What You Need to Know About: The SECURE Act

In December of 2019, President Donald Trump passed the Setting Every Community Up for Retirement Enhancement Act or SECURE Act. Some of the Act aims as making it easier for small business owners to create more affordable and easier to administer retirement plans. Key takeaways from the SECURE Act include:

  • Small Business Tax Credits have increased for businesses who start a 401(k) Plan, thus making starting a plan more affordable.
  • New automatic enrollment plan tax credit created.
  • Removes the annual notice requirement for Safe Harbor 401(k) Plans that utilize the nonelective contribution instead of the match.
  • 401(k) Nonelective Safe Harbor Plans can be adopted up until 30 days before plan year end, instead of 90 days prior.
  • Maximum automatic contribution rate is increased to 15% from 10% in Qualified Automatic Contribution Arrangements (QACAs).
  • Pushes the age of 70 ½ to 72 for retirement plan participants needing to take RMDs or ‘required minimum distributions.
  • Part-time employees will be eligible to participate after completing 500 hours of service in each of 3 consecutive 12-month periods, if at least age 21 at the end of that time. These employees do not have to share in company contributions.
  • Pooled Employer Plans (PEPs) will be allowed which could make it easier for small businesses to administer their retirement plan.

“There is a lot of hype in the government and media about how the SECURE Act will make it cheaper to sponsor a plan. I don’t know if recordkeepers could lower their annual costs any more than they have over the last 8 or 9 years; but it definitely will provide lower start-up costs through the tax credits, and make it easier to administer plans if utilizing a Safe Harbor approach or a PEP,” stated Todd Yawit, Director / Retirement Plans at Saxon Financial Services, Inc.

For most plans and provisions, the SECURE Act became effective on January 1, 2020. However, for Pooled Employer Plans (PEPs), the SECURE Act will go into effect on January 1, 2021. For further information on how the SECURE Act will affect your retirement plans, contact Todd Yawit at (513) 573-0129 or tyawit@gosaxon.com.


Older workers are staying in the job market. Here’s why

According to the Bureau of Labor Statistics, the amount of employees over the age of 65 has risen by 697,000. With over two million jobs being created over the past 12 months with the help of the economy, the older generations are still wanting to be employed. Read this blog post to learn more as to why.


Older workers are sticking around the job market. This is why
The number of workers aged 65 and above increased by 697,000 as the economy created more than 2 million new jobs over the past 12 months, according to data from the Bureau of Labor Statistics in this CNBC article. The spike in the number of older workers represents about 36% of the overall increase, reflecting a trend over the past 10 years. “The norms about working at older ages have changed quite a bit, and I think in a way that really is to the advantage of older workers who want to keep working,” says an expert.

What ‘Rothifying’ 401(k)s would mean for retirees
Clients will not benefit from a switch to a retirement system where contributions would be made on an after-tax basis even if it could result in bigger tax revenue in the near term, experts write in The Wall Street Journal. "Over their lifetimes, workers would accumulate one-third less in their 401(k)s under a Roth system. This is because, with no tax advantage from contributing to a 401(k), workers would save less and those lower contributions would earn less over the years," they write. Moreover, "lifetime tax revenue generated by the average worker under a Roth regime would fall 6% to 10%, compared with the current regime."

Stop 'dollar-cost ravaging' your clients’ portfolio in retirement
Retirees who stick to a 4% withdrawal rule during a market downturn are putting their financial security at risk, as their portfolio would not recover even if the market eventually improves, writes an expert in Kiplinger. Instead, seniors should focus on how much income they can generate from their portfolio, he writes. "[I]t means choosing investments — high dividend-paying stocks, fixed income instruments, annuities, etc. — that will produce the dollar amount you need ($2,000, $3,000, $5,000 or more) month after month and year after year."

Will clients owe state taxes on their Social Security?
Retirees may face federal taxation on a portion of their Social Security benefits — but they could avoid the tax bite at the state level, as 37 states impose no taxes on them, writes a Forbes contributor. "While probably not a big enough issue to warrant moving in retirement, it is something to consider when choosing where you want to spend your retirement," writes the expert. "At the very least, you need to know about Social Security taxation when figuring out how much additional income you will need to have in order to maintain your standard of living during retirement."

8 ways clients can start saving for college now
There are a few savings vehicles that clients can use to prepare for college expenses, but they need to consider the pros and cons, according to this article in Bankrate. For example, clients who save in a 529 savings plan can get tax benefits — such as tax deferral on investment gains and tax-free withdrawal for qualified expenses — but will face penalties for unqualified withdrawals aside from taxes. Parents may also use a Roth IRA to save for their child's college expenses, but these accounts are subject to contribution limits and future distributions will be treated as an income, which can reduce their child's eligibility for scholarships or assistance.

SOURCE: Peralta, P. (18 February 2020) "Older workers are staying in the job market. Here’s why" (Web Blog Post). Retrieved from https://www.employeebenefitadviser.com/news/why-older-workers-are-staying-in-the-job-market


Rising cost of healthcare is hurting HSAs

With HSA's providing a way for users to be able to reduce out-of-pocket costs for healthcare, deductibles still continue to rise. Read this blog post to learn more about why continuously raised healthcare costs are hurting current HSA's and HSA's that could be used for retirement.


Employees are increasingly putting money aside for their HSAs, but they’re using almost the entirety of it to cover basic health needs every year instead of saving the money for future expenses, according to Lively’s 2019 HSA Spend Report.

“People are putting money in and taking money out on a very regular basis, as opposed to trying to create some sort of nest egg for down the road,” says Alex Cyriac, CEO and Co-Founder of Lively.

The San Francisco-based HSA provider says 96% of annual contributions were spent on expected expenses and routine visits as opposed to unexpected health events and retirement care. In 2019, the average HSA account holder spent their savings on doctor visits and services (50%), prescription drug costs (10%), dental care (16%), and vision and eyewear (5%).

The rising cost of healthcare is a factor in these savings trends: Americans spent $11,172 per person on healthcare in 2018, including the rising cost of health insurance, which increased 13.2%, according to National Health Expenditure Accounts. For retirees, the figures are shocking: a healthy 65-year-old couple retiring in 2019 is projected to spend $369,000 in today’s dollars on healthcare over their lifetime, according to consulting firm Milliman.

“Because people can't even afford to save, there's going to be a very low likelihood that most Americans are going to be able to afford their healthcare costs in retirement,” says Shobin Uralil, COO and Co-Founder of Lively.

HSAs were intended to be a way for consumers to save and spend for medical expenses tax-free. Additionally, its biggest benefit comes from being able to use funds saved in an HSA in retirement — when earnings are lowest and healthcare is most expensive. However, just 4% of HSA users had invested assets, according to the Employee Benefit Research Institute.

While HSAs have surged in popularity as a way for more Americans to reduce overall out-of-pocket healthcare spending, more education is required to help account holders understand the benefits of saving and investing their annual contributions for the long-term, the Lively report states.

“As deductibles continue to rise, people just don't seem to have an alternative source for being able to fund those expenses, so they are continuing to dip into their HSA.” Cyriac says. “I think this is just reflective of the broader market trend of healthcare costs continuing to rise, and more and more of those costs being disproportionately passed down to the user.”

SOURCE: Nedlund, E. (29 January 2020) "Rising cost of healthcare is hurting HSAs" (Web Blog Post). Retrieved from https://www.employeebenefitadviser.com/news/rising-cost-of-healthcare-is-hurting-hsas


Saver's Credit Can Spur Retirement Plan Contributions

Many employees are not aware of employer-sponsored retirement accounts, or individual retirement accounts (IRA), which could be costing those more money. Tax season is the best time for employers to educate their employees on how they can earn extra tax credits through their 401(k) plans. Read this blog post to learn more about how to educate employees on what retirement account opportunities that are available to them.


Many workers don't know that they're eligible for a tax credit by saving in an employer-sponsored retirement plan or individual retirement account (IRA)—and that could be costing them money. Tax time, however, is prime time for employers to inform eligible workers about the saver's credit.

The Retirement Savings Contributions Credit, or saver's credit, is available to low- and moderate-income workers who are putting money aside for retirement. But only 29 percent of workers with annual household income below $50,000 know about the saver's credit, according to the nonprofit Transamerica Center for Retirement Studies in Los Angeles, which surveyed nearly 6,000 employees last fall.

"Tax season is an ideal time to tell eligible workers how they can earn extra tax credits by saving through their employer's 401(k) or a similar retirement plan," said Catherine Collinson, president of the Transamerica Center. "The saver's credit might just be the motivator for those not yet saving for retirement to get started."

Scott Spann, a senior financial planner with Financial Finesse, a provider of workplace financial wellness programs in Charleston, S.C., said, "Saving for retirement is a challenge for many households in America. Special tax incentives help make the process of saving easier."

What Is the Saver's Credit?

Like other tax credits, the saver's credit can increase a taxpayer's refund or reduce the tax owed. Here's how it works:

The amount of the credit is a maximum of 50 percent of an employee's retirement plan contributions up to $2,000 (or $4,000 for married couples filing jointly), depending on the filer's adjusted gross income as reported on Form 1040. Consequently, the maximum saver's credit is $1,000 (or $2,000 for married couples filing jointly).

The saver's credit "is different than a tax deduction due to the fact that a tax credit is a dollar-for-dollar reduction of your gross tax liability, which is the total amount of taxes you're responsible for paying before any credits are applied," Spann explained.

The saver's credit also differs from the separate tax benefit of contributing pretax dollars to a qualified retirement plan, such as an employer-sponsored 401(k) or an IRA. "Many eligible retirement savers may be confusing these two incentives because the notion of a double tax benefit"—pretax contributions and an additional tax credit—"seems too good to be true," Collinson said.

Who Can Claim the Saver's Credit?

The credit is available to workers age 18 or older who have contributed to a company-sponsored retirement plan or an IRA in the past year and meet the income requirements shown in the table below. The filer cannot be a full-time student nor claimed as a dependent on another person's tax return.

Income Caps for Tax Years 2019 and 2020

For eligible workers, the amount of the available tax credit diminishes as adjusted gross income (AGI) rises. To help preserve the credit's value, income thresholds are adjusted annually to keep pace with inflation. Below are the AGI caps for tax year 2019 (for tax returns filed this year) and 2020 (for returns filed next year).

2019 Saver's Credit
Tax Credit Rate Single Filers and Married, Filing Separately* Married, Filing Jointly Heads of Household
50% of contribution AGI not more than - $19,250 AGI not more than $38,500 AGI not more than $28,875
20% of contribution AGI of $19,251 - $20,750 AGI of $38,501 - $41,500 AGI of $28,876 - $31,125
10% of contribution AGI of $20,751- $32,000 AGI of $41,501 - $64,000 AGI of $31,126 - $48,000
No credit AGI more than $32,000 AGI more than $64,000 AGI more than $48,000

 

2020 Saver's Credit
Tax Credit Rate Single Filers and Married, Filing Separately* Married, Filing Jointly Heads of Household
50% of contribution AGI not more than $19,500 AGI not more than $39,000 AGI not more than $29,250
20% of contribution AGI of $19,501 - $21,250 AGI of $39,001 - $42,500 AGI of $29,251 - $31,875
10% of contribution AGI of $21,251 - $32,500 AGI of $42,501 - $65,000 AGI of $31,876 - $48,750
No credit AGI more than $32,500 AGI more than $65,000 AGI more than $48,750

Deadlines for Retirement Contributions

"You must make eligible contributions to your employer-sponsored retirement plan or IRA for the tax year for which you are claiming the income tax credit," Spann said.

While 401(k) contributions for a tax year can be made only up to Dec. 31, those who are eligible but did not save last year can still make a tax year 2019 IRA contribution until April 15, 2020.

Filing for the Saver's Credit

Employers can advise eligible workers to take the following steps to claim the saver's credit, according to the Transamerica Center:

  • If using tax-preparation software, including those programs offered through the IRS Free File program, use Form 1040 or Form 1040NR for nonresident aliens. Answer questions about the saver's credit, which may be referred to as the Retirement Savings Contributions Credit or the Credit for Qualified Retirement Savings Contributions.
  • If preparing tax returns manually, complete Form 8880, Credit for Qualified Retirement Savings Contributions, to determine your exact credit rate and amount. Then transfer the amount to the designated line on Form 1040 (Schedule 3) or Form 1040NR.
  • If using a professional tax preparer, ask about the saver's credit.

Financial planners advise having tax refunds directly deposited into an IRA to further boost your retirement savings.

The Transamerica Center has additional information, in English and Spanish, on its Saver's Credit webpage, along with a downloadable fact sheet.


IRS Free File Program Is Available

Another potentially overlooked opportunity for workers is the IRS Free File program, which offers federal income tax preparation software at no charge to tax filers with an AGI of $69,000 or less.

Free File opened on Jan. 10, 2020, for the preparation of 2019 tax returns. Eligible taxpayers can do their taxes now, and the Free File provider will submit the return once the IRS officially opens the tax filing season on Jan. 27.

For 2020, the Free File partners are: 1040Now, Inc., ezTaxReturn.com (English and Spanish), FileYourTaxes.com, Free tax Returns.com, H&R Block, Intuit, On-Line Taxes, Inc., Tax ACT, TaxHawk, Inc. and TaxSlayer (English and Spanish).

Here's how Free File works:

  1. Taxpayers go to IRS.gov/FreeFile to see all Free File options.
  2. They browse each of the offers or use a "look up" tool to help find the right product. Each Free File partner sets its own eligibility standards generally based on income, age and state residency. But if the taxpayer's adjusted gross income was $69,000 or less, they will find at least one free product to use.
  3. They select a provider and follow the links to their web page to begin a tax return.
  4. They complete and e-File a tax return if they have all the income and deduction records they need. The fastest way to get a refund is by filing electronically and selecting direct deposit. For taxes owed, they can use direct pay or electronic options.

Many Free File online products also offer free state tax preparation, although some charge a state fee. Taxpayers should read each provider's information carefully.

"The IRS has worked to improve the program for this year, and we encourage taxpayers to visit IRS.gov, and consider using the Free File option to get a head start on tax season," said IRS Commissioner Chuck Rettig.

Nearly 57 million returns have been filed through the Free File program since it began in 2003, and 70 percent of U.S. taxpayers (about 100 million people) are eligible for Free File, according to the IRS.


SOURCE: Miller, S. (10 January 2020) "Saver's Credit Can Spur Retirement Plan Contributions" (Web Blog Post). Retrieved from https://www.shrm.org/resourcesandtools/hr-topics/benefits/pages/remind-low-wage-earners-about-savers-credit.aspx


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/


IRA spousal contributions can mitigate the high cost of women’s work breaks in retirement plans

According to a November 2018 study, women who took a year off from work in a 15-year period had 39 percent lower average annual earnings than women who worked continuously through that time. Read this blog post for more on how spousal contributions can mitigate the high cost of work breaks in retirement plans.


Women employees face special retirement savings challenges compared with their male counterparts. On average, they earn less and log fewer years of earned income compared to men. That’s because, in part, because women take multiple breaks from work, turn down work or decline promotions because of family care obligations.

The cost of a career break can be high. A November 2018 study by the Washington-based Institute for Women’s Policy Research found that women who took just one year off from work in a 15-year period had 39% lower average annual earnings than women who worked continuously through that time. The study also showed that the number of women taking at least one year off of work during a 15-year period was nearly twice the rate of men — 43% of women compared to 23% of men.

As a result, women are less likely to set aside money in a savings arrangement or to contribute to an employer-sponsored retirement plan.

Spousal advantage

Married women (and men) who take work breaks may stay on track with their retirement savings goals by making IRA (traditional or Roth) contributions based on their working spouse’s income — if they meet these requirements.

  • The couple must file a joint federal income tax return
  • The working spouse must have enough earned income to make any IRA contributions on behalf of the nonworking spouse, or, if both spouses are contributing, enough income to support both spouses’ contributions
  • Assuming enough earned income, each spouse can contribute up to $6,000 (plus $1,000 if turning age 50) for 2019. This limit applies to traditional and Roth IRA contributions combined
  • The spouse receiving a traditional IRA contribution must be under age 70 ½ for the entire year
  • To be eligible for Roth IRA contributions, the couple must also satisfy income requirements.

Roth IRA income restrictions

The amount that an individual is eligible to contribute to a Roth IRA depends on the amount of the couple’s modified adjusted gross income (MAGI). If the couple’s joint MAGI for a tax year is less than the IRS phase-out range, each spouse can make the maximum Roth IRA contribution allowed for that tax year (assuming enough MAGI to support both spouse’s contributions). If it’s above the phase-out range, neither spouse is eligible to contribute to a Roth IRA. Keep in mind that they could still contribute to a traditional IRA, if under age 70 ½. If the couple’s joint MAGI falls within the phase-out range, their maximum contribution amount is reduced. The MAGI phase-out range is subject to cost-of-living adjustments each year.

Traditional IRA income tax deductions

Note that separate MAGI phase-out ranges apply to traditional IRA contribution deductions — another way for non-working married individuals to potentially benefit when saving for retirement with an IRA. The ability to take a federal income tax deduction for a traditional IRA contribution — if eligible — appeals to many savers. But deduction eligibility depends on whether either spouse is an “active participant” in an employer-sponsored retirement plan. An active participant is generally making or receiving contributions to her retirement plan accounts for the applicable year. Because active participants have access to a workplace retirement plan, the IRS uses its MAGI to determine whether each spouse can take a full deduction, a partial deduction or no deduction at all.

No minimum required

Regardless of which IRA a couple chooses to, the main thing is to contribute — even if it’s a small amount. There is no minimum amount that must be contributed to either type of IRA. Couples can contribute whatever they’re comfortable with, up to the previously described limit. For those concerned about not having enough to set aside in an IRA during a career break, contributing even just $500 or $1,000 for the year will still make a difference.

It certainly beats not saving at all.

SOURCE: Van Zomeren, B. (9 December 2019) "IRA spousal contributions can mitigate the high cost of women’s work breaks in retirement plans" (Web Blog Post). Retrieved from https://www.benefitnews.com/opinion/ira-spousal-contributions-can-mitigate-cost-of-womens-work-breaks-in-retirement


What to do when your state says you need a retirement plan

Did you know: Almost 25 percent of U.S. adults lack any retirement savings. In response to these findings, many states are beginning to require employees to participate in state-sponsored retirement programs. Read the following blog post to learn what to do when your state requires you to participate in a state-sponsored retirement plan.


We’re all too aware of the looming retirement crisis. Almost 25% of adults in the United States lack any retirement savings, according to the Federal Reserve. In response, a number of states have decided to enact legislation that require employees to participate in their state-sponsored retirement program.

What does this mean for business owners not currently offering a plan?

For businesses operating in a state where legislation has been proposed, it’s very likely that they will have to make some changes in the not-so-distant future. Some state plans come with penalties for not enrolling, while others offer appealing incentives for involvement. However, the real question may not be whether you want to offer a state-sponsored plan, but rather, whether a state-sponsored plan is the right option.

Most state-sponsored plans are designated as Roth IRAs, using investments chosen by the state, and are low-cost. However, there are also benefits to creating a customized plan that works for you and your employees. Issuing your own plan allows you to:

  • Select your own investments to include the right fund variety and offer user-friendly models like target-date funds;
  • Create your own plan design so you have more control over things like company matching and eligibility rules;
  • Derive significantly greater tax benefits because a 401(k) plan allows deductions of pre-tax earnings of up to $19,000 whereas an IRA only permits deductions of up to $6,000 in earnings;
  • Borrow against your plan in times of emergency; and
  • Keep costs equally low thanks to new entrants and advanced technology that eliminates overhead.
  • While state-sponsored plans are getting the conversation started, it’s important to look at the bigger picture strategy and determine the best short- and long-term decisions.

To better understand the urgency behind any retirement plan decision, it’s worth digging deeper into the specific requirements of your state. But regardless of what state you’re in, there are many perks to offering a company-sponsored retirement plan such as tax incentives, recruitment and retention benefits, and investing in your employee’s future. And thanks to new entrants and advanced technology, many traditional inefficiencies and excess fees have been eliminated, keeping costs down.

States are putting emphasis on the retirement crisis and stepping in to help. But at the end of the day, this is about setting your employees — and yourself — up for retirement security. Look at the current proposals in your jurisdiction, think about what you’re trying to accomplish, and determine what will offer the greatest value for you and your team. Everyone deserves retirement security.

SOURCE: Brecher, A. (22 November 2019) "What to do when your state says you need a retirement plan" (Web Blog Post). Retrieved from https://www.benefitnews.com/opinion/what-to-do-when-your-state-says-you-need-a-retirement-plan


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


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