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“My client maintains a SIMPLE IRA plan for his small business. He is planning to expand and hire more employees. What happens to the SIMPLE IRA plan if his payroll grows to more than 100 workers?”
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 Minnesota is representative of a common inquiry related to savings incentive match plans for employees (SIMPLE) IRA plans.
Highlights of the Discussion
Among the employer eligibility rules for maintaining a SIMPLE IRA plan is the “100 employee limit.” In general, an employer may maintain a SIMPLE IRA plan if the business has 100 or fewer employees who received at least $5,000 in compensation from the employer for the preceding year [IRC §408(p)(2)(c)(i) IRC §408(p)(2)(c)(i) and IRS Notice 98-4, Q&As B1 and B2].
The IRS provides for a two-year grace period for employers who had 100 or fewer employees, but then grew to exceed the 100-employee limit. An employer that maintains a SIMPLE IRA plan is treated as satisfying the 100-employee limitation for the two calendar years immediately following the calendar year for which it last satisfied the 100-employee limitation, except in the case of a merger or acquisition. If the failure to satisfy the 100-employee limitation is due to an acquisition, disposition or similar transaction involving the employer, then the grace period runs through the end of the year following the year of acquisition or similar transaction. (See When SIMPLE IRA plans aren’t so simple Part 1 for additional guidance on acquisitions involving SIMPLE IRA plans.)
EXAMPLE 1
At the beginning of 2019, Company A employs 75 workers for which it maintains a SIMPLE IRA plan. In response to an expanding client base and increasing demand for products, Company A hires 27 new, full-time workers in July of 2019. Assuming a constant work force and constant salaries, Company A may maintain its SIMPLE IRA plan through 2021. (2019 is considered an eligible year, because eligibility is based on the preceding year. Therefore, the two years immediately following the last eligible year are 2020 and 2021.)
EXAMPLE 2
Assume the same facts as in Example 1, except in 2019 Company A acquires Company B and its 27 full-time workers. Assuming a constant work force and constant salaries, Company A may maintain its SIMPLE IRA plan through 2020. [The grace period runs from 2019 (the year of acquisition) through the end of the year following the year of acquisition.]
Conclusion
Sponsors of SIMPLE IRA plans must understand the ins and outs of the 100-employee limit for eligibility in order to avoid creating excess contributions. The 100-employee limit comes with a grace period that can be tricky to apply.
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Following an acquisition, can a business owner continue to offer both a SIMPLE IRA and a 401(k) plan at the same time?
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 savings incentive match plans for employees (SIMPLE) IRA plans. The advisor explained: “A CPA that I network with had a small business client that maintained a SIMPLE IRA plan. The CPA’s client purchased another business in 2018 via a stock acquisition. The acquired business brought with it a 401(k) plan.”
Highlights of the Discussion
Because of the circumstance (i.e., an acquisition) an exception to the “exclusive plan rule” for SIMPLE IRA plans applies. Among the employer eligibility rules for maintaining a SIMPLE IRA plan is the exclusive plan rule. In general, a single employer may not maintain a SIMPLE IRA plan in the same calendar year it maintains any other type of qualified retirement plan.[1]
In the situation noted above, the merger of the two businesses results in one employer with two plans (a 401(k) and SIMPLE IRA plan) during the same calendar year. Fortunately, a temporary exception to the exclusive plan rule is available. The temporary exception allows the merged businesses to maintain another plan in addition to the SIMPLE IRA plan during the year of merger or acquisition, and the following year as long as, only the original participants continue in the SIMPLE IRA plan (See Q&A B-3(2) of IRS Notice 98-4).
Let’s use this situation as an example. The ownership change occurred in 2018. The SIMPLE IRA plan can be maintained in 2018 and through 2019, along with the 401(k) plan, without running afoul of the exclusive plan rule. Before 2020, however, either the SIMPLE IRA plan or the 401(k) must be terminated.
Conclusion
Acquisitions and mergers involving multiple retirement plans can complicate SIMPLE IRA plan operations due to the exclusive plan rule. It is important to be aware of the transition rule in these scenarios.
[1] Another plan would include a defined benefit, defined contribution, 401(k), 403(a) annuity, 403(b), a governmental plan other than a 457(b) plan, or a SEP plan.
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“Has the Department of Labor (DOL) issued guidance on how to prudently select annuity providers for a defined contribution (DC) 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 Massachusetts is representative of a common inquiry related to annuities within defined contribution plans.
Highlights of the Discussion
Yes, the DOL has described a five-step, “safe harbor” procedure for plan sponsors and their advisors to follow in order to satisfy their fiduciary responsibilities when selecting and monitoring an annuity provider and contract for benefit distributions from DC plans. (Note: The DOL is contemplating proposed amendments to the annuity selection safe harbor related to the assessment of an annuity provider’s ability to make all future payments.)
According to DOL Reg. 2550.404(a)-4, issued in 2008, and as further clarified by DOL Field Assistance Bulletin 2015-02, in order to satisfy the safe harbor selection process a plan fiduciary must
The safe harbor rule provides that “the time of selection” means:
The fiduciary must periodically review the continuing appropriateness of the conclusion that the annuity provider is financially able to make all future payments under the annuity contract, as well as the reasonableness of the cost of the contract in relation to the benefits and services to be provided. The fiduciary is not, however, required to review the appropriateness of its conclusions with respect to an annuity contract purchased for any specific participant or beneficiary.
Conclusion
Similar to selecting plan investments, choosing an annuity provider for a DC plan is a fiduciary function, subject to ERISA’s standards of prudence and loyalty. One way to satisfy this fiduciary responsibility is to follow the DOL’s safe harbor selection process as outlined in DOL Reg. 2550.404(a)-4 and Field Assistance Bulletin 2015-02.
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“Does the IRS have a correction program that covers 457(b) plans for governmental employers under the Employee Plans Compliance Resolution System (EPCRS)?”
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 Ohio is representative of a common inquiry related to correcting 457(b) plan errors.
Highlights of the Discussion
Effectively, yes. The two avenues of correction for governmental 457(b) plans are 1) self correction (without a submission); and 2) voluntary compliance (VC) with a formal submission. The IRS accepts VC submissions for governmental plans on a provisional basis under standards that are similar to EPCRS, but that are, technically, outside of the correction system. Qualifying governmental entities are listed in Internal Revenue Code (IRC) § 457(e)(1)(A), and include a
Sponsors of governmental 457(b) plans may self-correct their plans without a formal IRS submission if they did not comply with the Internal Revenue Code (IRC) or regulations in some way. A sponsor has until the first day of the plan year that begins more than 180 days after the IRS notifies it of the failure (IRC Section 457(b)(6) and Treasury Regulation Section 1.457-9(a)). Considering the amount of time governmental entities have to self-correct plan errors, they may not need to make voluntary submissions to the IRS under the following procedures.
The IRS will accept VC submissions for some errors related to 457(b) plans for governmental employers (see Section 4.09 of Revenue Procedure 2016-51 through 2018 and Section 4.09 of Revenue Procedures 2018-52 effective January 1, 2019.) Note, however, the IRS, generally, will not address any issues 1) related to the form of a written 457(b) plan document; nor 2) problems associated with top-hat[1] plans of tax-exempt entities. However, the IRS may consider a submission where, for example, the top hat plan was erroneously established to benefit the entity’s nonhighly compensated employees and the plan has been operated in a manner that is similar to a qualified plan.
The IRS’s VC unit retains complete discretion to accept or
or reject any requests for correction approval. If accepted, VC will issue a special closing agreement.
The steps to voluntary correction are
Sponsors will receive IRS Letter 5265 acknowledging the submission along with a control number for reference.
Conclusion
The IRS has two avenues of correction for governmental 457(b) plans: self correction without a submission; and voluntary compliance with a submission. Sponsors can refer to IRS Form 8950 and its instructions, along with Revenue Procedure 2016-51 through 2018, and 2018-52 beginning in 2019 for complete details.
[1] Nongovernmental 457(b) “Top Hat” plans must limit participation to groups of highly compensated employees or groups of executives, managers, directors or officers. The plan may not cover rank-and-file employees.
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“Several of my clients are self-employed and have 401(k) plans. What is the date by which a self-employed individual must make his or her salary deferral 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 Nevada is representative of a common inquiry related to 401(k) plan salary deferral elections.
Highlights of the Discussion
Special rules regarding salary deferral elections apply to self-employed individuals (e.g., sole proprietors or partners). They must make their cash or deferred elections no later than the last day of their tax year (e.g., by December 31, 2018, for a 2018 calendar tax year). The timing is connected to when the individual’s compensation is “deemed currently available” [see Treasury Regulation Section (Treas. Reg. §) 1.401(k)-1(a)(6)(iii)].
Often a self-employed individual’s actual compensation for the year is not determined until he or she completes his or her tax return, which, in most cases, is after the end of the partnership or individual’s taxable year. However, the IRS deems a partner’s compensation to be currently available on the last day of the partnership taxable year and a sole proprietor’s compensation to be currently available on the last day of the individual’s taxable year. Therefore, a self-employed individual must make a written election to defer compensation by the last day of the taxable year associated with the partnership or sole proprietorship.
EXAMPLE
A partner can make a cash or deferred election for a year’s compensation any time before (but not after) the last day of the year, even though the partner takes draws against his/her expected share of partnership income throughout the year.
There are also special rules that address when salary deferrals for self-employed individuals are treated as made to the plan (versus when they may actually be made). Treas. Reg. §1.401(k)-2(a)(4)(ii) states that an elective contribution made on behalf of a partner or sole proprietor is treated as allocated to the individual’s plan account as of the last day of the partnership or sole proprietorship’s taxable year.
With respect to the DOL’s deferral deposit deadline, deferrals for self-employed individuals must be deposited as soon as they can be reasonably segregated from the business’s general assets. The DOL’s safe harbor for plans with fewer than 100 employees also applies. Therefore, as long as the deferrals are transmitted within seven business days after the amounts are separated from the business’s assets, the contributions are deemed timely made.
From the IRS’ tax perspective, in no event can the deferrals be deposited after the deadline for filing the business’s tax return, plus extensions.
Conclusion
With respect to making a salary deferral election, a self-employed individual must do so no later than the last day of his or her tax year. The election should be documented in writing for proof in the event the plan later undergoes an audit. Therefore, those self-employed individuals following a calendar tax year must be sure to execute their written deferral elections by December 31, 2018!
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“My client says she has a Long-Term Incentive Plan (LTIP). What is an LTIP, and is it a type of 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 York is representative of a common inquiry related to compensation programs.
Highlights of the Discussion
A Long-Term Incentive Plan or LTIP is a type of compensation incentive program designed to reward executives for achieving the sponsoring company’s strategic objectives while maximizing shareholder value. It in not an IRC Sec. 401(a) qualified retirement plan [e.g., profit sharing or 401(k)], but rather, a way of compensating executives for reaching specified company performance goals.
An LTIP may be one components of a senior executive’s pay package, which may include:
According to the Center for Executive Compensation, an LTIP can take the form of stock-based compensation, such as stock options, restricted stock, performance shares, cash, or stock-settled performance units. Usually, LTIPs are a mix of types of equity and may include a cash component. The performance period for an LTIP typically runs between three and five years. The executive does not receive any pay from the incentive program until the end of the performance period and the performance measure is met. Long-term incentive goals vary by company but the most prevalent are focused on Total Shareholder Return (TSR), operational measures such as earnings per share and return measures, such as return on assets.
Conclusion
An LTIP is a general name for a type of compensation for executives, the form of which may vary, depending on the company’s specific pay program. An LTIP can have material impact on an investment client’s overall finances. Therefore, reviewing the documentation associated with such arrangements and understanding their impact can go a long way to achieving a client’s goal of financial wellness.
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“What defines a discretionary plan trustee vs. a directed plan trustee?”
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 Kentucky is representative of a common inquiry related to retirement plan trustees.
Highlights of the Discussion
ERISA Section 403(a) (see page 207 of linked information) provides that the assets of a qualified retirement plan must be held in trust by one or more trustees. The trustee will be either named in the plan document or appointed by a person who is a named fiduciary. The appointment of a plan’s trustee(s) is an important fiduciary decision that must be undertaken in a prudent manner by the plan sponsor or retirement plan committee with the proper authority.
Not all trustees, however, have the same authority or discretion to manage or control the assets of a plan. A trustee that has exclusive authority and discretion to manage and control the assets of the plan is a discretionary trustee. A discretionary trustee may be an employee of the company, but, more than likely, this role is outsourced to a third party.
However, a plan can expressly provide that the trustee is subject to the direction of a named fiduciary who is not a trustee. This is a directed trustee. The scope of a directed trustee’s duties is “significantly narrower than the duties generally ascribed to a discretionary trustee …” (Field Assistance Bulletin 2004-03). While a directed trustee is still a plan fiduciary, his or her fiduciary liability is limited, because he or she is required to act upon the direction of another plan fiduciary. The use of a directed trustee is a common plan model in the retirement industry. Many organizations serve as directed trustees.
“Direction” of the trustee is proper only if it is “made in accordance with the terms of the plan” and “not contrary to the Act [ERISA].” Accordingly, when a directed trustee knows or should know that a direction from a named fiduciary of the plan is not made in accordance with the terms of the plan or is contrary to ERISA, the directed trustee should not, consistent with its fiduciary responsibilities, follow the direction.
Conclusion
There are two basic flavors of qualified retirement plan trustee: discretionary and directed. Check the terms of the governing plan document and trust agreement for a particular plan to determine which applies.
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“What contributions are eligible for the retirement savings tax credit?”
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 Oklahoma is representative of a common inquiry regarding available tax credits for retirement contributions.
Highlights of Discussion
IRA owners and retirement plan participants (including self-employed individuals) may qualify for a retirement savings contribution tax credit. Details of the credit appear in IRS Publication 590-A and here Saver’s Credit.
The credit
Contributors can claim the Saver’s Credit for personal contributions (including voluntary after-tax contributions) made to
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.
2018 Saver’s Credit Income Levels
| Credit Rate | Married Filing Jointly | Head of Household | All Other Filers* |
| 50% of your contribution | AGI not more than $38,000 | AGI not more than $28,500 | AGI not more than $19,000 |
| 20% of your contribution | $38,001 – $41,000 | $28,501 – $30,750 | $19,001 – $20,500 |
| 10% of your contribution | $41,001 – $63,000 | $30,751 – $47,250 | $20,501 – $31,500 |
*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.
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“Are defined contribution plans subject to the survivor annuity requirements for distributions?”
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 the survivor annuity rules for qualified plans.
Highlights of the Discussion
As you may know, all defined benefit (DB) plans are subject to the survivor annuity requirements. There are also some defined contribution (DC) plans that must satisfy these rules as well, although they are few and far between (IRC Secs. 401(a)(11) and 417).
As background, for plans that must satisfy the survivor annuity rules, if a participant dies before plan distributions are required to begin (i.e., the annuity starting date), benefits must be paid to the surviving spouse in the form of a qualified pre-retirement survivor annuity (QPSA). If a participant dies after the annuity starting date, the participant’s account balance must be used to purchase a qualified joint and survivor annuity (QJSA) Treas. Reg. § 1.401(a)-20, Q&A 8(a)]. 1.401(a)-20.
Under the Pension Protection Act of 2006 (PPA), starting with plan years beginning on or after January 1, 2008, a plan is required to offer a qualified optional survivor annuity (QOSA) in the event a participant waives the QJSA. A QOSA is an annuity that is
First, any DC plan to which the minimum funding standard of IRC Sec. 412 applies (such as a money purchase pension plan) must follow the QJSA/QOSA/QPSA rules. However, even if a DC plan is not subject to the minimum funding standard, it may still have to meet the QJSA/QOSA/QPSA requirements. In order to avoid the survivor annuity mandate the plan must meet all of the following stipulations:
A DC plan is a transferee plan for any participant if it
Note that a rollover contribution (including a direct rollover) is not a direct or indirect transfer that would cause the survivor annuity requirements to apply.
Conclusion
The following schematic illustrates when a DC plan may be subject to the QJSA/QOSA/QPSA requirements.
