The Mega Backdoor Roth IRA and Other Ways to Maximize a 401(k)

Did you know: Numerous 401(k) retirement plans allow after-tax contributions. This creates financial planning opportunities that are frequently overlooked. Read this blog post for more information on maximizing your 401(k) plan.


The most popular workplace-sponsored retirement plan is far and away the 401(k) — a plan that can be both simple and complex at the same time. For some of your clients, it functions as a tax-deductible way to save for retirement. Others might see its intricacies as a way to maximize lifetime wealth, boost investments and minimize taxes. One such niche area of 401(k) planning is after-tax contributions, an often misunderstood and underutilized area of planning.

Before we jump into after-tax contributions, we need to cover the limits and the multiple ways your clients can invest money into 401(k) plans.

Employee Salary Deferrals and Roth

The most traditional way you can contribute money to a 401(k) is by tax-deductible salary deferrals. In 2019, employees can defer up to $19,000 a year. If they’re age 50 or older, they can contribute an additional $6,000 into the plan. In 2020, these numbers for “catch-up contributions” rise to $19,500 and $6,500 respectively.

Someone age 50 or over can put up to $25,000 into a 401(k) in 2019 and $26,000 in 2020 through tax-deductible salary deferrals. Additionally, the salary deferral limits could instead be used as a Roth contribution, but with the same limits. The biggest difference is that Roth contributions are after-tax. And as long as certain requirements are met, the distributions, including investment gains, come out income tax-free, whereas tax-deferred money is taxable upon distribution.

Employer Contributions

Employers often make contributions to a 401(k), with many matching contributions. For instance, if an employee contributes 6% of their salary (up to an annual indexed limit on salary of $280,000 in 2019 and $285,000 in 2020), the company might match 50%, 75%, or 100% of the amount. For example, if an employee earns $100,000 a year and puts in $6,000 and their employer matches 100%, they will also put in $6,000, and the employee will end up with $12,000 in their 401(k). Employers can also make non-elective and profit-sharing contributions.

Annual 401(k) Contribution Cap

Regardless of how money goes into the plan, any individual account has an annual cap that includes combined employee and employer contributions. For 2019, this limit is $56,000 (or $62,000 if the $6,000 catch-up contribution is used for those age 50 and over). For 2020, this limit rises to $57,000 ($63,500 if the $6,500 catch-up contribution is used for those age 50 and over).

Inability to Max Out Accounts

If you look at the limits and how people can contribute, you might quickly realize how hard it is to max out a 401(k). If a client takes the maximum salary deferral of $19,000 and an employer matches 100% (which is rare), your client would only contribute $38,000 into the 401(k) out of the maximum of $56,000. Their employer would need to contribute more money in order to max out.

Where After-Tax Contributions Fit In

Not all plans allow employees to make after-tax contributions. If the 401(k) did allow this type of contribution, someone could add more money to the plan in the previous example that otherwise maxed out at $38,000.

After-tax contributions don’t count against the salary deferral limit of $19,000, but they do count toward the annual cap of $56,000. After-tax contributions are what they sound like — it’s money that’s included into the taxable income after taxes are paid, so the money receives all the other benefits of the 401(k) like tax-deferred investment gains and creditor protections.

With after-tax contributions, clients can put their $19,000 salary deferral into the 401(k), get the $19,000 employer match, and then fill in the $18,000 gap to max out the account at $56,000.

Mega-Roth Opportunity

If the plan allows for in-service distributions of after-tax contributions and tracks after-tax contributions and investment gains in separate accounts from salary deferral and Roth money, there’s an opportunity to do annual planning for Roth IRAs.

Clients can convert after-tax contributions from a 401(k) plan into a Roth IRA, without having to pay additional taxes. If a plan allows in-service distributions of after-tax contributions, the money can be rolled over to a Roth IRA each year. However, it’s important to note that any investment gains on the after-tax amount would still be distributed pro rata and considered taxable. Earnings on after-tax money only receive tax-deferred treatment in a 401(k); they aren’t tax free.

Clients can roll over tens of thousands of dollars a year from a 401(k) to a Roth IRA if the plan is properly set up. They can even set up a plan in such a way so the entire $56,000 limit is after-tax money that’s distributed to a Roth IRA each year with minimal tax implications. This strategy is referred to as the Mega Backdoor Roth strategy.

Complexities Upon Distribution of After-Tax Contributions

What happens to after-tax contributions in a 401(k) upon distribution? This is a complex area where you can help clients understand the role of two factors:

  1. After-tax contributions are distributed pro-rata (proportional) between tax-deferred gain and the after-tax amounts.
  2. Pre-tax money is usually considered for rollover into a new 401(k) or IRA first, leaving the after-tax attributed second. The IRS provided guidance on allocation of after-tax amounts to rollovers in Notice 2014-54.

Best Practices for Rollovers

Help your clients navigate the world of rollovers with after-tax contributions by following best practices. If a client does a full distribution from a 401(k) at retirement or separation of service, they can roll the entire pre-tax amount to a new 401(k) or IRA and separate out the after-tax contributions to roll over into a Roth IRA. The IRS Notice 2014-54 previously mentioned also provides guidance for this scenario.

You can help your clients understand after-tax contributions by envisioning after-tax money in a 401(k) as the best of three worlds. These contributions enter after taxes and give your client tax-deferred money on investment growth, allow them to save more money in their 401(k) while also giving them the opportunity to roll it over into a Roth IRA at a later date.

After-tax contributions build numerous planning options and tax diversification into retirement plans. Before your clients allocate money toward after-tax contributions, it’s important they understand what their plan allows and how it fits into their overall retirement and financial planning picture.

SOURCE: Hopkins, J. (17 December 2019) "The Mega Backdoor Roth IRA and Other Ways to Maximize a 401(k)" (Web Blog Post). Retrieved from https://www.thinkadvisor.com/2019/12/17/the-mega-backdoor-roth-ira-and-other-ways-to-maximize-a-401k/


Tech tools underused for workplace engagement: survey

Did you know: Only 45 percent of employers use technology to improve employee engagement, according to a survey of HR professionals. Read the following blog post to learn more about using technology to enhance workplace engagement.


Just 45% of employers are using technology to improve employee engagement, according to a new survey of thousands of HR professionals in organizations of varying sizes.

The research finding comes from the Next Concept Human Resource Association (NCHRA) and Waggl, a real-time engagement platform. HR tech industry professionals weighed in on the topic at the HR TechXpo 2019 and others as part of the latest “Voice of the Workplace” pulse survey.

Of those respondents, 92% said they would like to create a strong internal culture that affects results. In addition, 81% believed that investing in people-focused programs and skills such as onboarding, performance and employee engagement would help increase revenues and profit margins.

Lisa Hickey, VP of professional development at NCHRA, was “a bit surprised” that only 45% of her group’s members reported that their organizations are using technology to improve employee engagement in the face of business volatility and a tight labor market.

NCHRA and Waggl, both based in the San Francisco Bay Area, also distilled into a ranked list crowdsourced responses to a survey question about social media and gamification platforms as tools to increase employee engagement.

Several caveats were expressed. One HR leader, for example, cautioned that they need to be tied to the type of company and demographics, as well as the extent to which employees are willing to embrace change. Another respondent said it’s important that gamification not be “viewed as a nuisance and a distraction from accomplishing job tasks.”

The bottom line is that giving employees an opportunity to help shape their organization’s culture, experience, vision and execution enables them to “feel more connected to the workplace and empowered to drive change,” according to Alex Kinnebrew, chief marketing officer and head of growth strategy for Waggl.

Benefit brokers and advisers can play a critical role in helping their employer clients bridge the technology gap when it comes to improving employee engagement, Hickey believes. “From designing an offering that represents company goals to securing the best technology to administer the program, brokers are guiding you every step of the way and also helping utilize technology beyond benefits administration that delivers more services and solutions for the company,” she says.

Founded in 1960, NCHRA is the nation’s second-largest HR association — serving more than 30,000 professionals in 23 states and several countries and showcasing more than 100 annual educational events.

Waggl’s Employee Voice platform examines critical business topics that include culture, experience, vision and execution. The company’s management team includes executives from Glassdoor, SuccessFactors and Coupa. Customers include Paychex, eBay, City Electric Supply, UCHealth, American Public Media and Freddie Mac.

SOURCE: Shutan, B. (4 December 2019) "Tech tools underused for workplace engagement: survey" (Web Blog Post). Retrieved from https://www.benefitnews.com/news/tech-tools-underused-for-workplace-engagement-survey


6 steps to enhance your recruiting strategy

According to recent data from PwC, more and more potential employees are turning down job offers because of bad recruitment experiences. Often, when job candidates have a poor experience while applying for a job, they share the details of their encounter with friends, family and social media. Read this blog post for six steps employers can use to enhance their recruitment strategy.


Employers may be contributing to their organization’s bad reputation without even knowing it during the recruiting process

A strong labor market is presenting employees with more options, allowing them to weigh potential employers against each other, and eliminating the need to accept the first offer they get. Unique and inventive recruiting strategies are vital in attracting the right talent to your organization, but more potential employees are turning down job offers because of bad recruiting experiences, according to data from PwC.

Employers can develop some bad habits when it comes to recruiting, like dragging out the process and even ghosting candidates. When potential employees have a poor experience applying for a job with a company, they are going to share the details of that encounter with friends, family and the world at large thanks to social media.

“Job seekers today expect the hiring process to be streamlined, efficient and customized to their personal preferences, with effortless technology and sincere human interactions,” says Bhushan Sethi, a workforce strategy leader at PwC.

However, very few organizations are providing this experience, according to the PwC survey of 10,000 job seekers. Not only can a bad recruiting experience drive candidates away, it can also create lasting damage to an organization’s reputation as an employer.

“Leaders have an opportunity to gain an edge in the battle for talent by delivering a superior recruiting experience to every candidate, even those who don’t receive an offer,” Sethi says.

But there are ways to make a candidate’s recruiting experience more positive, even if they don’t ultimately get an offer. Here are six steps organizations can take to deliver a “first-rate” recruiting experience to potential candidates.

Find a balance between tech and human interaction

The human interactions candidates experience during the recruitment process makes a stronger impression than any digital experience, the survey shows. “Candidates want positive, direct human interaction throughout the recruiting process, whether that’s in person, over the phone or via email,” Sethi says. “Two-thirds of candidates said personalized initial outreach makes them more likely to apply for a position.”

Technology does have an important role to play in the recruiting process. However, recruiting technology is typically designed with the enterprise, not the candidate, in mind, Sethi says. Employers should look to utilize technology that streamlines routine tasks or makes the hiring process easier for job applicants. About 44% of those surveyed by PwC say they’re open to using automation and technology options for routine touchpoints and to get information during the recruiting process. Another 65% said they would like if an organization had an application dashboard so they could track their progress.

Communicate often and keep the process quick

More than half of job seekers (56%) said they would discourage someone else from applying for a job with a company where they had a bad recruiting experience, according to PwC data. A majority of job seekers (92%) said they’ve experienced poor recruiting practices at some point in their career. Candidates pointed out the two most frustrating behaviors by recruiters: dragging out the process by more than a month and recruiters who withdraw communication with no explanation.

“These practices are rampant: 61% of candidates said they’ve simply stopped hearing from an organization during the hiring process,” Sethi says. “And 67% gave up pursuing a role because the recruiting process took too long.”

Ask for social media details

About 50% of job seekers said they’d be willing to share their social media data with potential employers if it helps to determine a better job and organizational fit. Checking out a potential employee’s social media allows HR to understand more about the candidate. But candidates are only willing to share their social media data if the right privacy measures are in place. Recruiters can gain candidate’s trust by being transparent. About 78% of those surveyed by PwC said they expect the recruiting process to be clear on how personal data is used. About 77% of candidates said they wouldn’t apply for a job if they felt their privacy and information wasn’t protected.

Highlight the rewards potential employees most desire

Upskilling, personal flexibility and inclusion are three key aspects of workplace culture that have become more desirable among candidates than salary, according to PWC. Additionally, candidates are willing to give up 11.7% of their salary for more flexibility and training.

Give candidates a way to experience the company’s culture first hand

Today’s candidates are looking for more than a job, the PwC survey notes. They want an employee experience that provides a sense of purpose and pride.

“Culture is so meaningful that 33% of C-suite-level candidates said they’d take a pay cut to work for a mission-driven company that aligns with their ideals,” Sethi says.

It can be challenging for recruiters to provide an accurate sense of a company’s culture. Recruiters can help candidates experience this firsthand by holding networking and other social events.

Always be mindful of your reputation

When candidates have a bad recruiting experience it does more damage than recruiters realize. “It can cause lasting reputational harm and even hurt your chances of hiring the workers who are hardest to find,” Sethi says.

Almost half of candidates (49%) working in high-demand sectors like tech, banking and energy say they would be more likely to turn down a job due to a bad recruiting experience. Of those surveyed by PwC 71% say working for a company with a good reputation as an employer is more important than working for a well-known customer brand.

“That’s good news for small brands jockeying for talent with big-name competitors,” Sethi says. “You can gain an edge by cultivating and promoting a strong, positive reputation. It’s also a call to action for bigger brands: you can’t rely on name alone to attract talent.”

SOURCE: Schiavo, A. (9 December 2019) "6 steps to enhance your recruiting strategy" (Web Blog Post). Retrieved from 6 steps to enhance your recruiting strategy


How to maximize employee participation in HSA plans

According to the Employee Benefit Research Institute (EBRI), 96 percent of HSA account holders do not invest any portion of their contributions. Health Savings Accounts (HSAs) offer account holders the option to invest and investments are not subject to taxation. Read this blog post to learn more about maximizing employee participation in HSA plans.


High-deductible health plans (HDHPs) not only offer employees the opportunity to save on their premium contributions, they also provide access to what are commonly touted as triple-tax-advantaged health savings accounts (HSAs).

HSA users can put away money tax-free, and account distributions for eligible healthcare costs aren’t subject to federal income tax. Plus, these accounts offer users the option to invest and any investment returns aren’t subject to taxation. Not even the storied 401(k) promises this much bang for the proverbial buck. In fact, HSAs offer the best of pre-tax 401(k) and Roth contributions.

But, no matter how sweet a tax deal this is, for most of the over 25 million account holders, investing takes a back seat to current healthcare needs. According to EBRI, 96% of account holders don’t invest any portion of their balance, which leaves just 4% taking advantage of all three tax-advantaged components of the HSA. Instead, HSA users fall into two distinct categories: spenders and savers, with spenders representing over three-quarters of account holders.

In 2017, the average deductible for employee-only coverage was $2,447 and almost a quarter of employees covered under one of these plans had a deductible of $3,000 or more.

Let’s imagine it’s 2017, and our sample employee — let’s call her Emily — has a $2,500 deductible. Emily funded her HSA to the 2017 maximum of $3,400. If Emily had healthcare costs that totally eroded her deductible and she used her HSA dollars to fund them, at the end of the year Emily would have $900 left in her account ($3,400 maximum minus $2,500 to cover her deductible). That assumes no additional cost-sharing or eligible expenses.

However, Emily is in the minority. Only 13% of employees are fully funding their accounts, rendering an investment threshold potentially out of reach for most people, especially when they are using their HSA dollars for out-of-pocket healthcare costs.

With such a small percentage of HSA owners taking advantage of investment opportunities, finding effective ways to support the spending or saving habits of the majority of users seems to be tantamount. So is helping them address their concerns about deductible risk. As employers help people become smarter consumers, they may be able to build their accounts over time and ultimately pull the investment lever.

So, how can employers support these spenders and savers?

Encourage people to contribute, or to contribute moreEBRI found that only half of account holders put anything in their HSA in 2017, and just under 40% of accounts received no contributions — including employer dollars. Employer contributions can help overcome employees’ reluctance to enroll in an HDHP, but the way they are designed matters. Matching contributions act as a strong incentive for employees to save while also protecting the most vulnerable employees from having to shoulder the entire burden of out-of-pocket healthcare costs.

Another technique to help address employees’ anxiety around a high deductible is to pre-fund out-of-pocket costs by allowing employees to borrow from future contributions. If the employee incurs costs but doesn’t have enough HSA dollars to cover them, they can use future contributions as an advance against current out-of-pocket expenses. The employer provides the funds up front and the employee pays back those funds through payroll deductions. This acts as a safety net for new account holders or those without substantive balances.

Drive people toward the maximum contribution. With fewer than 20% of employees fully funding their HSA, there’s certainly room to move the needle. While additional contributions may not be possible for all employees, reinforcing the tax advantages and the portability of the HSA may help people divert more dollars to insulate themselves against healthcare costs.

Highlight ways to save on healthcare costs. When employees are funding their care before meeting a high deductible, help them spend those HSA dollars wisely. Promote telehealth if you offer it and remind employees about the most appropriate places to get care (for example, urgent care versus the emergency room). Reinforce the preventive aspects of your healthcare plan, including physicals, screenings and routine immunizations. If you have a wellness program that includes bloodwork and biometric testing, make sure you tie this into your healthcare consumerism messaging. There’s generally a lot of care employees can get at no cost, and it helps when you remind them.

Don’t lose contributors to an over-emphasis on investing. The tax advantages of investing in an HSA are undeniable, but most people are just not there yet. When we describe HSAs as a long-term retirement savings vehicle, we may inadvertently be messaging to non-participants that these accounts aren’t for them. Speak to the majority with messaging around funding near-term healthcare costs on a tax-advantaged basis and the flexibility to use HSA dollars for a wide variety of expenses beyond just doctor and pharmacy costs. Investing information should be included, but it shouldn’t be the primary focus.

HSAs are gaining in popularity, and the majority of account holders are using them to self-fund their healthcare, which is a good thing. A small but growing number are taking advantage of their plans’ investment options. Employees eventually may become investors as their accounts grow and they better understand the opportunity to grow their assets and save for the longer term. For now, however, the educational and engagement focus for HSA plan sponsors should primarily be around participation, maximizing contributions and spending HSA dollars wisely.

SOURCE: Cosgray, B. (6 December 2019) "How to maximize employee participation in HSA plans" (Web Blog Post). Retrieved from https://www.benefitnews.com/opinion/how-to-maximize-employee-participation-in-hsa-plans


Paving the Road to a Successful Portfolio

Determining a proper asset allocation is an important first step in creating your portfolio and planning how it will grow in the future. Asset allocation is the process of diversifying your investments into different asset classes based on the investor’s time horizon, their goals and how much risk they can tolerate.

“People always ask me what they can invest in that will make them a lot of money without the chance of losing any,” said Brian Bushman, Saxon Financial Advisor.

“I tell them that this simply doesn’t exist. But I can, however, help them design an optimized portfolio based on their risk tolerance and what they are trying to accomplish.”

Whether you’re just beginning to save for retirement or you’re much further down the road with more substantial savings, asset allocation is the result of understanding your comfort with risk and how to best diversify your investments to accomplish your goals.

The key to asset allocation is diversification. This allows an investor to take advantage of investing in many different opportunities which can reduce their overall risk.

Assets can be allocated either strategically or tactically. A strategic plan sets a target allocation and consistently rebalances that allocation back to the original percentages while a tactical plan focuses on adjusting the portfolio based on current economic conditions and opportunities in order to produce a better risk adjusted return. Brian and the investment team at Saxon bring a hybrid approach to designing and managing their investor’s portfolios.

Many investors only consider the returns on their investments, but it is very important to assess the level of risk a portfolio is taking to achieve that return. Saxon’s approach is to optimize this risk vs. return ratio.

It is also important for investors to understand there are different types of risk. Most associate risk with investment risk which is the risk of losing money.

However, there are many other risk factors to consider. Inflationary risk, interest rate risk, credit risk, taxability risk, currency risk and legislative/political risk are other types of risks that need to be considered when developing a portfolio.

Below are the three main factors needed in designing a suitable portfolio for the client.

3 Factors in Designing a Suitable Portfolio

1. Time Horizon

The amount of time that you have to reach your goals should directly impact the level of risk you are willing to take. When you’re young you have much more time to recover from any losses that could be incurred from a drop in the market, but as retirement approaches you have less time to recover from market losses.

The closer you get to retirement, the more you should consider reducing your risk level. Once you retire and need income from your investments you may need to redesign your portfolio from an accumulation portfolio to an income portfolio.

2. Risk Tolerance

Typically, investments that have the potential to generate higher returns are riskier. This is where the idea of risk tolerance comes in. This refers to the amount of volatility an investor can tolerate.

If your risk tolerance is low, then you will likely earn a lower return. To compensate for a lower anticipated return, it is important to evaluate the amount you are investing and possibly adjust your timeline accordingly to reach your goals. Usually gauged by a questionnaire, risk tolerance is often used to categorize investors as aggressive, moderate or conservative.

3. Goals

Each person’s goals are different, whether you are working towards a long-term goal of retirement or a short-term goal, you should consider these goals in your asset allocation plan.

One person’s ideal asset mix could be completely wrong for someone else. Outside of setting financial goals and an ideal retirement goal, it is important to set a goal to adjust investments as you age.

“There is no crystal ball that provides insight on how to best allocate assets. It’s a process that begins with an initial risk assessment, diversifying your investments and continually monitoring the progress of your portfolio,” said Brian Bushman, Saxon Financial Advisor.

How Saxon Helps

A Saxon investment advisor can provide guidance through the process of creating a well-balanced portfolio.

For more, contact Brian Bushman today at (513) 333-3901 or bbushman@gosaxon.com.


4 Things to Know About Mental Health at Work

Did you know: 80 percent of workers will not seek help for mental health issues because of the associated shame and stigma. Read this blog post from SHRM for four things employees and employers should know about mental health in the workplace.


Kelly Greenwood graduated summa cum laude from Duke University with degrees in psychology and Spanish. She holds a master's degree in business from Northwestern University's Kellogg School of Management, contributes to Forbes magazine and is editor-at-large for Mental Health at Work, a blog on Thrive Global.

She also is someone who has managed generalized anxiety disorder since she was a young girl. It twice led to debilitating depression. During a Smart Stage presentation at the recent Society for Human Resource Management Inclusion 2019 event in New Orleans, she discussed how someone can be a high-performing individual and still contend with mental health issues.

Greenwood had to take a leave of absence after experiencing a perfect storm at work—a new job in an understaffed, dysfunctional environment; an inflexible schedule that caused her to miss therapy sessions; and a change in her medication. When it became clear her performance had deteriorated, she was forced to disclose her condition to her manager.

She took a three-month leave, but that only fueled her anxiety. Still in her 30s, she worried about whether she would be able to return to work and feared her career was over. It wasn't. She went on to join the executive team of a nonprofit and in 2017 founded Mind Share Partners, a San Francisco-based nonprofit that offers corporate training and advising on mental health.

Greenwood shared the following four things she wishes she had known earlier in her life about mental health:

  1. Mental health is a spectrum. "Hardly anybody is 100 percent mentally healthy" all the time, she said. "We all go back and forth on this spectrum throughout the rest of our lives." The grief a person experiences over the loss of a loved one, for example, affects that person's mental health. "You can be successful and have a mental health condition," Greenwood said, noting that a study Mind Share Partner conducted with Harvard Business Review (HBR) found that mental health symptoms are equally prevalent across seniority levels within companies, all the way up to the C-suite.
  2. You cannot tell a person's mental condition by his or her behavior. "It's never your job," she told managers and other workplace leaders, "to diagnose or gather [information] or assume what's going on. Our goal at work is not to be clinicians, but to create a supportive environment."
  3. Mental health conditions and symptoms, including suicidal thoughts, are common. Greenwood said the Mind Share Partners/HBR study found that 60 percent of 1,500 people surveyed online in March and April said they had a mental health symptom: feeling anxious, sad or numb or experiencing a loss of interest or pleasure in most activities for at least two weeks. National Institutes of Health research suggests that up to 80 percent of people will manage a diagnosable mental health condition in their lifetime. "They may not know it," Greenwood said. "It may be a moment in time because of a job loss or grief over a death. That means mental health affects every conference call, every team meeting. It is the next frontier of diversity and inclusion."
  4. Workplace culture can reinforce the stigma around mental health issues. And so, 80 percent of workers will not seek help because of the associated shame and stigma. If they do, they cite a different reason, such as a headache or upset stomach, rather than admit they are taking time off because of stress. That is leading to what Greenwood calls a "huge retention issue," with 50 percent of Millennials and 75 percent of Generation Z saying they left a job—voluntarily and involuntarily—because of a mental health challenge. She advised leaders to have "courageous conversations" with those they work with. Even simply engaging in a discussion about having to deal with a child's tantrum can be powerful.

"There is so much research," she said, "about the power of vulnerability in leadership."

SOURCE: Gurchiek, K. (12 November 2019) "4 Things to Know About Mental Health at Work" (Web Blog Post). Retrieved from https://www.shrm.org/resourcesandtools/hr-topics/behavioral-competencies/global-and-cultural-effectiveness/pages/4-things-to-know-about-mental-health-at-work.aspx


IRS increases retirement contributions for 2020

Recently, the Internal Revenue Service (IRS) announced that workers contributing to 401(k), 403(b), 457 and the federal government’s Thrift Savings Plans will be able to add up to $19,500 in 2020. Read this blog post to learn more about this increase in retirement contributions.


The IRS said this week that workers contributing to 401(k), 403(b), 457 and the federal government’s Thrift Savings Plans plans can add $19,500 next year, an increase from $19,000 in 2019.

The move could help workers save more for retirement, but it may be inconvenient for employers who’ve already started open enrollment, experts say. Employees are now able to set aside $500 more for retirement.

“Every penny counts when you’re saving for retirement, and the higher contribution limit is definitely going to help,” says Jacob Mattinson, partner at McDermott, Will & Emery, a Chicago-based law firm. “But since companies are in the midst of open enrollment, employers may have to go back in and change the entries for employees who want to contribute the max.”

There are about 27.1 million 401(k) plan participants using roughly 110,794 employer-sponsored 401(k) plans, the Employee Benefit Research Institute says. Ninety-three percent of employers offer a 401(k) plan, and around 74% of companies match workers’ contributions, according to data from the Society for Human Resource Management.

While the vast majority of employers do offer retirement savings plans, employees may still be struggling to sock away money. Around 70% of workers say debt has negatively impacted their ability to save for retirement, EBRI says.

“Thirty-two percent of workers with a major debt problem are not at all confident about their prospects for a financially secure retirement, compared with 5% of workers without a debt problem,” says Craig Copeland, EBRI senior research associate.

The IRS also upped contribution limits on Savings Incentive Match Plan for Employees plans, or SIMPLE retirement accounts, to $13,500 from $13,000. The agency did not change the contribution limits to IRAs, which remain at $6,000 annually.

SOURCE: Hroncich, C. (7 November 2019) "IRS increases retirement contributions for 2020" (Web Blog Post). Retrieved from https://www.benefitnews.com/news/irs-increases-retirement-contributions-for-2020


It’s time to consider a wage and hour audit

A record $322 million of unpaid wages were recovered for the 2019 fiscal year, according to the Department of Labor (DOL). With the new salary threshold taking effect January 1, it may be a good time to consider conducting a wage and hour audit. Read the following blog post from Employee Benefit News to learn more.


Those who believed the Trump administration would scale back the Obama-era Department of Labor’s aggressive enforcement of wage and hour laws may be surprised to learn that the DOL recently announced that it recovered a record $322 million in unpaid wages for fiscal year 2019. This is $18 million more than that recovered in the last fiscal year, which was the previous record.

The agency has set records in back wages collected every year since 2015, according to data released by the DOL. This year, the average wages DOL recovered per employee were $1,025. The agency’s office of federal contractor compliance also announced that it had recovered a record $41 million in settlements over discrimination actions involving federal contractors, an increase of 150% over the last fiscal year.

Effective Jan. 1, the new salary threshold that most salaried employees must earn to be exempt from overtime pay will be $35,568, or $684 per week, under the final rule issued by the DOL in September.

With the new salary threshold taking effect soon, and the DOL continuing to aggressively enforce wage and hour laws, it is a good time to consider conducting a wage and hour audit to ensure that employees are properly classified as exempt or nonexempt and that other pay practices comply with the law.

Employers who did this in 2016, only to find out later that the Obama administration’s proposed hike in the salary threshold would not take effect, may have a strong feeling of déjà vu. But this time, there does not appear to be any viable legal challenge that would delay or block the salary threshold change, so employers must be prepared to either increase salaries of “white-collar” exempt employees (who earn less than $35,568) or reclassify them as hourly employees by January.

Among other things, a wage and hour audit should include the following:

  • Review all individuals classified as independent contractors;
  • Review all employees classified as exempt from overtime under one or more “white-collar” exemptions (administrative, executive, and professional), who must earn at least the $35,568 salary threshold beginning January 1, 2020;
  • Review all other employees classified as exempt from overtime, including computer and sales employees; and
  • Review all individuals classified as interns, trainees, volunteers, and the like.

In addition to ensuring whether employees are properly classified as exempt or nonexempt, a thorough wage and hour audit should look at a number of other issues, including timekeeping and rounding of hours worked, meal and rest breaks, whether bonuses and other special payments need to be included in employees’ regular rate of pay for calculating overtime, and payments besides regular wages, such as paid leave and reimbursement of expenses.

SOURCE: Allen, S. (8 November 2019) "It’s time to consider a wage and hour audit" (Web Blog Post). Retrieved from https://www.benefitnews.com/opinion/employers-should-consider-a-wage-and-hour-audit


IRS updates rules on retirement plan hardship distributions

Recently, the Internal Revenue Service (IRS) finalized updates to the hardship distribution regulations. These new regulations make the requirements more flexible and participant friendly. Read this blog post to learn more about these updated regulations.


Employers who allow for hardship distributions from their 401(k) or 403(b) plans should be aware that the Internal Revenue Service recently finalized updates to the hardship distribution regulations to reflect legislative changes. The new rules make the hardship distribution requirements more flexible and participant-friendly.

Hardship distributions are in-service distributions from 401(k) or 403(b) plans that are available only to participants with an immediate and heavy financial need. Plans are not required to offer hardship distributions. But there are certain requirements if a plan does offer hardship distributions. Generally, a hardship distribution may be made to a participant only if the participant has an immediate and heavy financial need, and the distribution is necessary and not in excess of the amount needed (plus related taxes or penalties) to satisfy that financial need.

An administrator of a 401(k) or 403(b) plan can determine whether a participant satisfies these requirements based on all of the facts and circumstances, or the administrator may rely on certain tests that the IRS has established, called safe harbors.

Over the last fifteen years, Congress has changed the laws that apply to hardship distributions. The new rules align existing IRS regulations with Congress’s legislative changes. Some of the changes are mandatory and some are optional. The new rules make the following changes. The following changes are required.

Elimination of six-month suspension.

Employers may no longer impose a six-month suspension of employee elective deferrals following the receipt of a hardship distribution.

Required certification of financial need.

Employers must now require participants to certify in writing or by other electronic means that they do not have sufficient cash or liquid assets reasonably available, in order to satisfy the financial need and qualify for a hardship distribution.

There were also some optional changes made to hardship distributions.

Removal of the requirement to take a plan loan.

Employers have the option, but are not mandated, to eliminate the requirement that participants take a plan loan before qualifying for a hardship distribution. In order to qualify for a hardship distribution, participants are still required to first take all available distributions from all of the employer’s tax-qualified and nonqualified deferred compensation plans to satisfy the participant’s immediate and heavy financial need. The optional elimination of the plan loan requirement may first apply beginning January 1, 2019.

Expanded safe harbor expenses to qualify for hardship.

The new hardship distribution regulations expand the existing list of pre-approved expenses that are deemed to be an immediate and heavy financial need. Prior to the new regulations, the list included the following expenses:

  • Expenses for deductible medical care under Section 213(d) of the Internal Revenue Code;
  • Costs related to the purchase of a principal residence;
  • Payment of tuition and related expenses for a spouse, child, or dependent;
  • Payment of amounts to prevent eviction or foreclosure related to the participant’s principal residence;
  • Payments for burial or funeral expenses for a spouse, child, or dependent; and
  • Expenses for repair of damage to a principal residence that would qualify for a casualty loss deduction under Section 165 of the Internal Revenue Code.

The new regulations expand this list of permissible expenses by adding a participant’s primary beneficiary under the plan as a person for whom medical, tuition and burial expenses can be incurred. The new regulations also clarify that the immediate and heavy financial need for principal residence repair and casualty loss expenses is not affected by recent changes to Section 165 of the Internal Revenue Code, which allows for a deduction of such expenses only if the principal residence is located in a federally declared disaster zone. Finally, the new regulations add an additional permissible financial need to the list above for expenses incurred due to federally declared disasters.

New contribution sources for hardships.

The law and regulations provide that employers may now elect to allow participants to obtain hardship distributions from safe harbor contributions that employers use to satisfy nondiscrimination requirements, qualified nonelective elective contributions (QNECS), qualified matching contributions (QMACs) and earnings on elective deferral contributions. However, 403(b) plans are not permitted to make hardship distributions from earnings on elective deferrals, and QNECS and QMACs are distributable as hardship distributions only from 403(b) plans not held in a custodial account.

As this list indicates, the new regulations make substantial changes to the hardship distribution rules.

The deadline for adopting this amendment depends on the type of plan the employer maintains and when the employer elects to apply the changes. Plan sponsors should work with their document providers and legal counsel to determine the specific deadlines for making amendments.

SOURCE: Tavares, L. (01 November 2019) "IRS updates rules on retirement plan hardship distributions" (Web Blog Post). Retrieved from https://www.benefitnews.com/opinion/irs-updates-rules-on-401k-403b-plan-hardship-distributions


DOL proposes rule on digital 401(k) disclosures

A new rule has been proposed by the Department of Labor (DOL) that is meant to encourage employers to issue retirement plan disclosures electronically. This rule would allow plan sponsors of 401(k)s and other defined-contribution plans to default participants with a valid email address to receive plan disclosures electronically. Read the following blog post to learn more.


The Department of Labor proposed a rule Tuesday that's meant to encourage more employers to issue retirement plan disclosures electronically to plan participants.

The rule would allow sponsors of 401(k)s and other defined-contribution plans to default participants with valid email addresses into receiving all their retirement plan disclosures — such as fee disclosure statements and summary plan descriptions — digitally instead of on paper, as has been the traditional route.

Participants can opt-out of e-delivery if they prefer paper notices. The proposed rule covers the roughly 700,000 retirement plans subject to the Employee Retirement Income Security Act of 1974.

"DOL rules have largely relied on a paper default," said Will Hansen, chief government affairs officer for the American Retirement Association. "Everything had to be paper, unless they opted into electronic default. This rule is changing the current standing."

Proponents of digital delivery believe it will save employers money and increase participants' retirement savings. The DOL also believes digital delivery will increase the effectiveness of the disclosures.

Plan sponsors are responsible for the costs associated with furnishing participant notices, and many small and large plans pass those costs on to plan participants, Mr. Hansen said. The DOL estimates its proposal will save retirement plans $2.4 billion over the next 10 years through the reduction of materials, printing and mailing costs for paper disclosures.

Opponents of digital delivery maintain that paper delivery should remain the default option. They have noted that participants are more likely to receive and open disclosures if they come by mail, and claim that print is a more readable medium for financial disclosures that helps participants better retain the information.

"We are reviewing the proposal carefully and look forward to providing comments to the Department of Labor, but we already know that in a world of information overload, many people prefer to get important financial information delivered on paper, not electronically," said Cristina Martin Firvida, vice president of financial security and consumer affairs at AARP. "The reality is missed emails, misplaced passwords and difficulties reading complex information on a screen mean that most people do not visit their retirement plan website on a regular basis."

President Donald J. Trump issued an executive order on August 2018 calling on the federal government to strengthen U.S. retirement security. In that order, Mr. Trump directed the Labor secretary to examine how the agency could improve the effectiveness of plan notices and disclosures and reduce their cost.

The DOL proposal, called Default Electronic Disclosure by Employee Pension Benefit Plans under ERISA, is structured as a safe harbor, which offers legal protections to employers that follow the guidelines laid out in the rule.

Retirement plans would satisfy their obligation by making the disclosure information available online and sending participants and beneficiaries a notice of internet availability of the disclosures. That notice must be sent each time a plan disclosure is posted to the website.

A digital default can't occur without first notifying participants by paper that disclosures will be sent electronically to the participant's email address.

The 30-day comment period on the proposal starts Wednesday. In addition, the DOL issued a request for information on other measures it could take to improve the effectiveness of ERISA disclosures.

SOURCE: Lacurci, G. (22 October 2019) "DOL proposes rule on digital 401(k) disclosures" (Web Blog Post). Retrieved from https://www.investmentnews.com/article/20191022/FREE/191029985/dol-proposes-rule-on-digital-401-k-disclosures