Tag Archive for: SECURE 2.0

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Long-Term Part-Time Employees and Liberal Plan Entry

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My client is concerned about the Long-Term Part-Time Employee (LTPTE) rules. His plan allows employees to enter the plan as of the first of the month following their date of hire, without an hour of service requirement. How do the LTPTE rules apply in his case?

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 Indiana is representative of a common inquiry related to long-term part-time employees.

Highlights of the Discussion
The short answer is—they do not apply. Here’s why. Under the LTPTE rules for 2024, employees who had at 500-999 hours of service in 2021, 2022 and 2023 (i.e., three consecutive years) and reached age 21, would have become eligible to defer into the company’s 401(k) plan in 2024. Pre-2021 service is ignored in this case. For 2025, the years of service requirement is reduced to two years. Therefore, an employee with at least 500-999 hours of service in 2023 and 2024, and who is age 21 would become eligible for deferrals in 2025. Pre-2023 service is ignored for this purpose.

If a plan has immediate eligibility (no hour of service requirement) or the eligibility requirements are more liberal than the LTPTE eligibility requirements, then the LTPTE rules are not applicable (REG–104194–23). Since the plan’s eligibility provisions, in this case, allow employees to enter the plan as of the first of the month following their date of hire without any hour of service requirement, the LTPTE rules do not apply as the eligibility rules are more liberal than the LTPTE requirements.

Conclusion
In 2024, we saw the first LTPTEs become eligible to participate in 401(k) plans. Plans that have more liberal eligibility requirements than those outlined under the LTPTE rules are not subject to the LTPTE rules.

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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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A SIMPLE Switch

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“Can I terminate my SIMPLE IRA plan and start a 401(k) plan mid-year?”

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

A recent call with a financial advisor from Minnesota is representative of a common inquiry related to SECURE Act 2.0 of 2022 (SECURE 2.0).

Highlights of the Discussion

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

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

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

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

 

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

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

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

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

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

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

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

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

Conclusion

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

 

 

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Sweeter Deal Awaits Small Businesses When Starting a Workplace Retirement Plan

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“What are the changes to the small plan startup tax credits for 2023 and could you walk me through an example, please?”

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 Florida dealt with a question on the SECURE Act 2.0 of 2022 (SECURE 2.0).

Highlights of Discussion

First, for businesses with up to 50 employees without a retirement plan that establish a SEP, SIMPLE IRA or 401(k) plan, Section 102 of SECURE 2.0 increases the small plan startup tax credit from 50 percent to 100 percent of eligible costs (capped at $5,000 per year) for the first three years the plan exists. (Prior rules still apply for those with 51-100 employees.)

More precisely, the enhanced credit is 100 percent of the eligible startup costs, up to the greater of

$500; or

The lesser of

  • $250 multiplied by the number of nonhighly compensated employees (nonHCEs) who are eligible to participate in the plan, or
  • $5,000.

Other eligibility rules include

  • The business had at least one plan participant who was a nonHCE; and
  • In the three tax years before the first year the business is eligible for the credit, the covered employees were not substantially the same employees who received contributions or accrued benefits in another plan sponsored by the business.

Second, the new law also added an additional credit exclusively for defined contribution plans with 50 or fewer employees. The credit is equal to a percentage of the amount contributed by the employer on behalf of employees, up to a per-employee cap of $1,000. Employees with compensation in excess of $100,000 are excluded from the calculation. This credit applies for five years and is phased out for employers with between 51 and 100 employees.

Year % of Contribution up to $1,000
1 and 2 100%
3 75%
4 50%
5 25%

 

But don’t forget about the third potential plan startup credit that still exists under the old rules. An eligible employer that adds an auto-enrollment feature to its plan can claim a tax credit of $500 per year for a three-year period beginning with the first taxable year the employer includes an auto-enrollment feature.

EXAMPLE:

  1. Newbie Inc., sets up a new auto-enroll 401(k) plan with a 100% match up to 4% of compensation
  2. The company has 19 employees: 17 nonHCEs and 2 HCEs,
  3. There are 8 employees with compensation over $100,000 and 11 employees each with compensation of between $25,000-$100,000.
  4. Total startup costs for Year 1 = $7,500

Credit #1 Startup Credit

Dollar Limitation (The greater of $500 OR the lesser of A or B)

  1. $4,250 (i.e., $250 x 17 nonHCE participants)*
  2. $5,000

Result= $4,250

*20-50 nonHCEs would impose the $5,000 yearly cap

Credit #2 Auto Enrollment

Credit for auto enrollment feature = $ 500

Credit #3 Employer Contributions

11 employees with comp < $100K x $1,000= $11,000

Year 1 Startup Credits
100% of costs up to dollar limitation $4,250
Plus credit for auto enrollment feature $   500
Plus credit for employer contribution $11,000
Total Year 1 Credits $15,750

 

Businesses will likely use an updated version of Form 8881, Credit for Small Employer Pension Plan Startup Costs and Auto-Enrollment to claim the credits.

Conclusion

A sweeter tax deal may await small businesses that do not currently offer workplace retirement plans. SECURE 2.0 enhances current plan startup tax credit rules and adds a new tax credit for employer-provided contributions. Plus, the $500 spiff for adding an auto-enroll feature may apply.

 

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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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