401(k)

SECURE Act Gives Businesses Extra Time to Establish New Retirement Plans

Hidden within the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) signed into law last December is a provision giving businesses extra time to establish certain new tax-qualified retirement plans.Prior to the SECURE Act, a new workplace plan had to be adopted by the last day of the employer’s tax year. Despite that deadline for adopting a new plan, businesses were always allowed extra time to make retroactive employer contributions for any year (including the plan’s first year). The employer contribution deadline is the due date (including extensions) of the company’s federal tax return.

IRS COMPENSATION LIMITS IN COMPANY RETIREMENT PLANS

Admittedly, it’s not such a bad problem to have. Nonetheless, it’s true that high-paid company plan participants can have their benefits limited by the IRS compensation limit.The compensation limit is $285,000 for 2020 and goes up most years based on cost-of-living increases. It was $280,000 for 2019 and $275,000 for 2018.Pay above the limit can’t be used in determining employer contributions made to 401(k) plans and SEP and SIMPLE IRAs. Excess pay also can’t count towards benefits earned in defined benefit pension plans.

A Roundup of Recent DOL and IRS Retirement Plan Guidance

There’s been a flurry of recent government regulation of company retirement plans. Here’s a quick summary:Electronic Disclosure of Retirement Plan DocumentsOn May 27, 2020, the Department of Labor published a final regulation making it easier for employers to issue retirement plan notices to participants electronically. Notices can be posted on a website or mobile app or delivered via email. Employees who prefer hard copies can opt out of electronic delivery and receive paper disclosures instead.

SECURE Act Gives 401(k) Relief to Part-Timers

Part-time employees in companies with 401(k) plans won a big victory when the SECURE Act was signed into law on December 20, 2019.Before the SECURE Act, 401(k) plans could exclude employees if they did not work at least 1,000 hours of service in a 12-month period or were under age 21. These rules have prevented many long-term part-time employees from the chance to save in 401(k) plans.The SECURE Act provides relief beginning with the first plan year after December 31, 2020 (for most plans, January 1, 2021). Any employee who has worked at least 500 hours in three consecutive years and is age 21 or older by the end of the three-year period must be allowed to start making elective deferrals. However, years beginning before January 1, 2021 do not have to be counted for purposes of meeting the three-consecutive-year rule.

GUNFIGHT AT THE 401(K) CORRAL

When the chips are down, the providers hold all the cards. This is true for both IRAs and workplace plans. Ultimately, the IRA custodian (through its custodial form) and retirement plan sponsor (through the plan document) will dictate what a person can and cannot do with his retirement dollars. Prior to sauntering into a local saloon and sitting down at the poker table, be sure to know the rules of the game before asking to be dealt in.For example, if a deceased IRA owner named both his son and daughter as beneficiaries, the custodian can refuse to allow the children to stretch the inherited IRA RMD payments over their own life expectancies. Additionally, what if the beneficiary son wants to disclaim his portion of the IRA? A custodian does not have to accept disclaimers, either.

HOW THE TOP-HEAVY RULES FOR 401(k) PLANS WORK

Just like eating too much pumpkin pie with whipped cream isn’t good for your waistline, being a “top-heavy” retirement plan also may not be healthy.Sponsors of certain retirement savings plans must have their plan tested each year to determine if it is “top-heavy.” The top-heavy test is designed to make sure that lower-paid employees receive at least a minimum benefit if most plan assets are held for higher-paid employees.Section 401(k) plans are subject to top-heavy testing, unless the plan uses a “safe harbor” contribution formula. SEP-IRAs are also subject to testing, but most will automatically comply. Section 403(b) and 457 plans and SIMPLE IRAs are exempt from the top-heavy test.

The Time Machine

A time machine would be cool to have. Even if it only worked on financial assets, it sure would come in handy. One might jump into the future and see if an investment paid off, or you could look around to see where the smart money succeeded. And if the original investment turned out to be a loser, you could go back in time and sell it – or never even buy it in the first place.Too bad financial time machines don’t exist. Bummer.While literal time machines have yet to be invented and we can’t quantum leap,

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