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Plan Establishment Deadlines

“Is it too late to establish a qualified retirement plan for 2020?”

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 Arizona is representative of a common inquiry related to setting up qualified retirement plans.

Highlights of the Discussion

As a result of the Setting Every Community Up for Retirement Enhancement (SECURE) Act, businesses have more time to set up plans for a particular tax year.

Prior to the SECURE Act, a business that wanted a qualified retirement plan (e.g., 401(k), profit sharing, money purchase pension, defined benefit pension plan, etc.) for a particular tax year had to establish it by the last day of the business’s tax year. For example, a calendar year business had to sign documents to set up the plan by December 31 of the tax year in order to be able to contribute to and take a deduction for contributions.

For 2020 and later tax years, a business has more time—until its tax filing deadline, plus extensions for a particular tax year—to set up a plan. Notice the plan establishment deadline is tied to the type of business entity (e.g., sole proprietor, partnership, corporation, etc.) and its associated tax filing deadline as illustrated below. [Note: Simplified employee pension (SEP) plans have historically followed this schedule; and special set-up rules apply for safe harbor 401(k) plans.]

Tax Status Filing Deadline Extended Deadline
S-Corporation (or LLC taxed as S-Corp) March 15 September 15
Partnership (or LLC taxed as a part) March 15 September 15
C-Corporation (or LLC taxed as C-Corp) April 15 October 15
Sole Proprietorship (or LLC taxed as sole prop) April 15 October 15

EXAMPLE:  Doin’ Great, Inc., has an extended tax filing deadline of October 15, 2021, for its 2020 tax year. The owners of Doin’ Great decide in early 2021 they would like to set up a 401(k)/profit sharing plan for the business for 2020. They have until October 15, 2021, to execute plan documents to set up the plan, effective for 2020. While Doin’ Great would be able to make a profit sharing contribution on behalf of participants for 2020, participants can only make pre-tax employee salary deferrals and designated Roth contributions prospectively—meaning after they execute valid salary deferral elections for compensation yet to be received in 2021.

Conclusion

Thanks to the SECURE ACT, for 2020 and later tax years, a business has more time—until its tax filing deadline, plus extensions for a particular tax year—to set up a plan.

 

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Qualified Charitable Distributions in 2020

“I have a client who consistently has made Qualified Charitable Distributions (QCDs) for the last several years and wants to make another for 2020.  Are they still available even though required minimum distributions (RMDs) are suspended for 2020?”

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 South Dakota is representative of a common inquiry related to charitable giving.

Highlights of the Discussion

  • Yes, if your client is an “eligible IRA owner or beneficiary,” s/he can still make a QCD for 2020 if s/he does so by December 31, 2020. Although the gift will not have the added benefit of counting towards an RMD for the year (since none are due pursuant to the CARES Act), s/he’ll still be able to exclude the QCD from taxable income and have the satisfaction of supporting a good cause. Because the QCD reduces taxable income, other potential benefits may result, for example, a person may be able to avoid paying higher Medicare premiums because of the reduced income. Note that for those who make both QCDs and deductible IRA contributions in the same year, new rules as a result of the SECURE Act may limit the portion of a QCD that is excluded from income.
  • An eligible IRA owner or beneficiary for QCD purposes is a person who has actually attained age 70 ½ or older, and has assets in traditional IRAs, Roth IRAs, or “inactiveSEP IRAs or savings incentive match plans for employees (SIMPLE) IRAs. Inactive means there are no ongoing employer contributions to the SEP IRA or SIMPLE IRA. A SEP IRA or a SIMPLE IRA is treated as ongoing if the sponsoring employer makes an employer contribution for the plan year ending with or within the IRA owner’s taxable year in which the charitable contribution would be made (see IRS Notice 2007-7, Q&A 36).
  • A QCD is any otherwise taxable distribution (up to $100,000 per year) that an eligible person directly transfers to a “qualifying charitable organization.” QCDs were a temporary provision in the Pension Protection Act of 2006.  After years of provisional annual extensions, the Protecting Americans from Tax Hikes Act of 2015 reinstated and made permanent QCDs for 2015 and beyond.
  • Generally, qualifying charitable organizations include those described in §170(b)(1)(A) of the Internal Revenue Code (IRC) (e.g., churches, educational organizations, hospitals and medical facilities, foundations, etc.) other than supporting organizations described in IRC § 509(a)(3) or donor advised funds that are described in IRC § 4966(d)(2). The IRS has a handy online tool Tax Exempt Organization Search, which can help taxpayers identify organizations eligible to receive tax-deductible charitable contributions. Note that s/he would not be entitled to an additional itemized tax deduction for a charitable contribution when making a QCD.
  • Changes under the Coronavirus Aid, Relief, and Economic Security (CARES) Act made the decisions related to charitable giving more complicated in 2020. In addition to the above information on QCDs, the CARES Act created a new above-the-line deduction of $300 for charitable contributions, and allows for cash gifts to most public charities of up to 100 percent of adjusted gross income in 2020.  Because of the added complexity, seeking the advice of a tax professional regarding charitable giving would be the best course of action. IRS Publication 526, Charitable Contributions, provides good basic information on the topic.
  • Where an individual has made nondeductible contributions to his or her traditional IRAs, a special rule treats amounts distributed to charities as coming first from taxable funds, instead of proportionately from taxable and nontaxable funds, as would be the case with regular distributions.
  • Be aware there are special IRS Form 1040 reporting instructions that apply to QCDs.
  • Section IX of IRS Notice 2007-7 contains additional compliance details regarding QCDs. For example, QCDs are not subject to federal tax withholding because an IRA owner that requests such a distribution is deemed to have elected out of withholding under IRC § 3405(a)(2) (see IRS Notice 2007-7 , Q&A 40).

 Conclusion

Eligible IRA owners and beneficiaries, including those with inactive SEP or SIMPLE IRAs, should be aware of the benefits of directing QCDs to their favorite charitable organizations.  Law changes have enhanced other giving options, making professional tax advice essential when making a gifting decision.

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Still Time for a 2020 Nonelective Safe Harbor Plan?

“Although it is already November, can my client amend her traditional 401(k) plan to be a safe harbor plan for 2020?”

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 Illinois is representative of a common inquiry related to safe harbor plans.

Highlights of the Discussion

Yes, but she must hurry. The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 relaxed the deadline for amending a 401(k) plan to add a safe harbor nonelective contribution for the current year.

Under Section 103 of the SECURE Act, plan sponsors may amend their plans to add a three percent safe harbor nonelective contribution at any time before the 30th day before the close of the plan year. The SECURE Act also did away with the mandatory participant notice requirement for this type of amendment.

Furthermore, amendments after that time would be allowed if the amendment provides

1) a nonelective contribution of at least four percent of compensation for all eligible employees for that plan year,

and

2) the plan is amended no later than the close of the following plan year.

EXAMPLE:

Safety First, Inc., maintains a calendar-year 401(k) plan. Based on the plan’s preliminary actual deferral percentage (ADP) test (which the plan is failing), Safety First decides a safe harbor plan is a good idea for 2020. It’s too late to add a safe harbor matching contribution for 2020. However, the business could add a three percent safe harbor nonelective contribution for the 2020 plan year (without prior participant notice) as long as Safety First amends its plan document prior to December 1, 2020. While Safety First still could add a nonelective safe harbor contribution to the plan for 2020 after that date, the minimum contribution would have to be at least four percent of compensation, and the company would have to amend its plan document no later than December 31, 2021.

Conclusion

Thanks to the SECURE Act, 401(k) plan sponsors have more flexibility to amend their plans for “safe harbor” status. Plan sponsors who are failing their ADP tests for the year may find this type of plan amendment attractive as a correction measure.

 

 

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“How did beneficiary distribution options change under the SECURE Act?”

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 Massachusetts is representative of a common inquiry related to beneficiary distribution options.

Highlights of the Discussion

The Setting Every Community Up for Retirement Enhancement (SECURE) Act provisions that Congress added to the Further Consolidated Appropriations Act, 2020, affected the distribution options for retirement plan beneficiaries in 2020 and beyond. The changes are summarized in the charts below.

Beneficiary Changes under the SECURE Act

Applies to distributions with respect to individuals who die after December 31, 2019

Refer to the terms of the plan or IRA agreement for specify options.

Type of Beneficiary Definition Distribution Options
Eligible Designated Beneficiary (EDB)
  • Spouse
  • Disabled or chronically ill individuals
  • Individuals who are not more than 10 years younger than the employee (or IRA owner), or
  • Children of the employee (or IRA owner) who have not reached the age of majority
Terms of the plan or IRA agreement will specify, but  generally:

Death before required beginning date (RBD)

•     Five-year rule

•     Single life expectancy payments

•     Lump sum

•     IRA transfer to own IRA “treat as own” (spouse beneficiary only)

•     Rollover

  • Spouse EDB may roll over his or her share from an IRA or qualified plan into his/her own IRA or eligible plan
  • Non-spouse EDB may roll over his or her share of an employer plan to a beneficiary IRA

Death on or after RBD

•     Single life expectancy payments

•     Lump sum

•     IRA transfer to own IRA “treat as own” (spouse EDB only)

•     Rollover (see above)

Noneligible Designated Beneficiary (Non-EDB) Nonspouse beneficiaries who do not qualify as an EDB as listed above (e.g., child who has reached the age of majority) Terms of the plan or IRA agreement will specify, but generally:

•     Timing of death does not matter (i.e., no before or after RBD differentiation)

•     10-year rule—account depleted within 10 years of death

•     Lump sum

•     Rollover−nonEDB may roll over his or her share of an employer plan to a beneficiary IRA, but payout remains subject to 10-year rule

 

Estate or nonqualified trust as beneficiary Nonperson beneficiaries Death before RBD

•   Lump sum

•   Five-year rule

Death on or after RBD

•   Lump sum

•   Single life expectancy payments

 

Qualified trust as beneficiary with underlying EBD A qualified trust is one that meets the following requirements of Treas. Reg. 1.401(a)(9)-4, Q&A 5(b).

1.   The trust is valid under state law,

2.   The trust is irrevocable (either during the IRA owner or plan participant’s

life or becomes so at his or her death),

3.   The trust has identifiable beneficiaries, and

4.   The trustee of the trust provides the IRA or plan administrator with a copy of the trust instrument (or qualifying trust documentation) by October 31 of the year following the year of the IRA owner or plan participant’s death.

EDB—See above

Death before RBD

·    Lump sum

·    Five-year rule

·    Single life expectancy payments

Death on or after RBD

·     Lump sum

·     Single life expectancy payments

·      Rollovers-

  • Spouse EDB rollover only allowed with private letter ruling
  • Nonspouse EDB may roll over his or her share of an employer plan to a beneficiary IRA with the trust named as beneficiary
Qualified trust as beneficiary with underlying Non-EDB Qualified trust—See above

Non-EDB—See above

Timing of death does not matter (i.e., no before or after RBD differentiation

•   10-year rule

•   Lump sum

•   Rollover−Non-EDB may roll over his or her share of an employer plan to a beneficiary IRA with the trust named as beneficiary, but payout remains subject to 10-year rule

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Boost to Plan Start Up Tax Credit

“Can you explain the recent changes to the tax credit for employers that start new retirement 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 a financial advisor from Colorado is representative of a common inquiry related to tax credits for starting retirement plans.   

Highlights of the Discussion

The Further Consolidated Appropriations Act, 2020 included a provision from the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) that modifies the amount of tax credit a small employer may receive for qualified costs incurred as a result of setting up a new retirement plan for 2020 and later years. Eligible employers (defined later) may be able to qualify for up to a $5,000 tax credit (previously up to $500) for each of the first three years of a plan’s existence.

An eligible employer[1] is one that

  • Had 100 or fewer employees who received at least $5,000 in compensation for the preceding year;
  • Had at least one plan participant who was a nonhighly compensated employee; and
  • In the three tax years before the first year the business is eligible for the credit, the employees were not substantially the same employees who received contributions or accrued benefits in another plan sponsored by the employer, a member of a controlled group, or a predecessor.

The new law increases the credit by changing the calculation of the flat dollar amount limit on the credit to the greater of 1. or 2. below:

  1. $500 OR
  2. The lesser of
  • $250 multiplied by the number of nonhighly compensated employees of the eligible employer who are eligible to participate in the plan OR
  • $5,000.

As a result, for each of the first three years, the credit could be at least $500 and up to $5,000, depending on the number of nonhighly compensated employees covered by the plan. Employers claim the credit using. Form 8881, Credit for Small Employer Pension Plan Startup Costs (to be updated for the increased credit amount).

The term qualified startup costs means any ordinary and necessary expenses of an eligible employer which are paid or incurred in connection with the

  1. Establishment or administration of an eligible employer plan, or
  2. Retirement-related education of employees with respect to such plan.

Eligible plans include an IRC Sec. 401(a) qualified plan, a 403(a) annuity plan, a simplified employee pension (SEP) plan or a savings incentive match plan for employees of small employers (SIMPLE) IRA plan.

The law also creates a separate, new tax credit for the first three years of up to $500 for small employers that add an automatic enrollment feature to a 401(k) or SIMPLE IRA plan.

Conclusion

For 2020 and later years, the incentive for small businesses to establish new retirement plans for their workers has become more lucrative from a tax perspective.

[1] IRC Sec. 45E

 

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SECURE Act Increases Late Filing Penalties

“What are the new higher penalties under the SECURE Act for companies that fail to timely file 401(k) plan reports and notices?”

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 Massachusetts is representative of a common inquiry related to penalties for late plan filings.

Highlights of the Discussion

The Further Consolidated Appropriations Act, 2020 included provisions from the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) that materially increased penalties for plan sponsors that fail to file certain reports and notices in a timely manner. The following penalties apply to filings and notices required to be provided after December 31, 2019.

 

Form or Notice Penalty Assessed for Late Filings after 12/31/2019 Pre-SECURE Act Penalties
Failing to timely file Form 5500[1] Up to $250 per day, not to exceed $150,000 per plan year $25 a day, not to exceed $15,000 per plan year
Failing to timely file Form 5310-A Up to $250 per day, not to exceed $150,000 per plan year $25 a day, not $15,000 per plan year
Failing to file Form 8955-SSA Up to a daily penalty of $10 per participant, not to exceed $50,000 A daily penalty of $1 per participant, not to exceed $5,000
Failing to file Form 5330 The lessor of $435 or 100% of the amount of tax due The lesser of $330 or 100% of the amount due
Failing to file Form 990-T The lessor of $435 or 100% of the amount of tax due The lesser of $330 or 100% of the amount due
Failing to provide income tax withholding notices up to $100 for each failure, not to exceed $50,000 for the calendar year $10 for each failure, not to exceed $5,000

 

Conclusion

Beginning in 2020, plan sponsors face much stiffer IRS penalties for not complying with plan reporting requirements as a result of law changes.

[1] The SECURE Act did not change the DOL’s penalty of up to $2,194 per day for a late Form 5500 filing.

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SECURE RMDs

“I have a client who has a 401(k) plan and an IRA. She turned age 70½ in 2019. How do the changes to required minimum distribution (RMD) rules affect her?”

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 required minimum distributions.

Highlights of the Discussion

The short answer is that she is unaffected by the increase in the age at which RMDs must begin as a result of recent law changes. The increase in the RMD age (from 70 ½ to 72) as enacted under provisions from the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) is effective for individuals turning 70 ½ after December 31, 2019. (See Sec. 114 on page 623 of Further Consolidated Appropriations Act, 2020.)

Because your client turned 70 ½ in 2019, as an IRA owner, her required beginning date (RBD) for taking her first RMD remains April 1, 2020. Her RBD for the RMD due from her 401(k) plan is subject to the specific provisions of the plan, and would be April 1, 2020, if her plan does not include the special language that allows certain participants to delay their RBD until April 1 following the year they retire. The delayed RBD provision that some plans offer allows still-working participants who do not own more than five percent of the business to delay their RBD until April 1 of the year following their retirement.

Keep in mind that a 50 percent penalty tax could apply if a person fails to take his or her RMD on a timely basis.

Conclusion

The new rule that delays a person’s RBD until April 1 following the year he or she turns age 72 applies to distributions required to be made after December 31, 2019, with respect to individuals who attain age 70 ½ after such date.

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SECURE Act breaks congressional gridlock; Retirement provisions fast tracked

By W. “Andy” Larson

Just when we thought it was safe to enjoy a quiet year end (at least from a retirement policy perspective) our supposedly gridlocked politicians fast tracked the Setting Every Community Up for Retirement Enhancement (SECURE) Act as part of the Further Consolidated Appropriations Act, 2020 —a necessary, year-end government spending bill. The SECURE Act contains some of the biggest retirement-related changes in years.  The president is expected to sign the bill on 12/20/2019 to avoid a shut-down. Many provisions are effective January 1, 2020, and we need to move quickly to get advisors and clients prepared for the changes. We encourage you to contact RLC to discuss SECURE Act training for advisors and clients www.retirementlc.com.

What will change?

Many aspects of retirement plans are affected by the SECURE Act.  We will focus on just a few of the major provisions here, and then discuss initial steps advisors can take to address these changes.

IRA

  • Required Minimum Distributions (RMDs) begin at age 72
  • Stretch IRAs eliminated or curtailed for many beneficiaries
  • Traditional IRA contribution eligibility regardless of age

Qualified Plan

  • Expanded availability of Multiple Employer Plans (MEPs) to unrelated employers through “Pooled Plan Providers”
  • Opened eligibility for 401(k) plans for certain long-service, part-time employees
  • Enhanced tax credits for small employers establishing qualified plans
  • Mandated retirement income disclosures for participants in defined contribution plans
  • Increased penalties for late IRS Form 5500 filings
  • Reduced the voluntary in-service distribution age for defined benefit plans and 457(b) plans from age 62 to 59½ (a provision originally from the Bipartisan American Miners Act of 2019)

529

  • New qualifying distributions (for apprenticeships, homeschooling, private school costs and up to $10,000 of qualified student loan repayments)

403(b)

  • New provisions for the disposition of terminated 403(b) plans

Next steps

Despite their near immediate effectivity, some implementation aspects of these new rules won’t be finalized until the IRS issues additional regulations.  Regardless, we feel it’s important to begin discussions post haste with individuals potentially impacted by these changes.  We encourage the following preliminary steps in addressing the SECURE Act changes:

  • Notify IRA clients under age 72 of the new ability to postpone RMDs.
  • Alert IRA clients with nonspousal beneficiaries that the stretch distribution provisions will be cut back, and work with them to consider alternatives in conjunction with their estate planning counsel.
  • Alert nonspouse beneficiaries with inherited IRAs of the changes to the stretch distribution rules. Discuss mitigating tax strategies with them and their tax and legal advisors.
  • Inform individuals over age 70 and still working they may continue making traditional IRA contributions if they are otherwise eligible.
  • Discuss with small business owners MEP opportunities and the expanded tax credits.
  • Review with 401(k) plan sponsors the new eligibility rules for part-time employees.
  • Modify 401(k) employee communication strategies based on new retirement income projection requirements.
  • Discuss with 401(k) plan sponsors the importance of timely and accurate IRS Form 5500 filing in light of the increases in late filing penalties.
  • Consider amendments to plan documents that will be required by the end of the 2022 plan year (2024 plan year for certain governmental plans).
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