Tag Archive for: SECURE Act 2.0

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SIMPLE IRA Plan Termination and Two-Year Rollover Rule

“One of my clients terminated his SIMPLE IRA plan at the end of 2023 and established a 401(k) plan beginning 2024. He’s worried about the two-year waiting period for distributing assets held in the now terminated SIMPLE IRA plan. Is there any leeway with the waiting period for a terminated SIMPLE IRA plan?”

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

Highlights of Discussion
Yes, there is, and we just received more clarification on this issue in IRS Notice 2024-02. You are aware that a distribution from a SIMPLE IRA within the first two years of an individual’s participation in the SIMPLE IRA plan, potentially, is subject to a 25 percent early distribution penalty tax unless the amount is being moved to another SIMPLE IRA plan or a penalty exception applies.

Section 332(b) of the SECURE Act 2.0 adds Internal Revenue Code (IRC) Sec. 72(t)(6)(B) to the IRC and amends IRC Sec. 408(d)(3)(G). Under the addition and amendment, if an employer terminates a SIMPLE IRA plan and establishes a 401(k) plan [or 403(b)] plan that limits distributions (as described next), then the two-year waiting period on rollovers from the terminated SIMPLE IRA to the 401(k) [or 403(b)] does not apply, provided the rollover contribution is subject to the receiving plan’s distribution restrictions (Q&A G4 of Notice 2024-02).

In the case of a 401(k) plan, distributions must be limited to those triggers listed in IRC Sec. 401(k)(2)(B):
• Severance from employment,
• Death,
• Disability,
• Plan termination,
• Attainment of age 59½,
• Hardship,
• As a qualified reservist distribution,
• For certain lifetime income investments and
• As qualified long-term care distributions.

Further, amounts may not be distributable by reason of the completion of a stated period of participation or the lapse of a fixed number of years (e.g., no in-service distributions prior to age 59 ½). Be sure to check the 401(k) plan document for its treatment of rollover contributions. Some plans allow distributions of rollover amounts at any time.

For 403(b) plans, rollover contributions from the terminated SIMPLE IRA plan must be limited to those triggers listed in IRC Sec. 403(b)(11), which are similar to those listed above.

Conclusion
Under SECURE Act 2.0, with clarification by Notice 2024-02, if an employer terminates a SIMPLE IRA plan and establishes a 401(k) plan [or 403(b)] plan that limits distributions as prescribed, then the two-year waiting period on rollovers from the terminated SIMPLE IRA to the 401(k) [or 403(b)] does not apply, provided the rollover contribution is subject to the receiving plan’s distribution restrictions. An in-service distribution provision before age 59 ½ would not align with the necessary distribution restrictions for the waiver.

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New Cash Out Limit—Mandatory or Not?

“SECURE Act 2.0 increased the plan cash-out limit to $7,000. Are plans required to apply the new limit?”

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

A recent call with a financial advisor in Utah is representative of a common inquiry involving plan cash outs.

Highlights of Discussion
This is a great question because there are several areas of confusion related to plan cash-out provisions. The following addresses the dollar thresholds associated with cash-outs or “mandatory distributions.”

First, qualified retirement plans are not required to have cash-out provisions at all. Internal Revenue Code (IRC) sections 411(a)(11) and 417(e) permit—but do not require—qualified plans to include provisions allowing for the immediate distribution of a separated participant’s vested benefit without the participant’s consent where the present value of the benefit is less than the statutory limit.

Plan sponsors can elect to add a provision to their plans to cash out small, vested benefit amounts up to the statutory limit when a participant terminates. These mandatory distributions can be paid out without the consent of the participant or his/her spouse, if applicable. The statutory limit in recent years has been up to $5,000, but Section 304 of the SECURE Act 2.0 increased the statutory limit to $7,000, effective for 2024 and later years.

Each plan has the option to set its own cash-out threshold within the prescribed limit (anywhere from $0 to $7,000 for 2024 and later years).The threshold must be written into the plan document. So, if a plan has a cash-out provision, the threshold could be any amount up to $7,000. Moreover, the anti-cutback rules do not apply to amendments adding or changing a plan’s cash-out threshold [Treas. Reg. §1.411(d)-4, Q&A-2(b)(2)(v)].

Plans with a cash-out level of less than $1,000 can issue a check for the amount to the participant. Plans that have a cash-out threshold of between $1,000 and the statutory maximum (now $7,000) must automatically roll over the distribution to an IRA established for the former employee, if the former employee does not make an affirmative election to have the amount paid in a direct rollover to an eligible retirement plan or to receive the distribution directly. Notice requirements apply. For additional information please see Notice 2005-5.

Conclusion
Qualified plans are not required to have cash-out provisions, but if they do, the details must be specified in the plan document. Each plan has the option to set its own cash-out threshold within the prescribed limit (anywhere from $0 to $7,000 for 2024 and later years).

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Deadline for Setting Up a SIMPLE IRA Plan

Did SECURE Acts 1.0 and/or 2.0 Change the Deadline for Setting Up a SIMPLE IRA Plan?

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

A recent call with an advisor in New Mexico is representative of an inquiry involving a savings incentive match plan for employees (SIMPLE) IRA plan.

Highlights of the Discussion

The short answer is no. While SECURE Acts 1.0 and/or 2.0 have given us a multitude of retirement plan changes, they did not affect the deadline for setting up a SIMPLE IRA plan. The general deadline for establishing a SIMPLE IRA plan for a given year is still October 1 of the year.  For example, the deadline for an eligible business owner to set up a SIMPLE IRA plan for 2023 is October 1, 2023.

There are two exceptions to the general rule as follow (See IRS Notice 98-4, Q&A K-1).

  1. If the business comes into existence after October 1 of the year the SIMPLE IRA plan is desired, then the new business owner may still set up a SIMPLE IRA plan for the year, provided he or she does so as soon as administratively feasible after the start of the new business.
  2. If a business has previously maintained a SIMPLE IRA plan, then it may only set up a new SIMPLE IRA plan effective on January 1 of the following year (e.g., set up the plan in 2023 with an effective date of January 1, 2024).

Businesses that are eligible to establish SIMPLE IRA plans are those that

  1. Do not maintain any other qualified retirement plans; and
  2. Have 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) and IRS Notice 98-4, Q&A B4 ].

However, an employer can use less restrictive participation requirements if it so desires.

(Note that SECURE Act 2.0, beginning in 2024, will allow employers to replace their SIMPLE IRA plans mid-year with an “eligible 401(k) replacement plan.” See a prior Case of the Week  “A SIMPLE Switch” for more information.)

The basic steps for establishing a SIMPLE IRA plan are

  1. Execute a written plan document (either a government Form 5304-SIMPLE or Form 5305-SIMPLE, or a prototype plan document from a mutual fund company, insurance company, bank or other qualified institution);
  2. Provide notice to employees; and
  3. Ensure each participant sets up a SIMPLE IRA to receive contributions.

Employees who are eligible to participate in a SIMPLE IRA plan are those who received at least $5,000 in compensation from the employer during any two preceding years and are reasonably expected to receive at least $5,000 in compensation during the current year.

Conclusion

Business owners who are interested in establishing SIMPLE IRA plans must be aware of the deadline to do so, and the additional steps involved to ensure a successful set up.

 

 

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New RMD Age and Plan Delay

“Several of my clients’ qualified retirement plans include the ability for certain participants who are still working to delay the required beginning date (RBD) for taking required minimum distributions (RMDs) until after retirement. Does the change in the RMD age from 72 to 73 for 2023 through 2032 affect the ability to delay RMDs past retirement if their plans give them that option?”

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

A recent call with a financial advisor from California dealt with a question on 401(k) plans and required minimum distributions (RMDs).

Highlights of Discussion

Great question. Section 107 of SECURE Act 2.0 of 2022 changes the RMD age in the Internal Revenue Code (IRC) from age 72 to “the applicable age,” which is further defined as 73 for years 2023 through 2032 (and 75 for 2033 and years thereafter). The ability for some workers to delay RMDs until after retirement (even after reaching the applicable age) is driven by plan design and Treasury Regulations.

Pursuant to Proposed Treasury Regulation §1.401(a)(9)–2(b)(3), plan sponsors have the option (depending on the document they use) to allow participants who 1) continue to work and 2) are not five percent owners (i.e., participants who own five percent or less of the employer) to wait to begin RMDs until April 1 of the year following the later of the calendar year in which the employee—

  • Attains age 72; or
  • Retires from employment with the employer maintaining the plan.

We currently have proposed RMD regulations, and the Treasury Department has indicated final regulations at 1.409(a)(9) are imminent. We fully anticipate the regulations will reflect the new “applicable age” language of SECURE 2.0 and will continue to allow eligible participants to delay RMDs until after retirement if their plans currently allow the option.

Conclusion

SECURE 2.0 changes the current RMD age of 72 to 73 for years 2023 through 2032 (and to 75 for 2033 and years thereafter).  The Treasury Department is schedule to issue final treasury regulations to provide further implementation guidance in the near future. Plans with the appropriate language may still allow non-five-percent owners who are still working to delay their RMDs until after retirement.

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Mandatory Automatic Enrollment—Is My Plan Grandfathered?

“My client established a new 401(k) plan effective 1/1/2023. The plan does not have an automatic enrollment feature. Would my client’s plan be considered ‘grandfathered’ under SECURE Act 2.0 and, therefore, exempt from the mandatory automatic enrollment requirement that takes effect in 2025?”

Highlights of Discussion

Even though your client established a plan before the date by which most new plans must include an automatic enrollment and escalation feature (i.e., by the 2025 plan year), the plan does not meet the definition of grandfathered for purposes of being exempt from the automatic enrollment requirement.

Section 101 of SECURE Act 2.0 of 2022 requires 401(k) and 403(b) plans to automatically enroll participants in the following eligible automatic contribution arrangement (EACA) upon becoming eligible. The Year 1 enrollment amount must be least 3% and may go up to 10%. For subsequent years, the deferral amount is increased by one percentage point until it reaches at least 10%, but not more than 15%.[1] Participants may opt out or elect another percentage. The following plans are exempt:

  • Grandfathered plans (i.e., all current 401(k) and 403(b) plans established as of 12/29/2022—the date of SECURE 2.0’s enactment)
  • Businesses with 10 or fewer employees
  • Businesses in existence for less than 3 years
  • Church plans
  • Governmental plans

Conclusion

Because your client did not establish the company’s  401(k) plan on or before 12/29/2022, it does not qualify for the grandfathered exemption. Therefore, your client will have to incorporate the EACA described above by the 2025 plan year unless, of course, one of the other exemptions applies.

 

[1] Nonsafe-harbor plans are capped at 10% until the 2025 plan year

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Linking Student Loan Repayments and 401(k) Plan Contributions

“I’m hearing more and more about 401(k) plans that allow participants to receive employer matching contributions based on their student loan payments. Is this permitted? What about the contingent benefit rule?”

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

A recent call with a financial advisor in Colorado is representative of a common scenario involving 401(k) participants with student loan debt.

Highlights of the Discussion

According to the Federal Reserve, student loan debt has reached a staggering amount: $1.52 trillion. For many younger workers it has become a huge stumbling block to achieving financial wellness, including saving for retirement. A new in-plan approach to addressing student loan debt is to provide some kind of loan repayment incentive through the employer’s 401(k) plan. The industry has been hearing more and more about such arrangements, especially following an IRS private letter ruling (PLR) issued in 2018 to Abbott Laboratories and new proposed legislation in 2020.

PLR 201833012 cracked open the door to encourage retirement savings by those saddled with student loan debt. In the method approved by the IRS in the PLR’s scenario, an employee with student loans was be able to enroll in his employer’s 401(k) plan, make monthly student loan payments to the loan servicer outside of the plan, and have his employer make “student loan repayment nonelective contributions” into the employee’s 401(k) retirement account that “matched” the participant’s loan payment, up to a certain amount.  Since the nonelective contribution was not contingent upon making employee salary deferrals, the plan did not violate the “contingent benefit” prohibition of Treasury Regulation §1.401(k)-1(e)(6).  The contingent benefit rule prohibits conditioning the receipt of other employer-provided benefits on whether an employee makes employee elective salary deferrals. Receiving matching contributions is the sole exception to this rule. The PLR did not address whether the plan meets other qualification requirements under IRC Sec. 401(a).

A PLR may not be relied on as precedent by other taxpayers. Consequently, while the interest of plan sponsors is there to use their companies’ 401(k) plans to help employees reduce student loan debt and improve financial wellness, and a few companies have stuck their toes in the water, the general uncertainty of how the feature would affect a plan’s overall qualified status in the eyes of the IRS still hinders its widespread adoption.

To help curb employer reticence, there is currently a proposal before Congress entitled the Securing a Strong Retirement Act of 2020 that includes Section 109: Treatment of student loan payments as elective deferrals for purposes of matching contributions. Under the bill, an employer would be permitted to make matching contributions under a 401(k) plan, 403(b) plan, or Savings Incentive Match Plan for Employees (SIMPLE) IRA plan with respect to “qualified student loan payments,” the definition of which is broadly defined as any indebtedness incurred by the employee solely to pay “qualified higher education expenses” of the employee. Similarly, governmental employers would also be permitted to make matching contributions in a 457(b) plan or another plan with respect to such loan repayments. This would essentially treat an employee’s student loan payment as an elective deferral.

Regardless of what happens to SECURE Act 2.0, the IRS has made guidance on the connectivity of student loan payments and qualified retirement plans (including 403(b) plans) at top priority for 2021.[1]

Conclusion

Employers are focusing on employee financial wellness, including adopting measures to help alleviate student loan debt and encourage retirement savings. One enticing option that advances both goals, potentially, is linking student loan repayments with 401(k) plan contributions. The industry can anticipate more guidance in 2021—whether in the form of new Treasury Regulations or federal law.

[1] IRS 2021 Priority Guidance Plan

 

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