Tag Archive for: SECURE Act

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Deadline for Setting Up a SIMPLE IRA Plan

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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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Is There Still Time for a Safe Harbor Plan for 2022?

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“My client, who has a traditional 401(k) plan, would like to change to a safe harbor plan for 2022. Is it too late to do that?”

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
It still may be possible for your client to have safe harbor plan with a nonelective contribution for 2022. December 1st is a key deadline—but there is also another option if she misses that deadline. 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.

Under Section 103 of the SECURE Act, plan sponsors may amend their plans to add a three percent (3%) 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 deadline would be allowed if the amendment provides

1) a nonelective contribution of at least four percent (4%) of compensation for all eligible employees for that plan year,

and

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

(See Issue Snapshot – Notice Requirement for a Safe Harbor 401(k) or 401(m) Plan)

EXAMPLE:

Safety First, Inc., maintains a calendar-year 401(k) plan. Based on the plan’s preliminary actual deferral percentage (ADP) test (which doesn’t look good), Safety First decides a safe harbor plan is a good idea for 2022. It’s too late to add a safe harbor matching contribution for 2022. However, the business could add a 3% safe harbor nonelective contribution for the 2022 plan year (without prior participant notice) as long as Safety First amends its plan document prior to December 1, 2022. While Safety First still could add a nonelective safe harbor contribution to the plan for 2022 after that date, the minimum contribution would have to be at least 4% of compensation, and the company would have to amend its plan document no later than December 31, 2023.

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 actual deferral percentage (ADP) tests for the year may find this type of plan amendment attractive as a correction measure

 

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Get Ready to Explain Lifetime Income Illustrations

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“When are the new lifetime income illustrations due and what should I be telling my clients who are 401(k) sponsors and participants about 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 an advisor in Colorado is representative of a common question related lifetime income illustrations in 401(k) plans.

Highlights of Discussion

  • It’s good you are thinking ahead! Sponsors of participant-directed defined contribution (DC) plans must provide lifetime income illustrations to participants in their plans no later than with the second quarterly benefit statements of 2022 (i.e., the first illustration needs to be in place for the quarter that ends June 30, 2022). For nonparticipant directed DC plans, sponsors must provide lifetime income illustrations on the annual pension benefit statement for the 2021 calendar year (e.g., making October 15, 2022, the deadline).
  • Showing what a lump sum amount will equate to as monthly income is a step in the right direction because people don’t retire on lump sums; they retire on monthly income. However, some say these particular income illustrations have the potential to upset participants and force plan sponsors and advisors into damage control mode because they are based on incomplete assumptions.
  • The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 amended the Employee Retirement Income Security Act of 1974 (ERISA) to require 401(k)s and other DC plans to include lifetime income illustrations in participant benefit statements on an annual basis. Final Department of Labor (DOL) interim final regulations, which provide the details for calculating these lifetime income illustrations, took effective September 18, 2021, and a series of DOL Frequently Asked Questions instruct plan sponsors on when they must provide the first disclosures (mid 2022).
  • According the DOL’s interim final regulations, the income Illustrations must show a monthly income amount based on a DC plan participant’s account balance as of the last day of the statement period converted to a lifetime income equivalent as a
  • Single life annuity (SLA) and
  • Qualified joint and survivor annuity (QJSA) involving a spouse.
  • The income projections for the new disclosures must be based on the following assumptions:
  • The participant is retiring at age 67 (the Social Security full retirement age for many workers) or the participant’s actual age, if older than 67),
  • An interest rate that is the 10-year constant maturity Treasuries (CMT) securities yield rate for the first business day of the last month of the period to which the benefit statement relates;
  • Life expectancy from a gender-neutral Mortality table pursuant to IRC Sec. 417(e)(3)(B), and
  • The current account value—assuming no further contributions.
  • By not accounting for future contributions, the retirement income projections will be significantly smaller than the actual number at retirement—which could be shocking—especially for younger participants. Example:  Theresa is age 40 and single. Her account balance on December 31, 2022, is $125,000. The 10-year CMT rate is 1.83% per annum on the first business day of December. The benefit statement of this participant would show the following amounts.

 

Current Account Balance $125,000
Single Life Annuity $645 per month for life (assuming Participant X is age 67 on December 31, 2022)
Qualified Joint and 100% Annuity $533 per month for participant’s life, and $533 for the life of spouse following participant’s death (assuming Participant X and her hypothetical spouse are age 67 on December 31, 2022)

Source: DOL Fact Sheet

 

  • It is essential for advisors and plan sponsors to get in front of these upcoming disclosures from a messaging and communication perspective. Specifically, advisors are encouraged to take the following steps to prepare for the statement delivery this summer and fall.
  1. Alert plan sponsors to the rules, assumptions, and the potential for negative feedback from plan participants. Explain the DOL assumptions upon which the income illustrations are based and how they may understate the actual retirement income amount—especially for younger plan participants.
  2. Craft an employee communication strategy explaining the new statements and assumptions. Provide a positive, encouraging message about the importance of making ongoing deferrals, automatically escalating deferral rates, the time value of contributions, and explain why the actual number will likely be larger—especially with ongoing contributions.
  3. Execute the communication plan and provide ongoing support.

 

Conclusion

Slowly the DC market is shifting from a lump sum accumulation mindset to a retirement income mentality. Plan sponsors soon must implement the formalized lifetime income disclosure rules. Although the lifetime income illustrations under the DOL’s regulations are far from perfect, they do press the issue of helping participants understand how their retirement plan balances translate into monthly retirement income. Plan sponsors and advisors can use this impetus to carefully craft their participant communications and messaging. A key differentiator for advisors, moving forward, will be the ability to effectively support participants in transitioning to a true retirement income mindset.

© Copyright 2024 Retirement Learning Center, all rights reserved
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LLC Plan Establishment Deadline

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An advisor asked,

“I’m working with a limited liability company (LLC) that is interested in setting up a retirement plan.  What is the LLC’s deadline for establishing a 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 from Texas is representative of a common inquiry related to setting up qualified retirement plans.

Highlights of the Discussion

Because this question deals with specific tax information, business owners should always seek the guidance of a tax professional for advice on their specific situations.  What follows is general information.

The short answer is it depends on whether the LLC is taxed as a corporation, a partnership or a sole proprietorship. For federal tax purposes, the IRS, typically, treats an LLC as a partnership that must file IRS Form 1065, U.S. Return of Partnership Income for the business.[1] There are exceptions to this rule, so a client should be encouraged to determine the exact nature of the business’s tax structure with a tax advisor. For example, a domestic LLC with at least two members is classified as a partnership for federal income tax purposes unless it files Form 8832, Entity Classification Election and elects to be treated as a corporation. A single-member LLC may choose to be taxed as either a corporation or as a sole proprietorship.

Once the LLC’s tax-filing status is determined, then we turn to the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which gave businesses 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.

Under the SECURE Act, 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 as illustrated below.

Tax Status Standard Filing Deadline Extended Filing Deadline
S-Corporation (or LLC taxed as S-Corp) March 15 September 15
Partnership (or LLC taxed as a partnership) 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

[Note: Simplified employee pension (SEP) plans have historically followed the above schedule; and special set-up rules apply for safe harbor 401(k) plans.]

EXAMPLE:  The Limited is an LLC taxed as a partnership. Its standard tax filing deadline is March 15th of the year following the tax year in question. For the 2020 tax year, The Limited timely filed IRS Form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns.  Consequently, it has an extended tax filing deadline of September 15, 2021, for its 2020 tax year. The owners of The Limited decide in August of 2021 they would like to set up a 401(k)/profit sharing plan for the business for 2020 and later years. The Limited has until September 15, 2021, to execute plan documents to set up the plan, effective for 2020. While The Limited 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

For many reasons, including determining the deadline to establish a qualified retirement plan, it is important to ascertain the federal tax-filing status of an LLC business. Under the SECURE Act, for 2020 and later tax years, a business has until its tax filing deadline, plus extensions to set up a plan.

 

[1] LLC Filing as a Corporation or Partnership

 

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No More Age Restriction for Traditional IRA Contributions

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“My client is 80 and still working. She wants to put some money aside for when she might retire; however, she doesn’t have access to a workplace retirement plan. Is an IRA an 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 an advisor in New York is representative of a common question related to making traditional IRA contributions.

Highlights of Discussion

More power to your client! You bet; an IRA is a great option. Of course, the most prudent course of action is to encourage your client to discuss her contribution options with her tax advisor.

Provided your client has the right amount of earned income to support it, she could contribute to a Roth IRA or—because of a key law change—she could contribute to a traditional IRA. She could even do a combination of Roth and traditional IRA contributions as long as she doesn’t exceed the maximum contribution of $7,000 for a person > age 50 between the two accounts. And, because the IRS has granted a special delay to the usual April 15th tax filing deadline,[1] she still could make a 2020 IRA contribution (Roth or traditional) up until May 17, 2021!

Prior to 2020, once a person reached age 70 ½, he or she could not contribute to a traditional IRA any longer. That rule changed for 2020 and later years as a result of the Setting Every Community Up for Retirement Enhancement Act of 2019 (the SECURE Act) (see TITLE I, section 107 of the Further Consolidated Appropriations Act of 2020). The SECURE Act removed the age restriction for eligibility to make a traditional IRA contribution.  Roth IRA contributions have never had a maximum age limit, but they are subject to a maximum earnings limit. Consequently, for 2020 and beyond, the only requirement to be able to make a traditional or Roth IRA relates to having modified adjust gross income (MAGI) for the year—enough to make either a traditional or Roth IRA contribution, but not too much in the case of a Roth IRA contribution.

As to the question of deductibility, since your client does not participate in a workplace retirement plan—any traditional IRA contribution she may choose to make would be tax deductible, potentially. Active participation in a retirement plan can affect whether a traditional IRA contribution is tax deductible.  For details, please see a prior case: Active Participation May Affect IRA Deductibility

Conclusion

Recognizing that more people are working passed their 70s and may want to continue to save for retirement, the Administration saw fit to do away with the age limit for making traditional IRA contributions, effective for 2020 and beyond.

[1] Tax Day for individuals extended to May 17

 

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Plan Establishment Deadlines

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“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

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“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 “inactive” SEP 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?

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“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?”

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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

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“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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