside his profit sharing plan at work. He will be retiring soon. Can he leave the policy in the plan after retirement?”

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 a financial advisor from Wisconsin is representative of a common inquiry related to life insurance in qualified retirement plans.

Highlights of the Discussion

No, the IRS says a life insurance policy cannot remain in a plan past the plan participant’s retirement or separation from service (Revenue Rulings 54-51 and 74-307).[1] The reasoning for this relates to the IRS’s rules that holding life insurance in a qualified retirement plan is OK as long as the death benefits are “incidental,” meaning they must be secondary to other plan benefits.

Death benefits are considered incidental if the plan meets two conditions: 1) employer contributions used to purchase coverage are limited as prescribed; and 2) the plan requires the trustee to convert the entire value of a life insurance contract at or before retirement into cash, provide periodic income so that no portion of the policy may be used to continue life insurance protection beyond retirement, or distribute the contract to the participant (IRS Publication 6392, Explanation #4, Miscellaneous Provisions.)  Participants and their financial advisors should check the terms of their retirement plan documents to see what the plan language dictates.

Regarding the contribution limits, life insurance coverage in a defined contribution plan is considered incidental if the amount of employer contributions and forfeitures used to purchase whole or term life insurance benefits are limited to 50 percent for whole life, and 25 percent for term policies. No percentage limit applies if the participant purchases life insurance with company contributions held in a profit sharing plan for two years or longer.

Conclusion

The incidental benefit rules that apply to holding life insurance in a qualified retirement plan prevent the plan from retaining the policy past a participant’s retirement.

[1] See www.legalbitstream.com

 

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Adding In-Service Distributions to a Company’s Retirement Plan

“What are the considerations around adding an in-service distribution option to a company’s qualified retirement plan?”

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 a financial advisor from New Jersey is representative of a common inquiry related to in-service distributions from qualified retirement plans.

Highlights of the Discussion

There are several important considerations surrounding adding an in-service distribution option to a company’s qualified retirement plan, including, but not limited to,

  • Type of plan,
  • The process to add,
  • The parameters for taking,
  • Potential taxes and penalties to recipients,
  • Nondiscrimination in availability, and
  • The effect on top-heavy determination.

Several types of retirement plans can offer in-service distributions, including 401(k), profit sharing, employee stock ownership and even defined benefit plans. If a plan sponsor desires an in-service distribution option, it must be formally written into the plan document, either when adopted or later through a plan amendment. The plan sponsor would need to check with its document provider for the exact adoption or amendment steps. For example, adding an in-service distribution option to a prototype 401(k) plan can be as easy as checking a box on the adoption agreement, selecting an effective date, signing the amendment and notifying participants of the change.

There are pros and cons to including an in-service distribution option in a plan. The pros include increased participant control of plan assets, and a higher level of participant satisfaction with the plan. The cons include the potential for greater administrative burdens and cost to the plan sponsor as a result of an increase in the number of distribution requests, potential taxes and penalties for the distribution recipient, and depletion of savings meant for retirement income.

Plan participants need to understand the taxation rules that apply to in-service distributions. Any pre-tax amounts that are distributed from a plan prior to age 59½ will be subject to taxation and, possibly, an early distribution penalty tax, unless an exception applies. Completing a rollover of the in-service distribution either directly or indirectly within 60 days of receipt is one way to delay any tax impact.

If a plan sponsor wants to add an in-service distribution option, it can choose to make the option very liberal or attach restrictions such as a requirement for a participant to reach a certain age, or complete a set amount of service. It is important to note that the IRS does not allow employee pre-tax elective deferrals to be distributed prior to age 59½, nor defined benefit assets to be distributed prior to age 62 under the in-service distribution rules. The plan sponsor could also limit access to a particular contribution source or sources (e.g., matching contributions, after-tax, etc.).

Distributions are part of the benefits, rights and features of a plan under Treasury Regulation §1.401(a)(4)-4. Therefore, if a plan offers in-service distributions, it must do so in a nondiscriminatory manner (i.e., not make them disproportionately more available to highly compensated employees (HCEs) than nonHCEs).

Finally, keep in mind that in-service distributions from a qualified retirement plan can affect top-heavy determination for up to five years. A plan is top-heavy if the key employees own more than 60 percent of the plan’s assets or benefits on the determination date. In-service distributions for active employees are added back to account balances if the distribution occurred within the five-year period ending on the determination date (Treasury Regulation §1.416-1, T-30)).

Conclusion

When the desire to give plan participants greater control of their plan assets exists, plan sponsors and participants may look to in-service distributions of retirement plan assets as a possible solution. But there are several important considerations surrounding such a plan feature. Financial advisors can help educate their clients on the pros and cons of adding, or changing the terms of an existing, in-service distribution option.

 

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Tax Reporting of Retirement Plan Contributions for Unincorporated Businesses

“Tax season has me wondering how sole proprietors deduct contributions they make to their qualified retirement plans?”

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 a financial advisor from Oklahoma is representative of a common inquiry related to deducting retirement plan contributions.

Highlights of the Discussion

Unincorporated business owners, such as sole proprietors, farmers and partnerships, are among the IRS’s list of “pass through” business entities. Why the name—because the profits of these firms directly pass through the businesses to their owners, and are taxed on the owners’ individual income tax returns.

Special rules apply for how such businesses report and deduct contributions to their retirement plans for themselves and their employees. The following table provides a general, informational summary of annual tax reporting requirements for unincorporated business owners who make retirement plan contributions. The table is based on the instructions to the filing forms noted. IRS Publication 560, Retirement Plans for Small Businesses provides additional information. Please consult a tax advisor for specific guidance.

Tax Reporting of Retirement Plan Contributions for Unincorporated Businesses

Type of Employer Contributions for Common Law Employees Contributions for the Business Owner
Sole proprietorship Line 19 of 2018 Schedule C, Profit or Loss From Business (attachment to IRS Form 1040)

 

Instructions to Schedule C

 

Line 28 of 2018 Schedule 1, Additional Income and Adjustments to Income,(attachment to IRS Form 1040)

 

Instructions for Schedule 1

 

Farmers Line 23 of 2018 Schedule F, Profit or Loss From Farming, (attachment to IRS Form 1040)

 

Instructions to Schedule F

 

Line 28 of 2018 Schedule 1, Additional Income and Adjustments to Income, (attachment to IRS Form 1040)

 

Instructions for Schedule 1

 

Partnership Line 18 of 2018 Form 1065, U.S. Return of Partnership Income

 

Instructions to Form 1065

 

Box 13 of Schedule K-1 Partner’s Share of Income, Deductions, Credits, etc. (attachment to Form 1065)

 

Instructions for Schedule K-1

 

 

 

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Proxy voting on securities held in qualified plans

“Who or what entity is responsible for proxy voting[1] on securities held in a qualified retirement plan?”

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 a financial advisor from Texas is representative of a common inquiry related to stock or securities held in an employer-sponsored retirement plan.

Highlights of the Discussion

For the definitive answer, one must turn to the language of the governing plan document. The responsible party will be different depending on whether the plan specifies that plan investments are directed by 1) the plan participant; 2) a discretionary trustee; 3) an ERISA 3(38) investment manager; or 4) plan administrator or other named fiduciary. The DOL issued guidance on this matter in Interpretive Bulletin (IB) 2016-01.

In plans where investments are participant-directed, a plan participant has the responsibility to direct the trustee as to the manner in which any voting rights should be exercised. Assuming the plan participant timely received all notices, prospectuses, financial statements and proxy solicitation, the terms of the plan document should address who or what entity assumes the voting responsibility when participants fail to give instructions. For example, many plan documents will specify the plan trustee as the entity to vote in lieu of receiving participant instructions. Alternatively, the plan may specify another plan fiduciary such as an investment manager.

In some cases, the plan trustee, who has investment discretion, has the obligation to vote proxies on securities held in a qualified retirement plan. That responsibility is an extension of the trustee’s fiduciary responsibility to prudently manage plan assets in the best interest of plan participants. However, if the trustee is a directed trustee (i.e., subject to the direction of a named fiduciary), then the named fiduciary would retain the responsibility for the voting of proxies.

The plan document may specify that an ERISA 3(38) investment manager is responsible for directing investments, including the responsibility for proxy voting. If the plan document or investment management agreement provides that the investment manager is not required to vote proxies, but does not expressly preclude the investment manager from voting proxies, the plan’s investment manager has exclusive responsibility for voting proxies. However, if the plan document or investment management agreement expressly precludes the investment manager from voting proxies, the plan’s discretionary trustee has exclusive responsibility for voting proxies.

IB 2016-01 is clear that the investment policy statement for the plan should include a statement of the plan’s proxy voting policy. An IPS is a written statement that provides fiduciaries responsible for plan investments with guidelines or general instructions on investment management decisions.

Conclusion

For guidance on the individual or entity responsible for the voting of proxies for securities held in a 401(k) plan—turn to the governing plan documents. Proxy voting is a fiduciary responsibility. The authority for proxy voting should be addressed in the plan document and the procedure outlined in the plan’s IPS.

[1] A way for shareholders to vote on matters affecting a company without having to personally attend the meeting.

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What is an 83(b) election?

“One of my 401(k) clients also has some restricted stock awards from his employer.  He is asking me about an 83(b) election.  What is an 83(b) election?”

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 a financial advisor from California is representative of a common inquiry related to restricted stock awards.

Highlights of the Discussion

An Internal Revenue Code Section (IRC §) 83(b) election is a tax tool relating to the transfer of property in connection with the performance of service. It provides an option to change the standard tax treatment of restricted stock grants and is typically used in start-up companies.

With restricted stock, employees are given shares or the right to purchase shares (sometimes at a reduced price), but they cannot take possession of the shares until they meet certain requirements (or the restrictions are lifted). Restrictions can include working for a set number of years, or meeting specified performance goals. The restrictions can phase out or cease immediately. While the employee holds the restricted stock, it may or may not provide dividends or voting rights.

There is some flexibility regarding taxation with restricted stock grants. Employees can choose whether to be taxed when the restrictions lapse or when the right is first granted. If taxation occurs when the restrictions lapse, employees will pay ordinary income tax on the difference between the current price and anything they may have paid for the shares.

Taxation upon grant for restricted stock may occur only if the individual files an IRC §83(b) election.[1] In that case, he or she pays tax on the difference (if any) between the current price and the purchase price at ordinary income tax rates, and then pays capital gains tax when he or she actually sells the shares. Thus, the value of property with respect to which this election is made is included in gross income as of the time of transfer, even though such property is not yet vested at the time of transfer.

An 83(b) election carries some risk. If an employee makes an election and pays tax, but the restrictions never lapse, the employee does not get a refund of the taxes paid, nor does the employee get the shares.

In Revenue Procedure 2012-29, the IRS presents some sample language that would satisfy the IRS regulations for making an 83(b) election. In addition, the Revenue Procedure 2012-29 provides examples of the tax results that may occur as a result of an IRC § 83(b) election.

Conclusion

An 83(b) election is a tax tool. An individual who receives restricted stock awards will want to discuss with his or her tax advisor whether making an 83(b) election makes sense given the individual’s unique financial situation.

[1] Note that recipients of restricted stock units are not allowed to make IRC §83(b) elections.

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How is it possible to make a $27,000 IRA contribution by April 15, 2019?

“A colleague of mine said a 60-year-old client couple of his just made a $27,000 IRA contribution. How is that possible without creating an excess contribution?”

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 a financial advisor from Massachusetts is representative of a common inquiry related to IRA contributions.

Highlights of the Discussion

There is a window of opportunity from January 1 through April 15, 2019, for a married couple to be able to contribute up to $27,000 at one time to their IRAs. Sizeable contributions like this are possible each year during tax season because of the carry-back and current-year IRA contribution rules, combined with the catch-up contribution limits for those ages 50 or more.

Here’s how it breaks down. From January 1 to April 15, 2019, it is potentially possible for a traditional or Roth IRA owner age 50 and over to contribute $6,500 as a 2018 carry-back contribution, and $7,000 as a 2019 current year contribution, for a total of $13,500.[1] That means a married couple filing a joint tax return could potentially make combined IRA contributions totaling $27,000, with $13,500 going to each spouse’s respective IRA.

Please be aware of the caveats. Such a large contribution would only be possible if the couple

  • Had not previously made 2018 contributions to traditional or Roth IRAs;
  • Each spouse was age 50 or greater as of December 31, 2018;
  • The couple has earned income to support the contributions;
  • For a Roth IRA contribution, had modified adjusted gross income (MAGI) under the limits for Roth IRA contribution eligibility; and
  • For a traditional IRA contribution, was under age 70½. (Whether a couple’s traditional IRA contributions would be tax deductible depends upon the couple’s MAGI and participation in a retirement plan at work. Please see the applicable MAGI ranges below.
Roth IRA Contribution Eligibility 2018 and 2019
Taxpayer Category 2018 MAGI Phase-Out Ranges 2019 MAGI Phase-Out Ranges
Married filing jointly $189,000-$199,000 $193,000-$203,000
Single individuals $120,000-$135,000 $122,000-$137,000
Married filing separately $0-$10,000 $0-$10,000
Traditional IRA Eligibility for Deductible Contributions
Taxpayer Category 2018 MAGI Phase-Out Ranges 2019 MAGI Phase-Out Ranges
Married active participant filing jointly $101,000-$121,000 $103,000-$123,000
Single active participant $63,000-$73,000 $64,000-$74,000
Married active participant filing separately $0-$10,000 $0-$10,000
Spouse of an active participant $189,000-$199,000 $193,000-$203,000

When making IRA contributions during the period between January 1 and April 15th of a given year, it is important for an investor to clearly designate to the IRA trustee or custodian for what year a contribution is being made (e.g., what portion represents a carry-back contribution for the preceding year and what portion represents a current-year contribution) in order to avoid having the full amount treated as a current-year contribution and, subsequently, an excess contribution.

Conclusion

Because of the carry-back and current-year IRA contribution rules, there is a window of opportunity through April 15th that allows eligible investors to double up, seemingly, on IRA contributions. Investors interested in maximizing their contributions in this way should consult their tax advisors regarding their particular circumstances.

 

[1] For eligible individuals under age 50, the maximum IRA contribution limit is $5,500 for 2018 and $6,000 for 2019.

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