Retirement Spotlight

Retirement Spotlight: How Employers Can Help Employees Pay Off Student Loans and Save for Retirement

$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[1].

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.

[1]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.

 


Retirement Spotlight: How Tax Reform Changed IRA Recharacterizations

The recent tax reform bill made a few changes to IRAs and retirement plans. You may have heard rumblings about one of them involving IRA recharacterizations. The change, which took effect January 1, 2018, reduces the scenarios in which IRA owners may choose to recharacterize a contribution. To help you understand and prepare for this change, let’s take a closer look at both the old and new recharacterization rules.

Old Recharacterization Rules

The recharacterization rules generally allowed you to “undo” certain transactions. You could recharacterize a contribution for any reason as long as it was completed by your tax return due date, plus extensions.

Before January 1, 2018, you could recharacterize a

  1. regular Traditional IRA contribution to a Roth IRA,
  2. regular Roth IRA contribution to a Traditional IRA,
  3. conversion of Traditional or SIMPLE IRA assets back to the original type of IRA, and
  4. retirement plan-to-Roth IRA rollover to a Traditional IRA.

New Recharacterization Rules

Under the new rules, your list of recharacterization options has been trimmed from four to two.

As of January 1, 2018, scenarios 3 and 4 (shown above) do not apply. You may no longer recharacterize a Roth IRA conversion, from any source. It is now a one-way transaction without an “undo” feature.

Options 1 and 2 remain unchanged. You can continue to recharacterize a regular current year IRA contribution by your tax return due date, plus extensions.

The new rules are clear about conversions and retirement plan-to-Roth IRA rollovers that occur in 2018—they cannot be recharacterized. But whether conversions and retirement plan rollovers completed in 2017 can be recharacterized in 2018 is unanswered in the new rules. Ascensus contacted an IRS representative who said that IRS was aware of this issue and that conversions and retirement plan rollovers completed in 2017 may be recharacterized in 2018.

Going Forward

If you are considering a conversion or retirement plan-to-Roth IRA rollover, you’ll want to carefully consider the new recharacterization restrictions. If you completed a conversion or retirement plan-to-Roth IRA rollover in 2017 and wish to recharacterize it in 2018, note that the IRS’ comments were provided in an unofficial, verbal conversation. As a result, you should consider talking to your tax or financial professional beforehand.


Retirement Spotlight: 2017 Hurricane Disaster Relief Guidance for Employers with Retirement Plans

The Internal Revenue Service (IRS), Department of Labor (DOL), and Pension Benefit Guaranty Corporation (PBGC), have extended many tax-related deadlines for hurricane victims in the wake of Hurricanes Harvey, Irma, and Maria. Congress then passed the Disaster Tax Relief and Airport and Airway Extension Act of 2017 to provide additional relief. What this means to you, your plan, and your participants will vary, so you’ll want to be aware of a few key takeaways.

 

Qualified Hurricane Distributions

The legislation passed by Congress permits a special distribution type: “qualified hurricane distribution.” Individuals whose principal residence is within a presidentially declared disaster area affected by Hurricane Harvey, Irma, or Maria—and who have sustained an economic loss as a result—are eligible to request qualified hurricane distributions from their IRA or employer-sponsored retirement plan (plan permitting).

Qualified hurricane distributions are distributions taken during a specified time period, described below.

HurricaneRelief AreaDistribution taken afterDistribution taken before
HarveyTexas8/23/20171/1/2019
IrmaFlorida, Georgia, U.S. Virgin Islands, and Puerto Rico9/4/20171/1/2019
MariaU.S. Virgin Islands, Puerto Rico, and Seminole Tribe of Florida9/16/20171/1/2019

Your plan is not required to allow qualified hurricane distributions. If you decide that your plan will allow qualified hurricane distributions, however, you should consult with your plan document provider to determine what action you must take. If you need to amend your plan document to allow qualified hurricane distributions, you must amend by the last day of the 2019 plan year.

 

Qualified Hurricane Distribution Relief Granted to Individuals

Designating a withdrawal request as a qualified hurricane distribution allows the individual to

  • withdraw amounts up to $100,000, aggregated across all IRAs and employer plans;
  • avoid mandatory 20 percent withholding on distributions from qualified plans, 403(b) plans, and governmental 457(b) plans;
  • pay taxes on the distribution ratably (equally) over three years, beginning in the tax year of the distribution, or elect to pay all taxes in current year;
  • avoid the 10 percent early distribution penalty tax;
  • repay the qualified hurricane distribution (as a rollover) into any eligible retirement vehicle within a three-year window starting on the day after the distribution is received; and
  • repay hardship distributions for the purchase or construction of a principal residence taken after August 23, 2017, if the purchase was cancelled due to hurricane events. Repayment must be completed by February 28, 2018, and can be made to any eligible retirement plan.

 

Hardship Distribution Relief

If you decide not to permit qualified hurricane distributions in your plan, you may still allow for other relief. Broader relief applies to individuals who live in, or have a business within, a presidentially declared disaster area. For instance, participants can now use disaster relief as a safe harbor hardship reason.

  • Even if your plan does not currently offer hardship distributions, you can permit hardship distributions for disaster relief immediately—if you amend your plan by the end of the 2018 plan year to allow for these distributions.
  • You do not need supporting documentation (e.g., spousal consent) before approving a hardship distribution, as long as you reasonably believe that you can obtain it. Then you must collect it as soon as practicable.
  • No six-month suspension of deferral contributions applies to disaster relief hardships.

 

Loan Relief Provided

For your plan participants who live in, or have a business within, one of the declared disaster areas, certain features of permissible loan programs have been relaxed.

  • Even if your plan does not currently offer loans, you can permit loans to provide disaster relief immediately and then amend your plan to allow for loans by the end of your 2018 plan year.
  • As with hardships, you can process loans without obtaining all of the supporting documentation first. But you must collect this information as soon as practicable.
  • The maximum loan amount for disaster-relief loans is raised to $100,000 (from $50,000), and participants can take loans in excess of 50 percent of their vested balance.
  • The borrower can delay loan repayments for one year, and does not need to include this period in the payment schedule. For example, a five-year loan repayment schedule could begin after the initial one-year delay.

 

Tax Deadline Extensions Granted

If you or your plan participants live in (or have a business within) one of the disaster areas, they may be eligible for extensions on deadlines that fall on or after the dates listed below. Click through the relief area name to see the full list of affected counties from www.fema.gov/disasters.

Hurricane  Relief Area Tax deadline
on or after
Deadline is
extended to
Harvey Texas   8/23/2017   1/31/2018
Irma Florida and Seminole Tribe of Florida   9/4/2017   1/31/2018
Irma U.S. Virgin Islands and Puerto Rico   9/5/2017   1/31/2018
Irma Georgia   9/7/2017   1/31/2018
Maria U.S. Virgin Islands   9/16/2017   1/31/2018
Maria Puerto Rico   9/17/2017   1/31/2018

Employer-Sponsored Retirement Plan Deadlines Extended

  • Employer contributions
  • Employer tax deduction
  • Employee contribution deposit timing (deferrals and loan payments), but must be deposited as soon as practicable
  • Form 5500 filing (IRS and DOL)
  • Loan repayments
  • Required beginning date and required minimum distributions
  • Removal of excess deferrals
  • Removal of ADP excess (no employer penalty applies)
  • Removal of ACP excess (no employer penalty applies)
  • Beneficiary disclaimer timing
  • End of 60-day rollover window
  • Blackout notices not given timely
  • Beneficiary disclaimer timing
  • IRS Employee Plan Compliance Resolution System two-year period for self-correcting significant failures

 

Additional PBGC Deadlines Extended for Defined Benefit Plans

  • Payment of PBGC insurance premiums
  • Filing termination notices
  • Completing the distribution of plan assets
  • Filing Form 501, Form 601, and reportable events notices
  • Filing of actuarial information for plans with funding waivers, missed contributions, or underfunding


IRA, HSA, and ESA Deadlines Extended

  • Regular contributions
  • Tax deduction
  • Recharacterizations
  • Forms 1099 and 5498 delivery
  • Required beginning date and required minimum distributions
  • 60-day rollover
  • SIMPLE IRA deposit timing, but must be deposited as soon as practicable
  • Timely removal of excess (with NIA)
  • Beneficiary disclaimer timing

 

Next Steps

The hurricane relief outlined above should help you and your affected participants in the wake of these recent disasters. But it is up to you whether you take full advantage of the available relief. Plans are not required to operate under the more generous hurricane provisions. But if your plan does, you should thoroughly document any changes to your plan in accordance with the existing rules and the requirements laid out in the relief itself.

Check back at Ascensus.com for updates on this and all retirement-related topics.

                                                   What is the right distribution type to use?

 

 Qualified
Hurricane
Distribution
Hardship
Distribution –
hurricane
reasons
Hardship
Distributions –
normal reasons
Distribution allowed if you live within
the disaster area and if you suffered an economic loss
            X          X  
Distribution allowed if your relative or lineal descendant lives within the
disaster area
           X  
Distribution allowed if your business
was within the disaster area
           X  
The limit on how much you can take for this distribution reason      $100,000 amounts eligible
for hardship
amounts eligible
for hardship
Distribution permitted without a regular (e.g., age 59½, hardship, normal retirement age) distribution trigger             X    
Distribution is considered eligible for rollover             X    
Distribution can be paid back into the plan or another plan             X Only if used to purchase a residence in the disaster area from 2/28/2017
to 9/21/2017
Only if used to purchase a residence in the disaster area from 2/28/2017
to 9/21/2017
Six-month deferral suspension applies                     X
Taxation on the distribution can be spread over three years instead of just in year of distribution             X    
Distribution subject to 10 percent early distribution penalty tax             X                X
Deadline for taking hurricane-related distributions        1/1/2019          1/31/2018              N/A

 


Retirement Spotlight – Fiduciary Rule’s Impact on IRAs Should be no Surprise

June 17, 2016—While there have been many questions on how the DOL final fiduciary rule on investment advice can cover IRAs, both ERISA-governed plans and IRAs have been subject to the same fiduciary investment advice rules since 1975. It should be no surprise that IRAs are subject to the recently issued final rule.

Read our ERISA team’s latest Retirement Spotlight for more on the rule’s implications for IRAs.


Retirement Spotlight – DOL Fiduciary Rule Applicable to HSA & Other Individual Savings Accounts

May 4, 2016 –The Department of Labor (DOL) recently released its long-awaited final fiduciary rule. Referred to by the DOL as the “conflict-of-interest” rule, it’s designed to protect retirement savers from biased advice.

 

With its release, the DOL has clarified that health savings accounts (HSAs), Coverdell education savings accounts (ESAs), and Archer Medical Savings Accounts (MSAs) are covered by the final rule. The application of the final rule to these accounts has received little media or industry attention. Nevertheless, it’s significant for providers of these plans.

 

Read our ERISA team’s Retirement Spotlight for more on the rule’s implications for these savings accounts.


Retirement Spotlight – Potential Challenges to the DOL’s Conflicted Advice Rule?

April 21, 2016 – Following a contentious rulemaking process, the DOL announced its final “conflict-of-interest” rule on April 6, 2016. After two written comment periods and several days of public hearings, the DOL made substantial changes to the proposed rule to accommodate the feedback it received.

 

The fact that both proponents and opponents of the guidance have some issues with the final product is an indication that the DOL may have found some common ground. What remains to be seen, though, is the legislative and legal action that opponents might initiate in their continued attempts to derail the rule.

 

Read our ERISA team’s Retirement Spotlight for commentary on potential challenges to the rule.


Retirement Spotlight – The DOL’s Fiduciary Regulation—It’s Here!

April 14, 2016 The Department of Labor (DOL) has released the long-anticipated final regulation that defines when investment advice provided for a fee is a fiduciary act.

The final regulation is clearly intended to unify all advisors under the higher standard of a fiduciary in order to protect retirement savers from potentially biased advice and reduce costs. As such, firms and advisors should carefully evaluate their business practices and compare them to the new rules.

Read the Retirement Spotlight for a full review of the regulations and their potential impact on advisors.


Ascensus Stands Ready to Assist Financial Professionals and Broker-Dealers with New DOL Fiduciary Regulations

Service provider will make it easy for financial professionals and broker-dealers to abide by new rules

 

Dresher, Pennsylvania–April 14, 2016Ascensus, the nation’s largest independent retirement plan and college savings services provider, is pleased to announce the development of a product offering that will provide much-needed simplicity and support for financial professionals and broker-dealers looking to comply with the Department of Labor’s (DOL’s) new fiduciary regulations that were announced on April 6, 2016. (See Ascensus’ April 2016 Retirement Spotlight for more information about the regulations.)

 

“We’ve been watching the developments surrounding the new fiduciary regulations with great interest, and we understand the challenges faced by financial professionals and broker-dealers,” says Todd Berghuis, Ascensus’ senior vice president of ERISA. “Now that the regulations have been finalized, we can move forward with providing them with the guidance they need.”

 

Ascensus has long been a leader in providing a fee-based platform for Registered Investment Advisors (RIAs) that offers flexibility for financial professionals looking to evolve their business model on a full-time, fee-for-service basis. The company is carefully studying the new regulations and will tailor its commission-based solution to be in line with them. Enhancements are scheduled to be available in the third quarter of 2016, and will be designed to ensure level compensation and a layer of additional fiduciary protection related to the management of a client’s investment lineup.

 

“Our product platform is designed to help financial professionals and broker-dealers comply with the new fiduciary regulations while minimizing disruption to their businesses,” states Steven Schweitzer, senior vice president of Ascensus’ Strategic Business Support Services. “Our ability to leverage technology and automation to ensure level compensation while offering an open-architecture investment platform and the flexibility to work within a desired business model makes Ascensus the easy choice for financial professionals and broker-dealers who want to comply with and thrive under the new standards.”

 

While financial professionals and broker-dealers may have had knowledge of various drafts of the new regulations, Ascensus anticipates that they will nevertheless be seeking assistance with the final guidelines as the new rules are reviewed and clarification from the DOL is provided prior to becoming effective.

 

“We’ve been working with financial professionals and broker-dealers to make sure that they’re comfortable with the new rules and the support we will provide them,” states Kathleen Connelly, Ascensus’ executive vice president of Client Services. “The ability to offer them a comprehensive product platform along with access to our ERISA experts will allow them to feel confident that they are adhering to the new standards as they service their clients.”

 

About Ascensus
Ascensus is the largest independent retirement and college savings services provider in the United States, helping over 6 million Americans save for the future. With more than 35 years of experience, the firm partners with financial institutions to offer tailored solutions that meet the needs of financial professionals, employers, and individuals. Ascensus specializes in recordkeeping, administrative, and program management services, supporting over 40,000 retirement plans and over 3.4 million 529 college savings accounts. It also administers more than 1.5 million IRAs and health savings accounts and is home to one of the largest ERISA consulting teams in the country. For more information about Ascensus, visit www.ascensus.com.

 

View career opportunities at careers.ascensus.com or on LinkedIn at linkedin.com/company/ascensus. For the latest company news, follow @AscensusInc on Twitter.


Retirement Spotlight republished by Employee Benefit News

ERISA Retirement Attorney Jessica Reynolds’ recent Retirement Spotlight article on the proper classification of independent contractors was republished in the March 2016 print edition of Employee Benefit News. The article, titled “Classify workers ahead of tax season,” reviews the guidelines of the IRS’ Fair Labor Standards Act which was issued in order to offer clarfication as to which employees can truly be classified as “independent.” Read more here.


Ascensus Retirement Spotlight featured on BenefitsLink

The latest edition of Ascensus’ Retirement Spotlight, written by ERISA Retirement Attorney Jessica Reynolds, was featured in the BenefitsLink daily newsletter on January 26. The article discusses a guidance issued by the D.O.L. offering clarification on the definition of an “independent contractor.” Worker complaints and lawsuits alleging improper classification of workers are continuing and employers are spending significant time and expense defending them. The guidance, issued in July, describes the “economic realities test” developed from the Fair Labor Standards Act (FLSA) to assist employers in properly classifying workers.