Tag Archive for: SIMPLE

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CalSaver’s Plan and Federal Plan Startup Tax Credit

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 “A number of my business clients have been required to adopt the Calsaver’s plan for their employees. Now I see the SECURE Act 2.0 of 2022 sweetened the federal tax credit for plan startup costs for businesses with 50 or fewer employees. If a business has adopted the CalSaver’s plan is the plan startup tax credit still available to them?”

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

Highlights of Discussion
The good news is, “yes,” small business owners that adopted the CalSaver’s plan will still qualify for the federal plan startup tax credit if they want to upgrade from the CalSaver’s plan to a simplified employee pension (SEP), savings incentive match plan for employees (SIMPLE) or qualified plan (e.g., 401(k) plan) and they otherwise qualify for the tax credit (i.e., had 100 or fewer employees who received at least $5,000 in compensation for the preceding year; and had at least one plan participant who was a nonhighly compensated employee).

The federal plan startup credit under IRC Sec. 45E is not available if, during the three-taxable year period immediately preceding the first taxable year for which the credit would otherwise be allowed, the employer or any member of any controlled group including the employer (or any predecessor of either), established or maintained a “qualified employer plan” with respect to which contributions were made, or benefits accrued, for substantially the same employees as are in the new qualified employer plan. A CalSaver’s plan is a payroll deduction Roth IRA—completely employee funded. It is not considered a qualified retirement plan that would preclude a small employer from being eligible to claim the plan startup credit if the employer is otherwise eligible.

Section 102 of the SECURE Act 2.0 of 2022 (see page 819) increases the plan startup credit from 50 percent to 100 percent of eligible plan startup cost up to $5,000 for the first three years for employers with up to 50 employees. Prior rules still apply for those with 51-100 employees. What’s more, there is an additional credit available for defined contribution plans that is a percentage of employer contributions made for five years on behalf of employees, up to a per-employee cap of $1,000. The contribution credit is phased out for employers with between 51 and 100 employees.

Conclusion
A CalSaver’s plan is a payroll deduction Roth IRA—completely employee funded. It is not considered a qualified retirement plan that would preclude a small employer from being eligible to claim the federal plan startup credit if the employer is otherwise eligible and establishes a SEP, SIMPLE or qualified plan.

 

© Copyright 2024 Retirement Learning Center, all rights reserved
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Remember the Saver’s Tax Credit

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“Can you remind me of the special tax credit available for individuals who make retirement savings contributions, please?”

ERISA consultants at the Retirement Learning Center 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 Nevada is representative of a common inquiry regarding available tax credits for personal contributions to eligible plans.

Highlights of Discussion

Absolutely, after all, it is tax time! IRA owners, retirement plan participants (including self-employed individuals) and others may qualify for the IRS’s “Saver’s Credit” for certain contributions made to eligible savings arrangements. Details of the credit appear in IRS Publication 590-A and here Saver’s Credit.

The credit

  • Equals an amount up to 50%, 20% or 10% of eligible taxpayer contributions up to $2,000 ($4,000 if married filing jointly), depending on adjusted gross income (as reported on Form 1040, 1040SR or 1040NR);
  • Relates to contributions taxpayers make to their traditional and/or Roth IRAs, or elective deferrals to a 401(k) or similar workplace retirement plan (other plans qualify so see full list below); and
  • Is claimed by a taxpayer on Form 8880, Credit for Qualified Retirement Savings Contributions.

Contributors can claim the Saver’s Credit for personal contributions (including voluntary after-tax contributions) made to

  • A traditional or Roth IRA;
  • 401(k),
  • Savings Incentive Match Plan for Employees (SIMPLE) IRA,
  • Salary Reduction Simplified Employee Pension (SARSEP),
  • 403(b),
  • Governmental 457(b),
  • Federal Thrift Savings Plan,
  • ABLE account* or
  • Tax-exempt, union pension benefit plan under IRC Sec. 501(c)(18)(D).

In general, the contribution tax credit is available to individuals who

1) Are age 18 or older;

2) Not a full-time student;

3) Not claimed as a dependent on another person’s return; and

4) Have income below a certain level (see table that follows).

* The Achieving a Better Life Experience (ABLE) Act of 2014 allows states to create tax-advantaged savings programs for eligible people with disabilities (designated beneficiaries). Funds from ABLE accounts can help designated beneficiaries pay for qualified disability expenses on a tax-free basis.

2021 Saver’s Credit Income Levels

Credit Rate Married Filing Jointly Head of Household All Other Filers*
50% of your contribution AGI not more than $39,500 AGI not more than $29,625 AGI not more than $19,750
20% of your contribution $39,501 – $43,000 $29,626 – $32,250 $19,751 – $21,500
10% of your contribution $43,001 – $66,000 $32,251 – $49,500 $21,501 – $33,000
0% of your contribution More than $66,000 More than $49,500 More than $33,000

*Single, married filing separately, or qualifying widow(er)

The IRS has a handy on-line “interview” that taxpayers may use to determine whether they are eligible for the credit.

Conclusion

Every deduction and tax credit counts these days. Many IRA owners and plan participants may be unaware of the retirement plan-related tax credits for which they may qualify.

 

 

 

 

 

© Copyright 2024 Retirement Learning Center, all rights reserved
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Remember Plan Tax Credits for 2021

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“Can you remind me of the special tax credits available for small businesses who set up qualified retirement plans, please?”

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

A recent call with a financial advisor from Arizona is representative of a common inquiry related to incentives for setting up retirement plans.

Highlights of Discussion

My pleasure! Small business owners (with fewer than 100 employees) are eligible for additional tax credits for setting-up retirement plans and/or adding an automatic enrollment feature. The credits are available if the owner establishes a 401(k), a SEP or a SIMPLE IRA plan. The business must

• Have had fewer than 100 employees who received at least $5,000 in compensation for the preceding year;
• Have at least one plan participant who was a nonhighly compensated employee; and
• Not have maintained a plan in the past.

The “Startup Credit” is up to $5,000 (a formula applies), available for the first three years the plan is in existence and offers real benefits to owners by freeing up tax dollars for other important business purposes. The credit was greatly improved as part of the Setting Every Community Up for Retirement Enhancement of 2019 Act (SECURE Act), effective January 1, 2020 (increasing the maximum credit from $500 to $5,000). It is intended to encourage owners to establish retirement plans by helping make the plan more affordable during the startup process. In addition, the owners receive full tax deductions for all contributions made to the plan.

On top of that, if an owner elects to add an automatic enrollment feature to the plan, an additional $500 credit (for the first three years) is also available. The automatic enrollment feature calls for newly eligible participants to be enrolled automatically in the plan with a specified default deferral rate. The IRS provides additional details about the startup and auto deferral credits here.

Eligible businesses may claim the credit using Form 8881, Credit for Small Employer Pension Plan Startup Costs.

See the Instructions for Form 8881 for more details.

Conclusion
Tax credits for setting up a plan and having an automatic enrollment feature are great tools to help small businesses defray the initial costs of starting and maintaining a plan. Business owners should discuss the credits with their accountants and advisors to determine if it makes sense for them to establish a plan.

 

© Copyright 2024 Retirement Learning Center, all rights reserved
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When Are Retirement Assets Protected from Creditors?

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An advisor asked: “Can you give me a refresher on the creditor protection rules for retirement plan assets at the federal and state levels?”

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 Minnesota is representative of a common question on creditor protection for retirement plan assets.

Highlights of the Discussion
• The level of creditor protection for retirement plan assets depends on

1) the type of plan assets, and

2) whether the owner of the assets has filed for bankruptcy and, if not, the governing laws of the state with jurisdiction over the assets.

• The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), effective October 17, 2005, clarified the level of creditor protection for retirement plan assets when the owner has filed for bankruptcy.

Bankruptcy
• BAPCPA amended Section 522 of the Bankruptcy Code to exempt from a debtor’s bankruptcy estate retirement assets that are held in

– IRC Sec. 401(a) plans (e.g., 401(k), defined contribution and defined benefit plans);
– 403(b) plans,
– Traditional IRAs (up to $1 million of contributory assets, indexed periodically),
– Roth IRAs (up to $1 million of contributory assets, indexed periodically),
– Simplified employee pension (SEP) plans,
– Savings Incentive Match Plans for Employees (SIMPLE) plans,
– Church plans,
– Governmental plans,
– Multiemployer plans,
– Eligible 457(b) plans of state and local governments and IRC Sec. 501(c)(3) tax-exempt organizations and
– IRC Sec. 501(a) plans of tax-exempt organizations.

• Eligible rollover distributions under IRC Sec. 402(c) retain the unlimited bankruptcy protection given to them while held in the exempt retirement plan if they are contributed to another eligible retirement plan within 60 days of distribution. Earnings on the rollover assets are protected as well.

Nonbankruptcy
• In nonbankruptcy situations, assets held in ERISA plans are fully protected under the anti-alienation provision of the law [see Section 541(c)(2) of the Bankruptcy Code pursuant to Patterson vs. Shumate, 504 U.S. 753 (1992) and Section 206(d)(1) of ERISA].
• The protection of IRA assets (including rollover amounts) from general creditors of the IRA owner in nonbankruptcy situations falls under applicable state law, with many states—but not all—providing some level of exemption. (Link to State Government Websites for more information)
• Keep in mind that any qualified retirement plan or IRA (including traditional, Roth, rollover, SIMPLE or SEP plan IRAs) may be subject to an IRS tax levy.

Conclusion
The amount of creditor protection for retirement assets depends on whether the investor has filed for bankruptcy or not, and the type of retirement savings arrangements involved. For specific situations, individuals should consult legal counsel.

 

© Copyright 2024 Retirement Learning Center, all rights reserved
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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.

© Copyright 2024 Retirement Learning Center, all rights reserved