In a recent article published by BenefitsPro, SVP Barb Van Zomeren discusses the success of the OregonSaves program. “Participation rates have been better than expected, and the program has been received positively by employer groups,” said Van Zomeren. As of September 1, 2018, 1,160 employers have enrolled in the program, accounting for 39,284 employees, or 73 percent of workers eligible to participate. On average, monthly contributions to the IRAs is about $100, making for an average savings rate of 5.13 percent. Total assets in the program topped $6.7 million.
The IRS has issued Notice 2018-74 that modifies existing safe harbor language for rollover option explanations required of retirement plans when a participant requests a distribution. Internal Revenue Code Section 402(f) requires that participants in these plans receive a notice of rollover options and tax treatment at such times.
The safe harbor language modifications now provided in Notice 2018-74 take into account the new extended rollover period for plan loan amounts that are offset when a plan is terminated, or when a participant ceases being employed by the sponsor of the retirement plan. Under such circumstances, an affected individual may make up and roll over such offset loan amount up to, and including, his individual income tax return deadline for the distribution year, including filing extensions. This option was provided by the Tax Cuts and Jobs Act, which is tax reform legislation enacted in December 2017.
Also addressed in Notice 2018-74 is the ability of an individual to self-certify their right under special circumstances to an extension of the normal 60-day time period to complete an indirect rollover from their plan to an IRA or to another employer plan.
The IRS has released two news items—News Release IR-2018-187 and a Help for Victims of Hurricane Florence webpage—describing tax-related deadline relief available to victims of Hurricane Florence, including those automatically eligible for that relief.
Currently, the announced deadline relief applies only to the North Carolina counties of Beaufort, Brunswick, Carteret, Craven, New Hanover, Onslow, Pamlico and Pender. But the IRS postings indicate that if the relief is extended to other areas, the same privileges will apply. Under this guidance, covered tax-related deadlines that fall on or after September 7, 2018, and on or before January 31, 2019, are extended to January 31, 2019.
The relief applies specifically to residents of the identified areas, to those whose businesses or records necessary to meet a covered deadline are located there, and to certain relief workers providing assistance following the disaster events. Any individual visiting a covered disaster area who was injured or killed as a result of the events is also entitled to deadline relief. Affected taxpayers who reside or have a business located outside the covered disaster areas are required to call the IRS disaster hotline at 866-562-5227 to request relief.
Attracting attention is something that lawmakers in Washington, D.C., are known for, and legislation revealed September 11th by the House Ways and Means Committee does nothing to change that image. The Committee has approved a trio of bills which—taken together—are being referred to as Tax Reform 2.0. The name is a nod to the Tax Cuts and Jobs Act of 2017, tax reform legislation signed into law by President Trump in December 2017. Many lawmakers up for re-election this November are looking for positive talking points—or what they hope will be—in advance of the midterm elections.
In keeping with the Tax Reform 2.0 title, the first bill in the legislative package would make permanent the individual tax cuts in the 2017 legislation; the corporate tax cuts are already permanent. A second bill—perhaps the most likely to receive favorable reviews—proposes many potentially popular changes to tax-advantaged savings arrangements. The third bill is aimed at promoting “business innovation.”
Can Consensus Be Achieved?
Some of the most sweeping tax cuts in more than 30 years were contained in the Tax Cuts and Jobs Act of 2017. They’re applauded by some and panned by others. Regardless, some components of the new legislative package—specifically those found in the second bill, titled The Family Savings Act of 2018 (FSA 2018)—enjoy bipartisan support. FSA 2018 is an eclectic mix of changes that would affect IRAs, employer-sponsored retirement plans, and 529 plans.
Divide and Conquer?
A vote on Tax Reform 2.0 by the full House chamber is expected by the end of September. It should be emphasized, however, that passage in the Senate in identical form is required. Under Senate rules, a simple majority would not suffice, which makes enactment of the total legislative package an uncertain outcome, at best.
The best chance for enactment of changes proposed in FSA 2018 may lie in the possibility that this element of Tax Reform 2.0 could be split off and voted upon independently. It is not impossible to imagine a compromise in which lawmakers of all political persuasions consider the benefits of enacting something popular before the November midterm elections.
Savings Enhancements in FSA 2018
Following are brief descriptions of the savings arrangement enhancements in FSA 2018 (i.e., the second bill), with currently proposed effective dates.
Employer-Sponsored Retirement Plans
- Multiple employer plans (MEPs) – Also referred to as “pooled employer plans,” the legislation would enhance the ability of employers to jointly participate in a common plan, the purpose being to reduce administrative burden and expense. The provision would apply to “qualified plans” as defined by Internal Revenue Code (IRC) Section (Sec.) 401, and IRA-based plans. Effective for plan years beginning after December 31, 2019.
- More time to establish a plan – An employer would have until the business’ tax return deadline—including extensions—to establish a plan, rather than the last day of the business’ tax year; this grace period would not apply to adding a 401(k) component to a qualified plan. The provision would apply to profit sharing, stock bonus, defined benefit, and annuity-based plans. Effective for plans adopted for taxable years beginning after December 31, 2018.
- Extend the period to adopt safe harbor design – Plans wishing to use safe harbor testing designs could elect safe harbor status after the plan year begins if the employer makes nonelective contributions to all eligible employees (versus matching contributions) and satisfies simplified safe harbor notice requirements. Effective for plan years beginning after December 31, 2018.
- Prohibition on retirement plan credit card loans – Loans from employer plans that are taken under a credit card arrangement would be considered a deemed distribution for tax and other purposes. Effective for loans taken after the date of enactment.
- Relief for closed defined benefit (DB) plans – Nondiscrimination rules would be modified so that a business could continue to operate a DB pension plan that is closed to new employees; such employers typically offer a defined contribution (DC) plan to new employees instead. Effective generally as of the date of enactment.
- Armed Forces Ready Reserve contributions – Would allow members of the Armed Forces Ready Reserve to make certain additional elective deferrals—both basic and catch-up (all deferral-type plans)—beyond the limitation in Internal Revenue Code Section 402(g). Effective for plan years beginning after December 31, 2018.
- Government employer contributions – Would clarify rules for certain “government pick-up” retirement plan contributions for new and existing employees. Effective for plan years beginning after the date of enactment.
- 403(b) participation by employees of qualifying church controlled organizations (QCCOs) – The legislation would clarify which employees of such organizations are eligible to participate in their employer’s Retirement Income Account plan. Effective (retroactively) for plan years beginning after December 31, 2008.
- PBGC DB insurance program evaluation – A study of the PBGC’s pension plan insurance program and its premiums would be required; to be completed by an independent organization. The study to begin no later than six months after date of enactment.
IRA, or Employer-Sponsored Retirement Plan/IRA “Crossover”
- Traditional IRA contributions at any age – Anyone with earned income (or with spouse’s earned income) could make Traditional IRA contributions; no longer limited to those under age 70½. Effective for contributions for tax years beginning after December 31, 2018.
- Exempt small balances from required minimum distribution (RMD) rules – The annual requirement to receive an RMD would be waived for any year if a taxpayer’s aggregate balance is at, or below, $50,000 (indexed). Would combine balances in IRAs, qualified plans, 403(b) plans, and governmental 457(b) plans. Effective for calendar years beginning more than 120 days after enactment.
- Grad student IRA eligibility – Graduate student stipend or fellowship payments would qualify as compensation for IRA contribution purposes. Effective for tax years beginning after December 31, 2018.
- Birth or adoption excise tax exemption – Would exempt from the 10 percent early distribution excise tax (for those plans subject to it) up to $7,500 for expenses related to the birth or adoption of a child. Such amounts withdrawn could be repaid. Effective for distributions made after December 31, 2018.
- Portability of lifetime income investments – Would allow an employer plan participant to distribute and roll over to an IRA or another employer plan a lifetime income investment—even in the absence of a distribution triggering event—if the investment is no longer available under the plan. Applies to IRC Sec. 401(a) “qualified plans.” Effective for plan years beginning after December 31, 2018.
- 403(b) custodial accounts to become IRAs with plan termination – A current obstacle to 403(b) plan termination—liquidating accounts to complete the termination process—would be overcome for certain plans by deeming 403(b) custodial accounts to be IRAs. Effective for plan terminations after December 31, 2018.
- Universal Savings Accounts – Would create an account similar to a Roth IRA (no tax deduction, tax-free earnings) with the ability to remove any amount at any time for any reason, tax free (no ordering rules or qualified distribution rules as in a Roth IRA); $2,500 per year maximum contribution. Effective for tax years beginning after December 31, 2018.
- Expansion of 529 Plans – Would amend the definition of qualified expenses to include those related to apprenticeship programs and homeschooling. Would also allow up to $10,000 (total) to be used to repay student loan debt, and would expand the definition of qualified expenses for K-12 education (currently limited to tuition). Effective for distributions made after December 31, 2018.
FSA 2018 was preceded by the March 2018 introduction of the Retirement Enhancement and Savings Act (RESA), whose chief sponsors in the Senate were Orrin Hatch (R-UT) and Ron Wyden (D-OR). An equivalent RESA bill has been introduced in the House of Representatives by Rep. Mike Kelly (R-PA). Some provisions are shared by RESA and FSA, though RESA was more comprehensive in terms of retirement simplification and provisions intended to encourage retirement plan formation and employee participation. It is not beyond possibility that some of those provisions could resurface if FSA 2018 progresses to the point of passage in the House of Representatives and the Senate takes up the bill. Following are some notable differences between the two bills.
- Expanded small plan start-up and auto-enrollment tax credit – RESA would have raised the maximum small plan start-up credit from $500 to $5,000 per year, and created a credit for adding automatic enrollment to a plan. FSA 2018 has no such provision.
- Raise the deferral cap on automatic enrollments – RESA would have lifted the 10 percent cap on deferrals of automatically-enrolled plan participants; FSA 2018 does not.
- Annuity selection safe harbor – RESA prescribed an annuity selection “safe harbor” for plans that make lifetime income investments available, to encourage the use of lifetime income investments; FSA 2018 does not.
- Lifetime income projections – To make savers more aware of what their current plan balance could generate throughout retirement, RESA required periodic projections of lifetime income; FSA 2018 does not.
- Beneficiary lifetime vs. five-year payout – RESA would have required most nonspouse beneficiaries to deplete inherited IRA or employer plan accounts within five years; FSA 2018 has no such requirement.
As noted above, the best chance for enactment of changes proposed in FSA 2018 (i.e., the second bill) may rest on the possibility that this component of Tax Reform 2.0 could be considered separately—on its own merits—by the U.S. Senate and House of Representatives. The provisions described here are likely to have significant bipartisan support. Ascensus will continue to monitor the progress of this legislation. Visit ascensus.com for the latest developments.
Click here for a printable version.
The IRS has posted a September 2018-dated version of Form 5558, Application for Extension of Time to File Certain Employee Plan Returns. The form is used to request an extension of time to file Form 5500, Annual Return/Report of Employee Benefit Plan, the short Form 5500-SF, and Form 5500-EZ filed by owner-only plans. It is also filed to request filing extensions for Form 8955-SSA, Annual Registration Statement Identifying Separated Participants with Deferred Vested Benefits, and Form 5330, Return of Excise Taxes Related to Employee Benefit Plans.
The What’s New section on the updated form notes that a separate Form 5558 must be filed for each type of return for which an extension is being sought (as opposed to one Form 5558 to request several different return filing extensions). Also noted is that a signature is required when seeking an extension to file Form 5330. No signature is required when requesting a filing extension for Forms 5500 or 8955-SSA.
$1.3 trillion…that’s how much student loan debt Americans had incurred by the end of June 2017. During that same time period, the Pew Research Center estimates that 37 percent of adults ages 18 – 29 had outstanding student loans.
As these statistics show, paying for college doesn’t just end at graduation; it can go on for years. Getting younger employees to save for retirement is already challenging. And for those facing crippling student loan debt, it may be impossible. In response to this growing financial crisis, some employers have found a way to help employees pay off their student loan debt and save for retirement.
New Solution Found in IRS Guidance
On August 17, 2018, the IRS released private letter ruling (PLR) 201833012, which allows a proposed employer 401(k) plan feature to be associated with employees’ student loan payments.
Under the proposed 401(k) plan feature, if an employee affirmatively elects to participate in the employer’s student loan benefit program and makes a student loan payment equal to at least two percent of her compensation during a pay period, the employer will make a nonelective contribution (also known as a “profit sharing contribution”) of five percent of that pay period’s compensation to the employee’s 401(k) plan account.
Some in the media have mistakenly referred to this proposed nonelective contribution as a “matching contribution”. Although the PLR’s proposed contribution formula would be identical to the 401(k) plan’s current matching contribution formula (i.e., all eligible employees who defer at least two percent earn a matching contribution of five percent), a matching contribution is defined as an employer contribution made on behalf of an employee who makes a 401(k) plan deferral contribution. Under the PLR, the proposed contribution would be made only if an employee made a student loan payment—not a 401(k) plan deferral contribution.
The Best of Both Worlds
The PLR clarifies that an employee who participates in the student loan benefit program could simultaneously defer her salary into the 401(k) plan, and—if deferring at least two percent—earn the 401(k) plan’s five percent matching contribution during those pay periods when she chooses not to make a student loan payment.
Example: Jane Smith, age 28, earns $36,000 per year and gets paid $1,384.62 every two weeks. Jane also owes $47,000 on her student loan and is enrolled in her employer’s student loan benefit program. On September 7, 2018, Jane makes a $27.69 student loan payment (2% of $1,384.62). She also makes a 2% salary deferral ($27.69) to her 401(k) plan account. Jane’s employer will make a $69.23 nonelective contribution to her 401(k) plan account for the student loan payment, but will not make a matching contribution for the salary deferral. On September 21, 2018, Jane does not make a student loan payment, but does make another 2% salary deferral to her 401(k) plan account. Therefore, Jane’s employer will make a 5% matching contribution (based on her salary deferral) to her 401(k) plan account.
Clarification on Open Questions
The PLR states that the proposed nonelective contribution is subject to plan qualification rules including—but not limited to—eligibility and contribution rules as well as coverage and nondiscrimination testing. The PLR also mentions that because receipt of the nonelective contribution is contingent upon the student loan payment and not upon an employee deferring (or not deferring) into the employer’s 401(k) plan, there is no conflict with the contingent benefit rules. (See Internal Revenue Code Section 401(k)(4)(A).)
Next Steps – How Can Other Employers Make Similar Contributions?
The student loan benefit program described in the PLR is just one way employers may design their retirement plan to simultaneously encourage repayment of student loans and help employees save for retirement. Employers who are interested in implementing a student loan benefit program similar to that described in the PLR should consider visiting with their attorney to determine whether to proceed because a PLR may be relied upon only by the party to whom it is issued.
If a decision to amend the plan to incorporate such a program is made, the employer should consult its plan record keeper or third-party administrator to discuss available options. The easiest path for an employer with access to pre-approved plan documents is to have a customized volume submitter document prepared on its behalf. If an employer is flexible in how its program is designed, there may be other options (e.g. new comparability allocation formulas) that will allow the employer to satisfy its objective.
Anthony Cilluffo, “5 Facts About Student Loans”, Pew Research Center, August 24, 2017, accessed August 23, 2018, http://www.pewresearch.org/fact-tank/2017/08/24/5-facts-about-student-loans/.
Click here to view a printable version.
On August 31, President Donald Trump launched the Labor Day holiday weekend by issuing an Executive Order directing the Secretaries of Labor and Treasury—and the agencies they lead—to consider options for changing several important items pertaining to retirement savings plans. The President focused on 1) broadening retirement plan availability by expanded use of multiple employer plans (MEPs) and a simplified plan disclosure process, and 2) enhancing savings preservation by modernizing the determination of required minimum distributions (RMDs) from IRAs and employer plans.
Expand Access through Common Plan Sponsorship and Participation
In an Executive Order signing ceremony in Charlotte, North Carolina, President Trump spoke of a need “to expand access to … retirement plans for American workers.” He cited a Bureau of Labor Statistics finding that 34 percent of full and part-time U.S. workers have no employer-provided retirement plan. A White House Fact Sheet cited a disparity in access to a retirement plan if employed by a large employer (89 percent) versus a small employer (53 percent).
The Trump Administration proposes relaxing the MEP rules to allow the formation of Association Retirement Plans, or ARPs, which—as is the nature of MEPs—would allow employees of different employers to participate in a common plan. The Executive Order directs the DOL and the Treasury Department to take the following actions.
- Within six months, the Department of Labor (DOL) is to consider whether to propose regulations or other guidance that would clarify which business entities and individuals can join together in a MEP.
- The DOL must consider sole proprietors, part-time workers, and “entrepreneurial workers with nontraditional employer-employee relationships”—such as gig-economy workers—in this guidance process.
- Within six months the Treasury Department is to consider proposing guidance—in consultation with the DOL—that would shield a MEP-participating employer from the consequences of compliance failures by other employers.
It is worth noting that there was no indication that the Administration is backing the “open MEP” concept, wherein no common ownership, business purpose, or other linkage would be a condition for MEP participation.
More Efficient, More Effective Plan Disclosure
One of the challenges faced by retirement plan sponsors is disclosing vital, required information to employees. In the Executive Order, President Trump directed the Labor and Treasury Departments to jointly undertake an effort “to make retirement plan disclosures … more understandable and useful for participants and beneficiaries, while also reducing costs and burdens they impose on employers and plan fiduciaries.” The Executive Order also contains the following.
- Within one year, the Departments of Labor and Treasury are to consider regulatory or other guidance options to reduce the number and complexity of retirement plan disclosures.
- The Executive Order links the cost and burden of plan disclosures and notices with suppressing the formation of more employer-sponsored retirement plans.
- The new guidance—if issued—should address not just cost, but “potential liability” associated with the disclosure process.
- The agencies’ review of guidance options is to “include an exploration of the potential for broader use of electronic delivery as a way to improve the effectiveness of disclosures and to reduce their associated costs and burdens.”
Align Required Distributions with Retirement Realities
The Executive Order points to current regulations as leading to unnecessarily rapid withdrawal of retirement savings, and retirees experiencing a shortfall in financial resources during their lifetime. The President is seeking a reexamination of regulations that dictate the rate of required withdrawal. The Executive Order requires the Treasury Department to take the following actions within six months.
- Review the mortality tables that now govern the speed of distribution—generally beginning at age 70½—in accounts subject to required minimum distributions (RMDs).
- Consider the latest data on longevity in determining whether current regulations—and the life expectancy tables within them—should be revised.
- Consider the appropriateness of more frequent updating of the life expectancy calculation factors in the RMD regulations. The Executive Order suggests this could be as often as annually.
Nothing that the President has asked of the Departments of Labor and Treasury in his Executive Order has the force of law, or makes any immediate changes to retirement savings arrangements. It is a prompt to incrementally change the compliance landscape by regulatory action, in the absence of action by Congress.
The changes President Trump is seeking are not sweeping, but very targeted. The most noteworthy—addressing the MEP rules and plan disclosures—are clearly meant to diminish employer-perceived obstacles to establishing and maintaining plans. The ball is now in the agencies’ court. Yet to be determined is the extent to which such changes will be made in agency drafting rooms, versus the halls of Congress.
Perhaps noteworthy, the DOL recently issued final regulations on association health plans (AHPs), which offer guidance on the ability of multiple employers to join together under a single health insurance plan. Will these regulations ultimately serve as a model for retirement arrangements?
Ascensus will continue to monitor these agencies and their response to the President’s Executive order. Visit ascensus.com for the latest developments.
On August 31, 2018, President Trump signed an executive order designed to “strengthen retirement security for American workers.” While the executive order itself has not yet been made available, the White House has published a fact sheet describing the order. The fact sheet outlines the executive order, which directs the Departments of Labor and Treasury to consider ways to:
- Expand access to retirement plans by directing the DOL and Department of Treasury to make it easier for businesses to join multiple employer plans called “Association Retirement Plans” (ARPs).
- Reduce costs for small businesses by directing the DOL and Department of Treasury to consider ways to improve retirement plan notice requirements to reduce paperwork and administrative burdens. This may involve enhancing the electronic delivery of notices and statements.
- Strengthening Workers’ Financial Futures by directing the Department of Treasury to review the required minimum distribution rules from retirement plans and IRAs to see if there are ways that participants and IRA owners to keep their money in their retirement plans for a longer period of time.
The text of the executive order will be reviewed once released, and the potential action taken by the DOL and Department of Treasury will be closely monitored. Visit www.ascensus.com and subscribe to our Industry and Regulatory news feed for the latest developments.
Addition of Highly Respected TPA Increases Firm’s Scale and California Presence
Dresher, PA—Ascensus—whose technology and expertise helps millions of people save for retirement, education, and healthcare—has entered into an agreement to acquire PenSys. The third-party administration (TPA) firm will immediately become part of Ascensus’ TPA Solutions division.
Based in Roseville, California, PenSys is a nationally recognized TPA that specializes in the design, implementation, and administration of defined contribution, defined benefit, and cash balance retirement plans. The firm, which also offers 3(16) fiduciary services, has established a strong reputation for providing creative plan design and high quality service.
“PenSys is one of the most highly respected TPAs in the country due to their focus on designing plans to meet clients’ unique needs and their use of technology to enhance personal service,” says Jerry Bramlett, head of TPA Solutions. “Their addition to Ascensus TPA Solutions goes a long way toward helping us build a national TPA that offers a broad set of services and resources to financial professionals, employers, and employees.”
“Since 1995, we’ve worked hard to make PenSys a partner who understands what service really means to financial professionals, CPAs, and their current and prospective clients,” states Bryan Jacobson, PenSys’ chief executive officer. “We’ll continue to offer the best possible solutions for establishing and maintaining their retirement plans as part of Ascensus.”
“PenSys is a high integrity business with excellence in plan design, actuarial consulting, and 3(16) services complemented by their open-architecture business model,” says Raghav Nandagopal, Ascensus’ executive vice president of corporate development and M&A. “This acquisition not only expands our California footprint significantly, but also adds to our capabilities to service clients nationally. We are delighted to welcome their clients and associates to the Ascensus family.”
Ascensus is the largest independent recordkeeping services provider, third-party administrator, and government savings facilitator in the United States. The firm delivers technology and expertise to help millions of people save for what matters most—retirement, education, and healthcare. For more information about Ascensus, visit ascensus.com. View career opportunities at careers.ascensus.com.
The IRS has issued private letter ruling (PLR) 201833012, responding to a request for a ruling on a proposed employer 401(k) plan feature to be associated with employees’ student loan repayments. After review, the IRS approved the request and added explanation of why the facts as presented will not violate retirement plan laws and regulations. While this is a private letter ruling to be relied upon by the requestor, it is not a new concept as it has been proposed in at least one federal bill introduced by a member of Congress and has been a subject of discussion within the retirement plan industry.
Under the 401(k) plan of the employer on whose behalf the PLR application was submitted, matching contributions are now received by those participating employees who defer their salary into the plan. The PLR request proposes to amend the plan to add an element tied to student loan repayment. Under the arrangement proposed, if an employee affirmatively elects to participate in the employer’s student loan benefit program, and during a pay period makes a student loan repayment equal to at least 2 percent of his compensation, the employer would make a “student loan repayment nonelective contribution” of 5 percent of that pay period’s compensation to the employee’s 401(k) plan account.
This nonelective contribution formula, incidentally, is identical to the plan’s matching contribution formula for those employees who defer their salary into the 401(k) plan. That is, all eligible employees who defer at a rate of at least 2 percent earn a “matching contribution” of 5 percent. Furthermore, it would not be an either/or situation. An employee who participates in the student loan benefit program could simultaneously defer salary into the 401(k) plan, and if deferring at least 2 percent, also earn the plan’s 5 percent matching contribution.
The PLR notes that under the proposal the student loan repayment nonelective contribution would be “subject to all the applicable plan qualification requirements, including, but not limited to, eligibility, vesting, and distribution rules, contribution limits, and coverage and nondiscrimination testing.”
The IRS specifically notes that the employer’s contribution under the student loan repayment program will not be treated as a matching contribution, thereby avoiding conflict with the “contingent benefit prohibition” of 401(k) plans. If the employer’s contribution associated with the student loan benefit program were to be considered a matching contribution received for an employee’s action outside the scope of the plan, such as making student loan repayments, the rule would be violated. Though it may seem only a semantic distinction, the fact that the benefit would be considered a nonelective contribution rather than a matching contribution is what led to the IRS to approve this PLR submission.
A plan contribution such as that proposed in this PLR might not be available in every plan document, and even with a document that would allow a special allocation approach such as described here, it bears repeating the PLR’s emphasis that all applicable plan qualification requirements must be met.
Note that a PLR may only be relied upon by the party to whom it is issued, though it generally is recognized that a PLR may reflect IRS policy and ruling inclinations for similar or identical fact patterns.