Tag Archive for: 401k

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Can My Client Still Set Up a 401(k) Plan for 2022?

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“I’m a wealth advisor working with sole proprietor who wants to set up a 401(k) plan for 2022. Is that still possible and could she make salary deferrals for 2022?”

Highlights of the Discussion

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

With respect to setting up a plan for 2022, the short answer is, yes, provided your client has an extension to file her 2022 tax return. However, she could only make an employer contribution for herself—not employee salary deferrals for 2022. Here’s why.

Under the SECURE Act 1.0, for 2020 and later tax years, a business has until its tax filing deadline, plus extensions for a particular tax year to set up a plan. The plan establishment deadline is tied to the type of business entity and its associated tax filing deadline. Please see a prior Case of the Week, “Plan Establishment and Compensation,” for more detailed information.

For example, a sole proprietorship [or limited liability corporation (LLC) taxed as sole proprietorship] would have an extended plan establishment deadline of October 15, 2023, to set up a plan for 2022. That means your client could set up a 401(k) plan up until that date if she has a tax filing extension.

Regarding the ability to make retro-active employee salary deferrals, unfortunately, it is too late for your client to make salary deferrals for 2022. The change that allows sole proprietors or single member LLCs to make retroactive first-year elective deferrals under Section 317 of SECURE Act 2.0 takes effect for plan years beginning after December 29, 2022. Consequently, if she sets up a 401(k) plan now, she could only make salary deferrals on a prospective basis.

Conclusion
SECURE Acts 1.0 and 2.0 have made favorable changes to plan establishment and funding rules, including the ability to make retroactive first-year elective deferrals for certain unincorporated business owners beginning for the 2023 plan year. Before jumping into a plan, be aware there are lots of details that investors should discuss with their tax and legal advisors.

 

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Education on Education Policy Statements

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“I just attended a training meeting where the speaker mentioned an Education Policy Statement (EPS). Is a plan required to have an EPS?”

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 Maryland involved a question on participant education.

Highlights of Discussion

While the DOL does not require qualified retirement plans to have an Education Policy Statement (EPS), it can be a helpful fiduciary liability reduction tool for plan sponsors who offer plan participants the ability to self-direct their account balances. It is often viewed as an extension of a plan’s Investment Policy Statement. The EPS is the blueprint for how the fiduciaries of the plan will implement, monitor and evaluate an employee education program with respect to the plan.

ERISA 404(c) provides a mechanism for plan sponsors to shift investment responsibility to participants, provided the plan meets certain requirements. Generally, to meet the requirements of ERISA 404(c), participants must have the opportunity to 1) exercise control over their individual account; and 2) choose from a broad range of investment alternatives (DOL Reg. 2550.404c-1). As part of the ability to exercise control participants must have “…the opportunity to obtain sufficient information to make informed investment decisions.” The EPS can be the means by which plan fiduciaries document how this requirement is met.

Today, the EPS can be part of a broader Financial Wellness Program for employees.

While there is no prescribed format for an EPS, answering the following questions may be helpful in designing the document:

  • What is the purpose of the EPS?
  • What are the objectives of the EPS?
  • What are the educational goals for the plan participants?
  • Who are the responsible parties and what are their duties?
  • How will the education be delivered?
  • How will results be measured?

Conclusion

An EPS is a blueprint for how plan fiduciaries will implement, monitor and evaluate an employee education program with respect to a retirement plan. Although not required, an EPS could be a prudent addition to a plan sponsor’s fiduciary fulfillment file.

 

 

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

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

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with an advisor in Illinois involved a case related to multiple employer plans (MEPs).

Highlights of Discussion

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

 

Conclusion

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

 

 

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CalSaver’s Plan and Federal Plan Startup Tax Credit

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 “A number of my business clients have been required to adopt the Calsaver’s plan for their employees. Now I see the SECURE Act 2.0 of 2022 sweetened the federal tax credit for plan startup costs for businesses with 50 or fewer employees. If a business has adopted the CalSaver’s plan is the plan startup tax credit still available to them?”

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

Highlights of Discussion
The good news is, “yes,” small business owners that adopted the CalSaver’s plan will still qualify for the federal plan startup tax credit if they want to upgrade from the CalSaver’s plan to a simplified employee pension (SEP), savings incentive match plan for employees (SIMPLE) or qualified plan (e.g., 401(k) plan) and they otherwise qualify for the tax credit (i.e., had 100 or fewer employees who received at least $5,000 in compensation for the preceding year; and had at least one plan participant who was a nonhighly compensated employee).

The federal plan startup credit under IRC Sec. 45E is not available if, during the three-taxable year period immediately preceding the first taxable year for which the credit would otherwise be allowed, the employer or any member of any controlled group including the employer (or any predecessor of either), established or maintained a “qualified employer plan” with respect to which contributions were made, or benefits accrued, for substantially the same employees as are in the new qualified employer plan. A CalSaver’s plan is a payroll deduction Roth IRA—completely employee funded. It is not considered a qualified retirement plan that would preclude a small employer from being eligible to claim the plan startup credit if the employer is otherwise eligible.

Section 102 of the SECURE Act 2.0 of 2022 (see page 819) increases the plan startup credit from 50 percent to 100 percent of eligible plan startup cost up to $5,000 for the first three years for employers with up to 50 employees. Prior rules still apply for those with 51-100 employees. What’s more, there is an additional credit available for defined contribution plans that is a percentage of employer contributions made for five years on behalf of employees, up to a per-employee cap of $1,000. The contribution credit is phased out for employers with between 51 and 100 employees.

Conclusion
A CalSaver’s plan is a payroll deduction Roth IRA—completely employee funded. It is not considered a qualified retirement plan that would preclude a small employer from being eligible to claim the federal plan startup credit if the employer is otherwise eligible and establishes a SEP, SIMPLE or qualified plan.

 

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The Dos and Don’ts of Aggregating Required Minimum Distributions

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“I have a 72-year-old client who is retired.  He has numerous retirement savings arrangements, including a Roth IRA, multiple traditional IRAs, a SEP IRA and a 401(k) plan. Can a distribution from his 401(k) plan satisfy all RMDs that he is obliged to take for the year?

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with an advisor in Minnesota is representative of a common question involving required minimum distributions (RMDs) from retirement plans.

Highlights of Discussion

No, your client may not use the RMD due from his 401(k) plan to satisfy the RMDs due from his IRAs (and vice versa). He must satisfy them independently from one another. Participants in retirement plans, such as 401(k), 457, defined contribution and defined benefit plans, are not allowed to aggregate their RMDs [Treasury Regulation 1.409(a)(9)-8, Q&A 1]. If an employee participates in more than one retirement plan, he or she must satisfy the RMD from each plan separately.

With respect to your client’s IRAs, however, there are special RMD “aggregation rules” that apply to individuals with multiple IRAs. Under the IRA RMD rules, IRA owners can independently calculate the RMDs that are due from each IRA they own directly (including savings incentive match plan for employees (SIMPLE IRAs, simplified employee pension (SEP) IRAs and traditional IRAs), total the amounts, and take the aggregate RMD amount from an IRA (or IRAs) of their choosing that they own directly (Treasury Regulation 1.408-8, Q&A 9).

RMDs from inherited IRAs that an individual holds as a beneficiary of the same decedent may be distributed under these rules for aggregation, considering only those IRAs owned as a beneficiary of the same decedent.

Roth IRA owners are not subject to the RMD rules but, upon death, their beneficiaries would be required to commence RMDs. RMDs from inherited Roth IRAs that an individual holds as a beneficiary of the same decedent may be aggregated, considering only those inherited Roth IRAs owned as a beneficiary of the same decedent.

403(b) participants have RMD aggregation rules as well. A 403(b) plan participant must determine the RMD amount due from each 403(b) contract separately, but he or she may total the amounts and take the aggregate RMD amount from any one or more of the individual 403(b) contracts. However, only amounts in 403(b) contracts that an individual holds as an employee (and not a beneficiary) may be aggregated. Amounts in 403(b) contracts that an individual holds as a beneficiary of the same decedent may be aggregated [Treasury Regulation 1.403(b)-6(e)(7)].

Conclusion

In most cases, individuals who are over age 72 are required to take RMDs from their tax-favored retirement accounts on an annual basis. There is some ability to aggregate RMDs for IRAs and 403(b)s, but one must be careful to apply the rules for RMD aggregation correctly. Failure to take an RMD when required could subject the recipient to a sizeable penalty (i.e., 50 percent of the amount not taken).

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Applying a QACA Election

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“My client is implementing a QACA in her 401(k) plan. Does she have to apply the default election provision to all participants?”

Highlights of the Discussion

In general, according to IRS rules, your client would not have to apply the QACA default election to any employee who is eligible to participate in the 401(k) plan prior to the effective date of the QACA and has a previous salary deferral election in place or has affirmatively elected not to defer at all [ Treas. Reg. § 1.401(k)-3(j)(1)(iii)].

However, your client should check the terms of the plan document for the precise application of the default election. Sometimes a plan can be designed to apply the default election to those participants whose current deferral percentages are less than the QACA default deferral percentage.

Also, it could be possible for a plan to contain a provision where a participant’s current election expires after a set amount of time. In that case, the plan could then apply the QACA default percentage unless the affected participant executes another affirmative deferral election or opts out.

Conclusion

In a 401(k) plan with a QACA, there are exceptions to applying the QACA default deferral percentage. The best source to turn to is the plan document for the precise application of the QACA default election.

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IRS as Creditor

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Is the account balance of a 401(k) plan participant protected from an IRS tax levy?

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 Alabama is representative of a common inquiry involving 401(k) plans and IRS tax levies.

Highlights of Discussion

Unfortunately, no it is not. If the participant has an unpaid tax liability the IRS has the authority to levy against his or her 401(k) plan account balance [ Reg. § 1.401(a)-13(b)(2)].  In fact, any qualified retirement plan or IRA [including traditional, Roth, savings incentive match plan for employees (SIMPLE) or simplified employee pension (SEP) plan IRAs] may be subject to an IRS tax levy.

11.6.3 of the IRS’s Internal Revenue Manual (IRM) provides instructions and strict procedures when an IRS tax levy involves assets in retirement plans (as opposed to retirement income under 5.11.6.2 of the IRM). The IRM instructs agents to levy on retirement accounts only after considering the following questions.

1) Does the taxpayer have property other than retirement assets that may be available for collection first?

2) Has the taxpayer exhibited “flagrant” conduct? (See example next.)

EXAMPLE:  Jake, who has an outstanding tax liability with the IRS, continues to make voluntary contributions to retirement accounts while asserting his inability to pay the amount he owes to the IRS.   The IRS could deem this conduct as flagrant.

3) Are the retirement plan assets  necessary to cover the tax payer’s essential living expenses?

4) Does the taxpayer have “present rights” to receive the retirement plan assets?

EXAMPLE:  Amanda has money in a 401(k) plan, but cannot withdraw it until she experiences a distribution triggering event as listed in the plan document. An IRS levy may identify her 401(k) plan balance, but the money cannot be paid over until Amanda can withdraw it under the terms of the plan.

Logistically, the IRS will use Form 668-R, Notice of Levy on Retirement Plans for levying retirement plan assets.  When money is withdrawn from a retirement account to satisfy an IRS levy the taxpayer would include any pre-tax amounts in his or her taxable income for the year. Fortunately, an exception to the 10% additional tax on early distributions for taxpayers under age 59 ½ applies if the money was withdrawn because of a notice of levy served on the retirement account.

Conclusion

In most cases, 401(k) plan assets are protected from creditors—unless the creditor is the IRS.  However, IRS agents are instructed to levy against retirement plan assets only as a last resort.  Any taxpayer addressing an IRS tax levy should seek guidance from an experienced tax professional or attorney experienced in this area.

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“How is a lump-sum payout of unused vacation treated for plan purposes–is it compensation?”

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“How is a lump-sum payout of unused vacation treated for plan purposes–is it compensation?”

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

Highlights of Discussion

  • To answer this question, we need to consider two issues—ideally with the help of a tax advisor. First, how does the IRS treat a lump-sum payout of unused vacation for tax purposes and, second, what is the definition of compensation for plan purposes according to the governing plan document?
  • The following is not tax advice, but a general explanation of the rules based on IRS source materials. With respect to the first question, the IRS treats a lump-sum payout of unused vacation as “supplemental wages” subject to Social Security and Medicare taxes according to the IRS Publication 15, (Circular E), Employer’s Tax Guide. Any federal income tax withheld will be at the IRS supplemental wage tax rate, depending on whether the supplemental payment is identified as a separate payment from regular wages or combined with regular wages. (For more information, please see Publication 15 and Treasury Decision 9276.)
  • Regarding question number two, as supplemental wages, a lump-sum payout of unused vacation would be included in the definition of compensation for plan purposes—unless it is explicitly excluded under the terms of the plan document. Therefore, be sure to check the wording of the plan document carefully.

Conclusion

The IRS treats the lump-sum payout of unused vacation as supplemental wages for tax purposes. As supplemental wages, a lump-sum payout of unused vacation would be included in the definition of compensation for plan purposes—unless it is explicitly excluded under the terms of the plan document. For specific tax advice, please see the guidance of a tax professional.

 

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Remember the Saver’s Tax Credit

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“Can you remind me of the special tax credit available for individuals who make retirement savings contributions, please?”

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with an advisor in Nevada is representative of a common inquiry regarding available tax credits for personal contributions to eligible plans.

Highlights of Discussion

Absolutely, after all, it is tax time! IRA owners, retirement plan participants (including self-employed individuals) and others may qualify for the IRS’s “Saver’s Credit” for certain contributions made to eligible savings arrangements. Details of the credit appear in IRS Publication 590-A and here Saver’s Credit.

The credit

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

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

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

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

1) Are age 18 or older;

2) Not a full-time student;

3) Not claimed as a dependent on another person’s return; and

4) Have income below a certain level (see table that follows).

* The Achieving a Better Life Experience (ABLE) Act of 2014 allows states to create tax-advantaged savings programs for eligible people with disabilities (designated beneficiaries). Funds from ABLE accounts can help designated beneficiaries pay for qualified disability expenses on a tax-free basis.

2021 Saver’s Credit Income Levels

Credit Rate Married Filing Jointly Head of Household All Other Filers*
50% of your contribution AGI not more than $39,500 AGI not more than $29,625 AGI not more than $19,750
20% of your contribution $39,501 – $43,000 $29,626 – $32,250 $19,751 – $21,500
10% of your contribution $43,001 – $66,000 $32,251 – $49,500 $21,501 – $33,000
0% of your contribution More than $66,000 More than $49,500 More than $33,000

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

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

Conclusion

Every deduction and tax credit counts these days. Many IRA owners and plan participants may be unaware of the retirement plan-related tax credits for which they may qualify.

 

 

 

 

 

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