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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.

© Copyright 2020 Retirement Learning Center, all rights reserved
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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.

© Copyright 2020 Retirement Learning Center, all rights reserved
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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).
© Copyright 2020 Retirement Learning Center, all rights reserved