Tag: 401(k)

Employers Get a 2-Year Breather on Complying with the Secure 2.0 Change to Catch-Up Contributions

Daniel L. Morgan ●

Professional photo of Daniel L. Morgan

The Internal Revenue Service (“IRS”) issued Notice 2023-62 last week, which addresses a change made by the SECURE 2.0 Act of 2022 (“Secure 2.0”) to the 401(k) plan rules applicable to so-called “catch-up contributions” that may be made by older plan participants.

Background—Catch-Up Contributions and Roth Contributions

Employers are permitted to write their 401(k) plans to allow employees who are age 50 or older to make catch-up contributions in excess of the annual limit on elective contributions. Therefore, for example, someone who is at least 50 years old in 2023 can elect this year to contribute an additional $7,500 on top of the normal limit of $22,500 that a person who is younger than 50 can elect to contribute.

Employers are also permitted to allow 401(k) plan participants to make their elective contributions as Roth contributions, which go into the plan on an after-tax basis. If these Roth contributions satisfy requirements on how long they must be held in the plan, they ultimately can be distributed, along with earnings on the contributions, tax free.

Continue reading “Employers Get a 2-Year Breather on Complying with the Secure 2.0 Change to Catch-Up Contributions”

U.S DOL Offers Some Good News for Smaller Businesses with 401(K) Plans

Daniel L. Morgan ●

It’s not often that business owners get good news from the government, but small and even some medium-sized businesses with 401(k) plans got a helping hand from the U.S. Department of Labor (“DOL”) earlier this year when the DOL eased the rules for identifying which 401(k) plans are required to have audited financial statements.

Background

The Employee Retirement Income Security Act of 1974 (“ERISA”), everyone’s favorite federal law, has a dual reporting structure for 401(k) plans depending on the number of participants in the plan. Plans with 100 or more participants at the beginning of the year—so-called large plans—are required to prepare audited financial statements and file them with the plan’s Form 5500, Annual Return/Report of Employee Benefit Plan. Plans with fewer than 100 participants escape the audit requirement and, in most instances, can file a Form 5500-SF, Short Form Annual Return/Report of Small Employee Benefit Plan.

Continue reading “U.S DOL Offers Some Good News for Smaller Businesses with 401(K) Plans”

Defaulting 401(k) Plan Borrowers in the Time of COVID

Daniel L. Morgan

The great majority of 401(k) plans allow participants to borrow against their plan benefits. These loans are secured by the borrowing participant’s plan account and are typically repaid by withholding amounts from the borrower’s paychecks.

Plan loans are subject to a number of limitations, including a repayment period of five years (unless the loan is used to acquire a primary residence) and a maximum borrowing limit of 50 percent of the borrower’s vested account balance or $50,000.* Violating these limits has adverse tax consequences to the borrower, which are not addressed in this article. The focus of this piece is what happens when someone has borrowed from a 401(k) plan within the limits, terminates employment, and then defaults on the loan—in particular, changes made by the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) and a 2017 change to the tax law, which are helpful to the large number of people who may find themselves in this situation during the pandemic.

Plan Loan Defaults by Terminated Employees = Plan Distributions

Under most 401(k) plans, borrowers who terminate employment before paying off their plan loan must either pay the entire remaining amount of the loan within a period of time specified by the plan after cessation of employment or, failing to do so, be considered to be in default on the loan, in which event the tax law treats the borrower as having received a distribution from the plan in the amount of the unpaid loan balance. The Internal Revenue Service (“IRS”) refers to this amount as a plan offset amount.

Continue reading “Defaulting 401(k) Plan Borrowers in the Time of COVID”

Some Highlights from the Recently Enacted SECURE Act, Part 4

Daniel L. Morgan

The final installment of this blog series discussing changes made by the Setting Every Community Up for Retirement Enhancement Act of 2020 (“the SECURE Act”) focuses on modifications to the required minimum distributions rules (“RMDs”).

Two of the most widely reported changes made by the SECURE Act relate to the requirements in the Tax Code that require individuals to receive annual RMDs.

72 Is the New 70½

The tax law generally requires people to begin receiving distributions from employer retirement plans and individual retirement accounts (“IRAs”) by the April 1st following the year in which they reach age 70½.[1] Under the SECURE Act, effective for people who attain age 70½ after December 31, 2019, age 70½ is replaced with age 72. Continue reading “Some Highlights from the Recently Enacted SECURE Act, Part 4”

Some Highlights from the Recently Enacted SECURE Act, Part 3

Daniel L. Morgan

This third installment of summaries of some of the key provisions of the Setting Every Community Up for Retirement Enhancement Act of 2020 (“the SECURE Act”) discusses an extension of the date for adopting a new employer retirement plan.

Under prior law, an employer that wanted to deduct a contribution to a tax-qualified retirement plan for a tax year had to adopt the plan by the last day of the year, but had up until the due date of the tax return for the year, including extensions, to make the contribution.

Effective for tax years beginning after December 31, 2019, the SECURE Act allows an employer to adopt a tax-qualified retirement plan for a tax year up until the due date, including extensions, of the tax return for the year. Continue reading “Some Highlights from the Recently Enacted SECURE Act, Part 3”

Some Highlights from the Recently Enacted SECURE Act, Part 2

Daniel L. Morgan

In this second of a four-part series providing an overview of some key provisions of the Setting Every Community Up for Retirement Enhancement (“SECURE”) Act of 2019, I summarize the Act’s liberalization of the 401(k) plan nondiscrimination testing safe harbors and the Act’s effort to make it easier for employers to offer annuity payments as a distribution option under 401(k) plans. I also discuss why the changes made by the Act do not go nearly far enough to remove the legal and regulatory barriers that discourage 401(k) plans from offering annuity payments.

Easing of 401(k) Safe Harbor Requirements

An employer can avoid the Internal Revenue Service (“IRS”) nondiscrimination test applicable to elective contributions to a 401(k) plan by satisfying safe harbor requirements that include making a matching contribution or a matching contribution to the plan.

The SECURE Act increases employer flexibility in using these safe harbors, in several respects. Continue reading “Some Highlights from the Recently Enacted SECURE Act, Part 2”

Some Highlights from the Recently Enacted SECURE Act

Daniel L. Morgan

One of the spending bills signed by President Trump to avert a government shutdown late last year had attached to it the Setting Every Community Up for Retirement Enhancement Act of 2019, or as it’s known by its acronym, the SECURE Act.

The SECURE Act, which passed the House on May 23, 2019, but languished in the Senate, has important implications for retirement savings.

In a series of four posts, I will provide an overview of a few of the more noteworthy features of the legislation. In this first post, I examine the creation of a new rule requiring 401(k) plans to cover long-term part-time workers. A subsequent post will discuss other changes impacting 401(k) plans, including liberalizations of the safe harbors that allow a 401(k) plan to bypass contribution nondiscrimination testing, and a provision that seeks to encourage the inclusion of annuity payments as a form of 401(k) plan distribution. Another will describe an extension of the time limit on adopting a new retirement plan, to make it effective for a tax year, and the fourth post will discuss the changes made by the Act to the required minimum distribution rules applicable to retirement plans and IRAs. Continue reading “Some Highlights from the Recently Enacted SECURE Act”

%d bloggers like this: