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IRS updates required tax notice to address plan loan offsets

The model notices that all plan sponsors are required to send to plan participants before they receive an eligible rollover distribution from qualified plans were recently updated by the IRS. Continue reading to learn more.


The IRS has updated the model notice that is required to be provided to participants before they receive an “eligible rollover distribution” from a qualified 401(a) plan, a 403(b) tax-sheltered annuity, or a governmental 457(b) plan.

Notice 2018-74, which was published on September 18, 2018, modifies the prior safe-harbor explanations (model notices) that were published in 2014. Like the 2014 guidance, the 2018 Notice — sometimes referred to as the “402(f) Notice” or “Special Tax Notice” — includes two separate “model” notices that are deemed to satisfy the requirements of Code Section 402(f): one for distributions that are not from a designated Roth account, and one for distributions from a designated Roth account. The 2018 Notice also includes an appendix that can be used to modify (rather than replace) existing safe-harbor 402(f) notices.

The model notices were updated to take into consideration certain legislation that has been enacted, and other IRS guidance that has been published, since 2014. They include:

  • changes related to qualified plan loan offsets under the Tax Cuts and Jobs Act of 2017;
  • changes in the rules for phased retirement under the Moving Ahead for Progress in the 21st Century Act (“MAP-21”);
  • changes in the exceptions to the 10% penalty for early distributions from governmental plans under the Defending Public Safety Employees’ Retirement Act; and
  • IRS guidance (in Revenue Procedure 2016-47) regarding a self-certification procedure for waivers of the 60-day rollover deadline.

The model notices also make some “clarifying” changes to the 2014 notices, including:

  • clarification that the 10% additional tax on early distributions applies only to amounts includible in income;
  • an explanation of how the rollover rules apply to governmental 457(b) plans that include designated Roth accounts;
  • clarification that certain exceptions to the 10% tax on early distributions do not apply to IRAs; and
  • recognizing that taxpayers affected by federally declared disasters and other events may have an extended deadline for making rollovers.

The updated model 402(f) notices should be particularly useful in communicating to participants the extension, under the Tax Cuts and Jobs Act, of the time to roll over a “qualified plan loan offset amount.”

Inside the plan load offset

By way of background, Notice 2018-74 reminds us that distribution of a “plan loan offset amount” is an eligible rollover distribution, and that a “plan loan offset” occurs when, under the plan terms governing a plan loan, the participant’s accrued benefit is reduced, or offset, in order to repay the loan. According to the Notice, this can occur when, for example, the terms of the plan loan require that, in the event of an employee’s termination of employment or request for a distribution, the loan is to be repaid immediately or treated as in default.

The Notice also indicates that a plan loan offset may occur when, under the terms of the plan loan, the loan is canceled, accelerated, or treated as if it were in default (for example, when the plan treats a loan as in default upon an employee’s termination of employment or within a specified period thereafter). The Notice also reminds us, however, that a plan loan offset cannot occur prior to a distributable event.

This is helpful guidance for distinguishing between a “deemed distribution” of a defaulted loan (a taxable event which is not eligible for rollover) and a “plan loan offset amount,” which is an eligible rollover distribution.

Generally, if a default occurs before the participant has a distributable event (such as termination of employment, or attainment of age 59½), and the default is not cured by the last day of the cure period, it must be treated as a “deemed distribution” and reported on Form 1099. Such defaulted amounts are not eligible for rollover.

However, if the default occurs at or after a distribution event, and the plan terms require that the participant’s account be offset to pay off the loan, then the reduction of the account may be treated as a plan loan offset, which is an eligible rollover distribution.

Notice 2018-74 (and the new model notices) also reflect that, prior to the Tax Cuts and Jobs Act of 2017, participants who incurred a “plan loan offset” only had 60 days to “roll” an equivalent amount of money to an IRA or another employer plan (to avoid the offset being treated as a taxable distribution). However, for plan loan offsets that occur after December 31, 2017, if the plan loan offset is a “qualified plan loan offset” (meaning it occurs in connection with termination of employment or termination of the plan), then the participant has significantly more time (until the extended due date of the participant’s tax return for the year of the offset) in which to roll an amount equal to the loan offset amount to an IRA or another employer plan.

SOURCE: Browning, R (4 October 2018) "IRS updates required tax notice to address plan loan offsets" (Web Blog Post). Retrieved from https://www.employeebenefitadviser.com/opinion/irs-updates-required-tax-notice-to-address-plan-loan-offsets?brief=00000152-146e-d1cc-a5fa-7cff8fee0000


Cash Balance Plans for Business Owners

The new tax law is a lucrative opportunity for many pass-through businesses. As long as the owner’s income does not exceed a certain threshold, businesses can earn significant tax savings. In this installment of CenterStage, Todd Yawit – the director of retirement services at Saxon – has provided the following insightful information on Cash Balance Plans and how they can be used to help businesses earn significant tax savings.

The New Tax Law

With the new tax law, some business owners can now deduct up to 20 percent of their qualified business income (QBI) as long as their income falls below a certain threshold. Todd explained, “The new tax law that went into effect treats certain business types differently than it used to. In order to take advantage of the full deductions, certain business owners might need to lower their income to accommodate getting the deductions.”

deductions.” The full 20 percent deduction is available to companies that have an income that falls below the set threshold amount. Because of this, many businesses will have lower effective tax rates. Business owners whose income does not fall below the set threshold amount can still reap significant benefits by placing the difference of their income in a Cash Balance Plan. This will cause their taxable income to fall below the set threshold.

What Are Cash Balance Plans

Cash Balance Plans are a type of retirement plan that combines the maximum benefit amount associated with Defined Benefit Plans with the flexibility and portability of a 401(k) plan. 

Cash Balance Plans are trustee directed and assets are invested into a single pool. Participants receive individual statements with hypothetical account balances on them.

Cash Balance Plans are often preferred over traditional Defined Benefit Pension Plans. Individual statements received by participants reflect what participants could potentially collect in the form of a lump sum, if eligible.

Here are the top 6 features of a Cash Balance Plan:

  1. Niche Retirement Plan – Cash Balance Plans are a great fit for physician groups, dental groups, and other professional practices, as well as small business owners or self-employed individuals.
  2. Tax Deferred Contributions – All contributions are tax-deductible, and the investment earnings are tax-deferred. Assets are not subject to income tax until they are withdrawn from the Cash Balance Plan or a rollover IRA.
  3. Higher Contribution Limits – Cash Balance Plans allow for high tax-deductible contributions than a 401(k). The maximum contribution amount is dependent on the individual’s age and normally increases as participants get older.
  4. Creditor Protection – Plan assets in a Cash Balance Plan are ERISA creditor protected.
  5. Flexible Plan Design – Cash Balance Plans can easily provide for many different levels of benefits and contributions.
  6. Supplement to a 401(k) Plan – Cash Balance Plans can be used as a companion to a 401(k) plan, providing a more favorable contribution cost design.

How Can Cash Balance Plans Help Business Owners Take Advantage of the New Tax Law?

“One of the best ways for a business to lower their income is to make contributions into a retirement plan. The advantage of a Cash Balance Plan retirement plan is it benefits the owner and key other people, as opposed to a 401(k) where it’s benefiting everybody,” explained Todd.

The 20 percent pass-through deduction is “phased out” for business owners with taxable income between the threshold limit and phase-out limit. By taking advantage of Cash Balance Plans, businesses can fall within these limitations.

Please contact Todd Yawit with any questions regarding Cash Balance Plans. You can reach him at (513) 573-0129 or send him an email at tyawit@gosaxon.com.


Summarized Report of The Kaiser Health Tracking Poll March 2018 for Non-Group Enrollees

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Kaiser Health Tracking Poll – March 2018: Non-Group Enrollees

Key Findings: As part of the Republican tax reform plan signed into law at the end of 2017, lawmakers eliminated the ACA’s individual mandate penalty starting in 2019. About one-fifth of non-group enrollees (19 percent) are aware the mandate penalty has been repealed but is still in effect for this year. Regardless of the lack of awareness, nine in ten non-group enrollees say they intend to continue to buy their own insurance even with the repeal of the individual mandate. About one-third (34 percent) say the mandate was a “major reason” why they chose to buy insurance.

Survey: 9 in 10 people with non-group health insurance plan to continue buying insurance despite the repeal of the individual mandate penalty About half the public overall believes the ACA marketplaces are “collapsing,” including six in ten of those with coverage purchased through these marketplaces. In fact, across party identification and insurance type, more say the marketplaces are “collapsing” than say the marketplaces are not collapsing. Overall, the population who buy their insurance through the ACA marketplace report being satisfied with the insurance options available to them during the most recent open enrollment period and more than half give the value of their insurance a positive rating. Yet, some (32 percent) experienced problems while trying to renew or buy their coverage and six in ten marketplace enrollees say they are worried about the possible lack of health insurance coverage in their areas.

In 2017, President Trump issued an executive order directing his administration to expand the availability of non-renewable short-term insurance plans, and regulations have been proposed to implement the order. When asked whether non-group enrollees would prefer to purchase such a plan or prefer to keep the plan they have now, the vast majority (84 percent) say they would keep the plan they have now while 12 percent say they would want to purchase a short-term plan. The most common response offered by people who are uninsured when asked the reason why they don’t have health insurance is that it is too expensive and they can’t afford it (36 percent), followed by job-related issues such as unemployment or their employer doesn’t offer health insurance (20 percent).

Who Are Non-Group Enrollees?
This report examines people’s experiences with the current health insurance market focusing on individuals who currently have health insurance they purchased themselves (referred to as “non-group enrollees” throughout the report). This is comprised of individuals who purchase their own insurance through an Affordable Care Act (ACA) marketplace (“marketplace enrollees”) as well as those who purchase their insurance outside of the ACA markets. 1 In the first half of 2017, 10.1 million people had health insurance that they purchased through the ACA exchanges or marketplaces. 2 For comparison, the report also examines individuals ages 18-64 without health insurance (“uninsured”) as well as those who get their insurance through their employer (“employer-sponsored insurance”).

These extended interviews were conducted as part of the February and March Kaiser Health Tracking Polls and were completed after the close of the law’s fifth open enrollment period, which ended earlier this year. The Individual Mandate as part of the Republican tax reform plan signed into law at the end of 2017, lawmakers eliminated the ACA’s individual mandate penalty. The tax plan reduced the individual penalty for not having health insurance to zero beginning in 2019, effectively repealing the least favorable provision of the ACA (according to polling conducted by Kaiser Family Foundation). There is still uncertainty among the public as well as among the groups most directly affected by the individual mandate (non-group enrollees and the uninsured) on the status of the mandate.

—kff.org